Business Law: Limited Liability Companies

5/1/2023 1 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B USINESS L AW B USINESS L AW T EXT AND C ASES T EXT AND C ASES CHAPTERS 38: LIMITED LIABILITY COMPANIES and SPECIAL BUSINESS FORMS CHAPTERS 38...

5/1/2023 1 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B USINESS L AW B USINESS L AW T EXT AND C ASES T EXT AND C ASES CHAPTERS 38: LIMITED LIABILITY COMPANIES and SPECIAL BUSINESS FORMS CHAPTERS 38: LIMITED LIABILITY COMPANIES and SPECIAL BUSINESS FORMS © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. IntroductionIntroduction  Limited liability company (LLC) – A hybrid form of business enterprise that offers (i) the limited liability of a corporation and (ii) the tax advantages of a partnership.  The LLC has become the preferred structure for many small businesses.  The problem with LLCs is that they are governed by state statute, and the laws differ from state to state. 1 2 5/1/2023 2 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Nature of the LLCThe Nature of the LLC  LLCs share many characteristics with corporations.  Like corporations, LLCs must be formed and operated in compliance with state law.  Like the shareholders of a corporation, the owners of an LLC, who are called members, enjoy limited liability. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Formation of the LLCThe Formation of the LLC  To form an LLC, articles of organization must be filed with a central state agency—usually the secretary of state’s office.  The articles of organization contain basic information about the business:  The name of the business  The business’s principal address  The name and address of a registered agent  The members’ names  How the LLC will be managed 3 4 5/1/2023 3 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Nature of the LLCThe Nature of the LLC  Like corporations or partnerships, an LLC is a separate legal entity apart from their owners.  As a legal entity, the LLC can sue or be sued, enter into contracts, and hold title to property. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages of the LLCAdvantages of the LLC  A key advantage of the LLC is the limited liability of its members.  The LLC as an entity can be held liable for any loss or injury caused by the wrongful acts or omissions of its members.  Members themselves generally are not personally liable. 5 6 5/1/2023 4 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages of the LLCAdvantages of the LLC  Another advantage of the LLC is its flexibility in regard to taxation .  An LLC that has two or more members can choose to be taxed as either a partnership or a corporation.  An LLC that wants to distribute profits to its members usually prefers to be taxed as a partnership to avoid the “double taxation” that is characteristic of the corporate entity. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Disadvantages of the L LCDisadvantages of the L LC  The main disadvantage of the LLC is that state LLC statutes are not uniform.  Businesses that operate in more than one state may not receive consistent treatment in these states. 7 8 5/1/2023 5 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LLC Management and OperationLLC Management and Operation  The members of an LLC have considerable flexibility in managing and operating the business.  LLC members have two options for managing the firm: 1. A “manager-managed” LLC 2. A “member-managed” LLC © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 38.1 Management of an LLC 9 10 5/1/2023 6 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The LLC Operating AgreementThe LLC Operating Agreement  The members of an LLC can decide how to operate the various aspects of the business by forming an operating agreement .  This is an agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LLC v. LPLLC v. LP  There are several similarities and distinct differences between a limited liability company (LLC) and a limited partnership (LP).  Even so, an LLC is by far the most popular type of entity.  In 2019, 73% of the state of Delaware's new formations were LLCs, while only approximately 6% were LPs. 11 12 5/1/2023 7 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Similarities: FlexibilityThe Similarities: Flexibility  Organizers of LLCs and LPs are given flexibility in how they define the rights and responsibilities of the entity's members or partners, as well as how the entity is structured.  These issues are defined via the Operating Agreement (LLCs) or Limited Partnership Agreement (LPs).  Both of these are internal agreements that remain in force until amended or changed by unanimous consent of all company members or partners. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Similarities: Pass-Through Tax Treatment The Similarities: Pass-Through Tax Treatment  Pass-through tax treatment, common to both LLCs and LPs, typically means that the business itself is not subject to federal income tax.  However, each investor will often be required to report his/her share of the business's income, gain, loss, and deduction. 13 14 5/1/2023 8 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Differences: StructureThe Differences: Structure  An LP is composed of general partners and limited partners.  Limited partners can invest in the business and share its profits or loss, but cannot be active participants in the day-to-day operations of the company.  An LLC can have as many members as it would like.  The rights and responsibilities of an LLC's members are outlined in the LLC's Operating Agreement.  Unless the Operating Agreement states otherwise, all members have the right to participate in the business' management . © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Differences: Personal LiabilityThe Differences: Personal Liability  The most important difference between the LLC and LP relates to the personal liability of the participants.  An LP is managed by one or more general partners who control the day-to-day operations of the business.  A general partner has unlimited personal liability for the debts and obligations of the limited partnership, meaning they can be held personally liable for those debts and obligations.  A limited partner typically does not have personal liability for partnership obligations. 15 16 5/1/2023 9 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Differences: Personal LiabilityThe Differences: Personal Liability  The LLC was created to offer the flexibility of a partnership while providing corporation-like protection against personal liability.  One or more of its members can manage an LLC, in the same way that a general partner could in an LP.  Unlike in an LP, however, an LLC member engaged in the management of the business is typically not held personally responsible for the liabilities of the LLC. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Your TurnYour Turn  You and the those to your right and left decide to form your own accounting firm.  You remember his and the previous lesson.  Should you form am LLP and LLC? 17 18 5/1/2023 10 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SimilaritiesSimilarities  Because an LLC is considered a separate business entity, it creates a financial barrier between the owner(s) and the company.  This means that business creditors cannot go after an owners’ personal assets.  It affords the owners the same legal protections as a corporation, but typically requires less paperwork and fees.  An LLP is also a formal structure that offers the partners at least some legal protection from the partnerships’ liabilities. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SimilaritiesSimilarities  But remember, the structures are governed by state law!  Some states only allow certain professionals to open an LLP.  In California, Nevada and New York, only certain licensed professionals such as accountants, attorneys and architects can operate as an LLP.  Not every state allows the formation of an LLP, either.  The definition and regulations of LLPs vary by state, including how limited liability is defined, and it’s important to keep in mind that not every state recognizes the LLPs of other states. 19 20 5/1/2023 11 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SimilaritiesSimilarities  In most states, an LLP provides the same liability protection as an LLC.  However, in other states, the protection is more limited; partners aren’t liable for other partners’ negligence, but may remain fully liable for general business obligations.  Some states require LLPs to designate a general partner who is fully liable, while the other partners have limited liability. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ManagementManagement  LLCs have a great deal of flexibility in the way they structure management and decision-making within the company.  An LLC can either be member-managed or manager- managed (someone who is not a member).  In most states, the LLP must be managed by a partner. 21 22 5/1/2023 12 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TaxesTaxes  An LLC can either be taxed as a sole proprietorship, a partnership, a C corporation or an S corporation.  An LLP, on the other hand, can only be taxed as a partnership.  Also, there may be additional differences in the way LLCs and LLPs are taxed at the state level. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Special Business FormsSpecial Business Forms  In addition to what we have learned and corporations (next lesson), other forms that can be used to organize a business include:  Joint ventures  Syndicates  Joint stock companies  Cooperatives 23 24 5/1/2023 13 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Joint VentureJoint Venture  Joint venture – A joint undertaking by two or more persons or business entities to combine their efforts or their property for a single transaction or project, or for a related series of transactions or projects.  Example: When several contractors combine their resources to build and sell houses in a single development. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Joint VentureJoint Venture  There are various reasons why companies form joint ventures, including, but not limited to:  Leverage Resources  Cost Savings  Enter Foreign Markets 25 26 5/1/2023 14 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Joint Venture (Not in Text)Joint Venture (Not in Text)  When forming a JV, the most common thing the two parties can do is to set up a new entity.  Because the JV itself isn't recognized by the IRS, the business form between the two parties helps determine how taxes are paid.  If the JV is a separate entity, it will pay taxes as any other business or corporation does.  So, if it operates as an LLC, then the profits and losses would pass through to the owners' personal tax returns just like any other LLC © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SyndicateSyndicate  Textbook Definition: A group of individuals or firms that join together to finance a project (also called an investment group).  Better Definition: A temporary alliance of businesses that joins together to manage a large transaction, which would be difficult, or impossible, to affect individually.  Syndication makes it easy for companies to pool their resources and share risks. 27 28 5/1/2023 15 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Joint Stock CompanyJoint Stock Company  Joint stock company: a true hybrid form of business organization that combines characteristics of a corporation and a partnership.  Usually, a joint stock company is regarded as a partnership for tax purposes .  A joint stock company has many characteristics of a corporation in that: 1. Its ownership is represented by transferable shares of stock. 2. It is managed by directors and officers of the company or association. 3. It can have a perpetual existence. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Joint Stock CompanyJoint Stock Company  Most features of a joint stock company are more characteristic of a partnership : 1. It is formed by agreement (not statute). 2. Property usually is held in the names of the owners , who are called shareholders, and they have personal liability . 29 30 5/1/2023 16 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cooperative (A Brief Word)Cooperative (A Brief Word)  Cooperative: an association, which may or may not be incorporated, that is organized to provide an economic service to its members.  The cooperative form of business generally is adopted by groups of individuals who wish to pool their resources to gain some advantage in the marketplace. 31