Limited Liability Companies

Question 1

What is an LLC?

Answer 1

An unincorporated association having one or more members, and is organized and operated pursuant to a state LLC statute. Treated like a corporation for limited liability purposes in protecting its members, managers, and agents from liability for the obligations of the company

Question 2

Articles of Organization

Answer 2

LLCs must file articles of organization with the secretary of state in which it is organized.

Question 3

What the Articles of Org. Must Contain

Answer 3

• A statement that the entity is an LLC
• The name of the LLC
• The address of the LLC’s registered office and that of its registered agent

Question 4

Operating Agreement

Answer 4

A document similar to a corporation’s bylaws that governs the LLC’s internal affairs

Question 5

Control of LLC

Answer 5

Lies with the members

Question 6

Liability for the Losses of an LLC

Answer 6

Members are liable for losses up to the amount which a member contributed to the LLC. Losses are to be paid by the LLC, but if the LLC lacks funds to cover the expenses, the members will not be personally liable beyond the scope of their contributions, unless a court pierces the company veil.

Question 7

Member-Managed LLCs

Answer 7

If the operating agreement does not appoint managers, the LLC is member-managed. Each member has equal rights in the management of the LLC’s ordinary business activities, unless expressed otherwise in the operating agreement. Each member owes the others the duties of loyalty and care.

Question 8

Manager-Managed LLC

Answer 8

Where LLC members appoint one or more managers to operate the business (may or may not be member of LLC themselves). Managers owe the duties of care and loyalty similar to those owed by directors to a corporation.

Question 9

Altering a Manager’s Fiduciary Duties

Answer 9

Most states and the Uniform Limited Liability Company Act (ULLCA) permit the operating agreement of an LLC to alter the fiduciary duties of managers or members.

Question 10

Manager’s Duty of Care

Answer 10

• Managers generally owe a duty not to engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
• However, some states reject the gross negligence requirement, instead using the business judgment rule used by corporations.

Question 11

Personal Liability for an LLC

Answer 11

No member, manager, or agent of an LLC will have any personal obligation for the debts; obligations, and liabilities of the company.

Question 12

Pierce of the Company Veil for an LLC

Answer 12

Individuals might be personally liable if the LLC is a mere instrumentality and inadequate capitalization (inadequate formalities is not enough)

Question 13

Derivative Actions in the LLC

Answer 13

Are different then derivative suits for corporations. P must have made a demand to other members in a member-managed LLC or the managers of a manager-managed LLC, asking that they bring an action to enforce the right but they do not need to make a demand if they can argue that demand would be futile

Question 14

Assignment of LLC Interest

Answer 14

Absent a contrary provision in an operating agreement, a member may assign all or a part of his economic interest in the LLC.

Question 15

Rights of an Assignee

Answer 15

An assignee will not be permitted to become a member or to have a voice in management of the LLC unless the assignee is admitted as a member in accordance with an operating agreement or by consent of a majority in interest of the remaining members.

Question 16

Dissolution of LLC

Answer 16

Dissolution occurs:

• upon the occurrence of an event that the operating agreement states will cause dissolution
• upon the consent of all the members
• upon the passage of 90 consecutive days where the LLC has no members
• judicial grant of an application
• signed filing of administrative dissolution by the secretary of state

Question 17

Dissolution by Court

Answer 17

A court will grant a dissolution if:

• the conduct of the company’s activities and affairs is unlawful
• it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization and the operating agreement
• the managers or members in control of the LLC have acted (or will act) in a manner that is illegal or fraudulent or have acted in a manner that is oppressive and is directly harmful to the applicant.

Question 18

Notice to Creditors Upon Dissolution

Answer 18

Notice of dissolution must be given to creditors. If the LLC does not follow proper procedure, a court can enforce a creditor’s claim against each member to the extent of each member’s proportionate share of the claim.