Chapter 39- Limited Liability Companies and Limited Liability Partnerships

Limited Liability Company

• Unincorporated entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations

• It is a separate legal entity

Member

An owner of an LLC

Uniform Limited Liability Company Act

• Model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs

  • codifies LLC Law

• Revised Uniform Limited Liability Company Act: A revision of the ULLCA

Taxation of LLCs

• LLC taxed as partnership

  • Unless it elects to be taxed as a corporation

  • Income or losses flow through the members’ individual income tax returns

  • meaning the business itself pays no federal income tax. Instead, profits "pass through" to members, who report them on personal tax returns. Members pay personal income tax plus a self-employment tax on earnings.

Powers of an LLC

• Same powers as an individual to do all things necessary or convenient to carry on its business or affairs

Formation of an LLC

• An LLC may be organized to operate businesses, real estate developments

  • Certain professional groups, such as accountants, lawyers, and doctors, may not operate as LLCs

• An LLC can be organized in only one state, even though it can conduct business in all other states

• Certificate of Interest

  • Document demonstrates evidence of a member’s ownership interest in an LLC

• At-will LLC

  • LLC that has no specified term of duration

• Term LLC

  • LLC that has a specified term of duration

Articles of Organization

• Formal Documents that must be filed at the Secretary of state’s office of the state of organization of an LLC to form the LLC

• The LLC is a domestic LLC in the state in which it is organized

  • LLC Law of the state governs the operation of the LLC

Capital Contribution to an LLC

• Member’s capital contribution to an LLC may be in the form of:

  • Money

  • Personal Property, real property, other tangible peoperty, and intangible property

  • Services performed

  • Contracts for services to be performed

  • Promissory notes

Operating Agreement

• Agreement entered into among members that governs the affairs and business of the LLC and the relations among members, managers, and the LLC

• Conversion of an existing business to an LLC takes effect when the articles of organization are filed with the secretary of State

  • Or at any later date specified in the articles of organization

Dividing an LLC’s Profits and Losses

• ULLCA mandates that a member has the right to an equal share in the LLC's profits

• Distribution Interest: Members’ ownership interest in an LLC

  • Entitles the member to receive distribution of money and property from the LLC

Liability of an LLC

• Liability for any loss or injury caused to anyone as a result of a wrongful act or omission by a member, manager, agent, or employee of the LLC while acting within the ordinary course of business of the LLC

• Limited Liability of Members of LLCs: Limited to the extent of their capital contributions

Liability of Managers

• Not personally liable for the debts, obligations, and liabilities of the LLC they manage

• Liability of tortfeasors

  • Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or death to another person

  • Personally liable to the injured party

Member-managed LLC

The members do not designate managers to manage the LLC. The LLC is managed by its members.

Tzompas Plumbing

Manager-Managed LLC

The members designate certain members or nonmembers to manage the LLC. the LLC is managed by the designated managers; non-manager members have no right to manage the LLC

La Michoacana

Compensation and Reimbursement

• Non-manager member not entitled to remuneration

  • Except for winding up the LLC

• Managers of LLC are paid compensation and benefits

  • specified in employment agreements

• LLC is obligated to reimburse members and managers for payments made on behalf of the LLC

Agency Authority to Bind an LLC to contracts

Member-managed LLC

• All members have agency authority to bind the LLC to contracts

Manager-Managed LLC

• Non-manager members cannot bind the LLC to contracts

Fiduciary Duties are strict legal obligations requiring a person or entity (fiduciary to act in the best interests of another party to the LLC

• Fiduciary duty

  • Duty of loyalty

  • Duty of care

Duty of Loyalty

• A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC to:

  • Be honest in his or her dealings with the LLC

  • Not act adversely to the interests of the LLC

Duty of Care

• A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC not to engage in:

  • A known violation of the law

  • Intentional conduct

  • Reckless conduct

  • Grossly negligent conduct that injures the LLC

Dissolution of an LLC

• A member has the power to withdraw from the LLC

  • Unless otherwise stated in the operating agreement

• Wrongful Dissociation: When a member withdraws from

  • A term LLC before the expiration of the term or

  • An at-will LLC when the operating agreement eliminates a member’s power to withdraw

Payment of Distributional Interest

• No wrongful dissociation- LLC must purchase the dissociated members’ distributional interest

• Wrongful disassociation- Damages may be offset by the price again

• Notice of Dissociation:

  • Statement of Disassociation: A document filed with the Secretary of state that gives constructive notice that a member has dissociated from an LLC

Continuation of an LLC

• Can be continued in two ways

  • The members of the LLC may vote before the expiration date

  • As an at-will by a simple majority vote of the members of the LLC

Articles of Termination

• Winding up an LLC;s business invoices

  • Preserving and selling the assets of the LLC

  • Distributing the money and property to the creditors and members

• The documents that the secretary of state fills to:

  • Terminate an LLC as of the date of filing or upon a later effective date specified in the articles

Limited Liability Partnership

A special form of partnership in which

• All partners are limited partners

• There are no general partners

Articles of Partnership

• LLP is created formally by filing articles of partnership with the Secretary of State in the state in which the LLP is organized

• Articles of Limited Liability Partnership: Formal documents that must be filed at the Secretary of State’s office of the state where the LLP is organized to form the LLP

• An LLP must register as a foreign LLP in any other state in which it wants to conduct business

Taxation of LLPs

• Flow-through tax benefit- No tax paid at the partnership level

  • All profits and losses are reported on the individual partners’ income tax returns

• Limited Liability of Partners of LLPs: Liability of LLP partners for debts, obligations, and liabilities is limited only to the extent of their capital contributions

  • Partners of LLPs are not personally liable