Chapter 17: Limited Liability Companies & Limited Partnerships Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Copyright © 2009 South-Western Legal Learning. Studies in Business, a part of South-Western Cengage Learning.

Introduction • Limited liability companies are relatively new creatures of state statute. • An LLC is a _______ entity that combines the limited _______ of a corporation and the tax advantages of a ____________. • LLC’s are increasingly become the entity of ___________ for businesses.

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1: LLC’s • 1997 IRS rules provide that any unincorporated business (including LLC’s) will automatically be taxed as a partnership unless otherwise indicated on the tax return. • LLC’s are attractive in today’s global business environment because they allow foreign investors to own interests.

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Nature of the LLC • Like corporations, LLC’s are creatures of state law. • The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).

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Nature of the LLC • Members of an LLC enjoy limited liability. • Can a third party pierce the LLC “veil” and hold managing member liable?

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LLC Formation • Articles of Organization require: – – – – –

Name of Business. Principal Address. Name and Address of Registered Agent. Names of the Owners; and How the LLC will be managed.

• Business name must include LLC or Limited Liability Company. • Case 17.1 02Development, LLC v. 607 South Park, LLC (2008). 6

Jurisdictional Requirements • An LLC is a legal entity ________ from its owners. • For federal jurisdiction based on _______, an LLC may be treated ___________ than a corporation. • For diversity purposes the citizenship of an LLC is the citizenship of its _______, which may live in _______ jurisdictions. 7

Advantages and Disadvantages of the LLC ADVANTAGES Member liability is limited to amount of investment. Can be treated as a “pass through” entity for tax purposes. Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

DISADVANTAGES State statutes are not uniform. Not all states recognize LLC’s.

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LLC Operating Agreement • LLC Operating Agreement is analogous to corporation’s bylaws. • Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues. • Generally, if the operating agreement is silent, courts will apply partnership principles.

• Case 17.2 Kuhn v. Tumminelli (2004). 9

Management of an LLC • There are two options for management, generally set forth in the articles of organization: – Member-Managed: all of the members participate in management, like a partnership. – Manager-Managed: members are elected to manage the LLC.

• If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership. 10

2: LLPs • Creature of state statute, similar to an LLC except that an LLP is designed for ___________ who _______ do business as a partnership (lawyers & accountants). • LLP allows partnership to ______ personal liability of the partners but allows “pass through” tax advantages. 11

Liability in an LLP • Recall that partnership law makes all partners jointly and severally for another partner’s tort, including personal assets. • The LLP allows professionals to avoid personal liability for the malpractice of other partners. • Supervising Partner is also liable for acts of subordinate.

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Family Limited Liability Partnerships • FLLP is a limited liability partnership in which the majority of the partners are related to each other. • Used frequently for agriculture.

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3: Limited Partnerships • Entity that __________ the liability of some of its owners (the limited partners). • __________ of state statute. Filing a certificate with the Secretary of State is required. • Agreement between at least one general partner and one limited partner to carry on a business for __________. 14

Rights and Liabilities of Partners • Only General Partners can manage but they have a fiduciary obligation to LP’s. • LP’s enjoy limited liability as long as they do not engage in management functions. • An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

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Rights and Liabilities of Partners • The General partner assumes all management and personal liability. • Limited Partner contributes cash but has no management rights. Liability is limited to the amount of investment. A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP.

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Rights and Liabilities of Partners • General partners are personally liable to 3rd parties for breach of contract and tort liability. However, a corporation (or an LLC) can be a general partner and have limited liability. • Limited partners have the right to inspect the LP’s books and be informed of the LP’s business.

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Dissolution of the LP • A general partner has the right to dissociate, which leads to the LP dissolution, unless all partners agree to continue. • On dissolution, the limited partner is entitled to return of capital contributions. • LP interests are considered securities and regulated by both federal and state securities laws. • Limited partners’ liability is limited to the capital investment. 18

Dissolution of the LP • Dissolved in much the same way as a general partnership. • Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue. • Creditors are paid first then partners. • Case 17.3 In re Dissolution of Midnight Star Enterprises, L.P. (2006). 19

LLLPs • Limited Liability Limited Partnership is a type of limited partnership. • Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment. • Most states do not allow for LLLP’s.

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