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HA3021
CORPORATIONS LAW
CASE STUDIES OF CONTRACT LAW AND BUSINESS STRUCTURES
Table of Contents
Part A    3
a)    3
Professional Corporation    3
Personal Service Corporations    3
Taxation of a PSC    3
Advantages of Professional Corporation    4
Disadvantages of Professional Corporation    4
b)    5
Limited Liability Partnership    5
Forming a Limited Liability Partnership    6
Advantages of LLP    6
Disadvantages of LLP    6
Part B    7
a)    7
Corporate Veil    7
Circumstances, under which an Australian Court is likely to lift it    8
b)    9
Non- Profit Organisation Legal Structure    9
Need for Incorporation for a Non-Profit Organisation    10
References    13
Part A
a)
Professional Corporation
The small businesses, which come under a tax code, are called professionals. There are three modes of operation as a business entity. They are sole proprietorships, partnerships and the third is Professional Corporation.[footnoteRef:1] When a professional sets up a corporation that provides different kinds of service it is termed as a professional corporation. An example can be that of a doctor. The owners of a professional corporation provide the services to their customers as an employee. Professional corporations were set up under the law to provide the professionals with few tax advantages. The key factor in running any business is responsibility. Therefore, the government cannot not give a permission to the professionals; to escape the liability for their actions; once they receive the tax benefits. [1: Rozelia Laurett and Joao J. Ferreira, "Strategy In Non-profit Organisations: A Systematic Literature Review And Agenda For Future Research" (2018) 29(5) VOLUNTAS: International Journal of Voluntary and Non-profit Organizations]
Personal Service Corporations
To gain federal tax benefits, most professional corporations qualify as Personal Service Corporation (PSC). The Internal Revenue Service rules, a professional corporation requires to pass two tests before it can convert the business into a PSC. The two tests include the function test and the ownership test. The function test checks the type of service activities of a professional corporation. The test suggests that approximately 95% of the services should specifically include the fields of health, law, accounting and engineering.[footnoteRef:2] To pass the ownership test a corporation requires a qualified individual to be a stockholder, who are either of the one— [2: Rozelia Laurett and Joao J. Ferreira, "Strategy In Non-profit Organisations: A Systematic Literature Review And Agenda For Future Research" (2018) 29(5) VOLUNTAS: International Journal of Voluntary and Non-profit Organizations]
i. Employees who are performing as professional servers,
ii. Retired employee and
iii. Heirs to estates
Taxation of a PSC
A PSC is taxed similarly like any other regular C corporations. The contrasting feature of a PSC to other corporations is the flat corporate tax rate of 35% benefit it receives. This tax rate does not depend on the level of income earned by a corporation. It is a responsibility of a PSC to file corporate tax returns and issue the K-1 Form. The K-1 Form makes the professionals liable to show the corporation’s profit or loss to that of the stakeholders.[footnoteRef:3] The incomes of a PSC are subjected to corporate tax but the salaries paid to employees are deducted as business expenses. Reducing corporate taxable income to zero is beneficial for the corporates. [3: Shaheen Banoo, "Lifting Of The Corporate Veil: Decoding The Doctrine Of Separate Legal Personality" [2018] SSRN Electronic Journal]
Advantages of Professional Corporation
A Professional Corporation organisation offers several benefits to the small business owners. The primary advantage is the tax break. A professional corporation can make policies catering to retirement plans and 401K plans for their employees. Both the plans have much larger contribution limits as opposed to the plans available to the unincorporated business. This type of a corporate structure provides numerous health and life insurances for their employees. The insurances can be made tax-free by establishing a Voluntary Employees’ Beneficiary Association (VEBA). Disability insurance, dependent care and other fringe benefits are also tax exempted when a business is enlisted as a corporation.
Another important advantage is the perpetual existence. All the professional corporations can legally continue to operate even when its owner dies or leaves. This is a differentiating factor of professional corporations with proprietorships and partnerships, where the business dissolves[footnoteRef:4]. Another advantage is an employee’s ability to avoid personal liability. When the shareholders or employees are liable for their negligence in a regular corporation, the employees in a professional corporation structure are not answerable for their actions. Hence, we observe that when a business provides service under a professional corporation structure the benefits accrued are more as compared to the regular businesses. [4: Louise Crawford, Gareth G. Morgan and Carolyn J. Cordery, "Accountability And Not-For-Profit Organisations: Implications For Developing International Financial Reporting Standards" (2017) 34(2) Financial Accountability & Management]
Disadvantages of Professional Corporation
The major disadvantage is the passive loss. This type of loss is generated when the non-active shareholders are restricted to deduct for tax purposes in the event of a business loss. In case of a partnership, all the members are able to deduct the same share of loss from their personal taxable income. The flat tax rate is another disadvantage. Retaining earnings hinders a firm’s flexibility. The high tax bracket reduces the equal distribution of income amongst the shareholders. In contrast, the regular corporations can split the income, adjust the amount paid and gain a favourable tax bracket.
Dr Abby as a practitioner earning $150,000 should enlist herself as a professional corporation. As she has to support her husband and three dependent children, it will be beneficial for her to gain tax exemptions. Professional corporations receive flat tax rates, which might help Dr Abby, generate more revenue and contribute to savings at the same time. Professional corporations will allow Dr Abby to provide her employees with low cost insurance. This will help create employee motivation and improve work performance. In future if one of Dr Abby’s children become doctors so they will be able to run her business too.
b)
Limited Liability Partnership
A limited liability partnership (LLP) is not synonymous but similar to general partnership. There are two groups of partners in limited liability partnership. In limited liability, partnership an individual does not have any personal responsibility once the individual has contributed in investment. A limited liability partnership is different from a general partnership. The main distinction, which can be pointed out, is that general partnership has full management of the business. This system endows the general partners to control the business and accept personal liability. Participation in daily business activities and operation is restricted for limited partners without them being treated as the general partners under the law.[footnoteRef:5] [5: Michael Simkovic, "Limited Liability And The Known Unknown" (2018) 68 SSRN Electronic Journal.]
The two types of general partner are individual or...