Chapter 17 - Limited Liability Business Forms

Limited liability company (LLC)

a hybrid form of business enterprise that offers the limited liability of a corporation and the tax advantages of a partnership

Member

a person who has an ownership interest in a limited liability company

When liability may be Imposed

the members of an LLC, like the shareholders in a corporation, can lose their limited personal liability in certain circumstances

Personal liability for loan guarantees

When an individual guarantees payment of a business loan to the LLC, that individual is personally liable for the business's obligations

Pierce the corporate veil

On rare occasions, courts ignore the corporate structure to expose the shareholders to personal liability when it is required to achieve justice

Formation of the LLC

LLCs are creatures of statute and thus must follow state statutory requirements

Articles of organization

the document that is filed with the appropriate state official, usually the secretary of state, when an LLC is formed and that contains basic information about the business

Requirements for articles of organization

- The name of the business, which might include the words 'Limited Liability Company' or the initials 'LLC'

- the business's principal address

- the name and address of a registered agent

- the members name

- how the LLC will be managed

One-member LLCs

Although a majority of states permit one-member LLCs, some states require at least two members

liability advantages of the LLC

the limited liability of its members

Taxation advantages of the LLC

Flexible Taxation

- An LLC that has two or more members can be chosen to be taxed as either a partnership or a corporation

Business operations advantages of the LLC

flexibility it offers in terms of business operations and management

- Foreign investors are allowed to become LLC members, so organizations as an LLC can enable a business to attract investors from other countries

Main disadvantage of the LLC

state LLC statutes are not uniform

Foreign LLC treatment

Generally, most states apply to a foreign LLC (an LLC formed in another state) the law of the state where the LLC was formed

2 LLC Management options

1. member-managed LLC

2. manager-managed LLC

Fiduciary Duties

under the ULLCA, 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

an agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated

Operating agreement requirements

In many states, an operating agreement is not required for an LLC to exist, and if there is one, it need not be in writing

operating agreement

an agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated

State LLC statute governance

If a dispute arises and there is no agreement covering the topic under dispute, the state LLC statute will govern the outcome

Member Managed LLC

- All members vote on decisions; majority vote controls

- most LLC statutes assume the firm will be member managed unless the articles state otherwise

Manager Managed LLC

- Members designate a person or a group of persons to manage the LLC, which may include nonmembers

- members normally specify that the LLC is manager managed in the articles of organization

provisions commonly included in an LLC operating agreement

- management

- profits

- membership

- dissociation and dissolution

- member meetings

- voting rights

Management provisions in Operating Agreement

sets forth who will manage the LLC and how future managers will be chosen or removed

Management

The ULLCA provides that members may choose and remove managers by majority vote.

Profits

Establishes how profits will be divided among members.

Membership

Specifies how membership interests may be transferred.

Dissociation and Dissolution

Clarifies which events cause the dissociation of a member- such as by death or retirement- and triggers the LLC's dissolution.

- also provides a method of calculating a buyout price for a members dissociation

Member meetings

Determines whether or not formal membership meetings will be held.

Voting rights

Details how voting rights will be apportioned, such as according to each member's capital contribution or by allowing one vote for each member.

Dissociation

Occurs when a member ceases to be associated in the carrying on of the LLC business.

Right to dissociate

A member has the power to dissociate at any time but may not have the right to dissociate.

Member's death

If a member dies or otherwise dissociates from an LLC, the other members may continue to carry on the LLC unless the operating agreement provides otherwise.

what occurs when a member dissociates from an LLC

- Loss of management rights

- Loss of agency rights

- duty of loyalty to the LLC terminates

- member's duty of care continues only with respect to events that occurred before dissociation

- buyout right

Dissolution

Regardless of whether a member's dissociation was wrongful or rightful, normally the dissociated member has no right to force the LLC to dissolve.

Remaining members' options after dissolution

can opt either to continue or to dissolve the business.

Dissolution stipulations

Members can stipulate in their operating agreement that certain events will cause dissolution.

- members can also agree that they have the power to dissolve the LLC by vote

Court-ordered dissolution

A court can also order an LLC to be dissolved in certain circumstances.

Winding up process

When an LLC is dissolved, any members who did not wrongfully dissociate may participate in the winding up process.

Winding up tasks

To wind up the business, members must collect, liquidate, and distribute its assets.

Limited liability partnerships (LLP)

A hybrid form of business organization that is used mainly by professionals who normally do business in a partnership.

LLP tax status

An LLP is a pass-through entity for tax purposes.

Partners' liability in LLP

- A partner's personal liability for the malpractice of other partners is limited.

- An LLP allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners

LLP statutes

Almost all of the states have enacted LLP statutes.

Family limited liability partnership (FLLP)

a limited liability partnership in which the majority of the partners are members of a family.

FLLP partners

All of the partners must be natural persons acting in a fiduciary capacity for the benefit of natural persons.

most significant use of the FLLP

in agriculture

Limited partnerships (LP)

A partnership consisting of one or more general partners and one or more limited partners.

General partner

A partner who assumes responsibility for the management of the partnership and has full liability for all partnership debts.

Limited partner

A partner who contributes capital to the partnership but has no right to participate in its management and has no liability for partnership debts beyond the amount of their investment.

Formation of an LP

The formation of a limited partnership is a public and formal proceeding.

Liability of general partners in a LP

personally liable to the partnership's creditors.

Limited partner's liability in a LP

limited to the capital that they contribute or agree to contribute to the partnership.

limited partner rights in a LP

- right of access to the partnership books

- right of access to information regarding partnership business

- entitled to a return of their contributions

- can sue an outside party if the general partners have refused to file suit

dissociation and dissolution in an LP

a general partner has the power to voluntarily dissociate, or withdraw, from the limited partnership unless the partnership agreement specifies otherwise

Withdrawal notice for limited partner

Under the RULPA, a limited partner can withdraw from the partnership by giving six months notice, unless the partnership agreement specifies a term.

Limited liability limited partnership (LLLP)

type of limited partnership in which the liability of the general partner is the same as the liability of the limited partners.

whose claims take priority first in dissolution

creditors claims