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Welcome to BusOrg!. Module III – Corporate Form. Chapter 6 (part 2) Organizational Choices. Bar exam. Corporate practice. Basic choices: partnerships, corporation, LLC Essential characteristics: Formation Liability Owner control Management Financial rights - PowerPoint PPT Presentation
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Welcome to BusOrg!
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 1of 18
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 2of 14
Chapter 6 (part 2)Organizational Choices
• Basic choices: partnerships, corporation, LLC• Essential characteristics:
– Formation – Liability – Owner control– Management– Financial rights – Liquidity– Change/combinations
• Planning considerations– Economics of choice– Tax consequences
Module III – Corporate Form
Citizen of world
Citizen of world
Law profession
Law profession
Corporatepractice
Corporatepractice
Bar examBar
exam
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 3of 14
Planning considerationsEconomics of the firm
• Firms: capital + mgmt• Equity > debt• P-ship lacks stability /
corporation too stable
Opportunism• GP dissolution / majority
buys out low, skilled P• Corporation illiquidity /
majority intransigenceRichard Posner
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 4of 18
Pass through
limited
(PCV*) All Ms agree
manager equal No
(withdraw voting)
distributions (equal)
filing *(agreement)
Manager-managed
Pass through
limited (PCV*)
All Ms agree
equal / agent
equal No
(withdraw mgmt)
distributions (equal)
filing *(agreement)
Member-managed
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Pass through
limited (PCV*)
Board + Sh majority
board directors fund'tal tx
No(agreement)
Dividends +
salaries
filing *(agreement)
S Corporation (CHC)
income * (zero out)
limited (PCV*)
Board + Sh majority(PHC*)
board (PHC*)
directors* fund'tal tx*
Yes(PHC*)
dividends (per share)
filing *
(bylaws) C Corporation
Corporation
Pass through
LP-ltd GP-jt/sev
(ltd if LLLP)All agree
LP-ltd
GP-manage agreement
LP-Yes GP-No
(withdraw)
share distributions($ contrib)
filing*(agreement)
Limited partnership
Passthrough
Joint / sev *LLP-limited(supervise)
All agreeequal
/ agent equal
No(withdraw)
share profits (equal)
Association*
filing LLP*(agreement)
General partnership
Partnership
Change Liability Liquidity Mgmt Voting Tax Financial Formation
Organizational choices * mandatory
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 5of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Financial
Organizational choices (Financial Rights)
* mandatory
Partnership Corporation
Partners
Corporation
Board
Shareholders
LLC
LLC
Members
Example 6.6Q: A and B form a logging GP -- A contributes capital and B the
equipment. They do not specify in their agreement how losses will be shared. The business does not generate enough profits to cover A’s capital contribution, and A asks B to share in the net losses.
A: The UPA controls, in the absence of an agreement. B must contribute toward the loss (including the capital loss) according to his share in the profits. [Some courts give B credit for his labor.]
distributions(Ms equal)
distributions(equal)
dividends + salaries
dividends (per share)
share distributions($ contrib)
share profits (equal)
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 6of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Liquidity
Organizational choices (Liquidity)
* mandatory
Partnership Corporation
Partners
Corporation
Board
Shareholders
LLC
LLC
Members
Example 6.8Q: A and B are partners in a family GP. They have no written
agreement about dissolution. A wants to end the partnership, sell (liquidate) the business assets, and then split the cash proceeds. B wants to divide the assets in-kind between them, but not sell.
A: Under the UPA, a partner in an at-will GP can withdraw (causing dissolution) and share in a forced liquidation of partnership assets, provided creditors are first fully paid.
No(withdraw
voting)
No (withdraw
mgmt)
No(agreement)
Yes(PHC*)
LP-Yes r GP-No
(withdraw)
No(withdraw)
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 7of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Change
Organizational choices (Change/Combination)
* mandatory
Partnership Corporation
Partners
Corporation
Board
Shareholders
LLC
LLC
Members
Example 6.10Q: A, B and C are equal partners in GP that owns and rents two
identical beachfront condos. A and C have a falling out, but B wants to keep his partnership with C.
A;; Two new partnerships can be created: A and B create AB Partners; B and C create BC Partners. The GP transfers one condo to AB Partners and the other to BC Partners. Following the transfer, GP dissolves.
All Ms agree
All Ms agree
Board + Sh majority
Board + Sh majority(PHC*)
All agree
All agree
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 8of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Tax
Organizational choices (Tax)
* mandatory
Partnership Corporation
Partners
Corporation
Board
Shareholders
LLC
LLC
Members
Example 6.11 (A and B plan to form a business)
Scenario #1: They will pay themselves salaries totaling $70,000 and expect net income of $80,000.
A: If the business is a corporation, they will pay total federal income taxes of $24,700, but only $14,700 if they organize as a partnership.
Scenario #2: They take the same salaries, but the business has a net loss of $20,000.
A: Federal income tax (total): corporation $2,800, partnership $800.
Pass through
Pass through
Pass through
income *(zero out)
Pass through
Passthrough
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 9of 14
Business taxation(couple hypotheticals)
#2 Lose money
(at start)
Assume business owners have personal income of $75,000 and anticipate early business losses of $60,000.
How should they organize the business?
#1 Make money
(at start)
Assume business owners have personal income of $75,000 and anticipate early business income of $60,000.
How should they organize the business?
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 10of 18
Make money(double corporate taxation)
CorporatePass-through
$22$25Personal tax
$126$135Total income
$51$60Dividends / share
$9$0Business tax
$60$60Business income
$75$75Personal income
What is total tax?
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 11of 18
Lose money(flow through of losses)
CorporatePass-through
$12$1Personal tax
$75$15Total income
$0($60)Dividends / share
$0$0Business tax
($60)($60)Business loss
$75$75Personal income
What is total tax?
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 12of 18
Zero-out income
($60)Business expense
Corporate(deductions)
Corporate(no deductions)
$25$22Personal tax
$135$126Total income
$60$51Dividends / salary
$0$9Business tax
$60$60Business income
$75$75Personal income
What is total tax?
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 13of 18
Pass through
limited
(PCV*) All Ms agree
manager equal No
(withdraw voting)
distributions (equal)
filing *(agreement)
Manager-managed
Pass through
limited (PCV*)
All Ms agree
equal / agent
equal No
(withdraw mgmt)
distributions (equal)
filing *(agreement)
Member-managed
Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."
Pass through
limited (PCV*)
Board + Sh majority
board directors fund'tal tx
No(agreement)
Dividends +
salaries
filing *(agreement)
S Corporation (CHC)
income * (zero out)
limited (PCV*)
Board + Sh majority(PHC*)
board (PHC*)
directors* fund'tal tx*
Yes(PHC*)
dividends (per share)
filing *
(bylaws) C Corporation
Corporation
Pass through
LP-ltd GP-jt/sev
(ltd if LLLP)All agree
LP-ltd
GP-manage agreement
LP-Yes GP-No
(withdraw)
share distributions($ contrib)
filing*(agreement)
Limited partnership
Passthrough
Joint / sev *LLP-limited(supervise)
All agreeequal
/ agent equal
No(withdraw)
share profits (equal)
Association*
filing LLP*(agreement)
General partnership
Partnership
Change Liability Liquidity Mgmt Voting Tax Financial Formation
Organizational choices * mandatory
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Organizational Choice – Hypos #2
Group Work
Slide 14of 14
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 15of 14
The end