Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 33: Limited Partnerships and Chapter 33: Limited Partnerships and

Limited Liability CompaniesLimited Liability Companies

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 33: Limited Partnerships and Chapter 33: Limited Partnerships and

Limited Liability CompaniesLimited Liability Companies

ByBy

Richard A. MannRichard A. Mann

&&

Barry S. RobertsBarry S. Roberts

Topics Covered in this ChapterTopics Covered in this Chapter

A. Limited PartnershipsA. Limited Partnerships

B. Limited Liability CompaniesB. Limited Liability Companies

C. Other Unincorporated Business C. Other Unincorporated Business Associations Associations

Limited Partnerships Limited Partnerships

Definition of a Limited PartnershipDefinition of a Limited Partnership – – a partnership formed by two or more a partnership formed by two or more persons under the laws of a State and persons under the laws of a State and having one or more general partners having one or more general partners and one or more limited partners.and one or more limited partners.

FormationFormation – – a limited partnership can a limited partnership can only be formed by substantial only be formed by substantial compliance with a State limited compliance with a State limited partnership statute.partnership statute.

Comparison of General and Comparison of General and Limited PartnersLimited Partners

General Partner Limited Partner

Control Has all the rights andpowers of a partner in apartnership without limitedpartners

Has no right to take part inmanagement or control

Liability Unlimited Limited, unless partnertakes part in control orpartner’s name is used

Agency Is an agent of thepartnership

Is not an agent of thepartnership

Fiduciary Duty Yes No

Duty of Care Yes No

FormationFormation

Filing of CertificateFiling of Certificate – – two or more two or more persons must file a signed certificate of persons must file a signed certificate of limited partnership.limited partnership.

Name Name – – inclusion of a limited partner's inclusion of a limited partner's surname in the partnership name in surname in the partnership name in most instances will result in the loss of most instances will result in the loss of the limited partner's limited liability.the limited partner's limited liability.

Contributions Contributions – – may be cash, may be cash, property, services, or a promise to property, services, or a promise to contribute cash, property, or services.contribute cash, property, or services.

Defective FormationDefective Formation

If no certificate is filed or if the one filed If no certificate is filed or if the one filed does not substantially meet the does not substantially meet the statutory requirements, the formation is statutory requirements, the formation is defective and the limited liability of the defective and the limited liability of the limited partners is jeopardized.limited partners is jeopardized.

Foreign Limited PartnershipsForeign Limited Partnerships – – a a limited partnership is considered limited partnership is considered “foreign” in any State other than that in “foreign” in any State other than that in which it was formed.which it was formed.

RightsRights

A general partner in a limited partnership A general partner in a limited partnership has all the rights and powers of a partner in has all the rights and powers of a partner in a general partnership.a general partnership.

ControlControl – – the general partners have almost the general partners have almost exclusive control and management of the exclusive control and management of the limited partnerships; a limited partner who limited partnerships; a limited partner who participates in the control of the limited participates in the control of the limited partnership may lose limited liability.partnership may lose limited liability.

Voting RightsVoting Rights – – the partnership agreement the partnership agreement may grant to all or some general or limited may grant to all or some general or limited partners the right to vote on any matter.partners the right to vote on any matter.

RightsRights

Choice of Associates Choice of Associates – – no person no person may be added as a general partner or may be added as a general partner or a limited partner without the consent of a limited partner without the consent of all partners.all partners.

WithdrawalWithdrawal – – a general partner may a general partner may withdraw from a limited partnership at withdraw from a limited partnership at any time by giving written notice to the any time by giving written notice to the other partners; a limited partner may other partners; a limited partner may withdraw as provided in the limited withdraw as provided in the limited partnership certificate.partnership certificate.

Assignment of Partnership Assignment of Partnership InterestInterest

Unless otherwise provided in the partnership Unless otherwise provided in the partnership agreement, a partner may assign a partnership agreement, a partner may assign a partnership interest; an assignee may become a limited interest; an assignee may become a limited partner if all other partners consent.partner if all other partners consent.

Profit and Loss SharingProfit and Loss Sharing – – profits and losses profits and losses are allocated among the partners as provided are allocated among the partners as provided in the partnership agreement; if the partnership in the partnership agreement; if the partnership agreement has no such provision, then profits agreement has no such provision, then profits and losses are allocated on the basis of the and losses are allocated on the basis of the contributions each partner actually made.contributions each partner actually made.

Assignment of Partnership Assignment of Partnership InterestInterest

DistributionsDistributions ––partners share distributions partners share distributions of cash or other assets of a limited of cash or other assets of a limited partnership as provided in the partnership partnership as provided in the partnership agreement.agreement.

LoansLoans ––general and limited partners may be general and limited partners may be secured or unsecured partnership creditors.secured or unsecured partnership creditors.

InformationInformation – – each partner has the right to each partner has the right to inspect and copy the partnership records.inspect and copy the partnership records.

Derivative ActionsDerivative Actions – – a limited partner may a limited partner may sue on behalf of a limited partnership if the sue on behalf of a limited partnership if the general partners refuse to bring the action.general partners refuse to bring the action.

Duties and LiabilitiesDuties and Liabilities

DutiesDuties – – general partners owe a duty of care general partners owe a duty of care and loyalty (fiduciary duty) to the general and loyalty (fiduciary duty) to the general partners, the limited partners, and the limited partners, the limited partners, and the limited partnership; limited partners do not.partnership; limited partners do not.

LiabilitiesLiabilities – – the general partners have the general partners have unlimited liability; the limited partners have unlimited liability; the limited partners have limited liability (liability for partnership limited liability (liability for partnership obligations only to the extent of the capital obligations only to the extent of the capital that they contributed or agreed to contribute).that they contributed or agreed to contribute).

Liability of Limited PartnersLiability of Limited Partners

Activity ConsequencesDefective formation

Unlimited liability to third parties who transacted business beforewithdrawal or amendment and in good faith believed “equity participant”was a general partner

Participation in control is

of a general partner

1976 Act: Unlimited liability to all third parties who transact businesswith the partnership

1985 Act: Unlimited liability to third parties who transact business withreasonable belief, based on limited partner’s conduct, that limited partnerwas a general partner

Participation in control is not substantially thesame as powers of a general partner

1976 Act: Unlimited liability to those persons who transacted businesswith actual knowledge of the limited partner’s participation in control

1985 Act: Same as 1985 Act where participation in control issubstantially the same as powers of a general partner

Name used with permission

Unlimited liability to third parties who did not have actual knowledgethat she was a limited partner

substantially the same as powers

DissolutionDissolution

CausesCauses – – the limited partners have the limited partners have neither the right nor the power to neither the right nor the power to dissolve the partnership, except by dissolve the partnership, except by decree of the court; the following events decree of the court; the following events trigger a dissolution: (1) the expiration of trigger a dissolution: (1) the expiration of the time period; (2) the withdrawal of a the time period; (2) the withdrawal of a general partner, unless all partners general partner, unless all partners agree to continue the business; or (3) a agree to continue the business; or (3) a decree of judicial dissolution.decree of judicial dissolution.

DissolutionDissolution

Winding UpWinding Up – – unless otherwise provided in unless otherwise provided in the partnership agreement, the general the partnership agreement, the general partners who have not wrongfully dissolved partners who have not wrongfully dissolved the partnership may wind up its affairs.the partnership may wind up its affairs.

Distribution of AssetsDistribution of Assets – – the priorities for the priorities for distribution are: (1) creditors, including distribution are: (1) creditors, including partners; (2) partners and ex-partners for partners; (2) partners and ex-partners for unpaid distributions; (3) partners for the return unpaid distributions; (3) partners for the return of contributions, except as otherwise agreed; of contributions, except as otherwise agreed; and (4) partners for their partnership interests and (4) partners for their partnership interests in the proportions in which they share in in the proportions in which they share in distributions, except as agreed.distributions, except as agreed.

Limited Liability Companies Limited Liability Companies

DefinitionDefinition – – a limited liability company a limited liability company is a noncorporate business organization is a noncorporate business organization that provides limited liability to all of its that provides limited liability to all of its owners (members) and permits all of its owners (members) and permits all of its members to participate in management members to participate in management of the business.of the business.

Formation Formation – – the formation of a limited the formation of a limited liability company requires substantial liability company requires substantial compliance with a State's limited liability compliance with a State's limited liability company statute.company statute.

FormationFormation

FilingFiling – – the LLC statutes generally require the LLC statutes generally require the central filing of articles of organization in the central filing of articles of organization in a designated State office.a designated State office.

NameName – – LLC statutes generally require the LLC statutes generally require the name of the LLC to include the words name of the LLC to include the words limited limited liability companyliability company or the abbreviation or the abbreviation LLC.LLC.

ContributionContribution – – the contribution of a member the contribution of a member to a limited liability company may be cash, to a limited liability company may be cash, property, services rendered, a promissory property, services rendered, a promissory note, or other obligation to contribute cash, note, or other obligation to contribute cash, property, or to perform services.property, or to perform services.

FormationFormation

Operating AgreementOperating Agreement – – the basic the basic contract governing the affairs of a contract governing the affairs of a limited liability company and stating the limited liability company and stating the various rights and duties of the various rights and duties of the members.members.

Foreign Limited Liability Companies Foreign Limited Liability Companies – – a limited liability company is a limited liability company is considered “foreign” in any State other considered “foreign” in any State other than that in which it was formed.than that in which it was formed.

Rights of MembersRights of Members

A member's interest in the LLC A member's interest in the LLC includes the financial interest (the right includes the financial interest (the right to distributions) and the management to distributions) and the management interest (which consists of all other interest (which consists of all other rights granted to a member by the LLC rights granted to a member by the LLC operating agreement and the LLC operating agreement and the LLC statute).statute).

Financial RightsFinancial Rights

Profit and Loss SharingProfit and Loss Sharing ––if the operating if the operating agreement makes no other provision, the agreement makes no other provision, the profits and losses are typically allocated on profits and losses are typically allocated on the basis of the value of members' the basis of the value of members' contributions.contributions.

DistributionsDistributions ––if the operating agreement if the operating agreement does not allocate distributions, they are does not allocate distributions, they are typically made on the basis of the members' typically made on the basis of the members' contributions.contributions.

WithdrawalWithdrawal – – a member may withdraw and a member may withdraw and demand payment of her interest upon giving demand payment of her interest upon giving the notice specified in the statute or the LLC's the notice specified in the statute or the LLC's operating agreement.operating agreement.

Management RightsManagement Rights

ManagementManagement – – in the absence of a contrary in the absence of a contrary agreement, each member has equal rights in agreement, each member has equal rights in the management of the LLC, but LLCs may the management of the LLC, but LLCs may be managed by any number of the members.be managed by any number of the members.

VotingVoting – – LLC statutes usually specify the LLC statutes usually specify the voting rights of members, subject to a voting rights of members, subject to a contrary provision in a LLC's operating contrary provision in a LLC's operating agreement.agreement.

Derivative ActionsDerivative Actions – – a member may bring a member may bring an action on behalf of the LLC to recover a an action on behalf of the LLC to recover a judgment in its favor if the members with judgment in its favor if the members with authority to bring the action refuse to do so.authority to bring the action refuse to do so.

Rights of MembersRights of Members

Assignment of LLC InterestAssignment of LLC Interest – – Unless Unless otherwise provided in the LLC's otherwise provided in the LLC's operating agreement, a member may operating agreement, a member may assign his financial interest in the LLC; assign his financial interest in the LLC; an assignee of a financial interest in an an assignee of a financial interest in an LLC may acquire the other rights by LLC may acquire the other rights by being admitted as a member of the being admitted as a member of the company if all the remaining members company if all the remaining members consent or the operating agreement so consent or the operating agreement so provides.provides.

DutiesDuties

Manager-managed LLCsManager-managed LLCs – – the managers of the managers of a manager-managed LLC have a duty of a manager-managed LLC have a duty of care and loyalty; usually, members of a care and loyalty; usually, members of a manager-managed LLC have no duties to the manager-managed LLC have no duties to the LLC or its members by reason of being LLC or its members by reason of being members.members.

Member-managed LLCs Member-managed LLCs – – members of members of member-managed LLCs have the same member-managed LLCs have the same duties of care and loyalty that managers duties of care and loyalty that managers have in manager-managed LLCs.have in manager-managed LLCs.

Comparison of Member-and Comparison of Member-and Manager-Managed LLCsManager-Managed LLCs

Member of Member-Managed LLCManager of Manager-Managed LLC

Member of Manager-Managed LLC

Control Full None

Liability Limited Limited

Agency Is an agent of LLC Is not an agent of LLC

Fiduciary Duty Yes No

Duty of Care Yes No

LiabilitiesLiabilities

No member or manager of a limited No member or manager of a limited liability company is obligated personally liability company is obligated personally for any debt, obligation, or liability of the for any debt, obligation, or liability of the limited liability company solely by limited liability company solely by reason of being a member or acting as reason of being a member or acting as a manager of the limited liability a manager of the limited liability company.company.

DissolutionDissolution

An LLC will automatically dissolve upon: An LLC will automatically dissolve upon: (1) in some States, the dissociation of a (1) in some States, the dissociation of a member, (2) the expiration of the LLC's member, (2) the expiration of the LLC's agreed duration or the happening of any agreed duration or the happening of any of the events specified in the articles, of the events specified in the articles, (3) the written consent of all the (3) the written consent of all the members, or (4) a decree of judicial members, or (4) a decree of judicial dissolution.dissolution.

DissolutionDissolution

DissociationDissociation – – means that a member means that a member has ceased to be associated with the has ceased to be associated with the company through voluntary withdrawal, company through voluntary withdrawal, death, incompetence, expulsion, or death, incompetence, expulsion, or bankruptcy.bankruptcy.

DissolutionDissolution

Distribution of AssetsDistribution of Assets – – the default rules for the default rules for distributing assets of a LLC are (1) to distributing assets of a LLC are (1) to creditors, including members and managers, creditors, including members and managers, except with respect to liabilities for except with respect to liabilities for distributions; (2) to members and former distributions; (2) to members and former members in satisfaction of liabilities for members in satisfaction of liabilities for unpaid distributions; (3) to members for the unpaid distributions; (3) to members for the return of their contributions; and (4) to return of their contributions; and (4) to members for their limited liability company members for their limited liability company interests in the proportions in which members interests in the proportions in which members share in distributions.share in distributions.

Limited Liability PartnershipLimited Liability Partnership

A general partnership that, by making A general partnership that, by making the statutorily required filing, limits the the statutorily required filing, limits the liability of its partners for some or all of liability of its partners for some or all of the partnership's obligations.the partnership's obligations.

Limited Liability PartnershipLimited Liability Partnership

FormalitiesFormalities – – most statutes require most statutes require only a majority of the partners to only a majority of the partners to authorize registration as an LLP; others authorize registration as an LLP; others require unanimous approval.require unanimous approval.

DesignationDesignation – – the name of the LLP the name of the LLP must include the words must include the words limited liability limited liability partnershippartnership or or registered limited liability registered limited liability partnershippartnership or the abbreviation or the abbreviation LLP.LLP.

Liability LimitationLiability Limitation

SSome statutes limit liability only for ome statutes limit liability only for negligent acts; others limit liability to any negligent acts; others limit liability to any partnership tort or contract obligation partnership tort or contract obligation that arose from negligence, malpractice, that arose from negligence, malpractice, wrongful acts, or misconduct committed wrongful acts, or misconduct committed by any partner, employee, or agent of by any partner, employee, or agent of the partnership; some provide limited the partnership; some provide limited liability for all debts and obligations of liability for all debts and obligations of the partnership.the partnership.

Liability Limitations in LLPsLiability Limitations in LLPs

LLP Statutes Limited Liability Unlimited Liability

First Generation Negligent acts • All other obligations• Wrongful partner• Supervising partner

Second Generation Tort and contractobligations arising fromwrongful acts

• All other obligations• Wrongful partner• Supervising partner

Third Generation All obligations • Wrongful partner• Supervising partner

Limited Liability Limited Limited Liability Limited PartnershipPartnership

A limited partnership in which the A limited partnership in which the liability of the general partners has been liability of the general partners has been limited to the same extent as in an LLP.limited to the same extent as in an LLP.