Chapter 17: Limited Liability Business Forms
When Liability May Be Imposed
-In extraordinary circumstances, in cases of abuse and to achieve justice, the courts may hold the members of an LLC personally liable for its debts. -Known as "piercing the corporate veil."
Formation of an LLP
-LLPs must be formed and operated in compliance with state statutes. -The appropriate form must be filed with a central state agency and the business's name must include either "Limited Liability Partnership" or "LLP".
LLC Operating Agreement Addresses
-Management and how future managers will be chosen. -How profits will be divided. -How membership interests may be transferred.
Articles of Organization
-Must be filed with a central state agency—usually the secretary of state's office. -Articles must usually include the business name, its principal address, the name and address of a registered agent, the members' names, and how the LLC will be managed.
Preformation Contracts
-Prior to charter, owners of the firm are called "promoters." -If a promoter forms a "preincorporation contract" prior to formation, they may be personally liable.
Other Similarities to Corporations
-Separate legal entity from owners. -Can hold property separately. -"Foreign" designation if doing business in state other than the one where the LLC was formed.
LLC Operating Agreement Cont.
-State Statute Fills in the Gaps: LLC statute governs where operating agreement is silent. -Partnership Law May Apply: If LLC statute is silent, courts may apply partnership principles.
Disadvantages of the LLC
-The main disadvantage is the lack of uniformity with state laws. -Businesses that operate in multiple states may not receive consistent treatment.
Articles of Organization Cont.
-The name of the business must include the words Limited Liability Company or the initials LLC. -A majority of the states permit one-member LLCs, but some states require at least two members.
Advantages of the LLC
1.) Limited Liability: Members are liable to amount of investment. 2.) Flexibility in Taxation: Two or more members can choose to be taxed as part-nership (pass-through) or corporation (double-tax). A one-member LLC is taxed as sole proprietorship unless owner wishes to be taxed as corporation.
Family Limited Liability Partnerships
A limited liability partnership in which the partners are related to each other. -All partners must be natural persons or be acting in fiduciary capacity for the benefit of natural persons.
Rights and Duties in a Limited Partnership
Except for right to participate in management, limited and general partners have essentially the same rights. -Limited partners have the right to inspect the LP's books and be informed of the LP's business. -Both general and limited partners owe each other a fiduciary duty.
Formation of an LP
Formation of a limited partnership is a public and formal proceeding in which partners must strictly follow statutory requirements. -The partners must also sign a certificate of limited partnership. -Certificate of limited partnership must include certain information such as the name, mailing address, and capital contribution of each general and limited partner.
LP Cont.
-A limited partnership consists of at least one general partner and one or more limited partners. -A GENERAL PARTNER: Assumes management responsibility for the partnership. - Has Full Responsibility for the partnership and all of its debts.
Jurisdictional Requirements
-An LLC is a legal entity separate from its owners. -For federal diversity jurisdiction, the LLC may be treated differently than a corporation. -Citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions. -The state citizenship of an LLC may come into play when a party sues the LLC based on diversity of citizenship.
Dissociation of an LLC
-An LLC member has the power—but not necessarily the right—to dissociate from the LLC at any time. -Dissociation of an LLC is triggered by events similar to dissociation of a partnership including voluntary notice, triggering event, unanimous vote, bankruptcy, incapacity, or death.
LLC Operating Agreement
-Analogous to corporation's bylaws. -Not required for LLC to exist, but strongly recommended the agreement be in writing. -Dissociation procedures. -Whether formal meetings will be held. -How voting rights will be apportioned.
Limited Partner
-Contributes cash or other property and owns an interest in the firm. -Is not involved in management responsibilities. -Is not personally liable for partnership debts beyond the amount of his or her investment, unless they engage in management of the business.
Effects of Dissociation
-Dissociating member loses the right to participate in the management and the right to act as an agent.
Dissociation and Dissolution
-General partners can voluntarily dissociate (withdraw) from a limited partnership unless partnership agreement specifies otherwise. -Under the RULPA, a limited partner can withdraw by giving six months' notice, unless the partnership agreement specifies a term.
Management of an LLC
An LLC can be member-managed or manager-managed. In member management, all members participate in management and decisions.
Liability in an LLP
An LLP allows professionals to avoid personal liability for the malpractice of other partners. -A partner in an LLP is still liable for her or his own wrongful acts. The partner who supervised the individual who committed a wrongful act is also liable.
Liability outside the State of Formation
An LLP formed in one state may do business in another state, but the LLP statutes in the two states may provide different liability protection. Most states apply the law of the state in which the LLP was formed, even when the firm does business in another state.
Dissolution
Dissociated member has no right to force the LLC to dissolve. The remaining members can choose to continue or dissolve.
Liabilities of Partners in an LP
In most states, the General partners are personally liable to the partnership's creditors. -Liability of a limited partner is limited to the capital that she/he contributes or agrees to contribute to the partnership. -Liability arises when the creditor believes—based on the limited partner's conduct—that the limited partner is a general partner based on the LP's management of the partnership.
Limited Partnership (LP)
Is a business organizational form that limits the liability of some of its owners (the limited partners).
Limited Liability of Members
LLC members are shielded from personal liability in most situations and any liability of members is normally limited to the amount of their investments.
Fiduciary Duties
Managers in a manager-managed LLC owe fiduciary duties (the duty of loyalty and the duty of care) to the LLC and its members.
Winding Up of LLC
Members who did not wrongfully dissociate may participate in the winding up process. -Members must collect and liquidate LLC assets and honor prior contracts. -After all assets are sold, proceeds are distributed to pay creditors, then capital contributions, and then remaining money is distributed pro-rata to the members.
Distribution of Assets
On dissolution, creditors' claims take priority. After that, partners and former partners receive unpaid distributions of partnership assets.
Nature of the LLC
Owners are called "members" (not shareholders) and their ownership is called an "interest" (not shares).
Limited Liability Partnership (LLP)
a hybrid form of business designed mostly for professionals who normally do business as partners in a partnership. -An LLP allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners.
Limited liability limited partnerships
differ from a limited partnership in that the liability of a general partner in an LLLP is limited to the amount of his or her investments in the firm. -Only a few states provide expressly for LLLPs. In states that do not provide for them but do allow for LPs and LLPs, a limited partnership should probably still be able to register with the state as an LLLP.
Limited Liability Company (LLC)
is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership. -LLCs are increasingly the entity of choice for businesses. -LLCs are governed by state law.