LLC Flashcards
Basic Components of an LLC
II. LIMITED LIABILITY COMPANY: statutory hybrid of traditional corporation & p’ship
A. Basic Components
- artificial jural person, created by registration w with Sec of State
- members are protected from personal liability just like corporations SH’s – piercing the corporate veil the same for LLC’s as corps
- LLC’s governed largely through operating agreement: K between members; more flexible in governance
- LLC’s can elect how they want to be taxed- p’ship (most), S Corp, or C corp
- elect whether to be member- or manager-managed
- elect whether to be at-will or for a term
The Operating Agreement
B. The Operating Agreement: can vary almost all provisions of the statute, so highly customized governance
- is a comprehensive governance agreement between the members
- doesn’t have to be in writing! (there’s always an operating agreement just not always on in writing); if not in writing, look to:
a) agreements between members (unwritten)
b) operation over time (course of operation)
c) uncontradicted statutory default rules
Restrictions on Flexibility of Operating Agreement
- Operating agreement CANNOT:
a) unreasonably restrict members’ access to info. or records
b) eliminate the duty of loyalty to managers or managing members
c) unreasonably reduce the duty of care of managers or managing members
d) eliminate the obligation of good faith and fair dealing
e) vary the right to expel a member by judicial determination
Organization of LLC
C. Organization
- LLC begins by filing the Articles of Organization with the Secretary of State; must include:
a) the LLC’s name
b) the address of its initial designated office
c) the name and street address of its initial agent for process
d) the name and address of each organizer
e) whether LLC is to be at will or a term company (if for a term, term must be specified)→ at will is the statutory default
f) whether LLC is to be manager managed or member managed→ member-managed is the statutory default
g) whether one or more members are to be personally liable for the LLC’s obligations
- each LLC must maintain an agent and street address for process, registered with the Secretary of State
Member Managed LLCs
- Member-Managed: statutory default: like a partnership because every member has the apparent authority to bind the company in the ordinary course of business
a) if a member leaves the company/dissociates, has apparent authority to bind the company for two years unless a statement of dissociation is filed with the Secretary of State, in which case the authority expires 90 days after filing
b) any member may sign and deliver any instrument affecting the co’s interest in real property
c) members have equal rights in management, majority rules- can’t make decisions requiring unanimous consent of members
Manager Managed LLCs
a) members have no authority to bind the company, only have to approve the list of things requiring member approval below;
(1) members are NOT agents solely by reason of being members, however it is possible for them to become agents or servants of the company based on the usual rules of agency
b) managers have apparent authority to bind the company in the ordinary course of business, unless they act outside their actual authority and the third party knew or had notice of the limit
(1) any manager can sign and deliver any instrument affecting the co’s interest in real property
c) managers have equal rights in management, majority rules- can’t make decisions requiring unanimous approval of members
For Term or at Will
E. For a term or At-will
- At-will: statutory default: a member can withdraw or dissociate at any time;
- For a term: member can’t dissociate prior to the expiration of its term without the dissociation being wrongful;
Corporate Veil - LLC
F. LIABILITY past exam question
1. same corporate veil as a corporation, EXCEPT: failure of an LLC to follow company formalities is not a ground for piercing the veil
- unauthorized acts may render the member or manager liable to the company
- Respondeat Superior: the LLC is vicariously liable for all actionable conduct of a member or manager acting either in the ordinary course of business or with the authority of the company
LLC - K Liability and Tort Liability
- LLC – Contract Liability
a) A member of an LLC is not personally liable for the obligations of an LLC unless they make themselves liable in some way, such as by committing a tort or by acts leading a third party reasonably to rely on their personal credit instead of or in addition to the credit of the company. - LLC - Tort Liability
a) An LLC is vicariously liable for actionable conduct of a member or manager acting either in the ordinary course of business or with the authority of the company. The member is liable if they are the tortfeasor.
Relations of Members to Each Other and to the LLC
G. Relations of Members to Each Other & to the LLC
- becoming a member: requires unanimous approval (unless otherwise provided in Articles)
a) consideration for membership = contribution & sufficiency of value of contribution must be consented to by ALL members - members who work for LLC: are not paid (stat. default)
Matters Requiring Unanimous Approval of the Members
H. Matters requiring unanimous approval of members:
- amendment of operating agreement
- ratification of acts that would otherwise violate the duty of loyalty
- amendment of the articles
- compromise of obligation to make a contribution
- making interim distributions, including redemption of an interest
- admission of a new member
- use of company assets to redeem a charging order
- dissolution
- merger
- disposition of all assets outside the ordinary course
Distributions
I. Distribution: any value paid to a member because of that person’s status as a members
- types:
a) interim distributions: distributions of profits while carrying on business
b) redemption of a membership
c) payment in liquidation - distribution can’t be made if
a) equity insolvency test: the company would not be able to pay its debts as they become due in the ordinary course of business, or
b) balance sheet test: the company’s total assets would be less than its total liabilities - don’t have to use GAAP (is a good idea); can use any accounting method or valuation reasonable in the circumstances
Access to Books and Records
J. Members have unlimited access to company books and records
Duties of Members
K. Duties
- Members in member-managed & Managers in manager-managed: 3 –part duty of loyalty
a) account to the company for any profit made in the course of the company’s business or using the company’s property
b) not to compete with the company
c) not to deal with the company as, or on behalf of, an adverse party - Members in a manager-managed LLC owe no duties to the company or its members solely by reason of being a member (may if they exercise the power of a manager)
Member Distributional Interest
L. Members have no transferable interest in the property of the company
- have a “distributional interest” which is personal property and can be transferred, giving assignee right to distributions
- this does not necessarily make assignee a member, unless all members agree or operating agreement provides for it, only get right to receive distributions & seek judicial dissolution
- distributions can be attached by a charging order, which can be redeemed by any member, or if permitted by the operating agreement, by the company
- if a member dies, estate because owner of members distributional interest (not a member)
