The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. In what ways are limited liability companies
different from general partnerships?
The most important distinction between
a limited liability company and a general
partnership is that the limited liability
company offers limited personal liability
for its members, whereas a partnership
offers no protection from personal liability
to its partners. Unlike general partnerships,
limited liability companies
must be formed by filing articles of organization
with the secretary of state or
other appropriate authority. It is not
possible to form a limited liability company
with merely an oral agreement.
Other distinctions may vary depending
on state law. Whereas, depending on
state law, partnerships may be considered
more of an extension of the individuals,
the limited liability company is considered
a legal entity distinct from its
members for all purposes except taxation.
Also, the limited liability company
may have just one member in most
states.
2. If Sandy owes Mike $5,000 that she is unable
to repay, can she assign to him her
rights as a limited liability company member
to receive payments as set forth in the
company’s operating agreement?
Yes, members of a limited liability company
can transfer or assign their financial
interest to receive profits and losses
from the company.
Can Sandy assign her entire rights in the
limited liability company to Mike, making
him a new member with the right to manage
the business?
No, the rights of a member to vote and
partake in the management of the limited
liability company are not transferable.
Therefore, it is not possible for
Sandy to transfer her entire interest in
the limited liability company to Mike unless
permitted by the company’s operating
agreement.
3. Katherine is a member of a membermanaged
limited liability company that designs
software called K & A Software Ltd.
Liability Company. Can she enter the company
into a contract for the design of new
educational software for a local college?
Yes, unless prohibited by the operating
agreement of the limited liability company,
Katherine, as a member of a
member-managed limited liability company,
has the right to act on behalf of the
company for matters within the normal
course of business.
What if the K & A Software Ltd. Liability
Company is manager managed?
If the company was manager managed
and Katherine was not a manager, she
would not have the authority to act as an
agent on behalf of the company to enter
into such an agreement.
4. Are the members of a limited liability
company always protected from personal
liability for the debts and obligations of the
company?
No
What are some circumstances under which
members of a limited liability company
may be personally liable for the company’s
debts and obligations?
Although members are generally protected
from personal liability for the
debts and obligations of the limited liability
company, there are exceptions to
this rule. Lenders may require members
of a limited liability company to personally
guaranty loans made to the company.
In addition, the limited liability company
veil may be pierced if members of
a limited liability company use the entity
to defraud creditors or investors. Also,
members may be personally liable if
those they are dealing with think they
are dealing with the members individually,
instead of the limited liability company.
5. Suppose that you are forming a limited liability
company that will own and operate
auto dealerships. Your company will operate
only one dealership in Missouri to start
with, but you want to expand into Illinois,
Texas, and Arizona. What steps might you
take during the organization process to plan
for your future expansion?
To plan for future expansion into other
states, you would want to do a quick review
of the limited liability laws in those
states. You may also want to register the
name of your limited liability company
in Illinois, Texas, and Arizona to reserve
it for future use.
6. If you are a family-practice physician going
into business with three other doctors,
what options are available in your state for
transacting business?
Answers will vary depending on state
law.
Why might a professional limited liability
company be an attractive alternative?
Limited liability companies provide that
professionals such as physicians are not
liable for the debts or obligations of the
company that arise from a wrongful act
or omission of another member. Physicians
who are members of this type of
entity will be liable for debts and obligations
that arise from their own malpractice
or wrongdoing.
7. Why is it important to designate in the articles
of organization whether a limited liability
company will be member managed
or manager managed?
The member-managed or managermanaged
designation will determine who
has authority to act on behalf of the limited
liability company.
8. Why might an investor prefer to become a
member of an LLC rather than a limited
partner of a limited partnership?
Unlike limited partners, all members of
LLCs have the right to participate in the
management of the business, either as a
member (in a member-managed LLC)
or by the appointment of managers (in a
manager-managed LLC).
9. Suppose that Dan decides to form a limited
liability company to operate a grocery
delivery service with his two sons,
Tom and Bob. Tom and Bob are each
contributing $10,000, but Dan’s initial
contribution is $20,000. Can the LLC’s
operating agreement provide for Dan to
receive distributions that are twice the
amount of the distribution that Tom and
Bob each receive?
Yes, LLC statutes provide for maximum
flexibility when designing the financial
structure of an LLC. The operating
agreement, which is signed by all members,
can provide for distributions from
the LLC in any equitable manner.
If the operating agreement is silent on the
subject of distributions, how would a
$6,000 distribution be divided among the
three members?
This may vary, but state statutes generally
provide for equal distributions to all
members unless otherwise provided for
in the articles of organization or operating
agreement.
10. Suppose that you have formed a limited
liability company in your state to operate a
sporting goods franchise. Your business
has become very successful and you and
your members would like to expand. One
of your members, who will be managing
the new store, lives in a neighboring state
and would like to open a store in his
hometown. Would it be necessary to form a
new limited liability company, or can your
limited liability company own and operate
a store in a neighboring state?
The existing LLC can operate in a
neighboring state.
What formalities may be required?
The LLC will be required to qualify to
do business as a foreign limited liability
company in the neighboring state.