1. Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships and Related FormsPartners Dissociation & Partnerships Dissolution and Winding Up Limited Liability Companies, Limited Partnerships, and Limited Liability Limited Partnerships 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. Limited Liability Companies,Limited Partnerships, andLimited Liability Limited PartnershipsThe man who occupies thefirst place seldom plays the principal part. Johann Wolfgang von Goethe 2010 The McGraw-Hill Companies, Inc. All rights reserved. 3. Learning Objectivesv Limited Liability Companiesv Limited Partnerships and LimitedLiability Limited Partnershipsv Creation of Limited Partnershipsv Right and liabilities of members andpartnersv Dissociation and dissolution40 - 3 4. Overviewv The limited liability company (LLC) combinesadvantages of the corporation with regard toprotection from personal liability andfavorable tax status of the partnershipv The Uniform Limited Liability Company Act of1996 (ULLCA) offers default rules similar toRUPA that govern an LLC in the absence ofa contrary agreement of its owners w http://www.nccusl.org/Update/40 - 4 5. Taxation of the LLCv An LLC may elect to be taxed like apartnership or a corporation for federalincome tax purposes w Election as partnership more commonv Therefore, the LLC pays no federal incometax and all income and losses of the LLC arereported by the LLCs owner-members ontheir individual income tax returns40 - 5 6. Creation of the LLCv At least one person (organizer) must filearticles of organization with a secretary ofstate w Articles must include LLC name, its duration, and the name and address of its registered agentv Owners of an LLC are members w An individual, partnership, corporation, or another LLC may be a member of an LLC w An LLC is an entity separate from its members40 - 6 7. Management of the LLCv Articles of organization must state whetherthe LLC is member-managed or manager-managed w If manager-managed, initial managers must be namedv An LLC probably will have an operatingagreement covering how members will shareprofits, manage the LLC, and withdraw fromthe LLC40 - 7 8. Liability of Membersv An LLC member has no individual liability onLLC contracts, unless LLC contracts signedin a personal capacity (e.g., as a surety)v A members liability is usually limited to themembers capital contributionsv A member is liable for torts s/he committedwhile acting for the LLC40 - 8 9. A Member-Managed LLCv Under the ULLCA, an LLC must choose tobe member-managed or manager-managedv Each member in a member-managed LLCshares equal rights in the management ofthe business and each member is an agentof the LLC with implied authority to carry onits ordinary business40 - 9 10. A Member-Managed LLCv The LLC operating agreement may modifyULLCA default rules by granting more powerto some membersw Creatinga class of members whose approvalis required for certain contractsw Members share power based on capitalcontributions40 - 10 11. A Manager-Managed LLCv Managers in a manager-managed LLC are electedand removed by a vote ofa majority of LLC membersv A managers powers to actfor the LLC are similar to amembers power in amember- managed LLCA team effort.40 - 11 12. Tort and Contract Liabilityv An LLC is liable for the contractualobligations incurred by its members ormanagers acting within their express,implied, or apparent authorityv An LLC is also liable for the torts and otherwrongful acts of managing members andother managers acting within their authority40 - 12 13. Duties of Membersv Each member in a member-managed LLCand each manager in a manager-managedLLC is a fiduciary of the LLC and itsmembers with duties similar to the duties ofpartners, including the duty of carev Nonmanaging members of a manager-managed LLC owe no fiduciary dutiesw See Katris v. Carroll40 - 13 14. Ownership Interest of Membersv A members ownership interest in an LLC isthe members personal propertyw Limited ability to sell or transfer LLC rightsv A member may transfer the distributionalinterest in the LLC to another personw Transferee not a member, but receives right topartnership distributionsw Limited right of transfer may be altered in theoperating agreement40 - 14 15. Distributions to Membersv A member in an LLC has the right is toreceive distributions (usually profits)v ULLCA states that members share profitsand other distributions equally, regardless ofdifferences in their capital contributions w This may be altered by the operating agreement40 - 15 16. Dissociationv Under the ULLCA, membersdissociate from an LLC in wayssimilar to those by which a partnerdissociates from a partnership orLLP under RUPA w Under the ULLCA, a partner has the power to dissociate by withdrawing from the LLC at any time40 - 16 17. Dissociationv As in partnership, a members dissociationmay be wrongful or nonwrongfulv Dissociation terminates a members statusas a member, and a dissociated member istreated as a transferee of a membersdistributional interestw In Re Garrison-Ashburn, LC considers the effectsof a members dissociation and the managementrights of a member in an LLC.40 - 17 18. Dissolutionv Dissolution of an LLC is similar to that of anLLP or partnershipv When an LLC dissolves, any member whohas not wrongly dissociated may wind up thebusinessw LLC bound by reasonable acts of membersduring winding up40 - 18 19. Dissolutionv After all the LLC assets sold,proceeds distributed first toLLC creditors, then memberscontributions are returnedv Any remaining proceeds aredistributed in equal shares tothe members40 - 19 20. Uniform Limited Partnership Actv Substantially similar to RUPA, theULPA of 2001 is the first comprehensivestatement of American limited partnershiplaww Only ULPA applies to limited partnershipsv The limited partnership (or LLLP) form isperpetual and used primarily in tax shelterventures, real estate ventures, oil and gasdrilling, and professional sports40 - 20 21. The Limited Partnershipv Limited partnerships has two owner classes:w General partners contribute capital, managethe business, share in profits, and possessunlimited liability for its obligationsw Limited partners contribute capital and shareprofits, but possess no management powersw Liability limited up to the amount of theirinvestments in the businessv Limited partnership agreements common40 - 21 22. Limited LiabilityLimited Partnershipv A variant of a limited partnership is thelimited liability limited partnership (LLLP)which offers limited liability status for all itspartners, including general partnersv Except for liability of general partners, limitedpartnerships and LLLPs are identical40 - 22 23. Creating the LP or LLLPv A limited partnership (or LLLP) may becreated by complying with the applicablestate statutes, but requirements are minimalw However, see Moser v. Moser, in which failureto strictly comply with law invalidated attemptto create a family limited partnershipv A certificate of limited partnership must beexecuted (signed by all general partners)and submitted to the secretary of state40 - 23 24. Rights of LP and LLLP Partnersv A partner may contribute any property orother benefit to the limited partnershipv Under ULPA, profits and losses are sharedon the basis of the value of each partnerscapital contribution unless there is a writtenagreement to the contraryv ULPA of 2001 requires few actions to beapproved by all the partners40 - 24 25. Rights of LP and LLLP Partnersv ULPA is clear that limited partners have noinherent right to vote on any matterv Default rule is that no new partner may beadmitted unless each partner has consentedto the admissionw Limited partnership agreement may provide forother admission procedures40 - 25 26. Transferable Interestv Each partner in a limited partnership owns atransferable interest in the limited partnershipas personal propertyv A partners transfer of his transferableinterest has no effect on his status as apartner, absent a contrary agreement40 - 26 27. Management & Dutiesv A general partner of a limited partnership orLLLP has same right to manage and sameagency powers as a partner in an ordinarypartnership, including the duty of carev A general partner of a limited partnership orLLLP is in a position of trust and thereforeowes fiduciary duties to the limitedpartnership and the other partners40 - 27 28. Withdrawingv Partners have the power to withdraw fromthe limited partnership at any time, but ULPAgives the partners no right to withdraw,absent a contrary provision in the limitedpartnership agreementv Under ULPA, a withdrawing partner has noright to receive the value of the partnershipinterest40 - 28 29. Dissociation of theLP and LLLPv ULPA adopts terminology andframework of partnership law,establishing dissociation anddissolution rulesv A limited partner dissociatesupon limited partners death,withdrawal, or expulsion fromthe partnership40 - 29 30. Dissociation of theLP and LLLPv A dissociated limited partner is not a limitedpartner, has no rights as a limited partner,and is treated as a mere transferee of thedissociated limited partners transferableinterestv ULPA treats dissociation of general partnersas RUPA treats partner dissociations in apartnership40 - 30 31. Dissociation of theLP and LLLPv A general partners express and impliedauthority to act for the limited partnershipterminates upon dissociation, the partnermay retain apparent authorityv A dissociated general partner will remainliable on a limited partnership obligationincurred while a partner unless creditoragrees to a release of liabilityw No liability for post-dissociation obligations40 - 31 32. Dissolution of the LP and LLLPv ULPA provides that a limited partnership (orLLLP) is not dissolved, wound up, orterminated merely because a partnerdissociated from the limited partnershipv When a limited partnership dissolves,winding up follows automatically by thegeneral partners40 - 32 33. Dissolution of the LP and LLLPv After general partnershave liquidated theassets, proceeds aredistributed first tocreditors and if proceedsexceed creditors claims,the remainder is paid tothe partners in the sameproportions that theyshared distributions40 - 33 34. Mergers and Conversionsv ULPAand the RULLCA permit limitedpartnerships and LLCs to merge with otherbusinesses, including other LLCs, limitedpartnerships, and corporations, or to convertto another business formw Allpartners or members must consent to the planof merger or conversionw See Lach v. Man OWar, LLC40 - 34 35. Test Your Knowledgev True=A, False = B w An LLC may be taxed like a corporation for federal income tax purposes w An LLC member is liable for torts s/he committed while acting for the LLC w General partners and limited partners are the same except in regard to how distribution of profits occur.40 - 35 36. Test Your Knowledgev True=A, False = Bw Under the ULLCA, an LLC must choose to bepartner-managed or manager-managed.w To create an LLC, articles of limited liabilitymust be filed.w Under the ULLCA, members dissociate froman LLC in ways similar to those by which apartner dissociates from a partnership or LLPunder RUPA.40 - 36 37. Test Your Knowledgev Multiple Choice w Jamesinvested in a partnership and receivesprofit sharing, but has no right to vote or makemanagement decisions. James is: (a) A limited member in an LLC (b) A limited partner in an Limited Partnership (c) A member in a member-managed LLC (d) A general partner in an LLLP39 - 37 38. Thought QuestionvWhy should business owners be allowed to limit their liability or choose the form of business that gives them the greatest protection? What risks does thetypical business face?40 - 38