LLCs, LPs, LLPs Explained

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 39:
Limited
Liability
Companies
and Related
Forms

S-2
Learning Objectives
• Explain limited liability companies.
• Compare LLCs to other business
forms.
• Describe LLC formation process.
• Understand LLC management
process.
• Explain limited partnerships.
• Explain limited liability partnerships.

S-3
39.0 In the News
How to Structure a Single Member LLC
http://bvtlab.com/bQnAp
A corporation isn't required to have a full team of
c-suite executives and large, formal shareholder
meetings. It is possible to be the sole shareholder,
director, and officer for your corporation as a single
member Limited Liability Company (LLC).
• Discuss the benefits of the LLC business formation.
• Why is it a good formation for sole proprietors?

S-4
39.1a Background
• A form of business that guarantees
owners/members limited liability for the
debts of the business and “pass-through”
income tax treatment.
• Pass- through concept
– Income passed through to the owners/members
• LLC offers the best of both worlds
– Limited liability (from the law of corporations)
– Favorable tax treatment (only one taxable
incidence, as for a general partnership)

S-5
39.1b Comparing Forms
Liability Created by
Enabling
Statute of
State
Entity
Taxed
Legal
Principals
Developed
General
Partnership
Owners
personally liable
No No Yes
Corporation No personal
liability of owners
beyond capital
contributed
Yes Yes Yes
LLC No personal
liability of owners
beyond capital
contributed
Yes No No

S-6
39.1c Formation
• Must be state-enabling legislation that
provides for the formation of an LLC.
• File articles of organization with secretary
of state’s office.
• Name must include “LLC.”
• Members (owners) of the LLC create an
operating agreement.
– Not filed with the secretary of state’s office
– Same topics that are common in a partnership
agreement

S-7
39.1c Critical Thinking
CASE: Burkle
A father asserts his daughter owes him money because
there was no intent to grant a gift of the interest of a
limited liability company.
• Why does the court disagree with the trial court
regarding whether the daughter’s interest may not
be a loan?
• After reading this case, what concerns do you have
about going into business with a family member
within the LLC structure?
• Is there a way to reduce the possibility of internal
problems of members, regardless of whether they
are related to one another?

S-8
39.1d Management (Slide 1 of 2)
Articles of organization must state one of
two methods of management.
• A member-managed LLC
– Functions like a general partnership
– Appropriate in family LLCs
• A manager-managed LLC
– Managed by single person or select group
– Similar to the corporate form where individuals
function as officers
– Works better in larger LLCs

S-9
39.1d Management (Slide 2 of 2)
• Rights that are guaranteed to members
by statute:
– Right to dissolve the LLC
– Right to approve a merger
– Right to access to the LLC books and
records
– Operating agreement can only be amended
by unanimous consent

S-10
39.1d Critical Thinking
CASE: Pacific Landmark
The court was asked to decide if personal liability
extends to the manager of a limited liability
company in this situation.
• Do you believe Mavaddat knew that the tenants
were conducting illegal behavior? Why?
• According to the opinion, when can a manager of
an LLC be held personally responsible for a
nuisance associated with an LLC? Why?

S-11
39.2a Limited Partnerships (Slide 1 of 3)
• Form of business consisting of at least one
general partner and one limited partner
• Uniform Limited Partnership Act of 2001
• Requires the state to have enabling statute
• Create and submit to the secretary of state’s
office a certificate of limited partnership that
is signed by all general partners
• Name must include “limited partnership” or
the letters “LP.”

S-12
• Recommended to execute a limited
partnership agreement.
– Not submitted to the secretary of state’s office
– States the capital contributions of all partners
– Each partner’s share of profits and losses
• All general partners owe a fiduciary duty to
all limited partners.

S-13
• General partner
– Operates the business
– Unlimited liability for all partnership debts
• Limited partners
– Contribute capital
– Prohibited from participating in management
– Liability is limited to capital investment.
– Not liable personally for partnership debts
– If actively participates in the management of the
business, limited liability is forfeited

S-14
39.2a Critical Thinking
CASE: Gotham Partners
The issue regards the application of a state
statute that allows a limited partnership to
modify common law fiduciary duties.
• Was the General Partner acting to improve
the financial outlook of all partners in the
firm?
• Why is it advisable for the limited
partnership agreement to specify the extent
of fiduciary duties?

S-15
31.2h Limited Liability Partnerships
• A partnership that grants owners limited
liability
• Generally appropriate for professional
service firms
• Limited liability and pass-through treatment
for tax purposes
• Grants limited liability to the other partners
– In most states, any partner not involved in the
contract or tort that generated the liability is
totally exempt from liability

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