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in whole or in part.
in whole or in part.
in whole or in part.
parties from which ORX could seek to recover. If all of the circumstances here—
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Leslie owned a majority of in Polk Plumbing. Could his “firing” of Dusty
and Lezanne still be considered evidence of a breach of fiduciary duty? Explain. Yes,
Leslie’s firing of Dusty and Lezanne would be subject to consideration of a breach of fiduciary
duty even if Leslie owned a majority of the shares in the LLC. The operating agreement provides
worked for the firm and the operating agreement did not restrict the conditions of their
discharge, as in this case. Employee members of an LLC could then be discharged for any or
no reason if (1) there were no express or implied contract terms that limited their dismissal; (2)
there was no tortious conduct supporting an action for wrongful discharge; or (3) there was no
ground for making an exception on the basis of public policy.
and Thompson had formed a partnership rather than an LLC. Like an LLC, a partnership may be
judicially dissolved if continuing the business is impracticable. To determine a partnership’s
purposes, a court would likely consider the terms of the parties’ agreement. Assuming that their
partnership agreement would be similar to the operating agreement in Venture Sales, the
parties probably could not achieve the business’s purposes. Thus, dissolution would probably
This limited liability company (LLC) would be taxed as a partnership unless it opted to be taxed
as a corporation. With a few exceptions, any LLC with at least two members can choose
4 UNIT ONE: BUSINESS ORGANIZATIONS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
whether to be taxed as a partnership or a corporation. (A one-member LLC is taxed as a sole
proprietorship unless it chooses to be taxed as a corporation.) If a firm prefers to be taxed as a
corporation, it can check a box on a federal tax form to indicate this choice. Taxed as a
partnership, an LLC would pay no taxes; its profits would be “passed through” to its members,
who would, however, pay taxes on the profits. The corporate taxing option might be preferable
to LLC members who want to reinvest the profits in the business, because corporate tax rates
are often lower than personal tax rates.
2A. LLC management
These parties formed a joint venture. In a joint venture, two or more persons or entities combine
their efforts or property for a single transaction or project or a related series of transactions or
projects. The elements of a joint venture are (1) a contract to engage in a common undertaking;
(2) the parties’ contributions of money, property, time, or skill to it; (3) an interest in, and mutual
right to control, its property; and (4) an agreement to share its profits. The agreement between
than the business of a partnership. In this situation, Davidson Masonry did not even know of
Lafayette’s contract. In other circumstances, however, a court might hold differently, since
courts may apply to joint ventures the same principles that they do to partnerships. If a court did,
it might hold a joint venturer liable for debts incurred on the venture’s behalf.
no new laws or operating rules need be created for LLCs, except with respect to the limited
liability of LLC members. The law of partnerships has a long history, one that has created a
solid body of case law that should be applied to LLCs, too.
Yes, LLCs do resemble partnerships in many respects. But since their humble
beginnings in 1997, they have become a form of business organization in their own rights. Why
in whole or in part.
in whole or in part.
CHAPTER 3: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 7
in whole or in part.
disagreement about the work being done, but the project was moving toward completion, so
there is no reason the purpose of the LLC should not be fulfilled.
3–6A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—LLC operation
No. One Bluewater member could not unilaterally “fire” another member without providing a
Bluewater member could not unilaterally “fire” another member without providing a reason. In
fact, a majority of the members could not terminate the other’s interest in the firm without
providing a reason. Moreover, the only acceptable reason would be a circumstance that
undercut the firm’s status as a contractor.
The flexibility of the LLC business form relates to its framework, not to its members’
The district court does not have diversity jurisdiction. For diversity jurisdiction to exist, there
must be complete diversity of citizenship, meaning that all of the plaintiffs must be from different
states than all of the defendants. In this case, Mid-Atlantic is not diverse from MAG. Mid-Atlantic
is a New Jersey citizen because it is a New Jersey corporation. MAG is also a New Jersey
citizen because LLCs and partnerships are citizens of every state of which their members are
corporate shareholder may be liable for a corporate obligation. In either situation, if an owner of,
or an investor in, the firm does not follow statutory formalities, co-mingles funds, or ignores the
entity’s articles of formation, a court may disregard its identity and hold the owner or investor
liable.
8 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
In this case, the court ordered Blushing Brides and Zacks to pay Gray the balance due on
appellate court, which agreed that “Blushing Brides, LLC failed to pay in full the balance on the
printing services account . . . . Thus, Blushing Brides, LLC's actions constituted a breach of the
printing services account, thereby subjecting Blushing Brides, LLC to liability.”
The appellate court reversed the lower court’s judgment as to Zacks’s personal liability,
however. The appellate court cited a provision of the state’s LLC statutes, under which “[n]either
credit agreement established that Louis Zacks did not incur personal liability on the account
when he signed the credit agreement . . . on behalf of Blushing Brides, LLC. Rather, the credit
agreement clearly denoted Blushing Brides, LLC, not Louis Zacks, as the purchaser on the
account.”
As for the effect of the promissory note, the court held that it “was based on separate and
by substitution of parties or of the undertaking, with the consent of all the parties, and based on
valid consideration. Here, the promissory note made no indications of discharging any liability
under the printing services account.”
Thus, “[i]n summary, . . . Louis Zacks is [not] personally liable to [Gray]. However, we
also conclude that the parties did not modify the printing services account in a manner that
articles of formation, the member is not likely to be immune from personal liability for the acts of
the LLC that injure third parties.
This result seems ethically satisfying as well. A contrary result would undercut the
viability of an LLC and the welfare of those with whom it does business. It would encourage
unethical conduct by allowing unscrupulous individuals to avoid sanctions for their
in whole or in part.
10 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
(a) A member of a limited liability company (LLC) has a fiduciary duty to act in a
manner that he or she believes in good faith to be in the best interests of the LLC and with the
care that an ordinarily prudent person in a like position would exercise under similar
circumstances. But this duty may be expanded, restricted, or eliminated by a written operating
agreement under the principle of freedom of contract.
basis for finding that the Newbury group breached its fiduciary duties as members of the LLC. A
member of an LLC has a fiduciary duty to act in a manner that he or she believes in good faith
to be in the best interests of the LLC and with the care that an ordinarily prudent person in a like
position would exercise under similar circumstances. This duty can be expanded, restricted, or
eliminated by a written operating agreement. Here, the operating agreement between the
Stokers and the Newbury group clearly stated that the members could engage in activities that
competed with the LLC’s business.
in whole or in part.
in whole or in part.
parties from which ORX could seek to recover. If all of the circumstances here—
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Leslie owned a majority of in Polk Plumbing. Could his “firing” of Dusty
and Lezanne still be considered evidence of a breach of fiduciary duty? Explain. Yes,
Leslie’s firing of Dusty and Lezanne would be subject to consideration of a breach of fiduciary
duty even if Leslie owned a majority of the shares in the LLC. The operating agreement provides
worked for the firm and the operating agreement did not restrict the conditions of their
discharge, as in this case. Employee members of an LLC could then be discharged for any or
no reason if (1) there were no express or implied contract terms that limited their dismissal; (2)
there was no tortious conduct supporting an action for wrongful discharge; or (3) there was no
ground for making an exception on the basis of public policy.
and Thompson had formed a partnership rather than an LLC. Like an LLC, a partnership may be
judicially dissolved if continuing the business is impracticable. To determine a partnership’s
purposes, a court would likely consider the terms of the parties’ agreement. Assuming that their
partnership agreement would be similar to the operating agreement in Venture Sales, the
parties probably could not achieve the business’s purposes. Thus, dissolution would probably
This limited liability company (LLC) would be taxed as a partnership unless it opted to be taxed
as a corporation. With a few exceptions, any LLC with at least two members can choose
4 UNIT ONE: BUSINESS ORGANIZATIONS
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
whether to be taxed as a partnership or a corporation. (A one-member LLC is taxed as a sole
proprietorship unless it chooses to be taxed as a corporation.) If a firm prefers to be taxed as a
corporation, it can check a box on a federal tax form to indicate this choice. Taxed as a
partnership, an LLC would pay no taxes; its profits would be “passed through” to its members,
who would, however, pay taxes on the profits. The corporate taxing option might be preferable
to LLC members who want to reinvest the profits in the business, because corporate tax rates
are often lower than personal tax rates.
2A. LLC management
These parties formed a joint venture. In a joint venture, two or more persons or entities combine
their efforts or property for a single transaction or project or a related series of transactions or
projects. The elements of a joint venture are (1) a contract to engage in a common undertaking;
(2) the parties’ contributions of money, property, time, or skill to it; (3) an interest in, and mutual
right to control, its property; and (4) an agreement to share its profits. The agreement between
than the business of a partnership. In this situation, Davidson Masonry did not even know of
Lafayette’s contract. In other circumstances, however, a court might hold differently, since
courts may apply to joint ventures the same principles that they do to partnerships. If a court did,
it might hold a joint venturer liable for debts incurred on the venture’s behalf.
no new laws or operating rules need be created for LLCs, except with respect to the limited
liability of LLC members. The law of partnerships has a long history, one that has created a
solid body of case law that should be applied to LLCs, too.
Yes, LLCs do resemble partnerships in many respects. But since their humble
beginnings in 1997, they have become a form of business organization in their own rights. Why
in whole or in part.
in whole or in part.
CHAPTER 3: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 7
in whole or in part.
disagreement about the work being done, but the project was moving toward completion, so
there is no reason the purpose of the LLC should not be fulfilled.
3–6A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—LLC operation
No. One Bluewater member could not unilaterally “fire” another member without providing a
Bluewater member could not unilaterally “fire” another member without providing a reason. In
fact, a majority of the members could not terminate the other’s interest in the firm without
providing a reason. Moreover, the only acceptable reason would be a circumstance that
undercut the firm’s status as a contractor.
The flexibility of the LLC business form relates to its framework, not to its members’
The district court does not have diversity jurisdiction. For diversity jurisdiction to exist, there
must be complete diversity of citizenship, meaning that all of the plaintiffs must be from different
states than all of the defendants. In this case, Mid-Atlantic is not diverse from MAG. Mid-Atlantic
is a New Jersey citizen because it is a New Jersey corporation. MAG is also a New Jersey
citizen because LLCs and partnerships are citizens of every state of which their members are
corporate shareholder may be liable for a corporate obligation. In either situation, if an owner of,
or an investor in, the firm does not follow statutory formalities, co-mingles funds, or ignores the
entity’s articles of formation, a court may disregard its identity and hold the owner or investor
liable.
8 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
In this case, the court ordered Blushing Brides and Zacks to pay Gray the balance due on
appellate court, which agreed that “Blushing Brides, LLC failed to pay in full the balance on the
printing services account . . . . Thus, Blushing Brides, LLC's actions constituted a breach of the
printing services account, thereby subjecting Blushing Brides, LLC to liability.”
The appellate court reversed the lower court’s judgment as to Zacks’s personal liability,
however. The appellate court cited a provision of the state’s LLC statutes, under which “[n]either
credit agreement established that Louis Zacks did not incur personal liability on the account
when he signed the credit agreement . . . on behalf of Blushing Brides, LLC. Rather, the credit
agreement clearly denoted Blushing Brides, LLC, not Louis Zacks, as the purchaser on the
account.”
As for the effect of the promissory note, the court held that it “was based on separate and
by substitution of parties or of the undertaking, with the consent of all the parties, and based on
valid consideration. Here, the promissory note made no indications of discharging any liability
under the printing services account.”
Thus, “[i]n summary, . . . Louis Zacks is [not] personally liable to [Gray]. However, we
also conclude that the parties did not modify the printing services account in a manner that
articles of formation, the member is not likely to be immune from personal liability for the acts of
the LLC that injure third parties.
This result seems ethically satisfying as well. A contrary result would undercut the
viability of an LLC and the welfare of those with whom it does business. It would encourage
unethical conduct by allowing unscrupulous individuals to avoid sanctions for their
in whole or in part.
10 UNIT ONE: BUSINESS ORGANIZATIONS
in whole or in part.
(a) A member of a limited liability company (LLC) has a fiduciary duty to act in a
manner that he or she believes in good faith to be in the best interests of the LLC and with the
care that an ordinarily prudent person in a like position would exercise under similar
circumstances. But this duty may be expanded, restricted, or eliminated by a written operating
agreement under the principle of freedom of contract.
basis for finding that the Newbury group breached its fiduciary duties as members of the LLC. A
member of an LLC has a fiduciary duty to act in a manner that he or she believes in good faith
to be in the best interests of the LLC and with the care that an ordinarily prudent person in a like
position would exercise under similar circumstances. This duty can be expanded, restricted, or
eliminated by a written operating agreement. Here, the operating agreement between the
Stokers and the Newbury group clearly stated that the members could engage in activities that
competed with the LLC’s business.
