OTHER UNINCORPORATED BUSINESS FORMS

Question 1

LIMITED PARTNERSHIPS (“LP”) Definition

Answer 1

A partnership with at least one general partner and at least one limited partner. Because it is a partnership, general partnership principles typically apply unless displaced by LP-specific provisions.

Question 2

LP Formation

Answer 2

Must file a certificate of limited partnership with the secretary of state. The information required in the certificate is minimal. It includes, among other items:

(1) the name of the LP;
(2) the name and address of the agent for service of process; and

(3) the name and address of each general
partner. (If you fail to file, you are just a general partnership.)

Question 3

LP Name

Answer 3

The name of the LP must contain the phrase “limited
partnership” or the abbreviation “L.P.” or “LP.” (The policy here is to alert the public to the limited liability nature of the business.)

Question 4

LP PARTNERSHIP AGREEMENT:

Answer 4

The real detail on the operation and governance of a LP is typically found in a partnership agreement. It can be written, oral, or implied. As in a general partnership, the agreement can displace almost all of the statutory provisions.

Question 5

LP MANAGEMENT & OPERATION:

Answer 5

The LP is managed by the General partner(s). Each general partner has equal rights in the management and conduct of the LP’s activities. The vote of a Majority of the general partners is necessary for ordinary business activities. Limited partners usually have no management
rights unless the partnership agreement grants them rights.

That said, unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain extraordinary activities, including an amendment of the
partnership agreement, the admission of a new general or limited partner, and the sale of all or substantially all of the LP’s property (if such sale is outside the ordinary course of the LP’s activities).

Question 6

LP FINANCIAL RIGHTS:

Answer 6

Unless otherwise agreed, distributions from a LP are
made on the basis of the partners’ contributions (i.e., in
proportion to the value of each partner’s contribution).

Question 7

LP LIABILITY:

Answer 7

1. GENERAL PARTNERS: General partners are liable for the obligations of the LP, just as they are in a general partnership.
2. LIMITED PARTNERS: A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner. Limited partners have limited liability,
   meaning that they can only lose the value of their investments.

Note: A limited partner (as well as a general partner) is always liable for her own torts. The limited liability shield of any business organization does not protect a person from liability for her own torts.

Question 8

LP FIDUCIARY DUTIES:

Answer 8

A general partner owes the LP and the other partners
the same fiduciary duties of loyalty and care that general partners owe in a general partnership. A limited partner does not have any fiduciary duty to the LP or to any other partner solely by reason of being a limited partner.

Question 9

LIMITED LIABILITY PARTNERSHIPS (“LLP” or “RLLP” (for registered LLP)) A. DEFINITION:

Answer 9

An LLP is typically a general partnership where all of
the partners have limited liability. In general, you apply general partnership rules to LLPs, with the exception of the material below.

Question 10

LLP FORMATION:

Answer 10

Must file a “Statement of Qualification”
with the secretary of state. The required minimal information includes

(1) the name and address of the partnership;
(2) a statement that the partnership elects to be an LLP; and
(3) a deferred effective date, if any.

The partnership becomes an LLP at the time of the filing of the statement or on the date specified in the
statement. (There is no LLP unless this statement is filed.)

NAME: The name of a registered limited liability partnership must end with the words “Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,”
“R.L.L.P.,” or “RLLP.”

Question 11

LLP LIABILITY:

Answer 11

A partner in an LLP is not personally liable (directly,
indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for her own wrongful acts.

Question 12

LIMITED LIABILITY COMPANIES (“LLC”)
A. DEFINITION:

Answer 12

A hybrid between a corporation and a partnership in which the owners (called “members”) have limited liability as well as the benefits of partnership tax treatment. This is not a corporation, nor is it a partnership. It is its own business form. An LLC is treated as a separate legal entity distinct from its members.

Question 13

LLC FORMATION:

Answer 13

Must file Articles (or Certificate) of Organization with the secretary of state. The information required in the certificate is minimal. It includes

(1) the name of the LLC;
(2) the address of the LLC’s registered office; and
(3) the name and address of its registered agent.

NAME: The LLC’s name must include an indication that it is an LLC. In general, the name should contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.”

Question 14

LLC OPERATING AGREEMENT:

Answer 14

The real detail on the operation and governance
of an LLC is typically found in an operating agreement. The operating agreement can displace almost all of the statutory provisions.

Question 15

LLC MANAGEMENT AND OPERATION:

Answer 15

Management of the LLC is presumed to be by all of the members. Other management arrangements can be made (e.g., management by outside managers), but they
must be specified in the operating agreement.

A majority vote of members (or managers if manager-managed) is required to approve ordinary business decisions. A unanimous vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement.

Question 16

LLC FINANCIAL RIGHTS:

Answer 16

Unless otherwise agreed, profits and losses are
allocated on the basis of contributions

Question 17

LLC Liability

Answer 17

Members generally are not personally liable for the LLC’s
obligations. They have limited liability and can only lose the amount of their investments. As always, members are liable for their own torts.

Question 18

LLC FIDUCIARY DUTIES:

Answer 18

The fiduciary duties owed by a member (if membermanaged) or a manager (if manager-managed) to the LLC AND to its members are the fiduciary duties of care and loyalty.

Question 19

LLC DUTY OF CARE:

Answer 19

Members (or managers if manager-managed) must
act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interests of the LLC. Business judgment rule protection is provided,
which effectively means that, despite the prior sentence, members (or managers if manager-managed) cannot be held liable for negligent decisions (but can be held liable for decisions tainted by gross negligence or worse).

Question 20

LLC DUTY OF LOYALTY

Answer 20

Pursuant to the duty of loyalty, a member (or manager if manager-managed) must:

(i) account to and hold for the LLC any benefit he derives from the LLC’s activities or from the appropriation of an LLC opportunity;
(ii) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC—unless the transaction is fair to the LLC; and
(iii) refrain from competing with the LLC’s business. However, after disclosure of all material facts, all of the members may authorize or ratify a specific act by a member (or manager if manager-managed) that would otherwise violate the duty of loyalty.

Question 21

LLC TRANSFERABILITY OF OWNERSHIP INTERESTS:

Answer 21

Essentially the partnership rule applies here—financial rights are unilaterally transferable, but management rights are not. One can become a member (i.e., management rights can be transferred) only with the consent of all of the members.

Question 22

LLC DISSOCIATION:

Answer 22

A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member. Generally, the events that will cause dissociation of a partner in a partnership will
also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages.

Question 23

DISSOLUTION: An LLC will be dissolved when any of the following events occur:

Answer 23

(i) An event or circumstance that the operating agreement states causes dissolution;
(ii) The consent of all of the members; or
(iii) The passage of 90 consecutive days during which the LLC has no members.

Question 24

A member may also apply for a judicial dissolution of the
LLC. A court may grant an application for judicial dissolution if:

Answer 24

(i) the conduct of all or substantially all of the LLC’s activities is unlawful; or
(ii) it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.

A court may also dissolve the LLC if the managers or those members in control of the LLC

(i) have acted, are acting, or will act in a manner that is illegal or fraudulent; or
(ii) have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution.

Question 25

LLC TAXATION:

Answer 25

Partnerships and LLCs are taxed on a “pass-through” basis. There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless
of whether that business income is actually distributed to the partners).

By contrast, a corporation is subject to “double taxation.” The corporation pays taxes on its income, and the shareholders pay taxes on that income again when and if it is distributed to them. In today’s tax climate, pass-through treatment usually results in less taxes paid.

Note: LLPs and LLCs are generally the best vehicles for closely held businesses. They protect ALL of the owners from liability for the obligations of the business; they allow the owners to contract around almost all of the statutory provisions (so that the business can be run as the owners desire); they allow all of the owners to participate in the management of the business;
and they provide pass through income tax treatment.