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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Liability of an LLC
• LLC is liable for loss or injury
caused by wrongful act or
omission by 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. (See LLP’s)
• 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. (It is a contract.)
• 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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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 nonmembers who are
designated managers
control the management of
the LLC.
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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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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 not engage in
conduct that injures the LLC:
– A known violation of law
– Intentional conduct
– Reckless conduct
– Grossly negligent conduct
• 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.
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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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Limited Liability Partnership
(LLP)
• A special form of partnership
where all partners are limited
partners and there are no general
partners, all have limited liability.
• Attorneys, Accountants, Doctors.
• LLPs have flow through tax
benefits.
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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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Quiz
• 1) Define and name four
legal powers of a Legal Entity.
• 2) Name three legal powers
of an individual?
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