Chapter 15 Partnerships and Limited Liability Companies PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 4E, by Henry R. Cheeseman Chapter 15 Partnerships and Limited Liability Companies Prentice Hall © 2005 1

Forms of Conducting Domestic Business Sole proprietorship General partnership Limited partnership Limited liability partnership (LLP) Limited liability company (LLC) Prentice Hall © 2005 Prentice Hall © 2005 2

Definition of a General Partnership A voluntary association of two or more persons created for carrying on a business as co-owners for profit Prentice Hall © 2005

Formation of General Partnerships Express partnership General partnership created by words, either verbal or written Implied partnership General partnership implied from the conduct of the parties Certificate of partnership A document that a partnership must file with the appropriate state government agency in some states to acknowledge that the partnership exists Prentice Hall © 2005

Duration of Partnership Partnership for a term A partnership with a fixed duration Partnership at will A partnership with no fixed duration Prentice Hall © 2005

Property Rights of the Partnership and the Partners Partnership property Property that is originally brought into the partnership on account of the partnership and property that is subsequently acquired by purchase or otherwise on account of the partnership or with partnership funds Right of survivorship A deceased partner’s right in specific partnership property vests with the remaining partners upon his or her death Partner’s interest A partner’s share of profits and surplus of the partnership Charging order A document that the court issues against the debtor-partner’s partnership interest in order to satisfy a debt Prentice Hall © 2005

Partnership Agreements A written partnership agreement should contain: The firm name The names and addresses of the partners The principal office of the partnership The nature and scope of the partnership business The duration of the partnership The capital contributions of each partner The division of profits and losses among the partners The salaries, if any, to be paid to the partners Prentice Hall © 2005

Partnership Agreements A written partnership agreement should contain: The duties of the partners regarding management of the partnership Limitations, if any, on the authority of partners to bind the partnership Provision for admission and withdrawal of partners from the firm Provisions for continuing partnership upon withdrawal of a partner, death of a partner, or other dissolution of the partnership Any other provisions deemed relevant by the partners Prentice Hall © 2005

Rights of Partners Right to participate in management Right to share in profits Right to an accounting Right to compensation Right to indemnification Right to return of advance Right to return of capital Right to information Prentice Hall © 2005

Duties of Partners Duty of loyalty Duty of obedience Duty of care Duty to inform Prentice Hall © 2005

Tort Liability to Third Parties The partnership is liable if the tortious act of a partner, or employee, or agent of the partnership is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her copartners Prentice Hall © 2005

Contract Liability to Third Parties A partnership acts through its agents, i.e., partners If partners have express, implied, or apparent authority, contracts are binding Partners are jointly liable for contracts and debts of the partnership Prentice Hall © 2005

Liability of Incoming Partners A new partner who is admitted to the partnership is liable for the existing debts and obligations of the partnership only to the extent of his or her capital contribution The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner Prentice Hall © 2005

Termination of the Partnership by Acts of the Partners Termination of a stated time or purpose Withdrawal of a partner Expulsion of a partner Admission of a partner Mutual agreement of the partners Prentice Hall © 2005

Termination of a Partnership by Operation of Law Death of any partner Bankruptcy of any partner or the partnership Illegality Prentice Hall © 2005

Termination of a Partnership by Judicial Decree Partner is adjudicated insane Partner is incapable of performing duties Partner is guilty of improper conduct Partnership can only be carried on at a loss Prentice Hall © 2005

Winding-Up The process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership Prentice Hall © 2005

Distribution of Assets After the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order Creditors (except partners who are creditors) Creditor-partners Capital contributions Profits Prentice Hall © 2005

Limited Partnership A type of partnership that has two types of partners General partners Limited partners Prentice Hall © 2005

Personal liability for partnership’s Limited Partnership Debt or obligation owed Limited partnership Third party Capital investment Limited partner General partner Personal liability for partnership’s debts and obligations Liability limited to capital contribution Prentice Hall © 2005

Liability of Limited Partners General rule Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contributions Exceptions Defective formation Participation in management Personal guarantee Prentice Hall © 2005

Dissolution of a Limited Partnership End of the life of the partnership as specified in the certificate of limited partnership Written consent of all general and limited partners Withdrawal of a general partner Entry of a decree of judicial dissolution Prentice Hall © 2005

Permissible Activities of Limited Partners Being an agent, employee, or contractor of the limited partnership or a general partner Being a consultant or advisor to a general partner regarding the limited partnership Acting as a surety for the limited partnership Approving or disapproving an amendment to the limited partnership agreement Voting on certain partnership matters Prentice Hall © 2005

Rights of Limited Partners Share of profits and losses Right to information Voting rights Prentice Hall © 2005

Limited Liability Partnership (LLP) A limited liability partnership is a special form of partnership where all partners are limited partners and there are no general partners Prentice Hall © 2005

Limited Liability Partnership (LLP) Debt or obligation owed Limited liability partnership (LLP) Third party Capital Investment Limited partner Limited partner Limited partner Liability limited to capital contribution No personal liability for partnership’s debts and obligations Prentice Hall © 2005

Limited Liability Company (LLC) An unincorporated business that combines the most favorable attributes of general partnerships, limited partnerships, and corporations An LLC is a separate legal entity—an artificial person—that can own property, sue and be sued, enter into and enforce contracts, etc. Members are liable for the LLC’s debts, obligations, and liabilities only to the extent of their capital contributions Prentice Hall © 2005

Limited Liability Company (LLC) Debt or obligation owed Limited liability company (LLC) Third party Capital investment Member Member Member Liability limited to capital contribution No personal liability for Company’s debts and obligations Prentice Hall © 2005

Articles of Organization of an LLC Articles of organization must set forth: The name of the LLC The address of the LLC’s initial office The name and address of the initial agent for service of process The name of each organizer Whether the LLC is a term LLC, and if so, the term specified Whether the LLC is to be manager-managed Whether one or more of the members of the LLC are to be personally liable for the LLC’s debts and obligations Prentice Hall © 2005

Three Kinds of LLCs Domestic Foreign Alien An LLC in the state in which it is organized Foreign An LLC in any other state other than the one in which it is organized Alien An LLC that is organized in another country Prentice Hall © 2005

Liability of an LLC An LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a member, manager, agent, or employee of the LLC who commits the wrongful act while acting within the ordinary course of business of the LLC or with authority of the LLC Prentice Hall © 2005

Member Lawsuits Direct lawsuit Derivative action A lawsuit that a member can bring against an LLC to enforce his or her personal rights as a member Derivative action A lawsuit that a member may bring against an offending third party on behalf of his or her LLC when the LLC fails to bring the lawsuit or when a request of the LLC to do so is excused Prentice Hall © 2005

Fiduciary Duties Owed to an LLC Duty of loyalty Limited duty of care Duty of good faith and fair dealing No fiduciary duty owed by a nonmanager-member Prentice Hall © 2005

Dissolution of an LLC An LLC is dissolved upon the occurrence of any of the following An event specified in the operating agreement The occurrence of an event that makes it unlawful for all or substantially all of the business of the LLC to be continued A member applies to a court to have the LLC dissolved by judicial decree The secretary of state commences a proceeding to dissolve an LLC administratively Prentice Hall © 2005