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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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• An LLC may elect to be taxed like a partnership or a corporation for federal income tax purposes– Election as partnership more common– As partnership, the LLC pays no federal

income tax and all LLC income and losses are reported by the owner-members on their individual income tax returns

Taxation of the LLC

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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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• Articles of organization must state whether the LLC is member-managed or manager-managed– If manager-managed, initial managers

must be named

• An LLC probably will have an operating agreement covering how members will share profits, manage the LLC, and withdraw from the LLC

Management 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

A Member-Managed LLC

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• The LLC operating agreement may modify ULLCA default rules by granting more power to some members– Creating a class of members whose

approval is required for certain contracts– Members share power based on capital

contributions

A Member-Managed LLC

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

• A manager’s powers to act for the LLC are similar to a member’s power in a member- managed LLC

A Manager-Managed LLC

A team effort.

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• An LLC is liable for the contractual obligations incurred by its members or managers acting within their express, implied, or apparent authority

• An LLC is also liable for the torts and other wrongful acts of managing members and other managers acting within their authority

Tort and Contract Liability

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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

• Nonmanaging members of a manager-managed LLC owe no fiduciary duties– See Katris v. Carroll

Duties of Members

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• A member’s ownership interest in an LLC is the member’s personal property– Limited ability to sell or transfer LLC

rights

• A member may transfer the distributional interest in the LLC to another person– Transferee not a member, but receives

right to partnership distributions– Limited right of transfer may be altered in

the operating agreement

Ownership Interest of Members

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• A member in an LLC has the right is to receive distributions (usually profits)

• ULLCA states that members share profits and other distributions equally, regardless of differences in their capital contributions

Distributions to Members

This may be altered by the operating agreement

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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

– A partner has power to dissociate by withdrawing from the LLC at any time

Dissociation

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

• Dissociation terminates a member’s status as a member, and a dissociated member is treated as a transferee of a member’s distributional interest– In Re Garrison-Ashburn, LC considers the

effects of a member’s dissociation and the management rights of a member in an LLC

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

Dissolution

LLC bound by reasonable acts of members during

winding up

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• After all the LLC assets sold, proceeds distributed first to LLC creditors, then members’ contributions are returned

• Any remaining proceeds are distributed in equal shares to the 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 limited partnership (or LLLP) may be created by complying with the applicable state statutes, but requirements are minimal– However, see Moser v. Moser, in which failure

to strictly comply with law invalidated attempt to create a family limited partnership

• A certificate of limited partnership must be executed (signed by all general partners) and submitted to the secretary of state

Creating the LP or LLLP

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

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

• ULPA of 2001 requires few actions to be approved by all the partners

Rights of LP and LLLP Partners

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• ULPA is clear that limited partners have no inherent right to vote on any matter

• Default rule is that no new partner may be admitted unless each partner has consented to the admission– Limited partnership agreement may

provide for other admission procedures

Rights of LP and LLLP Partners

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• Each partner in an LP or LLLP owns a transferable interest in the limited partnership as personal property

• A partner’s transfer of his transferable interest has no effect on his status as a partner, absent a contrary agreement

Transferable Interest

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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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• Partners have the power to withdraw from the limited partnership at any time, but ULPA gives the partners no right to withdraw, absent a contrary provision in the limited partnership agreement

• Under ULPA, a withdrawing partner has no right to receive the value of the partnership interest

Withdrawing

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

• A limited partner dissociates upon limited partner’s death, withdrawal, or expulsion from partnership

Dissociation of the LP and LLLP

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• A dissociated limited partner is not a limited partner, has no rights as a limited partner, and is treated as a mere transferee of the dissociated limited partner’s transferable interest

• ULPA treats dissociation of general partners as RUPA treats partner dissociations in a partnership

Dissociation of the LP and LLLP

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• A general partner’s express and implied authority to act for the limited partnership terminates upon dissociation, the partner may retain apparent authority

• A dissociated general partner will remain liable on a limited partnership obligation incurred while a partner unless creditor agrees to a release of liability– No liability for post-dissociation obligations

Dissociation of the LP and LLLP

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• ULPA states 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

Dissociation of the LP and LLLP

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• After general partners have liquidated the assets, proceeds are distributed first to creditors and if proceeds exceed creditors’ claims, the remainder is paid to the partners in the same proportions that they shared distributions

Dissolution of the LP and LLLP

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• ULPA and the RULLCA permit limited partnerships and LLCs to merge with other businesses, including other LLCs, limited partnerships, and corporations, or to convert to another business form– All partners or members must consent

to the plan of merger or conversion– See Lach v. Man O’War, LLC

Mergers and Conversions

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Test Your Knowledge

• True=A, False = B– An LLC may be taxed like a

corporation for federal income tax purposes

– An LLC member is liable for torts s/he committed while acting for the LLC

– General partners and limited partners are the same except in regard to how distribution of profits occur.

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• True=A, False = B– Under the ULLCA, an LLC must choose to

be partner-managed or manager-managed.

– To create an LLC, articles of limited liability must be filed.

– 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.

Test Your Knowledge

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• Multiple Choice– James invested in a partnership and

receives profit sharing, but has no right to vote or make management decisions. James is: a) A limited member in an LLCb) A limited partner in an Limited

Partnershipc) A member in a member-managed LLCd) A general partner in an LLLP

Test Your Knowledge

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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?