Limit Your Liability

1. Limit Your Liability BUS 105 PowerPoints by Rick Manzano is licensed under CC-BY 4.0

2. Limited Liability Companies • General Provisions Cal. Corp. Code § 17000 et seq. • Authorized 1994 Beverly-Killea Limited Company Act. • Professional Limited Liability Companies are prohibited from registering or forming in California. • See Limited Liability Partnerships

3. Cal. Corp. Code 17002 • A limited liability company may engage in any lawful business activity, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business.

4. 17050. (a) • In order to form a limited liability company, one or more persons shall execute and file articles of organization with, and on a form prescribed by, the Secretary of State and, either before or after the filing of articles of organization, the members shall have entered into an operating agreement.

5. 17052. • The name of each limited liability company as set forth in its articles of organization: • (a) Shall contain either the words "limited liability company" or the abbreviation "LLC" or "L.L.C." as the last words in the name of the limited liability company. The words "limited" and "company" may be abbreviated to "Ltd." and "Co.," respectively. • WHY? • (b) May contain the name of one or more members.

6. 17052 (f) A limited liability company may record in the office of the county recorder of any county in this state, and county recorders, on request, shall record a certified copy of the limited liability company articles of organization and any exhibits or attachments, or any amendment or correction thereto, that has been filed in the office of the Secretary of State.

7. 17052 (f) • The recording shall create a conclusive presumption in favor of any bona fide purchaser or encumbrancer for value of the limited liability company real property located in the county in which the certified copy has been recorded, of the statements contained therein. • Why would you want to do that?

8. Be careful what is in the statement! • e) Any manager who executes a certificate or amendment shall be liable for any statement materially inconsistent with the operating agreement or any material misstatement of fact contained in the certificate of amendment if the manager knew or should have known that the statement was false when made or that the statement became false and an amendment required by subdivision (d) was not filed, and the person suffering the loss relied on the statement or misstatement.

9. 17057. • Each limited liability company shall continuously maintain in this state each of the following: (a) An office at which shall be maintained the records required by Section 17058. (b) An agent in this state for service of process on the limited liability company.

10. 17101. • (a) Except as otherwise provided in Section 17254 or in subdivision (e), no member of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a member of the limited liability company. • When might a member be liable?

11. Personal Liability of a Member • (b) A member of a limited liability company shall be subject to liability under the common law governing alter ego liability…. • What is that?

12. Personal Liability of a Member • (c) Nothing in this section shall be construed to affect the liability of a member of a limited liability company. • (1) to third parties for the member's participation in tortious conduct, or • (2) pursuant to the terms of a written guarantee or other contractual obligation entered into by the member, other than an operating agreement.

13. Tax Treatment • Corporation • double taxation on distributed income. • May be lower tax bracket? • Partnership • Pass through to partners. • Taxed at partner’s tax rate. • LLC • Two or more member LLC may choose between taxed as a corporation or partnership. • Single member LLC treated as a sole proprietorship.

14. LLC Management • Member-managed • Members manage the LLC. • Manager managed • A group is designated as the manager of the LLC.

15. Limited Liability Partnerships • General provisions governing limited liability partnerships are found in the Cal. Corp. Code, Sections 16951 et seq. • Limited liability partnerships may only be formed by licensed persons for the practices of public accountancy, law or architecture.

16. 16951. • No registered limited liability partnership or foreign limited liability partnership may render professional limited liability partnership services in this state except through licensed persons.

17. 16952. • The name of a registered limited liability partnership shall contain the words "Registered Limited Liability Partnership" or "Limited Liability Partnership" or one of the abbreviations "L.L.P.," "LLP," "R.L.L.P.," or "RLLP" as the last words or letters of its name. • Why?

18. 16952 • (h) A limited liability partnership providing professional limited liability partnership services in this state shall comply with all statutory and administrative registration or filing requirements of the state board, commission. • State Bar etc.

19. What does this mean? • 16952 (5) A partnership that has been converted to a registered limited liability partnership pursuant to this chapter is the same person that existed prior to the conversion. • Legal Action • Liability • Criminal Action

20. Protection of Clients • 16956 • Must maintain security for claims. • Minimum amounts are set by statute for Errors and Omissions insurance.

21. Distribution of Assets • §16957 places restrictions on distributions until liabilities are satisfied. • What might be the effect of a violation of this section? • Does not say it is unlawful. • Criminal? • Pierce the veil of non-liability?

22. What state law applies to Foreign LLP doing Business In Cal.? • 16958. (a) (1) The laws of the jurisdiction under which a foreign limited liability partnership is organized shall govern its organization and internal affairs and the liability and authority of its partners, subject to compliance with Section 16956… (insurance)

23. §16306.Partner’s Personal Liability • (c) a partner in a LLP is not liable for debts, obligations, or liabilities of or chargeable to the partnership or another partner in the partnership …. whether arising in tort, contract, or otherwise, that are incurred, created, or assumed by the partnership … by reason of being a partner or acting in the conduct of the business or activities of the partnership.

24. §16306.Partners personal liability • Partners own errors and omissions: • (e) Nothing in subdivision (c) shall be construed to affect the liability of a partner of a registered limited liability partnership to third parties for that partner's tortious conduct.

25. Limited Partnerships • General provisions governing limited partnerships are found in California Corporations Code Section 15501 et seq. • CA Codes (corp:15501-15533)

26. Filing/Formation • All limited partnerships have been required to file a CERTIFICATE OF LIMITED PARTNERSHIP with the Secretary of State's Office since July 1, 1984. • It allows limited partners to invest in a business. No liability, their investment is all that is at risk.

27. Limited Partnerships • 15501. A limited partnership is a partnership formed by two or more persons …. • having as members one or more general partners and one or more limited partners. • The limited partners as such shall not be bound by the obligations of the partnership.

28. CONTRIBUTIONS • 15504. The contribution of a limited partner may be cash or other property, but not services. • The general partner can contribute cash, property or services.

29. Liability of General Partner • A general partner is liable for all of the debts and liabilities of the partnership, and the acts of any general partner in furtherance of partnership business. • All of the rules of a regular partnership apply to a general partner.

30. Use of Partner’s Name • 15505 (1) The surname of a limited partner shall not appear in the partnership name, unless (a) It is also the surname of a general partner, or (b) Prior to the time when the limited partner became such the business had been carried on under a name in which his surname appeared.

31. Liability of Limited Partner • 15505 (2) A limited partner whose name appears in a partnership name contrary to the provisions of paragraph one is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner.

32. Liability of Limited Partner • 15507. (a) A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. • Limited partner has no management rights. • Only voting rights as set forth in the agreement.

33. Voting rights of limited partner • (1) Election or removal of general partners. • (2) Termination of the partnership. • (3) Amendment of the partnership agreement. • (4) Sale of all or substantially all of the assets of the partnership.

34. General Partners have no authority to • (a) Do any act in contravention of the certificate, • (b) Do any act which would make it impossible to carry on the ordinary business of the partnership, • c) Confess a judgment against the partnership, • (d) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose,

35. No authority • (e) Admit a person as a general partner, (f) Admit a person as a limited partner, unless the right so to do is given in the certificate, • (g) Continue the business with partnership property on the death, retirement or insanity of a general partner, unless the right so to do is given in the certificate.

36. Bus 105 Corporations Ch 18

37. Compare

38. Corporations Limiting your liability

39. Corporation Defined • A corporation is a legal person or entity recognized as having an existence separate from that of its shareholders. • (Erkenbrecher v. Grant (1921) 187 C. 7, 9, 200 P. 641;Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Service (1932) 217 C. 124, 129, 17 P.2d 709;Maxwell Cafe v. Department of Alcoholic Bev. Control (1956) 142 C.A.2d 73, 78, 298 P.2d 64;Merco Const. Engineers v. Municipal Court (1978) 21 C.3d 724, 729, 147C.R. 631, 581 P.2d 636,

40. CorporationsCA Corp Code Corporations Code § 200 • Corporations are formed by filing Articles of Incorporation. • Secretary of State. • The corporate existence begins on filing the articles and continues perpetually unless otherwise provided by law or in the articles. (Corp.C. 200(c);

41. Management • Board of Directors • § 300 • Hire corporate officers and other employees. • Corporate officers run the day to day operation of the corporation.

42. OwnershipCorp: 400-423 • Shares of stock • Absent an agreement to the contrary shares may be transferred. • Death, incapacity or transfer does not affect continued existence of the Corporate body. • Personal Property interest in shares. • Corporation is separate legal entity who owns all assets of the corporation.

43. Types of Corporations • Stock corporations § 100 • Nonprofit • Public Benefit § 5110 • Mutual Benefit § 7110 • Religious § 9110 • Foreign (out of state) § 2100

44. § 2: Classification of Corporations • Domestic corporation does business in its state of incorporation. • Foreign corporation from X state doing business in Z state. • Alien Corporation: formed in another country doing business in United States.

45. Classification of Corporations • Public and Private. • Nonprofit. • Close Corporations. • Shares held by few shareholders. • More informal management,similar to a partnership. • Restriction on transfer of shares.

46. Liability of Shareholders • So long as the corporate formalities are observed, • So long as the corporation was not initially undercapitalized, • There should be no liability for corporate debts. • Shareholder has her investment “at risk.” • Liable to corporation to pay value of stock when purchasing from Corporation.

47. Corporate Formalities • Current filings of Statement of Domestic Stock Corporation. • Initial filings • Bi-annual • Annual Membership meeting • Directors

48. Close Corporation a.k.a. Closely held Corporation • Cal. Law authorizes two different types of agreements that may be entered by and between shareholders of a close corporation. • A voting agreement, sometimes called a ''pooling agreement,''whereby the shareholders agree on how their shares shall be voted. • a ''shareholders' agreement'' relating to the affairs of the corporation, such as management of its business, division of its profits, or distribution of its assets on liquidation.

49. S Corporations • Internal Revenue Code designation • Close corporation • Election of S status • Avoid Federal Income Tax at the corporate level • Passes through to shareholders. • Gains • Losses

50. Directors • Fiduciary Duty • Duty of Care • Due care • Good faith and Prudence of an ordinary person • Best interest of the corporation • Informed and reasonable decisions • Exercise reasonable supervision • Attend board meetings • Loyalty - Personal advantage • Conflict of Interest