Chapter 39
Limited Liability Companies and
Limited Liability Partnerships
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Limited Liability Companies
• An unincorporated business entity
that combines the most
favorable attributes of general
partnerships, limited partnerships,
and corporations.
• An LLC may elect to be taxed as
a partnership.
• The owners can manage the
business.
• The owners have limited liability.
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Limited Liability Company
(LLC)
• Limited liability companies are
creatures of state law, not federal
law.
• Limited liability companies can
only be created pursuant to the
laws of the state in which the LLC
is being organized.
– Limited liability company codes
regulate the formation,
operation, and dissolution of
LLCs.
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Limited Liability Company
(LLC) (continued)
• Legal Entity – An LLC is a separate
legal entity (an artificial person)
that can:
– Own property
– Sue and be sued
– Enter into and enforce
contracts
– Be found civilly and criminally
liable for violations of law
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The Uniform Limited Liability
Company Act
• A model act that provides
comprehensive and uniform laws
for the formation, operation, and
dissolution of LLCs.
• The ULLCA is not law unless a state
adopts it as its LLC statute.
• Many states have adopted all or
part of the ULLCA as their limited
liability company law.
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Taxation of LLCs
• LLCs are taxed as
partnerships unless it elects to
be taxed as a corporation.
– Taxes flow through to
individual’s tax returns.
– No taxation at the entity level
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Powers of an LLC
• An LLC has the same powers
as an individual
– It can own, mortgage, and
transfer real estate.
– It can own and transfer
personal property.
– It can enter into contracts and
make guarantees.
– The LLC may borrow money,
and issue notes and bonds.
– An LLC can be sued and can
sue.
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Member’s Limited Liability
• Member – an owner of an LLC.
– Members have limited liability.
– Members are liable for the
LLC’s debts, obligations, and
liabilities only to the extent of
their capital contributions.
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Limited Liability Company (LLC)
Limited
Liability
Company
(LLC)
Debt or obligation
owed
Third Party
Capital investment
Member
Member
Member
Member
Liability limited to capital
contribution
No personal liability for company’s debts
and obligations
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Liability of an LLC
• LLC is liable for loss or injury
caused by wrongful act or
omission or member,
manager, employee, or
agent in course of ordinary
business.
• Managers are not personally
liable for debts, obligations,
and liabilities of LLC.
• Tortfeasors are still personally
liable for injuries they cause.
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Formation of an LLC
• An LLC may be organized to
operate businesses and real
estate developments.
– May not be certain professional
groups.
• An LLC can be organized in
only one state even though it
can conduct business in all
other states.
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Articles of Organization
• An LLC is formed by delivering
articles of organization to the
office of the secretary of state of
the state of organization for filing.
– The existence begins when the
articles of organization are filed.
• Articles include name, address of
office, name and address of
agent and organizers, type of LLC.
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Duration
• Term LLC
– An LLC that has a specified
term of duration
• At-Will LLC
– An LLC that has no specified
term of duration
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Capital Contribution
• Money, tangible or intangible
property, services performed or
promised to be performed,
promissory notes, or other
agreements to provide cash or
property
• Not excused by death or disability
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Certificate of Interest
• Document that evidences a
member’s ownership interest in an
LLC.
– Acts the same as a stock
certificate issued by a
corporation.
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Operating Agreement
• Agreement entered into
among member that governs
the affairs and business of the
LLC and the relations among
members, managers, and
the LLC.
• May be amended by the
approval of all the members
unless otherwise provided in
the agreement.
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Conversion of an Existing
Business to an LLC
• Some existing businesses may
want to convert to an LLC.
– To obtain the tax benefits and
limited liability shield of an LLC.
– Law permits such conversions.
• Agreement of conversion
sets forth terms.
• Articles of organization must
be filed with the secretary of
state.
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Dividing an LLC’s Profits and Losses
• ULLCA mandates that each
member has right to equal
share of profits and losses.
• Operating agreement may
have other provisions.
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Distributional Interest
• A member’s ownership interest in
an LLC that entitles the member
to receive distributions of money
and property from the LLC.
• A transferee of a distributional
interest in an LLC receives the right
to receive profit and other
distributions of the LLC.
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Member-Managed LLC
• In a member-managed LLC, all
members can bind the LLC to
authorized contracts.
• Each member has equal rights in
the management of the business
irrespective of the size of his or her
capital contribution.
• Any matter relating to the business
of the LLC is decided by a
majority vote of the members.
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Manager-Managed LLC
• In a manager-managed LLC, only
the managers can bind the LLC to
authorized contracts.
• The members and non-members
who are designated managers
control the management of the
LLC.
• The members who are not
managers have no rights to
manage the LLC unless otherwise
provided for in the operating
agreement.
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Compensation and
Reimbursement
• A non-manager member is not
entitled to remuneration.
– Except for winding-up the LLC.
• Managers of an LLC are paid
compensation and benefits.
– Specified in their employment
agreements.
• An LLC is obligated to reimburse
members and managers for
payments made on behalf of the
LLC.
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Agency Authority to Bind an
LLC to Contracts
• All members in membermanaged LLC may bind LLC.
• Only managers have
authority to bind LLC in
manager-managed LLC.
– Members cannot bind LLC
unless they are also a manager.
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Fiduciary Duties to the LLC
Duty of Loyalty
Duty of Care
Prentice
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Hall,
Prentice
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Duty of Loyalty
• Duty owed by a member of a membermanaged LLC and a manager of a
manager-managed LLC.
– Must be honest in dealings with the LLC
and not act adversely to the interests of
the LLC.
• Breaches of the duty of loyalty by a
covered member or manager include:
–
–
–
–
–
Usurping an LLC opportunity
Making secret profits
Secretly dealing with the LLC
Secretly competing with the LLC
Representing any interest adverse to that
of the LLC
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Limited Duty of Care
• A duty owed by a member of a
member of a member-managed
LLC and a manager of a
manager-managed LLC to not
engage in conduct that injures
the LLC:
– A known violation of law
– Intentional conduct
– Reckless conduct
– Grossly negligent conduct
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Duty of Care (continued)
• A member or manager of an LLC
is not liable to the LLC for injuries
caused to the LLC by his or her
ordinary negligence.
• The ordinarily negligent member
or manager, and the LLC on
whose behalf the member or
manager was acting when the
negligent act occurred, are liable
to the injured third party.
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No Fiduciary Duty Owed by a
Nonmanager Member
• A nonmanager member of a
manager-managed LLC owes no
fiduciary duties of loyalty, care, or
good faith and fair dealing to the
LLC or its members.
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Dissolution
• The ULLCA gives a member of an
LLC the power to disassociate
from the LLC.
• Wrongful disassociation
– Occurs when a member withdraws
from a term LLC prior to the expiration
of the term or from an at-will LLC
when the operating agreement
eliminates a member’s power to
withdraw.
– This could cause the dissolution of the
LLC.
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Payment of Distributional Interest
• If no wrongful disassociation, LLC
must purchase the disassociated
member’s distributional interest.
• Price and terms may be fixed in
operating agreement, otherwise,
must pay fair market value.
• If wrongful disassociation,
payment made at expiration of
term.
– Damages may be offset against
price.
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Notice of Disassociation
• A document filed with the
secretary of state that gives
constructive notice that a
member has disassociated
from an LLC.
• Effective against any person
who later deals with LLC.
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Continuation of an LLC
• Members may vote
unanimously to continue LLC
before the expiration of the
term.
• LLC may be continued as an
at-will LLC by simple majority
vote.
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Winding-Up an LLC’s Business
• The process of preserving and
selling the assets of the LLC and
distributing the money and
property to creditors and
members.
• Creditors are paid first.
• Surplus amounts are distributed to
members in equal amounts.
– May be modified by operating
agreement.
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Articles of Termination
• Document that is filed with the
secretary of state (of the state in
which the LLC is organized) that
terminates the LLC as of the date
of filing or upon a later effective
date specified in the document.
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Limited Liability Partnership
(LLP)
• A special form of partnership
where all partners are limited
partners and there are no general
partners.
• No partners are personally liable;
all have limited liability.
• LLPs have flow through tax
benefits.
– No taxes at entity level.
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Limited Liability Partnership (LLP)
(continued)
Limited
Liability
Partnership
(LLP)
Debt or obligation
owed
Third Party
Capital investment
Limited
Partner
Limited
Partner
Limited
Partner
Limited
Partner
Liability limited to capital
contribution
No personal liability for partnership’s
debts and obligations
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Articles of Partnership
• LLP’s must be created
formally by filing articles of
partnership with the secretary
of the state in which the LLP is
organized.
• The LLP is a domestic LLP in
the state in which it is
organized.
• An LLP must register as a
foreign LLP in any state in
which it wants to conduct
business.
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Liability Insurance Required
• Many state laws require LLPs to
carry a minimum of $1 million of
liability insurance that covers
negligence, wrongful acts, and
misconduct by partners or
employees of the LLP.
• Quid pro quo for limited liability of
partners.
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