BUSINESS ORGANIZATIONS UPDATE

Transcription

1 BUSINESS ORGANIZATIONS UPDATE Frank J. Carroll, JD Beverly Evans, JD Davis, Brown, Koehn, Shors & Roberts, P.C th Street, Suite 1300 Des Moines, IA Phone: (515) Fax: (515)

2 BUSINESS ORGANIZATIONS UPDATE A. Business Entities A1.1 This outline will review (a) the current state of Iowa law concerning limited liability companies ( LLC ), limited partnerships ( LP ), general partnerships ( GP ), limited liability partnerships ( LLP ), and general business corporations ( Corporation ); (b) the federal tax rules regarding the formation of S corporations; (c) use of single member LLCs in corporate transactions; and (d) miscellaneous tax and legal issues relating to flow-through estates. B. Limited Liability Companies B1. General B1.1 The LLC is a form of business entity that combines limited liability with the flow through tax consequences of a partnership. Most business owners who choose an LLC do so to (a) obtain limited liability, (b) receive the tax benefits of a partnership, and (c) be free of the S corporation limitations. B1.2 An LLC can be managed either by its owners, referred to as members, or by one or more managers. A member s ownership interest in an LLC is usually referred to as a membership interest, or units, which can be issued like stock of a corporation. B1.3 For Federal income tax purposes, the check the box regulations treat an LLC as a partnership if it has two or more members. If the LLC has only a single-member it is disregarded for Federal income tax purposes (that is, its income or loss and other tax attributes will simply be included in the income tax return of its sole owner.) B2. Formation - Certificate of Organization for LLCs B2.1 All that is legally required to form an LLC is to file a certificate of organization with the Secretary of State. B2.2 Pursuant to Iowa Code Section , the certificate must contain the following: (a) (b) The name of the LLC; and The address of the registered office and the name and address of the registered agent of the LLC. B2.3 The certificate may also contain other information.

3 B3. New Iowa LLC Act B3.1 The Iowa legislature enacted a new limited liability company act, entitled Revised Uniform Limited Liability Company Act ( RULLCA ), effective January 1, The RULLCA currently governs the formation and operation of all limited liability companies formed on or after January 1, The RULLCA will govern all limited liability companies, including those formed prior to January 1, 2009, beginning January 1, 2011, but companies formed prior to the effective date of the new act can elect to be governed by the new law before Chapter 489 provides in part as follows: B3.2 The limited liability company may be formed for any lawful purpose, regardless of whether for profit, unless a more limited definition is set forth in the operating agreement. Iowa Code B3.3 An ownership interest in a limited liability company is personal property. Iowa Code An ownership interest in a limited liability company is assignable in whole or in part. An assignment of a membership interest entitles the assignee to receive only distributions to which the assignor would be entitled. Iowa Code Assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to exercise any rights of a member unless and until the assignee is admitted as a member. Iowa Code B3.4 Unless the operating agreement provides for management of a limited liability company by a manager or managers, management of a limited liability company is vested in its members. Iowa Code Thus, a limited liability company may be member-managed or may be manager-managed. The distinction can be very significant. B3.5 A member does not have the authority to bind the LLC solely by reason of being a member. Iowa Code The operating agreement will generally designate who can bind the company. An LLC may also file a statement of authority with the Secretary of State, stating the authority or limits on the authority of any position or person to act for or bind the company. Iowa Code B3.6 The operating agreement governs the relations among the members and between the members and the company. The operating agreement can modify the statute in all respects except as specifically set forth in Iowa Code B3.7 Each member in a member-managed LLC and each manager in a managermanaged LLC owes the duty of care and the duty of loyalty to the company and each member. Iowa Code The duty of loyalty and duty of care can be modified but not eliminated in the operating agreement. Iowa Code B3.8 A member has the right to withdraw from a limited liability company at any time, rightfully or wrongfully, by express will. Iowa Code A person s dissociation is

4 wrongful if (i) it is in breach of the operating agreement or (ii) it occurs before the termination of the LLC and the person either (a) withdraws by express will, (b) is expelled by judicial order, (c) is dissociated by becoming a debtor in bankruptcy, or (d) the person is expelled or dissociated because the LLC willfully dissolved or terminated. Iowa Code B3.9 As under previous law, a member s dissociation does not cause the dissolution of the LLC. Chapter 489 provides that an LLC will be dissolved: (i) upon the occurrence of an event that the operating agreement states causes dissolution, (ii) upon the consent of all the members, (iii) once the company has at least one member, the passage of ninety consecutive days during which the company has no members, or (iv) upon judicial dissolution. Iowa Code B3.10 The rules governing the liability of members are substantially the same under the new Act. Generally, a member or manager of an LLC is not personally liable solely by reason of being a member or manager of the limited liability company. Iowa Code A member of a limited liability company is personally liable under a judgment or for any debt obligation or liability of the limited liability company (whether in contract, tort or otherwise) under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt obligation or liability of a corporation. As under previous law, the failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company. Iowa Code (2). B3.11 Unless otherwise provided in the operating agreement, an LLC must indemnify a member's or manager's activities on behalf of the company if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with the duties stated in sections Iowa Code Iowa Code and B3.12 The operating agreement may not eliminate or limit a member's or manager's liability to the LLC and members for money damages, except for any of the following: A breach of the duty of loyalty. A financial benefit received by the member or manager to which the member or manager is not entitled. A breach of a duty under section Intentional infliction of harm on the company or a member. C. Limited Partnerships C1. General C1.1 The LP is comprised of one or more general partners, who are liable for all debts and obligations of the LP, and one or more limited partners who have limited liability.

5 C1.2 The LP is primarily used for real estate ventures for which the developer desires to attract investors without relinquishing control over the project. C1.3 Iowa adopted the Uniform Limited Partnership Act in 2004 in Iowa Code Chapter 488. The new act is a stand-alone act, no longer linked to the Partnership Act. The new act has been designed to target two types of enterprises: (i) sophisticated, manager-entrenched commercial deals, and (ii) estate planning arrangements (family limited partnerships). See Prefatory Notes of the National Conference on Uniform State Laws, available at C2. The New Act C2.1 Pursuant to current Section , an LP is formed by executing and filing the Certificate of Limited Partnership with the Secretary of State and requires the Certificate to only contain the following items: (a) The name of the LP; (b) The address of the registered office and the name and address of the registered agent; (c) The name and address of each general partner; (d) The latest date on which the LP is to dissolve; and (e) Whether the limited partnership is a limited liability limited partnership. C2.2 Pursuant to Section , the Certificate of Limited Partnership must be amended promptly after the happening of any of the following events: (a) The admission of a new general partner; (b) The dissociation of a general partner; or (c) The appointment of a person to wind up the limited partnership s activities. C2.3 The new Act is effective January 1, 2005, and applies to limited partnerships formed on or after that date and those formed before that date that elect to be covered by the new Act. After January 1, 2006, the law applies to all limited partnerships, with certain exceptions for limited partnerships formed prior to January 1, The legislation adopting the new Act took effect July 1, C2.4 Comparison of Chapter 487 (Old Act) with Chapter 488 (New Act) Characteristic Old Act (Chapter 487) New Act (Chapter 488) constructive notice via publicly filed documents only that limited partnership exists and that designated general partners are general constructive notice provisions carried forward, Section 103(3), plus constructive notice, 90 days after

6 duration use of limited partner name in entity name partners, Section 208 specified in certificate of limited partnership, Section 201(1)(d) prohibited, except in unusual circumstances, Section 102(2) appropriate filing of: general partner dissociation and of limited partnership dissolution, termination, merger and conversion, Section 103(4) perpetual, Section 104(3); subject to change in partnership agreement permitted, Section 108(1) reports None biennial required, Section 210 limited partner liability for entity debts limited partner duties partner access to information - required records/information none unless limited partner participates in the control of the business and person transact(s) business with the limited partnership reasonably believing that the limited partner is a general partner, Section 303(1); safe harbor lists many activities that do not constitute participating in the control of the business, Section 303(2) none specified all partners have right of access; no requirement of good cause; Act does not state whether partnership agreement may limit access; Sections 105(2) and 305(1) none, regardless of whether the limited partnership is an LLLP, even if the limited partner participates in the management and control of the limited partnership, Section 303 no fiduciary duties solely by reason of being a limited partner, Section 305(1); each limited partner is obliged to discharge the duties and exercise any rights consistently with the obligation of good faith and fair dealing, Section 305(2) list of required information expanded slightly; Act expressly states that partner does not have to show good cause; Sections 304(1), 407(1); however, the partnership agreement may set reasonable restrictions on access to and use of required information, Section 110(2)(d), and limited partnership may impose reasonable restrictions on the use of information, Sections 304(7) and

7 partner access to information - other information general partner liability for entity debts general partner duties allocation of profits, losses, and distributions partner liability for distributions limited partners have the right to obtain other relevant information upon reasonable demand, Section 305(2); general partner rights are linked to general partnership act, Section 403 complete, automatic, and formally inescapable, Section 403(2) (Note: in practice, most modern limited partnerships have used a general partner that has its own liability shield, e.g., a corporation or limited liability company) linked to duties of partners in a general partnership, Section 403 provides separately for sharing of profits and losses, Section 503, and for sharing of distributions, Section 504; allocates each according to contributions made and not returned, unless partnership agreement provides otherwise recapture liability if distribution involved the return of contribution ; one year recapture 407(6) for limited partners, RULPA approach essentially carried forward, with procedures and standards for making a reasonable demand stated in greater detail, plus requirement that limited partnership supply known material information when limited partner consent sought, Section 304; general partner access rights made explicit, following RUPA, including obligation of limited partnership and general partners to volunteer certain information, Section 407; access rights provided for former partners, Sections 304 and 407 LLLP status available via a simple statement in the certificate of limited partnership, Sections 102(11), 201(1)(d); LLLP status provides a full liability shield to all general partners, Section 404(3); if the limited partnership is not an LLLP, general partners are liable just as under the old act, Section 404(1) existing general partner duties imported, Section 408; general partner s non-compete duty continues during winding up, Section 408(2) eliminates as unnecessary the allocation rule for profits and losses; allocates distributions according to contributions made, unless partnership agreement provides otherwise, Section 503 the Act adopts the Business Corporation Act approach to improper distributions, Sections 508 and 509

8 limited partner voluntary dissociation limited partner dissociation - payout general partner voluntary dissociation general partner involuntary dissociation transfer of partner interest - substance rights of creditor of partner dissolution by partner consent liability if distribution rightful, Section 608(1); six year recapture liability if wrongful, Section 608(2) limited partner may withdraw only as specified in the partnership agreement fair value based upon [the partner s] right to share in distributions upon withdrawal, unless partnership agreement provides otherwise power exists regardless of partnership agreement, Section 602; provided that damages may be recovered if it is in violation of agreement Section 402 lists causes economic rights fully transferable, but management rights and partner status are not transferable, Section 702 limited to charging order, Section 703 requires unanimous written consent, Section 801(1)(c) no right to dissociate as a limited partner before the termination of the limited partnership, Section 601(1); Section 601(2)(b) lists the events that can result in dissociation, including notice of desire of limited partner to withdraw no payout; person becomes transferee of own transferable interest, Section 602(1)(c) unchanged except that dissociation before termination of the limited partnership is defined as wrongful, Section 604(2) Section 603 expands the list of causes, including expulsion by court order, Section 603(5) same rule, but Sections 701 and 702 are more detailed and less oblique essentially the same rule, but the Act has a more elaborate provision that expressly extends to creditors of transferees, Section 703 requires consent of all general partners and of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective, Section 801(2)

9 dissolution following dissociation of a general partner filings related to entity termination conversions and mergers writing requirements occurs automatically unless all partners agree to continue the business, and if there is no remaining general partner, to appoint a replacement general partner, Section 801(2) certificate of limited partnership to be cancelled when limited partnership dissolves and begins winding up, or when there are no limited partners, Section 203 addressed in Sections some provisions pertain only to written understandings if at least one general partner remains, no dissolution unless within 90 days after the dissociation partners owning a majority of the rights to receive distributions as partners consent to dissolve the limited partnership, Section 801(3)(a); if no general partner remains, dissolution occurs upon the passage of 90 days after the dissociation, unless before that deadline, limited partners owning a majority of the rights to receive distributions owned by limited partners consent to continue the business and admit at least one new general partner and a new general partner is admitted, Section 801(3)(b) limited partnership may amend certificate to indicate dissolution, Section 803(2)(a), and may file statement of termination indicating that winding up has been completed and the limited partnership is terminated, Section 203 Article 11 permits conversions to and from and mergers with any: organization (defined as a general partnership and including a limited liability partnership), limited partnership including a limited liability limited partnership, limited liability company, business trust, corporation, or any other entity having a governing statute [including] domestic and foreign entities regardless of whether organized for profit. Section 1101(8) removes virtually all writing requirements; but does require that certain information be maintained in record form, Section 111

10 D. General Partnerships 1 D1. General D1.1 A GP is an association of two or more persons to carry on a business in the pursuit of profit. D1.2 There is no filing that is required with the Secretary of State to form a general partnership, and even though it is normal that partners will execute a partnership agreement to define their rights, a written partnership agreement is not required. D2. Introduction to IUPA (1998) D2.1 The Iowa legislature adopted a new Iowa Uniform Partnership Act ( IUPA (1998) ) based substantially on the Revised Uniform Partnership Act ( RUPA ) in its 1998 session. D2.2 IUPA (1998) preserves many long-standing principles of Iowa partnership law, but makes important changes in seven areas: (a) expressly authorizes partners to modify all but a few provisions of partnership law by agreement of the partners; (b) adopts the entity theory of partnership; (c) provides for a new system of optional public filings for partnerships; (d) redefines and limits partners fiduciary duties; (e) revises the scheme for partnership dissolutions and adds an entirely new concept of partner dissociation; (f) includes a safe harbor provision allowing partnership conversions and mergers, and (g) perhaps most importantly, IUPA (1998) contains elective LLP provisions that confer full-shield limited liability on LLP partners. D2.3 IUPA (1998) applies to all Iowa partnerships formed on or after January 1, 1999, as well as to existing Iowa partnerships that elect to be covered by the Act. From and after January 1, 2001, IUPA (1998) will apply to all Iowa partnerships, regardless of when the partnership was formed or whether it has elected to be so covered. D3. Background Concerning the Drafting and Adoption of IUPA (1998) D3.1 Before describing the changes IUPA (1998) makes in Iowa partnership law, it is worth emphasizing that the new statute preserves many long-standing principles of the law of partnership. For example, the rules governing formation of a partnership are basically the same in both IUPA (1998) and IUPA (1971); an association of two or more persons to carry on as co-owners a business for profit forms a partnership. D3.2 The default rules of IUPA (1998) for internal partnership management are basically the same as those that apply under IUPA (1971); e.g. each partner: (i) shares profits 1 This portion of the outline is based on an article by Matthew G. Dore in the Drake Law Review (see Drake Law Review, Vol. 47, No. 3, pp (1999)).

11 and losses equally with the other partners; (ii) is entitled to reimbursement for payments made on behalf of the partnership or excess partnership contributions; (iii) is generally not entitled to compensation for services rendered on behalf of the partnership; and (iv) has an equal voice in partnership management, with differences about ordinary matters being decided by a majority of the partners. An act beyond the ordinary scope of the partnership business or an amendment to the partnership agreement requires unanimous consent of the partners, as does admission of a new partner. D3.3 Existing partnership agreement forms, insofar as they address basic organizational and operational mechanics like those listed above, should function equally well under IUPA (1971) and IUPA (1998). D4. The Role of the Partnership Agreement and the Entity Theory of Partnership D4.1 Like IUPA (1971), the new statute divides the law of partnership by topic, including: (i) general provisions and definitions; (ii) nature of the partnership; (iii) relations of partners to persons dealing with the partnership; (iv) relations of partners to one another; (v) rights of transferees and creditors of partners; and (vi) dissolution. D4.2 Two new substantive policies permeate IUPA (1998): (1) the paramount role of the partnership agreement in shaping partnership affairs; and (2) the entity theory of partnership. D4.3 Under both IUPA (1998) and IUPA (1971), the partnership agreement binds only those who are a party to it and cannot affect the rights of third parties. IUPA (1998) increases the role of the partnership agreement by providing that, except in two situations, the partnership agreement trumps any statutory provision governing the partners rights with respect to one another or the partnership. D4.3.1 By express provision in section 486A.103(2), the rights and duties listed there may not be waived or varied by agreement beyond what is authorized. These mandatory rights and duties include: (i) the partner s right to file public statements; (ii) the partner s right of access to books and records; (iii) the partner s fiduciary duties of loyalty and care, and the partner s obligation of good faith and fair dealing; (iv) the partner s power to dissociate from the partnership; (v) judicial authority to expel partners; and (vi) the obligation to wind up the partnership business in certain instances. D4.3.2 The corresponding remedies for violation of these mandatory rights and duties (section 486A.405) are also mandatory. D4.3.3 These provisions come directly from RUPA, and the intention of the RUPA drafters was clear that except in these limited instances, and except for rules governing the rights of third parties, statutory partnership law should be comprised

12 entirely of default rules. As stated by the RUPA Reporters: RUPA reflects the policy judgment that, with rare exceptions, partners are permitted to govern relations among themselves by agreement. D4.3.4 Based on the above, it is clear that under IUPA (1998), partners are substantially free to draft a partnership organizational structure that best suits the partners needs as they perceive them. The attorney, however, should be mindful of the statutory default rules that will apply in the absence of a contrary agreement and make modifications where those rules are unsuitable. D4.4 IUPA (1998) generally ends the entity/aggregate debate in Iowa partnership law with an explicit endorsement of the entity theory. Section 486A.201 of IUPA (1998) states plainly: A partnership is an entity distinct from its partners. Indeed, while a few aggregate concepts remain, the entity view predominates in the new statute. Thus, IUPA (1998) s rules concerning partnership property, partnership litigation, and individual partner liability are now premised on the entity theory of partnership. D4.4.1 IUPA (1998) abandons the tenancy in partnership concept and instead provides plainly in Iowa Code section 486A.203 that: Property acquired by a partnership is property of the partnership and not of the partners individually. Section 486A.501 similarly provides: A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily. D4.4.2 Under section 486A.502, the only transferable interest of a partner in the partnership is the partner s share of the profits and losses of the partnership and the partner s right to receive distributions. D4.4.3 The transferee of such an interest has no rights of management or access to partnership records, and only limited rights to seek partnership dissolution. D4.4.4 IUPA (1998) includes specific rules to help determine when property is partnership property. D4.5 The partnership litigation concepts in IUPA (1998) also reflect the entity theory of partnership. For example, the statute expressly provides that a partnership may sue and be sued in the partnership name. Suits by the partnership against individual partners are permitted, as are suits by partners against the partnership or other partners. D4.6 The partner liability provisions in IUPA (1998) appear to preserve the aggregate theory of partnership. Under Iowa Code section 486A.306, unless a partnership has qualified as an LLP, its partners are liable jointly and severally for all partnership obligations. But section 486A.307 qualifies this rule substantially and establishes several conditions before a claimant against the partnership may obtain satisfaction from the assets of an individual partner.

13 D The partnership creditor must obtain a judgment on the claim against the partnership and a judgment on that same claim against the individual partner from whom she seeks to collect. D4.6.2 Absent special circumstances, the partnership creditor cannot enforce her judgment against the partner unless she has first exhausted the partnership s assets or such assets are otherwise unavailable to satisfy the claim. D4.6.3 The primary change from IUPA (1971) is that under IUPA (1998), partners are guarantors of claims against the partnership, not co-obligors with it, a result consistent with the entity view of partnership. D5. Partner Agency Authority and the Role of Filed Partnership Statements D5.1 IUPA (1998) preserves, with only slight modifications, the basic actual and apparent authority rules that define the agency power of partners under IUPA (1971). Decentralized partnership management authority--where each partner has substantial actual and apparent authority to bind the partnership--remains the norm under both Acts. D5.2 IUPA (1998) allows partnerships and partners to clarify issues of partner authority for third parties in many instances through the use of publicly filed partnership statements. These filed statements, which are optional rather than mandatory, may spark changes in Iowa real estate practice where conveyances by partnerships are concerned and may help alleviate lingering apparent authority problems in cases of partner buyouts and partnership dissolution. D5.3 Under IUPA (1998), each partner has actual authority to manage and conduct the ordinary business affairs of the partnership unless the partners have, by agreement, expanded or restricted that authority. In addition, and whether or not a partner is actually authorized to act for the partnership, a partner has apparent authority to bind the partnership by acts taken in the ordinary course of the partnership s business. D5.4 IUPA (1998) expands a partner s apparent authority powers in two respects: D5.4.1 A partner s apparent authority is not limited by the particular business practices of the partnership: Such authority now also encompasses acts for apparently carrying on in the ordinary course... business of the kind carried on by the partnership. Iowa Code 486A.301(6). D5.4.2 A restriction of a partner s actual authority limits that partner s apparent authority with respect to a third party only where the third party knows of the restriction or receives a notification of it--constructive knowledge is not enough.

14 D5.5 IUPA (1998) contemplates the possibility of various publicly filed partnership statements that can enlarge or restrict the authority of partners to act on the partnership s behalf. These optional filed statements include statements of partnership authority under Iowa Code section 486A.303, statements of dissociation under section 486A.704, and statements of dissolution under section 486A.805. Either the partnership (with at least two partners signing on the partnership s behalf) or individual partners can file one or more of these statements with the Secretary of State. Amendments and cancellations of filed statements are also permitted. The various filed statements differ slightly in their purpose and effect. D5.6 Statements of partnership authority are primarily intended to clarify, expand, or restrict a partner s authority to transfer real property held in the name of the partnership. D5.6.1 Such a statement must include: (i) the name and address of the partnership, (ii) the names and addresses of the partners, and (iii) [t]he names of the partners authorized to execute an instrument transferring real property held in the name of the partnership. Iowa Code 486A.303(1)(a). D5.6.2 Unless earlier canceled, such a statement remains effective for five years after its filing or most recent amendment. D5.6.3 Certified copies of such statements can then be recorded in the appropriate real property records. D5.6.4 The partner authority set forth in such a filed and recorded statement is conclusive in favor of a person who gives value without knowledge to the contrary. Iowa Code 486A.303(4)(b). D5.6.5 Thus, if a certified copy of a filed statement of partnership authority is recorded in the real property records and is not contradicted by another filed statement, a title searcher need not insist on copies of the partnership agreement or affidavits from the partners to clarify issues of partner authority in real property transactions where the property is held in the name of the partnership. The statement of partnership authority is conclusive. D5.6.6 A statement of partnership authority can also affect partners authority in non-real property transactions. Such a statement may state the authority, or limitations on the authority, of some or all of the partners to enter into [non-real property] transactions on behalf of the partnership. Iowa Code 486A.303(4)(b). To the extent a statement of partnership authority confers authority on a partner with respect to such transactions, the statement is, just as in the real property context, binding on the partnership with respect to bona fide purchasers. The converse, however, is not true. Where a statement of partnership authority limits a partner s authority to conduct non-real property transactions, the statement is not binding on third parties merely because it has been filed. Such a statement binds only those third parties with actual knowledge of its contents or who have received a notification thereof. Unlike the real property context,

15 then, where filed and recorded statements can either grant or limit partner authority to transfer property on the partnership s behalf, in the personal property context statements of authority work only one way --to grant partner authority. D5.7 Under IUPA (1998), a partner s dissociation terminates his actual authority to bind the partnership. However, for a period of two years following a partner s dissociation, that partner has continuing apparent authority to bind the partnership in transactions with third parties as if the dissociation had not occurred, provided the third party reasonably believed that the dissociated partner was then a partner [and] did not have notice of the partner s dissociation. Iowa Code 486A.702. During this same two-year period, the partnership can similarly bind the dissociated partner in transactions with such third parties. D5.7.1 Either the partnership or the dissociated partner can terminate this lingering apparent authority by filing a statement of dissociation--a statement stating the name of the partnership and that the partner is dissociated from the partnership. Iowa Code 486A.704(1). D5.7.2 Such a statement serves as a limitation on the dissociated partner s authority (as if the partnership had filed a statement of partnership authority to that effect). D5.7.3 The statement also constructively notifies third parties, effective ninety days after the filing, that the partner has been dissociated, thus cutting off his continuing apparent authority to bind the partnership, as well as the partner s corresponding continuing liability on the partnership transactions with third parties who otherwise had no notice of the dissociation. While IUPA (1971) has no counterpart to the dissociation concept, it does establish special partner authority rules following an event of partnership dissolution. Under IUPA (1971), a partner s continuing actual and apparent authority following an event of dissolution varies, depending on whether the act in question is appropriate for winding up the partnership s business affairs and whether the third party has previously transacted business with the partnership or has knowledge of the dissolution. D5.8 IUPA (1998) simplifies the partner authority rules following dissolution to two criteria. The partnership is bound by a partner s act after dissolution if (i) the act was appropriate for winding up of partnership affairs; or (ii) the act would have bound the partnership under normal authority principles prior to dissolution and the other party did not have notice of the dissolution. D5.8.1 Under IUPA (1998), if a partner files a statement of dissolution stating the name of the partnership and that the partnership has dissolved and is winding up its business, these authority rules change. D5.8.2 The filed statement of dissolution cancels any previously filed statement of partnership authority and operates as a limitation of partner authority.

16 D5.8.3 In addition, once ninety (90) days have elapsed from the date of the filing of such a statement, third parties are deemed to have knowledge of the partnership s dissolution, effectively limiting all partners authority to acts appropriate for windup. D6. Partner Fiduciary Duties D6.1 The IUPA (1998) rules governing partner fiduciary duties are contained primarily in Iowa Code section 486A.404. This provision limits the scope and role of fiduciary duties in the partnership relationship, but preserves a core of fiduciary obligations that the partners cannot eliminate by agreement. D6.2 There are three important new concepts in the law of partner fiduciary duties: (i) the fiduciary duties provided in Iowa Code section 486A.404 are the exclusive fiduciary duties of partners, so that courts cannot expand them; (ii) these fiduciary duties are narrowly defined both substantively and temporally; and (iii) although the partners cannot agree to eliminate these fiduciary duties, the partners may, under section 486A.103, contractually limit the scope of the duties. D6.3 IUPA (1998) Iowa Code section 486A.404(1) provides that [t]he only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections 2 and 3. As explained in the comments to RUPA: The intent of section 486A.404(1) is to reign in, by statutory edict, the propensity of some judges to tailor new fiduciary duties from whole cloth. D6.4 Iowa Code section 486A.404(3) limits a partner s duty of care in the conduct and windup of the partnership business to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. The rationale for such limited duties is that partners do not need protection against one another s negligence, since all partners have the statutory right to participate in management. Partners can, of course, contract for a higher standard of care where they desire it. D6.5 Under IUPA (1998) Iowa Code section 486A.404(2), a partner s duty of loyalty is limited to: (i) accounting for any use of partnership property, including misappropriation of a partnership opportunity, in the conduct or windup of the partnership business; (ii) refraining from dealing with the partnership in the conduct or windup of its business as or on behalf of an adverse party; and (iii) refraining from competing with the partnership in the conduct of its business prior to dissolution.

17 D6.6 The obligation of good faith and fair dealing, arguably a fiduciary duty under prior law, is not a fiduciary duty under IUPA (1998). The obligation of good faith and fair dealing applies only to a partner s discharge [of his] duties... under [IUPA (1998)] or under the partnership agreement and to any exercise of rights by the partner. D6.7 Perhaps the greatest potential controversy surrounding partnership fiduciary duties under IUPA (1998) concerns the right of partners to use the partnership agreement as a vehicle to limit or modify statutory fiduciary duties and related obligations. D6.7.1 The drafters of RUPA attempted to forge a compromise between two competing views of partnership by allowing contractual modifications of fiduciary duties and related partner obligations, subject to an irreducible core that may not be eliminated. D6.7.2 Contractual modifications of such duties and obligations are nonetheless possible. For example, consistent with section 486A.103(2), the partnership agreement may reasonably reduce the duty of care below the standard specified in section 486A.404(3). The partnership agreement may [also] identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable. Iowa Code 486A.103(2)(c). Similarly, the partnership agreement may prescribe the standards by which the performance of the obligation [of good faith and fair dealing] is to be measured, if the standards are not manifestly unreasonable. Iowa Code 486A.103(2)(e) D6.7.3 There are, as yet, no definitive judicial interpretations. What is clear is that partners are, to degrees that vary depending on the duty, obligation, or right at issue, authorized to agree in advance to permit conduct that might otherwise violate partner fiduciary duties under prior law. D6.7.4 When forming a new partnership or counseling an existing partnership about the potential application of IUPA (1998), attorneys will need to consider what, if any, agreements are appropriate concerning fiduciary duties (e.g., a partnership agreement might authorize one or more partners to compete with the partnership in specific situations; in a partnership where some partners are active in management and others are passive, the active partners may insist that the partnership agreement provide additional contractual insulation from fiduciary challenges.) D7. Partner Dissociation and Partnership Dissolution D7.1 Under IUPA (1998) and consistent with the entity theory of partnership, many events that would trigger partnership dissolution under IUPA (1971), e.g., the departure of a partner through death, voluntary withdrawal, retirement, expulsion, bankruptcy, and the like, now instead trigger only dissociation of the departed partner.

18 D7.2 Dissociation of a partner will generally lead to either (i) a buy-out of the dissociated partner s interest under Iowa Code sections 486A.701 through 486A.705, or (ii) dissolution and winding up of partnership affairs under sections 486A.801 through 486A.807. D7.3 Iowa Code section 486A.601 enumerates events that cause a partner s dissociation. Some are voluntary, e.g., withdrawal by express will of a partner, but most are involuntary, e.g., expulsion by partner vote or per judicial determination, insolvency, death or incapacity, and the like. The partnership agreement may expand or contract this list, except that the partnership agreement cannot eliminate a partner's power to withdraw by express will. D7.4 A partner s departure/dissociation may be wrongful if in violation of the partnership agreement and in certain other situations, triggering liability to the partnership and other partners for damages caused. D7.5 IUPA (1998) section 486A.603 describes the effect of a partner s dissociation by providing that, after a partner s dissociation, the partner s interest in the partnership must be purchased pursuant to the buyout rules in sections 486A.701 through 486A.705 unless there is a dissolution and winding up of the partnership business under sections 486A.801 through 486A.807. Thus, a partner s dissociation will generally result in either a buyout of the dissociated partner s interest or a dissolution and winding up of the business. This, however, may be modified by the partnership agreement. D7.6 IUPA (1998) s default rules require dissolution and winding up upon (i) the express will of a partner in an at-will partnership, (ii) the failure of a majority interest of the partners to agree to continue following certain events of dissociation, (iii) the express will of all partners, (iv) the expiration of the term of a term partnership, and (v) an event that the partnership agreement specifies as requiring winding up. D7.7 If the partnership is not wound up following an event of dissociation and if the partners have not agreed otherwise, section 486A.701 mandates a buyout of the departed partner s interest and that the partnership indemnifies the partner against any continuing personal liability for partnership obligations. D7.8 Section also provides default buyout terms which encompass valuation and payment with respect to the partners interest. D7.9 Where a buyout occurs, whether pursuant to the terms set forth in section 486A.701 or the partnership agreement, the partner s departure does not end the life of the partnership entity and constitute a new partnership. Consistent with the entity theory, the old partnership continues without the participation of the dissociated partner. D7.10 Just as most closely-held corporations should have a buy-sell agreement that facilitates shareholder departures in various situations, a well-drafted partnership agreement under IUPA (1998) should generally address events of dissociation and partner buy-outs.

19 D8. Safe Harbor for Partnership Conversions and Mergers D8.1 IUPA (1998) section 486A.902 authorizes conversion of a partnership to a limited partnership. This provision specifies the terms and conditions of partner approval of such a conversion, requires filing of a limited partnership certificate for the converted entity, and preserves general partner liability for limited partners in the resulting limited partnership with respect to pre-conversion obligations. IUPA (1998) section 486A.903 is basically a mirror image to section 486A.902 and authorizes conversions of limited partnerships into partnerships. D8.2 IUPA (1998) section 486A.906 authorizes the merger of one or more partnerships and/or limited partnerships. The statutory requirements loosely parallel those applicable to corporate mergers with respect to voting and approval of a plan of merger. As in corporate mergers, all priorities, rights, and liabilities of the constituent entities remain with the survivor. A partner of a party to a merger who does not become a partner in the survivor is dissociated from the entity in which he was a partner as of the date of the merger, and the survivor is obligated to buy out his interest under the general scheme that applies to dissociated partners. Iowa Code 486A.906. D8.3 IUPA (1998) requires a public filing in the partnership context only where such is required by law to be filed as a condition to the effectiveness of the merger. Presumably, such filing would be required only where a limited partnership is a party, as a means of canceling or amending its previously filed certificate of limited partnership. Iowa Code 486A.905. D9. Full-Shield Limited Liability Partnership Provisions D9.1 Among the most important changes effected by IUPA (1998) are those concerning limited liability partnerships (LLP). IUPA (1998) basically provides full-shield limited liability protection for partners in partnerships that qualify as an LLP. D9.2 Under the original Iowa LLP legislation in 1994, a partnership could register as an LLP by filing an application with the Secretary of State and including Registered Limited Liability Partnership or the abbreviation LLP in its name. This registration could be renewed each year and provided a partial liability shield. That is, a partner in an Iowa partnership that registers as an LLP under IUPA (1971) is not personally liable, either directly or by way of indemnification or contribution, for the negligence, wrongful acts, or misconduct of another partner, employee, agent, or representative of the partnership that occurs while the partnership s LLP registration is effective. Under IUPA (1971) a partner remained personally liable for all other obligations of the partnership, as well as for her own acts, and for the misconduct of persons under her direct supervision and control. D9.3 Current Iowa Code sections 486A.1001 and 486A.1002 govern qualifications of domestic partnerships as LLPs: D9.3.1 The partnership must first obtain the approval of the partners by the vote necessary to amend the partnership agreement.

20 D9.3.2 The partnership must then file a statement of qualification with the Secretary of State that contains the name of the partnership, the street address of the chief executive office of the partnership, the partnership s registered office and agent, and a statement that the partnership elects to become an LLP. D9.3.3 The partnership s name must end with Registered Limited Liability Partnership or an appropriate abbreviation thereof. D9.3.4 Unlike the LLP provisions that apply under IUPA (1971), qualification of a partnership as an LLP under IUPA (1998) remains effective until canceled, thus preventing inadvertent lapses in the LLP liability shield based on the partnership s failure to timely renew the LLP registration. D9.4 Iowa Code section 486A.306(3) provides the expanded limited liability shield to LLP partners under IUPA (1998) as follows: An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. D9.5 To the extent a partner actively participates in the partnership business, the partner will, of course, continue to be personally liable for any wrongful personal conduct, just as any agent is personally liable for such conduct. D10. Differences Between an LLP and an LLC D10.1 A limited liability partnership is essentially a general partnership in which the partnership and partners have elected to have limited liability protection. As a result, a limited liability partnership and a limited liability company may seem like substantially similar entities. However, there are several unique issues that need to be taken into account before electing to use a limited liability partnership or a limited liability company. D10.2 The IUPA treats every partner of a limited liability partnership as an agent of the partnership for purposes of conducting partnership business. Consequently, even if an individual partner has no actual authority to bind the partnership, agency law deems the partner to have apparent authority with respect to partnership business. For parties having no notice to the contrary, they can rely on the apparent authority even if the partnership agreement limits the partner s authority to act. The RULLCA provides that a member is not an agent of an LLC solely by reason of being a member. Consequently, members do not have apparent authority to bind the LLC.

21 D10.3 Both the limited liability partnership statute and the limited liability company statute have default provisions that need to be addressed in the partnership agreement in the case of a limited liability partnership or the operating agreement in the case of the limited liability company. Failure to address these default matters in the partnership agreement or operating agreement results in the statute controlling activities of the partners or members as the case may be. The default rules under the IUPA and the RULLCA are different and need to be reviewed with each entity formation. D10.4 Limited liability partnership partners and limited liability company members of a member-managed limited liability company have similar fiduciary duties to each other and to the respective entity. However, in a manager-managed limited liability company, it may be possible to transfer most if not all of these fiduciary duties to the managers. If the business is intended to be operated more like a corporation with centralized management and with the investors having little authority to act on behalf of the business or as agents for the business, a manager-managed limited liability may be the entity of choice. E. Business Corporations E1. Formation E1.1 A corporation is formed by filing Articles of Incorporation with the Secretary of State. Pursuant to Section , the Articles of Incorporation must contain: 1. The name of the Corporation; 2. The number of shares that the Corporation is authorized to issue; 3. The name and address of the registered agent; 4. The name and address of the incorporator; and 5. Any other provisions not inconsistent with Chapter 490. E2. Amendments to the Iowa Corporation Act E2.1 The share exchange provisions of Section have been expanded, consistent with the expansion of the merger provisions, to permit share exchanges involving corporations and other business entities. E2.2 Section has been added which requires, in certain cases, that the merger or other combination of a publicly-held or widely-held corporation with an interested shareholder be approved by two-thirds of the outstanding voting stock not owned by the interested shareholder. An interested shareholder is a person (and its affiliates and associates) that owns 10 percent or more of the outstanding voting stock of a corporation. The provision is