Explaining LLCs and LLP Disputes

Limited Liability Company

A limited liability company, or an LLC, is a business structure in which owners (members) have only a limited personal liability for the actions and debts of the company, meaning their liability is limited to their financial investment. Because of this, LLCs are very popular. Certain features of LLCs are similar to a partnership and are quite flexible. Similar to a partnership, members of an LLC have the right to participate in the management of the LLC unless the operating agreement mandates the LLC is to be managed by managers.

Another benefit of an LLC is that it is eligible for pass-through taxation, which means that the LLC is not directly taxed, and the tax burden is passed instead to members of the LLC. The LLC pays its profit earnings to members as income, and each member pays taxes on their share of those profits. If the LLC took a loss for the year, each member deducts their share of the loss from their personal tax return.

Limited Liability Partnership

A limited liability partnership, or an LLP, is a form of ownership in which all partners are given limited liability protection. An LLP is similar to a general partnership in that all of the partners are able to take an active role in managing the everyday affairs of the business. Partners in an LLP can determine the organization's structure and how profits and losses will be distributed. An LLP does not need to pay income tax, but must instead pay an annual tax of $800. In California, an LLP is limited to people who are licensed to practice in the fields of architecture, law, or public accountancy.

Common Types of LLC and LLP Disputes

There are many complex factors involved when there are disputes among members or partners of an LLC or LLP. If legal advice is not sought in a timely manner, an LLC dispute or an LLP dispute can quickly destroy a business, leaving behind little to no value for those who have worked to build it. Oftentimes, disputes arise from the following issues:

• Breach of fiduciary duty
• Contract issues
• Deadlock regarding major decision
• Dissolution, including how assets and liabilities should be divided
• Exclusion from management
• Failure to distribute profits
• Fraud
• Hiring/firing employees without required approval
• Operating agreement amendments
• Wrongful association/disassociation

If you are part of an LLC or an LLP and are caught in a dispute which you believe stems from fraudulent actions, breach of contract, or other contentious matters, call Matthews Law Firm to discuss your options and determine the best method to protect your business.