LLCs Flashcards
(43 cards)
What are the benefits of an LLCs formation?
Driven by tax laws
Called hybrid entities because of
Pass through taxation + limited liability
What is the Kitner test?
Under Kitner, if an LLC possesses two or more partnership characteristics, it will be taxed as a partnership
What do you need to make a LLC?
Formally file a certificate
What controls between the articles of incorporation and Theo operating agreement?
Under RULLCA §107(d) the operating agreement controls with respect to members, dissociated members, transferees, and managers, while the articles of organization controls with respect to third parties who reasonably rely on it.
Why the difference for third parties?
Because the articles of organization are a public document that anyone can find (usually online now).
Third parties don’t usually have access to the operating agreement because it doesn’t have to be in the public domain.
Isaac and Omar form an LLC by filing the articles of organization with the state. The articles say that the business will focus on all things related to buying and selling non-American vehicles to the public. The operating agreement restricts both Isaac and Omar from using any LLC funds to purchase any vehicle above $75,000.
One afternoon, Omar goes to the local Bentley dealer to buy a used Bentley for $95,000 and takes a loan out in the LLCs name to do so. Is the LLC bound by this Loan agreement?
Yes, because Omar’s action appear to be within the scope of the business given the company’s articles of incorporation, so it RULLCA § 107(d) applies.
This is apparent authority. To put it another way, the third party can reasonably rely on what is said in the articles of organization and it says that the business focuses on “all things related to buying and selling non-Amercian vehicles….”
Note: It doesn’t matter that the operating agreement doesn’t allow it. The LLC can go after Omar for exceeding his actual authority.
Are LLCs taxed or do they receive pass-through treatment?
Thye can do either, but pass through is more popular
What if LLC documents conflict with a statute?
If the articles of organization or the operating agreement conflict with a state statute, the state statute prevails for mandatory provisions, and the agreements between the parties prevails with respect to nonmandatory provisions. RULLCA §105.
Isaac and Omar want to form an LLC that focuses on all things related to buying and selling non-American vehicles to the public. The two of them create and sign the Articles of Organization, but they never get around to filing the documents with the State. The two start conducting business. After about a year of operating, a creditor sues the business and Isaac and Omar personally, alleging that there is no limited liability because the LLC formation documents were never filed. How would a court handle this situation? What type of business would it be if not an LLC?
It would probably not be considered an LLC under the default rules. It would be considered a general partnership, so both could be personally liabile.
What happens if an LLC is improperly created?
The default rules would generally make the entity into a GP. But there are excpections - generally when the business owner is not at fault for the flaw
What was the holding of Stone v Jetmar Properties?
Property cannot be transferred to an LLC that does not exist
What do you call LLC owners?
Members.
They are not called partners or shareholders.
An LLC with only one owner is called a single-member LLC.
An LLC with more than one owner is called a multi-member LLC.
What are the 2 ways to manage an LLC? Which is the default?
Member managed (default) and manager managed
Does the manager have to be a member?
No
How to change from a member managed LLC to a manager managed LLC?
Change the operating agreement - requiring a unanimous vote
What is the rule in Taghpour v Jerez?
Rule: If two statutes conflict, the provision more specific in application governs the more general provision
What is the definition of an LLP?
An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such a partnership obligation solely by reason of being or so acting as a partner.
When do partners become liable in an LLP?
Partners become personally liable because of their own conduct or if they have participated in or supervised the wrongful conduct of another partner.
This is particularly true in law practice where a partner supervises associates and others.
Professional ethics rules usually require some sort of supervisory liability for the partner, anyway.
What is a limited partnership?
A limited partnership is a partnership that has at least one general partner and at least one limited partner.
This type of partnership began in the 1800s as a way to limit the liability of certain partners, called “limited partners.”
Requires registration with the state to form an LP.
The generalpartners of a limited partnership are responsible for the activities and affairs of thepartnership. ULPA § 406.
General partners have all the management, fiduciary, and other duties we learned about for general partnerships. They are also personally liable, jointly & severally for partnership debts, etc.
Limited partners usually just provide the funds and do not engage in other duties, which allows them to limit their liability.
Before 2001, limited partners lost their limited liability if they tried to actively manage the firm. Now some active control is allowed, depending on the state.
What is an LLLP?
A “limited-liability limited partnership.”
Under this limited partnership form, even general partners obtain limited liability to the same extent as general partners in an LLP.
Limited partnerships can register as LLLPs by simply including a statement to that effect in the certificate of limited partnership.
Like LPs, often used these days in the “labor-capital partnerships
What can cause a dissolution of a partnership?
RUPA §801 lists all of the events that trigger a winding up, or liquidation, of the partnership business.
The most common dissolution events are dissociations, but it is not necessary to have a dissociation to cause a dissolution and winding up.
A partnership may be dissolved by the express will of all of the partners (RUPA §801(2)(B))
A dissolution can occur because of an event agreed to in the partnership agreement (RUPA §801(3)).
This could be death of a partner, the accomplishment of a goal, etc.
What happens if there is a disassociation, but not a dissolution?
If a dissociation does not cause the dissolution and winding up of the partnership business, the dissociating partner must be bought out under the RUPA.
How much must a departing partner be bought out for?
The dissociated partner’s interest must be purchased for the greater of the liquidation value or “the value based on a sale of the entire business as a going concern without” the dissociated partner. RUPA §701(b)
What is the difference between rightful and wrongful disassociations?
Rightful if dissociation doesn’t violate the partnership agreement (which often defines the process/timing for leaving)
Wrongful if the dissociation violates the partnership agreement or other law
Can partners dissaciciate at any time?
yes
