1. C H A P T E R
Limited Liability Companies,
40
Limited Partnerships, and Limited
Liability Limited Partnerships
The man who occupies the first place
seldom plays the principal part.
Johann Wolfgang von Goethe
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2. Learning Objectives
• Explain the attributes of a limited
liability company and a member’s
default rights and liabilities
• Explain the attributes of a limited
partnership and limited liability
limited partnership and the default
rights and liabilities of partners
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3. Overview
• The limited liability company (LLC) combines
advantages of the corporation with regard
to protection from personal liability and
favorable tax status of the partnership
• 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
– http://www.nccusl.org/Update/
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4. Taxation of the LLC
• An LLC may elect to be taxed like a
partnership or a corporation for federal
income tax purposes
– Election as partnership more common
– As partnership, the LLC pays no federal
income tax and all LLC income and losses
are reported by the owner-members on
their individual income tax returns
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5. Creation of the LLC
• At least one person (organizer) must file the
articles of organization with a secretary of
state
– Articles must include LLC name, duration, and
the name and address of its registered agent
• Owners of an LLC are members
– An individual, partnership, corporation, or
another LLC may be a member of an LLC
– An LLC is an entity separate from its members
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6. Management of the LLC
• Articles of organization must state
whether the LLC is member-managed or
manager-managed
– If manager-managed, initial managers
must be named
• An LLC probably will have an operating
agreement covering how members will
share profits, manage the LLC, and
withdraw from the LLC
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7. Liability of Members
• An LLC member has no individual
liability on LLC contracts, unless LLC
contracts signed in a personal
capacity (e.g., as a surety)
• A member’s liability is usually limited to
the member’s capital contributions
• A member is liable for torts s/he
committed while acting for the LLC
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8. A Member-Managed LLC
• Under the ULLCA, an LLC must choose
to be member-managed or manager-
managed
• 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 business
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9. A Member-Managed LLC
• The LLC operating agreement may
modify ULLCA default rules by granting
more power to some members
– Creating a class of members whose
approval is required for certain contracts
– Members share power based on capital
contributions
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10. A Manager-Managed LLC
• Managers in a manager-
managed LLC are
elected and removed by
a vote of a majority of
LLC members
• A manager’s powers to
act for the LLC are similar
to a member’s power in
a member- managed A team effort.
LLC
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11. Tort and Contract Liability
• An LLC is liable for the contractual
obligations incurred by its members or
managers acting within their express,
implied, or apparent authority
• An LLC is also liable for the torts and
other wrongful acts of managing
members and other managers acting
within their authority
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12. Duties of Members
• 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 care
• Nonmanaging members of a manager-
managed LLC owe no fiduciary duties
– See Katris v. Carroll
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13. Ownership Interest of Members
• A member’s ownership interest in an LLC is
the member’s personal property
– Limited ability to sell or transfer LLC rights
• A member may transfer the distributional
interest in the LLC to another person
– Transferee not a member, but receives
right to partnership distributions
– Limited right of transfer may be altered in
the operating agreement
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14. Distributions to Members
• A member in an LLC has the right is to
receive distributions (usually profits)
• ULLCA states that members share
profits and other distributions equally,
regardless of differences in their
capital contributions
This may be altered by the
operating agreement
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15. Dissociation
• 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
– A partner has power to
dissociate by withdrawing
from the LLC at any time
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16. Dissociation
• As in partnership, a member’s dissociation
may be wrongful or nonwrongful
• Dissociation terminates a member’s status
as a member, and a dissociated member
is treated as a transferee of a member’s
distributional interest
– In Re Garrison-Ashburn, LC considers the
effects of a member’s dissociation and the
management rights of a member in an LLC
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17. Dissolution
• Dissolution of an LLC is similar to that of
an LLP or partnership
• When an LLC dissolves, any member
who has not wrongly dissociated may
wind up the business
LLC bound by reasonable acts
of members during winding up
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18. Dissolution
• After all the LLC assets
sold, proceeds distributed
first to LLC creditors, then
members’ contributions
are returned
• Any remaining proceeds
are distributed in equal
shares to the members
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19. Uniform Limited Partnership Act
• Substantially similar to RUPA, the
ULPA of 2001 is the first comprehensive
statement of American limited
partnership law
– Only ULPA applies to limited
partnerships
• The limited partnership (or LLLP) form is
perpetual and used primarily in tax
shelter ventures, real estate ventures, oil
and gas drilling, and professional sports
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20. The Limited Partnership
• Limited partnerships has two owner
classes:
– 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
• Liability limited up to amount of the
investment in the business
• Limited partnership agreements common
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21. Limited Liability
Limited Partnership
• A variant of a limited partnership is the
limited liability limited partnership (LLLP)
which offers limited liability status for all its
partners, including general partners
• Except for liability of general partners,
limited partnerships and LLLPs are identical
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22. Creating the LP or LLLP
• A limited partnership (or LLLP) may be
created by complying with the applicable
state statutes, but requirements are minimal
– However, see Moser v. Moser, in which failure
to strictly comply with law invalidated
attempt to create a family limited partnership
• A certificate of limited partnership must be
executed (signed by all general partners)
and submitted to the secretary of state
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23. Rights of LP and LLLP Partners
• A partner may contribute any property or
other benefit to the limited partnership
• 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 contrary
• ULPA of 2001 requires few actions to be
approved by all the partners
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24. Rights of LP and LLLP Partners
• ULPA is clear that limited partners have
no inherent right to vote on any matter
• Default rule is that no new partner may
be admitted unless each partner has
consented to the admission
– Limited partnership agreement may
provide for other admission procedures
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25. Transferable Interest
• Each partner in an LP or LLLP
owns a transferable interest
in the limited partnership as
personal property
• A partner’s transfer of his
transferable interest has no
effect on his status as a
partner, absent a contrary
agreement
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26. Management & Duties
• 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
care
• 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 partners
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27. Withdrawing
• 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
agreement
• Under ULPA, a withdrawing partner has
no right to receive the value of the
partnership interest
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28. Dissociation of the LP and LLLP
• ULPA adopts framework and
terminology of partnership
law, establishing dissociation
and dissolution rules
• A limited partner dissociates
upon limited partner’s death,
withdrawal, or expulsion from
partnership
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29. Dissociation of the LP and LLLP
• 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 interest
• ULPA treats dissociation of general
partners as RUPA treats partner
dissociations in a partnership
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30. Dissociation of the LP and LLLP
• A general partner’s express and implied
authority to act for the limited partnership
terminates upon dissociation, the partner
may retain apparent authority
• A dissociated general partner will remain
liable on a limited partnership obligation
incurred while a partner unless creditor
agrees to a release of liability
– No liability for post-dissociation obligations
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31. Dissociation of the LP and LLLP
• ULPA states that a limited partnership
(or LLLP) is not dissolved, wound up, or
terminated merely because a partner
dissociated from the limited partnership
• When a limited partnership dissolves,
winding up follows automatically by
the general partners
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32. Dissolution of the LP and LLLP
• 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 distributions
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33. Mergers and Conversions
• 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
– All partners or members must consent to
the plan of merger or conversion
– See Lach v. Man O’War, LLC
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34. Test Your Knowledge
• True=A, False = B
– An LLC may be taxed like a
corporation for federal income tax
purposes
– An LLC member is liable for torts s/he
committed while acting for the LLC
– General partners and limited partners
are the same except in regard to how
distribution of profits occur.
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35. Test Your Knowledge
• True=A, False = B
– Under the ULLCA, an LLC must choose to
be partner-managed or manager-
managed.
– To create an LLC, articles of limited liability
must be filed.
– 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.
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36. Test Your Knowledge
• Multiple Choice
– 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 LLLP
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37. Thought Question
• Why should business owners be allowed
to limit their liability or choose the form of
business that gives them the greatest
protection?
What risk does the
typical business
face?
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Hinweis der Redaktion
Hyperlink is to the Revised Uniform Limited Liability Company Act of 2006 at the website for the National Conference of Commissioners on Uniform State Laws.
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 1015 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.
In Moser v. Moser , 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.