Chapter 42
LPs, LLCs, AND LLPs
RESTATEMENT
A limited partnership is a special kind of partnership in which all but the general partners have limited liability
meaning that the extent of their loss is their capital contribution. A limited partnership is a statutory creature
governed by the Uniform Limited Partnership Act (ULPA) or the Revised Uniform Limited Partnership Act (RULPA).
There are restrictions on the activity of limited partners so that third parties do not rely on their financial
reputations in making the decision to do business or extend credit.
Limited liability companies (LLC) qualify as partnerships for federal tax treatment but have the benefit of limited
liability. LLCs are also statutory creatures and require proper formation. The operating agreement governs the
members of the LLCs and their powers and interrelationships.
The newest form of business organizations are limited liability partnerships which provide limited liability and flow
through. These forms of business organizations are generally used by professionals such as accounting and law
firms.
STUDENT LEARNING OUTCOMES
LO.1: Explain the history of making limited liability available to general partnerships.
LO.2: Explain the extent of a founding general partner’s liability for the debts of the firm, and how unlimited
liability can be avoided by utilization of a corporate general partner.
LO.3: Explain the nature and extent of a limited partner’s liability for the debts of the firm.
LO.4: Explain the advantages of a limited liability company.
LO.5: Understand that an LLC is not liable for the conduct of its promoters prior to organization.
LO.6: Understand that unless modified in an operation agreement, managers of LLCs owe member-investors
the traditional duties of loyalty and care.
LO.7: Explain how a limited liability partnership “shields” innocent partners from liability to third parties.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What is partnership limited liability? (LO.1)
2. What are limited partnerships?
3. What are limited liability companies? (LO.4, LO.5, and LO.6)
List the characteristics of LLCs
4. What are limited liability partnerships?
CHAPTER OUTLINE
I. What is Partnership Limited Liability?
II. What are Limited Partnerships?
A. Formation of limited partnerships
B Members of a limited partnership
C. Certification of a limited partnership
D. Characteristics of limited partnerships (See Figure 42-1 in text)
1. Capital contributions
2. Firm name – may not be able to use a limited partner ’s name in firm name and may have to use
“limited partnership”
3. Management and control of the firm
a. Loss of limited liability
b. “Safe harbor” activities
i. Consulting
4. Right to sue
5. Dissolution
III. What are Limited Liability Companies?
A. Characteristics of LLCs
1. Qualifies as a partnership for federal taxes
2. Formation
3. Liability of promoters
CASE BRIEF: Hansen v. Fields Company, LLC
763 S.E. 2d 31 (S.C. 2014)
FACTS: Hansen contracted with Fields to help him secure financing and investors to purchase a water
company. Fields made some attempts to help Hansen, but subsequently terminated his
representation of Hansen to pursue purchase of the water company through other entities he
was involved in. Fields was a member of the LLC that ultimately purchased the water company.
ISSUE: Was the LLC liable for breach of contract and torts involving fraud?
REASONING: The prevailing rule is that an LLC is not liable for a promoter’s contracts unless the LLC ratified
the contract after it was organized or accepted any benefits for the contracts. An LLC is not
liable for torts committed by its promoter prior to organization because there is no agency
relationship between a promoter and a non-existent LLC; the injured party may seek recourse
from the promoter directly; and the potential for such liability would chill investment.
4. Capital contributions
a. Cash
5. Management
a. Per operating agreement
CASE BRIEF: Auriga Capital Corp. v. Gatz Properties, LLC
40 A. 3d 839 (Del. Ch. 2012)
FACTS: The plaintiffs, minority members of Peconic Bay, LLC, sued the defendant, Gatz
Properties, LLC, for breach of fiduciary duty. The defendant, William Gatz, managed the
Peconic Bay, LLC, which had a long-term lease on a valuable New York golf course. The
defendant manager allowed the property to fall into an economically vulnerable position, and
then auctioned off the LLC without properly marketing the sale. The defendant was then the
only person to show up for the auction and purchased the LLC for a nominal value over the
debt.
ISSUE: Did Gatz breach his fiduciary duty to the minority members of the LLC?
REASONING: The LLC agreement incorporated a core element of the traditional fiduciary duty of loyalty. The
manager was not free to create a situation of distress by failing to cause the LLC to explore its
marketing alternatives and then to buy the LLC for a nominal price. The purpose of the duty of
loyalty is in large measure to prevent the exploitation by a fiduciary of his self-interest to the
disadvantage of the minority. The fair price requirement of that duty, which was incorporated in
the LLC agreement, makes sure that if the conflicted fiduciary engages in self-dealing, he pays
a price that is as much as an arms-length purchaser would pay.
6. Distributions
7. LLC property
8. Assignment
CASE BRIEF: Ott v. Monroe
719 S.E. 2d 309 (Va. 2011)
FACTS: Admiral Dewey Monroe and his wife, Lou Ann Monroe, formed an LLC in 2003, with Dewey
holding an 80% membership interest and Lou Ann a 20% membership interest, respectively. The
LLC provided that Lou Ann would be the managing member. Dewey died in 2004 and
bequeathed his entire estate to his daughter, Janet Ott. Janet called a meeting of the company
seeking to remove Lou Ann and elect herself as the company’s new managing member,
asserting that she had inherited her father’s full membership upon his death under his will. The
LLC asserted that Janet had inherited only Dewey’s right to share profits and losses and to
receive distributions, but did not inherit a right to the management and control of the company.
ISSUE: Having inherited her father’s entire estate, did Janet Ott have the legal right to assume
management and control of the LLC?
REASONING: Judgment for the LLC and Lou Ann. Dewey Monroe was dissociated from the company upon his
death by operation of law, terminating all his rights as a member to participate in the
management and control of the company; and only the right to share profits and losses and to
receive distributions survived to be inherited by Janet, under his will.
9. Dissolution
10. Tax classification and IRS requirements for tax flow-through
a. Continuity of life
b. Centralized management
B. LLCs and other entities
1. LLC distinguished from a Subchapter S corporation – an LLC has no limit on number of members or
2. Disregarding LLC limited liability
CASE BRIEF: Kaycee Land and Livestock v. Flahive
46 P. 3d 323 (Wyo. 2002)
FACTS: Kaycee entered into a contract with Flahive, as managing member of Flahive Oil and
Gas, allowing Flahive to use the surface of its real property. Kaycee alleges that Flahive Oil
and Gas caused environmental contamination to its real property. Because Flahive has no
assets at this time, Kaycee seeks to pierce the limited liability company veil and disregard the
LLC entity of Flahive Oil and Gas and hold Flahive individually liable for the contamination.
ISSUE: In the absence of fraud, is the remedy of piercing the veil available against a company formed
under the Wyoming Limited Liability Company Act?
REASONING: No reason exists in law or equity for treating a limited liability company differently than a
corporation is treated when considering whether to disregard the legal entity. The equitable
remedy of piercing the veil is an available remedy under the Wyoming Limited Liability
Company Act. When corporations fail to follow the statutorily mandated formalities, co-mingle
funds, or ignore the restrictions in their articles of incorporation regarding separate treatment of
the corporate property, the courts deem it appropriate to disregard the separate identity and do
not permit shareholders to be sheltered from liability to third parties for damages caused by the
corporations acts.
3. LLC distinguished from a limited partnership – an LLC does not have to have a general partner, and
4. Usage – will not be physically traded
IV. What are Limited Liability Partnerships?
A. Most states recognize
B. Professionals subject to regulation
CASE BRIEF: Kuslansky v. Kuslansky, Robbins, Stechel and Cunningham, LLP
858 N.Y. S. 2d 213 (App. Div. 2008)
FACTS: Kuslansky sued his former law partners for breach of contract for failure to pay him the
value of his interest in the registered limited liability partnership upon his withdrawal from the
partnership. His former partners moved to dismiss the complaint, contending that they were
shielded from liability with respect to the plaintiff partner who had withdrawn from the
partnership.
ISSUE: Does partnership law shield a general partner in a registered LLP from personal liability
for breaches of the partnership’s or partners’ obligations to each other?
REASONING: The statute limiting personal liability for general partners does not shield general partners from
personal liability for breaches of the partnership’s or partners’ contractual obligations to each
other.
DISCUSSION POINTS: Ethics & the Law
S & L Crisis
Prior to the S & L crisis, there had not been the significant exposure for the large accounting partnerships.
However, the exposure the individual partners experienced as a result of the claims by investors and the federal
government resulted in the restructuring of the business structures of these firms. Avoiding future liabilities is
appropriate since future parties dealing with the firm will understand its organization and liability limitations.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. LLC v. LLP. The principal advantage of an LLP over an LLC is that existing traditional general partnerships
2. Application of Subchapter S Corporations to aliens; alternative forms of business organizations. Alan has
received inaccurate information about the use of the subchapter S form to his situation. One must be a U.S.
3. Filing a certificate of limited partnership. Since the certificate of limited partnership was not filed with the
secretary of state’s office as required by the state limited partnership act, a limited partnership was not
formed. Kate’s failure was not a mere technical defect in the certificate. She simply failed to file. As a
4. Loss of limitation of liability through participation in management. Judgment for American National Insurance
Company. Green and Murphy expressly adopted the partnership obligation in the Restated Agreement.
5. Pay for members of LLC for services rendered the company. A member of an LLC is not entitled to
compensation for services performed by an LLC, unless it is stipulated in the Operating Agreement. Jillian
6. Application of partnership principles to a LLC. The fact that the LLC did not have a written operating
agreement dealing with the division of contingency fees upon dissolution, nor was there an oral agreement
7. Liability of members and of an LLC. Beth made the contract with SDAA as an agent for the limited liability
company, PBD LLC. She signed the contract with SDAA “Beth Daley, manager PBD, LLC”, fully disclosing
that she was acting as an agent for the LLC. An agent is not liable for the contracts made on behalf of a
8. LLC distinguished from a limited partnership. Generally none of the owners of an LLC are personally liable
Limited partners cannot participate in the management of the partnership except certain “safe harbor ”
activities under the RULPA, such as being an employee of the general partnership. All owners of an LLC
may participate in the entity’s management. John is correct in his statement that the general partner of a
The legal cost in organizing a limited partnership should be greater than the legal costs in organizing a LLC
because of the need to file documents not only establishing the limited partnerships but also the documents
A “Duval County” exists in Florida, a state which imposes an annual intangible asset tax on the value of
intangible assets held by a Florida resident as of January 1 of each year (Fla. Stat §§ 199.032 and 199.103).
The decision on whether to use an LLC or a limited partnership form is a complex one, sometimes turning on
taxation matters.
If taxation is not an issue, the LLC form appears to be the most advantageous form of entity for John and
Amelia’s business.
9. Management and control of the firm. Judgment against Russell and Andrews under both the ULPA and the
RULPA. The limited partners, Russell and Andrews, took part in the control of the business of the partnership
Even under the RULPA, the activities of Russell and Andrews were not such as to bring them within the safe
harbors provisions of the RULPA. In exercising control over the business, they did not act as contractors,
10. Business ethics [Preface]; limited partnership, control of firm. It is true that under the RULPA, a number of
safe harbors exist for limited partners to engage in certain activities without losing their protection from
liability. Micco’s role changed drastically with the progression of events, and after the construction supervisor
was fired, he took over the control of the project. It does not appear to be within the ethical principles of
11. LLC. Hagans owned Stuart Court Apartments, which they listed with Adams. The Hagans formed an LLP
and transferred the apartments to it. Adams claimed a commission. The court found a sale and transfer and
12. Governance and operation of an LLC in the absence of other written terms. Judgment against Kertesz. He
had no majority. The majority members had the absolute right to replace this managing member. A
“deadlock,” like its cousin “gridlock,” is a standstill caused by the opposition of persons or of factions. Here
13. Assignment of interest in an LLC. Banner’s assignment of membership rights to Elizabeth Condo in violation
of the operating agreement made the assignment void. Judgment was thus rendered for Connors and
management system for classroom use.