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
