LLCs

Question 1

What are the benefits of an LLCs formation?

Answer 1

Driven by tax laws
Called hybrid entities because of
Pass through taxation + limited liability

Question 2

What is the Kitner test?

Answer 2

Under Kitner, if an LLC possesses two or more partnership characteristics, it will be taxed as a partnership

Question 3

What do you need to make a LLC?

Answer 3

Formally file a certificate

Question 4

What controls between the articles of incorporation and Theo operating agreement?

Answer 4

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.

Question 5

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?

Answer 5

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.

Question 6

Are LLCs taxed or do they receive pass-through treatment?

Answer 6

Thye can do either, but pass through is more popular

Question 7

What if LLC documents conflict with a statute?

Answer 7

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.

Question 8

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?

Answer 8

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.

Question 9

What happens if an LLC is improperly created?

Answer 9

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

Question 10

What was the holding of Stone v Jetmar Properties?

Answer 10

Property cannot be transferred to an LLC that does not exist

Question 11

What do you call LLC owners?

Answer 11

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.

Question 12

What are the 2 ways to manage an LLC? Which is the default?

Answer 12

Member managed (default) and manager managed

Question 13

Does the manager have to be a member?

Answer 13

No

Question 14

How to change from a member managed LLC to a manager managed LLC?

Answer 14

Change the operating agreement - requiring a unanimous vote

Question 15

What is the rule in Taghpour v Jerez?

Answer 15

Rule: If two statutes conflict, the provision more specific in application governs the more general provision

Question 16

What is the definition of an LLP?

Answer 16

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.

Question 17

When do partners become liable in an LLP?

Answer 17

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.

Question 18

What is a limited partnership?

Answer 18

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.

Question 19

What is an LLLP?

Answer 19

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

Question 20

What can cause a dissolution of a partnership?

Answer 20

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.

Question 21

What happens if there is a disassociation, but not a dissolution?

Answer 21

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.

Question 22

How much must a departing partner be bought out for?

Answer 22

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)

Question 23

What is the difference between rightful and wrongful disassociations?

Answer 23

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

Question 24

Can partners dissaciciate at any time?

Answer 24

yes

Question 25

What is the consequence of a wrongful disassociation?

Answer 25

The partner would be liable for any damage caused by breach of the partnership agreement or other misconduct.
Also liable for expenses resulting from a partner’s premature withdrawal from a term partnership, such as replacing the partner’s expertise or obtaining new financing.
Any damages for wrongful dissociation may be offset against the amount of the buyout price due

Question 26

What is the Fisher rule?

Answer 26

Rules: If a partnership is at will, any of the partners may elect to dissolve it and the dissolution is not wrongful.
A partnership is not at will if it is a partnership for a specific term or a “particular undertaking.”
A “particular undertaking” must be capable of accomplishment at some time, although the exact time may be unknown and unascertainable at the date of the agreement.

Question 27

How do you remove a manger in a manager manger LLC?

Answer 27

Under the RULLCA, unless the partnership agreement says otherwise, a manager can be removed at any time by the consent of a majority of the members.

Question 28

What are the exceptions of limited liability?

Answer 28

Exceptions to limited liability
Members are responsible for their own acts
Members are responsible for contractual obligations they undertake
Piercing-the-veil doctrine

Question 29

What does it mean to piece the veil?

Answer 29

If a member treats the company’s assets as their own, the courts will treat the company’s liabilities as theirs too.

Question 30

When would a court peirce the veil?

Answer 30

Under RULLCA §304(b): The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company.

Question 31

What is the test from NetJets case?

Answer 31

Key Test: To pierce the LLC veil to reach Zimmerman, NetJets need to show:
(1) business entity and its owner operated as a single economic entity
(2) there was an overall element of injustice or unfairness

Question 32

T/F Managers of a member-managed LLC are personally liable for any obligation of the LLC because they are the managers

Answer 32

False – limited liability extends to managers too
Managers (and members) liable for own acts or omissions

Question 33

T/F In order to successfully pierce the company veil, you must show that the LLC was created with the intent to defraud

Answer 33

false

Question 34

T/F You must always be able to pierce against all members in order to pierce the veil against any one member of an LLC

Answer 34

False. Depends on the jurisdiction. Majority rule says piercing against one makes all liable.

Question 35

How to dissolve partnerships?

Answer 35

Remember, for partnerships, dissolution/dissociation is easy because the ability to easily get away from partners you no longer wish to be affiliated with is a check against the opportunism of other partners.

Question 36

How to dissolve LLC and corp?

Answer 36

But for corporations, courts do not mind locking in members because members are protected under by the limited-liability of the corporate structure.

Question 37

What is the test to determine if a court should order the dissolution of a partnership?

Answer 37

the corporation must have two 50% stockholders,

those stockholders must be engaged in a joint venture, and

they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.

Question 38

What is a manager managed LLC?

Answer 38

The LLC hires managers who make the decisions on things in the ordinary course of business.
Under RULLCA, managers have exclusive management rights and decide all ordinary business matters by a majority of the managers. RULLCA §407(c).
But all members must consent to undertake any act outside the ordinary course of the company’s activities or to amend the operating agreement. RULLCA §407(c)(4).

Question 39

What are exceptions for limited liability?

Answer 39

Exceptions to limited liability
Members are responsible for their own acts
Members are responsible for contractual obligations they undertake
Piercing-the-veil doctrine

Question 40

What is pricing the veil?

Answer 40

What is it? It imposes personal liability on members, in the case of limited liability companies (and on shareholders, in the case of corporations) when they have failed to treat the entity as a separate legal entity.

Question 41

Do members of a manager managed LLC owe fiduciary duties?

Answer 41

no

Question 42

What is the one duty that cannot be eliminated via the operating agreement?

Answer 42

The covenant of good faith and fair dealing