Chapter 38 Limited Liability Companies and Limited Partnerships

WHAT THIS CHAPTER IS ABOUT

This chapter sets out the law relating to relatively new business
organizations: limited liability companies (LLCs), limited liability partnerships (LLPs),
limited partnerships, and limited liability limited partnerships (LLL-ps). The chief
features of these business forms are limited liability and tax advantages.

CHAPTER OUTLINE

1. LIMITED LIABILITY COMPANIES
A limited liability company (LLC) is a hybrid form of business enterprise
that offers limited liability of a corporation with tax advantages of a
partnership.

A. FORMATION OF AN LLC
Articles of organization must be filed with the state. Certain information
is required.

B. JURISDICTION OVER AN LLC
An LLC is a citizen of every state of which its members are citizens.

C. ADVANTAGES
Taxed as a partnership; liability of members is limited to the amount of
their investment; members can participate in management; corporations,
partnerships, and foreign investors can be members; no limit an the number of
members (in many states, one is enough).

D. DISADVANTAGES
Statutory restrictions on the transfer of ownership; because the LLC is a new
form, little case law exists; until uniform statutes are adopted by most
states, an LLC with multistate operations may face difficulties.

E. THE LLC OPERATING AGREEMENT
Provisions relate to management, division of profits, transfer of membership,
what events trigger dissolution, and so on. In the absence of an agreement,
state statutes govern. If there is no statute, the principles of partnership
law apply.

F. MANAGEMENT OF AN LLC

1. Member-Managed LLC
Unless members agree otherwise, all members participate in management and
voting rights are usually proportional to capital contributions. An
agreement may set govemmg procedures (in contrast to corporations, which are
subject to specific state requirements).

2. Manager-Managed LLC
Members may designate a group to run the firm. If so, the members' interests
in the firm may qualify as securities.

11. LIMITED LIABILITY PARTNERSHIPS
Professionals may organize as a limited liability partnership (LLP) to enjoy
the tax advantages of a partnership, while avoiding personal liability for
the wrongdoing of other partners.

A. LIABILITY IN AN LLP
In an LLP, professionals avoid personal liability for malpractice of other
partners.

1. Liability outside the State of Formation
If a state has not adopted the LLP form, its courts may not recognize the
LLP's limits an liability. If a state provides different LLP liability
protection, there may be a dispute as to which state's law to apply.

2.. Supervising Partner's Liability
A partner who conunits a wrongful act is liable for the results. Also liable
is the partner who supervises the party who commits the act. Some states
provide that each partner is liable only up to the proportion of his or her
responsibility for the result.

B. FAMILY LIMITED LIABILITY PARTNERSHIPS
This is a limited liability partnership (LLP) in which most of the partners,
are related. All partners must be natural persons or persons acting in a
fiduciary capacity for natural persons. Family-owned firms may benefit from
the use of the family limited liability partnership (FLLP) form.

111. LIMITED PARTNERSHIPS
Limited partnerships must include at least one general partner and one or
more limited partners. General partners assume management responsibility and
liability for all partnership debts.

A. FORMATION OF A LIMITED PARTNERSHIP
T'he partners sign a certificate of limited partnership, which requires
in­formation similar to that found in a corporate charter (see Chapter 34).
The certificate is filed with the secretary of state [RULPA 101(7), 201].

B. RIGHTS AND LIABILITIES OF LIMITED PARTNERS

1. Rights of Limited Partners
Essentially the same rights as general partners. Can generally assign their
interests in the partnership [RLJLPA 702, 704]. Can also sue on behalf of
the firm if general partners refuse [RULPA 10011.

2. Liabilities of Limited Partners

a . Limited Liability to Creditors of the Partnership
Liable to the extent of any contribution that is promised to the firm or any
part of a contribution that was withdrawn [RULPA 502].

b. Personal Liability for Defects in Formation

1) If a Firm Is Organized in an Improper Manner
If the limited partner fails to withdraw on discovery of the de­fect, he or
she can be personally liable to the firm's creditors.

2) If There Is a False Statement in the Partnership Certificate
If a limited partner knows of the statement, he or she may be liable to any
person who relies on it [RULPA 207].

3) How to Avoid Future Liability
File an amendment or corrected certificate or renounce an interest in the
profits of the partnership [RLJLPA 304].

3. Limited Partners and Management
Generally, participating in management results in personal liability for
partnership debt, if creditors knew of participation [RLJLPA 303].

C. DISSOLUTION

1. General Partners Dissolution
Retirement, death, or mental incompetence of, a general 'partner dis­solves
the firm, unless continued by other general partners [RULPA 801].
Illegality, expulsion, or bankruptcy of general partner dissolves a firm.

2. Limited Partners.--No Dissolution
Death or assignment of interest of a limited partner does not dissolve the
firm [RULPA 702, 704, 705], nor does personal bankruptcy.

3. Court Decree
A limited partnership can be dissolved by court decree [RULPA 8021.

4. Priority to Assets on Dissolution
(1) Creditors, including partners who are creditors; (2) partners and former
partners receive unpaid distributions of partnership assets and, except as
otherwise agreed, a return in their contributions and amounts proportionate
to their share of distributions [RULPA 201(a)(10), 804].

IV. LIMITED LIABILITY LIMITED PARTNERSHIPS
This form is similar to a limited partnership, except that the liability of
all partners in a limited liability limited partnership (LLLP) is limited to
the amount of their investment in the firm.

V. MAJOR BUSINESS FORMS COMPARED
To decide which form of business organization is appropriate involves the
consideration of such factors as the ease of creation, the liability of the
owners, tax considerations, and the need for capital. Each form has
advantages and disadvantages that indicate when it is most useful.