Thursday, September 22, 2011

Choice of Entity Matters: Daywear and Eveningwear

Choice of Entity Matters:  Daywear and Eveningwear
Electing to be organized in a particular form is effectively an election of what standard form agreement will govern the internal relations between the venture and its constituents.  Depending upon your position and circumstances, whether that election is, at a particular time and place, advantageous or disadvantageous to your objectives is simply a fact of life.  In Beatty v. Melody Lake Ranch Club, Inc., No. 2003-CA-001652-MR (Ky. App. Apr. 15, 1005) (Not to be Published), an unsuccessful effort was made to rewrite the history of the choice of entity.
Melody Lake Ranch Club, Inc. was in 1967 incorporated under then KRS ch. 271.  Persons owning land within the boundaries of the club became shareholders, receiving one share of stock for each $100 of investment made.  Fast forward 22 years to 1999, when several shareholders sought dissolution of the corporation, citing its “poor financial conditions” and failure to provide certain of the recreational facilities that it was chartered to provide.  On this basis, the plaintiffs asserted that the corporation was “insolvent” and should be dissolved and liquidated under Section 273.330 of the Kentucky Nonprofit Corporations Act.  KRS § 273.330(1)(a)5 provides that a nonprofit corporation may be liquidated upon a showing “that the corporation is unable to carry out its purposes.”
In response, the corporation argued that not only was it not insolvent, but that KRS § 273.330 is not applicable, it being a business corporation, and therefore any dissolution proceeding must come about under KRS ch. 271B.
The trial court found that the corporation’s dissolution would be governed by the business, and not the nonprofit, corporation act in that the latter act applies only to nonstock corporations, evidence from the Secretary of State indicated that the corporation was organized under the business corporation statute, and because of federal income tax returns, presumably on the form for a business corporation, had been filed for each year.
Affirming the trial court’s determination, the Court of Appeals found that the election to be organized as a business corporation was conclusive.  The plaintiffs asserted that had the nonprofit corporation statute existed at the time of the club’s incorporation (in fact, the nonprofit corporation statute was enacted a year and a half after the corporation’s formation), they would have organized under that statute.  The Court said, in effect, “Yeah, but you didn’t.”  Rather, the Court found that the corporation was clearly formed under the business corporation act, and that being the case, any dissolution is to be governed by that statute, not the nonprofit corporation statute.
As has oft been noted, different forms of business organization provide different rules for different factual situations.  That the outcome in a particular circumstance in one form of organization is different from what would be the outcome were those facts applied in a different form of organization in no manner indicates that one form or the other is deficient.  Recall (and for those of you too young to recall, it is on YouTube) the Wendy’s commercial featuring the Soviet fashion show and the great distinctions between “daywear” and “eveningwear.”  That is not where we are and it is not where we want to be.  Different outcomes are the intended consequence of a robust menu of organizational forms; if that were not the case then we would have no need for alternative forms.  Appreciating those distinctions is what is important in the choice of entity election, in the drafting of organizational documents and, crucially, when the courts come to resolve disputes in business entities.

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