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
