1. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 LIMITED LIABILITY COMPANIES AND LIMITED LIABILITY PARTNERSHIPS © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 39

2. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Limited Liability Company (LLC) Unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations. LLC may elect to be taxed as a partnership. The owners can manage the business. The owners have limited liability.

3. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 LLC (continued) Created under state law of state in which the LLC is being organized. Limited liability company codes regulate formation, operation, and dissolution of LLCs.

4. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 LLC (continued) LLC is separate legal entity that can: –Own property –Sue and be sued –Enter into and enforce contracts –Be found civilly and criminally liable for violations of law

5. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Uniform Limited Liability Company Act Goal of comprehensive and uniform laws for the formation, operation, and dissolution of LLCs. Revised in 2006. Not law unless a state adopts it as its LLC statute. Many states have adopted all or part of the ULLCA as their limited liability company law.

6. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Taxation of LLCs LLC taxed as partnership unless it elects to be taxed as a corporation. –Taxes flow through to individual’s tax returns. –No taxation at the entity level. –Avoids double taxation.

7. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Powers of an LLC Has same powers as an individual –Can own, mortgage, and transfer real estate. –Can own and transfer personal property. –Can enter into contracts and make guarantees. –Can borrow money and issue notes and bonds. –Can be sued and sue.

8. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 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.

9. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Articles of Organization An LLC is formed by delivering articles of organization to the office of the secretary of state of the state of organization for filing. Articles include name, address of office, name and address of agent and organizers, type of LLC, other information. –Name must include limited liability company or limited company or abbreviation thereof. Existence begins when articles of organization are filed.

10. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Duration Term LLC –An LLC that has a specified term of duration. –E.g., “period ending January 1, 2050.” At-Will LLC –An LLC that has no specified term of duration.

11. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Capital Contribution May be in form of money, tangible or intangible property, services performed or promised to be performed, promissory notes, or other agreements to provide cash or property A member’s obligation to contribute capital not excused by death or disability.

12. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Certificate of Interest Document that evidences a member’s ownership interest in an LLC. –Similar to stock certificate issued by a corporation.

13. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Operating Agreement Agreement entered into among members that governs the affairs and business of the LLC and the relations among members, managers, and the LLC. May be amended by the approval of all the members unless otherwise provided in the agreement.

14. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Conversion of an Existing Business to an LLC General or limited partnerships and corporations may wish to convert to an LLC. –To obtain the tax benefits and limited liability shield of an LLC. –Law permits such conversions. Execute agreement of conversion and file articles of organization.

15. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Dividing an LLC’s Profits and Losses Unless otherwise agreed, under ULLCA each member has right to equal share of profits and losses. Operating agreement may have other provisions.

16. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Distributional Interest A member’s ownership interest that entitles the member to receive distributions of money and property from the LLC. Member may transfer that interest to another party. Transferee receives the right to profit and other distributions of the LLC, but is not a member of the LLC unless otherwise provided in the operating agreement.

17. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Liability of an LLC LLC is liable for loss or injury caused by wrongful act or omission or member, manager, employee, or agent in course of ordinary business, or with authority of the LLC. Managers are not personally liable for debts, obligations, and liabilities of LLC. Members or managers are personally liable for their own torts.

18. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Member’s Limited Liability Member – an owner of an LLC. Members have limited liability. Members are liable for the LLC’s debts, obligations, and liabilities only to the extent of their capital contributions.

19. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Limited Liability Company (LLC) Liability limited to capital contribution No personal liability for company’s debts and obligations Capital investment Debt or obligation owed Limited Liability Company (LLC) Third Party MemberMember MemberMember

20. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Member-Managed LLC In a member-managed LLC, all members can bind the LLC to authorized contracts. Each member has equal rights in the management of the business regardless of the size of his or her capital contribution. Any matter relating to the business of the LLC is decided by a majority vote of the members.

21. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 Manager-Managed LLC In manager-managed LLC, only the managers can bind the LLC to authorized contracts. Members and nonmembers who are designated managers control the management of the LLC. Members who are not managers have no rights to manage the LLC unless otherwise provided in operating agreement. Certain actions cannot be delegated to managers but must be voted on by members. –E.g., amending operating agreement, admitting new members.

22. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 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.

23. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 Agency Authority to Bind an LLC to Contracts All members in member-managed LLC may bind LLC. Only managers have authority to bind LLC in manager-managed LLC. –Member cannot bind LLC unless also a manager.

24. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 Fiduciary Duties to the LLC Duty of Loyalty Duty of Care

25. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Duty of Loyalty Owed by member of member-managed LLC and manager of manager-managed LLC. Breaches include: –Usurping an LLC opportunity –Making secret profits –Secretly dealing with the LLC –Secretly competing with the LLC –Representing any interest adverse to that of the LLC

26. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 Limited Duty of Care Owed by member of a member-managed LLC and manager of a manager-managed LLC. Duty not to engage in: –Known violation of law. –Intentional, reckless, or grossly negligent conduct that injures the LLC.

27. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Limited Duty of Care (continued) Member or manager of an LLC is not liable to the LLC for injuries caused by his or her ordinary negligence. The ordinarily negligent member or manager, and the LLC on whose behalf the member or manager was acting when the negligent act occurred, are liable to the injured third party.

28. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 No Fiduciary Duty Owed by Nonmanager Member A nonmanager member of a manager- managed LLC owes no fiduciary duties of loyalty or care to the LLC or its members.

29. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 29 Dissolution Unless otherwise agreed, member of an LLC has the power to disassociate from the LLC. Wrongful disassociation occurs when member withdraws from a term LLC prior to the expiration of the term or from an at-will LLC when the operating agreement eliminates a member’s power to withdraw. –Member may owe damages to LLC and other members.

30. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 30 Payment of Distributional Interest If no wrongful disassociation, LLC must purchase the disassociated member’s distributional interest. Price and terms may be fixed in operating agreement; otherwise, pay fair market value. If wrongful disassociation, damages may be offset against price.

31. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 31 Notice of Disassociation Document filed with the secretary of state that gives constructive notice that a member has disassociated from an LLC. Effective against any person who later deals with LLC.

32. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 32 Continuation of a Term LLC Members may vote unanimously before expiration date to continue LLC for additional specified term. LLC may be continued as an at-will LLC by simple majority vote.

33. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 33 Winding-Up an LLC’s Business The process of preserving and selling the assets of the LLC and distributing the money and property to creditors and members. Creditors paid first. Surplus amounts are distributed to members in equal amounts. –May be modified by operating agreement.

34. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 34 Articles of Termination Document filed with the secretary of state that terminates the LLC as of the date of filing or upon a later effective date specified in the document.

35. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 35 Limited Liability Partnership (LLP) Usually restricted to partnerships of professionals, such as accountants, lawyers, doctors. All partners are limited partners. –No general partners. –No partners are personally liable; all have limited liability. LLPs have flow-through tax benefits. –No taxes at entity level.

36. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 36 Limited Liability Partnership (LLP) (continued) Liability limited to capital contribution No personal liability for partnership’s debts and obligations Capital investment Debt or obligation owed Limited Liability Partnership (LLP) Third Party Limited Partner

37. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 37 Articles of Partnership LLP created formally by filing articles of partnership with the secretary of the state in state in which LLP is organized. LLP is domestic LLP in the state in which it is organized. An LLP must register as a foreign LLP in any other state in which it wants to conduct business.

38. © 2010 Pearson Education, Inc., publishing as Prentice-Hall 38 Liability Insurance Required Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. Quid pro quo for limited liability of partners.