Chapter 15 Limited Liability Companies Limited Liability Partnerships

Chapter 15 Limited Liability Companies, Limited Liability Partnerships, and Special Forms of Business

Limited Liability Company (LLC) An unincorporated business Combines the most favorable attributes of general partnerships, limited partnerships, and corporations An LLC is a separate legal entity (or legal person) distinct from its members Member: An owner of an LLC Some states refer to members as shareholders Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -2

Uniform Limited Liability Company Act (ULLCA) A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs Revised Uniform Limited Liability Company Act (RULLCA): A revision of the ULLCA Provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -3

Taxation of LLCs An LLC’s income or losses flow through to the members’ individual income tax returns This avoids double taxation Formation of an LLC An LLC may be organized by one or more persons It can be organized in only one state The name of the LLC must contain the words limited liability company or limited company or the abbreviation L. L. C. , LLC, L. C. , or LC. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -4

Articles of Organization The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLC in order to form the LLC The LLC is a domestic LLC in the state in which it is organized The LLC foreign LLC in any state in which it wants to conduct business Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -5

Operating Agreement An agreement entered into among members that governs the affairs and business of the LLC and the relationships among members, managers, and the LLC Certificate of interest: A document that evidences a member’s ownership interest in an LLC The ULLCA mandates that a member has the right to an equal share in the LLC’s profits ▪ Unless otherwise agreed Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -6

Distributional Interest A member’s ownership interest in an LLC Entitles the member to receive distributions of money and property from the LLC Liability LLC members The liability of LLC members for the LLC’s debts, obligations, and liabilities, which is limited to the extent of their capital contributions Members of LLCs are not personally liable for the LLC’s debts, obligations, and liabilities Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -7

Exhibit 15. 1 - Limited Liability Company (LLC) Copyright © 2013 Pearson Education, Inc.

Liability of Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage [ULLCA Section 303(a)] Liability of a member tortfeasor Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or death to another person A tortfeasor is liable to persons he or she injures and to the heirs of persons who die because of his or her conduct Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -9

Management of An LLC Type of LLC Description Member-managed LLC The members do not designate managers to manage the LLC. The LLC is managed by its members. Manager-managed LLC The members designate certain members or nonmembers to manage the LLC. The LLC is managed by the designated managers; nonmanager members have no right to manage the LLC. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -10

Agency Authority to Bind an LLC to Contracts Type of LLC Agency Authority Member-managed LLC All members have agency authority to bind the LLC to contracts. Manager-managed LLC The managers have authority to bind the LLC to contracts; the nonmanager members cannot bind the LLC to contracts. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -11

Duty of Loyalty A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC: To be honest in his or her dealings with the LLC To not act adversely to the interests of the LLC No fiduciary duty A member of a manager-managed LLC who is not a manager: ▪ Owes no fiduciary duty of loyalty or care to the LLC or its other members Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -12

Limited Liability Partnership (LLP) A special form of partnership in which: All partners are limited partners There are no general partners LLPs enjoy the flow-through tax benefit of other types of partnerships Articles of limited liability partnership The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLP in order to form the LLP Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -13

Limited Liability of Partners The liability of LLP partners for the LLP’s debts, obligations, and liabilities, is limited to the extent of their capital contributions Partners of LLPs are not personally liable for the LLP’s debts, obligations, and liabilities Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -14

Exhibit 15. 2 - Limited Liability Partnership (LLP) Copyright © 2013 Pearson Education, Inc.

Exhibit 15. 3 - Franchise Copyright © 2013 Pearson Education, Inc. Publishing as Prentice

Types of Franchise Type of Franchise Description Distributorship franchise A franchise in which the franchisor manufactures a product and licenses a franchisee to distribute the product to the public. Processing plant franchise A franchise in which the franchisor provides a secret formula or process to the franchisee, and the franchisee manufactures the product and distributes it to retail dealers. Chain-style franchise A franchise in which the franchisor licenses a franchisee to make and sell its products or distribute its services to the public from a retail outlet serving an exclusive territory. Area franchise A franchise in which the franchisor authorizes a franchisee to negotiate and sell franchises on its behalf in designated areas. The area franchisee is called a subfranchisor. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -17

Franchise Agreement An agreement that a franchisor and franchisee enter into that sets forth the terms and conditions of a franchise Liability of franchisors and franchisees The franchisor deals with the franchisee as an independent contractor ▪ Franchisees are liable on their own contracts and are liable for their own torts ▪ Franchisors are liable for their own contracts and torts Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 15 -18