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Other Organizational Forms for Small Business
Chapter 31
The Limited Liability Company
• An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.
• An LLC is a legal entity separate from its owners.
• LLC’s are increasingly the entity of choice for businesses.
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The Limited Liability Company
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• Nature of the LLC. –LLC’s are creatures of state law. –Owners are called “members” (not
shareholders) and their ownership is called an “interest” (not shares).
The Limited Liability Company
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• Nature of the LLC. –Limited Liability of Members.
•Even when sued by employees of the firm.
–Liability under the Alter-Ego Theory.•As with corporations, courts may ‘pierce the veil’ of the LLC and hold members personally liable.
The Limited Liability Company
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• Nature of the LLC. –Other Similarities to Corporations.
•Separate legal entity from owners.•Can hold property separately.• ‘Foreign’ designation, doing business in another state.
The Limited Liability Company
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• Formation of the LLC. –Requires filing articles of organization
with central state authority.–Contents of the Articles:
•Name of Business.•Principal Address. •Name and Address of Registered Agent.•Names of the Owners.
The Limited Liability Company
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• Formation of the LLC. –Preformation Contracts.
•Prior to charter, owners of the firm are called “promoters”.
• If a promoter forms a “preincorporation contract” prior to formation, they may be personally liable.
The Limited Liability Company
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• Advantages of the LLC. –Limited Liability: to amount of investment.–Flexibility in Taxation.
• Two or members can choose to be taxed as partnership (pass through) or corporation (double-tax)
–Management and Foreign Investors.• LLC’s allow foreign investors to own
LLC interests and flexible management.
The Limited Liability Company
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• Disadvantages of the LLC.–The main disadvantage is the lack of
uniformity with state laws.–Therefore businesses that operate in
multiple states may not receive consistent treatment, and may make it harder to attract investors.
• Management of an LLC.–Either member-managed, or manager-
managed. –In member management, all members
participate in management and decisions.–Managers and members owe fiduciary
duties to the LLC and to each other.
LLC Management and Operation
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• LLC Operating Agreement:– Analogous to corporation’s bylaws.–(1) Management and how future
managers will be chosen.–(2) How profits will be divided. –(3) How membership interests may be
transferred.
LLC Management and Operation
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–(4) Dissociation procedures.–(5) Whether formal meetings will be
held.–(6) How voting rights will be
apportioned.
LLC Management and Operation
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• LLC Operating Agreement:–State Statute Fills in the Gaps: LLC
statute governs where operating agreement is silent.
–Partnership Law May Apply. If LLC statute is silent, courts may apply partnership principles.
LLC Management and Operation
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• An LLC member has the power, but not right, to dissociate from the LLC at any time.
• Dissociation of an LLC is triggered by events similar to partnership.
Dissociation and Dissolution of an LLC
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• Effect of Dissociation.–Dissociating member loses the right to
participate in the management , and the right to act as an agent.
–Member also has the right to have her interest bought out by other members.
Dissociation and Dissolution of an LLC
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• Effect of Dissociation.–If the dissociation violates the operating
agreement, it is wrongful and the member can be held liable for damages.
Dissociation and Dissolution of an LLC
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• Dissolution.–Dissociated member has no right to
force the LLC to dissolve. –Remaining members can choose to
continue or dissolve. –Operating agreement ‘trigger’ events
will cause dissolution.
Dissociation and Dissolution of an LLC
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• Winding Up.–Members must collect and liquidate the
assets.–After all assets are sold, proceeds
distributed to pay creditors, then capital contributions, then remaining $ distributed pro-rata.
Dissociation and Dissolution of an LLC
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Special Business Forms
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• Joint Venture.–When two or more entities combine efforts or
property for a single transaction or project. –Unless agreed otherwise, JV’s share profits and
losses equally.–Common in international transactions.–Similarities to Partnership. Resembles a
partnership and is taxed like a partnership with equal rights of management.
Special Business Forms• Joint Venture.
– Differences from Partnerships.• A JV is limited in time and scope,
whereas a partnership is an ongoing business.
• JV members have less implied and apparent authority than partners.
– Death of JV member does not terminate JV.– JV ordinarily terminates when project is
completed. 20
Special Business Forms
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• Syndicate (Investment Group):–Group of individuals getting together
to finance a particular project.
Special Business Forms
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• Cooperative.–Association organized to provide a not-
for-profit service to members.
Other Organizational Forms for Small Business
Chapter 31