Ch 17 - Limited Liability Business Forms

Chapter 17: Limited Liability Business Forms

Limited Partnership (LP)

• Structure:

  • Composed of:

  • At least one general partner who manages the partnership and bears full liability.

  • At least one limited partner who does not participate in management and has limited liability.

• Formation:

  • Requires filing formation documents with the state agency.

  • Partners must sign a certificate of limited partnership that includes:

  • Name and address of each partner.

  • Capital contribution of each general and limited partner.

• Rights of Limited Partners:

  • Right to inspect books and records.

  • Right to sue third parties if general partner(s) do not.

  • Right to assign interest in partnership.

  • Entitlement to return of capital contributions upon dissolution.

  • Limitation: Limited partners cannot participate in management.

• Dissociation and Dissolution:

  • Both general and limited partners can voluntarily dissociate, though wrongful dissociation is possible.

  • Events causing dissolution may include:

  • Voluntary agreement of all partners to dissolve.

  • Voluntary withdrawal, death, incompetence, or bankruptcy of the sole general partner.

  • Dissolution by court order or as specified in the partnership agreement.

  • After dissociation or dissolution events, partners may agree to continue, but at least one general partner must remain.

  • If dissolved, follow winding up and distribution rules similar to a general partnership, noting that typically only one partner has liability for unsatisfied debts.

Limited Liability Partnership (LLP)

• Structure:

  • Similar management structure and rules as a general partnership.

• Formation:

  • Requires filing formation documents with the state agency.

  • Provides limited liability.

• Liability Variations:

  • Some states offer liability limitations comparable to LLCs, meaning total liability is limited to LLP assets, with no personal liability.

  • Other states limit liability only regarding the acts of other partners.

• Personal Liability:

  • Partners remain liable for their own wrongful acts and the actions of those under their direct supervision.

• Conversion of Entities:

  • A general partnership can convert to an LLP by filing required documents with the state agency; the business name must include LLP.

• Family Limited Liability Partnership (FLLP):

  • All partners are related, and all must be natural persons.

• Dissociation and Dissolution:

  • Follow general partnership rules, except regarding partners’ liability for debts unsatisfied by LLP assets.

Limited Liability Company (LLC)

• Formation:

  • Governed by state statute, formed by filing articles of organization with the appropriate state agency (often the Secretary of State).

  • Articles of Organization must include:

  • Business name (must include "LLC").

  • Principal address.

  • Name and address of registered agent.

  • Number of members in the LLC.

  • Management structure of the LLC (member-managed or manager-managed).

  • Some states allow single-member LLCs while others require at least two members.

• Members:

  • Owners are referred to as members.

  • Members enjoy limited liability, typically not personally liable beyond their investment in the LLC.

• Exceptions to Limited Liability:

  • Liability may exist if:

  • An individual member has personally guaranteed a payment.

  • An individual member significantly contributed to tortious conduct of the LLC.

  • Applies if piercing the corporate veil of the LLC.

• Taxation Options:

  • Option to be taxed as a “pass-through” entity (like a sole proprietorship for single members or partnership for multiple members).

  • Can also elect to be taxed as a corporation where taxes on profits are paid by the corporation, and individual members pay personal taxes on dividends/distributions.

• Operating Agreement:

  • Outlines management structure, profit division, transfer of membership interests, and conditions of member dissociation triggering dissolution.

  • In absence of an operating agreement, default rules apply: member-managed structure, equal ownership, voting rights divided by ownership interest.

Limited Liability Company (LLC) (cont.)

• Fiduciary Duties:

  • Members owe duties of care and loyalty to the LLC, similar to duties in partnerships.

• Dissociation:

  • Refers to when a member ceases association with the LLC.

  • Events Triggering Dissociation:

  • Voluntary withdrawal.

  • Expulsion by other members.

  • Bankruptcy.

  • Court order.

  • Incompetence.

  • Death.

  • Remaining members decide whether to continue business or dissolve.

  • A dissociated member loses management participation rights and agency authority but may have membership interest purchased; wrongful dissociation may incur liabilities.

• Dissolution:

  • Occurs by member vote, court order, or event specified in the operating agreement.

  • Non-dissociated members partake in winding up:

  • Liquidation of assets.

  • Debt repayment.

  • Distribution of remaining assets, prioritizing return of capital contributions followed by profit distributions based on membership interest.

Sample Questions

• Sample Question 1:

  • Archie, Betty, and Veronica want to form a business with limited personal liability. The best entity type is:

  • Limited partnership

  • General partnership

  • Family limited liability partnership

  • Limited liability company

• Sample Question 2:

  • Does a limited liability company (LLC) dissolve upon a member's dissociation?

  • True

  • False

• Sample Question 3:

  • Ben and Jerry are members in an LLC with debts of $50,000 unrecoverable from business assets. Are they personally liable?

  • No, because they did not incur the debt for personal benefit.

  • Yes, because they are personally liable for business debts.

  • No, because the business is organized as an LLC.

  • Yes, because Ben and Jerry knowingly incurred the debt.