2. P A R T P A R T Partnerships 9 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships

3. PA E TR HC 40 “As work becomes more complex and collaborative, companies where people work together best have a competitive edge.” Daniel Goleman, Working With Emotional Intelligence (1998)

4. Learning Objectives  Limited Liability Companies  Limited Partnerships and Limited Liability Limited Partnerships  Creation of Limited Partnerships  Right and liabilities of members and partners  Dissociation and dissolution 40 - 4

5.  The limited liability company (LLC) combines advantages of corporation’s protection from personal liability and the favorable tax status of partnership  The Uniform Limited Liability Company Act of 1996 (ULLCA) offers default rules similar to RUPA that govern an LLC in the absence of a contrary agreement of its owners  http://www.nccusl.org/Update/ http://www.nccusl.org/Update/ Overview 40 - 5

6.  At least one person (organizer) files articles of organization with secretary of state  Must state whether LLC is member-managed or manager-managed  Owners of an LLC are members  Operating agreement covers how members will share profits, manage the LLC, and withdraw from the LLC LLC Creation 40 - 6

7.  A member’s ownership interest in an LLC is the member’s personal property  Limited ability to sell or transfer LLC rights  A member in an LLC has the right is to receive distributions (usually profits)  Member may transfer distributional interest  ULLCA: members share profits and other distributions equally unless otherwise agreed Ownership Interest of Members 40 - 7

8.  Each member in a member-managed LLC shares equal rights in management and each member is an agent of the LLC with implied authority to carry on its ordinary business  A managing member or manager is a fiduciary  Managers in manager-managed LLC elected and removed by majority vote of members  Manager’s powers to act for LLC similar to member’s power in member- managed LLC LLC Management 40 - 8

9.  LLC entity is liable for contracts and torts incurred by members or managers acting with express, implied, or apparent authority  LLC member has no individual liability on LLC contracts, unless contracts signed in a personal capacity (e.g., as a surety)  A member is liable for torts s/he committed while acting for the LLC Tort and Contract Liability 40 - 9

10.  Under ULLCA, members dissociate from an LLC in ways similar to partnership or LLP  May be wrongful or nonwrongful  Dissolution of an LLC similar to partnership  After LLC assets sold, proceeds distributed first to creditors, then member contributions returned; remaining proceeds distributed in equal shares to members Dissociation & Dissolution 40 - 10

11.  ULPA establishes limited partnership law  Limited partnership has two owner classes:  General partners: contribute capital, manage business, share profits, possess unlimited liability for partnership obligations  Limited partners: contribute capital and share profits, but possess no management powers  Liability limited to amount of investment Uniform Limited Partnership Act 40 - 11

12.  Limited partnership or limited liability limited partnership (LLLP) created by filing a certificate of limited partnership (signed by all general partners) with secretary of state  Partners contribute property or other benefit to limited partnership, and share profits and losses on the basis of the capital contribution  Unless otherwise agreed LP or LLLP Creation 40 - 12

13.  ULPA is clear: limited partners have no inherent right to vote on any matter  Each partner owns a transferable interest in limited partnership as personal property  General partner of a limited partnership or LLLP has right to manage and has agency powers, including fiduciary duties to the partnership entity and to other partners Rights & Management 40 - 13

14.  Through a derivative action or derivative suit, a partner may sue to enforce a limited partnership right of action against a person who has harmed the limited partnership Derivative Actions 40 - 14

15.  ULPA gives partners no right to withdraw from partnership or to receive value of partnership interest absent a provision in the limited partnership agreement  Limited partner dissociates upon death, withdrawal, or expulsion from partnership  ULPA treats dissociation of general partners as RUPA treats partner dissociations  General partner may have apparent authority Withdrawing & Dissociation 40 - 15

16.  Under ULPA, limited partnership (or LLLP) is not dissolved, wound up, or terminated merely because a partner dissociates  If limited partnership chooses to dissolve, winding up follows automatically  General partners liquidate assets, distribute proceeds: to creditors first, remainder to partners in same proportions they shared distributions Dissolution of the LP and LLLP 40 - 16

17. Test Your Knowledge  True=A, False = B  Through a derivative action or derivative suit, a partner may sue to enforce a limited partnership right of action against a person who has harmed the limited partnership.  General partners and limited partners are the same except in regard to how distribution of profits occur. 40 - 17

18. Test Your Knowledge  True=A, False = B  Under the ULLCA, an LLC must choose to be partner-managed or manager-managed.  To create an LLC, articles of limited liability must be filed.  Under the ULLCA, members dissociate from an LLC in ways similar to those by which a partner dissociates from a partnership or LLP under RUPA. 40 - 18

19. Thought Question  Why should business owners be allowed to limit their liability or choose the form of business that gives them the greatest protection? 40 - 19 What risks does the typical business face?