United States Non-Corporate Business Tax Law

Author: / Country: Mainland China
Publisher:
Publishing Date: 2000-11-01
Features: The new law restricts the concept of partnership to the scope of general partnerships. "A society that is not established in accordance with this law, its predecessor, or the corresponding law of another jurisdiction is not a partnership within the meaning of this law." In other words, any organization established under the Company Law, the Limited Liability Company Law, the Non-profit Organization Law, etc., does not belong to a partnership. The old Partnership Law treated limited partnerships as a special form of partnership, so the general provisions of the Partnership Law also applied to limited partnerships. However, considering the fundamental differences between these two types of enterprises, the 1994 Uniform Partnership Act no longer regulated limited partnerships, which was a difference from the old law. However, the new Limited Partnership Law still applies the provisions of the Uniform Partnership Act, but this is a provision of the Limited Partnership Law. The 1994 Uniform Partnership Act of the United States defined partnership much more broadly than the Partnership General Provisions of the Civil Code of China and the Partnership Enterprise Law. The partnership laws in China all require that partnerships must have a written agreement and go through legal procedures. However, in real life, there are objectively some cases where individuals cooperate for profit without any registration. Such profit-oriented groups are neither companies nor state-owned or collective enterprises, and naturally do not belong to individual enterprises. So, what is the relationship between them? If their business activities harm the interests of third parties and the actors involved do not have sufficient assets to compensate, how can the interests of third parties who suffer such profit-oriented activities be fully protected? China's current laws have not yet provided clear regulations for this situation, which is a legal blank area and cannot be said to be a shortcoming. ③ According to the U.S. Partnership Law, a third party who suffers damage can fully regard the tortfeasor as a partner and hold them jointly and severally liable, providing relatively comprehensive protection for the injured party. This is worth learning from. Signing on a limited partnership certificate means the signer confirms the authenticity of the certificate's content. The 1916 Act not only required signatures but also required an oath. ② The new law does not require an oath but stipulates that if the certificate's content is false, it shall be deemed as perjury, and the signer shall bear legal responsibility, and the person who suffers losses due to reliance on the certificate has the right to claim compensation from the signer of the certificate. ③ Therefore, its actual effect is the same as taking an oath to guarantee the authenticity of the certificate. Who should sign the certificate? The 1916 Act required all partners, including limited partners or their authorized persons, to sign the certificate, ④ but the 1985 Act no longer requires the list of limited partners to be included in the declaration of limited partnership certificates, so there is no longer an issue of limited partners signing; ⑤ Additionally, the 1916 Act required all partners to sign all types of limited partnership certificates, while the new law only requires all general partners to sign the initial establishment certificate and dissolution certificate, and revision certificates only require all new general partners and at least one original general partner to sign. ⑥ Regarding the signing of a partnership certificate or its revision certificate by a partner, it does not require a general partner to sign personally; each partner has the right to designate their own agent to sign. However, if the revision certificate is revised due to the admission of a new general partner, the authorization must specifically state that the authorization is to sign the revision certificate for admitting a new general partner. ① It is clear that admitting a new partner will directly affect the interests of other partners. Signing a limited partnership certificate is not only a right but also an obligation of a partner. If a partner has an obligation to sign but refuses to sign, thereby affecting the interests of others, the affected parties have the right to apply to the court to order the obligee to sign the certificate; if the obligee still refuses to sign, the court may order the Secretary of State to record the certificate that should be signed.
II. Separating Property to Assume Economic Liability as an Alternative When Insurance is Unavailable or Too Expensive
Texas law provides for the establishment of a separate fund of $100,000 to compensate for court judgments based on its limited liability protection for errors, omissions, negligence, incompetence, or minor crimes. This fund should be deposited in a trust or a separate bank account, or in a bank certificate or U.S. Treasury certificate; or in a bank letter of credit or an insurance company guarantee bond. ③ All other states requiring insurance have provisions equivalent to the amount of insurance required. California, Hawaii, and Oklahoma have explicitly stipulated a combination of insurance and other financial guarantees, which, in other laws, may be considered as an implied provision.
III. The Effect of Purchasing Insurance and Establishing a Separate Fund
Purchasing statutory insurance and establishing a separate fund can be considered sufficient reasons to avoid lifting the veil of limited liability. ④ However, the South Carolina legislature stipulates that insurance or a separate fund is not "in any sense a sufficient investment by a registered limited liability partnership," which implies the possibility of lifting the veil. To prevent undue influence on the jury's judgment regarding liability and damages, most states requiring insurance prohibit informing the jury about whether insurance has been purchased.
IV. The Time for Compliance with Statutory Requirements
Insurance or a separate fund serves as an alternative to the personal liability of partners. The concept of substitution clearly indicates that insurance and a separate fund should be effective at the time of the lawsuit to the purpose of excluding partner liability. This concept also requires that insurance or a separate fund should be effective at the time of the judgment. Most laws requiring insurance or a specific separate fund also require that the protected act occurred "when the partnership was a limited liability partnership." In particular, if the law defines compliance with statutory requirements as the definition of an LLP, it requires that the insurance or separate fund required by the LLP law be in effect at the time of the wrongful act. Some laws stipulate that the protected act should occur when the partnership is an LLP. The Delaware law provides a clear time for compliance with statutory requirements. It stipulates that if, at the time of a claim for a matter for which the partnership is only liable, or at the time of the act that caused the claim, the partnership has purchased effective insurance for that claim, the LLP meets the insurance requirement. If within 30 days after the lawsuit, the partnership has established the required separate fund, the LLP meets the separate fund requirement. The law also stipulates that when a bankruptcy proceeding against an LLP begins, an LLP that has otherwise met the insurance or separate fund requirements should be deemed to have complied with the insurance requirement at the time of partner liability.
The limited liability of an LLP and procedural issues may fundamentally change the relationship between partners. Partnership law implies or explicitly assumes that partners are personally liable for partnership debts in many aspects. A partner personally liable for partnership debts has the right to manage the partnership effectively, the right to veto the admission of new members, strong rights of withdrawal, and corresponding economic rights commensurate with their reputation investment and capital contribution. An LLP may require different rules. However, in most aspects, the default partnership rules still apply to an LLP. An important function of the LLP provisions is to add limited liability to the basis of a general partnership. Modifying the partnership law to suit an LLP would obviously interfere with this function. However, the interpretation of partnership agreements and default legal provisions may depend on whether the partnership is an LLP. It should be remembered that partners can alter default rules through a partnership agreement. Although this chapter focuses on the interpretation of default rules under partnership law, it also emphasizes that LLP partners need to consider whether their partnership agreement should be amended when registering as an LLP.
Section Management and Control
Partnership law stipulates that a general partner has equal management rights, voting rights, and the right to veto non-routine decisions or modifications of the partnership agreement and the admission of new partners. These rights are very important for partners personally liable, as they ensure that partners will not bear additional risks due to decisions they disagree with. This raises the question of whether the rights of partners in an LLP should be different. This section first discusses four aspects of partners' management rights and control rights.
I. Partners' Management Rights
Partnership law stipulates that partners have "equal and equal rights to manage and execute partnership affairs." Therefore, unless otherwise agreed, partners have the right to participate in proposing and approving all business decisions of the partnership and the right to be employed by the partnership. A partner excluded from partnership affairs may have the right to seek judicial dissolution of the partnership. Whether the default "equal" rule is appropriate depends partly on whether most businesses adopting the partnership form would choose this rule. (It also depends on whether other informal businesses accept or use contracts to exclude default legal provisions.) In determining whether the default management rule is appropriate, the limited liability of LLP partners is an important consideration. A partner with limited liability faces a smaller risk of damage when entrusting management responsibilities to others compared to a partner without limited liability. This does not necessarily lead to the conclusion that the partnership law on the issue of partners' participation in the management of an LLP should apply different rules from those of a non-LLP partnership. First, when partners are employed by the partnership, the default rule for participation in management is appropriate even for partners with limited liability. For partners who have invested their human capital in the partnership, business decisions will have significant consequences for them, even though they do not bear personal liability for the partnership's debts. Because these partners cannot diversify the risk of their human capital investment like those who only invest part of their property in the enterprise. The default rule for participating in the management of the partnership should not change for LLP partners for the second reason: according to many LLP laws, LLP partners still bear liability for "contractual" debts and their own or supervisory responsibilities for improper acts. The liability of LLP partners for contractual debts means they, like non-LLP partners, have a vested interest in participating in business decisions. The liability of LLP partners for supervisory negligence means LLP partners should have a say in determining the scope of the partnership's business and supervisory procedures, as well as in decisions that may determine their supervisory responsibilities. Third, if the default rule helps ensure that LLP partners receive favorable treatment as partners under tax law, securities law, and anti-employment discrimination law, then partners may choose the default rule. In particular, the rule of retaining the default management responsibility of partners plays an important role in determining whether the enterprise should be treated as a partnership. Of course, partners can change the default equal participation rule and entrust responsibility to managing partners. LLP partners may be more willing to do so. The LLP status of the partnership may affect the interpretation and enforcement of such agreements. Some court rulings interpret agreements transferring management authority as not excluding non-managing partners from participating in decisions. In the case of Wilzig v. Sisselman, the court interpreted an agreement transferring management authority to 5 to 11 partners as preventing other managing partners from inheriting the management authority of a deceased partner, partly because if other managing partners could inherit such management authority, after some time, management power might concentrate in one partner's hands. The court said: "A partner's right to express opinions on fundamental and critical aspects of the partnership enterprise, which may substantially affect investments and a partner's liability, should not be considered waived unless an explicit intention is expressed: management authority is extremely important, because partners are generally jointly liable for all debts incurred in the process of managing the partnership."