Miscellaneous Business Associations Topics Outline


Table of Contents


Family law.. 2

Community property. 3

Sole proprietorships. 4

Not-for-profit associations. 5

Family law


Very often, in dealing with business associations, family law comes up in a big way, especially in the areas of property and divorce.  In a common law jurisdiction, like Ohio and 40 other states, they will start by breaking up the property held in each person’s name, and then they will determine whether it is separate property or marital property.  Separate property is property that either person brought into the marriage or received by gift, devise, or intestate succession.  Other property that is held in a spouse’s name, especially personal earnings, is marital property.  Upon divorce in Ohio and other states, marital property will tend to get split 50-50.  The divorce action in Ohio consists of two subparts: dissolution and divorce.  Judges prefer dissolution.


Upon death, in most common law states, the surviving spouse can get a forced share of the other spouse’s property.  It will range from 1/3 to ½.  Study each state’s statutes carefully.  In Ohio, if there is no prenupital agreement, then the forced share applies to both separate and marital property.  If a rich lady marries a poor man, and she dies but excludes him from her will, the poor guy can retain a lawyer and get 1/3 of everything she had.  That’s why prenuptial agreements are often used!  In many states, these agreements not only have to be signed, but also acknowledged and recorded.


Suppose the rich lady marries the poor guy and there’s no prenuptial agreement and that contrary to actuarial predictions, the poor young guy dies well before the rich old lady.  Is there any claim by the heirs of the poor young guy?  No, because in the common law system, we say that the potential interest of the other spouse that would rise to fruition if he outlives her is an inchoate expectancy.  Thus, if that spouse dies earlier, nothing of the wife’s property passes under his will.


Consider the “Cat in the Hatt” situation.  Suppose there had been no prenuptial agreement.  What rights in management of the company would Hatt have had?  If we’re in a common law jurisdiction without a prenuptial agreement, and the property was titled in her name then he would have no management rights.  But what if she took dividends from her funeral home business to start a new funeral home company, taking title in her own name?  That would be marital property in most jurisdictions.  But, since it’s titled in her name and it doesn’t involve land, she would have the sole management power over that new business.


How about some really tough hypos?  Let’s say they they’re in a state with a heavy homestead statute.  She takes her money and buys a homestead in her own name.  She then wants to contribute this homestead to a third corporation where she will own all of the stock.  How many signatures are needed on the deed of the property in her name to the corporation?  In most states, having homestead statutes, community property or common law, there will need to be two signatures.


Suppose the lady takes money and buys a farm that is not a homestead, and after a few years she wants to form a fourth corporation, contributing the land.  In Ohio, where the homestead statute exists but is rather limited, how many signatures are needed?  In about six states, including Ohio, dower and curtesy statutes kick in, and we need two signatures.  Know these hypos!  If you screw them up, it’s sure to be malpractice!


If the lady owns stock in a company in a common law state and the stock is in her own name, and she’s the only shareholder, how many signatures do you need on the Sub S consent form?  You only need one, because if she’s in a common law jurisdiction and the corporation is titled in her name, whether it’s separate or marital, she has the sole management power and you only need one signature because dower and curtsey are not involved, and stock in a corporation is not a homestead (with one exception)!


Husband and wife may own things jointly as tenants in common or tenants with right of survivorship or tenants by the entireties in some states.  Don’t forget the “Dos Signatures” rule!  Today, more and more married couples hold everything in joint names like this.


Community property


Nine states are community property states and they vary greatly between each other.  In a community property state, they divide between separate property and “community” or “marital” property.  In Texas and all other community property states, all personal earnings are always per se community property regardless of how the title is taken.  Also, in Texas, Louisiana, and Idaho, earnings from separate property are community property.  In the rest of the community property states, if you don’t co-mingle and you have several different bank and brokerage accounts, then separate property stays separate.


Let’s say there is income from the funeral home, plus dividends from lots of GM stock.  The lady leaves her money to charity.  Here, the less rich spouse dies before the more wealthy one.  In Texas, the poor guy could get half of the community property.  In a community property system, it’s not a mere inchoate expectancy, it’s a vested right.


What does this have to do with business associations?  When you get to management of community property assets, “that is a goddamn mess”.  There are a couple of easy hypos.  In many community property states you can hold community property in joint tenancy.  If there are two names on the property, you’ll need two signatures to transfer.  If there is a homestead in a community property state, note that you’ll almost always need two signatures to transfer it.


Do community property states have dower and curtesy?  Yes and no.  Mainly no, though.  But in California and Texas, if a common law couple moves into those states from another state, then by statute their common law property is still governed by the law of their original state and you could still need two signatures.


Here’s the big question: Sub S requires not only the board of directors making the election but also the consent of all shareholders.  The regulations used to say, and still say, that in a community property state, regardless of how property is titled, it will take the signature of both spouses in order for the election to be valid.  The management theory in the community property states “is all fouled up”!  In these states, if a company is started up in a husband’s name, the attorney must assure that the wife writes down that she doesn’t object to the transfer.  They will add a paragraph that says: “My husband is not my partner or my agent and I’m not liable for his debts.”  Always watch out for tax elections in community property states!


If you sue a husband on a community property debt, you must join the wife to get at her share of the community property.  Also, for an Arizona partnership to agree to an arbitration clause, even though the agreement is in the husband’s name, you must get a signoff from the wife.  So community property law is pretty wild!


In a few states, if the husband has been married before and gets divorced, picks up a new wife, and the new wife is a big moneymaker, then in a number of states, the alimony payments and child-support payments due to the former wife and kids of the first marriage can be taken out of the wife’s personal property even if she doesn’t co-mingle.  This wouldn’t happen in a common law state though.  In a lot of those states, the part of the community that the wife manages (that is, her personal earnings) can be liable to the contracts and the torts of the husband!  It’s wild!


If someone is practicing law as a sole proprietor and you’re going to enter into a five-year computer lease with him, you will want a signed statement from the proprietor’s wife that says her part of the community property stands behind the husband’s debt before you ink the transaction.  How does she protect herself?  She goes to an attorney, who tells the husband to form an LLC or one-man corporation.


Sole proprietorships


Sole proprietorships have a long history, and they are still around today.  There is no business association there.  One guy is simply running a business, and his whole estate is liable for all of the debts of their business.  If he wants to sell the business, he must make out the bills of sale and the deeds and then consider tax factors.  With a sole proprietorship, his individual Form 1040 will reflect the income or loss from the business (on Schedule C) along with his other personal income or loss.  The proprietor will be taxed on his total income (if he’s single) at the current tax rate, which runs up to about 36% for federal income tax, and in Ohio it will run up to 6.9%.  It’s higher in a few states.


Moreover, his income, up to a maximum of about $82,000, will be subject to a self-employment tax (yuck).  That’s part of the Social Security system.  This tax will be about 160% of what an employee of an incorporation would pay.  If you’re an employee, you pay about 7-8% on the first $80,000, and the corporation pays the same amount.  It goes into your Social Security account.  If you’re a sole proprietor, you have to pay both income tax and the substantial self-employment tax.  But that’s not all either!  There’s a Medicare tax that is unlimited in amount.  Are we finished?  No.  He should be using either a corporation or an LLC (a limited liability company).  The LLC is a “child” of the last twenty years.  What is its big advantage?  It has all the tax advantages of a general partnership, and it also has the corporate advantage of limited liability.  No one who is thinking advertently uses a sole proprietorship or a general partnership.  You’ll go for an LLC or a corporation.


If he is married, he will most likely file a joint return with his wife.  At times, they’re better off filing separate returns, but that is relatively rare.  Usually, you’ll save money filing joint returns.  Does the wife take a risk by signing the joint federal income tax return?  Family law and tax law will constantly bubble up in this course, and this is a family/tax law problem.  If the wife files her own separate return, then she has no individual liability if her husband’s return is screwed up.  If a joint return is filed, generally, the wife will have joint and several liability, even if the screw-up relates to the husband’s income, but there are two or three affirmative “innocent spouse” defenses that sometimes work and sometimes don’t.  We’ll see more about this when we take more tax courses.  When you file a joint return, each spouse has a duty to make sure that the tax return is in order.  “You’re in bed with your spouse in more ways than one…and you can get screwed in more ways than one, as Bubba would say.”


We won’t talk about sole proprietorships very much, because a lawyer setting one of these up is almost malpractice per se.  Usually, if a business is getting set up this way, the guy is doing it himself.


For today, we read the old statute on general partnerships.  This is the statute as of 1914.  In Ohio, we have a version of that old statute, and that’s what we will work with.  Toward the end of the year, when we look at partnerships in detail, we’ll look at the newer statute that is in effect in about 75% of the states.  It’s called RUPA: the Revised Uniform Partnership Act.  Each state has slightly different versions of the thing, the casebook material has a lot of text on RUPA, and we will consider it.  But: if Shipman sets up “a partnership problem in Ohio” on an exam, and most of his questions are set in Ohio, then we should cite to UPA 1914, not RUPA.  We can discuss what RUPA does, but only by analogy.  That’s the only way that Ohio courts will currently consider RUPA.  If there’s a close question under UPA 1914, the courts will go with the way the RUPA does it.


Not-for-profit associations


Not-for-profit associations can be incorporated or unincorporated, but you should always incorporate them.  The not-for-profit corporation statute in Ohio is O.R.C. § 1702.  Rove v. Thornburgh – Most politicians incorporate their campaign committee because at the end of the day, the committee may have run up more debts than they are able to pay.  If you incorporate, then the candidate can walk away from the debts at the end.  On the other hand, Thornburgh did not incorporate his campaign committee.  He hired Rove, who did a good job for him, but he lost, and he owed $400,000 or so to Rove.  The Fifth Circuit found that Thornburgh wouldn’t be liable in the capacity of a candidate, but would be liable in the capacity of an individual.  The bottom line is that Thornburgh is out $400,000, non-tax-deductible!  They also lectured Thornburgh on a way out of the dilemma if he was stupid enough not to incorporate.  They said that he could have used “non-recourse contracts or notes”.  This is very important!  We’ll run into this three or four times in the course.  If, the court held, the contract with Rove had stated that only the assets of the committee could be reached by Rove, then in a contract case this provision would have been fully valid and Rove would get nothing.