LA BAR EXAM NON-CODE TOPIC 1 BUSINESS ENTITIES (LLCs) Flashcards
I. Introduction - Defintion
A limited liability company (“LLC) is a type of business form combining attributes of both corporations and partnerships. It has two primary attributes: (i) the limited liability that shareholders of a corporation enjoy and (i) the tax treatment of a partnership. An LLC is a legal “entity,” capable of suing and being sued, owning property, etc.
I. Introduction - No Personal Liability for Debts
By law neither the owners (called “members”) nor the managers of an LLC are personally liable for any of its debts-the major advantage of the corporate form.
I. Introduction - Tax Benefits
The income of an LLC will not be subject to federal or Louisiana income tax at the entity level-the major advantage of the partnership form.
I. Introduction - Compare S Corporations
Subchapter S corporations largely combine the two above mentioned attributes as well, but there are limits on which corporations can qualify for S tax status (e.g., S corporations are limited to 100 or fewer shareholders).
I. Introduction - Compare Limited Partnerships
Commendam (or limited) partnerships largely combine these two attributes as well, but in a commendam partnership the general partner is still personally liable for the entity’s debts and there are limitations on the authority of the commendam partners to be involved in the management of the business.
II. Formation - Commencement
An LLC may be formed and operated by any one or more persons capable of contracting. This includes natural persons, corporations, partnerships, limited partnerships, domestic or foreign LLCs, joint ventures, trusts, etc. To form an LLC, articles of organization, along with an initial report, must be filed with the secretary of state. No parish filing is required. Typically the LLC’s legal existence begins upon the issuance of a certificate of organization by the secretary of state.
The LLC statute is silent as to the liability of LLC promoters who engage in transactions prior to the date on which the LLC comes into existence. Most like-ly, courts will adopt the same rules in the LLC context that apply to the pre-incorporation activities of corporate promoters.
II. Formation - Articles of Incorporation
The articles must be written in English, and must be signed by at least one person, who need not be a member or manager.
It is mandatory that the articles state: (i) the name of the LLC; (ii) the purposes for which the LLC is formed or that its purpose is to engage in any lawful activity for which LLCs may be formed; and (i) whether the company is a low-profit limited liability company.
a. Name
The name usually must contain the words “limited liability company” or the abbreviation “L. L.C.” or “L.C.” A name may be reserved by filing with the secretary of state.
b. Purpose and Powers
An LLC may conduct business for any lawful purpose, for profit or not for profit, except insurance underwriting. An LLC has the same powers as a cor-poration or a partnership.
The articles may also include any other provision not inconsistent with law.
II. Formation - Initial Report
The initial report must be signed by each person (or his agent) who signed the articles and must state the name, location, and municipal address (not a PO Box) of the LLC itself, each of its registered agents, and the persons vested with the power to manage the LLC (either the managers or members). In addi-tion, the initial report must contain a notarized affidavit of acknowledqment and acceptance signed by each of the registered agents.
The requirements for forming an LLC (filing of the articles of organization and the initial report and their contents) is a commonly tested issue.
II. Formation - Operating Agreement
An operating agreement is any agreement, written or oral, of the members of an LLC as to the affairs of the LLC and the conduct of its business. It is analogous to corporate bylaws.
II. Formation - Conversions
Any type of already formed Louisiana business (e.g., a corporation) can convert to an LLC by submitting a conversion application to the secretary of state. LLCs may also be merged into or consolidated with other businesses by filing a merger or consolidation agreement with the secretary of state and the conveyance records office of each parish in which any party has immovable property for which title will be transferred.
III. Management and Operation - Operational Requirements
There are virtually no operational “formalities” required, e.g., no member meeting requirements. The LLC need only continuously maintain a registered office and at least one registered agent in the state.
III. Management and Operation - Members
Members are the equity owners of the LLC. There are no restrictions on who can be a member. Foreigners or non-human entities are permitted.
- Member-Managed Classification
Unless the management of the LLC is delegated to managers, all the members will manage the business, subject to any provision in the articles or a written operating agreement restricting or enlarging the rights and duties of any member or class of members. Such an LLC will be deemed to be member-managed.
- Risk of Members Who Manage
There is no risk to the limited liabilit of members if they participate in the management and control of the LLC (unlike for limited partners in a commendam partnership). (See D.4., infra.)
III. Management and Operation - Managers
- Manager-Managed Classification
If the members want the option of having one or more of the board of persons who manage the LLC to be nonmembers, the articles must specifically state that the business of the LLC will be managed by a group of managers, one or more of whom may, but need not, be members. Once it is specified that the LLC will be managed by a board of managers, it is thereafter deemed to be a manager-managed LLC even if at any given time the only managers elected happen to be members.
The differences between a member-managed LLC and a manager-managed LLC are commonly tested.
- Method of Selection and Removal
Unless otherwise provided in the articles, each manager position will be filled by plurality vote of the members (which is called “straight voting”); and a manager may be removed, with or without cause, by a majority vote of the members.
III. Management and Operation - Manager/Member Duties and Liabilities
Any member or manager entrusted with managing the business stands in a fiduciary relationship to the LLC and must act “in good faith, with the diligence, care, judgment, and skill which an ordinary prudent person in a like position would exercise” and “in the manner he reasonably believes to be in the best interests of” the LLC. Reliance in good faith on advisors and experts meets this standard.
Note: In effect, this statutory language, which tracks the Louisiana Business Corporation Law, creates a duty of care and a duty of loyalty that are probably identical to those duties for corporate officers and directors.
Any manager/member who fulfills these duties in good faith will not be liable for her actions taken on behalf of the LLC.
The articles or a written operating agreement may:
(i)
Eliminate or limit a manager/member’s monetary liability to the LLC for breach of the duties described above, although liability for receipt of an improper benefit or intentional violation of criminal law cannot be eliminated; and
(ii) Provide for indemnification and/or insurance for a manager/member for any “judgments, settlements, penalties, fines, or expenses” incurred as a
manager/member.
Note: Unlike for corporations, there is no provision in the LLC statute that provides for automatic reimbursement of costs and attorneys’ fees for members/managers who successfully defend a suit brought against them for conduct undertaken in their official capacity.
As already mentioned, a member will not lose limited liability because of participation in the management of the LLC. Also, because there are almost no required formalities (e.g., meetings, elections, minutes), courts will not “pierce the LLC veil” because formalities are not followed. However, as for corpora-tions, courts probably will “pierce the veil and find member liability for other factors like commingling member and LLC funds, inadequate capitaliza-tion, or failure to maintain a separate entity identity. By statute,
courts can pierce the veil of a Louisiana LLC based on fraud, breach of professional duty, or other negligent or wrongful conduct.
III. Management and Operation - Manager/Member Agency Authority
Each manager/member is a mandatary of the LLC for all matters in the ordinary course of its business except the alienation, lease, or encumbrance of the LLCs immovable property.
The mandatary authority of a manager/member may be taken away (i) in the articles, (ii) in an operating agreement, or (iii) by majority vote of the members/managers, provided that the third party with whom the manager/member deals has knowledge of the fact that she (the mandatary) lacks such authority.
A member who is not a manager (in a manager-managed LLC) does not have such agency authority, nor does he have the duties of care and loyalty. Such a member is purely an equity owner (like a corporate shareholder) with no authority or fiduciary duties.