P A R T
9
Partnerships
Introduction to Forms of Business
and Formation of Partnerships
Operation of Partnerships
Dissolution & Winding Up
Limited Liability Companies &
Limited Partnerships
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
40
Limited Liability Companies &
Limited Partnerships
“As work becomes more complex and collaborative,
companies where people work together best have a
competitive edge.”
Daniel Goleman, Working With Emotional Intelligence (1998)
Learning Objectives
Limited Liability Companies
 Limited Partnerships and Limited Liability
Limited Partnerships
 Creation of Limited Partnerships
 Right and liabilities of members and
partners
 Dissociation and dissolution

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Overview
The limited liability company (LLC)
combines advantages of corporation’s
protection from personal liability and the
favorable tax status of partnership
 The Uniform Limited Liability Company Act
of 1996 (ULLCA) offers default rules similar
to RUPA that govern an LLC in the absence
of a contrary agreement of its owners


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http://www.nccusl.org/Update/
LLC Creation

At least one person (organizer) files articles
of organization with secretary of state

Must state whether LLC is member-managed
or manager-managed
Owners of an LLC are members
 Operating agreement covers how members
will share profits, manage the LLC, and
withdraw from the LLC

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Ownership Interest of Members

A member’s ownership interest in an LLC is
the member’s personal property


Limited ability to sell or transfer LLC rights
A member in an LLC has the right is to
receive distributions (usually profits)


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Member may transfer distributional interest
ULLCA: members share profits and other
distributions equally unless otherwise agreed
LLC Management

Each member in a member-managed LLC
shares equal rights in management and each
member is an agent of the LLC with implied
authority to carry on its ordinary business


A managing member or manager is a fiduciary
Managers in manager-managed LLC elected
and removed by majority vote of members

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Manager’s powers to act for LLC similar to
member’s power in member- managed LLC
Tort and Contract Liability
LLC entity is liable for contracts and torts
incurred by members or managers acting
with express, implied, or apparent authority
 LLC member has no individual liability on
LLC contracts, unless contracts signed in a
personal capacity (e.g., as a surety)
 A member is liable for torts s/he committed
while acting for the LLC

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Dissociation & Dissolution

Under ULLCA, members dissociate from an
LLC in ways similar to partnership or LLP

May be wrongful or nonwrongful
Dissolution of an LLC similar to partnership
 After LLC assets sold, proceeds distributed
first to creditors, then member contributions
returned; remaining proceeds distributed in
equal shares to members

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Uniform Limited Partnership Act
ULPA establishes limited partnership law
 Limited partnership has two owner classes:



General partners: contribute capital, manage
business, share profits, possess unlimited
liability for partnership obligations
Limited partners: contribute capital and share
profits, but possess no management powers

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Liability limited to amount of investment
LP or LLLP Creation
Limited partnership or limited liability
limited partnership (LLLP) created by filing
a certificate of limited partnership (signed by all
general partners) with secretary of state
 Partners contribute property or other benefit
to limited partnership, and share profits and
losses on the basis of the capital contribution


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Unless otherwise agreed
Rights & Management
ULPA is clear: limited partners have no
inherent right to vote on any matter
 Each partner owns a transferable interest in
limited partnership as personal property
 General partner of a limited partnership or
LLLP has right to manage and has agency
powers, including fiduciary duties to the
partnership entity and to other partners

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Derivative Actions

Through a derivative
action or derivative suit,
a partner may sue to
enforce a limited
partnership right of
action against a person
who has harmed the
limited partnership
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Withdrawing & Dissociation
ULPA gives partners no right to withdraw
from partnership or to receive value of
partnership interest absent a provision in the
limited partnership agreement
 Limited partner dissociates upon death,
withdrawal, or expulsion from partnership
 ULPA treats dissociation of general partners
as RUPA treats partner dissociations


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General partner may have apparent authority
Dissolution of the LP and LLLP
Under ULPA, limited partnership (or LLLP)
is not dissolved, wound up, or terminated
merely because a partner dissociates
 If limited partnership chooses to dissolve,
winding up follows automatically


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General partners liquidate assets, distribute
proceeds: to creditors first, remainder to
partners in same proportions they shared
distributions
Test Your Knowledge

True=A, False = B


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Through a derivative action or derivative
suit, a partner may sue to enforce a limited
partnership right of action against a person
who has harmed the limited partnership.
General partners and limited partners are the
same except in regard to how distribution of
profits occur.
Test Your Knowledge

True=A, False = B



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Under the ULLCA, an LLC must choose to be
partner-managed or manager-managed.
To create an LLC, articles of limited liability
must be filed.
Under the ULLCA, members dissociate from
an LLC in ways similar to those by which a
partner dissociates from a partnership or LLP
under RUPA.
Thought Question

Why should business owners be allowed to
limit their liability or choose the form of
business that gives them the greatest
protection?
What risks does the
typical business face?
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