BUSINESS ORGANIZATIONS & PLANNING
Business Organizations & Planning entails two questions: What business organizations are available for consideration? And, what goes into an informed choice among them?
1. Nebraska entities: Most often included in a discussion about entities allowed by Nebraska Statutes are: Uniform Partnerships. Uniform Limited Partnerships. Limited Liability Partnerships. Business Corporations. And, Limited Liability Companies. About each of these.
a. Uniform Partnership: Broadly stated, a partnership is the formation of an agreement “in which there is an association of two or more persons to carry on as co-owners of a business for profit.” Each partner, whether two or more, is an agent of the partnership for purposes of the business it conducts. While a written agreement stating the objectives of the partnership is not required by the statute, a lawyer will advise the need for such a partnership agreement so there can be no doubt between or among the partners what is intended. One of the reasons that these partnerships are recognized without a written agreement is that the association of two or more people for a business objective actually predates statutory law addressing the subject - so, informal partnerships need to be recognized. The statutory scheme about partnerships address such subjects as: The nature of the partnership, relations of partners to persons who deal with that partnership, relations of partners to each other within the partnership, rights of creditors, ending the partnership, conversions and merges, and transferring personal property and conveying real property.
b. Uniform Limited Partnership: The statutes that apply to this entity are approximately thirty years old. This entity must have a written certificate of limited partnership, and beyond that, the partners decide what other written or oral agreements it might have for the conduct of its business. This entity has both general partners and limited partners. The statute provides that a limited partnership may carry on business that a regular partnership may. Elements of the certificate organizing this entity must identify (when it is filed with the office of the Secretary of State), its name; the name and address of its agent; the name and address of each general partner - only the general partners must sign this certificate. The heart of this entity is to provide that a limited partner is not liable for the obligations of the limited partnership, unless that person participates in the control of the partnership business. Essentially, the limited partner’s liability is set according to that person’s monetary contribution to the entity. The statutes provide for various aspects of the operation of the business of the limited partnership to include: Finance; distributions and withdrawal; assignment of partnership interest; dissolution; and more.
c. Limited Liability Partnership: This entity became statutory a little more than ten years ago. The forerunner of this entity was an outgrowth of the nationwide savings and loan failures of the 1980’s with the first qualification of this in Texas in 1991. To understand the limited liability partnership you need to compare the liability protections found in a uniform partnership as opposed to a limited partnership. In a uniform partnership, all general partners have the liability for partnership activities. In a limited partnership, only general partners have such liability. In a limited liability partnership, a partner would like some limited liability but does not want to give up the control of managing. So, in a limited liability partnership, a partner is shielded from personal liability of partner obligations arising from the errors of wrongful acts of his/her partners and/or employees, but the partner remains personally liable for the ordinary business debts of the partnership, as well as obligations arising from errors or wrongful acts committed by the partner or someone directly supervised by the partner. This entity gains its life by filing a statement of qualification with the Secretary of State.
d. Business Corporation: Nebraska’s current statutes on this entity date from 1995. This entity acquires its life by filing Articles of Incorporation with the Secretary of State, with one or more persons may act as the incorporator. It is generally set up to have perpetual existence. The Secretary of State has a clear procedure in which the corporation is only allowed to use a particular name. The registered agent for this entity becomes “the place of being” so far as legal process. The Articles of Incorporation must proscribe the classes of shares and the number of shares of each class that the corporation is authorized to issue. Shareholders on the one hand and director and officers on the other hand, organize with certain powers and authorities. The concept of ownership and management of a business corporation as between the shareholders and the directors/officers is the heart of how this entity conducts its business.
e. Limited Liability Company (LLC): Nebraska statutes authorizing this entity date from 1993. It begins by filing Articles of Organization with the Secretary of State. The name of the LLC must include the words “limited liability company” or some abbreviation of it. The statutes list 15 enumerated powers that an LLC may exercise. The heart of this entity is the expression in the statutes about the liability of members and managers within that LLC; generally, that they shall not be liable under a judgment, or in any other manner for a debt or liability of the LLC. The management of an LLC is either by its members or an appointed manager.
f. The business organizations listed, above, do not include others such as: Business Developmental Organizations, Industrial Development Corporations, Professional Corporations and Non-Profit Corporations.
2. Planning relative to business entities starts with the appropriate choice of the entity, and then considers the particular needs of the participants (partners, shareholders, members) and how they are to be treated with regard to their ownership interests and objectives for the conduct of the business. Here are some random thoughts:
a. In a general partnership, all partners have an equal right to the management and conduct of the partnership business. However, there is also unlimited liability to all of these partners who become, generally, severally liable for acts which are chargeable to the partnership. Also, while the partnership is treated as an extension of the partners, for such as income and expenses and deductions, the partnership interest is not as transferable as in other entities.
b. In a limited partnership, the obvious purpose is for limited liability for the limited partner as opposed to the general partner. Conversely, the general partner who assumes the liability is in charge of the conduct of the business. As with a uniform partnership, a limited partnership also enjoys favorable treatment for the pass through of income, expense, and deductions.
c. In a corporation (Chapter C status) the principle advantage is limited liability for all of the shareholders. Since the corporation is viewed as a complete and separate legal entity from the shareholders and officers, these shareholders and officers are not liable for the debts and obligations within the business. The principle detraction of a Chapter C corporation is that earnings are generally taxed twice: First as income subject to the corporate income tax, and second as a distributive dividend income subject to the personal income tax of the shareholder. Much effort is spent in planning with a “C” corporation to try to reduce the effects of this double taxation. Because corporations have a long and rich history in American business planning, there are numerous features that can be listed as pluses of minuses.
d. The “S” corporation offers the taxpayer the best of both worlds. It is a corporation so it affords the shareholders all of the advantages permitted to a corporate owner; but on the other hand, the “S” election permits the entity to be treated much like a partnership for federal and state income tax purposes. Simply, items of income, gain, loss, deductions and credits flow through to the shareholders which means, there is no tax imposed on the corporate level. Also, because the “S” corporation is a pass through entity, distributions to the shareholders are generally nontaxable - but there are exceptions to this.
e. Limited liability companies are popular because they combine limited liability principles championed in corporations, but an LLC is treated as a partnership for tax purposes, which allows the items of income, expense, deductions and credits to be passed through to the members in proportion to the respective ownership interests. And, an LLC, like partnerships generally, is not subject to entity level taxation. The heart of an LLC’s management is its operating agreement.
f. This law firm believes that carefully selecting an entity and then making certain that the client’s wishes are thoughtfully constructed within planning is the key to a successful business venture. We look forward to providing this service.