LLCs Flashcards
Mini Outline – LLCs
(1) LLC purpose
(2) LLC control & management
(3) LLC owner liability and rights
(4) LLC dissolution
LLC definition
An unincorporated association having one or more members, organized and operated under a state’s LLC statute (can be formed to conduct any type of business)
Treated like a corp. for limited liability purposes
Professional LLC
Organized for the sole purpose of rendering professional services and has members licensed or otherwise duly authorized individuals to render the
services
Organizing an LLC
Must file Articles of Organization with the secretary of state. Articles must generally include:
- Statement that the entity is an LLC;
- Name of the LLC;
- Address of LLC’s registered office and registered agent
Name requirement for LLC
Name must include “limited company,” “limited liability company,” or abbreviations LC or LLC (with or without periods)
Name may NOT imply association with government entity
Operating agreement for LLC
Operating Agreement – similar to a corp.’s bylaws and govern LLC’s internal affairs
Number of owners in LLC
One or more individuals or entities are required to form the LLC
Admitting members into LLC
May admit initial and subsequent members (other than assignees) only with the consent of all of the members (unless operating agreement says otherwise)
Assignees as members of LLC
Assignees may become members by consent of a majority of the remaining members (unless operating agreement says otherwise)
Member liability for loss
Generally, members are liable for losses up to the amount of contribution to the LLC
Member personal liability
Members are not personally liable unless court pierces the company veil
Flexibility of operating agreement
Members can enter into an operating agreement that sets forth how the LLC will be operated and how profits/losses will be shared
Member managed LLC
- members appoint a manager(s) to operate biz
- Each member has equal rights in management
- Members owe LLC and other members duties of loyalty and care
Duties of LLC managers
Managers may or may not be members. Managers owe duties of loyalty and care (similar to directors of a corp.)
Most states and ULLCA permit the operating agreement to alter fiduciary duties of managers or members
Manager tort duties
Managers owe a duty not to engage in grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law (some states reject gross negligence and use business judgment rule)
LLC owner liability
No member, manager, or agent of an LLC will have any personal obligation for LLC debts and obligations, but is liable for own conduct
Exception: Pierce the Company Veil: a court may pierce similar to corp. (alter ego and
inadequate capitalization)
LLC member suits
Members may bring direct and derivative actions
LLC derivative suits
Members must make a demand unless that demand would be futile because other members or managers have a financial interest or are
otherwise biased
Assignment of LLC interest
A member may assign all or part of economic interest in LLC (assignee
does not become a member or have management rights unless admitted)
LLC dissolution requirements
Under the ULLCA, an LLC is dissolved and must be wound up upon:
- event stated in operating agreement;
- consent of all members;
- no members for 90 consecutive days (unless within the 90 days a new member is admitted);
- application of a member and entry of a court order; or
- statement of administrative dissolution by secretary of state
Grounds for application of dissolution
o LLC’s activities/affairs are unlawful;
o Not reasonably practicable to carry on LLC activities in conformity with articles and operating agreement; or
o Managers or members in control have acted/will act in a manner that is illegal or fraudulent or have acted in a manner oppressive and directly harmful to applicant
LLC member liability for dissolution
LLC member have limited liability UNLESS proper procedures are not followed during dissolution, winding up, or a court pierces the company veil
If proper winding up procedure is not followed, court can enforce creditor’s claim against each member (proportionate to member’s share of the claim, up to amount of assets distributed to member during dissolution)
Notice of dissolution
Must provide notice of dissolution to creditors (includes explanation of how creditors can enforce claim)
