Business Planning Outline

Business Planning Outline, Fall 2011 PART 1: MODEL RULES OF PROFESSIONAL CONDUCT I. ETHICAL ISSUES AT FORMATION OF THE ENTITY A. INTRODUCTION Rule 1.13(a) 1) Defined: Lawyer employed or retained by an organization represents the organization acting through its duly authorized constituencies a) Organization: Defined broadly to include nonprofit, common law organization or venture, partnership, LLC, corporation b) Corporation = separate legal entity ? lawyer represents corporation, NOT individuals 2) Rule does NOT apply to proposed venture since not yet a formed organization that can be represented B. REPRESENTING BOTH ENTITIES & OWNERS Rule 1.7 - Conflict of Interest 1) Rule 1.7(a): Lawyer cannot represent a client if the representation involves a concurrent conflict of interest ? a concurrent conflict of interest exists if . . . a) Representation of one client will be directly adverse to the other (ex. litigation between parties); OR b) Significant risk exists that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client, or a 3rd party 2) Rule 1.7(b) - Exception: Lawyer can represent a client that involves a conflict of interest if . . . a) Lawyer reasonably believes that he will be able to provide competent and diligent representation to each affected client; b) Representation is not prohibited by law; c) Representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; AND d) Each affected client gives informed consent, confirmed in writing i) Rule 1.0(f) - Informed Consent: Lawyer has communicated adequate info regarding the risks of the proposed project C. ATTORNEYS' FEES Estimate Rule: If make fee estimate to client, inform client that figure is only an estimate Rule 1.5 - Fees 1) Rule 1.5(a): Lawyer must charge a reasonable fee or a reasonable amount for expenses ? factors to consider in determining the reasonableness of a fee: a) Time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly b) Likelihood that the acceptance will preclude other employment by the lawyer c) Fee customarily charged in the locality for similar legal services d) Amount involved and the results obtained e) Time limitations imposed by the client or by the circumstances f) Nature and length of professional relationship with client ? applies for lawyer working on retainer g) Experience, reputation, and ability of the lawyer performing the services h) Whether the fee is fixed or contingent ? contingent fee allows for higher fee 2) Rule 1.5(b): The scope of representation and rate of the fee and expenses must be communicated to the client, preferably in writing, before or within a reasonable time after beginning the representation a) Exception: When the lawyer charges a regularly represented client on the same basis or rate i) BUT, any changes in the basis or rate of the fee or expenses must be communicated to the client 1 Business Planning Outline, Fall 2011 Rule 1.8(a): Lawyer can invest in a venture with a client or can take stock in the client's business instead of fees ONLY IF . . . a) The transaction and terms of the deal are fair and reasonable to the client and are fully disclosed and transmitted in writing (no oral contracts) in a manner that can be reasonably understood by the client; b) The client is advised in writing of the desirability of seeking the advice of independent legal counsel on the transaction and is given the opportunity to seek that advice; AND c) The client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction PART 2: TAXATION OF BUSINESS ORGANIZATIONS I. CLASSIFICATION Check-the-Box Rule: Method that allows unincorporated eligible entity to elect to be classified as a corporation for tax purposes 1) General Classifications: All entities classified as corporations OR partnerships for federal tax purposes 2) Business Entities with 2 or More Members a) Tax Classification: Corporation or partnership b) Election: Eligible entity with 2 or more members is automatically classified as a partnership unless an election is made for the entity to be classified as a corporation 3) Business Entities with 1 Owner a) Tax Classification: Corporation or disregarded i) Disregarded: Entity is not considered for tax purposes b) Election: Eligible entity with only 1 owner that is not automatically classified as a corporation is disregarded UNLESS an election is made for the entity to be classified as a corporation 4) Publicly Traded Partnerships (PTP): Any partnership where interests are traded in a publicly-traded national market (NYSE) or secondary market ? classified as corporations for tax purposes a) Exception: If 90% or more is qualifying income, PTP taxed as partnership even if interest is publicly traded i) Qualifying Income: Dividends, interest, gain from sale of real property and capital assets, passive royalty interests (mineral and natural resources) General Classification Scheme: Corporate Entity vs. Unincorporated Entity 1) Corporate Entity: Corporation ? 2 types of corporations: a) C-Corporation: Taxation governed by Subchapter C ? default tax classification b) S-Corporation: Taxation governed by Subchapter S ? only corporations that affirmatively elect to be taxed under Subchapter S and that meet stated requirements are governed by Subchapter S i) Purpose of Election: To give benefits of partnership-like taxation to corporations 2) Unincorporated Entity a) Sole Proprietorship ? NOT an entity b) General Partnership c) Limited Partnership d) Limited Liability Partnership e) LLC II. FORMS OF BUSINESS ORGANIZATIONS Sole Proprietorship: Business owned and operated by a single individual under a fictitious name 1) Liability: NO limited liability Corporation: Legal entity 1) Purchase: Stock 2 Business Planning Outline, Fall 2011 2) Liability: Limited liability for owners of C-Corps and S-Corps 3) Exception: If corporation borrows money, bank will request guarantee of loan payment from corporate SH ? SH can be personally liable for default due to relation with bank, NOT due to his position as SH Partnership: 2 or more individuals carry on as co-venturers of a business for a profit 1) Venturer: Individual who has put at risk his money and/or time 1. General Partnership 2) Formation: State law 3) Revised Uniform Partnership Act: Default provisions that govern rights and obligations of partners unless expanded or restricted by partnership agreement ? controls in most states a) Manage: All partners have right to manage i) Law firms often change provision to have only managing partner manager b) Profits: All partners split profits equally c) 306(a) - Liability: All partners personally liable for partnership debt ? joint and several liability i) If partner pays more than his share, he has right of indemnification ? fellow partners have obligation of contribution d) 301 - Mutual Agency: Each partner is an agent of the partnership i) Partnership = principal, so agent has power to bind the principal unless contracting party has notice that partner does not have right to bind partnership e) 303 - Authority to Bind: Allows partnership to file a Statement of Authority with Secretary of State in state in which GP organized or where GP does business i) States who has right to bind partnership ii) Provides notice to creditors 2. Limited Partnership: General partner + limited partner 1) Two Types of Partners a) General Partner: Holds a general partner interest i) Management: Actively manages the business ii) Liability: Unlimited liability iii) Rights: Same rights and powers granted to GP ? power to bind partnership, power of agency b) Limited Partner: Holds a limited partner interest i) Management: No right of management or control (passive) ii) Liability: NOT personally liable for partnership debts except to the extent of their capital contributions made or agreed to make? same position as SH in a corporation 2) Revised Uniform Limited Partnership Act: Controls in most states a) 303(a) - Liability: Limited partner has limited liability UNLESS he is also a general partner or participates in the control of the business b) 303(b) - Control: Limited partner does NOT participate in the control of the business by proposing, approving, or disapproving by voting one or more of the following matters: i) The dissolution and winding up of the LP ii) The sale, exchange, or other transfer of all or substantially all of the assets of the LP iii) The incurrence of indebtedness by the LP other than in the ordinary course of its business iv) A change in the nature of the business v) The admission or removal of a general partner or limited partner vi) A transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners vii) An amendment to the partnership agreement or certificate of limited partnership 3 

Buy the full version of these notes or essay plans and more in our Law and Business Planning Outlines.