BUSA2106 Lecture 11 Outline of Last Lecture I Sole Proprietorships II General Partnerships III Limited Partnerships Outline of Current Lecture IV Limited Partnerships V Corporation VI Current Lecture Limited Partnership Taxes Same as general partnership Pass through taxation Taxed as personal income of the partners Limited Partnerships Pros and Cons Advantages Attractive to investors who don t want to participate Limited partners liable up to amount of capital contribution Flow through tax Disadvantages Requires certificate of LP General partners are personally liable Defective formation and or participation may expose limited partners to liability Limited Liability Company LLC Separate legal entity from the members themselves Hybrid business type that combines Management and control of a general partnership Pass through tax status of a partnership OR taxed as a separate entity like a corporation Greater liability protection like a corporation Formation File articles of organization with state Names of members Other requirements Operating agreement How LLC will be managed How profits will be divided How membership can be transferred How LLC will be dissolved Like partnership agreement Termination Similar to partnerships Dissociation Departing member s interest is usually purchased by remaining members at fair market value Dissolution and winding up Assets are collected liquidated and distributed After assets are distributed to creditors capital contributions are returned to members and remaining money is distributed to members Controlled by terms of LLC operating agreement Liability LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a member manager agent or employee of the LLC who commits the wrongful act while acting within the ordinary course of business of the LLC or with authority of the LLC Member Liability Member liability is generally limited to capital contribution How is this similar to another form of business entity Taxes Taxed as either choose when setting up Partnership pass through taxation taxed as personal income of members Corporation taxed as separate legal entity Tax rates Individual 10 35 Corporate 15 35 LLCs Pros and Cons Advantages Owners have limited liability Tax flexibility All owners can participate fully in management Disadvantages Must file articles of organization Non uniform state laws Diversity jurisdiction o Sole proprietorship o General partnership o Limited partnership o LLC o Must have complete diversity between plaintiff and all partners members o Different rule from corporations o Additional liability consideration Corporations o Separate legal entity from owners o Shareholders owners Owners of the corporation who select directors and vote on other major actions to be taken by the corporation Publicly vs privately held Board of Directors big picture Responsible for making policy decisions and employing the major officers Officers daily operations Responsible for the day to day operation of the corporation Formation File articles of incorporation with state Specify purpose duration capital structure of the corporation State issues Charter or Certificate of Incorporation Amendments to articles must also be filed with the state Establish corporatebylaws Annual shareholder meeting Termination Can exist forever as its own legal entity Dissolution and winding up Similar to other business entities Debts and creditor claims satisfied Remaining assets distributed to shareholders in accordance with stock holdings Liability In lawsuits by third parties Corporation itself is liable for acts of agents employees within the scope of their employment Shareholders are usually shielded from personal liability unless corporate veil is pierced Piercing the corporate veil Corporate veil gives shareholders limited liability in lawsuits by third parties Reasons for piercing the veil Alter ego theory Corporation is undercapitalized Piercing the corporate veil alter ego Corporation is the alter ego of shareholders not a separate entity Controlling shareholder dominates Shareholder and corporate assets are commingled Corporate formalities have not been observed e g no board meetings or corporate records Piercing the corporate veil undercapitalization Could founders reasonably anticipate that the corporation would be unable to pay the debts it would incur Does corporation have adequate assets Does it have sufficient insurance to cover anticipated liabilities Taxation Corporate profits themselves taxed Dividends distributed to shareholders taxed as personal income Double taxation Shareholder power How can the shareholders owners exercise power over the corporation Vote on amendments to articles of incorporation and bylaws Make proposals and vote Elect remove members of the board of directors Sue directors or officers for breach of fiduciary duty Bring shareholder s derivative suit