Limited Liability Company Flashcards
What is a limited liability company?
A company that enjoys the pass-through tax advantage of a partnership and the limited liability of a corporation.
How is a LLC created?
Created by
-> filing articles of organization with the state (including the LLC’s name, mailing address, and , if there are no members upon filing, a statement to that effect)
->does not come into existence until it has at least one member
-> some states apply doctrines of de facto corporation and corporation by estoppel if there was a good-faith effort to create an LLC
What is an LLC’s operating agreement?
The articles of organization only reflect an LLC’s existence, but an LLC may also adopt an operating agreement to govern business.
-> agreement can be oral, in a record, or implied by conduct.
-> statutory default provisions apply when the operating agreement is silent
-> default management arrangement is member-manager
What is the membership requirement of an LLC?
How do you become a new member to an LLC?
Minimum one member, no maximum number.
To become a new member requires the consent of all other LLC members (a transfer of a membership interest also requires the consent of all members).
What does the transfer acquire and not acquire through the transfer of membership to them?
The transferee only acquires the transferor’s right to share in the LLC’s profits and losses, NOT a right to participate in the LLC’s management.
What are the impacts of a termination of membership on the LLC?
Termination of membership does not automatically trigger a dissolution of the LLC
-> the LLC may elect to liquidate the fair value of that person’s interests.
How are allocations of profits and losses made with regards to members of the LLC?
Unless determined by an operating agreement, the allocations are made according to each member’s contributions to the LLC.
What rights do members of the LLC have?
They have inspection rights similar to SHs of Cs.
What style of management can an LLC be?
An LLC can be member-managed (direct management of the LLC by its members) OR manager-managed (centralized management of the LLC by one or more managers who need not be members).
When are members and managers generally not liable?
Members are generally not liable for the LLC’s obligations.
Managers are not personally liable for obligations incurred on behalf of the LLC.
When does the piercing of the veil render members liable?
Members may be liable if the veil is pierced due to:
-> undercapitalization
-> commingling of assets
-> confusion of business affairs
OR
-> deception of creditors
What are two theories courts use to pierce the veil?
Mere instrumentality test
-> members dominated the entity such that the LLC had no will of its own
-> members used that domination to commit a fraud or wrong
AND
-> the control and wrongful action proximately caused an injury
Unity of interest and ownership test
-> the LLC did not have an existence independent of the members because there was such a unity of interest and ownership between the entity and the members that the failure to pierce the veil would be unjust or inequitable
What can a credit obtain against a member’s LLC interest?
Creditors can obtain a charging order (judgment lien) against a member’s LLC interest, requiring the LLC to pay to the judgment debtor distributions that otherwise would be paid to the member; the operating agreement cannot alter this rule to the prejudice of third parties.
Who owes a duty of care and loyalty to the LLC and its members?
The members of a member-managed LLC and managers of manager-managed LLC.
What is included in the duties?
-> must account to the LLC for any benefit derived by the member related to the LLC’s business
-> refrain from dealing with the LLC on behalf of one having an adverse interest
AND
-> refrain form competing with the LLC
What rule is the duty of care to an LLC subject to?
Is a member or manager liable for simple negligence?
Subject to BJR
Not liable or simple negligence/
Are fiduciary waivers recognized in LLCs?
Yes.
May agree to specific activities that do not violate the duty of loyalty, as long as the agreement is not manifestly unreasonable.
Does a manager have the authority to bind the LLC?
Yes
Can a member dissociate themselves from the LLC?
What impact does this have on the LLC?
Member can withdraw at any time for any reason without written notice.
Withdrawal does not necessarily trigger dissolution and winding up.
When and for what reasons can direct and derivative suits be brought with regards to an LLC?
Direct
-> an action to enforce a member’s rights as a member under the operation agreement and the state LLC statute
-> there must be an actual or threatened injury that is not just a result of an LLC injury
Derivative
-> an action by a member on behalf of the LLC to enforce the rights of the LLC
-> must show that a demand was made or that demand would be futile
How can an LLC dissolve?
An LLC can resolve by
-> merging with another LLC or other business entity
-> the occurrence of various events (mutual consent of members, lack of members for 90 consecutive days, court order, or events provided in the operating agreement)
When can members seek involuntary dissolution?
Members may seek involuntary dissolution if a controlling member acts in away that is oppressive and directly harmful to the member seeking the order
-> action successful depending on whether the controlling member’s action violate member’s reasonable expectations
What must the LLC do when winding-up?
LLC must
-> discharge the LLC’s debts, obligations, or other liabilities
AND
-> settle and close the LLC’s activities, and marshal and distribute the LLC’s assets
-> may perform acts necessary or appropriate to the winding up
