bus law ch 17- limited liability business forms

limitied liability LLC definition

• a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership

• governed by state law

• increasingly popular choice for businesses

Nature of the LLC

• owners are called members

• their ownership is called an interest

• business is a seperate legal entity from owners

• can hold property seperately

• foreign- designation if doing business in state other than the one where the LLC was formed

Limited liability of members

shielded from personal liability in most situations and any liability of members is normally limited to the amount of their investments

when liability may be imposed on members of LLC

piercing the corportate veil- in cases of abuse and to achieve justice, the courts may hold the members of an LLC personally liable for its debts

sometimes not fair if business has no money: undercapitalized, shell corporations- will peirce the veil

rare

Formation of the LLC

• Articles of organization- to start

• preformation contracts

• Jurisdictional requirements

Articles of organization

• Must be filed with a central state agency, usually the secretary of states office

• include- name, address, name and address of registered agent, members names, and how LLC will be managed AND the words or initials LLC

• some states allow one person LLC and some require two, NC allows one

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

Jurisdictional requirements

• an LLC is a legal entity separate from its owners

• for federal diversity of citizenship

  • 2 different parties from 2 different states, and over $75,000

  • business can be sued in each state that its members live in, considered a resident in each of those states

Advantages of LLC

• limitied liability- members are liable to amount of their investment

• flexibilty in taxation-

  • 2 or more members can choose to be taxed as a partnership (pass thru)

  • one member llc is taxed as a sole proprietorship unless owner wishes to be taxed as a corporation

Disadvantages of the LLC

• lack of uniformity with the state laws- are different for LLC

• businesses that operate in multiple states may not receive consistent treatment

Management of an LLC

member managed- people who form the LLC, run it

manager managed- organizer managed: the manager is someone who was hired to run it, runs it!

fiduciary duties- if we hire you, you cant do anything to get us in trouble or take a business oppurtunity that solely benefits you

Managers in a manager-managed LLC owe fiduciary duties (the duty of loyalty and the duty of care) to the LLC and its members

LLC operating agreement definition

• spells out who has the right to do what- who can take out a loan, who purchases property, who can enter into contracts, what happens when business ends

• not required but strongly reccomended have this, and for it to be in writing

whats included in LLC operating agreement

• mgt and how future managers will be chosen- how they are chosen, how will it be run, what happens if they leave

• how profits will be divided

• how membership interests may be transferred- if someone leaves what happens

• dissociation procedures- what happens if this business ends

• whether formal meetings will be held- how often

• how voting rights will be apportioned

*if things end badly,

dissociation of an LLC

if you dont have operating agreement- court splits it evenly

dissociation is triggered by events similar to partnership

you can leave llc at any time just like a partnership

wrongful leaving- that leaving member can be held liable for damages

member cannot force LLC to dissolve, you can buy them out

dissolution of an llc

Just liek partnership, vote to dissolve and winding up

winding up- members who did not wrongfully dissociate may participate in the winding up process

• fullfill contracts

• collect and sell assets

Difference- if business owes remainng $, business owes money not partners, business can declare bankrupcuy

Limited Liability partnership definition

for professionals who go into business together

allows a partnership to continue as a pass thru entity for tax purposes but limits the personal liability of the partners:

• if one partner performs malpractice ,only they are liable and anyone supervising them

Formation of an LLP

Just like LLC

-must be formed and operated within the state laws

-fill out the right form and include LLP

-must file an annual report

• only get shieled once file formed

Liability in an LLP

an LLP allows profesionals to avoid personal liabilty for the malpractice of other partners

• that partner and their supervisor is liable

liabilty outside the state of formation: generally get liabilty protection in any state where you do business, but your also governed by theyre laws, if you have to file and do business, then you do it.

Limited partnership definition

business organizational form that limits the liability of some of its owners (the limited partners)

LP consists of at least one general partner-

• has full responsibility for the partnership, mgt responsibilty, liable!

and one limited partner-

• silent investor

• not involved in mgt responsibilites

• contributes cash or other property and owns interest in the firm

• is not personally liable for debts beyond the amt of their investment, unless they engage in mgt of the business

Formation of an LP

similar to others

certificate of limited partnership

Liabilites of partners in an LP

general- in most states, the general partners are personally liable to the partnership creditors

limited- only liable for the amt in their capital contribution

rights and duties for limited partner

right to see the books, visit the premiss, the irght to know whats going on with the business

CANNOT manage the business

rights and duties for both partners in an LP

fiduciary duty:

duty of care

duty of loyalty

dissociation of an LP

general partners can leave at any time, but debts will still be with them

limited partner can leave but have to give 6 month notice

Limited liability limited partnership: LLLP

both limited and general partner are shielded from liability

only 4 states recognize this