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Business Associations - Fall 2022 (Dexter) > Limited Liability Companies (LLCs) > Flashcards

Limited Liability Companies (LLCs) Flashcards

1
Q

Limited Liability Companies (LLCs)

Limited Liability Company

A

an unincorporated entity that provides limited liability and pass through tax to its owners (members)

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2
Q

Limited Liability Companies (LLCs)

Liability

A

Any debt, obligation, or other liability of the LLC is solely the liability of the LLC. ULLCA § 304

No Personal Liability

Members and managers do not face personal liability solely by virtue of their member/manager status, even after dissolution and even if the Member participates in management.

Members and managers are liable for their own misconduct

The court may issue charging orders against member’s LLC interests

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3
Q

Limited Liability Companies (LLCs)

Liability
Veil Piercing

A

The failure of an LLC to observe formalities relating to the exercise of its powers or management of its activities and affairs is not grounds for piercing the veil. ULLCA § 304(b)

However, some courts have applied veil piercing and reverse veil piercing to LLCs

Single-Member LLCs may face more risk of veil piercing

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4
Q

Limited Liability Companies (LLCs)

Taxation

A

Default Rules

Single-member LLCs –> disregarded as a separate entity  treated as sole proprietorships

2+ Member LLCs –> classified as a partnership for tax purposes unless affirmatively elected to be taxed as corporation



Disregarded or Partnership Tax Regimes


Members declare their share of the LLC income on their individual tax returns

















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5










Q















Limited Liability Companies (LLCs)


Formation



















A





















    

  1. Articles of Organization
    2. 

  2. Operating Agreement
    3. 



Articles of Organization


An LLC is created when the articles of organization is filed with the state and when at least one person becomes a member of the LLC. ULLCA § 201


Operating Agreement


This is a private document that is not filed with any state agency


Some states require the operating agreement be a written agreement, but most states and the ULLCA allow oral agreement. ULLCA § 102(13)**

















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6










Q















Limited Liability Companies (LLCs)


Management & Control
Operating Agreement



















A





















Where the management and operation rules should be specified, including:


    

  1. Management Style
    2. 

  2. Meetings
    3. 

  3. Voting
    4. 

  4. Agency & Authority
    5. 

  5. Fiduciary Duties and Fiduciary Waivers
    6. 


















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7










Q















Limited Liability Companies (LLCs)


Management Styles



















A





















    

  1. Member-Managed
    2. 

  2. Manager-Managed
    3. 



An LLC is presumed to be member-managed under the ULLCA.

















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8










Q















Limited Liability Companies (LLCs)


Member-Managed



















A





















Each member has equal rights in the management and conduct of the LLC’s activities and affairs. ULLCA § 407(b)


Under default rules, ordinary course matters may be decided by a majority of the members

















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9










Q















Limited Liability Companies (LLCs)


Manager-Managed



















A





















Each manager has equal rights in the management and conduct of the company’s activities and affairs. ULLCA § 407(c)(2)


Ordinary course matters may be decided by a majority of the managers. ULLCA § 407(c)(1)


Managers do not have to be members


Managers are similar to a board of directors

















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10










Q















Limited Liability Companies (LLCs)


Meetings



















A



















Most state statutes and the ULLCA do not impose requirements for meetings on an LLC, but the operating agreement should address the rules related to the holding of meetings.















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11










Q















Limited Liability Companies (LLCs)


Voting:
Operating Agreement Requirements



















A





















The Operating Agreement should specify whether voting:


    

  1. Will occur on a per capita or a pro rata basis, and
    2. 

  2. What voting standards–unanimous, majority, super-majority, or
    3. 

  3. Other requirements
    4. 


















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12










Q















Limited Liability Companies (LLCs)


Voting Models



















A





















ULLCA Rules
Voting is on an equal basis, unless otherwise stated in the operating agreement


Corporate Model 
If the operating agreement is silent, voting is in proportion to ownership interests (CA + Other states)

















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13










Q















Limited Liability Companies (LLCs)


Voting
Decisions Generally Requiring Unanimous Member Approval



















A



















    

  1. Matters outside the ordinary course of business
    2. 

  2. 
Amending the operating agreement
    3. 

  3. Agreement to dissolve the LLC
    4. 

  4. Agreement to sell all of the LLC’s assets

    5. 
















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14










Q















Limited Liability Companies (LLCs)


Agency & Authority of Members



















A





















A member of an LLC is not an agent of an LLC solely by reason of being a member. ULLCA § 301(a)


There is no statutory rule granting agency status to members


A member may have actual or apparent authority, based on specific facts and circumstances, to bind the LLC on a contract. ULLCA § 301(b)

















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15










Q















Limited Liability Companies (LLCs)


Agency & Authority of Members
Operating Agreement Requirements



















A





















The Operating Agreement should specify:


    

  1. 
Who is authorized to act on behalf of the LLC, in a manner that is consistent with the chosen management structure
    2. 

  2. The nature and extent of authority, and
    3. 

  3. Any limitations on that authority
    4. 


















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16










Q















Limited Liability Companies (LLCs)


Member-Managed
Fiduciary Duties




















A













Members in a member-managed LLC have fiduciary duties (Loyalty & Care) to the LLC and other members, as well as obligations of good faith and fair dealing















17










Q















Limited Liability Companies (LLCs)


Manager-Managed
Fiduciary Duties




















A















Members in a manager-managed LLC do not have fiduciary duties solely based on their membership, but they do have obligations of good faith and fair dealing


Managers in a manager-managed LLC have fiduciary duties (Loyalty & Care) to the LLC and other members, as well as obligations of good faith and fair dealing

















18










Q















Limited Liability Companies (LLCs)


Altered/Waived Fiduciary Duties




















A















Members may agree via the operating agreement to alter a member’s duty of care and loyalty, so long as it is not manifestly unreasonable


Manifestly Unreasonable


    

  1. Unreasonable Objective or Unreasonable Means to Achieve Objective
    2. 

  2. Based only on Circumstances Existing at the time

    3. 


















19










Q















Limited Liability Companies (LLCs)


Members’ Interest




















A















A member’s right to LLC distributions is a type of personal property. ULLCA § 102(24)


Transferability


Unless otherwise provided in the Operating Agreement, a member may transfer or assign their right to distributions. ULLCA § 502


Transfer of the right to distribution does not by itself cause a person’s dissociation as a member. ULLCA § 502

















20










Q















Limited Liability Companies (LLCs)


Allocations & Distributions
Operating Agreement




















A













The Operating Agreement may alter distribution rules to allow distributions so long as after the distribution is made the company’s total assets are not less than the sum of its total liabilities. ULLCA § 105(d)(1)(B)















21










Q















Limited Liability Companies (LLCs)


Allocations & Distributions




















A















The ULLCA provides for the equal allocation of distributions, except as necessary to comply with a transfer or charging order


Many state LLC statutes provide for pro rata distributions


Potential Insolvency


An LLC may not make distributions if it is, or would be as a result of the distribution, insolvent. ULLCA § 405

















22










Q















Limited Liability Companies (LLCs)


Effect of Member Dissociation




















A















The default rule for LLCs do not require dissolution after a member dissociation


Once a person is dissociated, they no longer have the right to participate in management. ULLCA § 603(a)(1)

















23










Q















Limited Liability Companies (LLCs)


Events Causing Dissociation




















A















A member may withdraw or dissociate according to the terms of the Operating Agreement or Articles of Organization. ULLCA § 602


Default Rules


A member may withdraw upon giving notice to the LLC. ULLCA § 601


A person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will. ULLCA §§ 601 & 602(1)

















24










Q















Limited Liability Companies (LLCs)


Wrongful Dissociation




















A















A wrongfully dissociating member is liable for damages caused by the dissociation. ULLCA § 601


This liability is in addition to any debt, obligation, or other liability of the member to the company or the other members

















25










Q















Limited Liability Companies (LLCs)


ULLCA Dissociation Events




















A













    

  1. An event occurs that has been agreed to in the Operating Agreement
    2. 

  2. A member is expelled

    3. 

  3. A member files for bankruptcy (in a member-managed LLC)
    4. 

  4. A member dies

    5. 
















26










Q















Limited Liability Companies (LLCs)


Events Causing Dissolution




















A















The dissociation of a member does not automatically result in the dissolution of the LLC, nor require winding up


LLC follows the same approach as RUPA


Dissolution Events


    

  1. An event occurs that has been specified in the Operating Agreement
    2. 

  2. 
All members consent to dissolve
           a. Some states (CA & NY) require only a majority vote, not unanimous)
    3. 

  3. 
90 days pass with no LLC members

    4. 

  4. A judicial decree is entered that 
           a. It is not reasonably practicable to carry on the LLC business
           b. The managers are acting fraudulently, illegally, or in a manner that is oppressive and harmful to the applicant
    5. 

  5. The secretary of state signs and files a statement of administrative dissolution

    6. 


















27










Q















Limited Liability Companies (LLCs)


Winding Up Process




















A













    

  1. 
Distribution of Assets
           a. Discharge obligations to creditors, including members. ULLCA § 702
           b. Any surplus is paid to members in accordance with their rights to distributions
    2. 

  2. File Articles of Termination/Dissolution

    3. 
















28










Q















Limited Liability Companies (LLCs)


Actions by Members




















A















A member of an LLC may bring direct or derivative actions
~~~


~~~
ULLCA Derivative Actions


A member may maintain a derivative action **only if **the member


    

  1. First makes a demand, or pleads with particularity demand-futility, and
    2. 

  2. Satisfied all other procedural and substantive requirements

    3. 


















29










Q















Limited Liability Companies (LLCs)


Conversions, Mergers, & Domestications




















A















Same rules as corporations.


LLCs may operate in foreign states but generally require an application to transact business

















30










Q















Limited Liability Companies (LLCs)


Other Forms of LLCs




















A













    

  1. Professional LLCs (PLLCs)
    2. 

  2. Family LLCS
    3. 

  3. Low-Profit LLCs (L3Cs)
    4. 
















31










Q















Limited Liability Companies (LLCs)


Professional LLCs




















A















Generally, the professions retain liability for their own negligence and that of others under their supervision


Protects the members’ personal assets from obligations of the PLLC


Membership is usually restricted to licensed professionals


Many states do not allow LLCs to offer banking or insurance services


California does not allow professions to be organized as LLCs
































Business Associations - Fall 2022 (Dexter) (13 decks)


























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