Читать книгу How to Use Limited Liability Companies & Limited Partnerships - Garrett Sutton - Страница 10
ОглавлениеIn every business, one or more people need to take care of day-to-day operations. In an LLC, management is by managers or members. In an LP, management is by the general partner. As the rules for each are slightly different, we shall consider each separately.
Limited Liability Company Management
There are two methods of management for an LLC – member management and manager management. Under most state statutes, all members of an LLC are equally responsible for its management. Where all members are actively involved in managing the business, as is frequently the case with many smaller businesses, the LLC is member-managed. On the other hand, the LLC may select to be managed by only some of its members or by a nonmember altogether. This is known as a manager-managed LLC.
It is a requirement in most states that you identify whether you are manager-managed or member-managed as part of your Articles of Organization filing with the state. (Please note that in Minnesota and North Dakota managers sometimes may be referred to as “governors”.)
Although at least one manager (member or otherwise) is required, there is no upward limit on the number of managers you may have. To change from one form of management to the other will generally require the consent of the members (in some cases by a super majority, or greater than a majority, vote) and may also require the amendment of your Operating Agreement and possibly the filing with your state of an amendment to your Articles of Organization.
Member Management
As mentioned, in the typical two or more member active LLC scenario, several individuals have come together to make a go at a business. For each individual the business is his or her current provider and his or her future hope. As such, it is perfectly reasonable and understandable that each member wants to have a say in how the business is run.
Case Number 1 – John and Liz
J & L Consulting, LLC is operated by John and Liz. They are the only members and the only people involved in running the business, thus the only managers. In almost all cases, it would not be appropriate or fair to ask one of them to refrain from managing the LLC. It is also not really necessary to create a separate class of managers to be elected by the members. Accordingly, John and Liz decide to be member-managed, whereby each member is also a manager. In corporate terms this would be the same as agreeing that every shareholder would automatically be on the board of directors and act as an officer. But corporations do not offer such fluid arrangements, offering LLCs a distinct advantage. John and Liz like this flexibility and agree to be member managers.
Manager Management
On the other hand, not every LLC wants to - or should - be managed by all of its members. An LLC with 85 members would have a difficult time getting much done at a members’ management meeting. Realizing this, the framers provided that an LLC could be managed by one or more managers. Manager management may be appropriate when:
• Certain members are investors who want no involvement or responsibility for management of the business.
• Similarly, some members may be active in the business but don’t want to be considered a “manager.”
• The owners hire an outside management professional to run the business.
• A nonmember financier is willing to lend money but wants a say as a manager in how the money is spent.
• Like the general partner of an LP, a member may want to manage the business as he gifts member interests to non-managing family members.
Because manager–managed offers more flexibility we generally recommend this format. The members can all be managers in a manger managed scenario. If the management structure changes you don’t have to amend the Articles, as you would if you went from member–managed to manager-managed.
Case Number 3 – Mike and Amy
Mike and Amy are movie producers. They have produced some of the greatest low budget films of all time. Each movie has the common elements of cheerleaders, motorcycles, misunderstood psychos and at least one nerd. Mike and Amy know their audience well, and it has made them very wealthy.
To raise money for each movie Mike and Amy use a separate LLC. They follow all the securities laws and provide the proper documentation. Each investor receives a percentage of the LLC. When profits are made they flow through the LLC directly to the investor. An issue for Mike and Amy is that each movie LLC has over 200 investors. The business can’t possibly be managed by all those people. Some of their money people are as oddly strange as the psychos in their movies. (One investor was even cast as a weirdo. He was brilliant, but then he wasn’t acting.) So they have to come up with a way to separate investment from management.
As such, Mike and Amy decide that their LLCs will be manager-managed. They will do the managing for all their investor members who, although they have plenty of opinions and grand artistic visions, have no experience managing a movie production.
Term
Managers serve for an indefinite term in most LLCs. Instead of holding an annual shareholders’ and directors’ meeting and electing directors and officers for the upcoming year as with a corporation, unless provided otherwise in the Operating Agreement, the managers serve until the members take a vote to remove them. In smaller, more informal LLCs, the initial managers will be installed and start managing. No one will give the matter of a manager’s term much thought until there is a problem and one or more of the managers must be removed.
In larger LLCs, or those in which investors have placed their money and trust in the managers, set terms for the managers may be established. The Operating Agreement may be drafted providing for, as an example, one-year terms for managers after which time the members shall review the managers’ performance and hold a new election.
It should be noted that unlike certain areas of corporate law, such as directors’ terms and meetings, which have a defined structure and procedure, the law of LLCs is much less formal. If you want to have terms for your managers, you can put them into your Operating Agreement. If you’d rather not bother, so be it. That’s your choice. If you run into a problem with your managers, state law lets you hold a vote of all the members, and the majority wins. For many, the laissez faire flexibility of the LLC is one of its endearing qualities. However, as discussed throughout this book, sometimes the following of certain formalities can be a useful and productive strategy.
Voting Rights
In a manager-managed LLC the members retain certain voting rights under most state statutes. (In a member managed LLC this isn’t much of an issue since all members vote on everything anyway.) Besides the right to remove and replace managers, non-managing members also have the right to:
• Approve membership changes to the LLC.
• Approve or deny the admission of new members.
• Approve or deny the transfer of a membership interest to an outsider.
• Approve fundamental changes through amendment of the Articles of Organization or Operating Agreement.
• Approve the merger or dissolution of the LLC.
Voting Power
The number of votes each member and/or manager is allowed to exercise should be clearly set out in the Operating Agreement. If your Operating Agreement is silent on this issue, your state’s statute will apply by default. Typically, state laws allocate voting power according to each member’s ownership interest as represented by his or her capital contribution. Some states’ default rules apply a per capita standard of one vote per member. Neither of these defaults may be right for your particular situation. Be sure to set out your own standards for voting in your Operating Agreement.
Whether the members of the LLC have a voting power based upon one vote each or a percentage of ownership, state law requires that most company matters be approved by at least a voting power majority. In addition, your Operating Agreement may be drafted so that certain key votes must be decided by a supermajority. Thus, for example, the removal of a manager may require a vote of not 51 percent but 81 percent of the voting power.
There is flexibility in the realm of manager-managed LLC decision-making as well. Although most state law default provisions provide for one vote per manager and a majority vote for all manager decisions, the Operating Agreement can be drafted to provide for different standards.
Case Number 3 – Mike and Amy
As mentioned, movie investors are an interesting class. They are drawn to a project by the hopes and dreams of Hollywood, only to learn that the reality is a group of hard-nosed businessmen involved in a crapshoot where no one is ever sure of winning. But when they do win it is huge, which keeps everyone coming back for more.
Mike and Amy find that some investors are easily upset by their inevitable disillusionment with the realities of Hollywood, and that they tend to take it out on the managers by trying to vote them out.
Being sharp people, Mike and Amy draft the Operating Agreement to create two classes of membership interests. One class, held by Mike and Amy, is able to exclusively vote for the two managers. The other class of membership interests, held by all the other investors, has no say or vote in electing the managers. This arrangement is freely disclosed to all potential investors in the LLC’s investment prospectus. No one can say they aren’t aware that they can’t vote for a manager.
As a result, when the investors get mad, as they sometimes do, their recourse is not to hold an election and remove the managers. Mike and Amy are the only managers and, absent a court order, that will not change. The investor’s recourse is to demand accounting and financial records, which Mike and Amy happily provide. They have nothing to hide. And by maintaining management control they are able to conduct the business to the benefit of all their investors.
Meetings
Another distinctive feature of the LLC format is that most states do not require LLC meetings. Unlike the corporate regime of detailed procedures for the notice and call of annual and special meetings, the LLC rules are very hands-off. Several states require meetings as a default, meaning that you can provide in your Operating Agreement for no meetings and avoid the state’s requirement.
Interestingly, while no meetings are required, as mentioned earlier, the members are required to vote on such major issues as dissolution of the LLC, removal of managers, if allowed, and amendment of the Operating Agreement. How can members vote without holding a meeting? If allowed in the Operating Agreement, the members can register their votes informally without holding a meeting or preparing meeting minutes. In some cases, they can simply sign a consent to the action taken without the need for a meeting. Otherwise, most states have default procedures allowing LLC members or managers to call a special meeting for the taking of votes on major issues.
As discussed throughout this book, no-meeting flexibility is not ideal. The following example illustrates why:
Case Number 4 – Eric and Sherry
Eric and Sherry operate a dry cleaning business. They have borrowed money from friends and family to open the business and formed an LLC to conduct their enterprise. Each of their investors receives an LLC membership certificate reflecting the amount of money they have invested. Their Operating Agreement does not call for annual meetings or even special meetings to decide major issues. Eric and Sherry get actively involved in running the business, and before long, several years go by without any communication with the investor/members.
One of their investors, a Mr. Beye, has put more into the LLC than he probably should have. Now, he needs his $10,000 investment back for certain upcoming medical expenses. Mr. Beye calls Eric and demands his money back. While Eric is not obligated to give an equity investment back, it is really not possible anyway, as the business is not that profitable as of yet.
Mr. Beye is furious. He calls all the other investors and alleges that Eric and Sherry are cheating them. While most know Eric and Sherry well enough to know that this is not the case, the investors are universally resentful that they have not heard from Eric and Sherry regarding the business. No meetings have ever been called to explain where the business stands or to answer investor questions.
Before long, a lawyer is retained to look into Eric and Sherry’s activities. Fortunately, cooler heads prevail. Eric and Sherry are allowed to hold a meeting to answer any and all questions. Eric and Sherry borrow enough money to buy out Mr. Beye so he can pay his medical expenses.
A valuable lesson is learned. Eric and Sherry now hold an annual members’ meeting every year.
The failure to hold meetings can lead to miscommunication and legal jeopardy. It is a certainty that someday some court is going to hold that the fact that regular meetings were never held, that votes on major issues were never recorded and that managers went about their business for years without reporting to the members is clear evidence of a lack of formality in business affairs. And who could effectively challenge a court for such a finding? Your defense of being flexible only supports the lack of formality. That court will then pierce the LLC veil and hold the managers and perhaps members personally responsible for the obligations of the LLC.
In the legal field it is said that bad facts make bad law. Courts are human, and they respond to human situations. Many judges are elected and must face the public every four or six years. In certain situations, an extreme and disturbing case (bad facts) will lead to a decision that may be appropriate in the individual case but is inapplicable to the entire field (bad law). Precedent is established, allowing for future cases to be decided in the same fashion.
This is what will happen in the area of piercing the LLC veil, and perhaps in other areas of LLC law. As has been mentioned, the LLC is a new business entity without a completely defined body of law. Although more and more LLC cases are being reported, the opportunity for bad facts to make bad law exists.
Which brings us to the key point in all of this. Despite that fact that you may draft your Operating Agreement so that no meetings are required and despite the fact that many state laws take a hands-off attitude toward the necessity of meetings, you should make meetings a regular feature of your LLC operation. Your Operating Agreement should require the preparation and retention of meeting minutes. It should provide for notice and call of meeting procedures and detail how many members or managers must be present for a valid meeting to be conducted. In this way, you will prevent some future decision allowing the piercing of the LLC veil (and it will come) from cutting against you. At the same time, you will prevent miscommunication and misunderstanding from undermining your organization.
As well, when the IRS comes calling on an audit they like to see the formalities of meeting minutes and issued ownership certificates. Following the corporate formalities in your LLC (or LP) goes a long way when the IRS is reviewing your records.
We shall again discuss this issue in later chapters, only because it is so important.
Limited Partnership Management
Management issues for Limited Partnerships are greatly simplified and are as follows:
1. A Limited Partnership must be managed by a general partner.
2. A Limited Partnership cannot be managed by a limited partner.
Case Number 2 – Mary and Gary
M & G Holdings, LP has been formed for several years now and is working well for Mary and Gary. The Limited Partnership holds their brokerage account and they are so pleased with the way it works they set up another Limited Partnership, G & M Properties, LP, to hold a four-plex apartment building they own. They are gifting Limited Partnership interests to each of their three children, thus reducing their taxable estate. Until the children reach age 18, their interests are held custodially by the parents under the Uniform Transfers to Minors Act (UTMA) (or in South Carolina and Vermont the Uniform Gifts to Minors Act (UGMA)). They are protecting and growing their assets.
Their oldest son, Charlie, who is not yet 18 years old, holds a Limited Partnership interest in both entities. He takes a liking to helping fix up and repair the apartment building and soon asks if he can manage it and collect the rents. This is fine with his parents for it shows he wants responsibility and using Charlie is cheaper than the management company they are currently paying.
One day Gary is casually speaking with his attorney and mentions that Charlie is handling the apartment building. The attorney comes unglued. In his legal opinion, for a limited partner to manage the property is to lose all protections afforded by the Limited Partnership, including that limited partner’s limited liability. Charlie cannot be involved in the management of the property. And so, to preserve and protect their limited liability protection, Mary and Gary go back to using their old management company and loan Charlie the down payment money so he can buy and manage his own apartment building. In time, however, when Charlie is old enough he is made a part of the general partner management group and all is well.
While the general partner has complete authority and control, he or she must still act in the best interests of the limited partners. A fiduciary duty is owed by the general partner to the limiteds (as is true for a manager in an LLC). The general partner must not waste or dissipate partnership assets, improperly maintain the books and records of the partnership or do any other act in contravention of the Partnership Agreement. The general partner also may not confess any judgments (i.e., agree to be held liable) against the partnership or perform any act that makes it impossible to carry on the partnership’s ordinary business. With absolute control comes absolute responsibility.
Most state partnership laws require that the general partner obtain the majority vote (or greater, if so set out in the Partnership Agreement) of the limited partners to (1) sell all or substantially all of the partnership’s assets; (2) admit a new general partner and (3) admit, in some cases, a new limited partner. At the same time, many states allow the Partnership Agreement to eliminate the right of the limiteds to replace the general partner. As such, it is possible to have a Limited Partnership controlled by a general partner who must only call meetings to discuss the most important of matters.
Again, we cite the Nevada law that provides: “The partnership agreement may grant to all or certain identified general partners the right to vote on a per-capita or any other basis, separately or with all or any class of the limited partners, on any matter.” (NRS 88.465)
It is then possible to provide for controlled management continuity for several generations through a Limited Partnership. By having one or more managing general partners, and designating successor managing general partners, control can be maintained. In addition, by utilizing a corporate general partner and providing for the multi-generation succession of shares, continuity can be achieved. Of course, given the complexity of some of these issues it may be appropriate to consult with your professional advisors to make sure your maximum advantage is being achieved.
For Limited Partnerships, when considering the term of a general partner, voting rights and voting powers of partners, as well as the holding of partnership meetings, it is important to remember that these issues are left up to you to be drafted into the Partnership Agreement. Decide what you want and then get it down in writing into the Partnership Agreement.
Frequently Asked Questions
Can an LLC/LP have corporate-style officers?
Yes, an LLC/LP can have corporate-style officers. Having a business card that reads “Manager” or “General Partner” does not carry the weight in today’s business world as does “President” or “Chief Executive Officer.” These titles and lesser ones such as chief operating officer and chief financial officer, may be given to individuals working for the business.
However, you must be careful how you handle these titles. In the LLC scenario, clear lines must be established as to who can obligate the business.
In the LP scenario, the better practice is to use a corporate general partner to manage the Limited Partnership. The corporate titles (president, etc.) flow from the corporate general partner, who has traditional corporate authority to conduct the Limited Partnership’s business.
Who has the authority to bind the LLC/LP?
LLC: In a member-managed LLC, each member has the authority to sign contracts that bind the LLC. In a manager-managed LLC, unless other members have been authorized, only the managers may bind the LLC.
LP: Only general partners may bind the LP.
Must LLCs/LPs maintain company records?
The general rule for most states (and a good idea anyway) is that each entity must keep the following records and, upon reasonable notice, make them available to members/limited partners.
1. All entity documents (Operating or Partnership Agreement, minutes of meetings).
2. A current list of members/partners with their addresses.
3. Voting right information.
4. All tax filings (federal, state and local).
5. Financial information including that information found on a balance sheet.
Are limiteds/members entitled to view company records?
Yes, limiteds/members are entitled to view company records. Most states provide that certain company documentation and financial information may be reviewed upon reasonable notice. Colorado and Illinois, for example, have statutes preventing unreasonable restrictions on a member’s right of access to books and records.
What is the fiduciary duty of care owed by a general partner/manager?
Fiduciary duty means the legal duty of general partners and managers to make business decisions, spend the entity’s money and act in what they reasonably believe to be the best interests of their business. A fiduciary has a duty to act in good faith and with the utmost of care. General partners and managers, respectively, have a fiduciary duty to their limiteds and members.
What can occur if the general partner/manager breaches his or her fiduciary duty?
The limited partners/members may obtain damages from the general partner/manager if he or she breaches his or her fiduciary duty. In addition, if a majority consent was not obtained, a general partner/manager may be required to return any profits or benefits received from taking an opportunity that was the company’s to pursue.
Who can act as a manager/general partner?
LLC: Most states allow any person (United States or foreign national), corporation, partnership and trust, or separate LLC to serve as manager. But check your state rules, which may be subject to change. Colorado requires a natural person, 18 years or older. Minnesota requires an 18 year old or older individual, disallowing corporations and the like.
LP: Again, most states allow individuals, Corporations, LLCs and Trusts to serve as general partners. Be sure to check your state’s statute for any variance to this general rule.
Must a general partner/manager be a partner/member?
LLC: If an LLC is member-managed, by definition, the managers must be members. In a manager-managed scenario, however, a manager does not have to be a member. As previously discussed, in some LLCs the members will bring in a professional (nonmember) manager to run the business.
LP: As a general rule, a general partner should be a partner and have a partnership interest in the Limited Partnership. While certain creative arrangements can be made whereby a general partner has a lesser form of partnership interest, be sure to consult with your professional advisor on how (and why) to craft such a strategy.
Who elects the initial general partner(s)/manager(s)?
The initial general partner(s)/manager(s) must be named in the certificate of Limited Partnership/Articles of Organization filed with the state. So they must be agreed upon and appointed by the founding partners/members at the very first meeting.
Must the general partner(s)/manager(s) be residents of the state of entity formation?
No, unless such requirement is set forth in the Partnership Agreement or the Operating Agreement, general partner(s)/manager(s) need not be residents of the state of entity formation.
Does an LP/LLC have to hold regular meetings for its limited partners/members?
Though not necessary, as a practical matter and as discussed throughout the book, the better practice is to hold an annual meeting.
Are general partner(s)/manager(s) required to be elected on an annual basis?
LLC: Most states allow the members to set up their own procedures for the election of managers, which may be annual or otherwise. A few states, unless agreed to the contrary by the members, require the annual election of managers.
LP: No, unless so required in the Partnership Agreement, general partner(s) need not be elected on an annual basis.
Can the limited partner(s)/member(s) remove a general partner/manager with or without cause?
LLC: Again, it depends on what is provided in the Operating Agreement. If the Operating Agreement is silent on the issue, the default rules of each state’s statute apply. These rules differ from state to state. The better practice, once again, is to draft exactly the procedure you want into the Agreement.
LP: It depends on what is provided for in the Partnership Agreement. If the agreement is so drafted, removal with or without cause can be accomplished. If the agreement is silent, state law will apply, and on this issue, each state’s law is different. The better practice is to draft the agreement with the procedure you want in place.
Can a manager/general partner be indemnified and held harmless for claims that may arise?
Yes, with both entities, indemnification is an option, whereby if a management person is sued the entity will cover their legal defense costs and pay any claims that arise. But check whether your state statute limits the extent of any indemnification.
When can a limited partner become liable as a general partner?
When a limited becomes actively involved in the business and its management, liability may attach. Nevada’s law on this issue is well drafted and protects the limiteds as best as possible. It states:
“1. Except as provided in subsection 4, a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that he is a general partner.”
For more on this statute see NRS 88.430.
Nevertheless, where a limited partner acts as a general he or she may be personally liable to creditors. If a limited negotiates contracts or represents the LP in an official capacity they may be seen as acting as a general partner. The key to avoiding such a fate is to not tempt it. If you are a limited partner, do not act as a general partner.
What LP/LLC decisions require unanimous agreement?
As previously mentioned, approval of the Limited Partnership/Operating Agreement requires unanimous consent in many states. The better practice is to have each partner/member sign the agreement, thereby agreeing to be bound by its terms. Some states require that amending the agreements also require a unanimous vote. Again, it is good practice to have each partner/member sign any amended agreement. Other decisions, by prior agreement, may be required to have a unanimous vote.
Is there any set standard for how much should or can be paid in management fees to a general partner/manager?
There is no set standard for management compensation. Please note that the federal government wants to see a reasonable salary being paid whenever possible so that payroll taxes may be assessed in order to forestall the coming bankruptcy of the Social Security System. Factors to be considered in arriving at a reasonable amount will include the gross revenue of the LP/LLC, the level of management services rendered and comparable industry standards for compensation. A good accountant can help you to arrive at the right number, or you can visit www.salary.com.
