The document discusses several factors to consider when choosing a business entity structure, including limited liability, taxation, formalities, financing, management, life of the business, and liquidity of investment. It provides an overview of the characteristics of sole proprietorships, general partnerships, limited partnerships, S-corporations and C-corporations based on these factors. For example, it notes that corporations provide the strongest continuity of life but double taxation, while LLCs provide liability protection but may dissolve upon a member's retirement.

1. Business Law Entity Formation: Factors to Consider

2. 4 Basic Entity Types: An Overview Sole proprietorship Individual owner; everything belongs to the proprietor General partnership Partners = owners; no agreement needed (can be implied by actions)

3. 4 Basic Entity Types: An Overview Limited partnership Gen partner = day to day; Limited partner = $ Corporation Close vs publicy held

4. Other Entity Types: An Overview Limited Liability Companies (LLCs) Like a corp, its own distinct entity (can sue/be sued in its own name; can buy/sell property) Can also create PLLC – professional LLC for professionals (doctors, lawyers, accountants) – limited liability for malpractice of other members, unlimited liability for own malpractice Limited Liability Partnerships (LLPs) Allow partnerships, but shield assets of one partner from wrongdoing committed by other partners Franchises Joint Ventures Cooperatives Syndicates

5. Entity Formation Decisions: The 7 Factors Limited liability Taxation Formalities Financing Management Life of the business Liquidity of investment

6. Factor 1: Limited Liability “ Is my house safe?” Concern for all, especially investors Sole proprietors: no limited liability General partners: no limited liability Limited partners: investments are unprotected, but personal assets are protected Shareholders: investments unprotected, but personal assets are protected absent contractual agreement otherwise LLC Members: Limited liability (but not for own malpractice) LLP partners: Limited liability (but not for own malpractice) BUT – see next slide!

7. Factor 1: Limited Liability Not even a limited liability entity always protects personal assets LaMontagne Builders v Bowman Brook Specific issue: General issue:

8. Factor 1: Limited Liability When you don’t treat the entity properly, you might lose is protection (piercing the corporate veil – if undercapitalized; if used as an alter ego for shareholder/director/officer.) See also Estate of Countryman p. 476

9. Factor 1: Limited Liability Back to George, Kim and Martha: Which form provides greatest protection for Kim & Martha’s savings? Kim: “large sum of $”; not able to operate the day-to-day business Martha: $20k, but needs to keep some for son’s college; wants to co-manage

10. Factor 2: Taxation Sole Proprietorship: “It’s all personal” – SP taxed personally on income/loss Partnership: Income/loss “passed through” to the partners and taxed to them personally according to their level of contribution LLC: Taxation benefits of partnership LLP: Taxed like a general partnership Advantages: Savings on taxes during early years if SP/P have other sources of income (take other income minus business losses) Lower taxes on operations than with corporations

11. Factor 2: Taxation Corporation: usually taxed as its own entity based on its income. Shareholders usually pay income taxes on dividends they receive (“double taxation”) $ (income)(taxed to corp)  Corporation  $ (dividends)(taxed to SH)  Shareholders Exception: S-Corp Taxed like a partnership – entity doesn’t pay corporate tax. 100 or fewer shareholders Shareholders can only be individuals (or estates) Shareholders must agree in writing to partnership taxation Corp tax rate varies from year to year (or administration to administration); many mechanisms available to reduce tax burden on shareholders

12. Factor 3: Formalities Sole proprietorship; general partnership: Few formalities Limited partnerships; corporations; LLCs: Many formalities LLP: Must file with state, maintain professional liability insurance

13. Factor 3: Formalities Back to G, K & M: which form of business is easiest to organize? Why do we have formalities?

14. Factor 4: Financing How can we obtain financing? Loans, lines of credit, securities… Large corporation: Limited liability for shareholders; can work w/ securities; seems “safer” Small corporation: Limited liability for shareholders; continuity of life (unlike with partnerships/sole proprietorships)

15. Factor 5: Management Sole proprietorship: “It’s all personal” – the SP can decide everything about running the organization General partnership: All GPs can make decisions; usually, they split it up, but to an outsider, any of them can usually make decisions on behalf of the partnership (“apparent authority”). Deadlocks/drawn-out discussions are possible. Limited partnership: No difference for the GP(s), but limited partners can’t participate in management

16. Factor 5: Management Close corporation: Possible to have deadlocks; may have a CEO charged with day-to-day decision-making Corporation: Officer(s) manage day-to-day; board may control policy; shareholders don’t usually participate (but are allowed to, generally) Limited Liability Company: All investors share in the management; no restriction on number of members (akin to shareholders); may hire managers; duty to act in LLC’s best interests

17. Factor 5: Management S-Corps Minority Shareholder Oppression Minority shareholder gets “frozen out” – can stem from personality conflict, business decision disagreement… Brooks v Hill Specific issue: Is Leroy liable for minority shareholder oppression? General issue: If a majority shareholder uses the business for his/her personal purposes, resulting in lower share value, and subsequently seeks to buy out a minority shareholder, is the majority shareholder liable for oppression?

18. Factor 6: Life of the Business Sole proprietorship: “It’s all personal” – business usually ends when SP can no longer run it b/c of death/disability Partnership: Without advance written agreement to the contrary, partnership dissolves when a partner dies, becomes insolvent or leaves; termination at will, but can contract to provide damages to remaining partners. Partnership can be inherited.

19. Factor 6: Life of the Business Corporation: Strongest continuity of life – death/disability of a shareholder doesn’t affect legal status of the corporation. Easy to transfer ownership of shares. Easiest to preserve good will. (But, think about Apple and Steve Jobs) LLC: Generally dissolved by death, retirement, bankruptcy, being left by one of the members. Remaining members can unanimously agree to continue the business operations.

20. Factor 6: Life of the Business In Re Garrison-Ashburn, LC Specific issue: General issue:

21. Factor 7: Liquidity of Investment Can you get your money back? Sole proprietorship: “It’s all personal” – SP puts in own $; can take any of it not committed to third parties whenever General partners: Can sell their stake at buyout time, but buyer doesn’t become a partner w/o unanimous consent of other Ps; hard to sell before buyout time; doesn’t benefit from goodwill if other Ps continue the business Limited partners: Can sell, but not much of a market Close corp: Restrictions may apply; market is small (strings attached; no incentive unless board influence is possible) Public corp: Easy – just sell the shares on the public market.

22. Factor 7: Liquidity of Investment LLC: Member can transfer ownership interest. Transferee receives member’s share of profits, but not ability to manage w/o other members’ consent.