CH40: Limited Liability Companies, Limited Partnerships, and Limited Liability Limited

Partnerships.

Tax treatment of LLCs

• May elects to be taxed like a partnership or a corporation
o LLC members usually elect partnership
 LLC pays no federal income tax.
 All income and losses of the LLC are reported by the LLC’s owners on
their individual income tax returns.
 Passive investors in an LLC may use their shares of LLC losses to offset
only income from other passive investments.
Formation of LLC
• To create LLC, one or more persons must file a certificate of organization with the
secretary of state.
o a certificate of organization must include the
 name of LLC, (must have XXXX “LLC”)
 name and address of its registered agent
• owners of an LLC are called members.
• Operating agreement: is an agreement of the members.
o States: member-managed or manager-managed.
o How members share profits,
o aspects of LLC’s operation and members’ relations

Members’ Rights and Liabilities

Limited Liability
 a member’s liability is limited to her capital contributions to the LLC
 liable for torts she commits while acting for the LLC
 all member must make capital contribution

Management Rights
 LLC choose to be member-managed or manager-managed.
 If fails, each member in a member-managed LLC, share equal rights in the management
of the business.
 Each member is an agent of the LLC with implied authority.
 A manager-managed LLC may be elected and removed at any time by a vote of majority of
LLC members.
 LLC is liable for the torts and other wrongful acts of managing members and other managers
acting within their authority.
 The LLC is not liable for the wrongful acts of members not designated as managers in a
manager-managed LLC.
Duty
 Each member in a member-managed LLC and each manager in a manager-managed LLC is a
fiduciary of the LLC and its members.
 Must account for LLC property and Funds and not compete with the LLC
 Nonmanaging members of a manager-managed LLC owe no fiduciary duties to the LLC.
 Nonmanaging members must have duty of good faith and fair dealing when exercising
their rights as member.
CH40: Limited Liability Companies, Limited Partnerships, and Limited Liability Limited
Partnerships.

Member’s Distributions
 Members of LLC has right to receive distributions from the LLC. Regardless of differences
in their capital contributions.
 Also receive salaries depend on LLC agreement

Member’s Ownership Interest

 Ownership interest in an LLC is the personal property of the member.
 Member has limited ability to sell or transfer her right in the LLC
 Member may transfer her distributional interest,
 The transferee cannot become member of the LLC, he only has right to receive
distributional profit of a LLC.
• Transferee Obtains judicial dissolution of the LLC at will or its term has expired.
 LLC has right to make transferee to become member.
 Then the transferee has all right and liability like other members.
 A personal creditor of a member charges the member’s distributional interest with the
payment of the debt owed to the creditor.
 The creditor doesn’t own the distribution interest, but has a lien or security interest
against it.
 For creditor, in order to own distributional interest or right of a transferee, creditor
forecloses against the interest and purchases it at a foreclosure sale.

Members’ Dissociations and LLC Dissolution

Dissolution of an LLC is similar to partnership or LLP

Member Dissociations
 A partner has the power to dissociate by withdrawing for the LLC at any time.
 Death,
 Having a guardian appointed over her affairs
 Being adjudged legally incompetent by a court
 Being a debtor in bankruptcy
 Transferring all her distributional interest in the LLC
 Being expelled by the other members
 Only if she unlawful to carry on business
 She suffered a charging order
 Harm business
 Breached operating agreement
 Judicial expulsion
 Breached the duty of good faith
 Competes against the LLC.

Wrongful Dissociation
(the dissociating member is liable to the LLC for damages caused by the dissociation, such as
loss of business due to the member’s withdrawal)
CH40: Limited Liability Companies, Limited Partnerships, and Limited Liability Limited
Partnerships.
 Breach the LLC operating agreement.
 Withdrawing before an LLC’s term expires
 Debtor in bankruptcy
 Expelled by court

Payment to a Dissociated Member

 A dissociated member has no right to liquidate or dissolve a LLC.
 If LLC continued, then pay the value of distributional interest
 If LLC at will no dissolved, LLC purchase his interest at fair value within 120 days after the
member’s dissociation.

LLC Dissolution
(When an LLC is dissolved, then it must be wound up.)
 Judicial dissolution at the request of a member or transferee of a member’s distributional
interest and administrative dissolution by the secretary of state.
 LLC cannot carry on it business
 LLC is being managed illegally or oppressively
 LLC failed to purchase a dissociated member’s distributional interest on the date
required.
 Dissolve LLC by members’ vote
 Any member who has not wrongly dissociated may wind up the business
 Notice of dissociation with the secretary of state, which is effect against all parties 90 days
after filing.

Effect of Operating Agreement

 Define the grounds for dissociation
 Death, withdrawal, disability
 When member may be expelled
 Amount and timing payments to a dissociated member
 When wind up occur: which member has right to participate in winding up
 Creditors’ claims are distributed equally to members, regardless of their capital contribution.