Chapter 38. BUSI Law Limited Liability Companies and Special Business Forms

Limited Liability Company (LLC)

Business structure combining features of a corporation and partnership.

LLC Main Benefits

Limited liability and possible tax advantages.

Member

Person who owns an interest in an LLC.

Limited Liability

Members are usually not personally responsible for LLC debts; their risk is generally limited to what they invested.

Exception to Limited Liability

A member can be personally liable for their own wrongful or tortious conduct.

Personal Guarantee

When a member personally promises to repay a business loan, they can become personally liable

Commingling Funds

Mixing personal money with business money.

Piercing the Corporate Veil

When a court ignores the LLC's separate legal status and holds owners personally liable.

Separate Legal Entity

An LLC is legally separate from its owners.

LLC Can

Sue or be sued, make contracts, and own property.

Foreign LLC

An LLC formed in one state but doing business in another state.

Articles of Organization

Document filed with the state to legally create an LLC.

Articles of Organization Usually Include

Business name, address, registered agent, members, and management information.

LLC Name Requirement

Usually must include “Limited Liability Company” or “LLC.”

Preformation Contract

Contract made before an LLC legally exists.

Preformation Contract Liability

People who sign before the LLC exists are normally personally responsible for the contract.

Novation

Replacing the old contract so the LLC becomes responsible instead of the original person.

Corporation Citizenship

State of incorporation + state of principal place of business.

LLC Citizenship

Every state where one of its members is a citizen.

Federal Jurisdiction Importance

LLC citizenship can affect whether a case can be heard in federal court.

LLC Limited Liability Advantage

Members are generally not personally liable for LLC obligations.

Tax Flexibility

An LLC can choose how it is taxed.

Multi-Member LLC Taxation

May be taxed as a partnership or corporation.

Pass-Through Taxation

Business profits pass through to members, who pay the taxes personally.

Double Taxation

Corporate income may be taxed at the company level and again when distributed to owners.

Single-Member LLC

LLC with only one owner.

Single-Member LLC Taxation

Usually taxed like a sole proprietorship unless it chooses corporate taxation.

Foreign Investors

Foreign individuals can become LLC members.

LLC Disadvantage

LLC laws differ from state to state.

LLC Management Flexibility

Members can usually decide how the business will be managed.

Member-Managed LLC

The owners themselves run the business.

Manager-Managed LLC

One or more managers are chosen to run the business.

Default LLC Management

Many states assume an LLC is member-managed unless the documents say otherwise.

Fiduciary Duty

Legal duty to act in the best interests of another person or organization.

Duty of Loyalty

Act honestly and in the LLC's interests instead of for personal benefit.

Duty of Care

Use reasonable care when making decisions for the LLC.

Operating Agreement

Agreement explaining how an LLC will be managed and operated.

Operating Agreement Purpose

Sets rules for member relationships, management, and business operations.

Operating Agreement Requirement

Often not legally required and may not always need to be written.

If Operating Agreement Is Silent

State LLC law usually controls.

If LLC Law Is Also Silent

Courts may use partnership law principles.

Dissociation

When a member stops being associated with the LLC's business.

Causes of Dissociation

Withdrawal, expulsion, court order, incompetence, bankruptcy, or death.

Power vs. Right to Leave

A member may have the power to leave but not the legal right to leave without consequences.

Effect of Dissociation

Member loses management rights and authority to act for the LLC.

Duty of Loyalty After Dissociation

Generally ends when the member leaves.

Duty of Care After Dissociation

Continues for matters that happened before the member left.

Buyout

Departing member's ownership interest is usually purchased by the LLC or remaining members.

Fair Value

Value generally used to buy out a member when no price is set in the operating agreement.

Wrongful Dissociation

Member leaves the LLC in violation of the operating agreement.

Wrongful Dissociation Consequence

Former member may have to pay damages caused by leaving improperly.

Dissolution

Legal process of ending an LLC.

Member Leaving and Dissolution

A member leaving does not automatically dissolve the LLC.

Reasons for Dissolution

Operating agreement event, member vote, or court order.

Court-Ordered Dissolution

Court may dissolve an LLC when continuing the business is illegal, oppressive, or impractical.

Winding Up

Process of finishing the LLC's business after dissolution.

Winding Up Steps

Collect assets

Distribution After Dissolution

Creditors are paid first, members get capital contributions next, and remaining money is divided among members.

Special Business Forms

Hybrid organizations that combine features of corporations and partnerships.

Examples of Special Business Forms

Joint ventures, syndicates, joint stock companies, business trusts, and cooperatives.

Joint Venture

Two or more people or businesses combine resources for a specific project or transaction.

Joint Venture Example

Contractors work together to build and sell houses in one development.

Joint Venture Profits/Losses

Usually shared equally unless agreed otherwise.

Joint Venture Management

Joint venturers generally have equal control unless they agree otherwise.

Joint Venture Fiduciary Duties

Joint venturers owe each other duties such as loyalty.

Joint Venture Liability

Joint venturers may be personally liable for venture debts.

Joint Venture Agency

Joint venturers can act as agents and enter contracts for the venture.

Breach of Loyalty in Joint Venture

Secretly taking an opportunity or property that belongs to the joint venture.

Joint Venture vs. Partnership

Joint venture is usually for a specific project; partnership usually operates an ongoing business.

Joint Venture Duration

Usually ends when the project is completed.

Joint Venture Authority

Joint venturers generally have less implied authority than ordinary partners.

Syndicate

Group of people or businesses that join together to finance a specific project.

Syndicate Other Name

Investment group.

Syndicate Organization

Can be a corporation, general partnership, or limited partnership.

Joint Stock Company

Hybrid business combining corporation and partnership features.

Joint Stock Company Corporate Features

Transferable shares, directors/officers, and possible perpetual existence.

Joint Stock Company Tax/Legal Treatment

Often treated like a partnership.

Joint Stock Company Creation

Usually created by agreement rather than statute.

Joint Stock Company Ownership

Owned by shareholders.

Joint Stock Company Liability

Owners may have personal liability.

Joint Stock Company Agency

Shareholders are not automatically agents of one another.

Business Trust

Business organization created through a written trust agreement that resembles a corporation.

Trustees

Hold legal ownership and manage the trust property.

Beneficiaries

Receive profits from the business trust.

Business Trust Liability

Beneficiaries generally have limited liability.

Cooperative (Co-op)

Organization created to provide an economic benefit or service to its members.

Purpose of a Cooperative

Members combine resources to gain an advantage in the marketplace.

Consumer Purchasing Co-op

Members combine purchasing power to get lower prices or discounts.

Seller Marketing Co-op

Sellers work together to market goods and get better prices.

Incorporated Cooperative

Cooperative where members usually have limited liability.

Incorporated Cooperative Profits

Usually distributed based on how much business each member does with the cooperative.

Unincorporated Cooperative

Often treated like a partnership for tax and other legal purposes.