Chapter 33 "Limited Partnerships and Limited Liability Companies"

Limited Liability Company (class)

Formed by: Articles of Organization - protective shell like a corporation, but treated/taxed like a partnership (infinitely modifiable) - Members - act like shareholders/general partners (not liable for personal assets) - Managers - optional - Manager-Managed - members have no fiduciary duty among each other - Member - Managed - Members have fiduciary duties among themselves - LLCs tend to be passive businesses such as rental property - LLCs try to avoid "inside-out" sucking of funds from the corporation to pay for personal debts

Limited Partnership (class)

Formed by: Limited Partnership Agreement - must be at least one general partner (assets on the line) and one or more limited partners (limited control and protected personal assets) - There could be one general partner and multiple limited partners - whatever is not stated in the operating agreement, is ruled by the Statute - often used for estate planning to get an artificial discount and pay less tax

General Partnership (class)

Formed by: Partnership Agreement - two or more people liable to creditors - If the general partners are Bob and Joe, both of their personal assets are liable for any credits one of the partners makes on his own

Fiduciary Duty (exam)

- General Partners owe each other fiduciary duty - General Partners owe fiduciary duty to limited partners - Member-Managed LLC - members owe fiduciary duty to each other - Manager-Managed LLC - members don't owe each other fiduciary duty

Voting (LLC)

- LLC statutes usually specify the voting rights of members, subject to a contrary provision in operating agreement

Filing a Certificate (Formation)

- RULPA says two or more persons desiring to form a limited partnership shall file a signed certificate of limited partnership in the office of the Secretary of State of the State in which the limited partnership is to have its principal office - Certificate must include: name of the LP, address of office, name and business address of GP, latest date where LP is to dissolve, any other matters the GP want to include - The certificate may be amended at any time and must be amended if a new GP is admitted, a GP withdraws, or a GP becomes aware something has become false

Withdrawal in LP

- a general partner may withdraw from a LP at any time by giving written notice to other partners - a limited partner may withdraw as provided in the written partnership agreement

Limited Liability Partnership

- a general partnership that, by making the statutorily required filing, limits the liability of its partners for some or all of partnership's obligations

Derivative Actions (LP)

- a limited partner may sue on behalf of a LP if the general partners refuse to bring the action

Limited Liability Limited Partnership

- a limited partnership in which the liability of the general partners has been limited to some extent as in a LLP

Dissociation (LLC)

- a member has ceased to be associated with the company through voluntary withdrawal, death, incompetence, expulsion, or bankruptcy

Derivative Action (LLC)

- a member has the right to bring an action on behalf of an LLC to recover a judgment in its favor if the managers or members with authority to bring the action have refused to do so

Withdrawal (LLC)

- a member may withdraw and demand payment of her interest upon giving the notice specified in the statute or operating agreement

Proxy (LLC)

- a member's authorization to an agent to vote for the member

Rights of Members (LLC)

- a member's interest in the LLC includes the financial interest and the management interest

Limited Liability Companies (LLC)

- a non-corporate business organization that provides limited liability to all of its owners (members) and permits all of its members to participate in management of the busines

Limited Partnerships

- a partnership formed by two or more persons under the laws of a State and having one or more general partners and one or more limited partners

Assignment of Partnership Interest in LP

- a partnership interest is a partner's share of the profits and losses of a LP and the right to receive distributions of partnership assets - A partner may assign his partnership interest

Choice of Associates in LP

- after forming a LP, the admission of additional limited partners requires the written consent of all partners

Dissolution (LLC)

- an LLC will automatically dissolve upon 1. dissociation of member 2. expiration of LLC's duration 3. written consent of all members 4. degree of judicial dissolution

Loans (LP)

- both general and limited partners may be secured or unsecured creditors of the partnership

Name of LP

- can't include the surname of a LP unless it is the same as the other partners or if the business had operated under that name before admitting a LP. - a LP can't use a name that is the same as any corp other than a LP - name must include "limited partnership" words

Winding up (LLC)

- completing unfinished business, collecting debts, distributing assets to creditors and members (Liquidation)

Foreign Limited Partnerships

- considered "foreign" in any State other than the one in which it was formed

Information (LP)

- each partner has the right to inspect and copy the partnership records

Duties (LP)

- general partners owe a duty of care and loyalty (fiduciary duty) to the general partners, the limited partners, and the LP - limited partners do not

Management (LLC)

- in the absence of a contrary agreement, each member has equal rights in the management of the LLC - LLCs may be managed by one or more managers who may be members

Person

- includes a natural person, partnership, limited partnership, trust, estate, association, or corporation

Protection of creditors (LLC)

- many LLC statutes establish procedures to safeguard the interests of the LLC creditors

Member-Managed LLCs

- members of member-managed LLCs have the same duties of care and loyalty that managers have in manager-managed LLCs

Liabilities (LLC)

- no member or manager of an LLC is obligated personally for any debt, obligation, or liability of the LLC solely by reason of being a member or acting as a manager of the LLC

Profit and Loss Sharing (LP)

- profits and losses are allocated among the partners as provided in the partnership agreement - if the partnership agreement has no such provision, then profits and losses are allocated on the basis of the contribution each partner actually made

Member's Management Interest

- right to manage, vote, obtain information, and bring enforcement actions

Member's Financial Interest

- right to share profits and losses and receive distributions

Rights of parties in a LP

- rights of the parties are set forth in the certificate of LP and the LP agreement - unless otherwise agreed, a general partner of a LP has all the rights and powers of a partner in a partnership w/out limited partners

Profit and Loss Sharing (LLC)

- the LLC's operating agreement determines how the partners allocate the profits and losses - if the LLC's operating agreement makes no such provision, the profits and losses are typically allocated on the basis of the value of the member's contributions

Authority (LLC) on dissolution

- the actual authority of a member or manager to act for the LLC terminates, except so far as it may be appropriate to wind up LLC affairs - apparent authority continues unless notice of the dissolution is given to a third party

Mergers (LLC)

- the combination of the assets or two or more business entities into one of the entities Effect: the surviving entity receives title to all of the assets of the merged entities and assumes all of their liabilities; the merged entities cease to exist

Defective Formation of LP

- the formation is defective if no certificate is filed or if the certificate filed does not substantially meet the statutory requirements

Formation (LLC)

- the formation of an LLC requires substantial compliance with a State's LLC statute 1. Filing - central filing of articles of organization in State office 2. Name - include words "LLC" 3. Contribution - members may contribute cash, property, services, promissory note, etc. 4. Operating Agreement - basic contract governing affairs of LLC and stating rights and duties of members 5. Foreign LLC - any State other than where it was formed

Liabilities (LP)

- the general partners have unlimited liability - the limited partners have limited liability - liability for partnership obligations only to the extent of the capital that they contributed or agreed to contribute

Control of LP

- the general partners of a LP have almost exclusive control and management of the LP - a limited partner is not permitted to share in this management or control

Causes of Dissolution (LP)

- the limited partners have neither the right nor the power to dissolve the partnership Dissolution: 1. the expiration of time period 2. withdrawal of a general partner 3. decree of judicial dissolution

Manger-Managed LLCs

- the managers of a manger-managed LLC have a duty of care and loyalty - usually, members of a manager-membered LLC have no duties to the LLC or its members by reason of being members

Distributions (LLC)

- the members share distributions of cash or other assets of an LLC as provided in the operating agreement or on basis of contributions

Distributions (LP)

- the partners share distributions of cash or other assets of a LP as provided in the partnership agreement

Voting Rights in LP

- the partnership agreement may grant to all or a specified group of general or limited partners the right to vote on any matter - if the agreement grants limited partners voting powers beyond the "safe harbor", a court may hold that the limited partners have participated in control of the business

Distribution of Assets on Dissolution (LP)

- the priorities for distribution are as follows: 1. creditors 2. partners - for unpaid distributions 3. partners - for return of contributions 4. partners - for partnership interest in proportion in which they share in distributions

Assignment of LLC Interest

- unless otherwise provided in operating agreement, a member may assign his financial interest in the LLC - an assignee of a financial interest in LLC may acquire the other rights by being admitted as a member of the company if all remaining members consent

Winding Up of Dissolution (LP)

- unless otherwise provided in the partnership agreement, the general partners who have not wrongfully dissolved the partnership may wind up its affairs

Formation of Limited Partnership (LP)

- unlike general partnerships, limited partnerships call for special procedures with substantial compliance with the limited partnership statute

Differences between Limited Partnerships & General Partnerships

1. a statute providing for the formation of limited partnerships must be in effect 2. the limited partnership must substantially comply with the requirements of that statute 3. the liability of a limited partner for partnership debts or obligations is limited to the extent of the capital he has contributed or has agreed to contribute

Distribution of Assets (LLC)

1. to creditors 2. to members for unpaid distributions 3. to members for return of contributions 4. to members for their LLC interests in proportion to share in distributions

Distribution of Assets at death spiral of company (Exam)

1st - creditors (include owners who loaned if they acted like a creditor) 2nd - unpaid distributions (dividends) 3rd - return of contribution 4th - value of ownership interests