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Chapter 34 LLC’s and LLP’s. Learning Objectives. What advantages do LLC’s/LLP’s offer to businesspersons that are not offered by general partnerships or the corporation? How are LLC’s formed and who decides who they will be managed and operated? What is the difference between LLC’s and LLP’s?
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Learning Objectives • What advantages do LLC’s/LLP’s offer to businesspersons that are not offered by general partnerships or the corporation? • How are LLC’s formed and who decides who they will be managed and operated? • What is the difference between LLC’s and LLP’s? • What is a Family Limited Liability Partnership? • What are the key differences between the general partners and limited partners?
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.
Introduction • 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.
LLC Formation • 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). • LLC’s are formed by filing Articles of Organization with the Secretary of State.
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 • 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 • 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.
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.
Limited Liability Partnerships • 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 • 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 • FLLP is a limited liability partnership in which the majority of the partners are related to each other. • Used frequently for agriculture.
Limited Partnership Formation • Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner. • Limits the liability of some of its owners (the limited partners) to their investment. • A LP is a creature of state statute. Filing a certificate with the Secretary of State is required.
LP – General Partner Rights and Liabilities • The General partner assumes all management and personal liability. • 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.
LP – Limited Partner Rights and Liabilities • 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. • Limited partners have the right to inspect the LP’s books.
LP – Limited PartnerRights and Liabilities • 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 LP • Dissolved in much the same way as a general partnership (Chapter 33). • 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.
Limited Liability Limited Partnerships • 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.
