40-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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9• Introduction to Forms of Business and

Formation of Partnerships• Operation of Partnerships and

Related Forms• Partners’ Dissociation and Partnerships’

Dissolution and Winding Up• Limited Liability Companies,

Limited Partnerships, and Limited Liability Limited Partnerships

Partnerships

PART

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Limited Liability Companies, Limited Partnerships, and

Limited Liability Limited Partnerships

PA ET RHC 40

The man who occupies the first place seldom plays the principal part.

Johann Wolfgang von Goethe

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Learning Objectives

• Explain the attributes of a limited liability company and a member’s default rights and liabilities

• Explain the attributes of a limited partnership and limited liability limited partnership and the default rights and liabilities of partners

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• The limited liability company (LLC) combines advantages of the corporation with regard to protection from personal liability and favorable tax status of the 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/

Overview

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• At least one person (organizer) must file the articles of organization with a secretary of state– Articles must include LLC name, duration, and

the name and address of its registered agent

• Owners of an LLC are members– An individual, partnership, corporation, or

another LLC may be a member of an LLC– An LLC is an entity separate from its members

Creation of the LLC

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• An LLC member has no individual liability on LLC contracts, unless LLC contracts signed in a personal capacity (e.g., as a surety)

• A member’s liability is usually limited to the member’s capital contributions

• A member is liable for torts s/he committed while acting for the LLC

Liability of Members

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• Under the ULLCA, an LLC must choose to be member-managed or manager-managed

• Each member in a member-managed LLC shares equal rights in the management of the business and each member is an agent of the LLC with implied authority to carry on its ordinary business

• Managers in a manager-managed LLC are elected and removed by a vote of a majority of LLC members

LLC Choice

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• Each member in a member-managed LLC and each manager in a manager-managed LLC is a fiduciary of the LLC and its members with duties similar to the duties of partners, including the duty of care

• A member’s ownership interest in an LLC is the member’s personal property and the distributional interest is transferable

Duties of Members and Ownership

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• 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

• As in partnership, a member’s dissociation may be wrongful or nonwrongful

• Dissociation terminates a member’s status as a member

Dissociation

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• Dissolution of an LLC is similar to that of an LLP or partnership

• When an LLC dissolves, any member who has not wrongly dissociated may wind up the business

• After all assets sold, proceeds distributed first to LLC creditors, then members’ contributions are returned; remainder distributed in equal shares to members

Dissolution

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• Substantially similar to RUPA, the ULPA of 2001 is the first comprehensive statement of American limited partnership law– Only ULPA applies to limited

partnerships• The limited partnership (or LLLP) form is

perpetual and used primarily in tax shelter ventures, real estate ventures, oil and gas drilling, and professional sports

Uniform Limited Partnership Act

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• Limited partnerships has two owner classes: – General partners contribute capital, manage

the business, share in profits, and possess unlimited liability for its obligations

– Limited partners contribute capital and share profits, but possess no management powers

• Liability limited up to amount of the investment in the business

• Limited partnership agreements common

The Limited Partnership

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• A variant of a limited partnership is the limited liability limited partnership (LLLP) which offers limited liability status for all its partners, including general partners

• Except for liability of general partners, limited partnerships and LLLPs are identical

Limited Liability Limited Partnership

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• A partner may contribute any property or other benefit to the limited partnership

• Under ULPA, profits and losses shared on basis of each partner’s capital contribution unless a written agreement to the contrary

• Limited partners have no right to vote• Each partner owns a transferable interest

in limited partnership as personal property

Rights of LP and LLLP Partners

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• A general partner of a limited partnership or LLLP has same right to manage and same agency powers as a partner in an ordinary partnership, including the duty of care

• A general partner of a limited partnership or LLLP is in a position of trust and therefore owes fiduciary duties to the limited partnership and the other partners

Management & Duties

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• ULPA adopts terminology and framework of partnership law, establishing dissociation and dissolution rules

• General partner’s express and implied authority to act for the limited partnership terminates upon dissociation

• General partner’s liability for partnership obligation incurred while a partner continues

Withdrawing & Dissociation

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• ULPA provides that a limited partnership (or LLLP) is not dissolved, wound up, or terminated merely because a partner dissociated from the limited partnership

• When a limited partnership dissolves, winding up follows automatically by the general partners

• After liquidation, proceeds distributed first to creditors and remainder paid to partners in same proportions as distributions

Dissolution of the LP and LLLP

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Thought Question

• Why should business owners be allowed to limit their liability or choose the form of business that gives them the greatest protection?

What risk does the typical business

face?