chapter 17 limited liability business forms

limited liability company

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

- are increasingly the entity of choice for businesses

- are governed by state law

limited liability of members

members are 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:

- 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"

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

- 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

Performation Contacts

- prior to charter, owners of the firms 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 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

limited liability

members are liable to amount of investment

flexibility in taxation

Two or more members can choose to be taxed as a partnership (pass-through) or corporation (double-tax). A one- member LLC is taxed as a sole proprietorship unless owner wishes to be taxed as a corporation

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

Management of an LLC

An LLC can be member- managed or manager- managed. In member managment, all members participate in management decisions.

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

LLC operating agreement

- analogous to corporations 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

LLC Operating Agreement Addresses

- management and how future managers will be chosen

- profits divided

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.

dissociation and dissolution of an LLC

an LLC member has the power- but not necessarily the right- to dissociate from the LLC at any time

effects of dissociation

- a dissociating member loses the right to participate in the management and the right to act as an agent

- the member also has the right to have her interest bought out by other members

- if the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages

dissolution

dissociated member has no right to force the LLC to dissolve. The remaining members can choose to continue or dissolve

winding up

- 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 the remaining money is distributed pro-rata to the members

limited liability partnership

- is 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

formation of an LLP

- LLPs must be formed and operated in compliance with state statutes

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 is formed

family limited liability partnership

- a limited liability partnership in which the partners are related to each other

- a person acting in a fiduciary capacity for persons so related can also be a partner

- all partners must be natural persons or be acting in a fiduciary

Limited partnerships

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

- most states and the District of Columbia

a general partner

- assumes management responsibility for the partnership

- has full responsibility for the partnership and for all its debts

a limited partner

- contributes cash or other property and owns an interest in the firm

- is not involved in management responsibilities

liabilities of partners in an LP

- liability of a limited partner is limited to the capital that she/he contributes or agrees to contribute to the partnership

rights and duties in a limited partnership

- limited partners have the right to inspect the LP's books and be informed of the LP's business
- both general and limited partners

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