BUS-107 Contemporary Business Law Ch. 30
articles of termination
The documents that are filed with the secretary of state to terminate an LLC as of the date of filing or upon a later effective date specified in the articles.
articles of organization
The formal documents that must be filed at the secretary of state's office of the state of organization of an LLC to form the LLC. Some states require at least two members to organize an LLC. In states where an LLC may be organized by only one member, sole proprietors can obtain the benefit of the limited liability shield of an LLC. The articles of organization may set forth provisions from the members' operating agreement and any other matter not inconsistent with law.
articles of limited liability partnership
The formal documents that must be filed at the secretary of state's office of the state of organization of an LLP to form the LLP. An LLP may do business in other states, however. To do so, the LLP must register as a foreign LLP in any state in which it wants to conduct business. Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. This requirement guarantees that injured third parties will have compensation to recover for their injuries and is a quid pro quo for permitting partners to have limited liability.
What is the members' limited liability?
The general rule is that members of an LLC are not personally liable to third parties for the debts, obligations, and liabilities of an LLC beyond their capital contribution. Members have limited liability. The debts, obligations, and liabilities of an LLC, whether arising from contracts, torts, or otherwise, are solely those of the LLC. *The failure of an LLC to observe the usual company formalities is not grounds for imposing personal liability on the members of the LLC [ULLCA]. For example, if the LLC does not keep minutes of the company's meetings, the members do not become personally liable for the LLC's debts. EXAMPLE: Jasmin, Shou-Yi, and Vanessa form an LLC, and each contributes $25,000 in capital. The LLC operates for a period of time, during which it borrows money from banks and purchases goods on credit from suppliers. After some time, the LLC experiences financial difficulty and goes out of business. If the LLC fails with $500,000 in debts, each of the members will lose her capital contribution of $25,000 but will not be personally liable for the rest of the unpaid debts of the LLC.
What actions of an LLC can not be delegated to managers but must be voted on by all members?
(1) amending the articles of organization, (2) amending the operating agreement, (3) admitting new members, (4) consenting to dissolve the LLC, (5) consenting to merge the LLC with another entity, (6) selling, leasing, or disposing of all or substantially all of the LLC's property
How can a term LLC be continued?
1) The members of the LLC may vote prior to the expiration date to continue the LLC for an additional specified term. This requires the unanimous vote of all the members and the filing of an amendment to the articles of organization with the Secretary of State, stating this fact. 2) Absent the unanimous vote to continue the term LLC, the LLC may be continued as an at-will LLC by a simple majority vote of the members of the LLC
statement of disassociation
A document filed with the secretary of state that gives constructive notice that a member has disasso- ciated from an LLC. Otherwise for two years after a member disassociates himself or herself from an LLC that continues in business, the disassociating member has apparent authority to bind the LLC to contracts in the ordinary course of business except to parties who either (1) know of the disassociation or (2) are given notice of disassociation.
certificate of interest
A document that evidences a member's ownership interest in an LLC. The certificate of interest acts the same as a stock certificate issued by a corporation.
(fiduciary) duty of care
A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC not to engage in (1) a known violation of law, (2) intentional conduct, (3) reckless conduct, or (4) grossly negligent conduct that injures the LLC. This duty is a limited duty of care because it does not include ordinary negligence. Thus, if a covered member or manager commits an ordinarily negligent act that is not grossly negligent, he or she is not liable to the LLC. EXAMPLE: Charlene is a member of a member-managed LLC. While engaging in LLC business, Charlene is driving an automobile and accidentally hits Zubin, a pedestrian, and severely injures him. Under agency theory, Zubin sues the LLC and recovers $1 million in damages. If the court determines that Charlene was ordinarily negligent when she caused the accident—for example, she was driving the speed limit and did not see Zubin because the sun was in her eyes—she will not be liable to the LLC for any losses caused to the LLC by her ordinary negligence. If instead the court determines that Charlene was driving 65 mph in a 35 mph zone and thus was grossly negligent, Charlene is liable to the LLC for the $1 million it was ordered to pay Zubin.
(fiduciary) duty of loyalty
A duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC to be honest in his or her dealings with the LLC and to not act adversely to the interests of the LLC. EXAMPLE: Ester, Yi, Maria, and Enrique form the member-managed LLC Big.Business.com, LLC, which conducts online auctions over the Internet. Ester secretly starts a competing business to conduct online auctions over the Internet. Ester is liable for breaching her duty of loyalty to the LLC with Yi, Maria, and Enrique. Ester is liable for any secret profits she made, and her business will be shut down. EXAMPLE: In the preceding example, suppose that Ester, Yi, Maria, and Enrique designated their LLC as a manager-managed LLC and named Ester and Yi managers. In this case, only the managers owe a duty of loyalty to the LLC, but nonmanager members do not. Therefore, Ester and Yi, the named managers, could not compete with the LLC; Maria and Enrique, nonmanager members, could compete with the LLC without any legal liability.
What is the default profit sharing arrangement for an LLC unless otherwise specified in the articles of organization or in their operating agreement?
A member has the right to an equal share in the LLC's profits. Profits and losses from an LLC do not have to be distributed in the same proportion. EXAMPLE: Lilly and Harrison form an LLC. Lilly contributes $75,000 capital, and Harrison contributes $25,000 capital. They do not have an agreement as to how profits are to be shared. If the LLC makes $100,000 in profits, under the ULLCA, Lilly and Harrison will share the profits equally—$50,000 each. To avoid this outcome, Lilly and Harrison should agree in their operating agreement how they want the profits to be divided.
distributional interest
A member's ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC. Unless otherwise provided in the operating agreement, a transfer of an interest in an LLC does not entitle the transferee to become a member of the LLC or to exercise any right of a member. A transfer entitles the transferee to receive only distributions from the LLC to which the transferor would have been entitled. A transferee of a distributional interest becomes a member of the LLC only if it is so provided in the operating agreement or if all the other members of the LLC consent. EXAMPLE: Cleveland, Heather, and Archibald are members of the Boston Tea Party LLC. Each owns a one-third interest in the LLC, and the members agree to divide the distributions equally in one-third portions. The LLC's operating agreement does not provide that a transferee of a distributional interest will become a member. Cleveland sells his one-third interest to Theodore. The members do not consent to allow Theodore to become a mem- ber. The LLC makes $99,999 in profits. Theodore is entitled to receive one-third of the distributions ($33,333). Theodore is not a member of the LLC, however. A transferor who transfers his or her distributional interest is not released from liability for the debts, obligations, and liabilities of the LLC.
member
A person who has an ownership interest in a limited liability company (some states refer to owners of LLCs as shareholders).
tortfeasor
A person who intentionally or unintentionally (negligently) causes injury or death to another person. A person liable to persons he or she injures and to the heirs of persons who die because of his or her conduct.
limited liability partnership (LLP)
A special form of partnership in which all partners are limited partners, and there are no general partners. All the partners who all have limited liability stand to lose only their capital contribution if the partnership fails. EXAMPLE: Suppose Shou-Yi, Patricia, Ricardo, and Namira, all lawyers, form an LLP called Shou-Yi, Namira LLP to provide legal services. While providing legal services to the LLP's client Multi Motors, Inc., Patricia commits legal malpractice (negligence). This malprac- tice causes Multi Motors, Inc., a huge financial loss. In this case, Multi Motors, Inc., can sue and recover against Patricia, the negligent party, and against Shou-Yi, Namira LLP. Shou-Yi, Ricardo, and Namira can lose their capital contribution in Shou-Yi, Namira LLP but are not personally liable for the damages caused to Multi Motors, Inc. Patricia is personally liable to Multi Motors, Inc., because she was the negligent party.
What is the liability of a tortfeasor who is a member of an LLC and commits the tort in the course of doing business?
A tortfeasor is personally liable to persons he or she injures and to the heirs of persons who die because of his or her conduct. This rule applies to members and managers of LLCs. Thus, if a member or a manager of an LLC negligently causes injury or death to another person, he or she is personally liable to the injured person or the heirs of the deceased person.
articles of amendment
Amendment to the articles of organization that can filed at any time with the Secretary of State.
How is an LLC taxed?
An LLC is taxed as a partnership unless it elects to be taxed as a corporation. Thus, an LLC is not taxed at the entity level, but its income or losses "flow through" to the members' individual income tax returns.
term LLC
An LLC that has a specified term of duration. The duration of a term LLC may be specified in any manner that sets forth a specific and final date for the dissolution of the LLC. EXAMPLE: Periods specified as "50 years from the date of filing of the articles of organizations" and "the period ending January 1, 2050" are valid to create a term LLC.
at-will LLC
An LLC that has no specified term of duration. This is the default - an LLC is an at-will LLC (i.e., with no specified term) unless it is designated as a term LLC and the duration of the term is specified in the articles of organization
operating agreement
An agreement entered into among members that governs the affairs and business of the LLC and the relations among members, managers, and the LLC. The operating agreement may be amended by the approval of all members unless otherwise provided in the agreement. The operating agreement and amendments may be oral but are usually written.
limited liability company (LLC)
An unincorporated business entity that combines the most favorable attributes of general partner- ships, limited partnerships, and corporations. LLCs are treated as artificial persons.
Member-managed LLC
Default LLC unless otherwise indicated in the articles of organization. In this type of LLC, the members of the LLC have the right to manage the LLC. In a member-managed LLC, each member has equal rights in the management of the business of the LLC, regardless of the size of his or her capital contribution. Any matter relating to the business of the LLC is decided by a majority vote of the members. EXAMPLE: Allison, Jaeson, Stacy, Lan-Wei, and Ivy form North West.com, LLC. Allison contributes $100,000 capital, and the other four members each contribute $25,000 capital. When deciding whether to add another line of products to the business, Stacy, Lan-Wei, and Ivy vote to add the line, and Allison and Jaeson vote against it. The line of new products is added to the LLC's business because three members voted yes, while two members voted no. It does not matter that the two members who voted no contributed $125,000 in capital collectively versus $75,000 in capital contributed by the three members who voted yes.
Basically a non-manager member of a manager-managed LLC is treated equally to a shareholder in a corporation.
EXAMPLE: Felicia is a member of a 30-person manager-managed LLC that is engaged in buying, developing, and selling real estate. Felicia is not a manager of the LLC but is just a member-owner. If a third party approaches Felicia with the opportunity to purchase a large and valuable piece of real estate that is ripe for development, and the price is below fair market value, Felicia owes no duty to offer the opportunity to the LLC. She may purchase the piece of real estate for herself without violating any duty to the LLC.
foreign LLC
LLC formed in one state but doing business in another state. The LLC must register as a foreign LLC in any state in which it wants to conduct business.
Uniform Limited Liability Company Act (ULLCA)
LLC law (guidance) issued by the National Conference of Commissioners on Uniform State Laws in 1996. Now there's the Revised Uniform Limited Liability Company Act (RULLCA) which was written in 2006.
Who has the authority to bind an LLC to contracts in a manager-managed LLC?
In a manager-managed LLC, the managers have authority to bind the LLC to contracts, but nonmanager members cannot bind the LLC to contracts. EXAMPLE: Alexis, Derek, Ashley, and Sadia form an LLC. They designate the LLC as a manager-managed LLC and name Alexis and Ashley as the managers. Alexis, a manager, enters into a contract to purchase goods from a supplier for the LLC. Derek, a nonmanager member, enters into a contract to lease equipment on behalf of the LLC. The LLC is bound to the contract entered into by Alexis, a manager, but is not bound to the contract entered into by Derek, a nonmanager member.
Who has the authority to bind an LLC to contracts in a member-managed LLC?
In a member-managed LLC, all members have agency authority to bind the LLC to contracts. EXAMPLE: If Theresa, Artis, and Yolanda form a member-managed LLC, each one of them can bind the LLC to a contract with a third party such as a supplier, purchaser, or landlord.
Manager-managed LLC
In this type of LLC, the members designate a manager or managers to manage the LLC, and by doing so, they delegate their management rights to the manager or managers, designated manager or managers have the authority to manage the LLC, and the members no longer have the right to manage the LLC unless otherwise provided in the operating agreement. This is designated in the articles of organization or the operating agreement. It is NOT the default. In a manager-managed LLC, each manager has equal rights in the management and conduct of the company's business. Any matter related to the business of the LLC may be exclusively decided by the managers by a majority vote of the managers. A manager must be appointed by a vote of a majority of the members; managers may also be removed by a vote of the majority of the members.
WINDING UP of an LLC
Involves preserving and selling the assets of the LLC and distributing the money and property to creditors and members.
What constitute capital contributions to an LLC?
It may be in the form of money, personal property, real property, other tangible property, intangible property (e.g., a patent), services performed, contracts for services to be performed, promissory notes, or other agreements to contribute cash or property. A member's obligation to contribute capital is not excused by the member's death, disability, or other inability to perform. If a member cannot make the required contribution of property or services, he or she is obligated to contribute money equal to the value of the promised contribution. The LLC or any creditor who extended credit to the LLC in reliance on the promised contribution may enforce the promised obligation.
What is the default distribution of losses for an LLC unless otherwise specified in the articles of organization or in their operating agreement?
Losses from an LLC are shared equally unless otherwise agreed. Profits and losses from an LLC do not have to be distributed in the same proportion. EXAMPLE: A member who has the right to a 10 percent share of profits may be given in the operating agreement the right to receive 25 percent of the LLC's losses.
What is the liability of managers of LLC's?
Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage. EXAMPLE: An LLC that is engaged in real estate development hires Sarah Goldstein, a non-member, to be its president. Sarah, while acting within the scope of her LLC authority, signs a loan agreement whereby the LLC borrows $1 million from a bank for the construction of an office building. If the LLC subsequently suffers financial difficulty and defaults on the bank loan, Sarah is not personally responsible for the loan. The LLC is liable for the loan, but Sarah is not because she was acting as the manager of the LLC.
Is a nonmanager member of an LLC entitled to remuneration for services performed for the LLC?
No, except for winding up the business of the LLC.
Does a manager have to be a member of the LLC?
No. A manager of an LLC may be a member of an LLC or a nonmember.
limited liability partnership codes
Regulate the formation, operation, and dissolution of LLPs. The state legislature may amend its LLP statutes at any time.
domestic LLC
The LLC is a domestic LLC in the state in which it is organized.
limited liability of members of LLCs
The liability of LLC members for the LLC's debts, obligations, and liabilities is limited to the extent of their capital contributions. Members of LLCs are not personally liable for the LLC's debts, obligations, and liabilities. An LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a member, a manager, an agent, or an employee of the LLC who commits the wrongful act while acting within the ordinary course of business of the LLC or with authority of the LLC. EXAMPLE: Sable, Silvia, and Samantha form SSS, LLC, to own and operate a business. Each member contributes $10,000 capital. While on LLC business, Sable drives her automobile and accidentally hits and injures Damon. Damon can recover damages for his injuries from Sable personally because she committed the negligent act. Damon can also recover dam- ages from SSS, LLC, because Sable was acting within the scope of the ordinary business of the LLC when the accident occurred. Silvia and Samantha have limited liability only up to their capital contributions in SSS, LLC.
limited liability of partners of LLPs
The liability of LLP partners for the LLP's debts, obligations, and liabili- ties is limited only to the extent of their capital contributions. Partners of LLPs are not personally liable for the LLPs' debts and obligations and liabilities.
What must the name of an LLC contain?
The name must contain the words limited liability company or limited company or the abbreviation L.L.C., LLC, L.C., or LC. Limited may be abbreviated as Ltd., and company may be abbreviated as Co.
What are the powers of an LLC?
The same as an individual to do all things necessary or convenient to carry on its business or affairs, including owning and transferring personal property; selling, leasing, and mortgaging real property; making contracts and guarantees; borrowing and lending money; issuing notes and bonds; suing and being sued; and taking other actions to conduct the affairs and business of the LLC.
How is the surplus equity distributed to the members after the creditors have been paid off at the winding up of an LLC?
The surplus amount is distributed to the members in equal shares, unless the operating agreement provides otherwise.
wrongful disassociation
When a member withdraws from (1) a term LLC prior to the expiration of the term or (2) an at-will LLC when the operating agreement eliminates a member's power to withdraw.
How are managers compensated in an LLC?
Whether they are members or not, are paid compensation and benefits as specified in their employment agreements with the LLC.
Is an LLC obligated to reimburse members and managers for payments made on behalf of the LLC (e.g., business expenses) and to indemnify members and managers for liabilities incurred in the ordinary course of LLC business or in the preservation of the LLC's business or property?
Yes
Can an existing business be converted to an LLC?
Yes, general partnerships, limited partnerships, and corporations may be converted to LLCs. When the conversion takes effect, at the time of filing with the Secretary of State, all property owned by the prior business vests in the LLC, and all debts, obligations, and liabilities of the prior business become those of the LLC.
Can a member withdraw from an LLC?
Yes, unless the operating agreement provides otherwise, a member has the power to withdraw from the LLC, whether it is an at-will LLC or a term LLC. A member who wrongfully disassociates himself or herself from an LLC is liable to the LLC and to the other members for any damages caused by his or her wrongful disassociation. A member's disassociation from an LLC terminates that member's right to participate in the management of the LLC, act as an agent of the LLC, or conduct the LLC's business. Disassociation also terminates the disassociating member's duties of loyalty and care to the LLC. If a member disassociates from an at-will LLC without causing a wrongful disassociation, the LLC must purchase the disassociated member's distributional interest. If the price is not agreed upon in the operating agreement, the LLC must pay the fair market value of the distributional interest. If a member disassociates himself or herself from a term LLC, the LLC must only purchase the disassociating member's distributional interest on the expiration of the specified term of the LLC. Any damages caused by wrongful withdrawal must be offset against the purchase price
What are the advantages of an LLC?
• An LLC can have any number of member-owners, whereas an S corporation can have only 100 shareholders. • An LLC has flow-through taxation the same as general and limited partnerships and S corporations. Unlike an S corporation, an LLC does not have to file a form with the IRS to obtain flow-through taxation. • S corporations cannot have shareholders other than estates, certain trusts, and individuals, whereas an LLC can have these and other types of shareholders such as general and limited partnerships, corporations, and other LLCs. • An LLC can have nonresident alien member-owners, whereas an S corporation cannot have nonresident aliens as stockholders. • An S corporation can have only one class of stock, whereas an LLC can have more than one class of inter- est, thereby permitting a more complex capital structure. • An S corporation may not own more than 80 percent of another corporation, whereas an LLC may own all of other businesses. • An S corporation cannot be affiliated with other businesses, whereas an LLC can be part of an affiliated group of businesses. • Members of LLCs can manage the LLC similarly to general partners who can manage a general partnership or a limited partnership, whereas shareholders of an S corporation do not have rights to manage the corporation. • Members of LLCs can manage the business and still have limited liability, whereas the general partners of a general or limited partnership can manage the business of the partnership but do not have limited liability. • Members of an LLC have limited liability like limited partners of a limited partnership, but unlike limited partners, member-owners of an LLC have a say in management without losing their limited liability. • A limited partnership must have at least one general partner who is personally liable for the obligations of the partnership. An LLC provides limited liability to all members. • Similar to corporations having professional management, an LLC can choose to be a manager- managed LLC whereby designated managers manage the affairs of the business. Nonmanager members thereby do not have rights to manage the LLC's business affairs. • An LLC can be owned by one owner in most states. Therefore, an owner obtains limited liability that is not available to a sole proprietor of a sole proprietorship. • The formation of an LLC is no more complex than forming a corporation. The formation of an LLC is more complex and costly than forming a sole proprietorship and usually more complex and costly than forming a general partnership and limited partnership.
What are the two management options for an LLC?
• Member-managed LLC • Manager-managed LLC
Under the ULLCA, what are the articles of organization of an LLC that must set forth to form an an LLC?
• The name of the LLC • The address of the LLC's initial office • The name and address of the initial agent for service of process • The name and address of each organizer • Whether the LLC is a term LLC and, if so, the term specified • Whether the LLC is to be a manager-managed LLC and, if so, the name and address of each manager • Whether one or more of the members of the LLC are to be personally liable for the LLC's debts and obligations
