Chapter 15 Limited Liability Companies and Limited Liability Partnerships Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15-2 Limited Liability Companies (LLCs) Same liability protection afforded to principals of a corporate form of entity, and Pass-through tax treatment for its principals without the restrictions on ownership and scope required for other pass-through entities.

15-3 Formation of LLC An LLC is formed by filing: Articles of organization (also called certificates of organization) with the state public filing official.

15-4 Operating agreement Structure of governance and responsibility of members Death, incapacity, and dissolution

15-5 Liability Although LLC members are insulated from personal liability for any business debt or liability, creditors often require members of new and/or small LLCs to sign personal guarantees.

15-6 Taxation Another attractive advantage of an LLC is the various tax treatment alternatives. Although many LLCs are typically treated as a pass-through entity, the LLC’s members may also elect to be taxed as a corporation if they consider the corporate tax structure more favorable.

15-7 Capitalization LLCs are capitalized primarily through debt via private lenders or commercial lenders, or by selling equity ownership in the LLC itself.

15-8 Management and Operation Most states distinguish between: A member-managed LLC, and A manager-managed LLC.

15-9 Dissolution of LLCs and Dissociation of Members Dissolution of an LLC is a liquidation process triggered by an event that is specified in the operating agreement. Dissociation occurs when an individual member decides to exercise the right to withdraw from the partnership. Generally, upon a dissociation the remaining members may either continue the LLC.

15-10 Limited Liability Partnerships (LLPs) Danger of being a general partner is the potential liability for acts of other general partners, debts, and liabilities of the partnership itself. LLP statutes provide partnerships with the protective shield ordinarily only afforded to limited partners or corporate shareholders.

15-11 Formation Limited liability partnerships are formed when members file a statement of qualification with the appropriate public official or state office.

15-12 Liability General idea behind being an LLP is that all partners have liability protection for debts and liabilities of the partnership, but there may be conditions on these limits. In cases where a partner has engaged in misconduct or tortious conduct (such as negligence), the LLP acts to shield the personal of assets of other partners—never the partner who committed the misconduct or negligence.

15-13 Taxation LLPs are treated as pass-through entities. They are not subject to tax; any income is taxed only when it is distributed to the LLP’s partners.

15-14 Capitalization LLPs are capitalized in the same way as a partnership: through debt via private or commercial lenders or by selling partnership equity for ownership in the LLP itself.

15-15 Management and Operation The day-to-day operations and powers of the partners are spelled out in the partnership agreement. The election procedures, qualifications, compensation, meeting times, and other organizational matters are typically addressed in the partnership agreement.