BUSA2106 Lecture 11Outline of Last Lecture I. Sole ProprietorshipsII. General PartnershipsIII. Limited PartnershipsOutline of Current Lecture IV. Limited PartnershipsV. CorporationVI. Current LectureLimited Partnership (Taxes) • Same as general partnership – Pass through taxation – Taxed as personal income of the partnersLimited 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 liabilityLimited 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 agreementTermination Similar to partnerships: – DissociationDeparting 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 agreementLiability • 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 LLCMember 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 lawsDiversity jurisdictiono Sole proprietorshipo General partnershipo Limited partnershipo LLCo Must have complete diversity between plaintiff and all partners/ memberso Different rule from corporationso Additional liability consideration?Corporationso Separate legal entity from ownerso 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 corporationFormation• 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 meetingTermination• 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 holdingsLiability• 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 piercedPiercing the corporate veil• “Corporate veil” gives shareholders limited liability in lawsuits by third parties• Reasons for piercing the veil?– Alter ego theory– Corporation is undercapitalizedPiercing 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 recordsPiercing 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-taxationShareholder 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