Chapter 41
Limited Liability Companies
and Limited Partnerships
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Introduction
Limited liability companies are relatively new
creatures of state statute.
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 become the entity of
choice for businesses.
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§ 1: LLC’s
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 are attractive in today’s global business
environment because they allow foreign
investors to own interests.
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Nature of the LLC
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.
Case 41.1: Kaycee Land and Livestock v. Flahive
(2002). Can a third party pierce the LLC “veil” and
hold managing member liable?
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LLC Formation
Articles of Organization require:
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Name of Business.
Principal Address.
Name and Address of Registered Agent.
Names of the Owners; and
How the LLC will be managed.
Business name must include LLC or Limited
Liability Company.
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Jurisdictional Requirements
An LLC is a legal entity separate from its
owners.
For federal jurisdiction based on diversity, an
LLC may be treated differently than a
corporation.
For diversity purposes the citizenship of an LLC
is the citizenship of its members, which may live
in multiple jurisdictions.
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Advantages and
Disadvantages of the LLC
Advantages
Disadvantages
Member liability is limited to amount State statutes are not uniform.
of investment.
Can be treated as a “pass through”
entity for tax purposes.
Not all states recognize LLC’s.
Profits can be distributed to members
without the double taxation of a
corporation. Members pay personal
income tax on received dividends.
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LLC Operating Agreement
 Operating agreement is analogous to corporation’s
bylaws.
 Operating agreements may be oral and contain
provisions relating to management, dividends,
meetings, transfer of membership interests, and
other significant issues.
 Generally, if the operating agreement is silent,
courts will apply partnership principles.
 Case 41.2: Hurwitz v. Padden (1996).
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LLC Management
 There are two options for management, generally set
forth in the articles of organization:
 Member-Managed: all of the members participate in
management, like a partnership.
 Manager-Managed: members are elected to manage the
LLC.
 If the articles are silent, statutes provide either that
each member has one vote or votes are made based
on percentage of ownership.
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§ 2: LLP’s
Creature of state statute, similar to an LLC
except that an LLP is designed for professionals
who normally do business as a partnership
(lawyers and accountants).
LLP allows partnership to limit personal liability
of the partners but allows “pass through” tax
advantages.
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Liability in an LLP
Recall that partnership law makes all partners
jointly and severally liable for another partner’s
tort, including personal assets.
The LLP allows professionals to avoid personal
liability for the malpractice of other partners.
Supervising Partner is also liable for acts of
subordinate.
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Family Limited
Liability Partnerships
FLLP is a limited liability partnership in which
the majority of the partners are related to each
other.
Used frequently for agriculture.
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§ 3: Limited Partnerships
Entity that limits the liability of some of its
owners (the limited partners).
Creature of state statute. Filing a certificate with
the Secretary of State is required.
Agreement between at least one general partner
and one limited partner to carry on a business for
profit.
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LP Management
Only General Partners can manage, but they have
a fiduciary obligation to LP’s.
LP’s enjoy limited liability as long as they do
not engage in management functions.
An LP will be liable to a 3rd party if the 3rd party
believes, based on conduct, that the LP is a
general partner.
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Rights and Liabilities of Partners
The General partner assumes all management
and personal liability.
Limited Partner contributes cash but has no
management rights. Liability is limited to the
amount of investment. A limited partner can
forfeit this “veil” of immunity by taking part in
the management of the LP.
 Case 41.3: BT-I v. Equitable Life Assurance Society
of the United States (1999).
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Rights and Liabilities of Partners
General partners are personally liable to 3rd
parties for breach of contract and tort liability.
However, a corporation (or an LLC) can be a
general partner and have limited liability.
Limited partners have the right to inspect the
LP’s books and be informed of the LP’s business.
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Dissolution of the LP
On dissolution, the limited partner is entitled to
return of capital contributions.
LP interests are considered securities and
regulated by both federal and state securities
laws.
Limited partners’ liability is limited to the capital
investment.
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Dissolution of the LP
Dissolved in much the same way as a general
partnership (Chapter 36).
Retirement, withdrawal, death, bankruptcy or
mental incompetence of a general partner will
trigger dissolution unless the remaining GP’s
consent to continue.
Creditors are paid first then partners.
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§ 4: LLLP’s
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.
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Law on the Web
Comparison of Different Business Entities.
LLC’s at Nolo.com
Legal Research Exercises on the Web.
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