Today I wanted to give a brief overview of the differences between a professional services corporation and a traditional corporation. For the purposes of this blog, I am lumping together companies using the phrases, “chartered,” “professional association,” “P.A.,” “professional limited liability company,” “P.L.L.C.” or “PLLC.” I will refer to all the professional services corporations as “P.A.” solely for ease in writing but please keep in mind that they are different and the reasons to use one entity structure over another is a choice to discuss with an attorney.
The main difference between a P.A. and a traditional corporation is the type of business that each transacts. A P.A. is required to organize for the specific purpose of providing professional services in a specialized field, i.e. law, accounting, real estate, etc. The phrase professional service is defined by Florida Statute 621.03 as, “any personal service to the public that requires…the obtaining of a license or other legal authorization.” A traditional corporation can organize for “any lawful purpose or purposes.” Some secondary differences are that the issuance of stock or memberships for a P.A. is limited to individuals or professional corporations that are licensed or authorized to provide the same professional services; shareholders or members cannot enter into agreements that allow another person to exercise their voting rights; and shareholders or members of P.A.s are restricted to selling their shares only to other individuals or professional organizations that are eligible to be shareholders or members of the organization.
The obvious question then becomes if a P.A. limits what business activities I can engage in and a traditional corporation does not, then why would I ever choose a P.A.? The simple answer is that if you are going to provide services to the public and you want to incorporate, you are required too. The Florida legislature specifically enacted statutes that allow for professionals to incorporate but only on their terms
The Small Business Reorganization Act of 2018 ("SBRA") was introduced in both chambers of Congress as H.R. 7190 and S.3689 during the 115th Congress. While it did not get signed into law it is a good idea.
The SBRA aims to simplify the bankruptcy process for "small business debtors," the term is defined by the bill, that realistically would be better off in a chapter 13 bankruptcy but because of debt limit issues are forced into a chapter 11. After reading the text, I came up with the 6 most important changes that I believe this bill will institute:
1. A trustee would be appointed in every case.
This is important because in most cases the debtor would be better off having a trustee appointed and handling a lot of the tedious work that becomes burdensome and expensive. Small business debtors typically do not have the same capabilities as the multi-billion-dollar institutions that they are lumped in with.
2. The unsecured creditors’ committee would be eliminated unless cause is shown why it should be convened.
Realistically this is not a huge deal because small business debtors tend to have fewer creditors in general, but it does eliminate a procedural issue and should streamline the process.
3. Only the Debtor can propose a plan and the plan must be filed within 90 days unless the court extends the time.
Currently, a small business debtor has 180 days to file a plan; upon expiration of that time frame, any party in interest, under certain circumstances, has the ability to file a plan. This has the potential to create dueling plans, one proposed by the debtor and another proposed by creditors, which creates problems for confirmation. With the proposed changes the case would function more like a chapter 13 case.
4. The need for disclosure statements and solicitations are eliminated unless cause is shown why the court should require them.
Potentially this could be huge and bring the confirmation process in line with chapter 13 but I could see courts issuing first day orders requiring both. If the court does not, it appears to shift the burden to the creditors to object to the plan if they do not agree with their treatment.
5. Property of the Estate is determined based upon how the plan is confirmed.
If a debtor can avoid having to resort to the “cram down” provisions of confirmation then property of the estate would be limited to prepetition property just like in chapter 7 cases, whereas if a debtor cannot get the creditors to agree to their treatment then property of the estate is expanded to include post-petition earnings and assets. This provides a HUGE incentive for debtors to get creditors to agree to the plan.
6. The Discharge would not be delayed.
This is another major incentive for the debtor to avoid the “cram down” provisions of confirmation. If the debtor can get the creditors to agree to their treatment then they will receive their discharge at confirmation and will not have to wait until completion of payments under the plan.
While the Small Business Reorganization Act of 2018 did not pass, the Small Business Reorganization Act of 2019 has been introduced in the Senate. Unfortunately, a companion bill has not been introduced in the House yet.
Last Friday the 3 month and 10 year treasury yields inverted. Historically, this has been one of the most accurate indicators of a pending recession. Basically, an inverted yield curve means that people believe that in the short term they will have better opportunities to invest their money and therefore require a higher interest rate to tie that money up for a relatively short period of time; whereas, people believe that over the medium term those same investment opportunities will decrease and therefore are willing to swap a lower interest rate for the safety of the "guaranteed" return.
While I personally believe that the next recession could be worst than the last, I will table my thoughts on that for now. Instead, I would just like to say that now is the time to start preparing. If you have a financial advisor it is probably a good idea to get their take on what you should do with your investments. Also, if you have the ability, now would be the time to prioritize building that "rainy day" fund so that you have a cushion were something to happen like an unexpected medical situation or job loss. I believe the "experts" say you should have at least 3 months worth of expenses saved. If you own a business you should at least entertain the possibility of a slow down and have a plan in place should one occur.
Whether a recession comes or not, communication with your advisors and having savings in the bank is good advice. If a recession comes and times get tuff, it is important to remember that the decisions you make during the tuff times are the ones that set-up for financial future. The thing I see most doing bankruptcy work is that people are willing to destroy their financial futures because they have to much pride to seek advice or get help. If the times get tuff and you are struggling to get by, please, please, please put your pride aside and seek help.
Why do people incorporate their business? The number one reason I've heard is to protect them from personal liability. While incorporating a new or existing business may protect the business owner from personal liability, the act of incorporation alone does not necessarily accomplish that goal. To understand why, you must first understand the reason for a corporate entity.
A corporation is a separate legal entity that is distinct from its owners. Corporations are born out of statutes and as such the requirements for forming a corporation vary from state to state. Generally, corporations are required to file a document which shows its intention to be a corporation (in Florida, Articles of Incorporation). These documents can be very general and usually state the corporation’s basic information i.e. name, address, what type of business it is authorized to conduct, number of shares authorized, etc. The initial document is then followed by the corporation’s bylaws. The bylaws are a detailed document which dictate the corporation’s existence. The bylaws layout the shareholder’s rights are and how they exercise those rights, how many directors are on the board, what those director’s obligations to the corporation are, what actions the board can take, what officers the corporation can have, what those officer’s responsibilities are, all the way down to what the corporation’s seal should look like and of course the all-important issuance of dividends.
At this point you are wondering what this has to do with limiting liability? The answer is that corporate formalities matter. There is a legal theory known as “piercing the corporate veil,” which is basically a fancy way of saying disregarding the corporate entity and treating it as an extension of the business owners. As a business owner, if a “piercing” happens, the number one reason you incorporated just disappeared and now the business’s assets and your personal assets are on the table.
As small business owners, it is important to remember the corporate formalities, especially when you are the only shareholder, the chairman of the board of directors, the president, and any other title that you want to throw in there. It is important that you take the time to make bylaws, hold the shareholder’s meetings and take minutes, hold the board of director’s meetings and take minutes, keep records of who owns the shares of the corporation, and keep all of that information in a safe place. That way when the time comes and you get sued and the plaintiff is arguing that your business is just an extension of yourself, it might be what saves your assets.
Jeffrey Lampley, Esq.
I am attorney in Southwest Florida who practices in the areas of Business Law and Bankruptcy. This Blog is a combination of useful information and my thoughts on life. Enjoy.