Slide 1 : 1 Limited Liability Companies and Special Business Forms Chapter27 BUSINESS LAW TODAY Standard 8th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus
Learning Objectives : 2 Learning Objectives What advantages do LLC’s offer to businesspersons that are not offered by sole proprietorships or partnerships?
How are LLC’s formed and who decides how they will be managed and operated?
What are the two options for managing LLC’s?
What is a joint venture? How is it similar to a partnership? How is it different?
What are the essential characteristics of joint stock companies, syndicates, business trusts, and cooperatives, respectively?
Introduction : 3 Introduction Limited liability companies are relatively new creatures of state statute.
An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.
LLC’s are increasingly become the entity of choice for businesses.
Introduction : 4 Introduction 1997 IRS rules provide that any unincorporated business (including LLC’s) will automatically be taxed as a partnership unless otherwise indicated on the tax return.
LLC’s are attractive in today’s global business environment because they allow foreign investors to own interests.
Nature of the LLC : 5 Nature of the LLC Like corporations, LLC’s are creatures of state law.
The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).
Members of an LLC enjoy limited liability.
CASE 27.1 Kaycee Land and Livestock v. Flahive (2002). Can a third party pierce the LLC “veil” and hold managing member liable?
LLC Formation : 6 LLC Formation Articles of Organization require:
Name of Business.
Principal Address.
Name and Address of Registered Agent.
Names of the Owners; and
How the LLC will be managed.
Business name must include LLC or Limited Liability Company.
Jurisdictional Requirements : 7 Jurisdictional Requirements An LLC is a legal entity separate from its owners.
For federal jurisdiction based on diversity, an LLC may be treated differently than a corporation.
For diversity purposes the citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.
Advantages andDisadvantages of the LLC : 8 Advantages andDisadvantages of the LLC
LLC Operating Agreement : 9 LLC Operating Agreement Operating agreement is analogous to corporation’s bylaws.
Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues.
Generally, if the operating agreement is silent, courts will apply partnership principles.
CASE 27.2 Kuhn v. Tumminelli (2004).
Management of an LLC : 10 Management of an LLC There are two options for management, generally set forth in the articles of organization:
Member-Managed: all of the members participate in management, like a partnership.
Manager-Managed: members are elected to manage the LLC.
If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership.
Operating Procedures : 11 Operating Procedures Members can set forth LLC decision-making procedures in operating agreement.
Operating agreement can include:
Meeting protocols.
Voting rights.
Dissociation of an LLC : 12 Dissociation of an LLC LLC, like a partnership, is dissociated when a member ceases to be associated in the carrying on of LLC business.
Events that can trigger dissociation include: voluntary withdrawal, expulsion, bankruptcy, incompetence, and death.
Effect: member ceases to have management rights, right to have interest bought by other members.
Dissolution : 13 Dissolution Normally dissociated member has no right to force dissolution.
Members can choose to continue or dissolve.
Operating agreement can give “trigger” events that automatically dissolve the LLC.
Remaining members in good standing can participate in the winding up of the LLC.
Special Business Forms : 14 Special Business Forms Joint Venture: two or more entities combine efforts or property for a single transaction or project.
Unless agreed otherwise, JV’s share profits and losses equally.
Common in international transactions when U.S. companies wish to expand overseas.
JV Characteristics : 15 JV Characteristics Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences:
JV members has less implied and apparent authority than partners.
Death of JV member does not terminate JV.
CASE 27.3 SPW Associates, LLP v. Anderson (2006).
JV Rights and Liabilities : 16 JV members can specify duration. If not, then JV terminates when purpose is accomplished.
JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest).
JV members have equal right to manage the business. JV Rights and Liabilities
Other Entities : 17 Other Entities Syndicate (Investment Group): group of individuals getting together to finance a particular project.
Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.
Other Entities : 18 Other Entities Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.
Cooperative is an association organized to provide a not-for-profit service to members.