McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 14 Limited Liability Partnerships, Limited Liability Companies, and Other Business Arrangements

14-2 Limited Liability Companies (LLCs) Same liability protection afforded to principals of a corporate form, and Pass-through tax treatment for its principals without the restrictions on ownership and scope required for other pass-through entities.

14-3 Liability Although LLC members are insulated from personal liability for any business debt or liability, creditors often require members of new and/or small LLCs to sign personal guarantees.

14-4 Taxation Another attractive advantage of an LLC is the various tax treatment alternatives. Although many LLCs are typically treated as a pass-through entity, the LLC’s members may also elect to be taxed as a corporation if they consider the corporate tax structure more favorable.

14-5 Capitalization LLCs are capitalized primarily through debt via private lenders or commercial lenders, or by selling equity ownership in the LLC itself.

14-6 Management and Operation Most states distinguish between: A member-managed LLC, and A manager-managed LLC.

14-7 Limited Liability Partnerships (LLPs) Danger of being a general partner is the potential liability for acts of other general partners, debts, and liabilities of the partnership itself. LLP statutes provide partnerships with the protective shield ordinarily only afforded to limited partners or corporate shareholders.

14-8 Liability General idea behind being an LLP is that all partners have liability protection for debts and liabilities of the partnership, but there may be conditions on these limits. In cases where a partner has engaged in misconduct or tortious conduct (such as negligence), the LLP acts to shield the personal of assets of other partners—never the partner who committed the misconduct or negligence.

14-9 Taxation LLPs are treated as pass-through entities. They are not subject to tax; any income is taxed only when it is distributed to it’s the LLP’s partners.

14-10 Capitalization LLPs are capitalized in the same way as a partnership: through debt via private or commercial lenders or by selling partnership equity for ownership in the LLP itself.

14-11 Management and Operation The day-to-day operations and powers of the partners are spelled out in the partnership agreement. The election procedures, qualifications, compensation, meeting times, and other organizational matters are typically addressed in the partnership agreement.

14-12 Franchises A franchise involves the franchisor, a business entity that has a proven track record of success, selling to a franchisee the right to operate the business and the business’s trade secrets, trademarks, products, and so on. The franchisor assists the franchisee with financing, supplies, training and other aspects of running a successful operation.

14-13 learning outcomes checklist Identify the sources and level of laws that govern LLP and LLC entities Explain the function of an operating agreement and fundamental structure of an LLC Distinguish between the formation and management of an LLC and the formation and management of an LLP.

14-14 learning outcomes checklist Determine the rights of principals upon withdrawal from an LLC Articulate the legal protections from personal liability afforded to the principals in an LLC and LLP Identify the tax treatment schemes of an LLC and LLP.

14-15 learning outcomes checklist Provide the primary methods for capitalizing limited liability entities Recognize the utility of other business arrangements including franchise relationships and business trusts.