Limited Liability Companies and Limited Liability Partnerships Chapter 39 Limited Liability Companies and Limited Liability Partnerships

Limited Liability Company (LLC) Unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations It is a separate legal entity Member: An owner of an LLC 39-2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Uniform Limited Liability Company Act A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs Codifies LLC law Revised Uniform Limited Liability Company Act: A revision of the ULLCA 39-3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Taxation of LLCs LLC taxed as partnership Unless it elects to be taxed as a corporation Income or losses “flow through” to the members’ individual income tax returns Powers of an LLC Same powers as an individual to do all things necessary or convenient to carry on its business or affairs 39-4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Formation of an LLC An LLC may be organized to operate businesses, real estate developments Certain professional groups, such as accountants, lawyers, doctors, may not operate as LLCs An LLC can be organized in only one state even though it can conduct business in all other states 39-5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Articles of Organization The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLC to form the LLC The LLC is a domestic LLC in the state in which it is organized LLC law of the state governs the operation of the LLC 39-6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 39.2: Limited Liability Company (LLC) 39-7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Case 39.1: Limited Liability Company Siva v. 1138 LLC 2007 Ohio 4667, Web 2007 Ohio App. Lexis 4202 (2007) Court of Appeals of Ohio Issue Is Richard Hess, a member-owner of 1138 LLC, personally liable for the debt owed by the LLC to Siva? 39-8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Liability of Managers Not personally liable for the debts, obligations, and liabilities of the LLC they manage Liability of tortfeasors Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or death to another person Personally liable to the injured party 39-9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Management of an LLC Type of LLC Description Member-managed LLC The members do not designate managers to manage the LLC. The LLC is managed by its members. Manager-managed LLC The members designate certain members or nonmembers to manage the LLC. The LLC is managed by the designated managers; nonmanager members have no right to manage the LLC. 39-10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Compensation and Reimbursement Nonmanager member not entitled to remuneration Except for winding-up the LLC Managers of LLC are paid compensation and benefits Specified in employment agreements LLC is obligated to reimburse members and managers for payments made on behalf of the LLC 39-11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Agency Authority to Bind an LLC to Contracts Type of LLC Agency Authority Member-managed LLC All members have agency authority to bind the LLC to contracts Manager-managed LLC The managers have authority to bind the LLC to contracts; the nonmanager members cannot bind the LLC to contracts 39-12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Fiduciary Duties to the LLC Fiduciary duty Duty of loyalty Duty of care 39-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Duty of Loyalty A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC to Be honest in his or her dealings with the LLC Not act adversely to the interests of the LLC 39-14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Duty of Care A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC not to engage in A known violation of law Intentional conduct Reckless conduct Grossly negligent conduct that injures the LLC 39-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. No Fiduciary Duty A nonmanager member of a manager-managed LLC owes no fiduciary Duty of loyalty Duty of care to the LLC or its members 39-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Dissolution of an LLC A member has the power to withdraw from the LLC Unless otherwise stated in the operating agreement Wrongful disassociation: When a member withdraws from A term LLC prior to the expiration of the term or An at-will LLC when the operating agreement eliminates a member’s power to withdraw 39-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Payment of Distributional Interest No wrongful disassociation – LLC must purchase the disassociated member’s distributional interest Wrongful disassociation – damages may be offset against price Notice of Disassociation Statement of disassociation: A document filed with the secretary of state that gives constructive notice that a member has disassociated from an LLC 39-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Continuation of a Term LLC Can be continued in two ways The members of the LLC may vote prior to the expiration date As an at-will LLC by a simple majority vote of the members of the LLC Winding up an LLC’s business involves Preserving and selling the assets of the LLC Distributing the money and property to creditors and members 39-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Articles of Termination The documents that are filed with the secretary of state to Terminate an LLC as of the date of filing or upon a later effective date specified in the articles 39-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Limited Liability Partnership (LLP) A special form of partnership in which All partners are limited partners There are no general partners 39-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Articles of Partnership LLP created formally by filing articles of partnership with the secretary of the state in state in which LLP is organized Articles of limited liability partnership: The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLP to form the LLP An LLP must register as a foreign LLP in any other state in which it wants to conduct business. 39-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 39.3: Limited Liability Partnership (LLP) 39-23 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Taxation of LLPs “Flow-through” tax benefit – no tax paid at the partnership level All profits and losses are reported on the individual partners’ income tax returns 39-24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Limited Liability of Partners The liability of LLP partners for the LLP’s debts, obligations, and liabilities is limited only to the extent of their capital contributions Partners of LLPs are not personally liable 39-25 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39-26 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.