§ 1: Limited Liability Companies

2. § 1: Limited Liability Companies • 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.

3. Limited Liability Companies • 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.

4. 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. • Can a third party pierce the LLC “veil” and hold managing member liable? Case 37.1: Kaycee Land and Livestock v. Flahive (2002).

5. 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.

6. 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.

7. Advantages andDisadvantages of the LLC

8. § 2: Management and Operation of an LLC • LLC 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 37.2: Kuhn v. Tumminelli (2004).

9. 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.

10. § 3: 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.

11. 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 have less implied and apparent authority than partners. • Death of JV member does not terminate JV. • Case 37.3: PGI, Inc. v. Rathe Productions, Inc. (2003). • JV members can specify duration. If not, then JV terminates when purpose is accomplished.

12. JV Rights and Liabilities • JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest). • JV members have equal right to manage the business.

13. 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.

14. 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.