Chapter 40: Limited Liability Companies, Limited Partnerships, and Limited Liability Limited Partnerships

  1. Limited Liability Companies
  2. Uniform Limited Liability Company Act of 1996 (ULLCA)
  3. Default rules that govern an LLC when there is no contrary agreement by its owners
  4. Treats LLCs and their owners like RUPA treats LLPs and their partners
  5. Tax Treatment
  6. May elect to be taxed like a partnership or corporation
  7. Most elect to be taxed like a partnership
  8. LLC pays no federal tax
  9. Owners report income and losses on their individual returns
  10. Passive investors may use their shares of losses to offset only income from other passive investments
  11. Formation
  12. Must file articles of organization with the secretary of state
  13. Must include
  14. Name of LLC, including words “limited liability company,” “limited company,” “LLC” or “L.L.C.”
  15. Duration
  16. Name and address of registered agent
  17. Must state whether
  18. Member-managed; or
  19. Mangager-managed, including names of initial managers
  20. Must indicate if LLC has a term; if not, it is deemed at will
  21. Owners
  22. Called members
  23. May include an individual, partnership, corporation, or another LLC
  24. Once formed
  25. May sue and be sued
  26. Can buy, hold and sell property
  27. Can make contracts and incur liabilities
  28. Foreign LLCs
  29. Created in one state (domestic state) but conducts business in another (foreign state)
  30. Foreign states may require that the LLC obtain a certificate of authority
  31. Foreign certificate of authority must
  32. Be filed with the secretary of state
  33. Include
  34. Name and address
  35. Agent for service of process
  36. Payment of a fee
  37. If a LLC fails to obtain a certificate of authority in foreign state,
  38. Contracts are still valid
  39. Members retain limited liability
  40. May be required to pay back fees and fines
  41. Disabled from using the foreign state’s courts until properly files certificate of authority
  42. Appoints foreign state’s secretary of state as agent for service
  43. Members’ Rights and Liabilities
  44. Limited Liability
  45. No individual liability on LLC contracts unless signed in personal capacity
  46. Liability usually limited to members’ capital contributions
  47. Must make capital contributions to the LLC as agreed
  48. Management Rights
  49. Member-managed
  50. Share equal rights in management
  51. Each member is an agent with implied authority
  52. Members also have apparent authority
  53. Manager-managed
  54. Managers elected and removed by majority vote
  55. Each manager shares equal rights in management as an agent
  56. Managers have implied authority and apparent authority
  57. Most matters may be conducted by individual managing members or managers or by a majority of managing members or managers
  58. Matters requiring consent of all members include

a)Amending of the operating agreement

b)Admission of new members

c)Redemption of a member’s interest

d)Sale of substantially all of the LLC’s assets

  1. LLC is not ordinarily liable for wrongful acts of non-managing members
  2. Non-managing members owe no fiduciary duties
  1. Duties: each member in a member-managed LLC and each manager in a manager-managed LLC are fiduciaries
  2. Managing member or manager
  3. Must account for LLC property and funds
  4. Not compete with LLC
  5. Exercise duty of care
  6. All members owe a duty of good faith and fair dealing
  1. Distributions: share profits and other distributions equally
  2. Ownership Interests
  3. Personal property of the member
  4. Limited ability to sell or transfer
  5. May transfer right to receive distributions, but
  6. Transferee does not become LLC member

a)No right to manage

b)Only a limited right to information

c)May obtain judicial dissolution if LLC is at will or term has expired

  1. Creditors do not own the distribution interest until foreclosure and purchase
  1. Members’ Dissociation and LLC Dissolution
  2. Member Dissociations
  3. Power to dissociate by withdrawing from LLC at any time
  4. Dissociation is caused by
  5. Death
  6. Having a guardian appointed
  7. Being adjudged legally incompetent
  8. Being a debtor in bankruptcy
  9. Transferring all distributional interest
  10. Being expelled by other members
  11. Wrongful dissociations breach the operating agreement
  12. Withdrawing before LLC term has expired
  13. Being a debtor in bankruptcy
  14. Being expelled by court
  15. Wrongfully dissociating member is liable for damages
  16. Right to manage terminates
  17. May still have apparent authority unless notice given to third parties
  18. Personal notice to creditors
  19. Filing a Statement of dissociation with the secretary of state
  20. No right to force the LLC to dissolve and liquidate assets
  21. Remaining members must pay value of distributional interest
  22. Must purchase interest at fair value within 120 days of member’s dissociation if at will
  23. If term LLC, must pay the value of interest within 120 days after the end of term
  24. Dissolution
  25. Ordinarily must be wound up after dissolution
  26. Few events automatically cause dissolution
  27. Event making it unlawful for the LLC business to continue
  28. Judicial dissolution at the request of a member or transferee because

a)LLC cannot practicably carry on its business

b)Is being managed illegally or oppressively; or

c)Failed to purchase a dissociated member’s interest on date required

  1. Administrative dissolution by secretary of state
  1. Any member who has not wrongfully dissociated may wind up
  2. LLC is bound by the reasonable acts of members during winding up
  3. May be liable for actions that continue the business and are inconsistent with winding up unless notice is given to third parties in a reasonable manner

a)Email, letter or phone call

b)Filing a Notice of Dissociation, effective 90 days later

  1. Proceeds are distributed
  2. First to creditors, including members who are creditors
  3. Then members’ contributions are returned
  4. Any remaining proceeds are distributed in equal shares
  5. Ordinarily creditors have no recourse if LLC’s assets are insufficient, unless members have not paid all of the capital promised to LLC
  1. Effect of Operating Agreement
  2. ULLCA gives members much flexibility to arrange affairs in the way they want
  3. In Re Garrison-Ashburn, LC
  4. Member dissociated from LLC by filing a petition in bankruptcy
  5. Dissociated member was divested of all rights to participate in management or operation of the company
  1. Limited Partnerships and Limited Liability Limited Partnerships
  2. Uniform Limited Partnership Act of 2001 (ULPA)
  3. Will soon be the dominant limited partnership law in the U.S.
  4. 11 states have adopted it
  5. Applies to both LPs and LLLPs
  6. Use of LPs and LLLPs
  7. Primarily used for tax shelter ventures
  8. General partners receive a greater tax shelter advantage
  9. Losses can offset income from any other sources, while
  10. Limited partners can only use losses to offset income from other passive investments
  11. LPs are also used by family businesses because of limited right to dissociate
  12. Creation
  13. Certificate of limited partnership must be executed and submitted to secretary of state
  14. Must be signed by all general partners
  15. Must include
  16. Its address
  17. Registered agent for service of process
  18. General partners’ names and addresses
  19. Whether it is an LP or LLLP
  20. ULPA provides for the continuing life of a LP or LLLP
  21. Any person may be a general partner
  22. Natural person
  23. Partnership
  24. LLC
  25. Trust
  26. Estate
  27. Association
  28. Corporation
  29. Defective Compliance with LP Statute
  30. ULPA requires substantial compliance or LP does not exist
  31. No substantial compliance usually if
  32. Failure to file a certificate of limited partnership
  33. Filing of a defective certificate
  34. Misstate name of LP
  35. Erroneously identify business form
  36. Limited partners
  37. If designated as a general partner, but individual believes he or she is a limited partner, may be liable unless
  38. Good faith belief; and
  39. Upon discovering he or she is not a limited partner,

a)Causes a proper certificate of limited partnership to be filed; or

b)Withdraws from future equity participation in the firm by a filing a certificate declaring such withdrawal

  1. Remains liable to third parties who believe in good faith that he or she is a general partner
  2. ULPA has no provision to protect general partners who erroneously believe an LLLP has been formed
  1. Foreign Limited Partnerships
  2. Domestic in state where organized
  3. Foreign in all other states
  4. Laws of domestic state apply to internal affairs
  5. Must file an application for a certificate of authority with the secretary of state of the foreign state to transact business there, and include
  6. Name and address of LP
  7. Names and addresses of general partners
  8. Name and address of agent for service of process
  9. An unregistered foreign LP
  10. May not use foreign state’s courts to sue
  11. Contracts still valid
  12. Rights and Liabilities of LPs and LLLPs
  13. Capital Contributions
  14. Partners obligated to contribute as promised
  15. Obligation may be enforced by LP or any of its creditors
  16. Profits and losses shared based on value of each partner’s capital contribution unless written agreement
  17. Voting Rights
  18. Actions that must be approved by all partners
  19. Amendment of limited partnership agreement
  20. Amendment of limited partnership certificate
  21. Sale or transfer of substantially all of the LP’s assets outside the ordinary course of business
  22. Limited partners have no right to vote on any matter as a class
  23. No new partner may be admitted unless each partner has consented
  24. Derivative Actions
  25. Usually the general partners hold the power to sue on behalf of the LP
  26. Exceptions
  27. If a limited partner asks the general partners to sue someone who has harmed the LP and they refuse, the limited partner may bring a derivative suit
  28. Also may bring suit if shows that asking the general partners will be a futile effort
  29. Recovery goes to the LP
  30. Partner’s Transferable Interest
  31. Personal property of each partner in a LP
  32. Buyer or transferee (or creditor with a charging order) is entitled only to receive the partner’s share of distributions
  33. Power and Right to Withdraw
  34. Power to withdraw from LP at any time
  35. ULPA gives no right to withdraw, absent a contrary provision in LP agreement
  36. Other Rights of General Partners
  37. Same right to manage and same agency powers as in ordinary partnership
  38. No right to compensation beyond share of the profits
  39. Other Liabilities of General Partners
  40. Liability
  41. In LP: unlimited liability to creditors
  42. In LLLP: liability is limited to capital contributions

a)Exception: may not escape liability for torts the general partner, himself, commits in the course of business

b)Protected from other torts, such as torts of other general partners

  1. Fiduciary Duties
  2. Must account for LP property
  3. Not compete against the partnership
  4. Not self-deal with partnership
  5. Duty of care
  1. Other Rights of Limited Partners
  2. Right to be informed about partnership affairs
  3. General partners must provide financial information and tax returns to limited partners on demand
  4. May inspect and copy a list of the partners, information concerning contributions by partners, the certificate of LP, tax returns, and partnership agreements
  5. Other Liabilities of Limited Partners
  6. Liability
  7. No further liability once contributed all of promised capital
  8. ULPA eliminates liability of limited partners who participate in control of the business
  9. Duties
  10. No limited partner owes fiduciary duties (unless an agent)
  11. Owe a duty to act in good faith and fair dealing
  1. Partners’ Dissociations and LP Dissolution
  2. Partners’ Dissociations
  3. Limited Partners
  4. Occurs upon

a)Death

b)Withdrawal

c)Expulsion from partnership

1)By partners: must be unanimous

  1. Transferred all of transferable interest
  2. Suffered a charging order
  3. Illegal to conduct business with limited partner

2)By court

  1. Engaged in wrongful conduct negatively affecting business
  2. Willfully and persistently breached partnership agreement or duty of good faith and fair dealing
  1. Retain right to receive distributions and liquidation value
  1. General Partners
  2. Occurs upon

a)Death

b)Withdrawal

c)Expulsion

d)Mental or physical inability to care for self

e)Unable to perform as a general partner (determined by court)

f)Debtor in bankruptcy

g)Assigns assets to creditors

h)Custodian appointed over property

i)By a vote of all other partners or by court, the same as a limited partner

  1. Ends right to manage
  2. Released from fiduciary duties (except duty of confidentiality)
  3. May retain apparent authority unless notice given

a)Email or phone calls

b)Filing of Notice of Dissociation

  1. Liable on obligations incurred during partnership unless creditors release
  2. Not liable on obligations incurred after dissociation if

a)Proper notice to third parties

b)More that two years has elapsed since dissociation

c)In LLLP, no need for dissociated general partners to be released from liability

  1. Effect of LP Agreement
  2. Can eliminate a limited partner’s right to withdraw
  3. Cannot eliminate a general partner’s right to withdraw
  1. LP Dissolutions
  2. Does not dissolve and wind up merely because a partner dissociates
  3. Dissolved and wound up only if
  4. All general partners and limited partners owning a majority of the claims to the distributions vote for dissolution
  5. If a general partner dissociates and partners owning a majority of the claims to partners’ distributions so vote
  6. If last general partner or limited partner dissociates and is not replaced within 90 days
  7. A court dissolves the LP because it is not reasonably practical to carry on the business
  8. Administrative dissolution by the secretary of state is possible if
  9. LP fails to pay fees and taxes due
  10. Fails to deliver annual report
  11. Winding up follows automatically after dissolution
  12. General partners have the power to wind up
  13. Unless dissociated
  14. If no remaining general partner to wind up, limited partners may appoint one
  15. Assets distributed
  16. First to creditors
  17. Remainder paid to partners in proportions as shared distributions
  18. If insufficient assets to pay creditors
  19. Persons who were general partners when obligation occurred must contribute cash in the same proportions that they shared distributions when obligation incurred