© 2011 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. 1 Chapter 28: Limited Liability Companies and Special Business Forms

2 © 2011 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 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? What are the two options for managing limited liability companies?

3 © 2011 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 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, respectfully?

4 © 2011 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’s are creatures of state law, like corporations. Owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares). Members of an LLC enjoy limited liability. LLC’s can sue and be sued by employees or third parties. Nature of the LLC Case 28.1 McFarland v. Virginia Retirement Services of Chesterfield, LLC. Members or managers of an LLC cannot be held liable for a wrongful discharge claim solely based on their status; defendants must have played a key role in the tortious conduct.

5 © 2011 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 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.” Case Development, LLC v. 607 South Park, LLC. A “preincorporation” contract or assignment is enforceable against an LLC that did not exist at the time the contract was made.

6 © 2011 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. Jurisdictional Requirements An LLC is a legal entity separate from its owners. For federal jurisdiction based on diversity, 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.

7 © 2011 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. AdvantagesDisadvantages Member liability is limited to amount of investment. (see Case 28.3 below) 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. LLC - Advantages and Disadvantages Case 28.3 Allen v. Dackman. Owner of interests in an LLC is not the legal “owner” of real property and not personally liable for injuries to tenants on property owned by LLC.

8 © 2011 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. The LLC Operating Agreement Operating agreement is analogous to corporation’s bylaws. Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues. Generally, if the operating agreement is silent, courts will apply partnership principles.

9 © 2011 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. 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. If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership.

10 © 2011 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 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. Effect of Dissociation: member loses right to participate or act as agent for LLC, have his interest bought out.

11 © 2011 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 Disassociated member has no right to force LLC to dissolve. –LLC operating agreement can stipulate what events cause dissolution. 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.

12 © 2011 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.

13 © 2011 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. JV Characteristics Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: –JV members has less implied and apparent authority than partners. –Death of JV member does not terminate JV. JV members can specify duration. If not, then JV terminates when purpose is accomplished.

14 © 2011 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 Syndicates. –Investment group of individuals/firms who finance a project together. Joint Stock Companies. –Hybrid of partnership and corporation, with many similarities of partnership. Business Trusts. –Created by private agreement with beneficiaries. Cooperatives.