Drafting Exercise

During the last class, I provided a handout with some basic examples of contract clauses that highlighted drafting considerations related to the class discussion. Click here for the handout.

Next Class: Drafting Exercise

There are no materials you need for our next class. During our next class, we will review some basic points of drafting and conduct an in-class exercise related to drafting contracts.

As such, there is nothing you need to do to prepare for class. Instead, please take some time to review prior course work (or catch up on your readings, if needed).

See you in class.

C corps & S corps

Prof. Fershee--

During the last class period you discussed "C corps" and "S corps." I know this question is likely irrelevant for this semester, but for those of us without any "business background" could you give a general definition/description of these types of corporations and some of their advantages/disadvantages?

Professor's Response:

We'll talk about this some more in class, but the basic difference is that a C corporation is taxed as an entity, and then distributions to shareholders (dividends) are taxed separately. If the corporation elects to be taxed as an S Corp, the taxation is the same as partnerships, LLCs, and sole proprietorships, which are taxed as "pass through" entities. This means the owners are taxed directly on their ownership shares, rather than paying taxes as an entity. (Note that LLCs and S Corps must file a form indicating ownership shares.)

The main benefits of a C Corps include certain employee benefit programs and carry forward of losses. S Corps can be taxed as a pass though, but can be restrictive in terms of who can own the entity.

LLC as a Partner/Shareholder in another entity

Professor Fershee-

In Elf v. Jaffari, a Corporation became a member of an LLC. I was wondering, can this happen the other way around?

Can an LLC become a partner in an Limited Partnership or a shareholder in a Corporation?

Can an LLC become a member in another LLC?

Professor's Response:

For the first question, an LLC can own stock in a corporation, which would allow it to vote for members of the board. There is some nuance here in how everything is effected, but yes, an LLC can be an owner of a corporation.

For the second question, yes, an LLC can become a partner in an LP or own shares in a corporation. Click here for an interesting example of an LP with an LLC as the managing General Partner.

Finally, yes, and LLC can be a member of another LLC.

Tax Implications

Professor Fershee,
In class today you mentioned there are negative tax consequences in switching from a GP to a LLP (as well as switching between the others)-without going into too much detail, where/how are the tax ramifications felt? Who drives these relatively new partnerships, is it the IRS or does the IRS merely react to trends in business?
Thanks.

Professor's Response:
Actually, (at least in the jurisdictions I have seen) there are no tax consequences to converting from a general partnership to an LLP (with the caveat that there could be some limited circumstances or state anomalies). The major consequences are when a corporation converts to an entity under the partnership structure (e.g., LP, LLP, LLC). This can be deemed a liquidation and have major tax consequences.

As for the other part of your question, we'll talk about it in more detail today. The IRS does not drive entity formation or rules, but IRS decisions certainly impact entity choices. When a new entity type is created, the IRS determines how it will treat the new entity -- that impacts if and how people will use such options.

partnership?

I have noticed that some partnerships are called (example's only): Fershee L.L.P. (limited liability partnership) while others are called Fershee L.P. (limited partnership). Is there a difference between an L.L.P and an L.P. or do they mean the same thing?

thanks

Tom

Professor's Response:

Great question, and certainly appropriate for today's discussion. In fact, today's class (October 27, 2008) will cover this specific issue. The short answer is no, they are not the same. Stay tuned . . . .

question

#1 Do the default rules that we have discussed in class (need all partners to agree to change original agreement, majority of partners can decide day to day issues if agreement doesn't appoint someone or already address, etc..) apply to an L.L.P as well. All the cases we have analyzed appear to be something other than an L.L.P arrangement.

#2 If a partner wants out of a partnership that is profitable, how do the partners normally settle on the value of "good will". It seems like it could be a highly litigated area and I haven't read any cases that address this.

Thanks

Tom

PROFESSOR'S RESPONSE

#1 The default rules we are talking about are for general partnerships, not Limited Liability Partnerships (LLPs). LLPs can only be created by agreement and filing with the state. As such, they have different rules, although they are similar in many instances). We will discuss LLPs periodically (I may note some specific differences and similarities), but overall, this course is about partnerships generally. LLPs are more advanced than we have time for in this course. We will discuss some LLP-related issues when we get to our LLC section later in this course.

#2 We will discuss goodwill a little more in the near future. It is often point of contention, but note that valuation of almost anything is contested when partners get to the litigation stage. More on this soon.