Limited Partnerships and Limited Liability Companies Notes

Limited Partnerships & Limited Liability Companies

Overview of Business Forms
  • Types of Business Associations:
    • Sole Proprietorship
    • Unincorporated Business Associations (e.g., general partnerships, limited partnerships, limited liability companies, limited liability partnerships)
    • Corporations
Factors Affecting Business Association Choice
  • Key Considerations:
    1. Ease of Formation: Consideration of the complexity involved in forming the business entity.
    2. Tax Implications: Understanding federal and state income tax laws.
    3. External Liability: Assessing the level of liability protection for owners.
    4. Management & Control: Determining how decisions will be made within the business.
    5. Transferability of Ownership: Ease of transferring ownership interests.
    6. Continuity of Existence: Potential continuance of the business after the departure of an owner.
Limited Partnerships
  • Definition: A partnership with one or more general partners and one or more limited partners.
  • Key Characteristics:
    • Formed under state law with compliance requirements.
    • Liability for limited partners is limited to their capital contributions.
    • Requires filing a certificate with the state, detailing essential information such as names, addresses, and business purpose.
  • Formation Process:
    • Necessary Steps:
    1. File a Certificate with the appropriate state official.
    2. Include essential information: name, business address, general partner details, and duration for which the partnership is to operate.
    • Defective Formation:
    • Limited partners may lose limited liability protection if the formation is defective unless they withdraw from the business and renounce their interest promptly.
Rights in Limited Partnerships
  • General Partners: Have comprehensive control and management authority similar to general partnerships. Own fiduciary duties to limited partners.
  • Limited Partners: Typically do not engage in management; risk losing limited liability if they participate in control.
    • Allowed to advise on business matters without daily management involvement.
  • Voting Rights: Rights can vary based on the partnership agreement. Limited partners may have limited votes without losing liability protection.
  • Withdrawal Rights: General partners can withdraw at any time. Limited partners need to adhere to the partnership agreement for withdrawal.
Duties and Liabilities
  • General Partners: Face unlimited liability for partnership debts.
  • Limited Partners: Liability limited to their capital contributions assuming no participation in management.
    • Must act in good faith; otherwise, may lose liability protection.
Dissolution of Limited Partnerships
  • Process of Dissolution: Includes dissolution, winding up, and termination.
    • Causes for dissolution: expiration of the term, withdrawal of a general partner, or judicial decree.
    • No automatic dissolution due to the death or bankruptcy of a limited partner.
Limited Liability Companies (LLCs)
  • Definition: A noncorporate business entity providing limited liability to all owners with flexible management options.
  • Historical Context: Gained traction in the U.S. post-1990; many states have adopted various LLC statutes, reflecting changes in regulations over the years.
  • Formation Requirements:
    1. Filing articles of organization with state authorities.
    2. Include essential provisions in the operating agreement.
    3. Must include “limited liability company” or “LLC” in the entity name.
  • Rights of Members: Include profit-sharing, management interests, and rights to information.
  • Duties of Members: Varying levels of fiduciary duties applicable based on management structure (member-managed vs. manager-managed).
  • Disassociation and Dissolution: LLC dissolution must follow specific steps, ensuring compliance with state laws and protecting creditor interests.