Business Organizations: The Creation of a Viable Entity

For a number of years I taught Business Organizations 441 and 442 at Michigan State University. This branch of law gives me great satisfaction as it indeed allows me to build an engine for dreams to come true.. much like website design is today, but in a much larger and more perpetually viable way.

Before I went to law school and after attaining a bachelors degree from Marquette University, I opened a small business. The business was a delicatessen/catering firm and we employed about seventeen employees at any given time. It was an on the job education for me, dealing with contracts, landlords, purveyors of product, tax matters, and, of course, for the first time.. attorneys. I hated not knowing the "rules" of how business is conducted in America. I remember saying.. 'If I'm to play the game of Monopoly, I want to read the instructions.' After two successful years, I sold my interest and the family and I packed up and left Wisconsin for Michigan.

While in law school I offered to volunteer my time as an intern at the Department of Commerce, Corporation and Securities Division and, happily, was hired into their Franchise Registration Department. At that time franchise was considered a security under Michigan law and it was regulated as the Michigan Blue Sky Act statutes were, ie, with strict enforcement through the Attorney General's office as per compliance prior to the offer, sale or even solicitation. I had learned a foundation about securities during college when I interned for three terms on Wall Street at a brokerage house, but with the Corporation and Securities Bureau this gave a hands on experience of the type that conformed with the education I was then receiving.

The Corporation (and its cousins)

Just what is a corporation? It is many things, among them it is a way to limit shareholder liability should the entity fail. It is a way, if the entity was adequately funded at its inception and if corporate formalities were properly followed, that stockholders are able to shield their personal assets. It is also an alias for the people behind the corporate name. It also has a perpetual existence.. it doesn't have given life expectancy. Similar to an intervivos trust which exists along side human lives, other than what is called a "Subchapter S Corporation," it is a taxpayer like all citizens are.

A little history always helps.

Corporations as a concept began, not surprisingly, because of a need to accomplish something which otherwise could not be legally done. It began in England where the only Common Law system of government then existed. Today about thirty percent of the world's population operates under Common Law. The rest, including various forms of dictatorships, operate under Civil Law. In all Common Law countries there are two systems which work together: the law of equity (meaning "fairness") that is written down as case law ("stare decisis"), and the statutory law (or
"black letter law") that is written down in statute books. The court of equity was called the "Chancellor's Court" or "The Chancellory." There things which required fairness rather than a uniform remedy could temper the harshness of the black letter law. Some of these include restitution, rescission, injunctions, and specific performance. In Michigan we had two court systems until 1963 when they merged the two into the highest trial court in the State, the Circuit Court. Many States and Common Law countries (jurisdictions) still have two distinct court systems.

In any event, in London a group of merchants wanted to pool their money during the early days in the rise of the English middle class, get a ship, head out for America and India, get furs and spices, come back and have an exclusive on such desired items. Not one of them could finance this alone, so they went to the Chancellor to speak to the King about how to do this. The Chancellor ruled that if they would pay a "royalty" to the Crown, and if they would plant the English flag where they landed to officially "claim" this territory for England, England would protect their ships on the high seas from the French, Spanish, Dutch and Portuguese, grant them a "franchise" (a license) to do business in these territories, and protect from all others and so recognize their collective name as if it were a human being. "The East India Tea Company" was born, and shortly thereafter, "The Hudson Bay Company" as well. Both of these entities still exist in one form or another to this day, and there began the mercantile system.. the ancestor of the franchise system today.

Today there are no national corporations. They are products of the State process. They can have two homes, the State of their Incorporation ("where the heart is"), and the State where their principal business is located ("where the brain is"). General Motors is a Delaware Corporation and its "brain" is in Michigan. It has a double resident status and is a foreign status in the other forty eight States as per doing business there and using the court systems.

The King granted a "Charter" to a new entity which had no term limit attached, and protected the name against all others so long as its taxes were paid. In Michigan, the Secretary of State, via the Department of Commerce, issues Articles of Incorporation and assigns a CID number which is much like a Social Security ID number, and in fact it means "Corporate Identification Number." This can only be done if the State, after a search, finds that there is no conflicting name then on file.

This number then goes to the IRS for an EIN number or a SS-4 number which is the taxpayer identification number. These numbers are taken to the bank for setting up corporate bank accounts. There are other applications which must be applied for in special cases such as the IRS notification and acceptance for Subchapter S corporations and these have strict time limits to apply attached.

At the same time corporate books, stock certificates, and the corporate seal are ordered, received and drafted. The bylaws (the contract or agreement between the shareholders) is drawn up as to how business is to be conducted, officers, salaries, etc. The incorporators call the first meeting, the shareholders pay for their shares, the shareholders elect (if at all in Michigan) a board of directors who in turn elect the officers (President, CEO, Secretary, etc.). In very brief description, this is how a corporation is formed.

There are different types of corporations: the domestic profit (C and S corporations), the ecclesiastical (church), the professional (PC), the not for profit (non-profit, these among others. Most corporations are C class. They are formed to make money for their shareholders who invest in them. They pay taxes and have excellent shelters available to them such as pension plans, profit sharing plans, medical reimbursement plans, etc., all paid for with pre-tax dollars. A smaller version of this came into existence about fifty years ago, the Subchapter S corporation, in an effort to give some of the benefits to small "mom and dad" entities, such as the corporate limited liability (..should the business fail at least the house is safe), but especially no corporate taxation, to wit: as with a partnership, the tax liabilities from profit go directly to the shareholders as do the depreciation of corporate assets as liability offsets. There are limitations and certain criteria that have to be met in the case of S corporations such as limits to income from passive investments (royalties, rents, etc.).

In recent years a relatively new form of for profit entity has come into popularity which is similar to Subchapter S corporations except that they are not corporations, and that is the Limited Liability Company (LLC). Just as the S corp is a hybrid between the not taxed partnership and the taxed C corp, the LLC is a hybrid between the S corp and the partnership without being a corporation at all but with S type limited liability. The differences are subtle but the LLC is often preferred in cases where the entity may own real estate.

Professional Corporations (PC) and Professional Limited Liability Companies (PLLC) deal with the same subject matter, to wit: all the stockholders (PC) or members (PLLC) have to be of the same class, such as licensed attorneys, doctors, dentists, etc. Professional misconduct such as malpractice are not insulated from liability, just matters of business failure. Professional liability insurance still must be maintained for this type of protection but may be sheltered to some degree by a pre-tax dollar structure within the entity.

Not for Profit (or non profit) corporations, such as educational institutions, research foundations, charities, etc., are self evident, as are ecclesiastical corporations which relate to the operation of religious enterprises.

Sole Proprietorships, Partnerships and Limited Partnerships

Sole proprietorship certainly pre-date all other entities. They were the family run barbershops, shoemakers, and inns of antiquity. There came a time when other people bought part interests in them and the came partnerships, and co-partnership agreements came into existence.. again, back to the power of contract law. (N.B.: contract law, arguably, is the second most powerful body of law behind property law.) Just as the King granted a charter to the first corporations, and the Secretary of State grants articles of incorporations in the different states, the sole proprietor and the partnership (or co-partnership) receive a DBA ("Doing Business As") Certificate from the county clerk of the county that the business is conducted in. Sometimes, and confusingly, this DBA is referred to as an "Assumed Name," and the converse is true too. An "Assumed Name" is an legal alias that corporations have to name, perhaps, divisions or different asset entities within the corporation, such as "The Green Thumb," a greenhouse business, being owned as one asset of, and a division, say.. "ABC Industries, Inc." These names have to be registered with the State and certificates granted. The DBA is likewise an alias on a sole proprietor or partnership level. Sole proprietorships and partnerships at the county level have there name protected and can sue under the business name in that county's court system but have no limited liability protection, hence must maintain adequate insurance in lieu of losing personal assets to the individuals. If this type of entity's business extends into more than that one county, DBA certificates must be taken out in each county. Unlike Articles of Incorporation, Limited Partnerships, and Limited Liability Company which pay a one time filing fee for existence, Sole Proprietorships and Partnerships have a time factor of usually five to ten years before renewal is due to maintain its legal existence and for the protection of the business name.

Thirty years ago the very old concept of the entity known as "Limited Partnership" was an entity of the county in which they resided. With the coming of the 1970's investment into separate oil and gas well drilling on leased farmer's fields throughout Michigan, limited partnerships, like corporations, became a State entity for practical sense, to wit: one entity could act in all counties. The limited partnership concept is unique. There must be at least one general partner who is exposed to unlimited liability, sometimes an individual and sometimes an insulated corporation. This being said, then investors come in for percentages of profit should the venture be successful. These are called limited partners. They must sit back and not be a part of any business or decision making of the limited partnership or they will lose their limited liability (up to what they invested only) status. They are like the person who bets at the horse race. They must remain in the stands. The tax ramifications and benefits of write offs as per depreciation on business property of the limited partnership flow directly to the partners, usually by their limited partnership agreement.

What Is A "Joint Venture?"

A joint venture is usually a partnership or limited partnership which ends on a date certain which is stated in advance, such as "when the ship comes in" or "when the treasure is found." Again, it is a matter of contract over that of legal entity but usually an entity is formed to give structure to this type of arrangement. It could be done on a State level by way of a Limited Partnership filing but usually it is done, if at all, by a county filing.. such as Broward County if the treasure ship sought is just off of that coast. The contract rather than the entity is usually the focal point.

These types of entities mentioned above are offered as examples of what might be right for your future growth, the matter of perpetuity after you retire, or an idea of which its time has at last come. We are available to discuss both the viability of the idea and the structure of a marketing plan once formed.

Come With Your Concept, Let Us Build It For You!

The design and possibilities are all based upon your dream. We have established literally hundreds of entities ranging from insurance to bancorps, stained glass studios to restaurantss, etc. We know and think business development and at a fair and efficient price. If you have an idea, why not call and make an appointment to talk about it. The initial consultation is both confidential and without charge.

Call Us If We Can Help Make A Dream A Reality: 517 337-8100