Limited Partnerships & LLCs (Outline 8)

Limited partnerships must have what?

One or more general partners and one or more limited partners

General partners do what?

Manage the limited partnership and have full liability for all the the debts of limited partnership

Limited partners are what?

Passive investors and have no right to participate in management

Which partners in a limited partnership are agents?

general partners and they have implied and apparent authority to everything + anything in the ordinary scope of limited partnerships.

Which partners in a limited partnership are fiduciaries?

General partners

Do limited partners have the right to management?

No, but they can be allowed to + they have no implied or apparent authority just because they are a partner

Can limited partners compete?

Yes, because they are not fiduciaries and can own an interest in a competing business.

Do limited partners still follow a duty of good faith?

Yes, as they can’t do anything with the intention to harm a limited partnership.

Does a limited partnership arise automatically?

No, you have to take steps in order to create a limited partnership

What is the first step one must do to create a limited partnership (1)

1. They must file a Certificate of LP with the state and pay a fee.

What is the second step one must do to create a limited partnership (2)

The name of the entity must include the words “limited partnership”

If an entity wants to do business outside the state in which it was formed, it does not have to go through the same process in those states, it files a simple document and pays a fee to get the foreign state’s permission to do business there.

Limited partnerships, corporations, LLPs, and LLCs must do all this, but general partnerships and sole proprietorships don't. Why are they treated differently?

General partnerships and sole proprietorships don’t have to pay a fee because they face 100% liability. Limited partnerships, corporations, LLPs, and LLCs pay a fee as the government is trying to protect the public because they all have limited liability meaning its harder to hold them liable.

Suppose a Limited partnership makes a contract with a TP and it is breached, who is most directly liable?

The Limited partnership itself

If the limited partner ship cannot pay, who is next most directly liable?

The general partner, as they are 100% liable for all the debts of the limited partnership.

Can TP recover from A & B because they are shareholders, officers, and directors of the general partner?

No, TP cannot recover from A & B because they are not vicariously liable.

Can TP recover from A & B because they are agents of the limited partnership

No, because agents are not liable for contracts that they make for principles if they have acted with their actual authority (express or implied) and apparent authority and if they disclosed the principles identity.

Who can the TP only recover from

The limited partnership and the general partner

Limited partner management law?

Limited partners who participate in managing the limited partnership are not liable unless a third party was misled by that into believing they were general partners

Differences between a partnership and a limited partnership surrounding the death of a partner?

In a partnership, a partners death is a dissociation and could trigger dissolution. But in a limited partnership, only the death of a general partner has an effect.

Can a death of a limited partner cause a dissociation

No, there is no effect when a limited partner dies.

Limited partnership with no agreement regarding sharing profits and losses?

If a limited partnership has no agreement re sharing profits and losses, the partners share in proportion to their capital accounts, not equally.

Rafi formed the Mane Limited Partnership to conduct a horse breeding business. He contributed $85,000 toward capital and received a 1% interest as a general partner and an 84% interest as a limited partner. Maria contributed $15,000 in capital and received a 15% interest as a limited partner.

An employee of Mane committed a tort within the scope of employment. If the limited partnership cannot pay the $200,000 judgment, what is Rafi’s personal liability?

He has to pay 200,000 because despite only being a 1% of a general partner he is still fully liable.

What entities make more sense than using a limited partnership?

Rather than using a limited partnership, it may make more sense to create an LLC, an LLP, or even an LLLP, in the states that permit it

What does LLLP stand for

Limited Liability Limited partnership

F and M created the F&M Wanda’s Limited Partnership to own and operate a Wanda’s Hamburger franchise. F received a 25% interest and became the general partner; M received a 75% interest and became a limited partner.

Although M was a limited partner, M worked together with F to negotiate contracts for the franchise. During negotiations with the CEO of Bread Company, F and M introduced themselves as “partners” in F&M Wanda’s LP. Both F and M participated in the negotiations. When the CEO made a final offer to F and M, both gave their consent. F signed the contract “F, General Partner” on behalf of the limited partnership.

The Wanda’s franchise failed, and the limited partnership was not able to pay the $100,000 it owed Bread Company. Bread Company sued M for the $100,000 debt.

A. Who wins Bread Company v. M?

Bread company wins as they argue that they were led to believe that M was a general partner. 1. M acted like a general partner as they were active in negotiations and when the offer was made M agreed to the offer. 2. M’s allowed the limited partnership to use his name which is misleading.

Assume M pays Bread Company $100,000 to satisfy the debt. What is F’s liability to M?

M is only a limited partner, M&F have an agreement that F will bear all personal liability. So when M is forced to pay Bread Company he should be fully indemnified by a limited partnership or general partners.

What is relatively new in the united states?

In US, LLC’s are relatively new and common, except in the case of public companies (who sell interest to investors), who find it easier to raise money as a corporation.

What are LLC owners called?

Members

Most states allow the formation of LLCs with how many members?

Most states allow LLCs with just one member, like corporations, but some states do require at least two or more, like partnerships.

What is a operating agreement

It is a document that covers the rules for managing the LLC and sharing its profits

What are the Articles of Organization

It is the LLC’s founding document

If there is no duration stated than what will the LLC be considered?

It will be an LLC at will

Members can transfer their ownership interests, but like in partnerships only the right to receive?

Members can only receive money and the transferee does not become a member unless the operating agreement says so

Unless agree otherwise profits are shared how in an LLC

Equally

The default rules regarding dissociation, dissolution, and winding up are like those for partnerships, with some differences: What is the first difference (1)

Transfer of all the member’s interest is a dissociation

The default rules regarding dissociation, dissolution, and winding up are like those for partnerships, with some differences: What is the second difference (2)

A member of an LLC cannot force dissolution.

An LLC can be either managed two ways; what are they?

Member-Managed or Manager-Managed

Member-Managed LLC

Like a partnership, all the members of the LLC have the right participate in management.

Manager-Managed LLC

Like a corporation , where the members elect managers like shareholders. Managers can be members or non-members.

Which management style for LLCs is the default rule?

Member Managed

Members who are not managers are not what?

Members who are not managers are not agents or fiduciaries, but all members always have a duty of good faith.

Can a member of an LLC compete with the LLC

It depends, Members who are managers also fiduciaries so they cannot compete with non manager members + non manager members are not agents of fiduciaries meaning they do not owe a duty of loyalty meaning they can have competing interesting as long as they act in good faith.

There are three main advantages of a LLC, what is the first advantage (1)?

Limited Liability for everyone including all managers and members. (1)

There are three main advantages of a LLC, what is the second advantage (2)?

LLCs can choose to be taxed either as a corporation or a partnership (2)

What is the default way LLCs are taxed

LLC’s are taxed as a partnership, unless they indicate they wish to be taxed as a corporation.

If there is only one member in the LLC, what is the default way is it taxed?

If it has only one member, then it’s taxed as a sole proprietorship, unless it indicates it wishes to be taxed as a corporation

There are three main advantages of a LLC, what is the third advantage (3)?

Flexibility for choosing a management structure. You can be manager managed, managed like a corporation, or you can be member managed.

There are two disadvantages with a LLC, whats the first disadvantage?(1)

The rules vary from state to state, and because they are new, little case law exists, so the rules are less settled. (The states that have more sophisticated LLC Laws are California, Delaware, and New York)(1)

There are two disadvantages with a LLC, whats the second disadvantage?(2)

LLCs are not as efficient for raising large amounts of capital, because they are so highly flexible. People are less likely to invest in LLCs as there are so many unique rules creates a lot of work for investors, which compared to corporations their rules are very uniform. (2)