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LLC Flashcards

1
Q

3 Characteristics/Benefits of LLCs

A
  • Limited liability for the obligations of the
    company
  • Pass-through tax treatment
  • Freedom to contractually arrange the internal operations
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2
Q

LLC

Charter

A

Certificate of Formation
Articles of Organization
Certificate of Organization

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3
Q

LLC

Governing Document

A

Operating Agreement
or LLC Agreement

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4
Q

Name of the owners

Partnership

A

parters (general or limited)

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5
Q

Name of the owners

Corporation

A

Shareholders or stockholders

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6
Q

Name of the owners

LLC

A

Members

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7
Q

LLC

Charter Document includes

A

Name of the LLC
* DE - Must contain Limited Liability Company or the LLC abbreviation
* RULLCA – Must contain Limited Liability Company, Limited Company, LLC or LC
* Can’t take someone else’s name

Address of the registered office
* In DE, the agent’s business office address to be identical to the LLC’s registered office address.

Name and address of registered agent

Will be signed

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8
Q

LLC

Miscellaneous Formation Provisions

A

Comes into existence with the certificate/articles are filed.
* Substantial compliance with formation statute in DE

You can have a single member LLC

You can convert from another entity type.

Operating/LLC agreements are required in DE
* Backdating is your friend
* Operating Agreements technically can be oral. They should not be.

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9
Q

If the certificate/articles and operating/LLC agreements conflict:

A
  • Most states don’t address it
  • NY – certificate
  • RULLCA –§ 112(d) makes the operating agreement the governing document for
    disputes among the “insiders” of the firm (members, managers, and
    transferees), while the certificate of organization controls for disputes involving
    “outsiders” of the firm
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10
Q

LLC: Role of Contract and General
Governance

A

“It is the policy of this chapter to
give the maximum effect to the
principle of freedom of contract
and to the enforceability of limited
liability company agreements

your on your own kid, llc can face it

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11
Q

LLC

2 Options for Governance

A
  • Member Managed
  • Manager Managed
    (Members can be elected as Managers)
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12
Q

LLC Multiple Classes

A
  • Some LLC statutes specifically authorize multiple classes of membership interests.
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13
Q

DE Authority

A

Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company

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14
Q

LLC

power of members

A

The Members shall have the power to exercise any and all rights or powers granted to Members pursuant to the express terms of this
Agreement and the Delaware Act. Except as otherwise specifically provided by this
Agreement or required by the Delaware Act, no Member, in its capacity as a
Member, shall have the power to act for or on behalf of, or to bind, the Company

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15
Q

DE Authority

Generally, officers will be appointed, and they will

A

sign on behalf of the LLC
- If no officers are appointment, managers or members (as applicable) would sign.

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16
Q

A member is not an agent of a limited liability company solely by reason of

A

being a member

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17
Q

Member-managed LLC

Actual authority – look at operating agreement

A
  • Single member (where there are multiple) doesn’t have actual authority outside the ordinary course
  • Single member (where there are multiple) has authority in the ordinary course UNLESS reason to know other members might disagree
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18
Q

Member-managed LLC

Apparent Authority

A
  • 3rd party knows or has reason to know about the management structure
  • Being a member alone doesn’t establish apparent authority
  • Look to course of dealing
19
Q

Manager-managed LLC

Actual authority – look at operating agreement

A
  • Look at management contracts
  • Course of dealing
  • Single manager (where there are multiple) **doesn’t have **actual authority outside
    the ordinary course
  • Single manager (where there are multiple) has authority in the ordinary course UNLESS reason to know other managers might disagree
20
Q

Manager-managed LLC

Apparent

A
  • 3rd party knows or has reason to know about the management structure
  • Being a manager may establish apparent authority by virtue of position
  • Look to course of dealing
21
Q

LLC- Documentation of Decisions

Written consent

A

DE - Unless the operating/LLC agreement says
otherwise, written consents of the managers or
members are allowed if they contain needed
votes (DLLCA § 18-302 and 18-404)

22
Q

LLC - Documentation of Decisions

Resolution at a meeting

A

Always allowed

23
Q

LLC

Allocations

A
  • Could be set up to allocate profits and loss based on what was put into the LLC (contributions).
  • Could be equal allocations per member.
  • Practically will be set out in the LLC/operating
    agreement.
24
Q

LLC

Allocations vs. Distributions

A
  • Allocations are what is on your score card. Distributions is when $ comes out.
  • If profits are allocated to a member, the member has to pay taxes on that regardless of if distributions are made.
    (Add a provision in the LLC/operating agreement
    requiring the company to make distributions to cover
    tax payments)
25
# LLC Protections for Creditors
* If you commit to make a contribution, you have to. (DLLCA § 18-502; RULLCA § 403) * You can’t receive distributions that would make the LLC insolvent. (DLLCA § 18-607; RULLCA § 406)
26
To see LLC authoruty look at the
operating agreement
27
# LLC General Rules on Liability
Members and managers are generally not liable for the obligations of the LLC solely because they are members/managers. Obligations, in an individual capacity, aren’t protected from the LLC. - Undisclosed/unidentified principal problems cans still exist * Everyone is still liable for their own torts
28
Piercing the LLC Veil
- (1) disregard economic separateness (doesn’t include failure to follow internal formalities) * (2) Inadequate capitalization at the outset or draining too much out * (3) Prevent fraud and achieve fairness
29
Fiduciary Duties (Member Managed)
Members owe the LLC and the other members fiduciary duties of loyalty and care and the contractual obligation of good faith and fair dealing (RULLCA § 409(a))
30
# Fiduciary Duties (Member Managed) Duty of Loyalty
account to the LLC for property, profit or benefits received; don’t deal as an adverse party unfairly and don’t compete with the LLC * Transactions or acts can be cleansed of what would otherwise be violations of the Duty of Loyalty by approval of (default is all but could be less) members after disclosure of material facts (RULLCA § 409(f)) * Can have interested transactions if fair
31
# Fiduciary Duties (Member Managed) Duty of Care
Subject to the business judgment rule, care that a person in a like position would reasonably exercise
32
Fiduciary Duties (Manager Managed)
Managers owe the LLC and the members fiduciary duties of loyalty and care and the contractual obligation of good faith and fair dealing * Members in manager-managed LLCs have no fiduciary duties to the LLC or their fellow members solely by reason of being a member. * A controlling member, or a member of a controlling group, can be found to have fiduciary obligations Members have the obligation of good faith and fair dealing (Default is all) members can cleanse violations of the duty of loyalty of managers
33
RULLCA Disclosure
LLC must furnish to a member in a member-managed or “without demand” * any information concerning the company’s activities, financial condition and other circumstances which the company knows AND * is material to the proper exercise of the member’s rights and duties. LLC must furnish to a member in a member-managed“ on demand” * Other information concerning the company’s activities, financial condition and other circumstances UNLESS the demand is improper or unreasonable.
34
# LLC DE Fiduciary Duties Default
* Default is that there are duties of care and loyalty and an obligation of good faith and fair dealing for members (in a member-managed) and managers (in a manager-managed).
35
# LLC Duty of care req
* Care of a reasonably prudent person * Business judgment rule can apply to substance of a decision
36
# LLC duty of loyalty req
* Usurpation of opportunity * Conflict of interest * Competition * Use of company’s assets
37
# Waiver of Fiduciary Duties - llc Duty of Loyalty
* Can restrict or eliminate parts of the duty of loyalty in the operating agreement **if not manifestly unreasonable** (RULLCA §110 (c)(4) and (d)(1)) * You can specify what activities do not violate the duty of loyalty **if not manifestly unreasonable** (RULLCA §110 (d)(2))
38
# Waiver of Fiduciary Duties duty of care
Can alter the duty of care **if not manifestly unreasonable** and **doesn’t authorize a knowing violation of law **(RULLCA §110
39
# RULLCA Waiver of Fiduciary Duties Good Faith
* **Can’t eliminate ** the good faith and fair dealing obligation (RULLCA §110 (c)(5) (d)(5)) * You can **prescribe standards** by which to measure the obligation of good faith and fair dealing if the standards are not manifestly unreasonable (RULLCA §110 (d)(5))
40
# RULLCA Waiver of Fiduciary Duties Disclosure
Can’t unreasonably restrict access to books and records
41
DE and NC LLC Waiver of Fiduciary Duties
* Can completely eliminate duty of loyalty and care in the Operating Agreement. * Have to keep the obligation of good faith and fair dealing
42
3 corp tools that apply to llc
* Insurance * Indemnification * Exculpation
43
Exculpation and Indemnity under RULLCA
The operating agreement can eliminate or limit a member/manager’s liability to the LLC and/or member for $ damages OR indemnify except for: * (1) breach of the duty of loyalty * (2) financial benefit received * (3) improper distributions * (4) intentional infliction of harm on the LLC or a member * (5) intentional violation of criminal law
44
# LLC Exculpation under DE The operating agreement can eliminate or limit a member/manager’s liability for breaches of duty except
for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.

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