Chapter 17: Limited Liability Companies & Limited Partnerships

Transcription

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

2 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. 2

3 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. 3

4 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). 4

5 Nature of the LLC Members of an LLC enjoy limited liability. Can a third party pierce the LLC veil and hold managing member liable? 5

6 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 Development, LLC v. 607 South Park, LLC (2008). 6

7 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

8 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. 8

9 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

10 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

11 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

12 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. 12

13 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. 13

14 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

15 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 3 rd party if the 3 rd party believes, based on conduct, that the LP is a general partner. 15

16 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. 16

17 Rights and Liabilities of Partners General partners are personally liable to 3 rd 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. 17

18 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

19 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

20 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. 20