1 / 15

Comprehensive Guide to Organizational Choices in Business

Explore essential characteristics and planning considerations for partnerships, corporations, and LLCs in business organizations. Understand the economics of firm choices, tax consequences, and the implications on liability, management, and financial rights.

plato
Download Presentation

Comprehensive Guide to Organizational Choices in Business

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Welcome to BusOrg! Chapter 6 Organizational Choices

  2. 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 Liquidity Change/combinations Planning considerations Economics of choice Tax consequences Law profession Citizen of world Chapter 6 Organizational Choices

  3. Planning considerations Economics 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 intransigence Richard Posner Chapter 6 Organizational Choices

  4. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * (zero out) limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries No (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent distributions (equal) No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager distributions (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 4 of 18

  5. Organizational choices (Financial Rights) * mandatory Financial Partnership LLC Corporation Partnership Members Shareholders share  profits (equal) General partnership Partners share  distributions ($ contrib) Limited partnership Board LLC Corporation Corporation C Corporation dividends (per share) SCorporation (CHC) dividends + salaries Example 6.6 Q: 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.] Limited liability company Member-managed distributions (equal) Manager-managed distributions (Ms equal) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 5 of 18

  6. Organizational choices (Liquidity) * mandatory Liquidity Partnership LLC Corporation Partnership Members Shareholders No (withdraw) General partnership Partners LP-Yes r GP-No (withdraw) Limited partnership Board LLC Corporation Corporation C Corporation Yes(PHC*) SCorporation (CHC) No (agreement) Example 6.8 Q: 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. Limited liability company Member-managed No (withdraw mgmt) Manager-managed No (withdraw voting) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 6 of 18

  7. Organizational choices (Change/Combination) * mandatory Change Partnership LLC Corporation Partnership Members Shareholders All agree General partnership Partners All agree Limited partnership Board LLC Corporation Corporation C Corporation Board + Sh majority (PHC*) SCorporation (CHC) Board + Sh majority Example 6.10 Q: 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. Limited liability company Member-managed All Ms agree Manager-managed All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 7 of 18

  8. Organizational choices (Tax) * mandatory Tax Partnership LLC Corporation Partnership Members Shareholders General partnership Pass through Partners Limited partnership Pass through Board LLC Corporation Corporation C Corporation income * (zero out) SCorporation (CHC) Pass through 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. Limited liability company Member-managed Pass through Manager-managed Pass through Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 8 of 18

  9. #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? #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? Business taxation(couple hypotheticals) Chapter 6 Organizational Choices

  10. Make money(double corporate taxation) Pass-through Corporate Personal income $75 $75 Business income $60 $60 Business tax $0 $9 Dividends / share $60 $51 Total income $135 $126 Personal tax $25 $22 What is total tax? Chapter 6 Organizational Choices

  11. Lose money(flow through of losses) Pass-through Corporate Personal income $75 $75 Business loss ($60) ($60) Business tax $0 $0 Dividends / share ($60) $0 Total income $15 $75 Personal tax $1 $12 What is total tax? Chapter 6 Organizational Choices

  12. Zero-out income Corporate(no deductions) Corporate(deductions) Personal income $75 $75 Business income $60 $60 Business expense ($60) Business tax $9 $0 Dividends / salary $51 $60 Total income $126 $135 Personal tax $22 $25 What is total tax? Chapter 6 Organizational Choices

  13. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * (zero out) limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries No (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent distributions (equal) No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager distributions (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 13 of 18

  14. Organizational Choice – Hypos #2Group Work Corporations: A Contemporary Approach Chapter 6 Organizational Choices

  15. The end Chapter 6 Organizational Choices

More Related