Limited Liability Companies MEE Flashcards
Limited Liability Company
hybrid business organization between a corporation and partnership that is (1) taxed like a partnership, (2) offers its owners (members) the limited liability of shareholders of a corporation, and (3) can be run like either a corporation or a partnership
Separate Entity
LLC is treated as a separate legal entity distinct from its owners
Operating Agreements
LLC members may adopt operating agreements to control most aspects of the LLC’s business and management
RULLCA
revised uniform limited liability company act
LLC Formation
an llc is formed by filing a certificate of organization with the secretary of state - LLC must have one member
Certificate of Organization Requirements
(i) name of the LLC
(ii) the address of the LLC’s registered office AND
(iii) name and address of its registered agent
Name of the LLC
the name should contain words “limited liability company” or the abbreviation LLC or L.L.C.
Management and Operation - Operating Agreement
the operation and governance of an LLC is typically found in an operating agreement - can displace almost all of the statutory provisions
Management and Operation - Operating Agreement May Alter Duties
(a) agreement may eliminate the duty of loyalty and alter the duty of care if doing so is not manifestly unreasonable
(b) similarly the operating agreement may not eliminate the contractual obligation of good faith and fair dealing but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable
Presumption of Management and Operation
management of the LLC is presumed to be by all members
Ordinary Business Decisions
a majority vote of the members (or managers) is required to approve most decisions - ordinary business decisions
Authority to Bind the Company in Member Managed LLC
each member of a member managed LLC has authority to bind the company to contracts apparently carrying on the ordinary business of the company unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks authority
Authority to Bind the Company
each member of a member managed LLC has authority to bind the company to contracts apparently carrying on the ordinary business of the company unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks authority
Authority to Bind the Company in the Manager Managed LLC
only the manager(s) have authority to bind
Extraordinary Business Decisions
a unanimous vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement
Financial Rights LLC
if an LLC makes any distributions to its members the distribution must be made to the members in equal shares unless the operating agreement provides otherwise
Rights to Demand Distributions in Other Forms
a member or transferee does not have a right to demand or receive a distribution from the LLC in any form other than money
Liability of Members and Managers
generally are not personally liable for the LLCs obligations
Liability of Members and Managers
members and managers generally are not personally liable for the LLCs obligations and can lose only the amount of their investments
Piercing the LLC Veil
courts may pierce the LLC veil of limited liability to reach the members and managers personal assets to satisfy the LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation
Fiduciary Duties owed by Manager or Member
the fiduciary duties owed by members and managers to the LLC and to its other members are the fiduciary duties of care and loyalty - must discharge their duties and exercise any rights consistently with the contractual obligation of good faith and fair dealing
Duty of Care - Only to Managers
members or managers must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interests of the LLC
Business Judgment Rule
members or managers cannot be held liable for negligent decisions
Duty of Loyalty - Only to Managers
a member must:
(1) account to and hold for the LLC any benefit they derive from the LLC’s activities or from the appropriation of an LLC opportunity;
(2) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest in the LLC
(3) refrain from competing with the LLCs business
all members may authorize or ratify a specific act by a member
Members Ability to Ratify Acts of Manager
only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty
Transferability of Financial Rights
unilaterally transferable
Transferability of Management Rights
not unilaterally transferable
Assignment of Membership Rights
transfers only the members right to receive distributions
How Does One Become a Member
one can become a member only with the consent of all members or as provided in the operating agreement
Dissociation
a person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member
Dissolution
an LLC will be dissolved when any of the following events occur:
(1) an event or circumstance that the operating agreement states causes dissolution
(2) the consent of all of the members
(3) the passage of 90 consecutive days during which the LLC has no members
Judicial Dissolution
a member may also apply for judicial dissolution of the LLC - a court may grant if:
(a) the conduct of all or substantially all of the LLCs activities is unlawful
(b) it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement
(c) the controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent
(d) the controlling members have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution
Administrative Dissolution
secretary of state may dissolve an LLC administratively when the LLC fails to submit a required fee or annual report
Effect of Dissolution
an LLC that has been dissolved continues its existence but is not allowed to carry on any business except that which is appropriate to winding up its activities
Barring Claims Against LLC - Undistributed Assets
a claim can be asserted against a dissolved LLC to the extent of the LLCs undistributed assets
Barring Claims Against LLC - Distributed Assets
if the assets have been distributed to the members, a claim can be enforced against each member to the extent of the member’s proportionate share of the claim or to the extent of the assets distributed to him, whichever less
Cutting Short time For Claims Against
an LLC can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim - time for filing unknown claims can be limited to 5 years by publishing notice of the dissolution in a newspaper in the county where the LLCs known place of business is located
Taxation of an LLC
partnerships and LLCs are taxed on a pass through basis - business income is passed through the owners and reported to the owners individual tax returns
Right to Information in a Member-Managed LLC
a member has a right to inspect and copy any record concerning the LLCs activities, financial condition, and so on, material to the members rights and duties - must automatically be furnished unless they reasonably believe the member already knows the information
Right to Information in Manager-Managed LLC
the managers have the same right to information and the duty to furnish information
Right to Information in a Manager- Managed LLC
pg 49
Members’ Actions against the LLC - When Injured by LLC
a member who has been injured personally by his LLC can bring a direct action against the LLC to recover
Members’ Actions Against the LLC - When Management Fails
a member may bring a derivative action on behalf of the LLC if they make a demand on the other members (or managers) unless demand would be futile
Who May Bring a Derivative Suit
a derivative action may be maintained only by a person who is a member at the time the action is commenced and who remains a member while the action continues
Indemnification
members of a member-managed and managers of a manger-managed LLC have a right to be indemnified for debts, obligations, and other liabilities incurred in the course of their activities on behalf of the company, provided that they complied with the duties of loyalty and care, and they also have a right to reimbursed for expenses they incur on the company’s behalf
Charge of Transferable Interest
a judgment creditor of a member or transferee of a member may charge (attach) the transferable interest of the judgment debtor to satisfy the judgment
