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A corporation is not a partnership

Peter Mahler discusses a recent NY close corporation case, Pappas v. Fotinas
which he describes as “a thoughtful, well-reasoned decision that sets forth the competing factual narratives and operative legal principles.” I defer to Mr. Mahler’s overall assessment of the opinion, and refer the reader to his detailed discussion of the case. But in one respect I disagree with the court’s reasoning.

In brief, the court declines to condition dissolution on giving defendants the right to buy out plaintiff as required under the NY statute. This might have been ok given that the parties had stipulated they weren’t seeking a buyout. The problem is that the court went further:

Dissolution here, where one of the three shareholders has died, and another has retired because of injury, is consistent with the real-world similarity between closely-held corporations and partnerships. Indeed, the Court noted in its January 2009 Decision After Hearing that, at the time 577 Baltic Street was purchased and the three shareholders commenced business from the property, Mr. Fotinos and Mr. Pappas described the enterprise to third parties as a partnership. Had Messrs. Pappas, Kalogiannis, and Fotinos chosen to conduct business as a partnership, the result would be clear.

It is “elemental” * * * [citing case] that, in the absence of agreement to the contrary, the death or withdrawal of a partner dissolves the partnership by operation of law, and a right to an accounting accrues to any partner or the partner’s personal representative in connection with the winding up of the partnership’s affairs. * * * That the same result obtains here would not offend the purpose or policies of Business Corporation Law § 1104-a.

Repeat after me: A CORPORATION IS NOT A PARTNERSHIP.

Is that clear? If not, let’s do it again:

A CORPORATION IS NOT A PARTNERSHIP.

Got it now?

At one time parties intending partnership nevertheless had to incorporate in order to get limited liability. The courts then had some basis for accommodating what they thought were the parties’ real intentions. Now uncorporations, and particularly the LLC, let the parties to closely held firms choose the business form they want. Indeed, more firms now are organizing as LLCs than as corporations. (For a history of these developments see my Rise of the Uncorporation.)

The upshot is that courts should now respect firms’ choice of form. So if the parties choose to incorporate, a court should not assume that they actually wanted to be anything other than a corporation.

Again, the court may have reached the result in Pappas given the parties’ no-buyout stipulation. But the court’s reasoning perpetuates the “incorporated partnership” confusion that has long infected the close corporation cases.

True, this may hurt some older firms that initially organized as close corporations during the bygone close corporation era and never switched. But ignoring the terms of the applicable statute creates costly unpredictability, particularly in the present age of the LLC.

I soon will be posting a paper that lays all this out. In the meantime, just remember:

A CORPORATION IS NOT A PARTNERSHIP.

Got it?

Filed under: close corporations, Unincorporated business entities

Full post as published by Truth on the Market on August 02, 2010 (boomark / email).