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1. THE CORPORATION
VS. THE LLC
PRESENTED BY:
Lori Ann Fox, Esq.

2. Corporation vs. LLC
SEMINAR OVERVIEW
• Entity characteristics
• Non-tax advantages
• Formation requirements
• Doing business in foreign states
• Management & ownership
• Compliance issues

3. Corporation vs. LLC
ENTITY
CHARACTERISTICS

4. Corporation vs. LLC
ENTITY CHARACTERISTICS
• Liability
• Control
• Transferability of interests
• Continuity of existence
• Taxation

5. Corporation vs. LLC
LIABILITY
• Personal liability of the owners?
• Both provide limited liability
Key similarity

6. Corporation vs. LLC
CONTROL
• Who manages? Owners or management group?
• Corporation
– board of directors
– officers
– not shareholders
• LLC
– either members or managers
– partnership or corporation structure

7. Corporation vs. LLC
TRANSFERABILITY OF INTERESTS
• Right to sell or transfer interest to a third party
• Interest = financial rights + management rights
• Free transferability - buyer receives all rights of seller
– Corporation
• free transferability
• buyer becomes shareholder
• buyer has all rights of seller
– LLC
• restricted transferability
• buyer becomes assignee - not member
• buyer has only financial rights of seller

8. Corporation vs. LLC
CONTINUITY OF EXISTENCE
• Affect of change in owners
• Continuity means entity does not dissolve upon change
• Corporation?
• LLC?

9. Corporation vs. LLC
POLLING QUESTION #1
Have you ever been asked to form an “S” corporation?
A. Yes
B. No

10. Corporation vs. LLC
TAXATION
• Pass-through vs. separate entity (federal income tax purposes)
• Corporation
– Default
– Election
• LLC
– Default
– Election
Key difference

11. Corporation vs. LLC
TAXATION OF C CORPORATION
• Corporation taxed on income
• Shareholders taxed on dividends & final distributions
• State taxes

12. Corporation vs. LLC
ADVANTAGES OF C CORPORATION TAXATION
• Deduct fringe benefits
• Qualified pension and ISO
• Tax free reorganization
• Adopt any tax year
• Passive loss

13. Corporation vs. LLC
S CORPORATION
• Permitted by federal income tax laws
• Alternative to C corporation
• Pass-through taxation
• State tax treatment
• Restrictions

14. Corporation vs. LLC
TAXATION OF LLC
• Pass-through entity
• One member LLC - disregarded as entity
• Two or more member LLC - taxed as partnership
• Options: C or S corporation taxation

15. Corporation vs. LLC
NON-TAX
ADVANTAGES

16. Corporation vs. LLC
NON-TAX ADVANTAGES – CORPORATIONS
• Public companies prefer
• Status symbol
• Familiarity
– investors and lenders
– lawyers, judges, other professionals
• Stock options & bonuses
• Legal treatment
– More case law
– Statutes well developed
– Statutory treatment known
– Laws governing solely owned corporations clearer than those
governing single member LLCs

17. Corporation vs. LLC
DIVERSITY JURISDICTION
• Multi-state entities often prefer to have litigation heard in federal
court
• Two ways to federal court
– federal question
– diversity of citizenship
• Corporation and LLC treated differently
– Corp is citizen of state of incorporation & state of ppb
• S.Ct in 2010 case: ppb is location of “nerve center”
– LLC is citizen of every state its members are citizens
• Easier for corporation with shareholders located throughout US to
have access to federal court

18. Corporation vs. LLC
LLC TREATMENT IN FLUX: HSR EXPERIENCE
• Hart-Scott-Rodino Act
– Federal law requiring pre-merger notification filing
– 1976 law – refers to corporations & partnerships only as LLCs did not
exist
• At first FTC decided to treat LLCs the same as corporations
1994 - rule change to
treat LLC like
corporation or
partnership on case
by case basis
1999 – new rules
applicable to LLCs
• Fewer filings required
than for corporations
2005 – rules changed
again
• LLC treatment made
consistent with
corporation

19. Corporation vs. LLC
UNCERTAIN TREATMENT – AN EXAMPLE
Cortez v. NACCO Materials Handling Group, Inc.,
274 P.3d 202 (Or. App. 2012)
• Facts:
– Pl employed by LLC; injured on job; receives workers comp award from LLC
– Pl sues LLC’s member for damages
– Member argues it is exempt under Sec. 656.018
– Ore. Workers Comp. L., Sec. 656.018 – states that workers comp provides
exclusive remedy for employer and its officers and directors
• Court:
– Because statute does not list LLC members it does not apply to members
– Legislature could have amended section if it wanted it to apply to LLC
members

20. Corporation vs. LLC
NON-TAX ADVANTAGES - LLC
• Few mandatory provisions - dissenter’s rights, indemnification, etc.
• Fewer management formalities - meetings, notice, minute keeping, etc.
• Management alternatives - member or manager
• Flexibility in splitting financial interests
• Governing provisions remain private
• Creditor generally limited to charging order
• Separation of assets from liabilities thru Series LLC

21. Corporation vs. LLC
CHARGING ORDER
• LLC protects entity from owner’s debts
• Limits remedy of judgment creditor of member to charging order
• Court order requiring LLC to pay member’s distributions to creditor
• Lien on economic interest only
• Creditor cannot obtain membership interest or management rights
• Corporation statutes do not limit remedy
– shareholder’s creditor may attach stock itself
– creditor obtains stock, voting and other rights
– may be able to force liquidation

22. Corporation vs. LLC
CHARGING ORDER - EXCEPTIONS
• Check statute to be sure it eliminates foreclosure as remedy
– Some say “court may charge LLC interest of member”
– Could be interpreted as allowing other remedies
• States are amending LLC law to clarify that charging order is only
remedy
• Example:
– Ohio Sec. 1705.19 as amended by HB 48, eff. 5/4/2012
– “An order charging the membership interest of a LLC is the sole and
exclusive remedy that a judgment creditor may seek to satisfy a
judgment against the membership interest of a member or a member’s
assignee.”

23. Corporation vs. LLC
CHARGING ORDER - EXCEPTIONS
• Limitation to charging order may not apply to SMLLC
• Reason – limitation intended to protect other members
• Olmstead v. FTC, 44 So.3d 76 (Fla. 2010)
– FL SCt rules that charging order provision of FL LLC act permits court to
order a judgment debtor to surrender all rights, title, interest in
debtor’s SMLLC to satisfy judgment
– Legislative response in 2011 clarifies that charging order applies to
SMLLC unless creditor proves to court distribution will not satisfy
judgment
• States are amending laws to clarify that charging order provision
applies to single member LLCs
– Ex. – South Dakota HB 1192, eff. July 1, 2012 adds subsection(g) to
charging order section
– “This section [which states that charging order is exclusive remedy]
applies to SMLLCs in addition to LLCs with more than one member.”

24. Corporation vs. LLC
WEDDELL V. H2O, INC., 271 P.3D 743 (NEV. 2012)
• Facts:
– Weddell, Stewart – members and managers of NV LLC
– Judgment creditor of Weddell obtains charging order
– Relationship deteriorates; they sue each other
• Trial ct:
– rules for Stewart
– holds that charging order divested Weddell of managerial rights so
Stewart sole manager
• NV S.Ct. reverses; charging order resulted in following:
– Weddell has no right to distributions but retains other rights including
managerial rights
– Judgment creditor only receives economic interests
– Reflects principle that LLC members should be able to choose members
with whom to associate

25. Corporation vs. LLC
POLLING QUESTION # 2
Are you familiar with the Series LLC?
A. Yes
B. No

26. Corporation vs. LLC
SERIES LLC - DIAGRAM

27. Corporation vs. LLC
SERIES LLC
• An LLC that is divided into separate series
• Each series functions like a separate LLC
• If properly formed and maintained, debts of a series can be
satisfied from that series only
• Delaware was first state to authorize
• Other states include AL (1/1/15), DC, IL, IA, KS, MO, MT, NV, OK,
TN,TX, UT

28. Corporation vs. LLC
SERIES LLC
Questions surrounding Series LLCs
– How will Series LLC and series be taxed?
• PLR 200803004 – IRS treated each series separately
– Will foreign state that does not provide for Series LLC respect separation
of liabilities?
– Can series, in its own name, enter into contracts, sue or be sued, own
legal title to real estate?
– Can series file for bankruptcy or register under securities laws?

29. Corporation vs. LLC
FORMATION

30. Corporation vs. LLC
CHOOSING FORMATION STATE
• More critical for corporations
• Normally where entity located
• Avoid quirks
• If not where located then in Delaware

31. Corporation vs. LLC
WHY SELECT DELAWARE?
• Statutes provide efficiency
• Annual review of statutes
• Court of Chancery
• Substantial body of case law
• Up-to-date filing office

32. Corporation vs. LLC
NAME ISSUES
• Entity indicator
• Name availability
• Name reservation
• Name registration
• Trademark search
• Assumed name

33. Corporation vs. LLC
FORMATION DOCUMENT - CORPORATION
• Articles of Incorporation
– name, shares, registered agent and office, incorporators
• Notice function plus
– management rules
– director and shareholder rights
• Review default provisions

34. Corporation vs. LLC
POLLING QUESTION #3
Do you include optional provisions in your corporation’s articles of
incorporation?
A. Include Optional Provisions
B. Do Not Include Optional Provisions

35. Corporation vs. LLC
OPTIONAL PROVISIONS
• Shield directors from personal liability
• Shareholders cumulate votes
• Qualifications for directors
• Staggered terms for directors
• Directors to change bylaws
• Creating classes and series of shares
• Fix terms of class of shares
• Voting rights
• Supermajority voting

36. Corporation vs. LLC
FORMATION DOCUMENT - LLC
• Articles of Organization
– only a notice function
– name
– principal office address
– registered agent/office
– management structure
• Not used to opt out of default provision
• Optional provision for public notice

37. Corporation vs. LLC
GOVERNING DOCUMENT - CORPORATION
• Bylaws
– location of offices
– director and shareholder meetings
– officers
– election and removal of directors
– committees
• Subordinate to Articles of Incorporation and state law

38. Corporation vs. LLC
GOVERNING DOCUMENT - LLC
• Operating agreement
– Who will manage
– Powers of members or managers
– Who can sign documents
– Meeting requirements
– Indemnification
– Member names, adding new
members
– Contributions and percent
interest
– Allocation of profits, losses,
distributions
– Subordinate to articles of
organization and state law
• Combination of corporation’s bylaws, Articles of Incorporation
and shareholder agreements
• Used to opt out
• Used to fill in gaps (Delaware)

39. Corporation vs. LLC
PURPOSES
• Corporation
– Statutes – any lawful business or purpose
– For profit entity
– Non profits generally incorporate under separate statute
• LLC
– Statutes – any lawful business or purpose
• banking or insurance may be prohibited
– For profit and non profit generally form under same statute

40. Corporation vs. LLC
ORGANIZATIONAL MEETING
• Required by corporation law
– completes organization
– consent in lieu of meeting
• Incorporators’ meeting
– elect directors
– bylaw adoption
• Directors’ meeting
– elect officers
– other actions
Difference: not required by LLC statutes

41. Corporation vs. LLC
DOING BUSINESS IN
FOREIGN STATES

42. Corporation vs. LLC
CONSEQUENCES OF DOING BUSINESS
• Foreign state - any state other than formation state
• Can corporations and LLCs do business in foreign states?
• Not all activities are “doing business”
• First step - find out all activities and contacts

43. Corporation vs. LLC
WHAT CONSTITUTES DOING BUSINESS?
• Must determine whether activities constitute “doing business” in
state
• First check statutory list
– maintaining, defending suits
– shareholder, director, member, manager meeting
– bank accounts
– isolated transactions
– interstate commerce
• Then check case law

44. Corporation vs. LLC
QUALIFICATION
• File application for authority/registration
– name
– state and date of formation
– principal office
– registered agent and office
– name of directors, officers, managers
• Supporting document
• Fees
• Conflict name

45. Corporation vs. LLC
RISKS OF FAILURE TO QUALIFY
• Denied access to courts
• Fines
– against corporation or LLC
– against individuals

46. Corporation vs. LLC
MANAGEMENT

47. Corporation vs. LLC
SOME MANAGEMENT DIFFERENCES
Corporation LLC
Individual directors Entity managers
No meeting –
unanimous consent
No meeting –
unanimous/majority
No vote by proxy Vote by proxy
Appoint officers
Limits on committee actions
Officers optional
No limits on committee actions

48. Corporation vs. LLC
CORPORATION - BASIC STRUCTURE
• Managed by board of directors
– use of committees
• Directors elected by shareholders
– plurality vote unless otherwise provided
– recent statutory trend: permit bylaw whereby nominee in public
corporation cannot serve if more “against” votes than “for” votes are
received
• Officers
– may be required by statute
• Shareholders
– do not manage

49. Corporation vs. LLC
MANAGEMENT FORMALITIES
• Corporations managed formally
• Meetings required
• Notice must be given
• Quorum required to act
• Inspectors of election

50. Corporation vs. LLC
STATUTORY CLOSE CORPORATION
• Limited number of shareholders
• Stock transfer restricted
• No public offering
• Can dispense with board
• Shareholders have same powers as directors
• Issues
– Not all states permit
– Unanimous consent

51. Corporation vs. LLC
LLC - BASIC STRUCTURE
• Default rule - members manage
• May have managers instead
– corporation structure
– managers chosen pursuant to operating agreement
• Can be managed informally

52. Corporation vs. LLC
FIDUCIARY DUTIES - CORPORATIONS
• Statutory standard: business judgment standard
• Common law
– duty of loyalty
– duty of care (including oversight)
• Limit on interested transactions

53. Corporation vs. LLC
DUTY OF LOYALTY: GUTH V. LOFT, INC
• Delaware case creating “corporate opportunity doctrine”
• Facts:
– Corporation looking for cheaper syrup
– Director/president learns of bankrupt syrup company
– Buys syrup formula and trademark for himself
– Uses corporate assets and employees to develop syrup
• Delaware Supreme Court holds director liable for breach of duty of
loyalty

54. Corporation vs. LLC
DUTY OF CARE: SMITH V. VAN GORKOM
• Rare DE case where directors found to violate duty of care
• Facts:
– Chairman/CEO decided to sell company and found buyer
– Called director meeting on one day notice without telling purpose
– Directors approve after two hour meeting
– No fairness opinion or valuation report
• Court:
– Directors held liable
– 12(b)(7)

55. Corporation vs. LLC
FIDUCIARY DUTIES - LLC
• Three approaches
– corporate standard
– partnership standard
– let operating agreement govern
• Duties less certain than corporations

56. Corporation vs. LLC
LLC FIDUCIARY DUTIES IN DELAWARE
• Auriga Capital Corp. v. Gatz Properties, LLC, C.A. No. 4390, Ch.Ct.
(1/27/2012)
• Background: no statutory standard of conduct in DE
• Facts:
– Minority members sued manager alleging breach of fiduciary duties after
he bought them out for price well below market value
– Manager argues he did not owe fiduciary duties in absence of LLC
agreement provision specifying such duties
• Issue – Do default fiduciary duties exist where they have not been
eliminated or modified in LLC agreement?
• Holding - Yes

57. Corporation vs. LLC
LLC FIDUCIARY DUTIES IN DELAWARE:
AURIGA CAPITAL V. GATZ PROPERTIES (CONT.)
• Ch. Ct.’s reasoning:
– LLC act explicitly states that rules of equity govern unless otherwise
provided for
– Default fiduciary duties apply to managers of alternative entities
– LLC act was amended to provide that fiduciary duties may be eliminated
in the LLC agreement; why would General Assembly eliminate something
unless it existed
• Manager breached his fiduciary duties
– Refused to explore strategic options
– Refused to consider credible offer to buy LLC from 3rd party
– Made low ball offer to members
– Conducted a sham auction for the LLC

58. Corporation vs. LLC
LIMITING LIABILITY
• Corporations
– duty of care only
– only in articles of incorporation
• LLC
– any fiduciary duty
– in operating agreement
– public policy limit

59. Corporation vs. LLC
SHAREHOLDERS
VS. MEMBERS

60. Corporation vs. LLC
WHAT DO INVESTORS GET?
• Corporation
– shares of stock
– may be represented by certificate
• LLC
– percentage interest
– generally, no certificate
• Privileges
• Rights
• Duties
• Liability

61. Corporation vs. LLC
PRIVILEGE OF OWNERSHIP
• Limited liability
• Exceptions
– consent to liability
– liable for own tortious conduct
– piercing the veil

62. Corporation vs. LLC
PIERCING THE VEIL
• Corporations: alter ego test
– Undercapitalization
– Management formalities
– Corporation maintained books and accounts
– Used for personal purposes
– Test of inequity
• LLCs
– State courts have applied the theory to LLCs
– Policy - liability shield may not be used fraudulently
– Only a few states expressly provide for piercing the LLC veil in the
enabling statute
– Less weight on formalities

63. Corporation vs. LLC
SAMPLE LLC STATUTE: WASHINGTON
• WA § 25.15.060 Piercing the veil
• “Members of a limited liability company shall be personally liable for
any act, debt, obligation, or liability of the limited liability company
to the extent that shareholders of a Washington business corporation
would be liable in analogous circumstances.”
• Court - Consider corporate case law

64. Corporation vs. LLC
LLC VEIL PIERCING: MARTIN V. FREEMAN
• 272 P.3d 1182 (Colo. App. 2012)
• Facts:
– Pl obtained judgment against SMLLC
– While suit pending LLC sold airplane that was only significant asset
• Court pierced veil to hold member liable for judgment
– Main factor – proceeds from airplane sale were diverted to member’s
personal account
– Courts do not have to consider that LLCs have fewer restrictions than
corporations in observing formalities
– Wrongful intent or bad faith need not be shown

65. Corporation vs. LLC
DIVIDENDS AND DISTRIBUTIONS
Corporation LLC
Dividend Interim distribution
Declared by board Decided by members
Apportioned in accordance
with stock ownership
Members allocate

66. Corporation vs. LLC
PROFITS & LOSSES
• Members share P & L
• S corporation shareholders share P & L
• C corporation shareholders do not
• Profit vs. distribution
• LLC can have special allocations
• S corporation shareholders share based on stock ownership

67. Corporation vs. LLC
MANAGEMENT RIGHTS
• Right to vote for directors & managers
• Right to vote for major changes
• Member-managed LLC
– make business decisions
– bind LLC

68. Corporation vs. LLC
INSPECTION AND DISSENTERS’ RIGHTS
• Inspect books and records
– provided by statute
– corporations cannot restrict right
– LLCs can restrict
• Dissenters’ rights
– corporation - required by statute
– LLC - may or may not be required

69. Corporation vs. LLC
MORE ON MANAGEMENT RIGHTS
• Right to transfer
– shareholder - yes
– member - with consent
• Derivative suit
• Affect on choice?

70. Corporation vs. LLC
DUTIES & LIABILITIES
Shareholder Member
Pay for shares Pay for interests
Failure to pay – breach of
contract
Failure to pay – breach of
contract or more
No fiduciary duties owed
Fiduciary duties owed to
members, LLC (member
managed LLC )

71. Corporation vs. LLC
COMPLIANCE ISSUES

72. Corporation vs. LLC
CHANGES TO FORMATION DOCUMENT
• Amendments
• Corrections
• Restatement

73. Corporation vs. LLC
REGISTERED AGENT & OFFICE
• Registered agent - agent authorized to receive service of process
• Registered office - location in state of registered agent
• Noncompliance - grounds for administrative dissolution
• MoRAA

74. Corporation vs. LLC
ANNUAL REPORT & FRANCHISE TAX
• Annual report
– information on file with filing office
– mandatory for corporations and LLCs
– failure to file is grounds for administrative dissolution
• Franchise tax
– state’s fee for providing franchise
– base may be income, shares, capital, flat fee
– failure to pay is grounds for administrative dissolution

75. Corporation vs. LLC
RECORDING KEEPING & ANNUAL MEETING
• Corporation’s recording keeping
– required to maintain records
– ex. - articles, bylaws, list of shareholders, directors, and officers
• LLC’s recording keeping
– required by some laws
– operating agreement
• Annual meeting

76. Corporation vs. LLC
FEDERAL COMPLIANCE REQUIREMENTS
• Securities cannot be sold to the public unless seller discloses material
information
– 1933 and 1934 acts require filings
• Form S-1
• Form 10
• Form 10-K
• Form 10-Q
• Form 8-K
• Forms 3, 4, and 5
• Sarbanes-Oxley
• Dodd-Frank

77. Corporation vs. LLC
RECAP
• Characteristics
• Advantages
• Formation
• Doing business in foreign states
• Owners and managers
• Compliance requirements

78. THE
CORPORATI
ON VS.
THE LLC
The Legal Professional’s First Choice
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