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CHAPTER 38
LIMITED LIABILITY COMPANIES
AND SPECIAL BUSINESS FORMS
ANSWERS TO CRITICAL THINKING QUESTIONS
IN THE FEATURE
MANAGERIAL STRATEGY—BUSINESS QUESTIONS
1. Should a manager for an LLC respond to employee complaints of discrimination any
differently from a manager at a corporation, a partnership, or a sole proprietorship? Why
or why not? Every manager, no matter what the organizational form of his or her employer,
2. How can a company, whether an LLC or some other business form, reduce the
chances of discrimination lawsuits? Managers should be given a course in ethics
training. They should also strive to create a workplace that promotes tolerance and diversity
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 38.1—CRITICAL THINKING
ECONOMIC
Why does the law allow—and even encourage—limits to the liability of a business
organization’s owners and managers for the firm’s actions? Discuss. The law allows, and
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encourages, limits to the liability of a business organization’s owners and managers for the
firm’s actions in order to facilitate business investment, which contributes to a more thriving
economy. Imposing personal liability in all circumstances on the owners and operators would
CASE 38.2—CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Green Cab had maintained a company Web site on which it posted its
operating agreement, conducted all internal company business, and offered a forum
where members could vent their complaints. How might the result have been different?
Why? If Green Cab had posted its operating agreement, and the members had conducted all
LEGAL ENVIRONMENT
During discovery, the plaintiffs were asked to answer requests for admission, but they
did not respond. Does it seem likely that their failure to answer affected the outcome?
CASE 38.3—LEGAL REASONING QUESTIONS
1. What dispute gave rise to the action filed in the court in this case? How did that
dispute lead to the issue on appeal? The dispute that gave rise to the action filed in the court
in the Reese case concerned the management, the membership, and ultimately the existence of
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2. What is the role of an appellate court when reviewing the exercise of discretion by a
trial court? The role of an appellate court when assessing the exercise of discretion by a trial
court is to engage in de novo review of the decision—to consider the question afresh, anew, or
from the beginning.
In this case, Allison Reese and Nicole Newman, the owners of ANR Construction
Management, LLC, could not reconcile their difference of opinion over the company’s direction.
Newman told Reese that she was going to dissolve and wind-up the firm. Reese wanted only
that Newman dissociate from ANR, so that Reese could continue the business. This dispute led
3. Newman alleged that after she delivered her notice to dissolve ANR, Reese locked her
out of the LLC’s bank accounts, blocked her access to the LLC’s files and e-mail, and
ended her salary and health benefits. Did any of the jury’s findings support these
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ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. LLC tax status
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
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
2A. LLC management
The LLC in this problem is a member-managed firm—the owners are the managers. In a
not be members of the firm.
3A. Special business form
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
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4A. Contractual liability
A court would probably hold that Davidson Masonry was not bound by the contract that
Lafayette entered. Joint venturers have less implied and apparent authority to bind their venture
than partners do to bind their partnership, because the activities of a venture are more limited
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Because LLCs are essentially just partnerships with limited liability for members,
all partnership laws should apply. While there are certainly some differences between how
LLCs operate relative to how partnerships operate, the similarities are sufficiently obvious that
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Gabriel, Harris, and Ida are members of Jeweled Watches, LLC. What are their
options with respect to the management of their firm? The members of a limited liability
2A. Greener Delivery Company and Hiway Trucking, Inc., form a business trust. Insta
Equipment Company and Jiffy Supply Corporation form a joint stock company. Kwik
Mart, Inc., and Luscious Produce, Inc., form an incorporated cooperative. What do these
forms of business organization have in common? Although there are differences, all of
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ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
38-1A. Limited liability companies
Limited liability company (LLC) operating agreements typically state how profits will be divided.
An operating agreement is not necessary for the formation of an LLC, and even if there is an
operating agreement, it does need not to be in writing. Generally, though, members protect
38-2A. Special business forms
Although a joint stock company has characteristics of a corporation, it is usually treated as a
partnership. Therefore, although the joint stock company issues transferable shares of stock
and is managed by directors and officers, the shareholders have personal liability. Unless the
shareholders transfer their stock and ownership to a third party, not only are the joint stock
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
38-3A. Joint venture
The same principles apply to joint ventures as apply to partnerships. Joint venturers owe to
each other the same fiduciary duties, including the duty of loyalty, that partners owe to one
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38–4A. Limited liability companies
The court denied the motion. There were numerous disputed factual issues, including the
38–5A. LLC dissolution
No, the appellate court reversed the trial court’s decision. Given the absence of other grounds
specified in the operating agreement for dissolution of a limited liability company, the petitioning
member must establish that (1) the management of the entity is unable or unwilling to
reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2)
38–6A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—LLC operation
No. One Bluewater member could not unilaterally “fire” another member without providing a
reason. Part of the attractiveness of an LLC as a form of business enterprise is its flexibility. The
members can decide how to operate the business through an operating agreement. For
example, the agreement can set forth procedures for choosing or removing members or
managers.
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38–7A . Jurisdictional requirements
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
38–8A. Jurisdictional requirements
No, based on the facts provided in the problem, the trial court cannot exercise diversity
jurisdiction in the Siloam case—at least, not yet. When the parties to a suit are from different
states, a federal court can exercise diversity jurisdiction if the amount in controversy exceeds
38–9A. Special business forms
If Crow Wing is found to have acted negligently, its members may be held jointly liable for the
cooperative’s acts. A cooperative is an association that is organized to provide an economic
service to its members. It may or may not be incorporated. Members of incorporated
cooperatives have limited liability, like the shareholders of corporations and the members of
38–10A. A QUESTION OF ETHICS—Limited liability companies
(a) A member of an LLC may be held liable for an obligation of the firm, just as a
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. In this case, the court ordered Blushing Brides and Zacks to pay Gray the balance due on
Blushing Brides’s account, plus interest. The defendants appealed to a state intermediate
appellate court, which agreed that “Blushing Brides, LLC failed to pay in full the balance on the
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(b) The legal liability of a member of an LLC arguably traces the outlines of the
member’s ethical responsibility for the obligations of the firm. Under the law in those jurisdictions
that have considered the issue, if a member does not follow the required statutory formalities,
co-mingles his or her funds with the LLC’s finances, or ignores the restrictions in the LLC’s
transgressions.
(c) At $4.50 apiece, the total retail value of 5,000 copies of Blushing Brides’s
spring/summer 2002 issue exceeded the unpaid amount on the firm’s account with Gray. The
court stated, “It is a cardinal rule of contracts that an injured party is under a duty to mitigate its
damages and may not recover those damages which it could have reasonably avoided.” But
38–11A. SPECIAL CASE ANALYSIS—LLC dissolution
Case No. 38.3
Reese v. Newman
District of Columbia Court of Appeals, 2016
131 A.3d 880
(a) Issue: Which party’s choice between two alternatives was at the heart of the issue
on the appeal of the Reese case? The trial judge was the party whose choice was disputed on
the appeal of the Reese case.
Allison Reese and Nicole Newman were the co-owners of ANR Construction
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(b) Rule of Law: What rules of interpretation did the appellate court apply to construe
the language of the statutes that created those alternatives? The appellate court applied the
plain language rule to construe the language of the state statutes that governed the dissolution
of LLCs and the dissociation of its members. Under that rule, according to the court, “the intent
of the lawmaker is to be found in the language that he has used. To that end, the words of the
of those statutes.
(c) Applying the Rule of Law: How did the court construe the language of those
statutes? The two state statutes at the heart of the appeal of the dispute in the Reese case
covered the dissociation of the members of an LLC and the dissolution of the firm. A jury had
found grounds for both the dissolution of the firm and the dissociation of one of its members.
The trial judge had chosen dissolution. This exercise of discretion was contested by Reese, the
member of the company who wanted Newman, the other member, out of the firm and therefore
appealed this result.
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(d) Conclusion: How did the court’s construction of that language lead to the result? The
appellate court in the Reese case based its ruling on its construction of the language of the state
statutes covering dissolution of an LLC and dissociation of its members to affirm the trial judge’s
exercise of discretion and the lower court’s decision as a result.
The co-owners of an LLC had disagreed over the firm’s management One of the owners
notified the other that she Intended to dissolve the company. The other member, however, did
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
38–12A. Fiduciary duties in LLCs
(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
(b) The fiduciary duty of a member of an LLC 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
(c) In this problem, the court should rule in the Newbury group’s favor. There is no
basis for finding that the Newbury group breached its fiduciary duties as members of the LLC. A
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