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Does the Legal Form of Your Business Matter?

Does the Legal Form of Your Business Matter?

In many business disputes, such as a breach of contract lawsuit, the legal form that a business entity takes may be relevant to the disposition of the case. For instance, a corporation is an entity that can be sued in its own name. That is to say, when you sue a corporation, you are not suing all of the individual shareholders personally. Conversely, when you sue an unincorporated entity, such as a sole proprietor, there is no legal distinction between the business and its owners.

Supreme Court Says Unincorporated Trust Shares its Owners Citizenship

Then there are other business forms that fall somewhere in the middle. The United States Supreme Court recently addressed such a situation. The court was asked to rule on a jurisdictional issue arising from a breach of contract lawsuit. In 1991, a warehouse fire destroyed the inventory of a number of companies. These companies sued the warehouse's owner in Kansas state court. The warehouse owner then moved to transfer the case to federal court.

Federal courts may hear state-law cases, such as breach of contract claims, if there is a “complete diversity” among the parties. For example, if you live in New York and sue a resident of New Jersey, the defendant may ask a federal court to hear the case. However, if you sue two defendants, and one of them is also a New York resident like yourself, than the case must remain in state court.

In the warehouse case, the building is owned by a legal entity known as a real estate investment trust (REIT). REITs are a common device used in many states, including New York, that allows multiple investors to pool their resources to purchase commercial properties. While some REITs are organized as corporations, many others, including the defendant in this case, are simply unincorporated associations.

The REIT here argued that it should be treated as a citizen of the State of Maryland, where it is organized, which would prove complete diversity existed. The plaintiffs argued that, to the contrary, the REIT's citizenship should be based on that of its individual shareholders. And since no record of the shareholders' residences existed, the REIT could not prove diversity and the case should be returned to state court.

The Supreme Court sided with the plaintiffs. Writing for a unanimous court, Justice Sonia Sotomayor said that when it comes to an “unincorporated entity” like the REIT in this case, such an entity does not possess separate citizenship of its own, but rather “the citizenship of all its members.”

Get Advice from a Long Island Business Law Attorney

While this may seem like a technical matter, this case does illustrate the consequences of choosing a particular business form. Courts treat corporations and unincorporated businesses differently. This can affect not only the liability of the business owners, but also the process used to adjudicate any civil lawsuits that may arise involving the business.

If you run a business—or are thinking about starting one—you should speak with an experienced New York business attorney who can advise you on the legal benefits and pitfalls of your organization. Contact the offices of Nisar & Mason, P.C. if you would like to speak with an attorney today.
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