LIMITED LIABILITY ENTITIES 2013 UPDATE Live ALI CLE Nationwide via Video Webcast March 22, 2013 DUTIES, DECISIONS, AND DISCRETION: THE REST OF THE RELATIONSHIP I. Introduction Robert R. Keatinge Holland & Hart LLP 555 17th Street, Suite 3200 Denver, CO 80202 303/295-8595 rkeatinge@hollandhart.com Generally in selecting and organizing business organizations, the parties and their advisers will carefully consider three important factors: the financial arrangement, the liability of the owners and managers, and the tax treatment of the organization. This outline does not address any of these important considerations, but focuses on the rest of the relationship in the partnership and LLC relationship, including rights and duties of owners and managers in making decisions and dealing on behalf of the organization. The decision-making within an unincorporated organization is conducted pursuant to the agreement of the owners, or state law to the extent not addressed by the agreement or the state law limits the ability of the owners to change state law rules. The outline begins by considering the sources of operational rules, the agreement and the state law under which the organization is formed. The state law considered include various unincorporated entity statutes promulgated by the National Conference of Commissioners on Uniform State Laws ( NCCUSL ) including the Uniform Partnership Act (1997) ( UPA (1997), the Uniform Limited Partnership Act (2001) ( ULPA (2001) ), the Revised Uniform Limited Liability Company Act (2006) ( ULLCA (2006) ) all as revised by the NCCUSL Harmonization Project ( UPA (2011), ULPA (2011), and ULLCA (2011) ). The ABA Revised Prototype Limited Liability Company (Act) (2011) (RPLLCA (2011) ); and, in some places, the California, Colorado, Delaware, Nevada, Ohio, and Texas. While some of the statutes considered have not been adopted, and may never be widely adopted, they do represent some of the most current thinking on statutory issues It then considers the manner in which state law deals with authority and duties, and concludes with language that may be included in an agreement to address these matters. The language, like all language in form agreements, is only included for the purpose of discussion and the drafter should clearly understand and accurately document the true agreement of the parties rather than relying on form language. a. The Agreement. A partnership or multi-member limited liability company ( LLC ) is above all else an agreement among the owners. The partnership agreement or, in the case of an LLC, the 1
operating agreement or limited liability company agreement with very few limitations establishes the relationship among the partners or members and between the partners or members, on the one hand, and the organization on the other. Under all partnership statutes and many LLC statutes, this agreement may be established through oral agreements or even course of conduct. Even where statutes require written LLC agreements, doctrine such as waiver and estoppel will allow a court to enforce the agreement that the members create through their actions. b. State Law i. Uniform Acts. The National Conference of Commissioners on Uniform State Laws ( NCCUSL ) promulgate uniform and model statutes for adoption by state legislatures. These statutes include statutes dealing with unincorporated business organizations. 1 (1) General Partnerships. The Uniform Partnership Act ( UPA (1914) ) was originally promulgated by the National Conference of Commissioners on Uniform State Laws ( NCCUSL ) in 1914 and was adopted in every state except Louisiana. The UPA(1914) was the subject of a revision project that produced a revised Uniform Partnership in 1994, which was updated to include provisions governing limited liability partnerships (LLPs). This statute, the Uniform Partnership Act (1997) ( UPA (1997) ) has been adopted in 39 jurisdictions. 2 In the summer of 2012, NCCUSL adopted a Harmonized version of UPA (1997) ( UPA (2011) ). (2) Limited Partnerships. The original Uniform Limited Partnership Act ( ULPA (1916 ) ) was adopted in 1914. ULPA (1916) was updated in 1976 ( ULPA (1976) ). As ULPA (1976) was being considered, Delaware made some changes that many other states followed. NCCUSL adopted these revisions in the Revised Uniform Limited Partnership (1976 with 1985 amendments) ( RULPA ). Under both ULPA (1916) 3 and RULPA, 4 the rules 1 The Model Business Corporation Act is drafted by the American Bar Association Committee on Corporate Laws and NCCUSL does not draft corporate laws but does address corporations in inter-entity statutes described below. 2 Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, West Virginia, Wyoming. 3 ULPA (1916) 9 ( Rights, Powers and Liabilities of a General Partner. (1) A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners, except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to (a) Do any act in contravention of the certificate, (b) Do any act which would make it impossible to carry on the ordinary business of the partnership, (c) Confess a judgment against the partnership, (d) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose, (e) Admit a person as a general partner, (f) Admit a person as a limited partner, unless the right so to do is given in the certificate, (g) Continue the business with partnership property on the death, retirement or insanity of a general partner, unless the right so to do is given in the certificate. ). 2
governing the rights and duties of general partners are determined by reference to the general partnership statute (either UPA (1914) 5 or UPA (1997)) through a process known as linkage. In 2001, NCCUSL adopted ULPA (2001). ULPA (2001) has been adopted in 19 jurisdictions. 6 In the summer of 2012, NCCUSL adopted Harmonization of Business Entity Acts presented a Harmonized version of ULPA (2001) ( ULPA (2011) ). (3) Limited Liability Companies (LLCs). In 1995, NCCUSL adopted a Uniform Limited Liability Company Act, which it amended in 1996 to reflect the Federal check-the-box classification regulations ( ULLCA (1995)/(1996) ), ULLCA (1995)/(1996) was enacted in 6 jurisdictions. 7 NCCUSL promulgated ULLCA (2006). ULLCA (2006) has been adopted in 6 jurisdictions. 8 In the summer of 2011, NCCUSL adopted ULLCA (2011) although as of this writing ULLCA (2011) is still being revised. (4) Multiple Entity Legislation and Harmonization. In response the state legislative development of junction-box merger and conversion statutes statutes providing for the merger or conversion involving different forms of entity NCCUSL developed the Model Entity Transactions Act ( META ) and a Model Registered Agents Act ( MORAA ). In response to state attempts such as the Texas Business Organizations Code ( TBOC ) to codify and coordinate business organization laws, NCCUSL initiated a project for a Business Organizations Act ( BOA ) which is intended provide for both corporate and unincorporated organizations. The BOA included META, MORAA, and provisions dealing with registered agents, filing, foreign entities, and administrative dissolution. No state has adopted BOA and it may be expanded at some point in the future. NCCUSL, having adopted the business organization statutes as well as other statutes dealing with trust entities or business 4 RULPA 403 ( (a) Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners. (b) Except as provided in this [Act], a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners. Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners. ); 1105 ( In any case not provided for in this [Act] the provisions of the Uniform Partnership Act govern. ) 5 Some states notably Colorado and Delaware that have adopted UPA (1997) but still have RULPA, have provided in RULPA that the rights of general partners are determined by reference to the otherwise-repealed UPA (1914) to prevent unanticipated changes in the law of limited partnerships. 6 Alabama, Arkansas, California, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maine, Minnesota, Montana, Nevada, New Mexico, North Dakota, Oklahoma, Utah, Washington. 7 Alabama, Hawaii, Illinois, Montana, South Dakota, U.S. Virgin Islands. 8 District of Columbia, Idaho, Iowa, Nebraska, Utah, Wyoming. 3
trusts, cooperatives, and unincorporated nonprofit association in recent years, undertook a project to harmonize these acts. In the Summer of 2011 the Drafting Committee on Harmonization of Business Entity Acts presented Harmonized versions of UPA (1997) ( UPA (2011) ), ULPA (2001) ( ULPA (2011) ), ULLCA (2006) ( ULLCA (2011) ), META, MORAA, the BOA, and other statutes. ii. Revised Prototype Limited Liability Company Act. The Committee on Limited Liability Companies, Partnerships and Unincorporated Entities of the ABA Section of Business Law ( LPUE ) originally developed and published the Prototype Limited Liability Company Act on November 19, 1992 (the Prototype LLC Act (1992)). In response to the checkthe-box regulations and to the rapid changes taking place in the field of LLCs, beginning in early 2000, LPUE undertook the task of updating the Prototype LLC Act, with the result being the Revised Prototype Limited Liability Company Act (2011) or ( RPLLCA (2011) ) (pronounced replica ). As set forth in the Preface of RPLLCA (2011), LPUE undertook the revision of the Prototype LLC Act (1992) in an effort to update the Prototype LLC Act (1992) with a view towards keeping RPLLCA (2011) current on a going forward basis, including developing provisions regarding series throughout RPLLCA (2011). As stated in the Preface to RPLLCA (2011): LPUE recognizes that most states have developed their LLC statutes over a period of years and that many businesses and practitioners in those states are comfortable with the current law. Over the long term, however, LPUE expects that most jurisdictions will continue their practice of reviewing other legislative models when drafting amendments to their own LLC Acts. The original Prototype Act was used as a drafting base for many of the existing LLC Acts. LPUE encourages state legislative drafting entities to use this Revised Prototype LLC Act as a drafting resource in addition to ULLCA (2006)and other states legislation. In order to facilitate that process, LPUE has followed the approximate architecture of ULLCA (2006), which is itself based on the architecture of the Revised Uniform Partnership Act ("RUPA") and the Revised Uniform Limited Partnership Act ("RULPA"). LPUE believes that, while a state may want to vary from the policy choices made in this or other legislative models, it would generally be in the best interests of those who use LLC statutes that all state statutes be organized in similar ways so that differences from state to state will be readily apparent. iii. Delaware. Delaware, long a leader in the development of corporation law, has, over the past twenty years attempted to bring the same dealfriendly statutory drafting to unincorporated (as Delaware refers to them, alternative) entities. 4
(1) General Partnerships. Delaware adopted a form of UPA (1997) 9 with significant modifications to conform it to other alternative entities. (2) Limited Partnerships. The Delaware Revised Uniform Partnership Act ( DRULPA ) 10 is similar to RULPA. 11 Delaware and some other states that have adopted UPA (1997) nonetheless expressly link limited partnerships to the UPA (1916), rather than to UPA (1997). 12 (3) Limited Liability Companies (LLCs). The Delaware Limited Liability Company Act ( DLLCA ) 13 expressly recognizes that the freedom of contract is the fundamental underpinning of LLCs. (4) Multiple Entity Legislation. While there is no Delaware multipleentity legislation, the alternative entity legislation is coordinated to ensure that the language of each of the alternative entity statutes dealing with the same issues is the same. iv. Colorado. Colorado has separate general partnership (based on UPA (1997)), limited partnership (based on RULPA), and limited liability company (sui generis) statutes. In addition, Colorado has a junction-box hub (the Colorado Corporations and Associations Act, C.R.S. 7-90-101 et seq.). v. Ohio. The Ohio LLC Act is sui generis. vi. Texas. Texas has adopted the Texas Business Organization Code ( TBOC ) which provides statutory rules for all forms of for-profit and nonprofit organizations. vii. Nevada. The Nevada LLC Act is sui generis. 9 6 Del. C. 15-101 et. seq. 10 6 Del. C. 17-101 et. seq. 11 DRULPA actually adopted many of the 1985 changes that were subsequently adopted in RULPA in 1982 (63 Del. Laws C. 420 (adopted July 21, 1982, effective for limited partnerships formed on or after January 1, 1983 and other partnerships that elect to be governed by it). Other states followed some of the Delaware revisions (e.g., the Colorado Uniform Limited Partnership Act of 1981 adopted by L. 81 p. 452 effective for limited partnership formed after November 1, 1981). In 1985, NCCUSL revised RULPA as adopted in 1976 to adopt many of revised provisions adopted by the states. See Comment, The Colorado Changes to the Revised Uniform Limited Partnership Act", see 53 U. Colo. L. Rev. 823 (1982). 12 6 Del. C. 17-1105. ( In any case not provided for in this chapter, the Delaware Uniform Partnership Law in effect on July 11, 1999 [6 Del. C. 1501, et seq.{delaware s version of UPA (1914)}] and the rules of law and equity, including the Law Merchant, shall govern. ); Colo. Rev. Stat. 7-62-1104. (Providing that a limited partnership, regardless of when formed, will link to Colo. Rev. Stat. 7-60-101 et. seq. [Colorado s version of UPA (1914)] unless it affirmatively elects to link to Colo. Rev. Stat. 7-64-101 et. seq. [Colorado s version of UPA (1997)]). 13 6 Del. Code 18-101 et seq. 5