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Business Organizations
Touro Law School
Sigman, Shayna

§ Purpose:
o Originally designed to provide protection of creditors to investors. Vehicle to invest cash for purpose of earning profit and not run risk of having unlimited liability. LPs are not personally liable for partnership debt and risk limited to their investment.
o Served as tax shelters at some point because LPs are responsible for loses and investors could cover their taxes in theloses. Income and losses allocated according to Limited Partnership Agreements. LP’s popular as a tax vehicle b/c they create tax shelters and can shelter their other income by using other partnership losses.
§ Description: There must be at least one general partner and at least one limited partner. Limited partner shall not be bound by the obligations of the partnership, limited partners are not liable for their partnership debts, their risk is limited to their investment) and LP’s generally do not exercise control/management powers. Limited partnerships are a tax oriented vehicle. Income and losses are allocated according to the limited partnership agreement.
§ Formation – public filing or either Partnership Agreement/Certificate; name must include “limited”; exclusively a creation of a state statute
§ Liability of an investor in Limited Partnerships can occur in two ways:
1. If the LP filing was screwed up, the LP never came into existence à See §91 Formation to ensure that the filing prerequisites were completed.
2. If the investor participated in control of the partnership, then the limited partnership shield of protection is given up. Participating in a derivative suit against a GP under the Revised LP statute, is not considered participation of control of the LP. Ensamble
In order to determine which one of the LP statutes applies, need to know the year when LP was formed.
§ Limited Partnership – governs LP’s formed prior to 1997 (unless amended thereafter to be governed under Revised LP Act.) Says that if you participated in control then you are liable (you have more exposure to liability under the old statute then the new one which requires knowledge and reliance). The argument that if someone was acting as an agent, officer or director and also a limited partner they would then be participating in control and therefore liable as a GP. See §96
§ Revised Limited Partnership Act – governs LP’s formed after 1997. LP formed prior to 1997 can opt to amend their cert of incorporation to be governed by the new statute. There is less exposure to liability under the Revised because in order to have liability you must be acting like a general partner. The new statute requires knowledge and reliance on the part of the creditor meaning that there is more to prove. The revised statute said that acting as an agent, officer of director does not constitute control and therefore you will not be liable as a GP. See §121-303
o Investor Protection Provisions – If the parties agree contractually and include in the articles of LP terms that allow LP’s to vote on transactions or removal of the general partner, this was not considered participation in control that would subject the LP to unlimited liability as a GP.
o LP statute similar to that of BCL – LP statute is similar to the norms of a corporation, we care about the investors and the investors have some degree of protection if they can vote on significant issues, otherwise their entire investment is at risk, they would be completely powerless.
o §121-1002- page 739- Limited Partner’s derivative action suit -gave the ability to limited partners to protect themselves.
§ Power to initiate litigation was originally with the general partner, but if the general partner doing something wrong, he will not sue himself.
§ In a derivative suit an investor can bring a suit in the name of the Limited Partnership, alleging an indirect injury –investor is hurt because business is hurt as a result of a manager (general partners) actions. (in corporations, shareholders have the right to initiate derivative suits against officers and directors).
§ One protection for investors in a limited partnership is to give them the power to bring a derivative suit so they can sue the general partner or manager that has breached a fiduciary duty.
o In USA Café, the LP’s alleged a breach of a fiduciary duty of General Partners who did not want to include $12 as part of purchase price which would increase price per share of sale of partnership. (could have brought this as a derivative suit). The GP in this case was a corporation owned by the Wiley brothers and they argued that they did not owe the LP’s a fiduciary duty but the GP Corporation did but the owners of the Corporation are behind a corporate shield and insulated from liability. Court disagreed, pierced the corporate veil and held that a fiduciary duty is owed by GP’s to LP’s.
o §121-1004 – Indemnification of a General Partner

Under the revised LP statutes, General Partners can also be indemnified from liability if they create corporate general partner, rather than an individual.

LIMITED LIABILITY COMPANIES – Limited Liability Company Law

Purpose (from Boars Head) “Designed as a hybrid of corporate and limited partnership forms, offering the tax benefits and operating flexibility of a limited partnership with a limited liability protection of a corporation.” Limit the liability of managers for breach of fiduciary duty.

LLC’s combine the tax benefits of a partnership with the best aspects of corporate form. Because it is a matter of contract it is an eminently flexible form of business, maybe even more than partnerships are.

§203 Formation (pg. 378):

(d) “A limited liability company is formed at the time of the filing of the initial articles of organization with the department of state or any or at any later time specified in the articles of organization, not to exceed sixty days from the date of such filing.”
(e) shall include:

(1) name of LLC with designation of LLC
(2) county in which LLC will have office or offices; principal office location
(3) dissolution date if there is one
(4) designation of Secretary of State as agent of LLC upon whom process against it may be served ….
(7) any other provision not inconsistent with the law

(a) business purpose of LLC
(b) limitations of authority of members
(c ) any provisions required under §417 Operating Agreement

§417 – Operating Agreement (allows members/managers to opt-out and not use default terms)– The operating agreement may set forth a provision eliminating or limiting the personal liability of managers to the LLC or its members for damages for any breach of duty in such capacity except that (a)(1) managers cannot contract out of acts of bad faith or involvement in intentional misconduct or knowing violation of law from which he personally gained a financial profit to which he was not legally entitled. (LLC can be managed by members or managers – depends what is in the Operating Agreement)
§401 – Management of the

lower state courts do not provide a persuasive basis for concluding that LLC member derivative actions are prohibited
4. court agrees that Plaintiff’s claims are derivative, even though he could have asserted a breach of fiduciary duty claim under §417(a) of the LCL.

Solar Cells – Merger of LLC’s – Whether managers breached duty of good faith even though they followed all merger of LLC provisions? In this case the directors did not disclose the merger until the date before makes it look like the merger is not fair and added to that the freeze out and reduction to 5% interest (no notice provided). Court said that even though pursuant to the operating agreement there is a waiver of liability for engaging in conflicting interest transactions that does not mean that there is a waiver of all fiduciary duties to Solar Cells.

The party with the burden to establish fairness must establish that the challenged transaction was the result of (1) fair dealing and (2) offered a fair price. Fair dealing pertains to the process by which the transaction was approved and looks at the terms, structure and timing of the transaction. Fair pricing includes all relevant factors “relating to the economic and financial consideration of proposed merger.”


Formation of a Corporation à Article 4

§401 Incorporators – provides that an incorporator is one or more natural persons of the age of eighteen years or over may act as incorporators of a corporation to be formed under this chapter.

§402 Certificate of Incorporation; Contents – This is the statutory provision that lists what the contents are of the certificate of incorporation.
(a) A certificate, entitled “Certificate of Incorporation” shall be signed by each incorporator, with his name and address included in such certificate and delivered to the department of state.

(1) The name of the corporation
(2) The purpose or purposes for which it is formed, it being sufficient to state, either alone or with other purposes that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under this chapter, …
(3) The county within this state in which the office of the corporation is to be located.
(4) The aggregate number of shares which the corporation shall have the authority to issue; if such shares are to consist of one class only, the par value of the shares or a statement that the shares are without par value; or, if the shares are to be divided into classes, the number of shares of each class and the par value of the shares having par value and a statement as to which shares, if any, are without par value.
(5) If the shares are to be divided into classes, the designation of each class and a statement of the relative rights, preferences and limitations of the shares of each class.