Law: #19 Flashcards
What business form is older between the LLC and LLP
The LLP is much older and the LLC is seen as improving some of the weaknesses of the LLP
What is the most significant disadvantage of a general partnership?
Personal Liability. Partners may be held personally liable for the debts and tort liabilities of the partnership.
What is the most significant disadvantage of a corporation?
Double tax.
What was the idea behind the LLP when it was first introduced? What was the LLP a solution to?
It eliminated the double tax found in a corporation and most (but not all) elements of personal liability.
What are the three main advantages of a LLC?
1) they are easy to organize
2) they eliminate personal liability for all members
3) the federal tax is a single tax
What are the two types of partners in an LLP?
A limited partner and a general partner
How does liability work in relation to the different types of partners within an LLP? Why is this?
A general partner has traditional liability
A limited partner does not have normal partner liability
This is because a general partner has a say in the control of the business, whereas a limited partner does not have a say in its management.
When can a limited partner in an LLP be PERSONALLY liable like a general partner?
When the limited partner participates in management and has some control they become liable.
If business operators are not liable for what they do not control, is it possible to organize a form of partnership that eliminates control and thereby eliminates liability? The answer is yes and the result is________________?
LLP
A general partnership can be created by neglect or default, is this true of an LLP? Explain.
This is not true of an LLP. An LLP is created by following statutory requirements.
What act requires a certificate of limited partnership to be filed? And who is it filed with?
The act is the Revised Uniform Limited Partnership Act (RULPA), and it must be filed with the Secretary of State in the state it was formed.
Once a LLP is formed can people join as partners? Explain.
Yes. limited partnership interests can be sold to people who wish to invest but not manage.
Can a limited partner be held liable for partnership debts or personal debts?
A limited partner can be held responsible for partnership debts, but only up to their contribution into the partnership. This does not extend to the partners personal assets.
What are some of the problems with the LLP setup?
1) It is more difficult to organize because it requires specific statutory requirements. If these are not followed the limited partners may be liable as general partners.
2) There must be a couple of general partners that have unlimited liability
What are the two problems that an LLC solves, which had made it a more popular form of business?
1) It is not a taxable entity which avoids double taxation
2) offers the reduced risk of personal liability to ALL operators of the enterprise (instead of just limited partners like an LLP)
What are the advantages mentioned in the lesson of an LLC? ((3)
1) Easy to organize and operate
2) May elect to be taxed as a partner
3) liability of members is limited to the extent of their capital contribution.
Disadvantage of an LLC?
The law relating to an LLC’s existence and operatin is limited because the LLC concept is so new. This creates uncertainty of how to proceed in some areas.
When it comes to personal liability, in what situation are you not liable for your own actions?
None. You are always liable for your own actions, even if someone else is also vicariously liable in some way. Being an agent does not give immunity.
Does a member of an LLC owe a fiduciary responsibility?
Only if that member is involved in management.
With respect to the Estate of Countryman case, assume that the facts were the following: (1) Keota was a member of the Double Circle and received its share of the profits, but (2) management of the Double Circle was handled by a manager named John Smith who had no connection with Keota. (Thus Keota is a member but not a manager.) In this instance would the injured plaintiffs have a good claim against Keota?
No, Keota would not be liable. The opinion of the court was clear that Keota had no liability simply because they were members of Double Circle. Keota was liable because of its personal negligence as manager [acting through the Keota manager, Mr. Hopscheidt])
One of the problems with an LLP is that business operators sometimes try to avoid the liability of a general partner. It is a tough question, but how can business entrepreneurs try to avoid the personal liability of a general partner?
One device that is sometimes tried is to form a corporation and have the corporation be the general partner of the LLP. The problem with this strategy is that it is sometimes limits partners who form the corporation when they try to manage the affairs of the LLP as officers of the corporation while still enjoying LLP limited liability and single tax benefits. The obvious danger is that they sometimes get too personally involved in LLP management and incur general partner liability. (A tough question—don’t worry if you didn’t get it.
Let’s do a little guessing. Suppose that Tumminelli borrowed large sums of money in the name of the LLC and it was not repaid. Would Kuhn be liable for the unpaid debt?
No, Kuhn would not be liable and that is what is different from a general partnership. If the organization was a general partnership, Kuhn would have liability for the debts of the partnership. With an LLC, however, Kuhn is not liable for the debts of the organization.
Suppose that Russell and Cohn were “good guys” and simply walked away from the LLP when they learned of its problems. What would be the result?
The LLP statute requires limited partners in a defectively organized LLP file a certificate with the secretary of state to avoid liability. If they failed to file the certificate after learning of the problem they would become liable as general partners.
Which of the following is not associated with a so-called “single tax”?
General partnership
Limited liability company
Limited liability partnership
All of these options are associated with a single tax
d
All three, general partnership, limited liability company and limited liability partnership, are associated with a single tax.
Which of the following organizations provides more protection from personal liability for all of its members?
A limited liability partnership (LLP).
A limited liability Company (LLC).
The companies above provide the same protection from personal liability for all of its members.
b
A general partner in an LLP is personally liable for all obligations of the organization. In an LLC, no member is personally liable for all obligations of the organization.
Which of the following is correct concerning a limited liability company (LLC)?
An LLC and its members are subject to the so-called “double tax.”
An LLC is as easy to form as a general partnership.
Both of the options above are correct.
Neither of the options above is correct.
d
One of the virtues of an LLC is that it is not subject to a double tax. Thus, option A is not correct. A general partnership may be formed without any agreement or paperwork of any kind. In contrast, an LLC requires the filing of a document called articles of organization. Therefore, it is easier to form a general partnership than an LLC. Option B is not correct.
In Gregg v. S.R. Investors, Ltd., Mr. Barron and Mr. Cohn were members of a limited liability partnership which was not properly formed, but they nevertheless claimed to not be liable as general partners. Which of the following is correct?
It was proper for the trial court to grant the motion for summary judgment of Mr. Barron and Mr. Cohn, even though their limited liability partnership was not properly formed.
A motion for summary judgment may be granted only if there is no issue of a material fact to be tried by the trial court. Thus, it was improper for the trial court to grant the motion for summary judgment in favor of Mr. Barron and Mr. Cohn.
a
A motion for summary judgment may be granted only if there is no issue of a material fact to be tried by the trial court. However, in this case there was no issue of a material fact to be tried by the trial court because a statute specifically allowed them to withdraw without general partner liability and they followed that statute.
In Estate of Countryman v. Farmers CO-OP, Mr. Hopscheidt (for example) was held personally liable for harms caused by an LLC known as Double Circle. Why?
Mr. Hopscheidt was liable because he was a member of Double Circle.
Mr. Hopscheidt was liable because he negligently provided services.
Both options above are correct.
b
Hopscheidt was liable because he negligently provided services. He would not have been personally liable because he was simply a member of the LLC.
Which of the following is correct concerning a limited liability company (LLC):
Members may choose to operate their LLC themselves, much like a general partnership is operated.
Members may hire a manager to operate the LLC for them.
Both of the options above are correct.
c
The members of an LLC have the option to operate their LLC themselves or to hire a manager to operate the LLC for them.
The two following questions refer to Milly, Jed, Sam and Matilda.
Milly, a member of ABC Services, a limited liability company (LLC), is engaged in company business and drives a car and negligently injures Jed. Which of the following is correct?
The organization ABC Services (only) is liable to pay for the injuries.
Milly (only) is personally liable to pay for the injuries.
Both ABC Services and Milly are liable for the injuries.
c
A person (whether or not acting as an agent) is personally liable for injuries he or she causes. In addition, the principal, in this case ABC Services, is also liable for the harm caused by its agent, Milly.)
Assume that Sam and Matilda are members with Milly in ABC Services. (They each originally invested $10,000 in the enterprise.) Which of the following is correct?
Sam and Matilda are not personally liable for the injuries to Jed, but all of the assets of ABC Services are subject to Jed’s claims.
Sam and Matilda are also personally liable for the injuries to Jed.
One-third of the assets of ABC Services are subject to Jed’s claims, but two-thirds of the assets of ABC Services (the assets attributable to Sam and Matilda) are subject to Jed’s claims.
a
A person, in this case, Milly, is personally liable for harms he or she causes. Moreover, a principal, in this case, ABC Services, is liable for harms caused by its agents. (There is no rule protecting some of the assets of a principal from claims caused by an agent.) However, Sam and Matilda are not personally liable for the debts of the LLC.
With respect to a Limited Liability Partnership (LLP), which of the following has greater exposure for purposes of personal liability?
A general partner
A limited partner
personal liability of a general partner and a limited partner is the same
a
A general partner has general liability and a limited partner has limited liability.
Kuhn v. Trumminelli illustrates which of the following is correct concerning a limited liability company (LLC)?
Articles of organization document is not required but an operating agreement is required.
Articles of organization and an operating agreement are both required.
Articles of organization document is required but an operating agreement is not required.
c
A document known as articles of organization is required. An operating agreement is not required, but most LLCs have one.
