S Corporation. An S corporation is limited by restrictions on who can be owners as well as the single class of stock rule which requires it to allocate profits and losses proportionately. This may limit the financing alternatives available to the S corporation. Limited Liability Company. The Limited Liability Company is financed by contributions from members. The Limited Liability Company offers more flexibility in structuring outside financing than does the S corporation. The Limited Liability Company may create multiple classes and series of membership interests, and may provide in its operating agreement (or its articles of organization) that profits and losses may be allocated other than under the default rule of per capita among the members. Unless the operating agreement provides differently, distributions by Limited Liability Companies formed under Minn. Stat. Chapter 322C that are made before dissolution and winding up are to be in equal shares among members (i.e., per capita), and upon dissolution and winding up are to be made first to return prior contributions that have not been previously returned and then in equal shares among members and dissociated members. (Tax counsel should be consulted on the tax consequences of a disproportionate allocation.) The ability of a Limited Liability Company to create additional membership classes or series of membership interests is typically governed by the operating agreement. Transferability of Ownership Interests Sole Proprietorship. A sole proprietor transfers ownership of the business by transferring the assets of the business to the new owner. The prior proprietorship is terminated and a new proprietorship is established under the new owner. Partnership. The transfer of a partner’s economic interest in a partnership is determined by the partnership agreement, or by statute if there is no partnership agreement. Unless permitted by the partnership agreement, no person may become a partner without the consent of all the other partners. If a partner attempts to transfer his or her interest in the partnership without such an agreement, the transferee does not become a partner but instead becomes entitled to receive the allocations of profit and loss and the distributions that the transferring partner otherwise would receive. A properly drawn partnership agreement will address the conditions under which an ownership interest may be transferred, and the consequences to the transferee and to the partnership. Corporation. Ownership in a corporation is transferred by the sale of stock. A change in ownership does not affect the existence of the corporate entity. Technically, shares of stock in a corporation are freely transferable. As a practical matter, however, the market may be limited for shares of stock in a small corporation that is not publicly traded. In addition, shareholders in a new venture often will want to restrict the transfer of shares and thus may provide for transfer restrictions in the articles of incorporation, bylaws, or a buy-sell or redemption agreement. In an S corporation, shares of stock are also freely transferable, in theory. However, the S corporation election may be inadvertently terminated if the entity to which the shares are transferred does not qualify as an S corporation shareholder, so a buy-sell agreement or other form of transfer restriction is even more important in these situations.
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