#11126 - Choice Of Organizational Form - Corporations

Choice of Organizational Form

1. Formation

   1. Corporation: Requires formal action with the state (File Articles/Certificate, etc.)

   2. General Partnership: Generally created by contract BUT may be formed by operation of law as simply defined as "an association of two or more persons to carry on as co-owners a business for profit"

   3. Limited Partnership: Requires the filing with the state of a certificate of partnership setting forth the rights and duties of the partners

      1. Typically, also execute a written partnership agreement

   4. LLC: (1) Requires the filing of articles of organization, (2) ALSO enter into an operating agreement (a.k.a. "regulations" of the LLC), (3) ALSO enter into the "limited liability company agreement" (a.k.a. member control agreement")

2. Limited Liability

   1. Corporation: A shareholder's liability is limited to original investment EXCEPT (1) where the corporation is not properly formed, (2) for unpaid capital contributions that the shareholder has agreed to make, or (3) where the veil of limited liability is pierced for equitable reasons.

   2. General Partnership: The partners, as individuals, can be held jointly and severally liable for partnership obligations

   3. Limited Partnership: General partners have the same unlimited liability as in the case of a general partnership. Liability of limited partners is limited to the amount of their investment in the partnership UNLESS they "participate" in management

      1. "Participation" does not include such activities as advising the general partner or voting on certain critical transactions

         • NOTE: A limited partnership can be structured such that a corporation is the general partner and the individuals are all limited partners thereby allowing limited liability for all the individuals involved

   4. LLC: Limited liability for all members and managers BUT may be liable (1) where the corporation is not properly formed, (2) for unpaid capital contributions, or (3) where the veil of limited liability is pierced for equitable reasons.

3. Management

   1. Corporation: Centralized in the board of directors BUT the board delegates day-to-day operations to officers of whom the board appoints

      1. By default, in most statutes, directors are elected by a plurality of shares entitled to vote

   2. General Partnership: Management authority vested in all the partners

   3. Limited Partnership: General partners have responsibility for most management decisions. Limited partners may not participate in management ELSE may lose limited liability

   4. LLC

      1. Member-managed: all members have authority to make management decisions

      2. Manager-managed: members are not agents of the entity and make only major decisions

4. Continuity of Existence

   1. Corporation: Exists in perpetuity

   2. General Partnership: (1) At-will (default) or (2) for a definite period of time

      1. At-will: Dissolved on the death, bankruptcy, or withdrawal of any partner

      2. For a definite period of time: Exists for period of time set forth in partnership agreement. If no such time stated, it is an at-will general partnership

   3. Limited Partnership: Business generally continues after death, bankruptcy, or withdrawal of a limited partner BUT partnership agreement must specify the latest date upon which the partnership must be dissolved

      1. ONLY dissolved upon the withdrawal of a general partner

   4. LLC: Exists in perpetuity

5. Transferability of Interests

   1. Corporation: Shareholders are free to transfer stock

      1. RE Close Corporations: Articles/Certificate generally includes provision that restricts transferability of stock

   2. General Partnership: All current partners must consent to the transfer of partnership interest and the admission of a new partner BUT a partner can transfer economic interest while retaining governance interest

   3. Limited Partnership: Limited partners can transfer their financial interest BUT the assignee may only exercise the governance rights of a limited partner with the consent of all the remaining partners

   4. LLC: Most statutes allow free transferability of member rights.

      1. Previous statutes contained restrictions similar to that of general partnerships, that is could transfer economic interest but not management rights without unanimous consent of the other partners

6. Fiduciary Duties

   1. Corporation: Directors, officers, and controlling shareholders owe fiduciary duties to the corporation and to the shareholders

   2. General Partnership/Limited Partnership/LLC: The same duties do not necessarily exist BUT can be limited or expanded in organic documents.

      1. General concepts of Contract Law apply SUCH AS Good Faith and Fair...