Other Organizational Forms for Small Business Chapter 31

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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• 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).


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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.


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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.


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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.


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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.


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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.


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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.


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–(4) Dissociation procedures.–(5) Whether formal meetings will be

held.–(6) How voting rights will be

apportioned.


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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.


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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.


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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.


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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.


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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.


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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

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• Syndicate (Investment Group):–Group of individuals getting together

to finance a particular project.


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• Cooperative.–Association organized to provide a not-

for-profit service to members.

Other Organizational Forms for Small Business

Chapter 31

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Other Organizational Forms for Small Business Chapter 31