Chapter#act 34 Small Business, Entrepreneurship, and General

Partnerships

Entrepreneurship Definition:
Person who forms and operates a new business either by himself or herself or with others. An
entrepreneur is an initiator, a challenger and a driver. Someone that creates something new,
either an initiative, a business or a company. He or she makes the beginning of a venture,
project or activity.

Types/Forms of organizations:
– Sole Proprietorship
– General Partnership
– Limited Partnership
– Limited Liability Partnership
– Limited Liability Company
– Corporation
Sole Proprietorship:
A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated
business that has just one owner who pays personal income tax on profits earned from the
business. Sole proprietorship does not create separate legal entity from its owner. The owner
has the personal liability against all the debts related to business.
Features of sole proprietorship:
1. One Man Ownership.
2. No Separate Business Entity.
3. No Separation between Ownership and Management.
4. Unlimited Liability.
5. All Profits or Losses to the Proprietor.
6. Fewer Formalities.
7. Continuity depends upon the owner. The death, retirement, bankruptcy, insanity,
imprisonment etc will have an effect on the sole proprietorship.
8. One man’s capital.
9. One-man Control.
Advantages:
1. Easy to Form and Wind up.
2. Direct Motivation.
3. Quick Decision and Prompt Action.
4. Better Control.
5. Maintenance of Business Secrets.
6. Close Personal Relation.
7. Flexibility in Operation.
8. Encourages Self-employment.

Disadvantages:
1. Limited Capital.
2. Unlimited Liability.
3. Lack of Continuity.
4. Limited Size.
5. Lack of Managerial Expertise.

Creation:
a. No formalities
b. No federal or state government approval

Case 34.1: Sole Proprietorship:

Case

 Bank of America, N.A. v. Barr

 9 A.3d 816 (2010)
 Supreme Judicial Court of Maine
Issue

 Is Barr, the sole owner of The Stone Scone, personally liable for the unpaid debt?
Constance Barr was owner of Stone scone a business operated as a sole proprietorship. Fleet
bank approved 100,000 credit to Barr. Sent the approval letter to both Barr and Stone Scone.
Stone Scone did not make all payments after four years and had a total of 91,444 of unpaid
principal. Interest on the unpaid principal increased by 6.5% per year. Bank of America acquired
Fleet Bank, then sued the Stone Scone and Barr for the unpaid principal and interest. Barr
argued she converted to an limited liability company, but denied personal responsibility for the
unpaid debt. Trail court found Barr responsible. Barr appealed. Supreme court affirmed trial
court's decision, because Barr was the sole proprietor of the stone scone, and the old sole
proprietorship still owed Bank of America.

Case Questions
What is a sole proprietorship? What are the main attributes of sole proprietorship?
A sole proprietorship is a form of business in which the owner is actually the business; the
business is not a separate legal entity. It is the most simple business organization because it is
not costly to form, the owner has the right to decide all management decisions without the
input of others such as partners such as HR and the conditions of employment, the owner
retains all profits and can make the sole decision on the sale of the business.
Did Barr act ethically in denying responsibility for The Stone Scone’s debt?
Yes, she did act unethically. When she commenced her business she did so as a sole proprietor
so she not only assumed all profits but she also assumed all debts and risks. So for her to try to
escape her financial obligations is unethical. However, Barr did change the business form to an
LLC with limits her personal liability so she should not personally be liable for an unsecured
loan.
Why sole proprietors are held personally liable for the debts of their businesses?
Just as they receive all profits, they assume all losses. That is the terms of the form of business.
They make all decisions including financial.
https://casetext.com/case/bank-of-america-na-v-barr?
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Taxation of Sole Proprietorship:
A sole proprietorship is not a separate legal, so it does not pay taxes at the business level.
Instead, the earning and the losses from a sole proprietorship are reported on the personal
income tax filing of the owner. A sole proprietor has to file tax returns and pay taxes to state
and federal governments.

General Partnership:
A general partnership is a business arrangement by which two or more voluntary individuals
agree to carry out a business as co-owners for profit and share in all assets, profits, and
financial and legal liabilities of a jointly-owned business. In a general partnership, partners
agree to unlimited liability, meaning liabilities are not capped and can be paid through the
seizure of an owner's assets. Simply put, general partners or partners are personally liable for
the debts. Furthermore, any partner may be sued for the business's debts.
Uniform Partnership Act:
It is a model act that codifies Partnership Law. The Uniform Partnership Act (UPA) provides
governance for business partnerships in several U.S. states. The UPA also offers regulations
governing the dissolution of a partnership when a partner dissociates.
https://www.upcounsel.com/uniform-partnership-act

Formation of a General Partnership:

1. Choose a name for your business:
Choosing a name for your new partnership is a critical task. This is the name that will represent
your firm’s services to the world. There are as many as three different places where you can
check the availability of a business entity name:
1) Local County Registrar
2) Secretary of State Office
3) The United States Patent and Trademark Office
2. Create a partnership agreement:
Once you establish your business name, you’ll want to draft a partnership agreement. All
individual partners with an ownership interest should sign and review this agreement. This step
isn’t required by law, but it can go a long way toward helping diffuse conflicts that could arise
between partners in the future.
  The name of the partnership and the type of business it is
 The purpose of the partnership
 The fictitious business name if there is one
 How partners share responsibilities and the ownership percentage of each
 The capital contribution that each partner made
 What will happen in the case of additional partner contributions
 How partners determine their share of the profits
 The ways in which partners split losses, debts, and other liabilities
 The management duties of partners
 Who will settle disagreements
 What actions warrant losses of the partnership
 How to pass or change ownership
 The monetary amount required for a buyout
 What needs to happen to dissolve the partnership
 What occurs in the case of the death of a partner
 How to divide the assets of the partnership upon dissolution

3. Secure an Employer Identification Number:

You’ll want to secure an Employer Identification Number from the IRS. Doing so allows you to
pay employees and pay business taxes.
4. Open a bank account:
5. Secure licenses and permits:
6. Maintain other regulatory and tax requirements

To qualify as a general partnership under the UPA, a business must meet the following criteria:

 Association of two or more persons:

 Carrying on a business
 Should have co-owners
 Aim should be profit
Right to participate in the management of a business determines the existence of a general
partnership
https://saylordotorg.github.io/text_legal-aspects-of-corporate-management-and-
finance/s14-partnerships-general-character.html
https://quickbooks.intuit.com/r/structuring/forming-partnership-step-step-guide/

Name of the General Partnership:

Can operate under name of any one or more of the partners, or May use fictitious name

 Must file fictitious business name statement

 Publish notice in newspaper
 Cannot be similar to name used by another business
Fictitious business name. A fictitious business name is used when the trade name is different
from the legal name of the entity (individual, partnership, LLC, or corporation) that owns the
business. For example, if Frank Farmer called his sole proprietorship “American Appliances,”
“American Appliances” would be considered a fictitious name because it does not contain the
owner’s last name. A fictitious business name is sometimes referred to as a d/b/a (doing
business as) name. Fictitious business names must be registered.
A legal name is the official name of the entity that owns a business. A sole proprietorship’s legal
name is the owner’s full name. If a general partnership has given a name to itself in a written
partnership agreement, then that name is the general partnership’s legal name. Otherwise, a
general partnership’s legal name is the last names of the owners.

Partnership Agreement:
The agreement to form a general partnership may be oral, written, or implied from the conduct
of the parties. It may even be created inadvertently. No formalities are necessary, although a
few states require general partnerships to file certificates of partnership with an appropriate
government agency. General partnerships that exist for more than one year or are authorized
to deal in real estate must be in writing under the Statute of Frauds.
It is good practice for partners to put their partnership agreement in writing. A written
document is important evidence of the terms of the agreement, particularly if a dispute arises
among the partners.
A written agreement is called a general partnership agreement, or articles of general
partnership, or articles of partnership. The parties can agree to almost any terms in their
partnership agreement, except terms that are illegal. The articles of partnership can be short
and simple or long and complex. If an agreement fails to provide for an essential term or
contingency, the provisions of the UPA apply. Thus, the UPA acts as a gap-filling device to the
partners’ agreement.

Taxation of general partnerships:

Partnerships are not taxable entities, so they do not pay income taxes. Instead, each partner’s
distributive share, which includes income or other gain, loss, deductions, and credits, must be
included in the partner’s personal income tax return, whether or not the share is actually
distributed. This is called flow-through taxation.

Case 34.2: General Partnership:

Case

 Pegg v. Kohn
 861 N.W.2d 764
 Supreme Court of North Dakota
Issue

 Was an oral general partnership created between Pegg and Kohn?

Kelly Kohn and Kohn Electric, LLC, appealed a damages award given in favor of Eugene Pegg for
$11,299 for breach of an oral partnership agreement. Pegg had been an electrician for more
than 30 years and had several employers throughout his career. In 1999, Sungold, a sunflower
seed processing facility, became Pegg's customer, and Pegg brought the Sungold account with
him when he changed employers. Kohn had been an electrician since 1996 and became a
partner in each of the companies in which he was employed. In 2009, both Pegg and Kohn
worked at Enterprise Electric in Valley City. In March 2009, Kohn left Enterprise Electric and
started Kohn Electric. In June 2009, Pegg was dissatisfied with his job at Enterprise Electric
because the company refused to pay him a percentage of the substantial revenue generated by
the Sungold account. Pegg testified he approached Kohn and proposed that they become
partners in Kohn Electric, with Pegg contributing the Sungold account and $10,000 in capital. In
return, Pegg would receive 10 percent of the gross revenue generated by the Sungold account,
10 percent of Kohn Electric's net revenue, and an hourly wage. Pegg stated he agreed to the
same wage he received from Enterprise Electric and agreed to no paid vacations or overtime
pay. Although no written agreement existed about the alleged partnership, Pegg testified he
and Kohn "shook hands on it," and Pegg began working at Kohn Electric in July 2009. Pegg paid
$9,152.49 for a pickup truck titled in Kohn Electric and paid for tools and equipment for the
business. After Kohn denied he and Pegg were partners, Pegg quit Kohn Electric and in 2011
brought this action for breach of the oral partnership agreement, seeking recovery of proceeds
due under the agreement. Before trial, Kohn paid Pegg $9,152.49 for his contributions to the
business. Following a bench trial, the district court found the parties entered into an oral
partnership agreement, Pegg substantially performed his obligations under the agreement by
contributing the pickup, equipment and the Sungold account, and Kohn breached the
agreement. The court found no agreement existed giving Pegg 10 percent of Kohn Electric's net
income from all accounts, but it awarded Pegg $11,164 representing 10 percent of the gross
revenue generated from the Sungold account during Pegg's employment. Judgment of $11,299,
including costs and disbursements, was entered against Kohn and Kohn Electric. Because the
district court's challenged findings of fact were not clearly erroneous, the Supreme Court
affirmed.

https://caselaw.findlaw.com/nd-supreme-court/1696659.html

Rights of general partners:

1) Right to participate in management
2) Right to share in profits
3) Right to compensation
4) Right to indemnification
5) Right to return of loans
6) Right to return of capital
7) Right to information

Right to participate in management: A situation in which, unless otherwise agreed, each

partner has a right to participate in the management of a partnership and has an equal vote on
partnership matters.
In other words, each partner has one vote, regardless of the proportional size of his or her
capital contribution or share in the partnership’s profits. Under the UPA, a simple majority
decides most ordinary partnership matters. If the vote is tied, the action being voted on is
considered to be defeated.

Right to Share in Profits: Unless otherwise agreed, the UPA mandates that a general partner
has the right to an equal share in the partnership’s profits and losses. The right to share in the
profits of the partnership is considered to be the right to share in the earnings from the
investment of capital.
Where a partnership agreement provides for the sharing of profits but is silent as to how losses
are to be shared, losses are shared in the same proportion as profits. The reverse is not true,
however. If a partnership agreement provides for the sharing of losses but is silent as to how
profits are to be shared, profits are shared equally.
Partnership agreements can provide that profits and losses are to be allocated in proportion to
the partners’ capital contributions or in any other manner.

Right to Compensation: Unless otherwise agreed, the UPA provides that no general partner is
entitled to remuneration for his or her performance in the partnership’s business. Under this
rule, partners are not entitled to receive a salary for providing services to the partnership unless
agreed to by the partners.
Under the UPA, it is implied that general partners will devote full time and service to the
partnership. Thus, unless otherwise agreed, income earned by partners from providing services
elsewhere belongs to the partnership
Right to Indemnification: Partners sometimes incur personal travel, business, and other
expenses on behalf of the partnership. A general partner is entitled to indemnification (i.e.,
reimbursement) for such expenditures if they are reasonably incurred in the ordinary and
proper conduct of the business

Right to Return of Loans: A partner who makes a loan to the partnership becomes a creditor of
the partnership. The partner is entitled to repayment of the loan, but this right is subordinated
to the claims of creditors who are not partners. The partner is also entitled to receive interest
from the date of the loan.

Right to Return of Capital: Upon termination of a general partnership, the partners are entitled
to have their capital contributions returned to them. However, this right is subordinated to the
rights of creditors, who must be paid their claims first

Right to Information: Each general partner has the right to demand true and full information
from any other partner of all things affecting the partnership. The corollary to this rule is that
each partner has a duty to provide such information upon the receipt of a reasonable demand.
The partnership books (e.g., financial records, tax records) must be kept at the partnership’s
principal place of business. The partners have an absolute right to inspect and copy these
records.

Duties of General Partners:

 Duty of Loyalty
 Duty of Care
 Duty to Inform
 Duty of Obedience
 Right to an Accounting

Duty of Loyalty: General partners are in a fiduciary relationship with one another. As such, they
owe each other a duty of loyalty. This duty is imposed by law and cannot be waived. If there is a
conflict between partnership interests and personal interests, the partner must choose the
interest of the partnership.
Forms of breach of loyalty:
I. Self-dealing
II. Usurping a partnership opportunity
III. Competing with the partnership
IV. Making secret profits
V. Breach of confidentiality
VI. Misuse of partnership property

Duty of Care: A general partner must use reasonable care and skill in transacting partnership
business. The duty of care calls for the partners to use the same level of care and skill that a
reasonable business manager in the same position would use in the same circumstances.
Breach of the duty of care is negligence. A general partner is liable to the partnership for any
damages caused by his or her negligence. The partners are not liable for honest errors in
judgment.

Duty to Inform: General partners owe a duty to inform their co-partners of all information they
possess that is relevant to the affairs of the partnership. Even if a partner fails to do so, the
other partners are imputed with knowledge of all notices concerning any matters relating to
partnership affairs. This is called imputed knowledge. Knowledge is also imputed regarding
information acquired in the role of partner that affects the partnership and should have been
communicated to the other partners.
Duty of Obedience: The duty of obedience requires general partners to adhere to the
provisions of the partnership agreement and the decisions of the partnership. A partner who
breaches this duty is liable to the partnership for any damages caused by the breach.
Right to an Accounting: General partners are not permitted to sue the partnership or other
partners at law. Instead, they are given the right to bring an action for an accounting against
other partners. An action for an accounting is a formal judicial proceeding in which the court is
authorized to (1) review the partnership and the partners’ transactions and (2) award each
partner his or her share of the partnership assets. An action results in a money judgment for or
against partners, according to the balance struck.
agent

Liability of General Partners:

Tort Liability of General Partners: While acting on partnership business, a partner or an
employee of the general partnership may commit a tort that causes injury to a third person.
This tort could be caused by a negligent act, a breach of trust, breach of fiduciary duty,
defamation, fraud, or another intentional tort.
The general partnership is liable if the act is committed while the person is acting within the
ordinary course of partnership business or with the authority of his or her co-partners. General
partners have unlimited personal liability for the debts and obligations of the partnership.
Under the UPA, general partners have joint and several liability for torts and breaches of trust.
This is so even if a partner did not participate in the commission of the act. This type of liability
permits a third party to sue one or more of the general partners separately. Judgment can be
collected only against the partners who are sued.
The partnership and partners who are made to pay tort liability may seek indemnification from
the partner who committed the wrongful act. A release of one partner does not discharge the
liability of other partners.
Joint and several liability: Tort liability of partners together and individually. A plaintiff can sue
one or more partners separately. If successful, the plaintiff can recover the entire amount of
the judgment from any or all of the defendant-partners who have been found liable.

Contract Liability of General Partners: As a legal entity, a general partnership must act through
its agents—that is, its partners and employees. Contracts entered into with suppliers,
customers, lenders, or others on the partnership’s behalf are binding on the partnership.
General partners have unlimited personal liability for contracts of the partnership.
 Joint liability: Liability of partners for contracts and debts of the partnership. A plaintiff
must name the partnership and all of the partners as defendants in a lawsuit.

Liability of Incoming Partners: A new partner who is admitted to a general partnership is liable
for the existing debts and obligations (antecedent debts) of the partnership only to the extent
of his or her capital contribution. The incoming partner is personally liable for debts and
obligations incurred by the general partnership after becoming a partner.

Liability of Outgoing Partners: If a general partnership is dissolved because a general partner

leaves the partnership and the partnership is continued by the remaining partners, the
outgoing partner is personally liable for the debts and obligations of the partnership at the time
of dissolution. The outgoing partner is not liable for any new debts and obligations incurred by
the general partnership after the dissolution, as long as proper notification of his or her
withdrawal from the partnership has been given to the creditor.

Dissolution of General Partnership:

The dissolution of a partnership is “the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on of the business”. A partnership that is
formed for a specific time or purpose dissolves automatically upon the expiration of the time or
the accomplishment of the objective. Any partner of a partnership at will may rightfully
withdraw and dissolve the partnership at any time.
Partnership for a term: A partnership created for a fixed duration.
Partnership at will: A partnership created with no fixed duration.

Winding Up of the Partnership: Unless a partnership is continued, the winding up of the

partnership follows its dissolution. The process of winding up consists of the liquidation (sale) of
partnership assets and the distribution of the proceeds to satisfy claims against the partnership.
The surviving partners have the right to wind up the partnership. If a surviving partner performs
the winding up, he or she is entitled to reasonable compensation for his or her services.

Wrongful Dissolution: A situation in which a partner withdraws from a partnership without

having the right to do so at that time.
Notice of Dissolution: The dissolution of a partnership terminates the partners’ actual
authority to enter into contracts or otherwise act on behalf of the partnership. Notice of
dissolution must be given to certain third parties.
Third parties who have actually dealt with the partnership must be given actual notice (verbal
or written) of dissolution or have acquired knowledge of the dissolution from another source.
2. Third parties who have not dealt with the partnership but have knowledge of it must be
given either actual or constructive notice of dissolution. Constructive notice consists of
publishing a notice of dissolution in a newspaper of general circulation serving the area where
the business of the partnership was regularly conducted.
3. Third parties who have not dealt with the partnership and do not have knowledge of it do
not have to be given notice.
If proper notice is not given to a required third party after the dissolution of a partnership, and
a partner enters into a contract with the third party, liability may be imposed on the previous
partners on the grounds of apparent authority

Distribution of Assets:
After dissolution of partnership, debts are satisfied in the following order:
1) Creditors (except creditor-partners)
2) Creditor-partners
3) Capital contributions
4) Profits
If partnership cannot satisfy claims, partners are personally liable.

Continuation of a General Partnership after Dissolution: The surviving, or remaining,

partners have the right to continue a partnership after its dissolution. It is good practice for the
partners of a partnership to enter into a continuation agreement that expressly sets forth the
events that allow for continuation of the partnership, the amount to be paid outgoing partners,
and other details.
The creditors of the old partnership become creditors of the new partnership and have equal
status with the creditors of the new partnership.

Right of survivorship: A rule which provides that upon the death of a general partner,
the deceased partner’s right in specific partnership property vests in the remaining partner or
partners; the value of the deceased general partner’s interest in the partnership passes to his or
her beneficiaries or heirs.

Chapter# 35 Limited Partnerships and Special Partnerships

Definition of Limited Partnership:

A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a
partnership made up of two or more partners. The general partner oversees and runs the
business while limited partners do not partake in managing the business. However, the general
partner of a limited partnership has unlimited liability for the debt, and any limited partners
have limited liability up to the amount of their investment.

More specifically, a limited partnership, or special partnership, has two types of partners: (1)
general partners, who invest capital, manage the business, and are personally liable for
partnership debts, and (2) limited partners, who invest capital but do not participate in
management and are not personally liable for partnership debts beyond their capital
contributions.
A limited partnership must have one or more general partners and one or more limited
partners. There are no upper limits on the number of general or limited partners allowed in a
limited partnership. Any person—including natural persons, partnerships, limited partnerships,
trusts, estates, associations, and corporations—may be a general or limited partner. A person
may be both a general partner and a limited partner in the same limited partnership.

Revised Uniform Limited Partnership Act (RULPA):

A revision of the ULPA that provides a more modern, comprehensive law for the formation,
operation, and dissolution of limited partnerships

Certificate of Limited Partnership:

The creation of a limited partnership is formal and requires public disclosure. The entity must
comply with the statutory requirements of the RULPA or other state statutes. Under the RULPA,
two or more persons must execute and sign a certificate of limited partnership. The certificate
must contain the following information:
• Name of the limited partnership.
• General character of the business.
• Address of the principal place of business and name and address of the agent to receive
service of legal process.
• Name and business address of each general and limited partner.
• Latest date on which the limited partnership is to dissolve.
• Amount of cash, property, or services (and description of property or services) contributed by
each partner and any contributions of cash, property, or services promised to be made in the
future.
• Any other matters that the general partners determine to include

Foreign Limited Partnership:

It is a foreign limited partnership in all other states. Under the RULPA, the law of the state in
which the entity is organized governs its organization, its internal affairs, and the liability of its
limited partners. Before transacting business in a foreign state, a foreign limited partnership
must file an application for registration with that state’s secretary of state. If the application
conforms to that state’s law, a certificate of registration permitting the foreign limited
partnership to transact business will be issued. Once registered, a foreign limited partnership
may use the courts of the foreign state to enforce its contracts and other rights.

Name of Limited Partnership:

The name of a limited partnership may not include the surname of a limited partner unless (1) it
is also the surname of a general partner or (2) the business was carried on under that name
before the admission of the limited partner. A limited partner who knowingly permits his or her
name to be used in violation of this provision becomes liable as a general partner to any
creditors who extend credit to the partnership without actual knowledge of his or her true
status.
Other restrictions on the name of a limited partnership are that (1) the name cannot be the
same as or deceptively similar to the names of corporations or other limited partnerships, (2)
states can designate words that cannot be used in limited partnership names, and (3) the name
must contain, without abbreviation, the words limited partnership.

Capital Contributions:
Under the RULPA, the capital contributions of general and limited partners may be in cash,
property, services rendered, or promissory notes or other obligations to contribute cash or
property or to perform services. A partner or creditor of a limited partnership may bring a
lawsuit to enforce a partner’s promise to make a contribution.

Defective Formation:
Defective formation occurs when (1) a certificate of limited partnership is not properly filed, (2)
there are defects in a certificate that is filed, or (3) some other statutory requirement for the
creation of a limited partnership is not met. If there is a substantial defect in the creation of a
limited partnership, persons who thought they were limited partners can find themselves liable
as general partners. Partners who erroneously but in good faith believe they have become
limited partners can escape liability as general partners by either (1) causing the appropriate
certificate of limited partnership (or certificate of amendment) to be filed or (2) withdrawing
from any future equity participation in the enterprise and causing a certificate showing this
withdrawal to be filed.
The limited partner remains liable to any third party who transacts business with the enterprise
before either certificate is filed if the third person believed in good faith that the partner was a
general partner at the time of the transaction.

Limited Partnership Agreement:

Although not required by law, the partners of a limited partnership often draft and execute a
limited partnership agreement (also called the articles of limited partnership) that sets forth the
rights and duties of the general and limited partners; the terms and conditions regarding the
operations, termination, and dissolution of the partnership; and so on. Where there is no such
agreement, the certificate of limited partnership serves as the articles of limited partnership.
It is good practice to establish voting rights in a limited partnership agreement or certificate of
limited partnership. The limited partnership agreement can provide which transactions must be
approved by which partners (i.e., general, limited, or both). General and limited partners may
be given unequal voting rights.

Share of Profits and Losses:

A limited partnership agreement may specify how profits and losses from the limited
partnership are to be allocated among the general and limited partners. If there is no such
agreement, the RULPA provides that profits and losses from a limited partnership are shared on
the basis of the value of each partner’s capital contribution.

Right to Information:
Upon reasonable demand, each limited partner has the right to obtain from the general
partners true and full information regarding the state of the business, the financial condition of
the limited partnership, and so on. In addition, the limited partnership must keep the following
records at its principal office:

 A copy of the certificate of limited partnership and all amendments thereto.

 A list of the full name and business address of each partner.
 Copies of effective written limited partnership agreements.
 Copies of federal, state, and local income tax returns.
 Copies of financial statements of the limited partnership for the three most recent
years.

Admission of a New Partner:

Once a limited partnership has been formed, a new limited partner can be added only upon the
written consent of all partners, unless the limited partnership agreement provides otherwise.
New general partners can be admitted only with the specific written consent of each partner. A
limited partnership agreement cannot waive the right of partners to approve the admission of
new general partners. The admission is effective when an amendment of the certificate of
limited partnership reflecting that fact is filed.

Master Limited Partnership:

• Limited partnership interests are traded on organized securities exchanges
• An investment in an MLP is liquid as it can be sold on the stock exchange
• Pay their investors quarterly; required distributions at an amount stated in
the investment contract
– Tax benefits

Liability of General and Limited Partners:

Liability of General Partners:
 General partners have unlimited personal liability for the debts and obligations
of the limited partnership. This liability extends to debts that cannot be satisfied with the
existing capital of the limited partnership.
The RULPA permits a corporation or limited liability company to be a general
partner or the sole general partner of a limited partnership. Where this is permissible, this type
of general partner is liable for the debts and obligations of the limited partnership only to the
extent of its capital contribution to the partnership.

Liability of Limited Partners:

Generally, limited partners have limited liability for the debts and obligations of
the limited partnership. Limited partners are liable only for the debts and obligations of the
limited partnership up to their capital contributions, and they are not personally liable for the
debts and obligations of the limited partnership.

Liability on a Personal Guarantee:

On some occasions, when limited partnerships apply for an extension of credit
from a bank, a supplier, or another creditor, the creditor will not make the loan based on the
limited partnership’s credit history or ability to repay the credit. The creditor may require a
limited partner to personally guarantee the repayment of the loan in order to extend credit to
the limited partnership. If a limited partner personally guarantees a loan made by a creditor to
the limited partnership and the limited partnership defaults on the loan, the creditor may
enforce the personal guarantee and recover payment from the limited partner who personally
guaranteed the repayment of the loan.

Participation in Management:
Under partnership law, general partners have the right to manage the affairs of the limited
partnership. On the other hand, as a trade-off for limited liability, limited partners give up their
right to participate in the control and management of the limited partnership. This means, in
part, that limited partners have no right to bind the partnership to contracts or other
obligations.
Under the RULPA, a limited partner is liable as a general partner if his or her participation in the
control of the business is substantially the same as that of a general partner, but the limited
partner is liable only to persons who reasonably believed him or her to be a general partner.
 Permissible Activities of Limited Partners: The RULPA clarifies the types of activities that
a limited partner may engage in without losing his or her limited liability. These are:
1. Being an agent, an employee, or a contractor of the limited partnership.
2. Being a consultant or an advisor to a general partner regarding the limited partnership.
3. Acting as a surety for the limited partnership.
4. Approving or disapproving an amendment to the limited partnership agreement.
5. Voting on the following partnership matters:
a. The dissolution and winding up of the limited partnership.
b. The sale, transfer, exchange, lease, or mortgage of substantially all of the assets of the
limited partnership.
c. The incurrence of indebtedness by the limited partnership other than in the ordinary course
of business.
d. A change in the nature of the business of the limited partnership.
e. The removal of a general partner.

General Limited partners are not individually liable for the obligations or conduct of the part
Rule beyond the amount of their capital contribution

Exceptions Limited partners are individually liable for the debt, obligations, and tortious acts of
to the partnership in three situations:
General
1. Defective Formation
Rule
2. Participation in Management
3. Personal Guarantee

Dissolution of a Limited Partnership:

The RULPA establishes rules for the dissolution and winding up of limited partnerships. Upon
the dissolution and the commencement of the winding up of a limited partnership, a certificate
of cancellation must be filed by the limited partnership with the secretary of state of the state
in which the limited partnership is organized.
Causes of Dissolution:

1) The end of the life of the limited partnership, as specified in the

certificate of limited partnership (i.e., the end of a set time period or the
completion of a project)
2) The written consent of all general and limited partners.
3) The withdrawal of a general partner. Withdrawal includes the retirement,
death, bankruptcy, adjudged insanity, or removal of a general partner or
the assignment by a general partner of his or her partnership interest. If a
corporation or partnership is a general partner, the dissolution of the
corporation or partnership is considered withdrawal.
4) The entry of a decree of judicial dissolution, which may be granted to a
partner whenever it is not reasonably practical to carry on the business in
conformity with the limited partnership agreement (e.g., if the general
partners are deadlocked over important decisions affecting the limited
partnership).

A limited partnership is not dissolved upon the withdrawal of a general partner if (1) the
certificate of limited partnership permits the business to be carried on by the remaining general
partner or partners or (2) within 90 days of the withdrawal, all remaining partners agree in
writing to continue the business.

Distribution of Assets:

• Proceeds must be distributed after the assets of the limited partnership

have been liquidated
• Order of distribution of partnership assets:
– Creditors of the limited partnership
– Partners with respect to
 Unpaid distributions
 Capital contributions
 The remainder of the proceeds
Winding Up of a Limited Partnership:
A limited partnership must wind up its affairs upon dissolution. Unless otherwise provided in
the limited partnership agreement, the partnership’s affairs may be wound up by the general
partners who have not acted wrongfully or, if there are none, the limited partners. Any partner
may petition the court to wind up the affairs of a limited partnership. A partner who winds up
the affairs of a limited partnership has the same rights, powers, and duties as a partner winding
up a general partnership.

Limited Liability Limited Partnership (LLLP): A special type of limited partnership

that has both general partners and limited partners, where both the general and limited
partners have limited liability and are not personally liable for the debts of the LLLP.

Liability of General and Limited Partners of an LLLP: Like a limited partnership, an LLLP requires
at least one general partner and at least one limited partner. However, the difference between
a limited partnership and an LLLP is that in an LLLP, the general partners are not jointly and
severally personally liable for the debts and obligations of the LLLP. Thus, neither the general
partners nor the limited partners have personal liability for the debts and obligations of the
LLLP. The debts of an LLLP are solely the responsibility of the partnership.
 Chapter# 36 Corporate Formation and Financing

Definition of a Corporation:
A fictitious legal entity that is created according to statutory requirements. A
corporation is a legal entity that is separate and distinct from its owners.

Corporations enjoy most of the rights and responsibilities that individuals

possess: they can enter contracts, loan and borrow money, sue and be sued, hire
employees, own assets, and pay taxes. Some refer to it as a "legal person."
An important element of a corporation is limited liability, which means that
shareholders may take part in the profits through dividends and stock appreciation
but are not personally liable for the company's debts.

Shareholders: Owners of a corporation who elect the board of directors and vote on
fundamental changes in the corporation.

Corporation codes: State statutes that regulate the formation, operation, and
dissolution of corporations. Courts interpret state corporation statutes to decide
individual corporate and shareholder disputes.

The Corporation as a Legal “Person”:

A corporation is a separate legal entity (or legal person) for most purposes. Corporations are
treated, in effect, as artificial persons created by the state that can sue or be sued in their own
names, enter into and enforce contracts, hold title to and transfer property, and be found civilly
and criminally liable for violations of law.
Because corporations cannot be put in prison, the normal criminal penalty is the assessment of
a fine, loss of a license, or another sanction.
Characteristics of Corporations:

1. Free Transferability of Shares: Corporate shares are freely transferable by a

shareholder by sale, assignment, pledge, or gift unless they are issued pursuant
to certain exemptions from securities registration.
2. Perpetual Existence: Corporations exist in perpetuity unless a specific duration is
stated in a corporation’s articles of incorporation. The existence of a corporation
can be voluntarily terminated by the shareholders. A corporation may be
involuntarily terminated by the corporation’s creditors if an involuntary petition
for bankruptcy against the corporation is granted. However, the death, insanity,
or bankruptcy of a shareholder, a director, or an officer of a corporation does not
affect its existence.
3. Centralized Management: The board of directors makes policy decisions
concerning the operation of a corporation. The members of the board of
directors are elected by the shareholders. The directors, in turn, appoint
corporate officers to run the corporation’s day-to-day operations. Together, the
directors and the officers form the corporate management.
4. Limited Liability of Shareholders: As separate legal entities, corporations are
liable for their own debts and obligations. Generally, the shareholders have only
limited liability. That is, they are liable only to the extent of their capital
contributions and do not have personal liability for the corporation’s debts and
obligations.

Case 36.1: Shareholder’s Limited Liability:

1. The law permits shareholders to avoid personal liability for the debts and
obligation of their own corporation”
Explanation:
It is because corporations are “separate legal entities and they are legally
responsible for their own debts and obligations”. Usually, shareholders have just
limited liability in the corporation.
 2. Ethical for MF to assert the corporate shield to avoid liability in case”
Explanation: On the day of accident, MF was not available in bar when the
alcohol was served to O’N. Hence, F was not liable for any damages, so it
was “ethical” for F to assert corporate shield to evade liability in the given
case.
3. “Releasing MF from liability will also release TR from the liability”
Explanation: Releasing F from liability will not release TR from the liability,
because TR is in charge for serving alcohol to O’N when he was underage.
MF is the only sole shareholder for the corporation, so he will not be liable
for the given case.

https://casetext.com/case/menendez-v-oniell-1?
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dAtGIE8d1dQ3h60B

Classifications of Corporations:

1. Private Corporation: Private corporations are formed to conduct privately

owned business. They are owned by private parties, not by the government.
They range from small one-owner corporations to large multinational
corporations such as Microsoft Corporation, Starbucks Corporation, and Google,
Inc.
 2. For-profit corporation: Profit corporations are created to conduct a business
for profit and can distribute profits to shareholders in the form of dividends.
Most private corporations fit this definition.
3. Publicly held corporation: Publicly held corporations have many
shareholders. Often, they are large corporations with hundreds or thousands of
shareholders, and their shares are traded on organized securities markets. The
shareholders rarely participate in the management of such corporations.
4. Closely held corporation: A closely held corporation, on the other hand, is
one whose shares are owned by a few shareholders who are often family
members, relatives, or friends. Frequently, the shareholders are involved in the
management of the corporation. The shareholders sometimes enter into buy-
and-sell agreements that prevent outsiders from becoming shareholders.
5. Professional corporation: Professional corporations are formed by
professionals such as lawyers, accountants, physicians, and dentists.
Shareholders of professional corporations are often called members. Generally,
only licensed professionals may become members.
6. Not-for-profit corporations: Not-for-profit corporations, or nonprofit
corporations, are formed for charitable, educational, religious, or scientific
purposes. Although not-for-profit corporations may make a profit, they are
prohibited by law from distributing this profit to their members, directors, or
officers.
7. Government-owned Corporation: Government-owned corporations (or
public corporations) are formed by government entities to meet a specific
governmental or political purpose. Public corporations are formed pursuant to
state law. Most cities and towns are formed as corporations, as are most water,
school, sewage, and park districts. Local government corporations are often
called municipal corporations.

Types of Corporations:
Types of Description
Corporations

Domestic A corporation is a domestic corporation in the state in which it is incorporated

Foreign A corporation is a foreign corporation in states other than the one in which it i

Alien A corporation that is incorporated in another country

Selecting a State for Incorporating:
A corporation can be incorporated in only one state, even though it can do business in all other
states in which it qualifies to do business. In choosing a state for incorporation, the
incorporators, directors, and/or shareholders must consider the corporation law of the states
under consideration.
For the sake of convenience, most corporations (particularly small ones) choose the state in
which the corporation will be doing most of its business as the state for incorporation. Large
corporations generally opt to incorporate in the state with the laws that are most favorable to
the corporation’s internal operations.

Selecting a Corporate Name:

When starting a new corporation, the organizers must choose a name for the entity. To ensure
that the name selected is not already being used by another business, the organizers should do
the following:

1. Choose a name (and alternative names) for the corporation. The name must contain the
word corporation, company, incorporated, or limited or an abbreviation of one of these
words (i.e., Corp., Co., Inc., Ltd.).
2. Determine whether the name selected is federally trademarked by another company
and is therefore unavailable for use
3. Determine whether the chosen name is similar to other nontrademarked names and is
therefore unavailable for use.
4. Determine whether the name selected is available as a domain name on the Internet. If
the domain name is already owned by another person or business, the new corporation
cannot use this domain name to conduct e-commerce over the Internet.

Incorporation Procedure:
Incorporators: The person or persons, partnerships, or corporations that are
responsible for incorporation of a corporation. One or more persons, partnerships, domestic or
foreign corporations, or other associations may act as incorporators of a corporation. An
incorporator’s primary duty is to sign the articles of incorporation.
 Promoter: A person or persons who organize and start a corporation, negotiate and
enter into contracts in advance of its formation, find the initial investors to finance the
corporation, and so forth.

Promoters’ contracts: A collective term for such things as leases, sales contracts,
contracts to purchase property, and employment contracts entered into by promoters on
behalf of the proposed corporation prior to its actual incorporation.

Promoters’ Liability for Pre-incorporation Contracts:

1. If the corporation never comes into existence, the promoters have joint
personal liability on the contract unless the third party specifically
exempts them from such liability.
2. If the corporation is formed, it becomes liable on a promoter’s contract
only if it agrees to become bound to the contract. A resolution of the
board of directors binds the corporation to a promoter’s contract
3. Even if the corporation agrees to be bound to the contract, the promoter
remains liable on the contract unless the parties enter into a novation, a
three-party agreement in which the corporation agrees to assume the
contract liability of the promoter with the consent of the third party.
After a novation, the corporation is solely liable on the promoter’s
contract.

Articles of Incorporation:
The basic governing documents of a corporation. It must be filed with the secretary of
state of the state of incorporation.

 The name of the corporation.

 The number of shares the corporation is authorized to issue.
 The address of the corporation’s initial registered office and the name of the initial
registered agent.
 The name and address of each incorporator.
The articles of incorporation may also include provisions concerning (1) the period of duration
(which may be perpetual), (2) the purpose or purposes for which the corporation is organized,
(3) limitation or regulation of the powers of the corporation, (4) regulation of the affairs of the
corporation, or (5) any provision that would otherwise be contained in the corporation’s
bylaws.
Amending the Articles:
A corporation’s articles of incorporation can be amended to contain any provision that could
have been lawfully included in the original document. Such an amendment must show that (1)
the board of directors adopted a resolution recommending the amendment and (2) the
shareholders voted to approve the amendment. After the shareholders approve an
amendment, the corporation must file articles of amendment with the secretary of state of the
state of incorporation.

Corporate Status:
The RMBCA provides that corporate existence begins when the articles of incorporation are
filed. The secretary of state’s filing of the articles of incorporation is conclusive proof that the
corporation satisfied all conditions of incorporation.

Purpose of a Corporation:
A corporation can be formed for any lawful purpose. Many corporations include a general-
purpose clause in their articles of incorporation. Such a clause allows the corporation to engage
in any activity permitted by law. The majority of articles of incorporation include a general-
purpose clause.
A corporation may choose to limit its purpose or purposes by including a limited-purpose
clause in the articles of incorporation. Such a clause stipulates the specific purposes and
activities that the corporation can engage in. The corporation can engage in no other purposes
or activities.

Registered Agent:
A person or corporation that is empowered to accept service of process on behalf of a
corporation. The articles of incorporation must identify a registered office with a designated
registered agent (either an individual or a corporation) in the state of incorporation. A
statement of change must be filed with the secretary of state of the state of incorporation if
either the registered office or the registered agent is changed.
Close Corporation:
A small corporation that has met specified requirements may choose to be a close corporation
under state law. As such, the corporation may dispense with some corporate formalities and
operate without a board of directors, without bylaws, and without keeping minutes of
meetings.

Corporate Bylaws:
A detailed set of rules adopted by the board of directors after a corporation is incorporated that
contains provisions for managing the business and the affairs of the corporation. The bylaws
govern the internal management structure of a corporation.

Corporate Seal:
Most corporations adopt a corporate seal. Generally, the seal is a design that contains the
name of the corporation and the date of incorporation. It is imprinted by the corporate
secretary on certain legal documents that are signed by corporate officers or directors. The seal
is usually affixed using a metal stamp.

Organizational Meeting of the Board of Directors:

An organizational meeting of the initial directors of a corporation must be held after the articles
of incorporation are filed. At this meeting, the directors must adopt the bylaws, elect corporate
officers, and transact such other business as may come before the meeting.

C Corporation:
A C corporation is a corporation that does not qualify for or has not elected to be taxed as an S
corporation. Where there is a C corporation there is double taxation, that is, a C corporation
pays taxes at the corporate level and shareholders pay taxes on dividends paid by the
corporation.
S Corporation Election:
A corporation that has met certain requirements and has elected to be taxed as an S
corporation for federal income tax purposes. An S corporation pays no federal income tax at
the corporate level. The S corporation’s income or loss flows to the shareholders and must be
reported on the shareholders’ individual income tax returns.

• C Corporation is the default. Corporation may elect to be taxed as an S corporation to

avoid double taxation
• Corporations that meet the following criteria can elect to be taxed as S corporations:
– The corporation must be a domestic corporation
– The corporation cannot be a member of an affiliated group of corporations
– The corporation can have no more than 100 shareholders

– Shareholders must be individuals, estates, or certain trusts.

Corporations and partnerships cannot be shareholders.
– Shareholders must be citizens or residents of the United States
– Nonresident aliens cannot be shareholders
– The corporation cannot have more than one class of stock.
Shareholders do not have to have equal voting rights.

Corporate Powers:
A corporation has the same basic rights to perform acts and enter into contracts as a physical
person.

Express Powers:
A corporation’s express powers are found in (1) the U.S. Constitution, (2) state
constitutions, (3) federal statutes, (4) state statutes, (5) articles of incorporation, (6) bylaws,
and (7) resolutions of the board of directors. Corporation codes normally state the express
powers granted to the corporation.

Implied Powers:
 Neither governing laws nor corporate documents can anticipate every act
necessary for a corporation to carry on its business. Implied powers allow a corporation to
exceed its express powers in order to accomplish its corporate purpose.

Ultra Vires Act:

An act by a corporation that is beyond its express or implied powers is called an
ultra vires act. The following remedies are available if an ultra vires act is committed:

 Shareholders can sue for an injunction to prevent the corporation from engaging in the
act.
 The corporation (or the shareholders, on behalf of the corporation) can sue the officers
or directors who caused the act for damages.
 The attorney general of the state of incorporation can bring an action to enjoin the act
or to dissolve the corporation

Financing the Corporation:

A corporation needs to finance the operation of its business. The most common way to do this is
by selling equity securities and debt securities. Equity securities (or stocks) represent ownership
rights in the corporation. Equity securities can be common stock and preferred stock.

Common Stock:

Common stock is an equity security that represents the residual value of a corporation. Common
stock has no preferences. That is, creditors and preferred shareholders must receive their
required interest and dividend payments before common shareholders receive anything.
Common stock does not have a fixed maturity date.

Persons who own common stock are called common stockholders. A common stockholder’s
investment in the corporation is represented by a common stock certificate. Common
stockholders have the right to elect directors and to vote on mergers and other important
matters. In return for their investment, common stockholders receive dividends declared by the
board of directors.

Preferred Stock:
Preferred stock is an equity security that is given certain preferences and rights over common
stock. The owners of preferred stock are called preferred stockholders. Preferred stockholders
are issued preferred stock certificates to evidence their ownership interest in the corporation.

Dividend preference: The right to receive a fixed dividend at stipulated periods during
the year
Liquidation preference: The right to be paid a stated dollar amount if a corporation is
dissolved and liquidated.
Cumulative preferred stock: Stock for which any missed dividend payments must be
paid in the future to the preferred shareholders before the common shareholders can receive
any dividends.
Participating preferred stock: Stock that allows the preferred stockholder to participate
in the profits of the corporation along with the common stockholders.
Convertible preferred stock: Stock that permits the preferred stockholders to convert
their shares into common stock.

Redeemable Preferred Stock:

Redeemable preferred stock (or callable preferred stock) permits a corporation to redeem (i.e.,
buy back) the preferred stock at some future date. The terms of the redemption are established
when the shares are issued. Corporations usually redeem the shares when the current interest
rate falls below the dividend rate of the preferred shares. Preferred stock that is not redeemable
is called nonredeemable preferred stock. Nonredeemable stock is more common than
redeemable stock.

Types of Shares:

Authorized shares: The number of shares provided for in the articles of incorporation.

Issued shares: Authorized shares that have been sold by a corporation.

Unissued shares: Authorized shares that have not been sold by the corporation

Treasury shares: Issued shares that have been repurchased by the corporation. Treasury shares
may not be voted by the corporation. Treasury shares may be resold by the corporation

Outstanding shares: Shares that are in shareholder hands, whether originally issued shares or
reissued treasury shares. Only outstanding shares have the right to vote.
Debt Securities:

Securities that establish a debtor– creditor relationship in which the corporation borrows money
from the investor to whom a debt security is issued. The corporation promises to pay interest on
the amount borrowed and to repay the principal at some stated maturity date in the future.

Types of Debt Securities:

Debt instruments are usually classified based on the length of the time of the instrument and
whether the instrument is secured or not.

 Debenture. A debenture is a long-term (often 30 years or more), unsecured debt

instrument that is based on a corporation’s general credit standing. If the corporation
encounters financial difficulty, unsecured debenture holders are treated as general
creditors of the corporation (i.e., they are paid only after the secured creditors’ claims are
paid).
 Bond. A bond is a long-term debt security that is secured by some form of collateral (e.g.,
real estate, personal property). Thus, bonds are the same as debentures except that they
are secured. Secured bondholders can foreclose on the collateral in the event of
nonpayment of interest, principal, or other specified events
 Note. A note is a short-term debt security with a maturity of five years or less. Notes can
be either unsecured or secured. They usually do not contain a conversion feature. They
are sometimes made redeemable.

Indenture Agreement:
The terms of a debt security are commonly contained in a contract between the corporation and
the holder; this contract is known as an indenture agreement (or simply an indenture). The
indenture generally contains the maturity date of the debt security, the required interest
payment, the collateral (if any), rights to conversion into common or preferred stock, call
provisions, any restrictions on the corporation’s right to incur other indebtedness, the rights of
holders upon default, and such.
Voluntary Dissolution:

• Dissolution of a corporation that has begun business or issued

shares upon recommendation of the board of directors and a
majority vote of the shares entitled to vote
• Articles of dissolution must be filed with the secretary of state of
the state of incorporation

Administrative Dissolution:

The secretary of state can obtain administrative dissolution of a corporation if

(1) It failed to file an annual report,
(2) It failed for 60 days to maintain a registered agent in the state,
(3) It failed for 60 days after a change of its registered agent to file a statement of such change
with the secretary of state,
(4) It did not pay its franchise fee, or
(5) the period of duration stated in the corporation’s articles of incorporation has expired.

If the corporation does not cure the default within 60 days of being notified of it, the secretary of
state issues a certificate of dissolution that dissolves the corporation.

Judicial Dissolution:

A corporation can be involuntarily dissolved by a judicial proceeding. Judicial dissolution can be

instituted by the attorney general of the state of incorporation if the corporation
(1) Procured its articles of incorporation through fraud or
(2) Exceeded or abused the authority conferred on it by law

If a court judicially dissolves a corporation, it enters a decree of dissolution that specifies the date
of dissolution.

Winding-Up and Liquidation:

A dissolved corporation continues its corporate existence but may not carry on any business
except as required to wind up and liquidate its business and affairs

Winding up and liquidation: The process by which a dissolved corporation’s assets are collected,
liquidated, and distributed to creditors, preferred shareholders, and common shareholders. In a
voluntary dissolution, the liquidation is usually carried out by the board of directors. If the
dissolution is involuntary or the dissolution is voluntary but the directors refuse to carry out the
liquidation, a court-appointed receiver carries out the winding up and liquidation of the
corporation

Termination: Termination occurs only after the winding up of the corporation’s affairs, the
liquidation of its assets, and the distribution of the proceeds to the claimants.

The liquidated assets are paid to claimants according to the following priority:
(1) Expenses of liquidation and creditors according to their respective liens and contract rights,
(2) Preferred shareholders according to their liquidation preferences and contract rights, and
(3) Common stockholders.
 Chapter# 37 Corporate Governance and Sarbanes-Oxley
Act

Shareholders:
Owners of a corporation who elect the board of directors and vote on fundamental changes in
the corporation. A shareholder, also referred to as a stockholder, is a person, company, or
institution that owns at least one share of a company’s stock, which is known as equity. Because
shareholders are essentially owners in a company, they reap the benefits of a business’ success.
These rewards come in the form of increased stock valuations, or as financial profits distributed
as dividends.

Shareholder Meetings:

A meeting of the shareholders of a corporation that must be held by the corporation to elect
directors and to vote on other matters.

Annual shareholders’ meetings are held to elect directors, choose an independent auditor, and
take other actions. These meetings must be held at the times fixed in the bylaws. If a meeting is
not held within either 15 months of the last annual meeting or six months after the end of the
corporation’s fiscal year, whichever is earlier, a shareholder may petition the court to order the
meeting held.

Special shareholders’ meetings: Meetings of shareholders that may be called to consider and
vote on important or emergency issues, such as a proposed merger or amending the articles of
incorporation.

Notice of a Shareholders’ Meeting A corporation is required to give the shareholders written

notice of the place, day, and time of annual and special meetings. For a special meeting, the
purpose of the meeting must also be stated. Only matters stated in the notice of a shareholders’
meeting can be considered at the meeting. The notice, which must be given not less than 10 days
or more than 50 days before the date of the meeting, may be given in person or by mail. If the
required notice is not given or is defective, any action taken at the meeting is void.

Proxies:

A shareholder’s authorizing of another person to vote the shareholder’s shares at the

shareholders’ meetings in the event of the shareholder’s absence.

Voting Requirements:

At least one class of shares of stock of a corporation must have voting rights. The RMBCA permits
corporations to grant more than one vote per share to some classes of stock and less than one
vote per share to others. Only shareholders who own stock as of a set date may vote at a
shareholders’ meeting. This date, which is called the record date, is set forth in the corporate
bylaws. The record date may not be more than 70 days before the shareholders’ meeting.

• Shareholders’ list – Contains the names and addresses of the shareholders

as of the record date and the class and number of shares owned by each
shareholder

Quorum and vote required:

The required number of shares that must be represented in person or by proxy to hold a
shareholders’ meeting. The RMBCA establishes a majority of outstanding shares as a quorum.

Voting for Election of Directors:

Straight (Noncumulative) Voting:

Each shareholder votes the number of shares he or she owns on candidates for each of
the positions open for election. Thus, a majority shareholder can elect the entire board of
directors.
Cumulative Voting:
A system in which a shareholder can accumulate all of his or her votes and vote them all
for one candidate or split them among several candidates.

Supramajority Voting Requirement:

A requirement that a greater than majority of shares constitutes a quorum of the vote of the
shareholders. . Such votes are often required to approve mergers, consolidation, the sale of
substantially all the assets of a corporation, and such.

Voting Agreements:

• Shareholders agree in advance as to how their shares will

be voted
• Voting trusts: Arrangement in which the shareholders
transfer their stock certificates to a trustee who is
empowered to vote the shares. A voting trust agreement
must be in writing and cannot exceed 10 years. It must be
filed with the corporation and is open to inspection by
shareholders of the corporation
• Shareholder voting agreements: Agreement between two
or more shareholders that stipulates how they will vote
their shares. Shareholder voting agreements are not
limited in duration and do not have to be filed with the
corporation.
Restrictions on the Sale of Shares:

• Right of first refusal: An agreement that requires a selling

shareholder to offer his or her shares for sale to the other
parties to the agreement before selling them to anyone
else
• Buy-and-sell agreement: An agreement that requires
selling shareholders to sell their shares to the other
shareholders or to the corporation at the price specified in
the agreement

Preemptive Rights:
Rights that give existing shareholders the option of subscribing
to new shares being issued in proportion to their current
ownership interests. Such a purchase can prevent a
shareholder’s interest in the corporation from being diluted.

Dividends:
Profit corporations operate to make a profit. The objective of the shareholders is to share in
those profits, either through capital appreciation, the receipt of dividends, or both. Dividends
are paid at the discretion of the board of directors. When a corporation declares a dividend, it
sets a date, usually a few weeks prior to the actual payment, that is called the record date.
Persons who are shareholders on that date are entitled to receive the dividend, even if they sell
their shares before the payment date. Once declared, a cash or property dividend cannot be
revoked. Shareholders can sue to recover declared but unpaid dividends.

Stock Dividends:
Corporations may issue additional shares of stock as a dividend. Stock dividends are not a
distribution of corporate assets. They are distributed in proportion to the existing ownership
interests of shareholders, so they do not increase a shareholder’s proportionate ownership
interest.

Derivative Lawsuits:
• behalf of a corporation when the corporation fails to bring the
lawsuit
• Court may dismiss if the lawsuit is not in best interests of
corporation
• Any award goes to corporate treasury
– Corporation pays shareholder’s expenses

Piercing the Corporate Veil:

• If a shareholder dominates a corporation and uses it for improper
purposes, a court of equity can disregard the corporate entity
– Hold the shareholder personally liable for the corporation’s
debts and obligations
• Occurs when:
– There is thin capitalization
– No separateness is maintained between the corporation and
its shareholders
Case 37.1: Piercing the Corporate Veil:

– Northeast Iowa Ethanol, LLC v. Drizin

– Web 2006 U.S. Dist. Lexis 4828 (2006)
– United States District Court for the Northern District of Iowa

Facts Local farmers in Manchester, Iowa, decided to build an ethanol plant. The farmers and
other investors invested $3,865,000 and formed Northeast Iowa Ethanol, LLC (Northeast Iowa)
to hold the money and develop the project. The project needed another $20 million, for which
financing needed to be secured. Jerry Drizin formed Global Syndicate International, Inc. (GSI), a
Nevada corporation, with $250 capital. Drizin formed GSI for the purpose of assisting Northeast
Iowa to raise the additional financing for the project. Drizin talked Northeast Iowa into
transferring its money to GSI and the money was placed in a bank in south Florida to serve as
security for a possible loan. Drizin commingled those funds with his own personal funds.
Through an array of complex transfers by GSI, the funds of Northeast Iowa were stolen. Some
funds were invested in a worthless gold mine and other worthless investments. Plaintiff
Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI,
the corporation, was liable but that he was not personally liable because he was but a
shareholder of GSI. The plaintiffs alleged that the doctrine of piercing the corporate veil applied
and that Drizin was therefore personally liable for the funds. Issue Does the doctrine of piercing
the corporate veil apply in this case, thus allowing the plaintiffs to pierce the corporate veil of
GSI and reach shareholder Drizin for liability for civil fraud? Language of the Court Generally a
corporation is a distinct entity from its shareholders. This distinction usually insulates
shareholders from personal liability for corporate debts. However, this protection is not
absolute. Personal liability may be imposed upon shareholders in “exceptional circumstances.”
Without question, this case presents the “exceptional circumstance” warranting the piercing of
GSI’s corporate veil and finding. Mr. Drizin personally liable for GSI’s misdeeds, as the sole
purpose of establishing GSI was to perpetuate fraud. GSI engaged in no legitimate business
transactions whatsoever. The $250 initial capitalization of GSI is, in fact, trifling compared with
the business to be done and the risk of loss. And now, GSI is a defunct corporation. Justice and
equity call for piercing the corporate veil. Decision The U.S. District Court held that the
corporate veil of GSI could be pierced to reach its shareholder Drizin. The court awarded the
plaintiff compensatory damages of $3.8 million and punitive damages of $7.6 million against
Drizin.
https://casetext.com/case/ethanol-v-drizin?
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4yxTzgK0M1tSO5m

Board of Directors:
The board of directors of a corporation is elected by the shareholders of the corporation. The
board of directors is responsible for formulating policy decisions that affect the management,
supervision, control, and operation of the corporation. Such policy decisions include deciding
the business or businesses in which the corporation should be engaged, selecting and removing
the top officers of the corporation, determining the capital structure of the corporation, and
the like.

Resolutions of the Board of Directors:

Corporate resolutions are recorded in minutes of the board of directors’ meetings and specify
the decisions that were made by the board during their meetings.
The board may initiate certain actions that require shareholders’ approval.
Corporate directors are required to have access to the corporation’s books and records,
facilities, and premises, as well as any other information that affects the operation of the
corporation. This right of inspection is absolute.
Selecting Directors:

• Corporate electronic communications: Modern method

by which corporations communicate with shareholders,
among directors, with regulatory agencies, and others
• Inside director: A member of the board of directors who is
also an officer of the corporation
• Outside director: A member of the board of directors who
is not an officer of the corporation
Term of Office:
The term of a director’s office expires at the next annual shareholders’ meeting following his or
her election, unless terms are staggered. The RMBCA allows boards of directors that consist of
nine or more members to be divided into two or three classes that are elected to serve
staggered terms of two or three years. The specifics of such an arrangement must be outlined
in the articles of incorporation.

Meetings of the Board of Directors:

Regular meetings of a board of directors are held at the times and places established in the
bylaws. Such meetings can be held without notice. The board can call special meetings of the
board of directors as provided in the bylaws. Special meetings are usually convened for such
reasons as issuing new shares, considering proposals to merge with other corporations,
adopting maneuvers to defend against hostile takeover attempts, and the like.

Quorum and Voting Requirement:

A simple majority of the number of directors established in the articles of incorporation or
bylaws usually constitute a quorum for transacting business. However, the articles of
incorporation and the bylaws may increase this number. If a quorum is present, the approval or
disapproval of a majority of the quorum binds the entire board. The articles of incorporation or
the bylaws can require a greater than majority of directors to constitute a quorum of the vote
of the board.

Corporate Officers:
• Employees of a corporation who are appointed by the board of directors
– They manage the day-to-day operations of the corporation
• Audit committee: Committee composed of outside directors responsible
for the oversight of the outside and internal audits of the corporation
• Agency authority of officers
– Possess authority that may be provided in the bylaws, or as
determined by resolution of the board of directors

Fiduciary Duty:
– Duty of obedience
– Duty of care
– Duty of loyalty
Duty of Obedience:
A duty that directors and officers of a corporation have to act within the authority conferred
upon them by state corporation codes, the articles of incorporation, the corporate bylaws, and
the resolutions adopted by the board of directors.

Duty of Care:
The duty of care requires corporate directors and officers to use care and diligence when acting
on behalf of the corporation. To meet this duty of care, the directors and officers must
discharge their duties
(1) in good faith,
(2) with the care that an ordinary prudent person in a like position would use under similar
circumstances, and
(3) in a manner they reasonably believe to be in the best interests of the corporation

The Business Judgment Rule:

The determination of whether a corporate director or officer has met his or her duty of care is
measured as of the time the decision is made; the benefit of hindsight is not a factor.
Therefore, the directors and officers are not liable to the corporation or its shareholders for
honest mistakes of judgment.

Duty of Loyalty:
• A duty that directors and officers have not to act adversely to the interests
of the corporation
– To subordinate their personal interests to those of the corporation
and its shareholders
• Usurping a corporate opportunity – If proven, the corporation can
– Acquire the opportunity from the director/officer
– Recover any profits made
• Self-dealing
– Contract or transaction with a corporate director or officer is
voidable if it is unfair to the corporation
• Competing with the corporation
– Any profits made by non-approved competition and any other
damages caused to the corporation can be recovered
• Making a secret profit
– The corporation can sue the director or officer to recover the secret
profit
Case 37.2: Fiduciary Duties of Corporate Directors and Officers

• Case
– McPadden v. Sidhu
– 964 A.2d 1262 (2008)
– Court of Chancery of Delaware
• Issue
– Did the plaintiff plead sufficient facts of i2’s board of directors bad
faith and Dubreville’s breach of the duty of loyalty to withstand the
defendants’ motions to dismiss?
Facts A complaint was filed in Delaware Court by John P. McPadden that alleged the following
facts. i2 Technologies, Inc. (i2) is a Delaware corporation headquartered in Dallas, Texas. The
company sells supply chain management software and related consulting services. The
directors of i2 were Sanjiv S. Sidhu, Stephen Bradley, Harvey B. Cash, Richard L. Clemmer,
Michael E. McGrath, Lloyd G. Waterhouse, Jackson L. Wilson, Jr., and Robert L. Crandall. Section
102(b)(7) of the Delaware Corporation Code permits Delaware corporations to include in their
certificate of incorporation an exculpatory provision to protect directors from personal liability
arising from their ordinary or gross negligence in the performance of their duties as directors. i2
included this exculpatory provision in its certificate of incorporation. Trade Services Corporation
(TSC) was a wholly owned subsidiary of i2. Anthony Dubreville was TSC’s vice president.
VisionInfoSoft and its sister company, Material Express.com (together VIS/ME), a competitor of
TSC, made an offer to the i2 board of directors to purchase TSC for $25 million. The i2 board of
directors did not accept the offer. Over the next year, Dubreville engaged in conduct whereby
he artificially depressed the value of TSC by overstating costs, inaccurately reporting TSC’s
performance, and engaging in transactions with a company that Dubreville partially owned, to
the detriment of TSC and windfall profits to Dubreville’s company. Dubreville informed TSC
employees that he was leading a management group to purchase TSC. Subsequently, the i2
board of directors decided to sell TSC. With knowledge that Dubreville was interested in
purchasing TSC, the i2 directors appointed Dubreville to find a buyer for TSC and conduct the
sale process. Dubreville was aware of VIS/ME’s previous offer to purchase TSC. However,
Dubreville did not contact VIS/ME or other competitors of TSC to see if any of these companies
were interested in buying TSC. The Dubreville-led group formed Trade Services Holdings, LLC
(Holdings) and offered to purchase TSC for $3 million, which consisted of $2 million in cash and
$1 million in software licensing agreements. Dubreville obtained an offer from an entity named
Surprise Ventures, the principal of which was Dubreville’s former boss at TSC, to purchase TSC
for $1.8 million. It is alleged that this was a “lowball” offer designed to make the Duberville-led
offer of $3 million seem generous. TSC’s management, under Dubreville’s direction, prepared
projections of TSC’s future profitability. These projections negatively painted TSC’s financial
future. Without negotiating with the Dubreville-led group, the i2 board of directors approved
the sale of TSC to Holdings for $3 million. The i2 directors did not contact VIS/ME, who had
previously made a $25 million bid to them to purchase TSC. The directors did not contact any
competitor of TSC to see if they would be interested in buying TSC. Six months after the sale,
VIS/ ME made an offer to Holdings to purchase TSC for $18 million. This offer was rejected.
Eighteen months later, Holdings sold TSC for $25 million. John P. McDadden, a shareholder of
i2, brought suit in Delaware court. The suit alleged that the board of directors of i2 acted in bad
faith when they sold TSC to the Dubreville-led group for $3 million. The suit also named
Dubreville as a defendant, alleging that he violated his duty of loyalty in the sale of TSC to
himself and other managers of TSC. The defendants filed motions to dismiss the plaintiff’s case.
Issue Did the plaintiff plead sufficient facts of i2’s board of directors bad faith and Dubreville’s
breach of the duty of loyalty to withstand the defendants’ motions to dismiss? Language of the
Court As authorized by Section 102(b)(7), i2’s certificate of incorporation contains an
exculpatory provision, limiting the personal liability of directors for certain conduct. Certain
conduct, however, cannot be exculpated, including bad faith actions. Gross negligence, in
contrast, is exculpated because such conduct breaches the duty of care. The conduct of the
Director Defendants here fits precisely within this understanding of gross negligence. Because
such conduct breaches the Director Defendants’ duty of care, this violation is exculpated by the
Section 102(b)(7) provision in the Company’s charter and therefore the Director Defendants’
motion to dismiss for failure to state a claim must be granted. As against Dubreville, however,
the claim for breach of fiduciary duty may, without a doubt, proceed. Though an officer owes to
the corporation identical fiduciary duties of care and loyalty as owed by directors, an officer
does not benefit from the protections of a Section 102(b)(7) exculpatory provision, which are
only available to directors. Thus, so long as plaintiff has alleged a violation of care or loyalty, the
complaint proceeds against Dubreville. Here, plaintiff has more than sufficiently alleged a
breach of fiduciary duty. Though this board acted “badly”—with gross negligence—this board
did not act in bad faith. Therefore, with the benefit of the protections of the Company’s
exculpatory provision, the motion to dismiss is granted as to the Director Defendants.
Defendants’ motion is, however, flatly denied as to Dubreville. Decision The Court of Chancery
of Delaware dismissed the plaintiff’s case against i2’s directors. The court permitted the
plaintiff’s case against Dubreville to proceed.
Sarbanes-Oxley Act:

• Enacted by Congress in 2002

• Goals
– To improve corporate governance
– Eliminate conflicts of interest
– Instill confidence in public companies
 Chapter # 39 Limited Liability Companies and Limited Liability
Partnerships

Limited Liability Company (LLC):

An unincorporated business entity that combines the most favorable attributes of general partnerships,
limited partnerships, and corporations. An LLC is a separate legal entity (or legal person) distinct from its
members. LLCs are treated as artificial persons who can sue or be sued, enter into and enforce
contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of
law.

Member is an owner of an LLC.

Uniform Limited Liability Company Act:

A model act that provides comprehensive and uniform laws for the formation, operation, and
dissolution of LLCs. The ULLCA was revised in 2006, and this revision is called the Revised Uniform
Limited Liability Company Act (RULLCA).

Taxation of LLCs:
An LLC is taxed as a partnership unless it elects to be taxed as a corporation. Thus, an LLC is not taxed at
the entity level, but its income or losses “flow through” to the members’ individual income tax returns.
This avoids double taxation. Most LLCs accept the default status of being taxed as a partnership instead
of electing to be taxed as a corporation.

Powers of an LLC:
An LLC has the same powers as an individual to do all things necessary or convenient to carry on its
business or affairs, including owning and transferring personal property; selling, leasing, and mortgaging
real property; making contracts and guarantees; borrowing and lending money; issuing notes and
bonds; suing and being sued; and taking other actions to conduct the affairs and business of the LLC.

Formation of an LLC:
Most LLCs are organized to operate businesses, real estate developments, and such. Certain
professionals, such as accountants, lawyers, and doctors, cannot operate practices as LLCs; instead, they
can operate practices as limited liability partnerships (LLPs).

An LLC can be organized in only one state, even though it can conduct business in all other states. When
choosing a state for organization, the members should consider the LLC codes of the states under
consideration. For the sake of convenience, most LLCs, particularly small ones, choose as the state of
organization the state in which the LLC will be doing most of its business.

When starting a new LLC, the organizers must choose a name for the entity. The name must contain the
words limited liability company or limited company or the abbreviation L.L.C., LLC, L.C., or LC. Limited
may be abbreviated as Ltd., and company may be abbreviated as Co.

Articles of Organization:
An LLC is formed by delivering articles of organization to the office of the secretary of state of the state
of organization for filing. If the articles are in proper form, the secretary of state will file the articles. The
existence of an LLC begins when the articles of organization are filed. The filing of the articles of
organization by the secretary of state is conclusive proof that the organizers have satisfied all the
conditions necessary to create the LLC.

Under the ULLCA, the articles of organization of an LLC must set forth:

 The name of the LLC

 The address of the LLC’s initial office
 The name and address of the initial agent for service of process
 The name and address of each organizer
 Whether the LLC is a term LLC and, if so, the term specified
 Whether the LLC is to be a manager-managed LLC and, if so, the name and address of each
manager
 Whether one or more of the members of the LLC are to be personally liable for the LLC’s debts
and obligations

Duration of an LLC:
At-will LLC: An LLC that has no specified term of duration.

Term LLC: An LLC that has a specified term of duration. The duration of a term LLC may be specified in
any manner that sets forth a specific and final date for the dissolution of the LLC.

Certificate of Interest

• Document demonstrates evidences of a member’s ownership interest in an LLC

Capital Contribution to an LLC:
A member’s capital contribution to an LLC may be in the form of money, personal property, real
property, other tangible property, intangible property, services performed, contracts for services to be
performed, promissory notes, or other agreements to contribute cash or property.

A member’s obligation to contribute capital is not excused by the member’s death, disability, or other
inability to perform. If a member cannot make the required contribution of property or services, he or
she is obligated to contribute money equal to the value of the promised contribution. The LLC or any
creditor who extended credit to the LLC in reliance on the promised contribution may enforce the
promised obligation.

Operating Agreement:
Members of an LLC may enter into an operating agreement that regulates the affairs of the company
and the conduct of its business and governs relations among the members, managers, and company.

Conversion of an Existing Business to an LLC:

An existing business may want to convert to an LLC to obtain its tax benefits and limited liability shield.

 An agreement of conversion is drafted that sets forth the terms of the conversion.
 The terms of the conversion are approved by all the parties or by the number or percentage of
owners required for conversion.
 Articles of organization of the LLC are filed with the secretary of state. The articles must state
that the LLC was previously another form of business and the prior business’s name.

Dividing an LLC’s Profits and Losses:

Unless otherwise agreed, the ULLCA mandates that a member has the right to an equal share in the
LLC’s profits. This is a default rule that the members can override by agreement and is usually a
provision in their operating agreement. In many instances, the members may not want the profits of the
LLC to be shared equally. This would normally occur if the capital contributions of the members were
unequal. If the members of an LLC want the profits to be divided in the same proportion as their capital
contributions, that should be specified in the operating agreement.

Liability of an LLC:
An LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a
member, a manager, an agent, or an employee of the LLC who commits the wrongful act while acting
within the ordinary course of business of the LLC or with authority of the LLC

Limited liability of members of LLCs: Limited to the extent of their capital contributions

• Liability of Managers

– Not personally liable for the debts, obligations, and liabilities of the LLC they manage

• Liability of tortfeasors

– Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or

death to another person

– Personally liable to the injured party

Case 39.1: Limited Liability Company:

• Case

– Siva v. 1138 LLC

– 2007 Ohio App. Lexis 4202 (2007)

– Court of Appeals of Ohio

• Issue

– Is Richard Hess, a member-owner of 1138 LLC, personally liable for the debt owed by
the LLC to Siva?

“Finally, the evidence did not show that Siva was misguided as to the fact he was dealing with a limited
liability company.” —Brown, Judge Facts Five members—Richard Hess, Robert Haines, Lisa Hess, Nathan
Hess, and Zack Shahin— formed a limited liability company called 1138 LLC. Ruthiran Siva owned a
commercial building located at 1138 Bethel Road, Franklin County, Ohio. Siva entered into a written
lease agreement with 1138 LLC whereby 1138 LLC leased premises in Siva’s commercial building for a
term of five years at a monthly rental of $4,000. 1138 LLC began operating a bar on the premises. Six
months later, 1138 LLC was in default and breach of the lease agreement. Siva sued 1138 LLC and
Richard Hess to recover damages. Siva received a default judgment against 1138 LLC, but there was no
money in 1138 LLC to pay the judgment. Hess, who had been sued personally, defended, arguing that as
a member-owner of the LLC, he was not personally liable for the debts of the LLC. The trial court found
in favor of Hess and dismissed Siva’s complaint against Hess. Siva appealed. Issue Is Richard Hess, a
member-owner of 1138 LLC, personally liable for the debt owed by the LLC to Siva? Language of the
Court Based upon the court’s examination of the record, we find there was competent, credible
evidence to support the trial court’s determination. The evidence does not show that Hess purposely
undercapitalized 1138 LLC, or that he formed the limited liability company in an effort to avoid paying
creditors. According to Hess, the bar was never profitable. Based upon the evidence presented, a
reasonable trier of fact could have concluded that 1138 LLC became insolvent due to unprofitable
operations. Moreover, even if the record suggests poor business judgment by Hess, it does not
demonstrate that he formed 1138 LLC to defraud creditors. Finally, the evidence did not show that Siva
was misguided as to the fact he was dealing with a limited liability company. Siva’s counsel drafted the
lease agreement and Siva acknowledged at trial he did not ask any of the owners of 1138 LLC to sign the
lease in an individual capacity. Decision The court of appeals held that Hess, as a memberowner of 1138
LLC, was not personally liable for the debt that the LLC owed to Siva. The court of appeals affirmed the
decision of the trial court that dismissed Siva’s complaint against Hess. Case Questions Critical Legal
Thinking What is the liability of an LLC for its debts? What is the liability of a member-owner of an LLC
for the LLC’s debts? Explain. Ethics Did Hess owe an ethical duty to pay the debt owed by 1138 LLC to
Siva? Did Siva act ethically by suing Hess personally to recover the debt owed by the 1138 LLC?
Contemporary Business What should Siva have done if he wanted Hess to be personally liable on the
lease? Explain.

Management of an LLC:
Member-Managed LLC:

In a member-managed LLC, each member has equal rights in the management of the business of the
LLC, regardless of the size of his or her capital contribution. Any matter relating to the business of the
LLC is decided by a majority vote of the members.

Manager-Managed LLC:

In a manager-managed LLC, the members and nonmembers who are designated managers control the
management of the LLC. The members who are not managers have no rights to manage the LLC unless
otherwise provided in the operating agreement. In a manager-managed LLC, each manager has equal
rights in the management and conduct of the company’s business. Any matter related to the business of
the LLC may be exclusively decided by the managers by a majority vote of the managers.

A manager must be appointed by a vote of a majority of the members; managers may also be removed
by a vote of the majority of the members.

Certain actions cannot be delegated to managers but must be voted on by all members of the LLC. These
include (1) amending the articles of organization, (2) amending the operating agreement, (3) admitting
new members, (4) consenting to dissolve the LLC, (5) consenting to merge the LLC with another entity,
and (6) selling, leasing, or disposing of all or substantially all of the LLC’s property.

Compensation and Reimbursement:

• Nonmanager member not entitled to remuneration
 – Except for winding-up the LLC

• Managers of LLC are paid compensation and benefits

– Specified in employment agreements

• LLC is obligated to reimburse members and managers for payments made on behalf of the LLC

Agency Authority to Bind an LLC to Contracts:

Type of Agency Authority

LLC

Member- All members have agency authority to bind the LLC to contracts
managed
LLC

Manager- The managers have authority to bind the LLC to contracts; the nonmanager members cannot bind
managed contracts
LLC

Duty of Loyalty:

• A duty owed by a member of a member-managed LLC and a manager of a manager-managed

LLC to:

– Be honest in his or her dealings with the LLC

– Not act adversely to the interests of the LLC

Duty of Care

• A duty owed by a member of a member-managed LLC and a manager of a manager-managed

LLC not to engage in:

– A known violation of law

– Intentional conduct

– Reckless conduct

– Grossly negligent conduct that injures the LLC

No Fiduciary Duty Owed:

• A nonmanager member of a manager-managed LLC owes no fiduciary

– Duty of loyalty
 – Duty of care to the LLC or its members

Dissolution of an LLC:
• A member has the power to withdraw from the LLC
– Unless otherwise stated in the operating agreement
• Wrongful disassociation: When a member withdraws from
– A term LLC prior to the expiration of the term or
– An at-will LLC when the operating agreement eliminates a member’s power to
withdraw
• Payment of Distributional Interest
– No wrongful disassociation – LLC must purchase the disassociated member’s
distributional interest
– Wrongful disassociation – Damages may be offset against price
• Notice of Disassociation
– Statement of disassociation: A document filed with the secretary of state that
gives constructive notice that a member has disassociated from an LLC
• Continuation of an LLC
– Can be continued in two ways
• The members of the LLC may vote prior to the expiration date
• As an at-will LLC by a simple majority vote of the members of the LLC
• Winding up an LLC’s business involves
– Preserving and selling the assets of the LLC
– Distributing the money and property to creditors and members
• Articles of Termination
– The documents that are filed with the secretary of state to:
• Terminate an LLC as of the date of filing or upon a later effective date
specified in the articles
Limited Liability Partnership:
• Limited Liability Partnership: A special form of partnership in which
– All partners are limited partners
– There are no general partners

Articles of Partnership:
• LLP created formally by filing articles of partnership with the secretary of the state in
state in which LLP is organized
• Articles of limited liability partnership: Formal documents that must be filed at the
secretary of state’s office of the state of organization of an LLP to form the LLP
• An LLP must register as a foreign LLP in any other state in which it wants to conduct
business

Taxation and Limited Liability of LLPs:

• Flow-through tax benefit – No tax paid at the partnership level
– All profits and losses are reported on the individual partners’ income tax returns
• Limited Liability of Partners of LLPs: Liability of LLP partners for debts, obligations, and
liabilities is limited only to the extent of their capital contributions
– Partners of LLPs are not personally liable