TBE--B.A. (Corp & Partnership) Flashcards
02/14 #5:
Jan 2013: A, B, and C form LLC called ABC selling kids toys via internet. Products 100% manufactured and marketed by ABC EE’s. A, B, and C each members of ABC LLC. Agreement says:
-A to serve as managing member and paid salary for doing so.
-B and C not employed by ABC nor participated in day-to-day management.
-None of members would be liable to 3rd parties for any debt, obligation, or liability of ABC, whether arising in tort, contract or otherwise.
June 2013: Y injured by defective toy purchased by his parents. Months before, ABC product manager was informed of defect in toy but didnt:
i) inform A, B, or C;
ii) take action to remedy defect; or
iii) pull defective toy from market.
Parents file suit naming ABC, A, B and C as D’s.
Which of the named D’s can be held liable in Parents’ lawsuit and which cannot?
In Texas, the members of an LLC are not liable for the obligations of the company, except in extraordinary circumstances (e.g. pcv).
The courts often pierce the corporate veil where
i) formalities are ignored;
ii) business organization is undercapitalized; and
iii) to prevent fraud.
Entity will be disregarded to “prevent fraud (to avoid paying debts/obligations) or achieve equity.
However, members can be held liable for their own obligation, including their own tortious actions. Texas law also provides for vicarious liability of a company for the tortious conduct of its employees in the scope of their employment.
ABC: ABC may be held liable in Parents’ lawsuit. Because a limited liability company seeks to protect its officers, directors and shareholders, rather than its own interests, it may be held liable on the tortious conduct of its employees. The facts state that the ABC product manager knew of the defect in the toy, but took no action to remedy the defect or pull the toys from the shelves. As product manager for ABC, he was an employee of ABC and thus under the control of ABC. On these facts, the product manager was certainly negligent in his duties under a vicarious liability theory, ABC will be held liable for the tortious conduct by its product manager. However, because this is products liability, the company will be held liable regardless of its or its employees’ negligence.
Amy: Will probably not be held liable in Parents’ lawsuit. In a tort action against a limited liability company, the only defendants who may be held liable are the company itself and the tortfeasor. The tortfeasor may claim that he was acting as agent for Amy, as she was the managing member, and was thus responsible for overseeing employees on a daily basis. However, because this is a products liability suit, the standard is strict liability and Parents do not need to prove that Amy or the product manager were negligent. ABC will be the only party held liable for the defective product.
Bart and Connor: Will not be held liable in Parents’ lawsuit. Bart and Connor are shielded from personal
liability because they are officers in their limited liability company. The only way in which they may be held personally liable is if their conduct is so egregious and malicious as to cause courts to pierce the corporate veil and hold them liable. As this is a close corporation, Bart and Connor are shareholders in the corporation and thus may be held liable under the PCV theory. However, the facts indicate that Bart and Connor neither knew or had reason to know of the defect.
02/14 #5:
Jan 2013: A, B, and C form LLC called ABC selling kids toys via internet. Products 100% manufactured and marketed by ABC EE’s. A, B, and C each members of ABC LLC. Agreement says:
-A to serve as managing member and paid salary for doing so.
-B and C not employed by ABC nor participated in day-to-day management.
-None of members would be liable to 3rd parties for any debt, obligation, or liability of ABC, whether arising in tort, contract or otherwise.
Feb 2013: Bank loans ABC $100k. Loan application signed on ABC’s behalf by A as “managing member of ABC LLC.” ABC was the sole borrower of the loan agreement.
Aug 2013: ABC defaulted on Bank Loan, Bank filed suit naming ABC, A, B, C as D’s.
Which of the named D’s can be held liable in Bank’s lawsuit and which cannot?
The first issue is whether Amy had the authority to bind ABC to the loan agreement. In Texas, an agent can bind a principal if they have actual authority or apparent.
Actual authority is given by an express or implied granting of authority.
Apparent authority is granted by the principal engaging in conduct that could make a third party believe that the agent has authority.
In Texas, if an agent signs a document with
(1) the title “as agent of [principal]” or equivalent title that puts the counter party on notice that the agent signs only in their capacity as agent and
(2) signs with actual authority,
their signature does not make them liable on the contract.
ABC: ABC may be held liable in First Bank’s lawsuit. A limited liability company may always be held liable for the tortious or contractual conduct of its employees. Here, Amy is ABC’s Managing Member. She signed the loan for ABC as Amy, “Managing Member, ABC Products LLC.” Amy entered into a contract with First Bank for $100,000 as an agent of ABC. The signature on the loan indicates that Amy had actual authority as an agent for ABC (principal-agency relationship). An agent has actual authority for a principal when they hold themselves out as an agent for the principal, and the agent has been
given direct authorization to conduct business on behalf of the principal. Here, the written LLC agreement states that Amy would act as ABC’s Managing Member and be paid a salary for doing so. Therefore, Amy was an employee of ABC and acting within the scope of her employment when she signed the loan. Additionally, the loan agreement only states ABC as the sole borrower. Therefore, as principal, ABC will be held liable for the loan with First Bank.
Amy: Amy may not be held liable to First Bank. An agent or employee, acting within the scope of employment and with actual authority, who enters into a contract on behalf of the company as the principal, will not be held personally liable on that contract. As for the reasons stated above, Amy is discharged of her liability when entering into a contract with actual authority as agent for a principal and thus would not be held liable to First Bank. However, if she entered into the contract acting with gross negligence or intentional misconduct, she may be held personally liable.
Though the LLC agreement states that Amy cannot be held liable for such conduct, this is unenforceable. Officers of an LLC may be held personally liable if they act with gross negligence or their misconduct is intentional. In a close corporation such as ABC, courts may “pierce the corporate veil” if shareholders - here, this includes Amy, Bart and Connor - acted so badly and maliciously as to cause their own personal liability. However, there is no indication here to show that Amy acted in such an egregious way as to meet either of these standards. There is no indication in the facts that she used the First Bank loan for any of her own personal needs, nor did she embezzle or mismanage funds.
Therefore, she cannot be held liable.
Bart and Connor: Bart and Connor may not be held liable to First Bank. Under the Texas Business Organizations Code, a limited liability company insulates officers and members from personal liability on contracts. Here, there is no indication that Bart and Connor were ever involved in the day-to-day management of ABC, nor were they acting as agents for ABC in contract formations with banks. Therefore, they cannot be held liable.
02/14 #6:
F and B are licensed accountants. Want to practice together and form an entity that would
i) avoid federal income taxation at entity level; and
ii) not expose one to personal liability mistakes or malpractice committed by the other.
They also want to bring C, a practicing tax lawyer, into the firm. C suggested forming PLLC.
Considering only F and B’s objectives (avoiding tax; reciprocal liability), which of following forms would satisfy both objectives?
a) corp
b) gen part
c) LP
d) LLP
a)
Under the TBOC, corporations are subject to double taxation, or taxation at the entity level and at the shareholder level; so that would not satisfy the first objective. In corporations, shareholders are not personally liable on the corporation’s obligations unless they pierce the corporate veil. A shareholder pierces the corporate veil if they take advantage of the corporation status and it would be unjust to provide them protection. Directors are liable for willful and want on actions of the Board if they are in attendance and do not abstain from the action.
b)
Under the TBOC, general partnerships enjoy pass-through taxation, or no taxation at the entity level. But, all the partners are personally liable for the obligations of the partnership whether arising in tort or contract. The person seeking damages must first exhaust all partnership assets, but then may go after the partner’s debts to satisfy the judgment.
c)
Under the TBOC, a limited partnership must include one general partner and one limited partner. The limited partner is protected from personal liability for the partnership’s obligations or torts or malpractice committed by other partners. However, the general partner is personally liable on the partnerships obligations. Limited partnerships do enjoy pass-through taxation, or not taxation on the entity level.
d)
Under the TBOC, LLPs enjoy pass-through taxation, or no taxation at the entity level. LLP’s partners also are not personally liable for the partnership’s obligations or torts committed by other partners. Partners are only personally liable for their own tortious conduct.
02/14 #6:
F and B are licensed accountants. Want to practice together and form an entity that would
i) avoid federal income taxation at entity level; and
ii) not expose one to personal liability mistakes or malpractice committed by the other.
They also want to bring C, a practicing tax lawyer, into the firm. C suggested forming PLLC.
Can F, B, and C lawfully practice together as members of PLLC?
Under the TBOC, a PLLC is a limited liability company for professionals. The members are not personally liable on the company’s obligations. Only one profession can be represented in a PLLC.
07/13 #11:
A, B, and C own and operate ABC. ABC’s only office is in Texas and all its business conducted in Texas. By unanimous vote of partners, A serves as managing partner. ABC’s written partnership agreement (sole copy in A’s possession) states:
a) Only A has right to access ABC’s books and records;
b) only A has power to admit new partners;
c) A partner can be expelled only by vote of partners–not by court;
d) B and C’s personal liability to ABC’s creditors is limited to amount of their initial investments;
e) No partner can be held liable to ABC for breach of duty of care or good faith unless partner in question adjudged by court to have engaged in willful/intentional misconduct;
f) Partner is permitted to withdraw only upon death/incapacity of that partner; and
g) Partnership’s affairs governed by California law.
What type of partnership in ABC partners?
When two or more people carry on a business for profit, a general partnership is formed. Note that their intent to form a general partnership is irrelevant. The only intent they need is the intent to carry on a business for profit as owners.
A General partnership is the default and is formed if no other entity applies. The Texas Business and Commerce Code allow partners to other types of entities that offer limited liability protection, for instance, LLP’s, LP’s, LLC’s, and Corporations. For each, however, you must formally form the entity with the secretary of state. If you do not, you are a general partnership.
As such, each partner is jointly and severally liable for the partnership debts. Where there is no partnership agreement, Texas law supplements the terms of the partnership with default rules. Here there is a partnership agreement, and where the provisions are not prohibited by the law provided by the Texas Business Organizations Code (TBOC), the terms of the partnership agreement will apply.
07/13 #11:
A, B, and C own and operate ABC. ABC’s only office is in Texas and all its business conducted in Texas. By unanimous vote of partners, A serves as managing partner. ABC’s written partnership agreement (sole copy in A’s possession) states:
a) Only A has right to access ABC’s books and records;
b) only A has power to admit new partners;
c) A partner can be expelled only by vote of partners–not by court;
d) B and C’s personal liability to ABC’s creditors is limited to amount of their initial investments;
e) No partner can be held liable to ABC for breach of duty of care or good faith unless partner in question adjudged by court to have engaged in willful/intentional misconduct;
f) Partner is permitted to withdraw only upon death/incapacity of that partner; and
g) Partnership’s affairs governed by California law.
Which of above-listed provisions of ABC’s partnership agreement are valid and which invalid?
Only provisions “b)” and “e)” are valid. The rest are invalid.
a)
While partnership contracts can vest management in just one partner, a contract cannot restrict a partner’s right to access the books. Such a provision is void because it serves no purpose and violates public policy. Furthermore, partners have a duty to provide another partner with an accounting on demand, and this provision effectively eliminates that duty, therefor this provision is invalid.
b)
The TBOC provides that admission of a new partner requires the unanimous consent of all the partners unless otherwise agreed.
c)
A general partnership may not seek to limit the court’s power in any way regarding the partnership. This is clearly against public policy. Though the TBOC may have other provisions allowing or prohibiting this type of action, it may not be agreed to by the partners in a written agreement,
d)
As stated above, partners in a general partnership are jointly and severally liable for all partnership debts. A creditor may hold any partner liable for the entire debt once partnership assets are used up. As such, a partnership agreement cannot terminate this right by itself.
e)
Abrogation of Fiduciary duties A General Partnership can abrogate but not eliminate fiduciary duties. By agreeing to have the court determine breaches of fiduciary duties, as is the case here, the partnership merely abrogated their fiduciary duties, and did not eliminate them.
f)
Withdrawal Prohibiting withdrawal of a partner only by death or incapacity unduly burdensome on a partner and constitutes an invalid restraint.
g)
This provision is invalid because it constitutes forum shopping. All of the general partners are Texas residents. ABC’s only office is in Texas and all of its business is in Texas. The partnership may not exercise its own source of law for its internal governance.
07/13 #12:
A and B are lawyers and only members of “A and B PLLC.” C is an accountant. Pursuant to written contract, C performed services for “A and B PLLC,” but they have failed to pay C. C has threatened to sue A and B, individually, for amount owed under contract with the PLLC. To avoid lawsuit and satisfy PLLC’s debt to C, A offered one-half of his interest in PLLC membership interest to C and to admit C as member of PLLC. B doesn’t oppose this.
Is A’s assignment to C valid and, if so, what rights will C obtain by the assignment?
A member of a professional limited liability company (PLLC) has the authority, unless otherwise stated in the certificate of formation or agreement, to assign his membership interest to another person/entity, without the consent of the other members. The member can assign only a portion or the entire interest as he sees fit. The assignee only acquires the rights to the distributions of the company and also a right to inspect the books and records upon the proper showing of good faith and a reasonable request. The assignee does not gain any membership rights in the company, i.e. the assignee does not have any rights to manage the company or make business decisions.
07/13 #12:
A and B are lawyers and only members of “A and B PLLC.” C is an accountant. Pursuant to written contract, C performed services for “A and B PLLC,” but they have failed to pay C. C has threatened to sue A and B, individually, for amount owed under contract with the PLLC. To avoid lawsuit and satisfy PLLC’s debt to C, A offered one-half of his interest in PLLC membership interest to C and to admit C as member of PLLC. B doesn’t oppose this.
Can C be admitted as member of PLLC?
A PLLC is a limited liability company that provides a professional service. A professional service is any field which requires licensing to practice. For example, dentists, certified public accountants, architects, doctors, and lawyers. To be a member of a PLLC, one must be an authorized person. An authorized person is a professional in the field in which the partnership does business. A PLLC may not engage in more than one professional area (with the exception of some kinds of doctors).
07/13 #12:
A and B are lawyers and only members of “A and B PLLC.” C is an accountant. Pursuant to written contract, C performed services for “A and B PLLC,” but they have failed to pay C. C has threatened to sue A and B, individually, for amount owed under contract with the PLLC. To avoid lawsuit and satisfy PLLC’s debt to C, A offered one-half of his interest in PLLC membership interest to C and to admit C as member of PLLC. B doesn’t oppose this.
If C elects to sue, what liability, if any, will each PLLC, A and B have to C for PLLC’s failure to pay for her accounting services?
A PLLC, is likened to a general limited liability company, wherein, the members of the company are liable up to their initial investments in the company but are not personally liable for the debts of the company. The members would still be personally liable for their own negligence.
The PLLC, other the other hand, is liable for any debts that are entered into by the members on account of the fact that they are considered agents of the principal company and can bind the company for acts done within the scope of the employment.
02/13 #7:
2008: A, B, and C formed Texas limited partnership called BBT to operate baseball training academy. A was general partner. B and C were limited partners (not involved with day to day operations; but served as hitting instructors and paid salary for doing so).
2010: A engaged FOD to construct baseball field on BBT’s property. A signed contract on behalf of BBT L.P. as its sole general partner. B and C not involved in contract negotiations with FOD, but were present when A signed contract and were introduced to FOD as ‘silent’ partners. FOD fully performed contract, but BBT didn’t pay all amount due. FOD sued BBT, A, B, and C for balance due.
2011: BBT became manager-managed LLC under Texas law changing name to EBT, LLC. A appointed manager of EBT. EBT indentified A, B, and C as EBT’s members and provided that EBT fully assumed ownership of assets, debts and liabilities of former BBT. B and C continued as EE’s of EBT as hitting instructors as they did under BBT. FOD, after learning of EBT’s creation, amended its pleadings to add EBT as Defendant.
2012: 12 yr old L was seriously injured at EBT’s training facility (hit by errant fast ball). B and C were the instructors and actively involved in training session at time of incident. L’s injury occurred bc B and C allowed L to bat without helmet (which was contrary to EBT written policy [drafted in 2008 by A while he was general partner of former BBT and adopted in 2011]). L’s parents, on L’s behalf, sued BBT, A, B, and C for negligence. B and C admitted in depositions that A had previously instructed them and EBT’s other hitting instructors that no one was permitted to bat without helmet)
In FOD’s lawsuit, can each of D’s be held liable for balance due under the contract?
BBT, A, and EBT are liable, but B and C are not.
At issue are when an L.P. and its partners are liable.
A principal is bound on a K executed by an agent acting with authority. BBT’s general partner, A had actual authority to enter K’s for BBT (A signed K in representative capacity; had apparent authority [FOD could reasonably believe that the general partner of baseball academy was authorized to hire someone to build baseball field]). BBT is liable.
General partners in a limited partnership are jointly and severally liable for its debts; thus A, as BBT’s general partner, is liable to FOD. BBT’s subsequent conversion to a LLC (i.e. EBT) does not affect his liability to FOD.
A limited partner is not liable for firm debts. However, a limited partner who participates in control is liable to anyone misled by his conduct into believing he is a general partner. B and C did not exercise control (not involved in day to day operations; they were BBT EE’s [but under statutory safe harbor: Limited Partner doesn’t participate in control simply by being EE of firm). Without other evidence of control/participation, neither is liable to FOD. That they were intorduced as ‘silent’ partners is of no consequence; they were limited partners in BBT.
BOLE ANSWER
BBT, Albert, and EBT can be held liable for the balance due under the contract, but Barry and Carlos are not personally liable. At issue is liability for the contract obligations of a limited partnership.
Under the Texas Business Organizations Code (“TBOC”), a limited partnership has one or more general partners and one or more limited partners. General partners are jointly and severally personally liable for partnership obligations. Limited partners have their liability limited to their interest in the
partnership and cannot be held personally liable. The limited partnership itself is also liable for partnership obligations, as is any successor-in-interest business form of the original limited partnership. Here, Albert is the general partner of BBT. He signed the contract with FOD as the “sole” general partner. He had actual authority to bind the limited partnership in this manner, and signed on behalf of the partnership, so this contract is an obligation of the limited partnership. Albert will be jointly and severally liable for the partnership obligation as the general partner. Barry and Carlos are limited partners. Under the TBOC, limited partners can be held personally liable for partnership obligations if they exercise control over the partnership or hold themselves out as general partners to third parties. FOD, however, will not be able to argue under these facts that Barry and Carlos took control of the partnership or held themselves out as general partners. The TBOC contains several “safe harbors” that
do not amount to control of the limited partnership. Being employed by the partnership and receiving a salary are included in these safe harbors. Further, Albert represented to FOD that Barry and Carlos were “silent” partners. Thus FOD cannot colorably argue that Barry and Carlos held themselves out as general partners. Barry and Carlos are thus insulated from personal liability, although their interest in the
partnership may be at risk. BBT will be liable because the limited partnership is always liable for the obligations of the partnership, so long as the agent who bound the partnership to the obligation was acting with authority. Here, Albert was acting within his authority as general partner, and so BBT will be liable. EBT will also be liable as BBT’s successor in interest. Under the TBOC, if a business entity changes business forms, the new entity continues to be liable for the obligations of the previous entity. FOD has
properly amended its complaint to include this entity. In sum, BBT, Albert, and EBT will be jointly and severally liable for the contract obligation to FOD. Barry and Carlos’s liability will be limited to their interest in the limited partnership, but they will not be held personally liable on this obligation.
02/13 #7:
2008: A, B, and C formed Texas limited partnership called BBT to operate baseball training academy. A was general partner. B and C were limited partners (not involved with day to day operations; but served as hitting instructors and paid salary for doing so).
2010: A engaged FOD to construct baseball field on BBT’s property. A signed contract on behalf of BBT L.P. as its sole general partner. B and C not involved in contract negotiations with FOD, but were present when A signed contract and were introduced to FOD as ‘silent’ partners. FOD fully performed contract, but BBT didn’t pay all amount due. FOD sued BBT, A, B, and C for balance due.
2011: BBT became manager-managed LLC under Texas law changing name to EBT, LLC. A appointed manager of EBT. EBT indentified A, B, and C as EBT’s members and provided that EBT fully assumed ownership of assets, debts and liabilities of former BBT. B and C continued as EE’s of EBT as hitting instructors as they did under BBT. FOD, after learning of EBT’s creation, amended its pleadings to add EBT as Defendant.
2012: 12 yr old L was seriously injured at EBT’s training facility (hit by errant fast ball). B and C were the instructors and actively involved in training session at time of incident. L’s injury occurred bc B and C allowed L to bat without helmet (which was contrary to EBT written policy [drafted in 2008 by A while he was general partner of former BBT and adopted in 2011]). L’s parents, on L’s behalf, sued BBT, A, B, and C for negligence. B and C admitted in depositions that A had previously instructed them and EBT’s other hitting instructors that no one was permitted to bat without helmet)
In L’s parents’ lawsuit, can each of the D’s be held liable for L’s personal injuries?
B, C, and EBT cn be held liable for L’s injuries, but A cannot.
At issue are the circumstances under which an LLC and its members, managers and EE’s are held liable to third parties.
As a general rule, members of an LLc are not liable for its obligations. However, a member who commits a tort remains liable for his own negligence. Thus, B and C are liable for their negligence in allowing L to bat without a helmet.
EBT is also liable for L’s injuries. An ER is liable for a tort committed by an EE within the scope of his employment. The key is whether ER had the right to control the EE when the tort was occurred, even if the ER didnt exercise control. EBT’s written policy stated helmets were required (EBT had right to control how B and C perfomed as hitting instructors bc they were salaried EE’s of EBT). Tort occurred within scope of employment. As a result, EBT is vicariously liable for their negligence.
BOLE ANSWER
EBT, Barry, and Carlos will be held liable for Lance’s injuries, but Albert will not. At issue is a limited liability company’s liability for torts of the company’s managers. Under the TBOC, a limited liability company insulates its members from personal liability. The company itself is liable for the company’s obligations, but the members themselves are not personally liable. The corporate form shields them against liability. A tortfeasor, however, is always liable for his own torts. Here, EBT, and the limited liability company, will be held liable for the tortious conduct of its members Barry and Carlos. Barry and Carlos will also both be liable as tortfeasors. Barry and Carlos committed negligence in allowing Lance to bat without a helmet, contrary to company policy and Albert’s instructions. Because tortfeasors are always liable for their own torts, Barry and Carlos will be held liable here. The corporate form of EBT will shield Albert from personal liability. Albert is not a tortfeasor. Both Barry and Carlos admitted in their depositions that Albert had previously instructed them that no one should be allowed to hit with a bat. Thus there are no grounds on which to hold Albert liable under these facts. In sum, EBT, Barry, and Carlos will be held liable for Lance’s injuries, but Albert will not.
02/13 #8: Ber and Beu inherited 10k acre ranch including cattle and vacant building that once served as slaughterhouse. Ber and Beu was to restore slaughterhouse and operate business of raising and slaughtering cattle for profit. They want to form entity named B & B Meats to operate the business and trying to decide whether to form a -corporation, -gen partnership, -LLP, or -LLC.
Their objectives are to form entity with best combination of following factors:
i) ease of formation;
ii) limited personal liability for debts/financial obligations of business;
iii) favorable tax treatment; and
iv) flexibility in management of business
Which form of entity would you recommend for them? Explain fully, comparing advantages/disadvantages.
FIRST BOLE ANSWER
Corporation: B&B cannot form a valid corporation because in Texas there is an exception to the “any lawful purpose” element of formation whereby a corporation cannot be formed that raises and slaughters cattle for profit. Nevertheless, I will discuss the elements of formation and the advantages and disadvantages of forming a corporation for the sake of thoroughness.
(i) If B&B did have a valid lawful purpose (and did not want to be in the business of raising and slaughtering cattle), in Texas, a corporation may be formed for any lawful purpose. You must file a certificate of formation with the secretary of state detailing things such as: the name of the corporation to be formed, the purpose, the name and addresses of all initial directors, the number of shares to be authorized and par value for stock, a designated registered agent for the corporation, etc. Proper filing of these things forms a de jure corporation meaning that the corporation will be treated as a valid entity on its own; it can sue and be sued. Formation of a corporation is not as easy as some other entities.
(ii) Shareholders and directors are generally shielded from personal liability. So this would be ideal based upon B&B’s wishes.
(iii) A corporation is taxed twice (double taxation); both at the corporate level as a corporate entity and also at a shareholder level. This is not ideal if you are looking for favorable tax treatment and is something that might deter people from forming a corp.
(iv) A corporation is managed by a board of directors, officers and shareholders. Management within a corporation is probably the most complicated of all the entities B&B could form. Again, B&B cannot form a valid corporation because Texas exempts “raising and slaughtering cattle” from being a lawful purpose for the sake of formation. Accordingly, B&B will have to look into other options.
General Partnership: A general partnership may be ideal as it meets several of B&B’s requirements, but it does not shield personal liability.
(i) A partnership can be formed when two or more people agree to carry on a business for profit. A general partnership does not require any formal filing or even any written agreement by the partners. It can be formed orally, or more simply, by the conduct of the partners.
(ii) A general partnership leaves the partners exposed as they each have personal liability for the debts of the partnership. This would not be ideal if one was seeking to limit liability.
(iii) Partnerships are only taxed at one level. This is an advantage to forming a partnership over a corporation.
(iv) The general partners are jointly liable for the management of the partnership. This is flexible and would be fair if B&B seek equal rights to manage their entity.
Limited Liability Partnership:
(i) A Limited Liability Partnership is formed by filing with the Secretary of the State indicating a LLP, you must include LLP with the name of your partnership (e.g. B&B, LLP) and you must pay a fee. Also, an LLP is required to carry $100,000 in liability insurance.
(ii) Partners within an LLP escape personal liability, except for that of the individual torts of a partner, which both he and the partnership would be liable for. This would likely be attractive to B&B.
(iii) LLPs have more favorable taxation than a corporation.
(iv) There are no managing partners in a LLP. The partnership would be equally managed.
Limited Liability Company:
SECOND BOLE ANSWER
I would advise Bernard and Beulah to form a Limited Liability Corporation (LLC), because it meets all of their needs with very few disadvantages. At issue here is which form of a business organization most adequately meets the needs of two individuals interested in easy formation, limited personal liability, favorable tax treatment and flexibility in management. The advantages and disadvantages of each type of business organization will be discussed by type, concluding with an explanation as to why an LLC is most favorable.
Corporation: A corporation will not serve Bernard and Beulah’s purposes of restoring a slaughterhouse and operating a business of raising and slaughtering cattle for profit. Texas laws expressly prohibit the use of a corporation for this purpose of farm/agricultural meat processing. Even if they were able to form a corporation, it is unlikely that doing so would be the most advantageous for their stated goals. Corporations, unless formed as a close corp, require more formalities (filing with the secretary of state, creating a board, establishing the financial structure of the company, selling stock, managing shareholders, holding annual meetings, etc.). These formalities would not serve the couple’s interest in flexibility well. Alas, the point is moot because they are not allowed to legally form a corporation.
General Partnership: A general partnership would meet some, but not all, of Bernard and Beulah’s needs. While it is extremely easy to form a partnership (no formal steps are required – two people merely need to agree to conduct business for profit), the two would be held personally liable for any debts the partnership was unable to satisfy. This would be contrary to their stated desire of limiting personal liability for debts and other financial obligations of the business. Still, partnerships do meet their last two needs: i) they receive favorable tax treatment, as the profits are merely taxed as they pass through to the individual instead of on two levels (income to the company and individual); and ii) management is flexible – the partners are entitled to create their own agreement for management, offering flexibility they desire. Due to the persona liability Bernard and Beulah would incur should they start a partnership, I would advise against it. The slaughter company, which they hope to open for profit, would likely subject itself to various lawsuits arising out of production or unmet financial obligations, and the partners would not be shielded from persona liability. This outweighs the benefits of flexibility.
Limited Liability Partnership: A limited liability partnership is similar to a partnership, but it shields its partners from personal liability for financial obligations the LLP cannot meet. Being shielded from personal liability is certainly important to Bernard and Beulah, and this makes the LLP a more advantageous option for the couple. However, the LLP carries with it disadvantages for the prospective slaughter-house as well. To create a limited liability partnership, the couple would have to follow a more formatted, formal procedure – it’s not very difficult, it’s simply less flexible than forming a general partnership. Beulah and Bernard would need to file an application with the secretary of state in Texas, in Austin to be specific, and they would need to designate their company as an LLP by adding the phrase “limited liability partnership” or “LLP” to the company’s title in its application for formation. Further, they would need to pay a filing fee and an added insurance requirement that may be difficult for them to meet at this early stage in the game. The advantage, however, is that Beulah and Bernard would avoid the personal liability for financial obligations by forming an LLP. Additionally, they would receive more favorable tax treatment because the income flows through the company to the partners and they are only taxed once, and they would be able to establish the management of their business in an agreement created by the two of them. Regardless of the advantages, given the startup cost of the LLP, I would recommend a LLC to the couple.
Limited Liability Corporation: The limited liability corporation is Beulah and Bernard’s best option. It satisfies all of their needs by being easy to form, limiting the personal liability of the members, offering favorable tax treatment, and flexibility in management. To form an LLC, Beulah and Bernard would need to file an application with the Secretary of State in Austin and pay the filing fee. Similarly to the LLP, their name would need to include the phrase “limited liability corporation” or “LLC” to be valid. The advantage of the LLC over the LLP is that the LLC does not require the additional insurance payment, which would save Beulah and Bernard a significant amount of money. Moreover, the LLC shield Beulah and Bernard from any personal liability for the LLC’s debt. If they were to run into problems, they could simply cease operations without having any personal liability. Finally, the LLC receives the same tax treatment as the general partnership, and the limited partnership. The only way this would change is if Beulah and Bernard chose to be taxed as a corporation, but they have the option not to, and would be able to elect which treatment was most favorable for their slaughterhouse purposes. Finally, the LLC allows its members to create its own management agreement, offering flexibility that they couple desires.
For the above reasons, the Limited Liability Corporation best serves Beulah and Bernard’s needs in their attempt to begin a slaughter-house for profit.
07/12 #1:
January: A, B and C start hardware store called ABC. Didnt file any documents with Sec of State, but did sign written agreement stating:
We hereby agree to jointly own and operate ABC. We will share profits equally, but only after our initial investments have been paid back. We will not be personally liable to third parties for any obligation of the business.
After signing the agreement, B and C deposited $25k each into ABC bank account at First Bank and A conveyed to ABC full title to warehouse he earned (warehouse to be used in ABC’s business). A worked in the store and was principally responsible for running the business, but consulted with B and C on major business decisions.
March: EE of ABC driving delivery truck to customer to deliver order ran red light colliding with motorist. Motorist sues ABC, A, B, C for personal injury and property damage.
June: B obtained $50k loan from First Bank by executing p/n naming ABC as borrower and First Bank as lender. B deposited proceeds in personal bank account and used them to purchase personal vehicle. A and C knew nothing about the loan or B’s use of loan proceeds. B made regular payments to First Bank on the loan from personal funds.
August: C negotiated deal with Investor to sell warehouse for $110k. C contacted A and B offering to purchase warehouse from ABC for $50k but didnt disclose negotiations with Investor. A and B agreed, C paid $50k to ABC for title to warehouse. Next day, C sold warehouse to Investor for $110k.
End of Year: ABC generated $150k net profit including profit realized from sale of warehouse to C. No prior distributions had been made to anyone. A learned of B’s dealing with First Bank and C’s transaction with investor. A immediately demanded an accounting from both B and C and refused to agree to distribute any profits until receiving accounting from both. By then, B paid the balance of First Bank loan down to $25k.
What form of business organization is ABC?
ABC is a general partnership. Under TBOC, partnership is an association of two or more persons to carry on a business for profit as owners, regardless of their intent. The factors that indicate the creation of a partnership include:
i) the expression of an intent to be partners;
ii) the right to receive a share of profits;
iii) participation or the right to participate in control of the business;
iv) an agreement to contribute or actually contributing money or other property to the business; and
v) an agreement to share or actually sharing losses or liability for claims by third parties against the business.
Based on these factors, A, B, and C are partners. Although they didnt express intent to be partners, they did agree to share profits and jointly own and operate the business (A responsible for running business with input from B and C on major decisions; $25k each in capital contributions). They agreed that they wouldn’t be personally liable to third parties for ABC’s obligations, but an agreement to share losses is not necessary to create a partnership. In fact, partners are jointly and severally liable to third parties on partnership debts whether or not they want to be (see next questions answer). Finally, failure to file documents with Sec of State reinforces conclusion that they formed a partnership. Except for general partnership, every type of business association with more than one owner must file certificate of formation with Sec of State. Therefore, by default, ABC is a general partnership.
07/12 #1:
January: A, B and C start hardware store called ABC. Didnt file any documents with Sec of State, but did sign written agreement stating:
We hereby agree to jointly own and operate ABC. We will share profits equally, but only after our initial investments have been paid back. We will not be personally liable to third parties for any obligation of the business.
After signing the agreement, B and C deposited $25k each into ABC bank account at First Bank and A conveyed to ABC full title to warehouse he earned (warehouse to be used in ABC’s business). A worked in the store and was principally responsible for running the business, but consulted with B and C on major business decisions.
March: EE of ABC driving delivery truck to customer to deliver order ran red light colliding with motorist. Motorist sues ABC, A, B, C for personal injury and property damage.
June: B obtained $50k loan from First Bank by executing p/n naming ABC as borrower and First Bank as lender. B deposited proceeds in personal bank account and used them to purchase personal vehicle. A and C knew nothing about the loan or B’s use of loan proceeds. B made regular payments to First Bank on the loan from personal funds.
August: C negotiated deal with Investor to sell warehouse for $110k. C contacted A and B offering to purchase warehouse from ABC for $50k but didnt disclose negotiations with Investor. A and B agreed, C paid $50k to ABC for title to warehouse. Next day, C sold warehouse to Investor for $110k.
End of Year: ABC generated $150k net profit including profit realized from sale of warehouse to C. No prior distributions had been made to anyone. A learned of B’s dealing with First Bank and C’s transaction with investor. A immediately demanded an accounting from both B and C and refused to agree to distribute any profits until receiving accounting from both. By then, B paid the balance of First Bank loan down to $25k.
To what extent are A, B, and C personally accountable to Motorist?
A, B, and C are personally liable to Motorist. Under agency principles, a partnership is vicariously liable to a third party for a tort committed by an EE acting within the scope of employment. Bc the partners are jointly and severally liable for all obligation of the partnership, the partners are also liable to the third party. Generally, if the tortious conduct was associated with the business in a common sense way (eg the conduct was the same nature or incident to that which the employee was to perform; the conduct was not substantially removed from the authorized time and space limits of the employment), the court will find it was within the scope of the employment.
EE ran red light and collided with Motorist. EE clearly acting w/i scope of employment bc making deliveries to ABC customer using ABC truck. Consequently, ABC is liable to Motorist for EE’s tort. As partners of ABC, A, B, and C are jointly and severally liable to Motorist. The agreement shielding them from personal liability is not effective against third parties like Motorist. However, Motorist must exhaust ABC’s resources before recovering from A, B, or C.
07/12 #1:
January: A, B and C start hardware store called ABC. Didnt file any documents with Sec of State, but did sign written agreement stating:
We hereby agree to jointly own and operate ABC. We will share profits equally, but only after our initial investments have been paid back. We will not be personally liable to third parties for any obligation of the business.
After signing the agreement, B and C deposited $25k each into ABC bank account at First Bank and A conveyed to ABC full title to warehouse he earned (warehouse to be used in ABC’s business). A worked in the store and was principally responsible for running the business, but consulted with B and C on major business decisions.
March: EE of ABC driving delivery truck to customer to deliver order ran red light colliding with motorist. Motorist sues ABC, A, B, C for personal injury and property damage.
June: B obtained $50k loan from First Bank by executing p/n naming ABC as borrower and First Bank as lender. B deposited proceeds in personal bank account and used them to purchase personal vehicle. A and C knew nothing about the loan or B’s use of loan proceeds. B made regular payments to First Bank on the loan from personal funds.
August: C negotiated deal with Investor to sell warehouse for $110k. C contacted A and B offering to purchase warehouse from ABC for $50k but didnt disclose negotiations with Investor. A and B agreed, C paid $50k to ABC for title to warehouse. Next day, C sold warehouse to Investor for $110k.
End of Year: ABC generated $150k net profit including profit realized from sale of warehouse to C. No prior distributions had been made to anyone. A learned of B’s dealing with First Bank and C’s transaction with investor. A immediately demanded an accounting from both B and C and refused to agree to distribute any profits until receiving accounting from both. By then, B paid the balance of First Bank loan down to $25k.
In an equitable action for an accounting:
a) how should First Bank loan taken out by B and profit taken by C on sale of warehouse be treated;
b) what is the resulting amount available for distribution; and
c) how should the distribution be allotted among A, B, and C?
a)
B’S LOAN:
Loan should be treated as B’s personal obligation. Under agency law, a principal is liable on a contract entered by an agent with actual or apparent authority or that he ratifies after the act has been performed. Every partner is an agent of the partnership for the purposes of carrying on its business. Actual authority is that authority a partner reasonably believes he has based on the communications between the partnership and the partner. Under apparent authority, the act of any partner for apparently carrying on in the ordinary course of the partnership business or business of the kind carried out by the partnership binds the partnership unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew that the partner lacked authority. Where the partner has no actual or apparent authority, the partnership may still be bound if it subsequently ratifies the partner’s act.
Here, there’s no indication B had actual authority to borrow for ABC. Moreover, he likely didn’t have apparent authority to borrow for ABC. First Bank may claim B had apparent authority bc B named ABC as borrower on the note. But B was not carrying on ABC’s business–he was acting for himself. Furthermore, B deposited proceeds of the loan in his personal bank account and made payments on the loan from his personal bank account, so First Bank should have known the loan was of a personal nature. Also, ABC didn’t ratify or adopt the loan as neither A nor C knew of it. Consequently, B–not ABC–owes First Bank the $25k.
C AND SALE OF WAREHOUSE:
Bc C usurped a partnership opportunity, the profit on the warehouse sale should be treated as belonging to ABC. A partner has a duty of loyalty to the partnership. Pursuant to that duty, a partner must:
i) account to the partnership for any benefit derived by him from the use of its property;
ii) refrain from dealing with the partnership on behalf of a party having an interest adverse to the partnership; and
iii) refrain from competing or dealing with the partnership in a manner adverse to the partnership.
Furthermore, a partner must discharge his duties to the partnership in good faith in a manner that he reasonably believes to be in the best interest of the partnership.
Here, C got approval from A and B to purchase warehouse, but failed to disclose deal with Investor for $110k. This conduct violates duty of loyalty to partnership, bc C failed to refrain from self-dealing (dealing with partnership in manner adverse to partnership) and failed to discharge duty in good faith and in best interest of the partnership. Consequently, C must turn over profit on warehouse sale to ABC.
b)
resulting amount available for distribution is sum of ABC’s $150k net profit and C’s $60k profit from selling warehouse to Investor, or a total of $210k.
c)
Distribution should be allotted equally. Partners split profits equally unless otherwise agreed. Here, partner’s agreement to split profits equally mirrors the default rule. Thus, each partner should receive $70k (the sum of capital contribution [$25k] and one third the balance [$45k]).
07/12 #2:
HC was formed in 2008; purpose to “construct and sell single family residences and no other purposes.” G purchased shares in HC in IPO in 2008.
June 2010: HC’s Board of Directors called meeting to discuss and vote on whether HC would enter into agreement with NHI to finance construction of Texas nursing homes. G and several other non-director SH’s attended the meeting and voiced objection. Over the Sh’s objections, HC’s board voted unanimously to invest in the nursing home venture.
Intending to challenge HC Board decision, G consulted an attorney for advice on available options. On July 15, 2010, G died.
August 1, 2010: HC signed joint venture agreement with NHI and wired $1 million investment to NHI account. Venture proved unsuccessful and HC’s entire investment was lost.
T (G’s nephew and sole heir) inherited G’s HS shares of stock and became SH January 1, 2011. Knowing of G’s opposition to NHI venture, T now wishes to vindicate G’s position.
What action could G have taken before death to prevent HC from entering into the agreement with NHI?
Under the TBOC, a corporation must do business according to its purpose state in its certificate of formation and anything outside of that is considered ultra vires. In TX, ultra vires contracts are no longer void. However, shareholders may seek an injunction to prevent them from engaging in the activity.Under Texas law, a board has the authority as a fiduciary to act loyally and in good faith to effectuate the purpose and best interest of the corporation. Normally, as allowed by law, certificates name “any legal purpose” as the corporate purpose, but where a certificate limits the scope, directors are bound and any action is deemed “ultra vires”. Although directors are normally protected by the business judgment rule not to second guess the decisions made in good faith after reasonable investigation, they will likely lose this protection (burden on G to prove) when action explicitly ultra vires. If suit had been brought after the act, shareholders could have either ratified or held the directors liable for such acts; however, because such acts are not per se invalid, G would have had a good cause for equitable relief to prevent it in the first place because of high likelihood of success and irreparable injury.
07/12 #2:
HC was formed in 2008; purpose to “construct and sell single family residences and no other purposes.” G purchased shares in HC in IPO in 2008.
June 2010: HC’s Board of Directors called meeting to discuss and vote on whether HC would enter into agreement with NHI to finance construction of Texas nursing homes. G and several other non-director SH’s attended the meeting and voiced objection. Over the Sh’s objections, HC’s board voted unanimously to invest in the nursing home venture.
Intending to challenge HC Board decision, G consulted an attorney for advice on available options. On July 15, 2010, G died.
August 1, 2010: HC signed joint venture agreement with NHI and wired $1 million investment to NHI account. Venture proved unsuccessful and HC’s entire investment was lost.
T (G’s nephew and sole heir) inherited G’s HS shares of stock and became SH January 1, 2011. Knowing of G’s opposition to NHI venture, T now wishes to vindicate G’s position.
What form of action is available to T and what are the conditions precedent to the commencement and prosecution of such an action?
Under the TBOC, in order to bring a derivative action a shareholder must have held shares at the time the alleged misconduct occurred OR have obtained the shares by operation of law. Second, to file a derivative action the shareholder must adequately represent the interests of the corporation. This has been interpreted to mean they must hold shares throughout the litigation. Third, a condition precedent to bring a derivative action is filing notice of the claim on the corporation 90 days prior to filing it. This notice must state the claim in particularity. Also, Tim must file this even if doing so will be futile as it is likely is here because the directors are likely unwilling to bring a suit against themselves for their actions and resulting in losses to HC. After the suit is filed, the corporation through disinterested directors or a committee appointed may try to stop the action if they find it is not in the corporation’s best interest.
A derivative action is a suit asserting a right belonging to the corporation. In order to commence such a proceeding, several requirements must be met. First, Tim must demonstrate stock ownership at the time of the challenged action. However, a shareholder may bring a derivative action if he acquired the shares by operation of law (including by heir-ship) from someone who had them at the appropriate time, which is satisfied here. Second, the shareholder must be able to adequately represent the interests of the corporation, which requires–at least–that the shareholder own stock through the full duration of the proceeding. Third, the shareholder must make a written demand on the corporation to bring suit, stating the claim with particularity, and the corporation to bring the suit itself (they would unlikely do it here because you’re essentially asking the directors to sue themselves). Tim may not bring a derivative suit until 90 days after the demand.
A derivative suit may only be settled by court order. Moreover, the disinterested directors (or a committee of two or more thereof) may, upon good faith determination that the suit is not in the corporation’s best interest, seek to have the suit dismissed, and the court must dismiss the suit if it determines that the determination was made in good faith. Finally, these requirements may not apply if HC is a close corporation with 35 or fewer shareholders. In such a case, Tim, as a shareholder, may bring suit personally, it will not be treated as a derivative action, the relief would go directly to Tim, and the requirements (discussed above) for derivative actions would not need to be satisfied. There are not enough facts to determine whether this exception is applicable.
02/12 #3:
S was officer and EE of XYZ corp (sells playing cards and poker accessories). While S was working with XYZ, she also had side job of bookie for sporting events. S resigned from XYZ Corp and decided to form own corp to carry on gambling business and related activities.
S wants to form a corp under TBOC and sell shares of stock to friends. Corp to be called Game Corp. S will be incorporator, director, officer, and significant SH of the corp. S wants Articles of Incorp to provide:
- corp is incorporated to engage in bookmaking and selling board games with gambling motifs for home use.
- corporation may loan money to officers.
- corp shall provide for profit-sharing plan for officers and EE’s
- corp may donate corporate funds to charities from time to time, and
- S will have limited liability to Gaming Corp’s Sh’s for acts taken or omissions made in her capacity as officer in corp.
Recently S learned that B, an XYZ corp SH threatened to sue S for actions S allegedly took while still employed with XYZ. The theory of the lawsuit is that she improperly received personal benefit from her actions.
S, who is still on good terms with XYZ’s board of directors, met and asked them to adopt a corporate resolution agreeing to indemnify her for any expenses she might incur and judgment she might suffer in the event that B pursues the lawsuit. S told the directors she believes B’s assertions to be meritless but acknowledges the possibility that S could lose.
Can the articles of incorporation for Gaming Corp contain the provisions S has requested?
Gaming corporations certificate of formation can include all but two of the provisions.
Texas law requires that a corporation’s certificate of formation contain the purpose for which the corporation is being formed. The Texas Corp. may not be formed for the purpose of engaging in unlawful activity. Bookmaking is unlawful in Texas and therefore may not be formed to engage in bookmaking. Furthermore, the certificate may set forth any provision not inconsistent with law regarding managing the business and regulating the affairs of the corporation.
Under the TBOC, a corporation has the power to:
1) loan money to officers if the loan reasonably may be expected to benefit Corp;
2) establish pension and profit sharing plans for officers and employees;
3) make donations for charitable purposes.
Thus, Sally‘s desired provisions on these matters may be included in gaming corporations certificate.
The TBOC permits a corporation to provide in its certificate that governing persons are not liable to the corporation or its shareholders for monetary damages for an act or omission in the persons official capacity, subject to certain exceptions (breach of duty of loyalty, where the person receives an improper benefit).
The term “governing person” includes board of directors but specifically excludes officers acting in their capacity as an officer.
Therefore, Sally may not limit her liability to gaming corporation’s shareholders for acts or omissions made in her capacity as an officer in the certificate of formation.
02/12 #3:
S was officer and EE of XYZ corp (sells playing cards and poker accessories). While S was working with XYZ, she also had side job of bookie for sporting events. S resigned from XYZ Corp and decided to form own corp to carry on gambling business and related activities.
S wants to form a corp under TBOC and sell shares of stock to friends. Corp to be called Game Corp. S will be incorporator, director, officer, and significant SH of the corp. S wants Articles of Incorp to provide:
- corp is incorporated to engage in bookmaking and selling board games with gambling motifs for home use.
- corporation may loan money to officers.
- corp shall provide for profit-sharing plan for officers and EE’s
- corp may donate corporate funds to charities from time to time, and
- S will have limited liability to Gaming Corp’s Sh’s for acts taken or omissions made in her capacity as officer in corp.
Recently S learned that B, an XYZ corp SH threatened to sue S for actions S allegedly took while still employed with XYZ. The theory of the lawsuit is that she improperly received personal benefit from her actions.
S, who is still on good terms with XYZ’s board of directors, met and asked them to adopt a corporate resolution agreeing to indemnify her for any expenses she might incur and judgment she might suffer in the event that B pursues the lawsuit. S told the directors she believes B’s assertions to be meritless but acknowledges the possibility that S could lose.
Under what circumstances does the TBOC REQUIRE XYZ to indemnify S and PERMIT XYZ to elect to indemnify S, and what is the scope of the indemnification?
The issue is when indemnification of an officer is required or permitted under Texas law, and the scope of indemnification in each case.
The TBOC REQUIRES a corporation to indemnify an officer against liability for an action or omission committed in the officers official capacity if the officer is wholly successful, on the merits or otherwise, in defense of the proceeding. The officer is indemnified for all reasonable expenses actually incurred in connection with the proceeding.
The TBOC PERMITS the corporation to indemnify an officer against liability if the officer acted in good faith and reasonably believed her conduct was in the corporation’s best interest. In such a case, and the corporation may indemnify the officer for all amounts she owes, including reasonable expenses. However, if the officer received an improper personal benefit or if liability was imposed in a derivative action, indemnification is limited to reasonable expenses actually incurred—unless the officer has been found liable for willful or intentional misconduct or a breach of the duty of loyalty, in which case she recovers nothing.
Here, XYZ must indemnify Sally if she is wholly successful in defending against Ben’s lawsuit. If not wholly successful, XYZ may indemnify her if she acted in good faith and with reasonable belief, but indemnification will be limited as described above if Sally is found to have received an improper benefit from her actions, as alleged by Ben.
Notwithstanding sally’s receipt of a personal benefit, if the court may order XYZ to indemnify Sally if it determines that she is fairly and reasonably entitled to indemnification in view of all the relevant circumstances.
02/12 #4:
C and G are lawyers. They formed PLLC to provide legal services to clients. Last year, G borrowed money from D, a CPA, and assigned his membership interest in PLLC to D as security for the loan. D demanded that:
i) he be admitted as member of PLLC and allowed to participate in management;
ii) he receive G’s distribution of income earned by PLLC until debt is satisfied; and
iii) he be allowed to inspect the books and records of PLLC. C and G have refused all demands.
Last month, C negligently failed to file a lawsuit on E’s behalf (E is a client) before statute of limitations expired. E sued C, G and PLLC for damages arising from C’s negligence.
Could G lawfully assign his membership in PLLC to D, and which of D’s demands can D D enforce?
Gary could lawfully assign his interest in PLLC to Dave, but Dave will not be able to enforce all of his demands.
This question raises two issues: whether a membership interest in a professional limited liability company may be assigned and, if so, the rights of the person to whom the interest is assigned.
A membership interest in a professional limited liability company may be assigned in whole or in part.
An assignee has the right to receive any income or distribution the assignor is entitled to receive, and to inspect the company’s books and records for any proper purpose, but has no right to become a member of the company or participate in management.
Thus, Dave can enforce his demands to receive Gary’s distribution of income earned by PLLC until debt paid off and to inspect PLLC’s books and records (assuming proper purpose), but not his demand to become a member and participate in PLLC’s management.
02/12 #4:
C and G are lawyers. They formed PLLC to provide legal services to clients. Last year, G borrowed money from D, a CPA, and assigned his membership interest in PLLC to D as security for the loan. D demanded that:
i) he be admitted as member of PLLC and allowed to participate in management;
ii) he receive G’s distribution of income earned by PLLC until debt is satisfied; and
iii) he be allowed to inspect the books and records of PLLC. C and G have refused all demands.
Last month, C negligently failed to file a lawsuit on E’s behalf (E is a client) before statute of limitations expired. E sued C, G and PLLC for damages arising from C’s negligence.
What liability do C, G and PLLC each have to E for C’s negligence?
Cathy and PLLC are liable to Ed for Cathy’s negligence, but Gary is not.
Generally, a member of a professional limited liability company is not liable for the debts, obligations, or liability of a professional limited liability company.
Moreover, members are not liable for another member’s tort. However, the person who committed the tort is liable to the injured party. Furthermore, the professional limited liability company will be liable for torts committed by members in the ordinary course of business.
Because Cathy was acting in the ordinary course of business when she negligently failed to file Ed’s lawsuit, both she and PLLC are liable to Ed, but Gary is not.
02/12 #4:
C and G are lawyers. They formed PLLC to provide legal services to clients. Last year, G borrowed money from D, a CPA, and assigned his membership interest in PLLC to D as security for the loan. D demanded that:
i) he be admitted as member of PLLC and allowed to participate in management;
ii) he receive G’s distribution of income earned by PLLC until debt is satisfied; and
iii) he be allowed to inspect the books and records of PLLC. C and G have refused all demands.
Last month, C negligently failed to file a lawsuit on E’s behalf (E is a client) before statute of limitations expired. E sued C, G and PLLC for damages arising from C’s negligence.
If C and G formed a limited liability partnership instead of forming a professional limited liability company, what liability would C, G and the limited liability partnership each have had for C’s negligence?
If Cathy and Gary had formed a limited liability partnership instead of a limited liability company, Cathy and the firm would be liable to Ed for Cathy’s negligence, but Gary would not.
A limited liability partnership is like a limited liability company in this regard: a partner who is negligent is liable for her own acts, but the other partners are not, and the firm is vicariously liable for torts committed by partners in the ordinary course of its business.
As a result Cathy and the firm would be liable to Ed for Cathy’s negligence, but Gary would not.
