In the Katris case, the court held that while managers of an LLC owe fiduciary duties, a nonmanaging member of an LLC had no fiduciary duty, even when the LLC’s manager delegated considerable power to him. Note that nonmanaging members still owe a duty of good faith and fair dealing when exercising rights as members
This case opinion, found on page 992 of the text, contains a good example of an LLC operating agreement that details the management powers of a managing member.
The hyperlink is to the text, in various downloadable forms, of the ULPA provided by the University of Pennsylvania. Fig. 2 on page 994 of the text depicts principal characteristics
Limited liability is financial protection.
Specifically, a husband and wife tried to use a family limited partnership to reduce taxes. Although they properly formed the limited partnership, they failed to comply with tax law and otherwise to keep the limited partnership’s assets separate from themselves. Consequently, the court ruled that the husband and wife had not made a gift of the limited partnership’s property to their children.
In the Lach case, the court held that the general partners were not required to comply with the requirements for conversion, because a new LLC was formed and the limited partnership dissolved. However, the court found that the general partners breached their fiduciary duty by transferring the assets of the limited partnership to the LLC without the consent of a limited partner.
True. An LLC may elect to be taxed like a partnership or a corporation for federal income tax purposes. True. Of course this is really a trick question since every person is always liable for his or her own torts, thus the only question that really arises is whether the company will also be liable for such torts. False. The difference is in the degree of liability. General partners contribute capital, manage the business, share in profits, and possess unlimited liability for its obligations. Limited partners contribute capital and share profits, but possess no management powers.
False. Under the ULLCA, an LLC must choose to be member-managed or manager-managed False. To create an LLC, articles of organization must be filed. True.
The correct answer is (b).
Opportunity to discuss choices about ethics and choice of form, particularly those forms that protect the individual owners.
Learning Objectivesv Limited Liability Companiesv Limited Partnerships and Limited Liability Limited Partnershipsv Creation of Limited Partnershipsv Right and liabilities of members and partnersv Dissociation and dissolution40 - 3
Overviewv The limited liability company (LLC) combines advantages of the corporation with regard to protection from personal liability and favorable tax status of the partnershipv The Uniform Limited Liability Company Act of 1996 (ULLCA) offers default rules similar to RUPA that govern an LLC in the absence of a contrary agreement of its owners w http://www.nccusl.org/Update/40 - 4
Taxation of the LLCv An LLC may elect to be taxed like a partnership or a corporation for federal income tax purposes w Election as partnership more commonv Therefore, the LLC pays no federal income tax and all income and losses of the LLC are reported by the LLC’s owner-members on their individual income tax returns40 - 5
Creation of the LLCv At least one person (organizer) must file articles of organization with a secretary of state w Articles must include LLC name, its duration, and the name and address of its registered agentv Owners of an LLC are members w An individual, partnership, corporation, or another LLC may be a member of an LLC w An LLC is an entity separate from its members40 - 6
Management of the LLCv Articles of organization must state whether the LLC is member-managed or manager- managed w If manager-managed, initial managers must be namedv An LLC probably will have an operating agreement covering how members will share profits, manage the LLC, and withdraw from the LLC40 - 7
Liability of Membersv An LLC member has no individual liability on LLC contracts, unless LLC contracts signed in a personal capacity (e.g., as a surety)v A member’s liability is usually limited to the member’s capital contributionsv A member is liable for torts s/he committed while acting for the LLC40 - 8
A Member-Managed LLCv Under the ULLCA, an LLC must choose to be member-managed or manager-managedv Each member in a member-managed LLC shares equal rights in the management of the business and each member is an agent of the LLC with implied authority to carry on its ordinary business40 - 9
A Member-Managed LLCv The LLC operating agreement may modify ULLCA default rules by granting more power to some members w Creating a class of members whose approval is required for certain contracts w Members share power based on capital contributions40 - 10
A Manager-Managed LLCv Managers in a manager- managed LLC are elected and removed by a vote of a majority of LLC membersv A manager’s powers to act for the LLC are similar to a member’s power in a member- managed LLC A team effort.40 - 11
Tort and Contract Liabilityv An LLC is liable for the contractual obligations incurred by its members or managers acting within their express, implied, or apparent authorityv An LLC is also liable for the torts and other wrongful acts of managing members and other managers acting within their authority40 - 12
Duties of Membersv Each member in a member-managed LLC and each manager in a manager-managed LLC is a fiduciary of the LLC and its members with duties similar to the duties of partners, including the duty of carev Nonmanaging members of a manager- managed LLC owe no fiduciary duties w See Katris v. Carroll40 - 13
Ownership Interest of Membersv A member’s ownership interest in an LLC is the member’s personal property w Limited ability to sell or transfer LLC rightsv A member may transfer the distributional interest in the LLC to another person w Transferee not a member, but receives right to partnership distributions w Limited right of transfer may be altered in the operating agreement40 - 14
Distributions to Membersv A member in an LLC has the right is to receive distributions (usually profits)v ULLCA states that members share profits and other distributions equally, regardless of differences in their capital contributions w This may be altered by the operating agreement40 - 15
Dissociationv Under the ULLCA, members dissociate from an LLC in ways similar to those by which a partner dissociates from a partnership or LLP under RUPA w Under the ULLCA, a partner has the power to dissociate by withdrawing from the LLC at any time40 - 16
Dissociationv As in partnership, a member’s dissociation may be wrongful or nonwrongfulv Dissociation terminates a member’s status as a member, and a dissociated member is treated as a transferee of a member’s distributional interest w In Re Garrison-Ashburn, LC considers the effects of a member’s dissociation and the management rights of a member in an LLC.40 - 17
Dissolutionv Dissolution of an LLC is similar to that of an LLP or partnershipv When an LLC dissolves, any member who has not wrongly dissociated may wind up the business w LLC bound by reasonable acts of members during winding up40 - 18
Dissolutionv After all the LLC assets sold, proceeds distributed first to LLC creditors, then members’ contributions are returnedv Any remaining proceeds are distributed in equal shares to the members40 - 19
Uniform Limited Partnership Actv Substantially similar to RUPA, the ULPA of 2001 is the first comprehensive statement of American limited partnership law w Only ULPA applies to limited partnershipsv The limited partnership (or LLLP) form is perpetual and used primarily in tax shelter ventures, real estate ventures, oil and gas drilling, and professional sports40 - 20
The Limited Partnershipv Limited partnerships has two owner classes: w General partners contribute capital, manage the business, share in profits, and possess unlimited liability for its obligations w Limited partners contribute capital and share profits, but possess no management powers w Liability limited up to the amount of their investments in the businessv Limited partnership agreements common40 - 21
Limited Liability Limited Partnershipv A variant of a limited partnership is the limited liability limited partnership (LLLP) which offers limited liability status for all its partners, including general partnersv Except for liability of general partners, limited partnerships and LLLPs are identical40 - 22
Creating the LP or LLLPv A limited partnership (or LLLP) may be created by complying with the applicable state statutes, but requirements are minimal w However, see Moser v. Moser, in which failure to strictly comply with law invalidated attempt to create a family limited partnershipv A certificate of limited partnership must be executed (signed by all general partners) and submitted to the secretary of state40 - 23
Rights of LP and LLLP Partnersv A partner may contribute any property or other benefit to the limited partnershipv Under ULPA, profits and losses are shared on the basis of the value of each partner’s capital contribution unless there is a written agreement to the contraryv ULPA of 2001 requires few actions to be approved by all the partners40 - 24
Rights of LP and LLLP Partnersv ULPA is clear that limited partners have no inherent right to vote on any matterv Default rule is that no new partner may be admitted unless each partner has consented to the admission w Limited partnership agreement may provide for other admission procedures40 - 25
Transferable Interestv Each partner in a limited partnership owns a transferable interest in the limited partnership as personal propertyv A partner’s transfer of his transferable interest has no effect on his status as a partner, absent a contrary agreement40 - 26
Management & Dutiesv A general partner of a limited partnership or LLLP has same right to manage and same agency powers as a partner in an ordinary partnership, including the duty of carev A general partner of a limited partnership or LLLP is in a position of trust and therefore owes fiduciary duties to the limited partnership and the other partners40 - 27
Withdrawingv Partners have the power to withdraw from the limited partnership at any time, but ULPA gives the partners no right to withdraw, absent a contrary provision in the limited partnership agreementv Under ULPA, a withdrawing partner has no right to receive the value of the partnership interest40 - 28
Dissociation of the LP and LLLPv ULPA adopts terminology and framework of partnership law, establishing dissociation and dissolution rulesv A limited partner dissociates upon limited partner’s death, withdrawal, or expulsion from the partnership40 - 29
Dissociation of the LP and LLLPv A dissociated limited partner is not a limited partner, has no rights as a limited partner, and is treated as a mere transferee of the dissociated limited partner’s transferable interestv ULPA treats dissociation of general partners as RUPA treats partner dissociations in a partnership40 - 30
Dissociation of the LP and LLLPv A general partner’s express and implied authority to act for the limited partnership terminates upon dissociation, the partner may retain apparent authorityv A dissociated general partner will remain liable on a limited partnership obligation incurred while a partner unless creditor agrees to a release of liability w No liability for post-dissociation obligations40 - 31
Dissolution of the LP and LLLPv ULPA provides that a limited partnership (or LLLP) is not dissolved, wound up, or terminated merely because a partner dissociated from the limited partnershipv When a limited partnership dissolves, winding up follows automatically by the general partners40 - 32
Dissolution of the LP and LLLPv After general partners have liquidated the assets, proceeds are distributed first to creditors and if proceeds exceed creditors’ claims, the remainder is paid to the partners in the same proportions that they shared distributions40 - 33
Mergers and Conversionsv ULPA and the RULLCA permit limited partnerships and LLCs to merge with other businesses, including other LLCs, limited partnerships, and corporations, or to convert to another business form w Allpartners or members must consent to the plan of merger or conversion w See Lach v. Man O’War, LLC40 - 34
Test Your Knowledgev True=A, False = B w An LLC may be taxed like a corporation for federal income tax purposes w An LLC member is liable for torts s/he committed while acting for the LLC w General partners and limited partners are the same except in regard to how distribution of profits occur.40 - 35
Test Your Knowledgev True=A, False = B w Under the ULLCA, an LLC must choose to be partner-managed or manager-managed. w To create an LLC, articles of limited liability must be filed. w Under the ULLCA, members dissociate from an LLC in ways similar to those by which a partner dissociates from a partnership or LLP under RUPA.40 - 36
Test Your Knowledgev Multiple Choice w James invested in a partnership and receives profit sharing, but has no right to vote or make management decisions. James is: (a) A limited member in an LLC (b) A limited partner in an Limited Partnership (c) A member in a member-managed LLC (d) A general partner in an LLLP39 - 37
Thought Questionv Why should business owners be allowed to limit their liability or choose the form of business that gives them the greatest protection? What risks does the typical business face?40 - 38