Study Notes on Limited Liability Companies and Limited Liability Partnerships

Business Law: Limited Liability Companies and Limited Liability Partnerships

Chapter Overview

  • Focus: Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs).

  • Copyright: © 2026, 2022, 2019 Pearson Education, Inc. All rights reserved.

Learning Objectives

  1. Formation of LLP: Describe how limited liability partnerships are formed (36.1).

  2. Limited Liability of Partners in LLP: Explain the limitations of personal liability for partners in an LLP (36.2).

  3. Definition of LLC: Define what constitutes a limited liability company (36.3).

  4. Organizing an LLC: Describe the process by which an LLC is organized (36.4).

  5. Limited Liability of LLC Members: Explain the limited liability protection afforded to members of an LLC (36.5).

  6. Management Comparison: Compare the management structures of member-managed LLCs and manager-managed LLCs (36.6).

  7. Fiduciary Duties: Identify members and managers who owe fiduciary duties to an LLC (36.7).

  8. Dissolution and Winding Up: Describe how an LLC is dissolved and how it winds up its affairs (36.8).

  9. Professional LLCs: Define what a professional limited liability company is (36.9).

Introduction to Limited Liability Companies and Limited Liability Partnerships

  • Professionals: Certain professionals like accountants, lawyers, and doctors may organize as LLPs, which protect them from personal liability.

  • LLC Definition: An unincorporated business entity combining favorable traits from general partnerships, limited partnerships, and corporations.
       - Functions as a separate legal entity.

Limited Liability Partnerships (LLP)

36.1 Formation of a Limited Liability Partnership

  • Definition: An LLP allows all partners to have limited liability, meaning no general partners are involved.

  • Usage: Commonly used in professional fields: law, accounting, medicine.

  • Liability: Partners are not personally liable for LLP debts; they can all manage the LLP’s affairs.

Uniform Limited Liability Partnership Amendments (ULLPA)

  • Amends the Revised Uniform Partnership Act (RUPA) for better rules regarding LLP formation, operation, and dissolution.

Formation Process

  1. State Law: LLPs are governed by state law.

  2. Filing Requirements: Articles of limited partnership or statement of qualification need to be filed with the state’s secretary.

  3. Amendments: Articles can be amended by filing the necessary forms with the state.

  4. Jurisdiction: Governed by the laws of the state where formed (domestic or foreign).

Name of LLP

  • Must contain “Registered Limited Liability Partnership” or “Limited Liability Partnership” with appropriate abbreviations (R.L.L.P., L.L.P., etc.).

  • If using a trade name, a fictitious business name statement must be filed.

Limited Liability Partnership Agreement

  • Importance: Written LLP agreements take precedence over state laws unless a violation occurs.

  • Default Rules: If no agreement, the state’s LLP rules apply.

Taxation of LLPs

  • LLPs can elect taxation as either a general partnership or corporation, with most opting for partnership taxation to benefit from flow-through taxation.

  • Flow-through taxation: No tax at the partnership level; income/loss reflected on partners' tax returns.

Rights of Partners

  • Equal rights in management and profit sharing unless stated otherwise in the partnership agreement.

  • Decisions typically made by simple majority on ordinary matters.

Liability of Partners in an LLP

  • Torts: LLPs liable for wrongful acts during business operations.

  • Contracts: LLPs liable for contracts entered on behalf of the partnership.

  • Limited Liability: Partners not personally responsible for debts beyond their capital contributions, protecting from vicarious liability for other partners' negligence/malpractice.

Limited Liability Companies (LLC)

36.3 Definition of a Limited Liability Company

  • Characteristics: Unincorporated, combines attributes of general partnerships, limited partnerships, and corporations.

  • Separate Legal Entity: LLCs function independently and can own property, enter contracts, sue and be sued.

  • Members: Owners of an LLC, which may also be a single-member LLC (SMLLC).

Uniform Limited Liability Company Act (ULLCA)

  • Model act standardizing laws for LLCs akin to ULLPA for LLPs.

  • Revised ULLCA updates the original version to reflect contemporary needs.

Formation of an LLC (36.4)

  • Purpose: LLCs can operate various businesses but may not be formed by certain professions like doctors or lawyers in some states.

  • Organizational Limit: LLCs must be registered in a single state where they will conduct business but can operate in others.

  • Conversion: Existing businesses can convert into an LLC.

Name of the LLC

  • Name must include “Limited Liability Company,” “Limited Company,” or abbreviations like “L.L.C.”

Articles of Organization

  • Required documents to be filed with the state's secretary of state to form the LLC.

  • Domestic LLC: Governed by state laws after organization.

LLC Operating Agreement

  • Governs internal affairs among members, prioritized over state laws unless legally inappropriate.

  • May be oral, written, or implied.

Capital Contributions (Page 25)

  • Members may contribute money, property (real or personal), services, or promissory notes.

  • Certificate of Interest: Document evidencing ownership interest in the LLC.

Distributable Interests

  • Ownership interests typically viewed as personal property, transferable if not restricted by LLC rules.

  • Transferee limits include not gaining membership rights.

Sharing of Profits and Losses

  • Members can agree on profit-sharing arrangements; if not, laws determine allocation.
       - ULLCA: Divided by capital contributions.
       - RULLCA: Shared equally.

Liability of an LLC and Members (36.5)

  • General Rule: Members shielded from personal liability for LLC debts beyond their contributions.

  • Exceptions: Including wrongful conduct or if the LLC form is abused (piercing the corporate veil).

Case Study (Page 30) - Erny Girl LLC v. BCNO 4 LLC

  • Context: Lease and liability issues in unpaid rent, involving the member’s personal liability under LLC protections.

Management of an LLC (36.6)
Member-managed LLC

  • Managed by its members.

  • Each member can engage in management regardless of contribution level.
       - Majority rules on ordinary business matters.

Manager-managed LLC

  • Members designate managers for overseeing operations, either from within or externally.
       - Must have majority consent to appoint/remove managers.
       -     Restrictions on Actions: Certain decisions require member votes (e.g., amendments, dissolutions).

Compensation and Reimbursement

  • Nonmanager members typically unpaid except during winding up.

  • Managers receive compensation as per agreements, and LLC reimburses expenses incurred on its behalf.

Fiduciary Duties of Members of an LLC

  • Members owe a duty of loyalty and limited care, requiring honesty and lawful conduct, devoid of gross negligence.

  • Non-manager members of a manager-managed LLC hold no fiduciary responsibility.

Series LLC (Page 39)

  • Functionality: Allows separate management of different properties/business units, individually responsible for their contracts and liabilities.

Professional Limited Liability Company (PLLC) (36.9)

  • Permissible for various professionals to form PLLCs with state approval required for articles.

  • Members retain personal liability for malpractice despite limited liability for business debts.

Decentralized Autonomous Organization LLC (DAO LLC)

  • A modern form of LLC governed by smart contracts and decentralized systems, with varying legal recognitions.

Dissolution and Winding Up (36.8)

  • Dissociation: Members may withdraw from the LLC unless restricted.
       - At-Will LLC: Members are entitled to value upon withdrawal.
       - Time-Limited LLC: Continued operations post-withdrawal.
       - Situations leading to dissolution include term expiration or mutual consent.

Winding Up Process

  • Involves liquidating assets, settling debts, and formally filing termination documents.

Continuation Agreement

  • Members can agree upon continuance events, stipulating protocol for dissociation events.

Ethical Considerations in LLCs

  • Cases address issues of liability and ethical behavior in operational decisions involving LLC structures.

Discussion of Cases 36.1 - 36.5

  • Cases focus on liability questions, ethical implications, and member responsibilities in various LLC and LLP contexts.