Introduction to Forms of Business and Formation of Partnerships
Operation of Partnerships and Related Forms
Partners’ Dissociation & Partnerships’ Dissolution and Winding Up
Limited Liability Companies, Limited Partnerships, and
Limited Liability Limited Partnerships
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Limited Liability Companies,
Limited Partnerships, and
Limited Liability
Limited Partnerships
The man who occupies the
first place seldom plays
the principal part.
Johann Wolfgang von
Goethe
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
v Limited Liability Companies
v Limited Partnerships and Limited
Liability Limited Partnerships
v Creation of Limited Partnerships
v Right and liabilities of members and
partners
v Dissociation and dissolution
40 - 3

Overview
v The limited liability company (LLC) combines
advantages of the corporation with regard to
protection from personal liability and
favorable tax status of the partnership
v 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 LLC
v An LLC may elect to be taxed like a
partnership or a corporation for federal
income tax purposes
w Election as partnership more common
v 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 returns
40 - 5

Creation of the LLC
v 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 agent
v 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 members
40 - 6

Management of the LLC
v Articles of organization must state whether
the LLC is member-managed or manager-
managed
w If manager-managed, initial managers must be
named
v An LLC probably will have an operating
agreement covering how members will share
profits, manage the LLC, and withdraw from
the LLC
40 - 7

Liability of Members
v 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 contributions
v A member is liable for torts s/he committed
while acting for the LLC
40 - 8

A Member-Managed LLC
v Under the ULLCA, an LLC must choose to
be member-managed or manager-managed
v 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
40 - 9

A Member-Managed LLC
v 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
contributions
40 - 10

A Manager-Managed LLC
v Managers in a manager-
managed LLC are elected
and removed by a vote of
a majority of LLC members
v 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 Liability
v An LLC is liable for the contractual
obligations incurred by its members or
managers acting within their express,
implied, or apparent authority
v An LLC is also liable for the torts and other
wrongful acts of managing members and
other managers acting within their authority
40 - 12

Duties of Members
v 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
v Nonmanaging members of a manager-
managed LLC owe no fiduciary duties
w See Katris v. Carroll
40 - 13

Ownership Interest of Members
v A member’s ownership interest in an LLC is
the member’s personal property
w Limited ability to sell or transfer LLC rights
v 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 agreement
40 - 14

Distributions to Members
v 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
agreement
40 - 15

Dissociation
v 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
time
40 - 16

Dissociation
v As in partnership, a member’s dissociation
may be wrongful or nonwrongful
v 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

Dissolution
v Dissolution of an LLC is similar to that of an
LLP or partnership
v 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 up
40 - 18

Dissolution
v After all the LLC assets sold,
proceeds distributed first to
LLC creditors, then members’
contributions are returned
v Any remaining proceeds are
distributed in equal shares to
the members
40 - 19

Uniform
Limited Partnership Act
v Substantially similar to RUPA, the
ULPA of 2001 is the first comprehensive
statement of American limited partnership
law
w Only ULPA applies to limited partnerships
v 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
40 - 20

The Limited Partnership
v 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 business
v Limited partnership agreements common
40 - 21

Limited Liability
Limited Partnership
v 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
v Except for liability of general partners, limited
partnerships and LLLPs are identical
40 - 22

Creating the LP or LLLP
v 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 partnership
v A certificate of limited partnership must be
executed (signed by all general partners)
and submitted to the secretary of state
40 - 23

Rights of LP and LLLP Partners
v A partner may contribute any property or
other benefit to the limited partnership
v 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
v ULPA of 2001 requires few actions to be
approved by all the partners
40 - 24

Rights of LP and LLLP Partners
v ULPA is clear that limited partners have no
inherent right to vote on any matter
v 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 procedures
40 - 25

Transferable Interest
v Each partner in a limited partnership owns a
transferable interest in the limited partnership
as personal property
v A partner’s transfer of his transferable
interest has no effect on his status as a
partner, absent a contrary agreement
40 - 26

Management & Duties
v 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
v 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
40 - 27

Withdrawing
v 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
v Under ULPA, a withdrawing partner has no
right to receive the value of the partnership
interest
40 - 28

Dissociation of the
LP and LLLP
v ULPA adopts terminology and
framework of partnership law,
establishing dissociation and
dissolution rules
v A limited partner dissociates
upon limited partner’s death,
withdrawal, or expulsion from
the partnership
40 - 29

Dissociation of the
LP and LLLP
v 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
v ULPA treats dissociation of general partners
as RUPA treats partner dissociations in a
partnership
40 - 30

Dissociation of the
LP and LLLP
v A general partner’s express and implied
authority to act for the limited partnership
terminates upon dissociation, the partner
may retain apparent authority
v 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 obligations
40 - 31

Dissolution of the LP and LLLP
v ULPA provides that a limited partnership (or
LLLP) is not dissolved, wound up, or
terminated merely because a partner
dissociated from the limited partnership
v When a limited partnership dissolves,
winding up follows automatically by the
general partners
40 - 32

Dissolution of the LP and LLLP
v 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
40 - 33

Mergers and Conversions
v 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, LLC
40 - 34

Test Your Knowledge
v 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 Knowledge
v 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 Knowledge
v 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 LLLP
39 - 37

Thought Question
v 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