Pg 47

Question 1

Why is it not a good idea to have a one person LLC?

Answer 1

Because the partnership ends up being owned personally by the member so there’s no real limited liability in that situation. It’s a good idea to have at least two members so that there can be no liability beyond your initial investment

Question 2

What are the fiduciary duties involved in an LLC?

Answer 2

• duty of care
  – duty of loyalty
  – duty of candour

Question 3

Who has a fiduciary duty in an LLC?

Answer 3

The managers and controlling members, but not passive members

Question 4

How are profits shared in an LLC?

Answer 4

According to the operating agreement, or if default is observed, then they share profits equally

Question 5

What acts as the bylaws of an LLC?

Answer 5

The operating agreement

Question 6

What are the two different types of management for an LLC?

Answer 6

• member managed

– non-member managed

Question 7

What does it mean if an LLC is member-managed?

Answer 7

• it is a smaller LLC that can operate like a partnership
• each member is an agent of the LLC and has authority to bind it in the ordinary course of business
• they have fiduciary duties and the operating agreement defines the scope of their authority
• apparent authority allows member managers to act to carry on the business in the usual way against third parties that don’t know the limits of his authority. If a managing member acts outside of his authority, he can incur personal liability. Duty of care and loyalty

Question 8

What is involved in a non-member managed LLC?

Answer 8

Usually for larger and complex LLCs. Has centralized management where it is managed by people that are not members. Managers have agency authority from the operating agreement and can bind the LLC.

Question 9

Member voting rights for LLCs are laid out in the operating agreement, but what are the two different state default provisions?

Answer 9

• half the states: members have an equal say in the operation of the business
  – other half: use proportional ownership rule

Question 10

How do you figure out the jurisdiction for an LLC?

Answer 10

By looking at the citizenship of its owners and members

Question 11

What governs LLCs?

Answer 11

State statutes

Question 12

If A and B agree to open a restaurant with A in charge of the kitchen and B doing front of house, and together they plan the menu and do the marketing, and they want to limit their liability to their investments in the restaurant, and B wants to be able to freely sell part of his interest to his daughter if she wants to be an owner, what is the best form to organize under?

Answer 12

An LLC because they allow freely transferrable interests

Question 13

When does a dissolution happen in an LLC?

Answer 13

• in the event that the operating agreement says
  – if it isn’t reasonably practical to carry on the LLC
  – with consent of all the members
  – through a judicial proceeding because the managers or members acted illegally, fraudulently, or oppressively

Question 14

Who do managers of an LLC owe a fiduciary obligation to?

Answer 14

The LLC and its members

Question 15

What is a joint stock company?

Answer 15

Partners have unlimited personal liability, there is ease of transferability of the shares, continuity of existence, and centralized management. Today this is almost never used

Question 16

What is a business trust?

Answer 16

A trust that operates like a business and doesn’t give limited liability for the owners. This is very rarely seen today

Question 17

What is a joint venture?

Answer 17

A business venture of limited scope or duration that is done by two or more people for profit or commercial gain. Usually there’s a single business transaction or a few related ones and it combines property, money, efforts, skills, and knowledge.

Question 18

Why is a joint venture different from a partnership?

Answer 18

Because joint ventures have limited scope or duration

Question 19

What are the elements of a joint venture?

Answer 19

– contract
– common purpose
– community of interest
– equal right of control
– participation in profits and losses

Question 20

What is a family limited partnership?

Answer 20

This is an estate planning device that lets a business owner create a limited partnership with family members as limited partners. The idea is to eventually transfer the business to the family while minimizing estate and gift taxes. It is used as a receptacle to transfer assets like corporate stock, securities, real property, bonds, notes, etc. Essentially the FLP is used as a holding company instead of just giving outright gifts. The parent is the general partner that transfers an interest to the kids who are the limited partners, and this allows the estate to get valuation discounts and the parent to keep sufficient control over the assets. Over time, the general partners make a gift of limited partnership interests to the kids.