Chapter 34LLC’s and LLP’s

Chapter 34LLC’s and LLP’s

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What advantages do LLC’s/LLP’s offer to businesspersons that are not offered by general partnerships or the corporation?

How are LLC’s formed and who decides who they will be managed and operated?

What is the difference between LLC’s and LLP’s? What is a Family Limited Liability Partnership? What are the key differences between the general

partners and limited partners?

What advantages do LLC’s/LLP’s offer to businesspersons that are not offered by general partnerships or the corporation?

How are LLC’s formed and who decides who they will be managed and operated?

What is the difference between LLC’s and LLP’s? What is a Family Limited Liability Partnership? What are the key differences between the general

partners and limited partners?

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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IntroductionIntroduction

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.

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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Introduction Introduction

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.

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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LLC FormationLLC Formation

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).

LLC’s are formed by filing Articles of Organization with the Secretary of State.

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).

LLC’s are formed by filing Articles of Organization with the Secretary of State.

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LLC FormationLLC Formation

Articles of Organization require:Name of Business.Principal Address.Name and Address of Registered Agent.Names of the Owners; andHow the LLC will be managed.

Business name must include LLC or Limited Liability Company.

Articles of Organization require:Name of Business.Principal Address.Name and Address of Registered Agent.Names of the Owners; andHow the LLC will be managed.

Business name must include LLC or Limited Liability Company.

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Jurisdictional RequirementsJurisdictional 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.

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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LLC Advantages & DisadvantagesLLC Advantages & Disadvantages

Advantages DisadvantagesMember liability is limited to amount of investment.

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.

Foreign citizens can be members.

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LLC Operating Agreement

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.

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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Management of an LLCManagement of an LLCThere 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.

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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Limited Liability Partnerships

Limited Liability Partnerships

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.

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 LLPLiability in an LLP

Recall that partnership law makes all partners jointly and severally 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.

Recall that partnership law makes all partners jointly and severally 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

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.

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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Limited Partnership Formation

Limited Partnership Formation

Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner.

Limits the liability of some of its owners (the limited partners) to their investment.

A LP is a creature of state statute. Filing a certificate with the Secretary of State is required.

Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner.

Limits the liability of some of its owners (the limited partners) to their investment.

A LP is a creature of state statute. Filing a certificate with the Secretary of State is required.

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LP – General Partner Rights and Liabilities LP – General Partner Rights and Liabilities

The General partner assumes all management and personal liability.

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.

The General partner assumes all management and personal liability.

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.

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LP – Limited Partner Rights and LiabilitiesLP – Limited Partner Rights and Liabilities

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.

Limited partners have the right to inspect the LP’s books.

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.

Limited partners have the right to inspect the LP’s books.

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LP – Limited PartnerRights and LiabilitiesLP – Limited PartnerRights and Liabilities

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.

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 LPDissolution of the LP

Dissolved in much the same way as a general partnership (Chapter 33).

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.

Dissolved in much the same way as a general partnership (Chapter 33).

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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Limited Liability Limited Partnerships

Limited Liability Limited Partnerships

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.

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.