Burrill Business Entities

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BurrillBusiness Entities

• Nathan Dosch
• Neider Boucher
• Entity Choice
• Non-Tax Factors

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Business Entities

• Agenda
• Limited Liability
• Piercing the Veil
• Asset Seizure

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BusinessEntities
Vendors
Tax Accountant
Employees
Landlord
Bank
Business Entity
Other 3rd Party
Customer
Owner
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Non-Tax Factors

• Limited liability - Limited liability for the
  owners as owners. That is, an owner can lose
  his/her investment. The owner is always
  personally liable for his or her own actions.
  The issue is the extent to which the owner
  personally has exposure to the debts and
  obligations of the entity beyond his/her
  investment

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Non-Tax Factors

• Limited liability
• Sole Proprietorship
• Unlimited liability of owner
• Operating Division
• Unlimited liability of owner (entity, not owners
  of entity)

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Non-Tax Factors

• Limited liability
• Corporations
• Regular Corporations. Wis. Stats. 180.0622
  ... a shareholder of a corporation is not
  personally liable for the acts or debts of the
  corporation, except that a shareholder may become
  personally liable by his or her acts or conduct
  other than as a shareholder.

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Non-Tax Factors

• Limited liability
• Exception for debts owed to employees up to
  amount equal to par value of stock, Wis. Stats.
  180.0622(2) (and maybe up to consideration paid
  for no par stock, See Local 257, Hotel
  Restaurant Employees Union v. Wilson St. East
  Dinner Playhouse, No. 82-CV-0023 (Dane County,
  Wis. Circuit Court, Sept. 6, 1983), affd. by
  equally divided court, 126, Wis. 2d 284, 375 N.W.
  664 (1985))
• This exception was recently eliminated effective
  immediately.

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Non-Tax Factors

• Limited liability
• Statutory Close Corporations. Wis. Stats.
  180.1835 The failure of a statutory close
  corporation to observe usual corporate
  formalities or requirements relating to the
  exercise of its corporate powers or the
  management of its business and affairs is not
  grounds for imposing personal liability on the
  shareholders for obligations of the corporation.

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Non-Tax Factors

• Limited liability
• General Partnerships Wis. Stats. 178.12(1)
  (a) Jointly and severally for wrongful acts or
  breaches of trust by a partner. (b) Jointly for
  all other debts and obligations of the
  partnership...

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Non-Tax Factors

• Limited liability
• Limited Partnerships
• General Partner Wis. Stats. 179.33 ... a
  general partner of a limited partnership has all
  of the liabilities of a partner in a general
  partnership...
• Limited Partner Wis. Stats. 179.23 ... a
  limited partner is not liable for the obligations
  of a limited partnership unless he or she is also
  a general partner or ... he or she participates
  in the control of the business....

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Non-Tax Factors

• Limited liability
• LLC Wis. Stats. 183.0304 ... a member or
  manager of a limited liability company is not
  personally liable for any debt, obligation or
  liability of the limited liability company,
  except that a member or manager may become
  personally liable by his or her acts or conduct
  other than as a member or manager.

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Non-Tax Factors

• Limited liability
• LLP Wis. Stats. 178.12(2) a partner ... is
  not personally liable directly or indirectly, or
  by way of indemnification, contribution,
  assessment or otherwise, for any debt, obligation
  or liability of the partnership, whether in tort,
  contract or otherwise, and including any debt,
  obligation or liability arising from omissions,
  negligence, wrongful acts, misconduct or
  malpractice...

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Non-Tax Factors

• Limited liability
• Illusory Nature of Limited Liability
• Many creditors require personal guarantees of
  owners
• Some statutory exceptions such as for trust fund
  taxes
• Owners may not be liable as owners, but are
  liable for their own actions

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Non-Tax Factors

• Ability to Pierce the Veil
• Sole Proprietorship
• No need to pierce the organizational veil,
  because owner is personally liable
• Operating Division
• No need to pierce the organizational veil,
  because entity that operates the division is
  directly liable

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Non-Tax Factors

• Ability to Pierce the Veil
• Corporations
• Veil can be pierced, but hard to do. It is an
  equitable remedy. Limited liability is not to
  be dispensed with lightly. Ruppa v. American
  States Insurance, 91 Wis. 2d 628, 284 NW2d 318
  (1979). Courts will look at extent of
  under-capitalization, formalities (set up of
  corporation, meetings, use of corporate name,
  commingling of assets) and extent of personal
  control exercised. Consumers Co-op of Walworth
  County v. Olsen, 142 Wis. 2s 465, 419 NW 2d 211
  (1988).

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Non-Tax Factors

• Ability to Pierce the Veil
• Corporations
• Statute says cannot pierce veil of statutory
  close corporation for failure to observe
  corporate formalities, Wis. Stats. 180.1835
• General Partnership
• No need to pierce the organizational veil because
  each partner is personally liable
• Limited Partnership
• Need to make sure limited partners do not
  participate in management

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Non-Tax Factors

• Ability to Pierce the Veil
• LLCs
• Fewer formalities
• Annual report
• LLPs
• Fewer formalities
• No annual report required

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Non-Tax Factors

• Ability to Pierce the Veil
• Other Areas of Potential Direct Liability
• Direct personal liability for own actions
• Responsible Person liability for unpaid taxes
• Agency Individuals acting on behalf of a
  corporation can also be personally liable under
  agency rules if they do not disclose the
  corporate status of the entity. Benjamin
  Plumbing, Inc. v. Barnes, 162 Wis. 2d, 470 NW2d
  888 (1991).

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Non-Tax Factors

• Ability to Pierce the Veil
• Other Areas of Potential Direct Liability
• Conspiracy-Anti Trust laws
• Securities law
• Ability of Creditors of Owner to Seize Assets of
  Entity
• Sole Proprietorship
• Yes, because not an entity separate from owner

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Non-Tax Factors

• Ability of Creditors of Owner to Seize Assets of
  Entity
• Operating Division
• Yes, because not an entity separate from owner
• Corporations
• Stock is an asset of the shareholder, and may be
  attached in a judgment
• If sufficient control/vote, creditor may be able
  to dissolve corporation

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Non-Tax Factors

• Ability of Creditors of Owner to Seize Assets of
  Entity
• General Partnerships
• Charging order - Wis. Stats. 178.24(1)
• Court may charge the members interest with
  payment of an unsatisfied judgment
• Only get rights of an assignee of the interest
• Foreclosure of interest - 178.24(2)
• Limited Partnership
• Charging order - Wis. Stats. 179.63

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Non-Tax Factors

• Ability of Creditors of Owner to Seize Assets of
  Entity
• LLCs
• Charging order - Wis. Stats. 183.0705
• LLPs
• No distinction between LLP and a General
  Partnership
• Charging order - Wis. Stats. 178.24(1)
• Foreclosure of interest - 178.24(2)

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Non-Tax Factors

• Other Factors
• Extent Understood by External Constituencies
• Use of LLCs and LLPs internationally still not
  widely accepted
• IPOs require use of a C Corporation
• Relatively easy to convert from an LLC to a
  Corporation

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Non-Tax Factors

• Other Factors
• Wisconsin Real Estate Transfer Fee
• Transfer by members to their LLC or from an LLC
  to its members is a taxable transfer. Wis.
  Stats. 77.21 et. seq.
• Exception if all of members are related to one
  another and the transfer is for no consideration
  other than the acquisition of an interest in the
  LLC. Wis. Stats. 77.25(15s)

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Non-Tax Factors

• Other Factors
• Wisconsin Real Estate Transfer Fee
• Same rules apply to transfers to and from
  corporations and their shareholders (Wis. Stats.
  77.25(15), but for a transfer from the
  corporation only if the corporation owned the
  property for at least three years) and
  partnerships and their partners (Wis. Stats.
  77.25(15m))
• LLPs avoid this cost