Choosing a Business Form 237Limited Liability Companies
As previously mentioned, although a membership interest in an LLC may be
freely transferable under applicable state law, most LLCs require the affirma-
tive vote of at least a majority of the members or managers before a member ’s
interest may be transferred. Furthermore, membership interests in an LLC
will usually qualify as securities under relevant securities laws and will there-
fore be subject to the restrictions on transfer imposed by such laws.
CONTROL
Simply put, control in the context of a business entity means the power to make
decisions regarding all aspects of its operations. But the implications of control
extend to many levels. These include control of the equity or value of the busi-
ness, control over distribution of profits, control over day-to-day and long-term
policy making, and control over distribution of cash f low. Each of these is
different from the others, and control over each can be allocated differently
among the owners and other principals of the entity. This can be seen either as
complexity or f lexibility, depending upon one’s perspective.
Sole Proprietorships
No such debate over allocation exists for the sole proprietorship. In that busi-
ness form, control over all these factors belongs exclusively to the sole propri-
etor. Nothing could be simpler or more straightfor ward.
Partnerships
Things are not so simple in the context of general partnerships. It is essential to
appreciate the difference between the partners’ relationships with each other
(internal relationships) and the partnership’s relations with third parties (exter-
nal relationships).
Internally, the partnership agreement governs the decision-making pro-
cess and sets forth the agreed division of equity, profits, and cash f lows. Deci-
sions made in the ordinary course of business are normally made by a majority
vote of the partners, whereas major decisions, such as changing the character
of the partnership’s business, may require a unanimous vote. Some partner-
ships may weight the voting in proportion to each partner ’s partnership inter-
est, while others delegate much of the decision-making power to an executive
committee or a managing partner. In the absence of an agreement, the Uni-
form Partnership Act prescribes a vote of the majority of partners for most
issues and unanimity for certain major decisions.
External relationships are largely governed by the law of agency; that is,
each partner is treated as an agent of the partnership and, derivatively, of the
other partners. Any action that a partner appears to have authority to take will