Chapter 28: Limited Liability Companies
and Special Business Forms
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Learning Objectives
• What advantages do limited liability
companies offer to businesspersons that
are not offered by sole proprietorships
or partnerships?
• How are limited liability companies
formed, and who decides how they will
be managed and operated?
• What are the two options for managing
limited liability companies?
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Learning Objectives
• What is a joint venture? How is it similar
to a partnership? How is it different?
• What are the essential characteristics of
joint stock companies, syndicates,
business trusts, and cooperatives,
respectfully?
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Nature of the LLC
• LLC’s are creatures of state law, like
corporations.
• Owners are called “members” (not
shareholders) and their ownership is called an
“interest” (not shares).
• Members of an LLC enjoy limited liability.
• LLC’s can sue and be sued by employees or
third parties.
Case 28.1 McFarland v. Virginia Retirement
Services of Chesterfield, LLC.
Members or managers of an LLC cannot be held liable for a wrongful
discharge claim solely based on their status; defendants must have
played a key role in the tortious conduct.
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LLC Formation
• Articles of Organization require:
– 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.”
Case 28.2 02 Development, LLC v. 607 South
Park, LLC.
A “preincorporation” contract or assignment is enforceable against an LLC
that did not exist at the time the contract was made.
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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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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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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LLC - Advantages and Disadvantages
Advantages
Disadvantages
Member liability is limited to amount of
investment. (see Case 28.3 below)
State statutes are not uniform.
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.
Case 28.3 Allen v. Dackman.
Owner of interests in an LLC is not the legal
“owner” of real property and not personally liable
for injuries to tenants on property owned by LLC.
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The 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.
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Management of an LLC
• 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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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Dissociation and Dissolution
• Dissociation: same partnership principle
applies. Member of LLC has power to
dissociate but she may not have the right
to do so.
– External events may trigger dissociation:
bankruptcy, court order, incompetence, death.
• Effect of Dissociation: member loses
right to participate or act as agent for
LLC, have his interest bought out.
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Dissociation and Dissolution
• Disassociated member has no right to
force LLC to dissolve.
– LLC operating agreement can stipulate what
events cause dissolution.
• Winding up: Members must collect,
liquidate, and distribute LLC assets.
– After assets sold, proceeds used to pay off
creditors (including members who are creditors).
– Then members’ capital contributions are returned,
and anything remaining is shared as “profits”
among the members according to the operating
agreement.
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Special Business Forms
• Joint Venture: two or more entities
combine efforts or property for a
single transaction or project.
– Unless agreed otherwise, JV’s share profits
and losses equally.
– Common in international transactions when
U.S. companies wish to expand overseas.
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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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JV Characteristics
• Resembles a partnership and is taxed like a
partnership. However, a JV is limited in time
and scope, whereas a partnership is an
ongoing business. Other differences:
– JV members has less implied and apparent authority
than partners.
– Death of JV member does not terminate JV.
• JV members can specify duration. If not,
then JV terminates when purpose is
accomplished.
© 2011 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.
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Special Business Forms
• Syndicates.
– Investment group of individuals/firms who
finance a project together.
• Joint Stock Companies.
– Hybrid of partnership and corporation, with
many similarities of partnership.
• Business Trusts.
– Created by private agreement with
beneficiaries.
• Cooperatives.
© 2011 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.
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