LLCs Flashcards
LLC:
Limited Liability Company
Hybrid of Corporation and Parternship where owners have limited liability and partnership tax treament.
NOT a corporation.
A limited liability company (“LLC”) is a hybrid business organization between a corporation and a partnership that
(1) is taxed like a partnership (except for a single-member LLC),
(2) offers its owners (called members) the limited liability of shareholders of a corporation, and
(3) can be run like either a corporation or a partnership.
This is not a corporation, nor is it a partnership.
It is its own business form.
An LLC is treated as a separate legal entity distinct from its owners (called “members”).
• No shareholders, no partners - just members.
• No limit on the number of members as there would be in a Subchapter S corporation (a corporation that is taxed like a partnership under the tax code), and no one has to accept full personal liability for the organization’s debts, as would be required in a limited partnership. Although LLCs are governed by statute, LLC members may adopt operating agreements to control most aspects of the LLC’s business and management.
Note that the Revised Uniform Limited Liability Company Act of 2006 (“R.U.L.L.C.A.”) provides a default set of rules for LLCs.
FORMATION
***Dont worry about the details here…
An LLC is formed by filing a certificate of organization (or, in some states, articles of organization) with the secretary of state. The LLC must have at least one member.
Contents of Certificate
The information required in the certificate is minimal. It must include the following:
a. The name of the LLC
b. The address of the LLC’s registered office AND
c. The name and address of its registered agent
Name
The LLC’s name must include an indication that it is an LLC. In general, the name should contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.”
What is the doc that details the LLC
What can it do?
Operating Agreement.
The real detail on the operation and governance of an LLC is typically found in an operating agreement.
The operating agreement can displace almost all of the statutory provisions.
a. . May Alter Duties
The operating agmt may alter duties owed by members.
For example, the agreement may eliminate the duty of loyalty and alter the duty of care (except to authorize intentional misconduct or knowing violations of law) if doing so is not manifestly unreasonable.
Similarly, the operating agreement may not eliminate the contractual obligation of good faith and fair dealing, but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable.
Management and Operation
of LLC
Two structures:
• Member-managed LLC: LLC where members handle management of the LLC themselves
• Manager-managed LLC: LLC where managers, who may or may not be members, handle management.
Management of the LLC is presumed to be by all members.
Other management arrangements can be made (for example, management by outside managers), but they must be specified in the operating agreement.
Each member (or manager, if the LLC is manager-managed) has equal rights in the LLC’s management.
A majority vote of the members (or managers) is required to approve most (that is, ordinary business) decisions. Thus, consistent with general agency law principles, each member of a member-managed LLC has authority to bind the company to contracts apparently carrying on the ordinary business of the company, unless the member lacks actual authority to do so and the other party to the contract has notice
that the member lacks such authority. In a manager-managed LLC, only the manager(s) has (have) such authority. A unanimous vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement.
FINANCIAL RIGHTS
• Based on contribution
Although the R.U.L.L.C.A. is silent on the allocation of profits and losses among members (for tax purposes), it does provide that if an LLC makes any distribution to its members, the distribution must be made to the members in equal shares unless the operating agree- ment provides otherwise.
In most states, however, unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions. A member or transferee does not have a right to demand or receive a distribution from the LLC in any form other than money.
LIABILITY
Members and managers generally are not personally liable for the LLC’s obligations.
They have limited liability and can lose only the amount of their investments. (As always, though, members are liable for their OWN torts.)
However, courts may pierce the LLC veil of limited liability to reach the members’ and managers’ personal assets to satisfy LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation.
Failure to observe corporate-type formalities (for example, having meetings, recording minutes, etc.) will not be a ground for piercing the LLC veil.
FIDUCIARY DUTIES
EXAM: Look for who has management control when assigning fiduiary duties.
The fiduciary duties owed by a member (if member-managed) or a manager (if manager-managed) to the LLC and to its other members are the fiduciary duties of care and loyalty.
They must also discharge their duties and exercise any rights consistently with the contractual obligation of good faith and fair dealing.
Duty of Care: Protected by BUSINESS JUDGMENT RULE.
Members (or managers if manager-managed) must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interests of the LLC. Business judgment rule protection is provided, which effectively means that, despite the prior sentence, members (or managers if manager-managed) cannot be held liable for negligent decisions (but can be held liable for decisions tainted by gross negli- gence or worse).
Duty of Loyalty: treat with UTMOST FAIRNESS.
Pursuant to the duty of loyalty, a member (or manager if manager-managed) must: (1) account to and hold for the LLC any benefit they derive from the LLC’s activities or from the appropriation of an LLC opportunity; (2) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC (unless the transaction is fair to the LLC); and (3) refrain from competing with the LLC’s business. However, after disclosure of all material facts, all of the members may authorize or ratify a specific act by a member (or manager if manager-managed) that would otherwise violate the duty of loyalty.
Member-Managed vs. Manager-Managed LLC
As indicated above, in a member-managed LLC, members owe to each other and the LLC duties of care and loyalty.
Remember that the duties of loyalty and care are different for managers and members in a manager-managed LLC.
Although both members and managers must discharge their duties and exercise their rights in accordance with the contractual obligation of good faith and fair dealing, (1) only the managers are subject to the duties of loyalty and care discussed above; and (2) only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.
TRANSFERABILITY OF OWNERSHIP INTERESTS
Follows partnership rules for transferability-
Unanimouty needed for one to become a new member. unless otherwise in the op agmt.
Financial rights are unilaterally transferable
Management rights are not.
An assign- ment of a member’s interest in an LLC transfers only the member’s right to receive distributions. Management rights are not transferred.
DISSOCIATION OF LCC
Dissociation - leaving the LLC
A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member.
Generally, the events that cause dissociation of a partner in a partner- ship will also cause dissociation of a member of an LLC.
A wrongfully dissociating member may be liable to the LLC for damages.
DISSOLUTION OF LCC
Events Causing Dissolution
An LLC will be dissolved when any of the following events occurs:
(1) event/circumstance that the operating agreement states causes dissolution;
(2) the consent of all the members; or
(3) the passage of 90 consecutive days during which the LLC has no members.
(4) Judicial dissolution
Judicial Dissolution: A member may apply for judicial dissolution of the LLC.
A court may grant an application for judicial dissolution if:
a. The conduct of all or substantially all of the LLC’s activities is unlawful.
b. It is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement.
c. The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent.
d. The controlling members have acted or are acting in a manner that is OPPRESSIVE and was, is, or will be directly harmful to the member applying for dissolution.
Administrative Dissolution
The secretary of state may dissolve an LLC administratively when the LLC fails to submit a required fee or annual report. The LLC may apply for a reinstatement after correcting the problem. If reinstated, the LLC may resume its activities as if the administrative dissolution had never taken place.
Effect of Dissolution
An LLC that has been dissolved continues its existence but is not allowed to carry on any business except that which is appropriate to winding up its activities.
TAXATION OF LLC
• Taxed on “PASS-THROUGH” basis, NO entity-level tax.
pass-through treatment usually results in less taxes paid.
Partnerships and LLCs are taxed on a “pass-through” basis.
There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually DISTRIBUTED to the partners).
- This sucks, bc owner has to pay a lot of taxes on reported income from the LLC/partnership, even if the owner didnt get that income.
RECALL: corporation is subject to “double taxation.” The corporation pays taxes on its income, and the SHs pay taxes on that income again when and if it is distributed to them (as dividend).
RIGHTS TO INFORMATION
Member-Managed LLC
In a member-managed LLC, a member has a right to inspect and copy any record concerning the LLC’s activities, financial condition, and so on, material to the member’s rights and duties. An LLC and its members must automatically furnish such information that they know is material to the exercise of a member’s rights and duties, unless they reasonably believe the member already knows the informa- tion. The LLC and its members must furnish other information on a member’s demand unless the demand is unreasonable or improper.
Manager-Managed LLC
In a manager-managed LLC, the managers have the same right
to information and duty to furnish information as is discussed in 1., above. The members have a right to inspect and copy any record regarding the LLC’s activities, financial condition, and so on, as is just and reasonable if: (1) the member seeks the information for a purpose material to the member’s interest as a member; (2) the member makes a demand to the LLC describing with reasonable particularity the infor- mation sought and the purpose for seeking the information; and (3) the information sought is directly connected to the member’s purpose.
MEMBERS’ ACTIONS AGAINST THE LLC
A member who has been injured personally by his LLC can bring a direct action against the LLC to recover.
A member may also bring a derivative action on behalf of the LLC if they make a demand on the other members (or managers), unless demand would be futile.
For example, demand would be futile if a majority of the members/ managers were involved in the alleged wrong.
A derivative action may be maintained only by a person who is a member at the time the action is commenced and who remains a member while the action continues.
INDEMNIFICATION
Members of a member-managed LLC and managers of a manag- er-managed LLC have a right to be indemnified for debts, obligations, and other liabilities incurred in the course of their activities on behalf of the company, provided that they complied with the duties of loyalty and care, and they also have a right to be reimbursed for expenses they incur on the company’s behalf.
CHARGE OF TRANSFERABLE INTEREST (ATTACHMENT)
A judgment creditor of a member or transferee of a member may charge (attach) the transferable interest of the judgment debtor to satisfy the judgment.
