Limited liability comanies

Question 1

LLC

Answer 1

1. important- this is the major entity now
2. LLC: structure in which owners have limited liability and benefits of partnership tax treatment
3. limited liability company
   a. it is not a corporation, do not call it a corporation
   b. corporation-partnership hybrid, but is neither a corporation nor a partnership
   ii. owners (“members”) have limited liability and benefits of partnership tax treatment
   iii. treated as a separate legal entity distinct from its members

Question 2

LLC formation

Answer 2

1. must file the articles of organization with the secretary of state
2. minimal information required in the filed document:
   i. the name of the LLC (containing limited liability company or LLC)
   ii. address of the LLC’s registered office
   iii. name and address of LLC’s registered agent (designated mail receiver)

Question 3

LLC operating agreement

Answer 3

1. contains detail on operation and governance of the LLC

2. can displace almost all statutory provisions

Question 4

LLC management and operation

Answer 4

1. management of LLC presumed to be by all of the members (“member-managed”)
2. modifications must be specified in the operating agreement
   i. can specify management by outside managers (“manager-managed”)
3. majority vote of members (or managers if manager-managed) required to approve ordinary business decisions
4. unanimous vote of members (or managers if manager-managed) required to approve extraordinary business decisions, including amending the operating agreement

Question 5

LLC financial rights

Answer 5

1. profits and losses are allocated on the basis of contributions, unless otherwise agreed
2. follows limited partnership rule

Question 6

LLC liability

Answer 6

1. members generally are not personally liable for the LLC’s obligations
2. limited liability and can only lose the amount of their investments
3. as always, members are liable for their own torts

Question 7

LLC fiduciary duties

Answer 7

1. note: fiduciary duties normally follow control
2. owed by members in member-managed LLCs, and managers in manager-managed LLCs
3. Duty of Care
   i. must exercise care of a reasonably similarly situated person, in a manner reasonably believed to be in the best interests of the LLC
   ii. BJR: business judgment rule applies, so no liability for negligence, and liability only for gross negligence or worse
4. Duty of Loyalty
   i. must pass benefits during performance of LLC activities or appropriation of LLC opportunities to LLC
   ii. must not deal with LLC adversely or on behalf of a party with adverse interests unless the transaction is fair to the LLC
   iii. must not competing with the LLC’s business
   iv. ratification: after disclosure of all material facts, all of the members may authorize or ratify a specific act that would otherwise violate the duty of loyalty

Question 8

LLC transferability

Answer 8

1. essentially the partnership rule applies
2. financial rights are unilaterally transferable, but management rights are not
3. can only become a member (with management or management selection rights) with the consent of all other members

Question 9

LLC dissociation

Answer 9

1. express withdrawal: can dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member
2. events causing dissociation in a general partnership apply to LLC
3. wrongfully dissociating
   member may be liable to the LLC for damages

Question 10

LLC dissolution

Answer 10

1. LLC is dissolved if any:
   i. event the operating agreement specifies causes dissolution
   ii. consent of all members
   iii. passage of 90 consecutive days during which the LLC has no members
2. member may also apply for judicial dissolution of the LLC, may be granted if any:
   i. the conduct of all or substantially all of the LLC’s activities is unlawful
   ii. not reasonably practicable to carry on the LLC’s activities in conformity with the certificate of organization and the operating agreement
   iii. managers or members in control of the LLC
   a. have acted, are acting, or will act in a manner that is illegal or fraudulent
   b. have acted or are acting in a manner that is oppressive
   c. and was, is, or will be directly harmful to the member applying for dissolution
   d. i.e. can seek dissolution if treated illegally or oppressively

Question 11

LLC taxation

Answer 11

1. partnerships and LLCs taxed on a pass-through basis
   i. no entity-level tax
   ii. business income is passed-through to the owners and reported on the owners’ personal tax returns regardless of whether that business income is actually distributed to the partners
2. corporations: subject to “double taxation.”
   i. pays taxes on its income
   ii. shareholders pay taxes on that income again when distributed to them

Question 12

LLC note

Answer 12

1. LLPs and LLCs are generally the best vehicles for closely held businesses
2. they protect ALL of the owners from liability for the obligations of the business
3. they allow the owners to contract around almost all of the statutory provisions (so that the business can be run as the owners desire)
4. they allow all of the owners to participate in the management of the business
5. they provide pass-through income tax treatment

Question 13

Most important topics

Answer 13

1. P’s liability in K for agent’s acts
2. P’s liability in tort for agent’s acts
3. partner fiduciary duties
4. partnership formation (general partnership) and effect (liability in general partnership)
5. transferability of partnership interests
6. LLCs