Choice of Entity

What follows is a brief review of the alternative legal entities and their principal advantages and disadvantages:

For-Profit Corporations.This form of business organization offers the important advantages of limited liability for its owners (shareholders), centralized management through a board of directors, continuity of existence, and easy transferability of ownership.Of great practical importance is the capacity of the for-profit corporation form to raise capital for business enterprises.A significant downside is the possibility of double taxation, as both the entity and its shareholders may be taxed on the same income.(One method of avoiding double taxation is choosing the S Corporation form; however, this option is in practice limited to small corporations because of requirements that it have 35 or fewer shareholders, ownership only by individuals and not business entities, and that it offer only one type of stock).

Control of the corporation is shared by its shareholders, board of directors and officers.Shareholders elect the board and have voting rights on certain matters such as amending the articles of incorporation or bylaws, selling a major portion of corporate assets or merging with another business.However, shareholders have no control over routine business decisions.These powers are vested in the board of directors, which may delegate substantial authority to corporate officers.The power to control the corporation flows from the power to elect the board of directors.Voting shares in "plain vanilla"corporate structures are distributed according to the shareholders' contribution of capital, property or services.However, it is possible to allocate control through a variety of devices, such as issuance of debt, preferred or other stock with limited voting rights, classifies shares, and other means.

In large publicly traded corporations, it is common for the board to perform at most an advisory role: in practice, the officers run the corporation.Members of the board of directors and officers are bound by common law and statutory fiduciary duties to exercise care and avoid self-dealing when overseeing the business affairs of the corporation.Publicly traded corporations, i.e. those whose shares are exchanged on national securities or over-the counter exchanges, offer the ability to raise large amounts of capital more easily than other forms.However, state and federal securities laws may impose substantial costs on corporations that are not exempt from regulation.

Not-for-profit Corporations.Not-for-profit corporations do not have owners who share in the entity's profits.However, this form may have members who elect the board of directors and reserve certain powers such as amending the entity's articles of incorporation or bylaws.The defining characteristic of not-for-profit corporations is the so-called "nondistribution constraint."That is, although these entities may earn substantial profits (or "surpluses," as they are euphemistically called),those funds must be devoted to the entities' charitable, religious or other public purposes.Moreover, to avoid taxation, it must comply with the requirements for exemption under section 501(3) of the Internal Revenue Code.Although unable to sell stock, not-for-profits may obtain tax-exempt financing as a source of capital.

Professional Corporations:All states permit professionals to conduct business under the corporate form.For the most part these statutes adopt the same legal rules that apply to other business corporations.However, several important differences typically exist.First, shareholders are not shielded from personal liability for their own acts of professional negligence or for the acts of others working under their direct supervision.However, the statutes typically provide limited liability for the negligence of other professionals and for the corporation's liabilities for nonprofessional activities.Second, most statutes stipulate that only licensed professionals may be shareholders of professional corporations and that the board of directors must be comprised entirely or by a majority of professionals.

Partnerships:General partnerships are associations of two or more persons who act as co-owners of a business.Important features include unlimited personal liability of all partners for partnership debts and the ability of all partners to participate in the management of the partnership and to bind the partnership.A significant advantage of this business form is the absence of double taxation: While each partner is liable for his or her share of partnership income, the partnership is not taxed on its business income.A second attractive feature is the informal means by which business can be conducted.

Limited Partnerships:Limited partnerships differ from general partnerships in that the former include limited partners who enjoy limited liability similar to that of corporate shareholders.The limited partner is restricted in the extent to which s/he may participate in the management and control of the business.Limiter partnerships must have at least one general partner who bears the same unlimited liability as a partner in a general partnership and who assumes responsibility for management of the business.Hence, the limited partnership affords many of the corporate advantages of raising capital through passive investment.However, limited partnership interests are also treated as securities and are subject to regulation under federal and state securities laws.

Limited Liability Companies and Limited Liability Partnerships:Almost all states have adopted statutes authorizing limited liability companies and limited liability partnerships.These business forms combine some of the most attractive features of partnerships and corporations:limited liability for all owners; pass-through tax treatment; free transferability of ownership; and centralized management.The statutes generally place no ceiling on the permissible number of owners, permit different classes of ownership, and allow for ownership by entities such as corporations.

QUESTIONS:

1.What are the advantages and disadvantages of each business form for:

a)Two (2) small-town family practitioners joining together to form a medical group?

b)A big city hospital establishing a jointly-owned MRI facility with its specialists?

2.What factors would be relevant in making your recommendation?

1. 3.What information would you need to get from each of the two groups?