Other Unincorporated Forms: Limited Liability Companies Flashcards
1
Q
LLC - Basic Concept
A
- limited liability company
- hybrid business org 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
2
Q
Benefits of LLC
A
- treated as a separate legal entity distinct from its “members” (owners)
- no limit on the number of members as there would be in a Subchapter S corporation (the kind of corporation that’s taxed like a partnership)
- AND no one has to accept full personal liability for the organization’s debts, as would be required in a limited partnership
3
Q
What rules are LLCs governed by?
A
- governed by statute
-> Revised Uniform Limited Liability Company Act of 2006 provides default rules - BUT members may adopt operating agreements to control most aspects of business + management
4
Q
Formation
A
- LLC formed by filing certification of organization w/ secretary of state
- must have at least one member
5
Q
Contents of Certificate
A
Must include:
- name of the LLC
- address of the LLC’s registered office AND
- name and address of its registered agent
6
Q
Name Requirement
A
- LLC’s name must include indication that it is an LLC
- name should generally contain the words “limited liability company” or LLC or L.L.C.
7
Q
Operating Agreement
A
- typically contains the real details on op + governance of an LLC -> can displace almost all statutory provisions
- may alter duties owed by members
-> can eliminate duty of loyalty + alter duty of care if doing so is not manifestly unreasonable
->can’t eliminate contractual obligation of good faith + fair dealing, but may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable
8
Q
LLC Management and Operation
A
- management presumed to be by all members
-> other management arrangements can be made, but must specify in operating agreement - each member has equal rights in management
- majority vote of members is required to approve most ordinary business decisions
- each member has authority to bind the company to Ks apparently carrying on in the ordinary business of the company, unless the member lacks actual authority to do so + the other party to the contract has notice that the member lacks such authority
- unanimous vote of members is required to approve extraordinary business decisions (includes amending op agreement)
9
Q
Financial Rights
A
- under RULLCA, if an LLC makes any distribution to its members, that distribution must be made in equal shares unless operating agreement provides otherwise
- BUT in most states, unless otherwise agreed, profits + losses + distributions are allocated on the basis of contributions
- member or transferee does not have a right to demand or receive a distribution from the LLC in any form other than money
10
Q
Liability
A
- members + managers generally are not personally liable for LLC’s obligations -> have limited liability + can lose only the amount of their investments
- BUT courts can pierce LLC veil to reach personal assets to satisfy LLC obs under circs similar to those under which courts would piece a corporate veil
-> failure to observe corporate type formalities though is not grounds for piercing LLC veil
11
Q
Fiduciary Duties
A
- duties of care + loyalty -> owed by a member or a manager to LLC and its other members
- must also discharge duties + exercise rights consistently w/ contractual obligation of good faith and fair dealing
12
Q
Duty of Care
A
- members 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 -> members cannot be held liable for negligent decisions (would need gross negligence or worse)
13
Q
Duty of Loyalty
A
Member must:
1) account to + hold for LLC any benefit they derive from the LLC’s activities or from the appropriation of an LLC opportunity
2) refrain from dealing w/ 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 that would otherwise violate the duty of loyalty
14
Q
Duty of Loyalty - Member-Managed vs. Manager-Managed LLC
A
- in a member-managed LLC, members owe to each other and the LLC duties of care + loyalty
- for manager-managed LLC, both members + managers must discharge duties + exercise rights in accordance w/ contractual obs of good faith + fair dealing BUT:
1) only managers are subject to duties of loyalty + care
2) only members may authorize or ratify an act by a manager that would otherwise violate duty of loyalty
15
Q
Transferability of Ownership Interests
A
- partnership rule applies w/ respect to the transferability of ownership in the LLC -> financial rights are unilaterally transferable but management rights aren’t
- assignment of a member’s interest in an LLC transfers only the member’s right to receive distributions
-> management rights aren’t transferred - one can become a member only w/ the consent of all members or as provided in the operating agreement
16
Q
Dissociation
A
- person has power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member
- generally, events that cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC
- a wrongfully dissociating LLC member may be liable to the LLC for damages
17
Q
Evenets Causing Dissolution
A
LLC will be dissolved when any of the following occurs:
1) an event or 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
18
Q
Judicial Dissolution
A
- member may also apply for judicial dissolution of the LLC
A court may grant an application for judicial dissolution if:
- the conduct of all or substantially all of the LLC’s activities is unlawful
- it is not reasonably practicable to carry on the company’s activities in conformity w/ the certificate of organization + operating agreement
- the controlling members have acted/are acting/will act in a manner that is illegal or fraudulent
- controlling members have acted/are acting in a manner oppressive + was, is or will be directly harmful to the member applying for dissolution
19
Q
Administrative Dissolution
A
- secretary of state may dissolve an LLC administratively when the LLC fails to submit a required fee or annual report
- LLC may apply for reinstatement after correcting the problem
- if reinstated, the LLC may resume its activities as if the administrative dissolution had never taken place
20
Q
Effect of Dissolution
A
- 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
21
Q
Barring Claims Against the LLC
A
- a claim can be asserted against a dissolved LLC, even if the claim doesn’t arise until after dissolution, to the extent of the LLC’s undistributed assets
- if the assets have been distributed to the members, a claim can be enforced against each member to the extent of the member’s proportionate share of the claim or to the extent of the assets distributed to him, whichever is less
- a member’s total liability for creditor claims may not exceed the total amount of assets distributed to him after dissolution
- an LLC can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim
- the time for filing unknown claims can be limited to 5 yrs by publishing notice of the dissolution in a newspaper in the county where the LLC’s known place of business is located
22
Q
Taxation
A
- partnerships + LLCs are taxed on a “pass-through” basis -> usually results in less taxes
- no entity-level tax
-> instead, business income is passed-through to the owners + reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners - contrasts w/ corporations (subject to “double taxation” - pays taxes on income + shareholders pay taxes again when + if distributed to them)
23
Q
Rights to Info - Member-Managed LLC
A
- member has right to inspect + copy any record concerning the LLC’s activities, financial condition, and so on, material to the member’s rights + duties
- an LLC + its members must automatically furnish such info that they know is material to the exercise of a member’s rights + duties, unless they reasonably believe the member already knows the info
- LLC + its members must furnish other info on a member’s demand unless the demand is unreasonable or improper
24
Q
Rights to Info - Manager-Managed LLC
A
- managers have same right to info + duty to furnish info as members do in a member-managed LLC
- members have a right to inspect + copy any record regarding the LLC’s activities, financial condition, etc as is just + reasonable if:
1) the member seeks the info for a purpose material to the member’s interest as a member
2) the member makes a demand to the LLC describing w/ reasonable particularity the info sought + purpose for seeking the info AND
3) the info sought is directly connected to the member’s purpose
25
Q
Member’s Actions Against the LLC
A
- member who has been injured personally by his LLC can bring a direct action against the LLC to recover
- can also bring a derivative action on behalf of the LLC if they make a demand on the other members, unless demand would be futile (ex: if majority of members were involved in the wrongdoing)
-> can be maintained only by a person who is a member at the time the action is commenced + remains a member while the action continues
26
Q
Indemnification
A
- members of a member-managed LLC + managers of a manager-managed LLC have a right to be indemnified for debts, obs, + 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
- also have a right to be reimbursed for expenses they incur on the company’s behalf
27
Q
Charge of Transferable Interest
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
28
Q
Pros of LPCs and LLCs
A
- protect all owners from liability for obs of the business
- allow the owners to contract around almost all statutory provisions
- allow all owners to participate in management
- provide pass-through tax treatment
