Chapter 40: LLC and LLP
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This 7 page Class Notes was uploaded by Mina Riazi on Friday February 13, 2015. The Class Notes belongs to BLAW703 at Kansas taught by Jamison Shipman in Fall. Since its upload, it has received 136 views. For similar materials see Legal Aspects of Business Orginizations in Business at Kansas.
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Date Created: 02/13/15
Ch 40 text notes LLC and LPsOnly covering LLC and LP 1 Limited Liability Companies LLChas both the advantages of being a corporation and tax status of a partnership a Tax treatment LLC can elect to be taxed like a partnership no federal taxation or as a corporation federal taxation 1 Partnership election is the most popular i pro ts and losses are recorded on individual partner39s tax return ii LLCs losses can be deducted on individual return up to partner39s capital contribution risk in LLC iii Limited partnersuse their share of LLC losses to offset passive investment gains b Formation 1 File Certi cate of organization with secretary of state 2 Owners of the LLC are called members Can be individuals partnership corporation or another LLC 3 Create an operating agreementan agreement of the members Includes i Membermanaged or managermanaged ii Share of pro ts or losses iii Management of LLC iv How to withdraw from the LLC 4 Once created an LLC is a separate entity from its members c Members39 rights and liabilities 1 Limited liabilityindividual has no liability on LLC contracts unless they commit a tort i Usually limited to their capital contributions to the LLC ii Partner must make contribution as agreed upon in operating agreement initial capital contribution and additional calls for capital 2 Management rights 0 Without operating agreement automatically membermanaged 1 Membermanaged a each member shares equal rights in management b implied authority to carry on LLC ordinary business c operating agreement can make classes of members with different powers 2 Managermanaged a Not all members are managers managers have implied authority to manage the business as an agent of LLC agentprincipal duties apply b Manager does conducts LLC39s ordinary business c Managers can be voted on an off at any time by a majority vote d Consent of all members required when 1 amendment of the operating agreement 2 new partner admission 3 redemption of a member39s interest 4 big sale of partnership39s assets e LLC is liable only for a manager s wrongful act torts and not other members of the LLC 0 Since members of membermanaged and managers of manager managed LLCs have implied authority if the member39s implied authority is limited and the third party doesn39t know about the limitation then the limited member can have apparent authority d Dutieseach member whether the LLC is membermanaged or manager managed have a duciary duty of the LLC and its members 1 Fiduciary duties 1 duty to account for LLC property 2 duty not to compete with LLC 3 duty of care 4 duty to act in the best interests of the LLC 2 Nonmanaging members in a managermanaged LLC do not have duciary duties they don39t really participate in everyday ordinary business 0 All members must act in good faith and fair dealing act honestly and treat other members fairly e Member39s distributions 1 Default RULLCA ruleall members share pro ts and other distributions equally regardless of differences in capital contributions i No member can get a distribution of pro ts before the dissolution of the LLC unless there are interim distributions 2 Distribution of pro ts is usually spelled out in the operating statement in terms of how and when f Member39s ownership interestan member39s ownership interest is the personal property of the member 1 Transfer or sale of interest is limited in a LLC 2 Default RULLCA rulea member may transfer their transferable interest in the LLC to another person but they are still a member i a member will always be a member even if they transfer their interest and don39t get the pro ts directly ii transferee can t manage the LLC and has access to limited information about the LLC accounts 3 operating agreement can state that the transferee can become a member in which case they d get the rights power and liabilities of a regular member 4 A creditor can issue a changing order lien on a member s transferable interest and get the member39s share of pro ts to satisfy their debt The creditor doesn39t own the transferable interest g Members39 dissociation and LLC dissolution 1 Member dissociation a member stops being associated with carrying on the business and the relationship between the LLC and other members ends i Causes for dissociation members death guardian appointed over their affairs member is judged incompetent by court bankrupt expelled by other members ii Court expulsion 1 Harmed LLC business 2 Breached operating agreement 3 Its impractical to carry on business with the member because of their conduct 4 Appropriate when a member persistently breaches the duty of good faith or duty not to compete iii Wrongful dissociation 1 Causes a Withdrawing from the LLC before the set term b Being a debtor in bankruptcy c Being expelled by court 2 Dissociated member is still liable for damages caused by the dissociation Ex member dissociates before the term is over they are still liable until the term actually ends if the LLC continues to exist They don39t get any future pro t after the dissociation date iv Apparent authoritya dissociated member can have apparent authority to transact for the LLC if the third party is not noti ed Can notify by giving them some sort of notice or lling a Statement of Dissociation v Dissociation terminates a member s status as a member treated as a transferee of a member39s transferable interest 2 Dissociated member payment i Dissociated member can39t force the LLC to dissolve or liquidate unless it39s stated in the operating agreement ii Member can39t get the value of their interest in the LLC until the LLC dissolves However if there39s not term to the LLC at will then the LLC must buy the member39s interest back at FV within 120 days h LLC39s dissolution 1 Reasons i Unlawful to continue LLC ii Judicial dissolution at request of member transferee or dissociated member iii Administrative dissolution by the secretary of state 2 Judicial dissolution causes i Not practical for the business to carry on ii Business managed illegally or oppressively iii LLC failed to repurchase dissociated person39s interest on the date required 120 days after dissociation 3 All members can agree to dissolve the LLC unless it s stated otherwise in the operating agreement 4 Nonwrongfully dissociated members can wind up the business 5 Distribution of dissolved LLC assets i Priority 1 Creditors and partners who are creditors 2 Members39 contributions are refunded 3 Pro ts are distributed according to pro t share agreement ii Creditors ordinarily can only go after LLC39s assets because of limited liability protection iii LLC member must pay their required capital or else creditors can go after her assets 0 The operating agreement can override all of the dissociation and dissolution default rules of RULLCA so it39s important to have a detailed agreement 2 Limited partnership a General vs limited partners i Generalcontribute capital to the business manages the business and gets pro t Limited liability of obligations of the LP ii Limitedcontribute capital and get their share of pro t but do not have management powers Limited liability to their investments in business b LP tax shelterlosses of LP reduce member39s personal tax liability i General partner member39s share of losses from business can offset any kind of income from any source ii Limited partnermember39s share of losses from LP only offset income from passive investments Therefore only a limited partners pro t from the LP can be offset by the LP39s losses o If a limited partner sells or terminates their interest then their losses from the LP can offset any income c Creation i A certi cate of limited partnership must be executed and submitted to the secretary of state ii Many LPs have unlimited duration unless otherwise stated in agreement d Defective compliance with Limited Partnership Statute i Limited partners are actually general partners can 1 Causes a proper certi cate of limited partnership to be led 2 Withdraws from future equity participation in the rm by ling a certi cate 3 May still be liable to third parties whom believed they were general partners e Rights and liabilities of partners i A partner is obligated to contribute as he promised ii Share of pro ts of lossesproportionate to capital contribution unless stated otherwise in written agreement vi vii f Gener i ii iii iv v g Gener i ii iii iv Partnership agreements usually state that a limited partner can take all the losses of the business up to their capital contribution Voting rights 1 Limited partners usually don39t have a right to vote unless its agreed upon in the partnership agreement 2 Approval of all partners is needed when a Amendment of limited partnership agreement b Amendment to certi cate c Sale or transfer of a lot of assets outside the ordinary course of business New partners 1 All partners must agree to admit a new partner unless stated otherwise in the agreement General partners usually have the power to admit new partners but they should try not to dilute ownership interest Default ULPA rulepartners don39t have much power to expel other partners from the partnership Transferable interest partners can transfer or sell their interest 1 Buyer transferee or creditor have the right to get distributions 2 Original partner who transfers their interest still has the status of partner unless stated otherwise in the agreement Withdrawal from LLP 1 Default ULPA ruleno right to withdraw unless the limited partnership agreement says otherwise Default ULPA rulewithdrawing partner doesn39t get their investment refunded to them unless the LLP dissolves or liquidates So a limited partner may have to wait until the LLP liquidates to get their investment back al partner39s rights and liabilities Implied authority to manage the ordinary business Express authority to act as agreed upon by partners Apparent authority if third party doesn39t know general partner has a limit on their implied authority Generally don39t get compensation Unlimited liability to the creditors of the limited partnership al partners duciary duties Duty to account for property Duty to not compete Duty to not selfdeal with the partnership Duty of care 2 3 2 h Liabilities and rights of limited partners Rights of limited partners is to be informed about partnership affairs LP only liable up to their contributed capital iii No LP owes duciary duties to the LLP or other partners but they still need to act in good faith and deal fairly with the limited partnership i Both general and limited partner at the same time i LP has duties as a general partner when acting as a general partner and has duties as a limited partner when he is acting as a limited partner ii General partner39s liability in a LP is not reduced merely because he is also a limited partner iii A limited partner who becomes a general partner would lose his limited liability 3 Partners39 dissociations a Limited partner will dissociate if the limited partner dies withdraws or is expelled i Reasons to expel 1 Transferred of all her transferable interest 2 Suffered a charging order against her partnership interest 3lHegalconduct 4 Partners vote LP off unanimously ii Court expulsion 1 Wrongful conduct that negatively affects the business 2 Willfully and persistently breached the partnership agreement or limited duty of good faith and fair dealing iii Dissociated limited partner has no power or a right to vote but they still get distributions of pro t and their interest upon termination of the LLP b General partnerdissociates if LP dies withdraws expelled mentally or physically incapacitated or unable to perform as a general partner i Reasons 1 Debtor in bankruptcy 2 Assets are assigned to bene t creditors 3 Custodian appointed to manage property 4 Expelled by vote of other partners Wrongful dissociation 1 Leaving before it terminates 2 Violated LP agreement 3 Being a debtor in bankruptcy 4 Expelled by court A general partner that is wrongfully dissociated is liable for damages caused by dissociation iv Implied and apparent authority A dissociated partner may have apparent authority and therefore the LP may still be liable for obligations So creditor should be noti ed Apparent authority ends after 2yrs of dissociation v A dissociated partner will remain liable to obligations made before dissociation unless creditor agrees to relinquish the liability 4 Limited partners dissolutions reasons i vote to dissolve by majority of partners ii last general or limited partners dissociates are not replaced in 90days iii court decides business can reasonably carry on business iv fail to pay taxes or fees due to the secretary of state v fail to deliver an annual report to secretary after creditors are paid the pro ts are distributed to partners according to their share of interest if a limited partnership39s assets are insuf cient to pay creditor s claim the general partners at the time the liability was incurred must contribute cash
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