Chapter 33 Limited Liability Companies and Special Business Forms

Learning Objectives What advantages do limited liability companies offer to businesspersons that are not offered by sole proprietorships or partnerships? How are limited liability companies formed, and who decides how they will be managed and operated?  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What are the two options for managing limited liability companies? What is a joint venture? How is it similar to a partnership? How is it different? What are the essential characteristics of joint stock companies, syndicates, business trusts, and cooperatives, respectively? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership. LLC’s are increasingly become the entity of choice for businesses. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies Nature of the LLC. Like corporations, LLC’s are creatures of state law. The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares). Members of an LLC enjoy limited liability.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies Nature of the LLC (cont’d). Can a third party pierce the LLC “veil” and hold a managing member personally liable? CASE 33.1 ORX Resources, Inc. v. MBW Exploration, LLC (2010). Why was Washauer held personally liable? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies LLC Formation. Articles of Organization require: Name of Business. Principal Address. Name and Address of Registered Agent. Names of the Owners; and How the LLC will be managed. Business name must include LLC or Limited Liability Company.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies LLC Formation. Are persons forming an LLC personally liable for contracts that are signed on behalf of the LLC before it is formed? CASE 33.2 02 Development, LLC v. 607 South Park, LLC (California, 2008). What was the court’s main holding? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies Jurisdictional Requirements. An LLC is a legal entity separate from its owners. For federal diversity jurisdiction, an LLC may be treated differently than a corporation. For diversity purposes the citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Limited Liability Companies Advantages Disadvantages Member liability is limited to amount of investment. State statutes are not uniform. Can be treated as a “pass through” entity for tax purposes. Not all states recognize LLC’s. Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LLC Operations and Management The LLC Operating Agreement. Operating agreement is analogous to corporation’s bylaws. Writing is Preferred. Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LLC Operations and Management The LLC Operating Agreement. (cont’d). Partnership Law May Apply. Generally, if an issue arises and the operating agreement is silent, or the statute does not control, courts will apply partnership principles. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LLC Operations and Management Management of an LLC. There are two options for management, generally set forth in the articles of organization: Member-Managed: all of the members participate in management, like a partnership. Manager-Managed: members are elected to manage the LLC.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LLC Operations and Management Management of an LLC. If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LLC Operations and Management Operating Procedures: operating agreement can set forth provisions for: Choosing or removing managers. Purpose and times of member meetings. Voting rights. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Dissociation and Dissolution of an LLC Effect of Dissociation: same partnership principle applies. Member of LLC has power to dissociate but she may not have the right to do so. External events may trigger dissociation: bankruptcy, court order, incompetence, death.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Dissociation and Dissolution of an LLC Effect of Dissociation (cont’d). Member loses right to participate or act as agent for LLC, have his interest bought out. Disassociated member has no right to force LLC to dissolve. LLC operating agreement can stipulate what events cause dissolution. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Dissociation and Dissolution of an LLC Winding up: Members must collect, liquidate, and distribute LLC assets. After assets sold, proceeds used to pay off creditors (including members who are creditors). Then members’ capital contributions are returned, and anything remaining is shared as “profits” among the members according to the operating agreement. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Special Business Forms Joint Venture: two or more entities combine efforts or property for a single transaction or project. Unless agreed otherwise, JV’s share profits and losses equally. Common in international transactions when U.S. companies wish to expand overseas. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Special Business Forms Joint Venture (cont’d). Similarities to Partnerships: resembles a partnership and is taxed like a partnership. Differences from Partnerships. A JV is limited in time and scope, whereas a partnership is an ongoing business. JV members has less implied and apparent authority than partners.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Special Business Forms Joint Venture (cont’d). Differences from Partnerships. Death of JV member does not terminate JV. JV members can specify duration. If not, then JV terminates when purpose is accomplished. Syndicates. Investment group of individuals/firms who finance a project together.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Special Business Forms Joint Stock Companies. Hybrid of partnership and corporation, with many similarities of partnership. Business Trusts. Created by private agreement with beneficiaries. Cooperatives. Association to provide economic service to its members. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.