Limited Liability Companies

2 Introduction Limited liability companies LLC are relatively new creatures of state laws. An LLC combines the liability of a Corp and the tax advantages of a Pship. What does that mean?

3 LLC’s IRS rules - any unincorporated business (including LLC’s) will automatically be taxed as a partnership unless otherwise indicated on the tax return. Why LLC - they allow non resident foreign investors.

4 LLC The owners are called “members” Members can distribute profits as want

Profits Example: you and a partner own an LLC. Your partner contributed $40,000 for capital. You only contributed $10,000 but you perform 90% of the work. Agree to share the profits 50/50 5

6 Nature of the LLC - IMP Can a LLC be 1. member-managed – 2. manager-managed -

In Tennessee, there are three options for management of an LLC. First, the member managed. Second, a manager managed. Third, a director managed, which is similar to using a board of directors and officers like a corporation. 7

8 LLC Formation - TN Must file with TN Secretary of State File the Articles of Organization : –Name of Business and principal address. –Name and Address of registered agent –Names of the members

First, you will need to find a business name that is available Second, file your paperwork. Third, make the operating agreement that will dictate how the LLC will be run. 9

Operating Agreement - 10

John and Anna set up an LLC to operate their consulting business. John puts up all the cash, while Anna signs a promissory note to contribute her share in installments over the first two years of the business. Their operating agreement says that John and Anna each have a 50% ownership interest in the LLC, but it also says that John will be allocated 75% of the LLC's profits (and losses) for the first two years, and Anna will be allocated 25% of the LLC's profits (and losses) during this initial period. After the first two years, the agreement says that both members will split LLC allocations of profits and losses that is, in proportion to their ownership interests. Because there are legitimate financial reasons for the uneven split, the IRS should respect this special allocation. 11

To get protection of LLC must act like a LLC!! Assumed name: How much; how many years 12

TN LAW NAMES TN Law - LLC, domestic or foreign, may elect to transact business under an assumed name Must meet the name requirements of TCA § Costs 13

14 Jurisdiction For federal diversity jurisdiction purposes the citizenship of an LLC is the citizenship of its member, which may live in multiple states.

Can sue wherever ANY member lives What about min contacts? 15 Jurisdiction

16 Advantages and Disadvantages of the LLC ADVANTAGESDISADVANTAGES Member liability is limited to amount of investment. State statutes are not uniform. Taxed as partnershipNot all states recognize LLC’s. No corporate meetingsSome states you must have more than 1 member (Fl)

LLP 17

Limited Liability Partnerships Liability in an LLP. –LLP allows professionals to avoid personal liability for the malpractice of other partners.

19 Liability in an LLP The LLP allows professionals to avoid personal liability for the malpractice of other partners.

FLLP 20

Limited Liability Partnerships Family LLP. –FLLP is a limited liability partnership in which the majority of the partners are related to each other. –Used frequently for agriculture.

LP 22

23 Limited Partnerships/Silent Partners For silent partners – just give $$

Formation of an LP  An LP is a creature of state statute  Must file with the a secretary of state who will issue a certificate of limited partnership. 24

25 Limited Partnership The General partner assumes all management and personal liability. Limited Partner contributes cash but has no management rights so silent partner’s liability is limited to the amount of invest. Just can look money invested. When can a limited partner/silent partner be held liable ????

EXAMPLES: 26

Question? Mark Hardie was the sole member of Technical Plastics of Oregon, LLC (TPO). TPO operated out of Hardie’s home, and Hardie used TPO’s accounts to pay such personal expenses as landscaping, housecleaning, personal credit card bills, his step-son’s tuition, family vacations, and K- Mart, and Mattress World. Hardie received cash advances from his personal credit cards and deposited them into the TPO account. Hardie did not take a salary from TPO. When TPO filed for bankruptcy, it owed BLD Products approximately $120,000 for goods that it had purchased. LIABILITY? 27

QUESTION? Blum, an attorney, was negligent in his representation of Anthony. To settle the lawsuit, Blum signed a promissory note for $10,400 on behalf of his law firm, Gladstone, Schwartz, Blum & Woods, LLC. When the law firm did not pay, Anthony filed suit against Blum. In his suit, Anthony alleged that Blum, as a member of the LLC, was personally liable for the promissory note. 28