KNS - LLC Flashcards
1 - What is a limited liability company (an LLC)?
An LLC is a hybrid between a corporation and a partnership in which the owners (called “members”) have limited liability as well as the benefits of partnership tax treatment. This is not a corporation, nor is it a partnership. It is in its own business form. An LLC is treated as a separate legal entity distinct from its members.
2 How do you form an LLC?
To form an LLC, you must file “articles (or certificate) of organization” with the secretary of state.
3 - To form an LLC, you must file “articles (or certificate) of organization” with the secretary of state. The information required in the certificate is minimal. It includes what three things?
The articles or certificate of organization must include:
- the name of the LLC
- the address of the LLC’s registered office and
- the name and address of its registered agent.
4 - What must an LLC’s name include?
An LLC’s name must include an indication that it is an LLC. In general, the name should contain the words “limited liability company” or the abbreviation LLC or L.L.C.
5 - Where is the real detail on the operation and governance of an LLC typically found?
The real detail on the operation and governance of the LLC is typically found in an operating agreement. The operating agreement can displace almost all of the statutory provisions.
6 - Who manages the LLC?
The management of an LLC is presumed to be by all of the members.
7 - The management of an LLC is presumed to be by all of the members. Can other management arrangements be made?
Other management arrangements can be made (eg management by outside managers), but they must be specified in the operating agreement. A majority vote of members (or managers if manager-managed) is required to approve ordinary business decisions. A unanimous vote of members (or manages if manger-managed) is required to approve extraordinary business decisions, including amending the operating agreement.
8 - How are the profits and losses shared in an LLC?
Unless otherwise agreed, profits and losses are allocated on the basis of contributions.
9 - Who has liability in an LLC?
Members are generally not personally liable for the LLC’s obligations. They have limited liability and can only lose the amount of their investments. As always, members are liable for their own torts.
10 - Do members of an LLC owe fid duties?
The fiduciary duties owed by a member (if member managed) or a manager (if manager managed) to the LLC AND TO ITS MEMBERS are the fiduciary duties of care and loyalty. See p 27 for more details.
11 - Can members transfer their ownership interests in an LLC?
Essentially the partnership rule applies here - financial rights are unilaterally transferable, but management rights are not. One can become a member (ie management rights can be transferred) only with the consent of ALL the members.
12 - Can a member dissociate in an LLC?
A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member. Generally, the vents that will cause dissociation of a partnership in a partnership will also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages.
13 - An LLC will be dissolved when any of the following three events occur. What are these?
An LLC will be dissolved when any of the following evens occur.
- An event or circumstance that the operating agreement states causes dissolution.
- Consent of all the members or
- The passage of 90 consecutive days during which the LLC has no members.
14 - What is a fourth way to dissolve an LLC?
A member may also apply for a judicial dissolution of the LLC. A court may grant an application for judicial dissolution if
1. the conduct of all or substantially all of the LLC’s activities is unlawful.
or
2. It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.
- A court may also dissolve the LLC if the managers or those members in control of the LLC have acted, are acting, or will act in a manner that is illegal or fraudulent OR have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution.
15 - How are partnerships AND LLCs taxed?
Partnerships and LLCs are taxed on a pass through basis. There is no entity level tax. Instead, business income is passed through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners). By contrast, a corporation is subject to double taxation. The corporation pays taxes on its incomes, and the shareholders pay taxes on that income again when and if it is distributed to them. In today’s tax climate, pass through treatment usually results in less taxes paid.
