Partnerships

2. Partnerships Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships

3. Limited Liability Companies & Limited Partnerships

4. Learning Objectives Limited Liability Companies Limited Partnerships and Limited Liability Limited Partnerships Creation of Limited Partnerships Right and liabilities of members and partners Dissociation and dissolution

5. 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/

6. An LLC may elect to be taxed like a partnership or a corporation for federal income tax purposes Election as partnership more common 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

7. At least one person (organizers) must file articles of organization with a secretary of state Articles must include LLC name, its 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

8. 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

9. 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

10. 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

11. 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

12. 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 LLC

13. 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

14. 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 But owe a duty of good faith and fair dealing when exercising rights as members

15. 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

16. 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

17. 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 Under the ULLCA, a partner has the power to dissociate by withdrawing from the LLC at any time

18. 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 concerns dissociation

19. 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

20. 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

21. 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

22. 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 the amount of their investments in the business Limited partnership agreements common

23. 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

24. A limited partnership (or LLLP) may be created only by complying with the applicable state statute, but requirements are minimal A certificate of limited partnership must be executed (signed by all general partners) and submitted to the secretary of state

25. 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

26. 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

27. Each partner in a limited partnership 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

28. 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

29. Through a derivative action or derivative suit, a partner may sue to enforce a limited partnership right of action against a person who has harmed the limited partnership

30. 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

31. ULPA of 2001 adopts terminology and the framework of partnership law, thus ULPA establishes dissociation and dissolution rules A limited partner dissociates upon limited partner’s death, withdrawal, or expulsion from the partnership

32. 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

33. 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

34. ULPA provides 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

35. 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

36. Test Your Knowledge True=A, False = B Through a derivative action or derivative suit, a partner may sue to enforce a limited partnership right of action against a person who has harmed the limited partnership. General partners and limited partners are the same except in regard to how distribution of profits occur. True. 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.True. 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.

37. 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. 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.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.

38. Thought Question Why should business owners be allowed to limit their liability or choose the form of business that gives them the greatest protection? Opportunity to discuss choices about ethics and choice of form, particularly those forms that protect the individual owners. Opportunity to discuss choices about ethics and choice of form, particularly those forms that protect the individual owners.