Chapter 14

Limited Liability
Partnerships,
Limited Liability
Companies,
and Other
Business
Arrangements

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Limited Liability Companies (LLCs)

 Same liability protection afforded to principals

of a corporate form, and

 Pass-through tax treatment for its principals

without the restrictions on ownership and
scope required for other pass-through
entities.

14-2
Liability

 Although LLC members are insulated from

personal liability for any business debt or
liability, creditors often require members of
new and/or small LLCs to sign personal
guarantees.

14-3
Taxation

 Another attractive advantage of an LLC is the

various tax treatment alternatives.

 Although many LLCs are typically treated as

a pass-through entity, the LLC’s members
may also elect to be taxed as a corporation if
they consider the corporate tax structure
more favorable.

14-4
Capitalization

 LLCs are capitalized primarily through debt

via private lenders or commercial lenders, or
by selling equity ownership in the LLC itself.

14-5
Management and Operation

 Most states distinguish between:

 A member-managed LLC, and

 A manager-managed LLC.

14-6
Limited Liability Partnerships (LLPs)

 Danger of being a general partner is the

potential liability for acts of other general
partners, debts, and liabilities of the
partnership itself.

 LLP statutes provide partnerships with the

protective shield ordinarily only afforded to
limited partners or corporate shareholders.

14-7
Liability

 General idea behind being an LLP is that all

partners have liability protection for debts and
liabilities of the partnership, but there may be
conditions on these limits.

 In cases where a partner has engaged in

misconduct or tortious conduct (such as
negligence), the LLP acts to shield the personal of
assets of other partners—never the partner who
committed the misconduct or negligence.

14-8
Taxation

 LLPs are treated as pass-through entities.

They are not subject to tax; any income is
taxed only when it is distributed to it’s the
LLP’s partners.

14-9
Capitalization

 LLPs are capitalized in the same way as a

partnership: through debt via private or
commercial lenders or by selling partnership
equity for ownership in the LLP itself.

14-10
Management and Operation

 The day-to-day operations and powers of the

partners are spelled out in the partnership
agreement.

 The election procedures, qualifications,

compensation, meeting times, and other
organizational matters are typically
addressed in the partnership agreement.

14-11
Franchises

 A franchise involves the franchisor, a business

entity that has a proven track record of success,
selling to a franchisee the right to operate the
business and the business’s trade secrets,
trademarks, products, and so on.

 The franchisor assists the franchisee with financing,

supplies, training and other aspects of running a
successful operation.

14-12
learning outcomes checklist

 14 - 1 Identify the sources and level of laws that

govern LLP and LLC entities.

 14- 2 Explain the function of an operating

agreement and fundamental structure of an LLC.

 14- 3 Distinguish between the formation and

management of an LLC and the formation and
management of an LLP.

14-13
learning outcomes checklist

 14- 4 Determine the rights of principals upon

withdrawal from an LLC.

 14- 5 Articulate the legal protections from

personal liability afforded to the principals in
an LLC and LLP.

 14- 6 Identify the tax treatment schemes of

an LLC and LLP.

14-14
learning outcomes checklist

 14- 7 Provide the primary methods for

capitalizing limited liability entities.

 14- 8 Recognize the utility of other business

arrangements including franchise
relationships and business trusts.

14-15