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KU BLAW 301 - Chapter 18 (FA14)

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Slide 1Summary of Business FormsSec. 1: Limited Liability Company (LLC)The Nature of the LLCLimited Liability of LLC MembersLLC FormationLLC TaxationSec. 2: LLC Management and OperationLLC Operating AgreementSec. 3: Dissociation and Dissolution of an LLCSec. 4: Limited Liability Partnerships (LLPs)Limited Liability Partnerships (LLPs)Limited Liability Partnerships (LLPs)Sec. 5: Limited PartnershipsManagement of Limited PartnershipsLimited Partners1Limited Liability Business FormsChapter 182Summary of Business FormsSole proprietorship—no separate legal entity (owner and business are legally viewed as one); no formation documents to file with state. General partnership—an unincorporated legal entity that is not required to file formation documents with the state.Unincorporated legal entities that are required to file formation documents with the state include:Limited liability companyLimited liability partnershipLimited partnershipCorporation—for a business to become an incorporated entity, it must file formation documents with the state in which it is incorporating.3Sec. 1: Limited Liability Company (LLC)Relatively new and very popular hybrid form of business organization that provides owners with the limited liability of a corporation and the tax advantages of a partnership.LLC’s are entities created under state law. TN enacted its first LLC statute in 1995, but a new (and improved) LLC law was adopted in 2005.Since 2005, the number of newly-formed LLCs has far exceeded the number of new TN corporations, LPs, and LLPs (other entities that must file formation documents with the Secretary of State).4The Nature of the LLCLLC’s are similar to corporations in that they are legal entities apart from their owners.An LLC’s owners are “members” (not shareholders); their ownership in the LLC is called an “interest” (not shares).LLC may have many members or just a single member (in most states).LLCs can have members that are individuals, corporations, or partnerships (an advantage over an S corporation—discussed in Ch. 19).The LLC’s owners have limited liability, which means that they are not personally liable for the LLC’s debts.Limited Liability of LLC Members“Limited liability” means that a member’s personal liability for the business’s debts/losses is limited to the member’s investment in the LLC (i.e., what they contributed in exchange for their interest).Liability may be imposed on a member under the “alter-ego theory.” Read Case 18.1, ORX Resources, Inc. v. MBW Exploration, LLC, which explains how this could occur.Liability may also be imposed when a member personally guarantees a debt of the LLC.i56LLC FormationAn LLC is formed (“organized”) under the laws of the state of its choice by filing Articles of Organization with that state’s secretary of state. Articles typically include: name of business; principal address; name and address of Registered Agent; names of the members; and statement as to how the LLC will be managed.Business name must include “LLC” or “Limited Liability Company.”An LLC is a “domestic LLC” in the state in which it organizes. After it has organized in one state, it may “register to do business” in other states as a “foreign LLC.”Can be expensive to form and maintain; annual filings/fees.Skip “Jurisdictional Requirements.”7LLC TaxationTreated as a partnership for federal income tax purposes (unless it elects otherwise). Files Form 1065 (Ptshp. Return) with K-1s for each member. (LLC’s can elect to be taxed as a corporation—but this is unusual.)Single level of taxation: No federal income tax (FIT) is paid by the LLC because each member’s share of the LLC’s income/loss is reported on the member’s federal tax return.The member pays FIT on its share of LLC income.Losses can be used to offset member’s other income.Single-member LLC taxed like a sole proprietorship.Some states, such as Tennessee, tax LLCs like corporations instead of partnerships.8Sec. 2: LLC Management and OperationAn LLC has more flexibility in management than a corporation. It can choose one of these options:Member-Managed: all of the members participate in management; unless the operating agreement specifies otherwise, statutes may provide that members have equal rights/votes on LLC matters.Manager-Managed: members designate a group of managers to manage the LLC. The mangers may be members or nonmembers.Generally, managers owe fiduciary duties of care and loyalty to the LLC and its members, though this may vary by state. Fiduciary duties will be covered in Ch. 19.Skip Case 18.2.9LLC Operating Agreement Though not required by statute, LLC members should have an operating agreement. An operating agreement sets out the rights and obligations of the owners, and typically contains provisions relating to management, meetings, distributions, transfer of membership interests, and other significant issues.Operating agreements may be oral, but written agreements are strongly recommended.If an LLC does not adopt its own operating agreement, most LLC statutes provide default rules for governing the entity (e.g., profits are divided equally among members).10Sec. 3: Dissociation and Dissolution of an LLCGenerally, a LLC continues in operation even after a member withdraws from the LLC.Ability to transfer ownership interests may be restricted by statute, unless specifically permitted by the operating agreement.Skip: “Dissolution,” Case 18.3, and “Winding Up.”11Sec. 4: Limited Liability Partnerships (LLPs) A limited liability partnership (“LLP”) is a relatively new type of partnership that provides some limitation on a partner’s personal liability for business debts while permitting all partners to participate in management (vs. a limited partnership where LPs cannot be involved in management).LLPs were designed primarily for professionals who normally practice their business as partners in a partnership (e.g., doctors, lawyers, accountants), but want protection from potential judgments arising from malpractice by their partners.12Limited Liability Partnerships (LLPs)LLP allows innocent partners to avoid personal liability for the malpractice of other partners (including negligent acts, wrongful acts, or misconduct) –a “partial shield.”Partners are always liable for


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