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Chapter 17 Limited Liability Companies and Limited Partnerships. Introduction. Limited liability companies are relatively new creatures of state statute. An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.

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introduction
Introduction
  • Limited liability companies are relatively new creatures of state statute.
  • An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.
  • LLC’s are increasingly become the entity of choice for businesses.
1 llc s
§ 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.
nature of the llc
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).
nature of the llc1
Nature of the LLC
  • Members of an LLC enjoy limited liability.
  • Case 17.1:Kaycee Land and Livestock v. Flahive (2002).
  • Can a third party pierce the LLC “veil” and hold managing member liable?
llc formation
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.
jurisdictional requirements
Jurisdictional Requirements
  • An LLC is a legal entity separate from its owners.
  • For federal jurisdiction based on diversity, an LLC may be treated differently than a corporation.
  • For diversity purposes the citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.
llc operating agreement
LLC Operating Agreement
  • 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: Hurwitz v. Padden (1996).
llc management
LLC Management
  • 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.
2 llp s
§ 2: LLP’s
  • Creature of state statute, similar to an LLC except that an LLP is designed for professionals who normally do business as a partnership (lawyers and accountants).
  • LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.
liability in an llp
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.
family limited liability partnerships
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.
3 limited partnerships
§ 3: Limited Partnerships
  • Entity that limits the liability of some of its owners (the limited partners).
  • Creature 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 profit.
rights and liabilities of partners
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.
rights and liabilities of partners1
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.
  • Case 17.3:BT-I v. Equitable Life Assurance Society of the United States (1999).
rights and liabilities of partners2
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.
dissolution of the lp
Dissolution of the LP
  • 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.
dissolution of the lp1
Dissolution of the LP
  • Dissolved in much the same way as a general partnership (Chapter 36).
  • 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.
4 lllp s
§ 4: LLLP’s
  • 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.
law on the web
Law on the Web
  • Comparison of Different Business Entities.
  • LLC’s at Nolo.com.
  • Legal Research Exercises on the Web.