Chapter 39 Limited Liability Companies and Limited Liability

Chapter 39 Limited Liability Companies and Limited Liability Partnerships

Limited Liability Company (LLC) § Unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations § It is a separate legal entity § Member: An owner of an LLC Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -2

Uniform Limited Liability Company Act § A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs § Codifies LLC law § Revised Uniform Limited Liability Company Act: A revision of the ULLCA Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -3

Taxation of LLCs § LLC taxed as partnership § Unless it elects to be taxed as a corporation § Income or losses “flow through” to the members’ individual income tax returns § Powers of an LLC § Same powers as an individual to do all things necessary or convenient to carry on its business or affairs Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -4

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 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -5

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 to form the LLC § The LLC is a domestic LLC in the state in which it is organized § LLC law of the state governs the operation of the LLC Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -6

Exhibit 39. 2: Limited Liability Company (LLC) Copyright © 2013 Pearson Education, Inc. Publishing

Case 39. 1: Limited Liability Company § Siva v. 1138 LLC § 2007 Ohio 4667, Web 2007 Ohio App. Lexis 4202 (2007) § Court of Appeals of Ohio § Issue § Is Richard Hess, a member-owner of 1138 LLC, personally liable for the debt owed by the LLC to Siva? Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -8

Liability of Managers § Not personally liable for the debts, obligations, and liabilities of the LLC they manage § Liability of tortfeasors § Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or death to another person § Personally liable to the injured party Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -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. 39 -10

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 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -11

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 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. 39 -12

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 § Not act adversely to the interests of the LLC Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -14

Duty of Care § A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC not to engage in § A known violation of law § Intentional conduct § Reckless conduct § Grossly negligent conduct that injures the LLC Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -15

No Fiduciary Duty § A nonmanager member of a manager-managed LLC owes no fiduciary § Duty of loyalty § Duty of care to the LLC or its members Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -16

Dissolution of an LLC § A member has the power to withdraw from the LLC § Unless otherwise stated in the operating agreement § Wrongful disassociation: When a member withdraws from § A term LLC prior to the expiration of the term or § An at-will LLC when the operating agreement eliminates a member’s power to withdraw Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -17

Payment of Distributional Interest § No wrongful disassociation – LLC must purchase the disassociated member’s distributional interest § Wrongful disassociation – damages may be offset against price § Notice of Disassociation § Statement of disassociation: A document filed with the secretary of state that gives constructive notice that a member has disassociated from an LLC Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -18

Continuation of a Term LLC § Can be continued in two ways § The members of the LLC may vote prior to the expiration date § As an at-will LLC by a simple majority vote of the members of the LLC § Winding up an LLC’s business involves § Preserving and selling the assets of the LLC § Distributing the money and property to creditors and members Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -19

Articles of Termination § The documents that are filed with the secretary of state to § Terminate an LLC as of the date of filing or upon a later effective date specified in the articles Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -20

Limited Liability Partnership (LLP) § A special form of partnership in which § All partners are limited partners § There are no general partners Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -21

Articles of Partnership § LLP created formally by filing articles of partnership with the secretary of the state in which LLP is organized § 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 to form the LLP § An LLP must register as a foreign LLP in any other state in which it wants to conduct business. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -22

Exhibit 39. 3: Limited Liability Partnership (LLP) Copyright © 2013 Pearson Education, Inc. Publishing

Taxation of LLPs § “Flow-through” tax benefit – no tax paid at the partnership level § All profits and losses are reported on the individual partners’ income tax returns Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -24

Limited Liability of Partners § The liability of LLP partners for the LLP’s debts, obligations, and liabilities is limited only to the extent of their capital contributions § Partners of LLPs are not personally liable Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 39 -25