2.  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 becoming 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. 2

3.  1997 IRS rules provide that any unincorporated business (including LLC’s) will automatically be taxed as a partnership unless otherwise indicated on the tax return.  LLC’s allow foreign investors to own LLC interests. © 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. 3

4.  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. 4

5.  Requires filing articles of organization with central state authority:  Name of Business.  Principal Address.  Name and Address of Registered Agent.  Names of the Owners.  © 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. 5

6.  How will the LLC will be managed?  And what about ‘pre- formation’ contracts?  CASE 18.1 02 Development, LLC v. 607 South Park, LLC (2008). Are LLC members liable for “preincorporation” contracts? © 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. 6

7.  An LLC is a legal entity separate from its owners.  For federal diversity jurisdiction, the LLC may be treated differently than a corporation. 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. 7

8.  Limited Liability: liability of members limited to amount of investment.  CASE 18.2 ORX Resources, Inc. v. MBW Exploration, LLC (2010). Why did the court apply the corporate “alter-ego” theory to hold a member 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. 8

9.  Flexibility in Taxation.  Management and Foreign Investors.  Foreign investors can be member- owners of an 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. 9

10.  There are not many disadvantages to an LLC.  The main disadvantage is the lack of uniformity with state laws. © 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. 10

11.  Management of an LLC.  An LLC can be either member- managed, or manager-managed.  Managers and members owe fiduciary duties to the LLC and each other. © 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. 11

12.  The LLC operating agreement is the same as a corporation’s bylaws.  Written agreement is preferred.  Partnership law may apply: if the operating agreement is silent, 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. 12

13.  Generally set forth in the operating agreement. Can include, for example:  Decision-making procedures.  Choosing or removal of managers.  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. 13

14.  Member has power, but not right, to dissociate from the LLC at any time.  Trigger events: voluntary withdrawal, expulsion by other members or court order, bankruptcy, incompetence, or 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. 14

15.  Dissociating member loses the right to participate in the management, and the right to act as an agent.  Member also has the right to have her interest bought out by other 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. 15

16.  If the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages. © 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. 16

17.  Dissociated member has no right to force the LLC to dissolve.  Remaining members can choose to continue or dissolve.  © 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. 17

18.  Operating agreement ‘trigger’ events will cause dissolution.  Members who did not wrongfully dissociate may participate in the winding up process. © 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. 18

19.  Designed for professionals service firms, it allows limits on personal liability of the partners but allows “pass through” tax advantages. © 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. 19

20.  An LLP must be in compliance with state statutes and be filed with the appropriate state agency.  The name of the entity must include “Limited Liability Partnership” or “LLP.”  Relatively easy to convert a partnership to an LLP. © 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. 20

21.  Partnership law makes all partners jointly and severally liable for another partner’s tort, including personal assets.  LLP allows professionals to avoid personal liability for the malpractice of other 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. 21

22.  An LP is an entity that limits the liability of some of its owners (the limited partners).  Consists of at least one general partner and one limited partner to carry on a business for profit. © 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. 22

23.  An LP is a creature of state statute and must follow statutory requirements.  Documents must be filed with the a secretary of state who will issue a certificate of limited partnership. © 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. 23

24.  Only General Partners can manage, but they have a fiduciary obligation to LP’s.  Limited partners enjoy limited liability as long as they do not engage in management functions.  © 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. 24

25.  A General partner assumes all management and personal liability.  A Limited Partner has no management rights, and liability is limited to the amount of investment; however a limited partner can be liable if he participates in management. © 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. 25

26.  Except for right to participate in management, limited and general partners have essentially the same rights.  Limited partners have the right to inspect the LP’s books and be informed of the LP’s business.  © 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. 26

27.  Both general and limited partners owe each other a fiduciary duty.  CASE 18.3 1515 North Wells, LP v. 1513 North Wells, LLC (2009). Did any of the parties commit an ethical violation? © 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. 27

28.  A general partner has the right to dissociate unless the LP agreement states otherwise.  On dissolution, the limited partner is entitled to return of capital contributions.  © 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. 28

29.  LP interests are considered securities and regulated by both federal and state securities laws.  Limited partners’ liability is limited to the capital investment.  © 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. 29

30.  An LP is dissolved in much the same way as a general partnership (Chapter 17).  Retirement, withdrawal, death, bankruptcy or mental incompetence of a general partner will trigger dissolution.  On dissolution, creditors are paid first then 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. 30

31.  Limited Liability Limited Partnership is a type of limited partnership.  Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment.  Most states do not allow for LLLP’s. © 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. 31