Limited Liability Companies (LLCs)

Question 1

Formation: When is an LLC created?

Answer 1

An LLC is created when its owners file articles of organization/a certificate of formation

Question 2

What must be included in the articles of organization/certificate of formation?

Answer 2

1. LLC’s name (i.e., must be distinguishable from other business entities) with the words
   “Limited Liability Company” or “LLC”;
2. Address of the LLC’s registered office and name of its registered agent within the state; and
3. Organizers’ names and addresses

Question 3

Operating agreement

Answer 3

Operating Agreements: Are like the corporation’s bylaws but are more flexible and open-ended; they often read like a general contract

Question 4

Typical provisions in operating agreements

Answer 4

1. A list of capital contributions each member has made to the LLC, and a requirement that the LLC’s managers maintain separate capital accounts for each member;
2. An allocation of profits and losses among the members;
3. The process by which distributions may or must be made by the LLC to its members;
4. A designation of management by the members or by a manager; and
5. The steps that must be taken to dissolve and wind up the LLC and the allocation of LLC assets among members before the LLC terminates

Question 5

Liability of members

Answer 5

If the LLC becomes indebted, obligated, or otherwise liable to an outside party, no member or manager becomes liable on that debt, obligation, or liability solely by reason of actingas a member or manager

Question 6

Management

Answer 6

LLCs do not have a preordained structure and usually are flexible. Like the shareholders, directors, and officers in a corporation, the various parties within an LLC have distinct powers and are subject to limitations depending on their roles.

Question 7

Member-managed

Answer 7

The owners typically operate the entity on a day-to-day basis. Each
member is empowered to sign contracts and take other actions on the LLC’s behalf

Question 8

Manager-managed

Answer 8

Owners typically do not operate the LLC on a day-to-day basis. A manager is hired to operate the LLC, similar to a corporate officer. LLC members generally lack the power to sign contracts or take other actions on the LLC’s behalf

Question 9

Fiduciary duties

Answer 9

The agency principles and fiduciary duties of directors and officers of a corporation apply similarly to individuals tasked with managing an LLC. However, LLCs can modify these duties as long as the modification does not authorize conduct involving bad faith, willful or intentional misconduct,
or a knowing violation of law

Question 10

Duty of loyalty

Answer 10

Managing members or managers must:

1. Account and hold in trust for the LLC any benefit derived in conducting the LLC’s business;
2. Not conduct business adverse with the LLC’s interest, including avoiding any conflicts of interest between the LLC’s objectives and their own personal goals; and
3. Not compete with the LLC’s business, including secretly usurping the LLC’s business opportunities or amassing secret profits from the LLC’s commercial activities

Question 11

Duty of care

Answer 11

Subject to the business-judgment rule, the duty of care requires the member to act with the care that a person would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company

Question 12

Dissociation

Answer 12

A member can dissociate from an LLC at any time by providing notice to the LLC. The dissociating member relinquishes the right to participate in the LLC. However, the dissociating member’s interests and liabilities are not discharged, and the member may be entitled to distributions made after the dissociation. A member’s dissociation does not necessarily trigger dissolution of the LLC

Question 13

Dissolution

Answer 13

Many state statutes provide that an LLC is dissolved upon the following:

1. An event or circumstance that causes dissolution per the operating agreement;
2. The affirmative vote or consent of all its members to dissolve;
3. The passage of 90 consecutive days during which the LLC has no members;
4. Administrative dissolution of the LLC by the secretary of state; or
5. A legal action brought by a member establishing that one of the following is true:
   a. The conduct of all or substantially all the LLC’s activities and affairs is unlawful;
   b. It is not reasonably practicable to carry on the LLC’s activities and affairs in conformity with the articles of organization and the operating agreement; or
   c. The managers (or those members in control) have acted in an illegal, fraudulent, or oppressive manner (i.e., is directly harmful or violates the member’s reasonable expectations)

Question 14

Which doctrines apply to LLCs and corporations?

Answer 14

1. Promoters and preorganization contracts;
2. Piercing the corporate veil (e.g., members are treated like shareholders);
3. Deficient filings (e.g., de facto corporations doctrine applies to de facto LLCs);
4. Winding up; and
5. Direct and derivative lawsuits