ACC chap 17 - Lecture notes chapter 17 PDF

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ACC chap 17...

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Chapter 17- The Limited Liability Company (LLC) 17-1- The Limited Liability Company (LLC) - A LLC is a hybrid that combines the LLC and the tax advantages of a partnership - LLCs are governed by state statutes, which vary from state to state. - In an attempt to more uniformity, the National Conference of Commissioners on Uniform State Laws issued the Uniform Limited Liability Company Act (ULLCA) 1a-The Nature of the LLC - LLCs must be formed and operated in compliance with state law - The owners of an LLC, who are called members, enjoy limited liability - The liability of members normally is limited to the number of their investments. - Under various principles of corporate law, courts may hold the owners of a business liable for its debts. - LLCs are legal entities apart from their owners. - As a legal person, the LLC can sue or be sued, enter into contracts, and hold title to the property 1b-The Formation of the LLC - To form an LLC, articles of organization must be filed with a central state agency (secretary of state’s office) - Articles of organization: Document filed with the state official when an LLC is formed. - the articles must include the name of the business, principal address, the name/address of the registered agent, the members’ names, and how the LLC will be managed - The business’s name must include the words Limited Liability Company or the initials LLC - Persons forming a corporation may enter into contracts during the process of incorporation but before the corporation becomes a legal entity. These contracts are referred to as pre-incorporation contracts. 1c-Jurisdiction Requirements - a significant difference between these organizational forms involves federal jurisdictional requirements. - a corporation is deemed a citizen of the state where it is incorporated and maintains its principal place of business. - Remember that when parties to a lawsuit are from different states and the amount in controversy exceeds $75,000, a federal court can exercise diversity jurisdiction. - Total diversity of citizenship must exist, however

1d-Advantages of the LLC - a significant difference between these organizational forms involves federal jurisdictional requirements. - A key advantage of the LLC is the limited liability of its members - An LLC that has two or more members can choose to be taxed as either a partnership or a corporation - Unless an LLC indicates that it wishes to be taxed as a corporation, the IRS will tax it as a partnership. - An LLC that has only one member cannot be taxed as a partnership. - advantage of the LLC for businesspersons is the flexibility in terms of business operations and management 1e- Disadvantages of the LLC - The main disadvantage of the LLC is that state LLC statutes are not uniform. - Therefore, businesses that operate in more than one state may not receive consistent treatment in these states 2a- Management of an LLC - The firm can be either a “member-managed” LLC or a “manager-managed” LLC - All of the members participate in management, and decisions are made by majority vote - In, the members designate a group of persons to manage the firm - The management group may consist of only members, both members, and nonmembers, or only nonmembers. 2b- Fiduciary Duties - Under the ULLCA, managers in a manager-managed LLC owe fiduciary duties to the LLC and its members

2c- The LLC operating agreement -

The members of an LLC can decide how to operate the various aspects of the business by forming an operating agreement - Operating agreement:An agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated. - Operating agreements: typically contain provisions relating to the following area 1. How profits will be divided 2. How membership interests may be transferred. 3. Whether the dissociation of a member will trigger dissolution of the LLC, and how a buyout price will be calculated in the event of a member’s dissociation. 4. Whether formal members’ meetings will be held 5. How voting rights will be apportioned. ● If a dispute arises with no agreement covering the topic under dispute, the state LLC statute will govern the outcome. ● the issue is not covered by operating agreement or LLC statute, the courts often apply principles of partnership law

3- Dissociation and dissolution of an LLC -

a member of an LLC has the power to dissociate at any time but may not have the right to dissociate. Under the ULLCA, events that trigger a member’s dissociation from an LLC include voluntary withdrawal, expulsion by other members, court order, incompetence, bankruptcy, and death.

3a- Effects of dissociation from LLC -

When a member loses the right to participate in the management and the right to act as an agent for the LLC The member’s duty of loyalty to the LLC terminates while the duty of care continues with respect to events Generally, dissociated members also have a right to have interest in the LLC bought out by the other members.

3b- Dissolution of an LLC -

Regardless of whether a member’s dissociation was wrongful or rightful, normally the dissociated member has no right to force the LLC to dissolve Members can also stipulate in their operating agreement that certain events will cause dissolution, or they can agree that they have the power to dissolve the LLC by vote.

3c- Winding up of an LLC -

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When LLC is dissolved, members who didn't wrongfully dissociate may participate in the winding-up process. To wind up the business, members must collect, liquidate, and distribute the LLC’s assets Members may preserve assets for a reasonable time to optimize their return The members’ capital contributions are returned next, and any remaining amounts are then distributed to members in equal shares or according to their operating agreement.

4- Limited liability partnerships -

limited liability partnership (LLP): passthrough entity for tax purposes, but personal liability is limited. Advantage: allows pass-through entities for tax purposes but limits the personal liability of the partners.

4a- Formation of an LLP -

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LLPs must be formed and operated in compliance with state statutes, which may include provisions of the UPA business’s name must include either “Limited Liability Partnership” or “LLP” An LLP must file an annual report with the state to remain qualified as an LLP in that state

4b- Liability in an LLC -

Generally each state statute limits the liability of partners in some way. If LLC formed to do business with another: may require to file a statement of foreign qualification in 2nd state

4c- Family limited liability partnerships - A FLLPis a limited liability partnership in which the partners are related to each other - Probably the most significant use of the FLLP is in agriculture.

5- limited Partnerships - limited partnership (LP):A partnership consisting of one or more general and limited partners. - A limited partnership consists of at least one general partnerand one or more limited partners. - assumes management responsibility for partnership and for all its debts - contributes cash/property and owns an interest infirm but is not involved in the management - A limited partner is not personally liable for partnership debts beyond the amount of his or her investment. 5a- Formation of LP - The formation of a limited partnership is a public and formal proceeding. - Not only must a limited partnership have at least one general partner and one limited partner, but the partners must also sign a certificate of the limited partnership. - Certificate of limited partnership:The document filed with a designated state official to form an LP. - The certificate of LP must include the name, mailing address, the capital contribution of each general/limited partner. - The certificate must be filed with the designated state official—under the RULPA, the secretary of state. The certificate usually is open to public inspection. 5b- Liabilities of partners in an LP - General partners are personally liable to the partnership’s creditors. - Liability arises when the creditor believes, based on the limited partner’s conduct, that the limited partner is a general partner - Such conduct includes acting as a general partner, knowingly allowing her or his name to be used in the partnership business, or contributing services to the partnership - A number of “safe harbors” protect a limited partner from liability for acting as a general partner - A limited partner who engages in one of the safe-harbor activities is not exposed to personal liability

5c- Rights and duties of partners in an LP - Limited partners have a right of access to the partnership’s books and to information regarding partnership business - On dissolution of the partnership, limited partners are entitled to a return of their contributions in accordance with the partnership certificate - In addition, they can sue an outside party on behalf of the firm if the general partners with the authority to do so have refused to file suit

5d- Dissociation and Dissolution of an LP - A general partner has the power to voluntarily dissociate, or withdraw, from a limited partnership unless the partnership agreement specifies otherwise - Under the RULPA, a limited partner can withdraw from the partnership by giving six months’ notice, unless the partnership agreement specifies a term - In a limited partnership, a partner’s voluntary dissociation will lead to dissolution unless all partners agree to continue - The bankruptcy of a limited partner, however, does not dissolve the partnership unless it causes the bankruptcy of the firm. - A limited partnership can be dissolved by court decree - On dissolution, creditors’ claims, including those of partners who are creditors, take first priority. After that, partners and former partners receive unpaid distributions of partnership assets.

5e- Limited liability limited partnerships (LLLP) - LLLP:A type of limited partnership in which the liability of the general partner is the same as the liability of the limited partners—that is, the liability of all partners is limited to the number of their investments in the firm. - General partner: Limited partner: - The liability of all partners is limited to the number of their investments in the firm...