Chapter 39: Limited Liability Companies and Limited Liability Partnerships

formation of an LLC

LLC can be organized in only one state, even though it can conduct business in all other states; organizers must choose a name for the entity which must contain the words limited liability company or limited company or the abbreviation

disassociation - payment of distributional interest

LLC must purchase the disassociated member's distributional interest; if price is not specified in operating agreement, the LLC must pay the FMV of the distributional interest

statement of disassociation

a document filed with the secretary of state that gives constructive notice that a member has disassociated from an LLC; for two years after a member disassociation, the 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 entice of disassociation; the notice is effective against any person who later deals with the disassociated member, whether the person was aware of the notice or not

certificate of interest

a document that demonstrates evidences of a member's ownership interest in an LLC

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

duty of loyalty

a duty owed by a member of a member-managed LLC and manager of a manager-managed LLC to be honest in his or her dealings with the LLC and not act adversely to the interests of the LLC

dissolution of an LLC

a member has the power to withdraw from the LLC, whether it is an at-will LLC or a term LLC; the disassociation of a member from an at-will LLC is not wrongful unless the power to withdraw is eliminated in the operating agreement ... disassociation before the expiration of a specified term is wrongful

capital contribution to an LLC

a member's capital contribution may be in the form of money, personal property, real property, other tangible property, intangible property, services performed, etc.; a member's obligation to contribute capital is not excused by the member's death, disability, or other inability to perform ... they are obligated to make contribution equal to the value of the promised contribution

distributional interest

a member's ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC; 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 unless otherwise stated in the operating agreement (i.e. Cleveland sells his on-third interest to Theodore ... the other members of the LLC do not consent to allow Theodore to become a member ... the LLC makes $99,999 in profits and Theodore receives $33,333 .... does not make him member of the LLC); a transferor who transfers their distributional interest is not released from liability for the debts, obligations, and liabilities of the LLC

uniform limited liability company act (ULLCA)

a model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs

compensation and reimbursement

a non manager member of an LLC is not entitled to remuneration for services performed for the LLC (except for winding up the business of the LLC); managers are paid compensation and benefits as specified in employment agreements; LLC is obligated to reimburse members and managers for payments made on behalf of LLC and to indemnify members and managers for liabilities incurred in the ordinary course of business

tortfeasor

a person who intentionally or unintentionally causes injury or death to another person; 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

limited liability partnership (LLP)

a special form of partnership in which all partners are limited partners, and there are no general partners; can only be used for professionals such as accountants, lawyers, and doctors; creatures of state law, not federal law

agency authority - member-managed LLC

all members have agency authority to bind the LLC to contracts

liability of an LLC

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

term LLC

an LLC that has a specified term of duration

manager-managed LLC

an LLC that has designated in its articles of organization that it is a manager-managed LLC; non-manager members give their management rights over to designated managers, who mange the LLC; each manager has equal rights in the management and conduct of the company's business; matters 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; certain actions cannot be delegated to managers but must be voted on by all members such as (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, and (6) selling, leasing, or disposing of all or substantially all of the LLC's property

at-will LLC

an LLC that has no specified term of duration

member-managed LLC

an LLC that has not been designated as a manger-managed LLC in its articles of organization; the LLC is managed by its members; each member has equal rights in the management of the business of the LLC, regardless of the size of his or her capital contribution; matters are decided by majority vote

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; may be oral but are usually written

member

an owner of an LLC

limited liability company

an unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations; creatures of state law, not federal law; LLC is a separate legal entity (or legal person), distinct from its members; LLCs are treated as artificial persons who can sue or be sued, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law

continuation of an LLC

at the expiration of the term, some of its members may want to continue the LLC ... (1) the members of the LLC may vote prior to the expiration date to continue the LLC for an additional specified term (requires unanimous vote of all members and filing of amendment) or (2) absent the unanimous vote to continue the term LLC, the LLC may be confined as an at-will LLC by a simple majority vote of the members of the LLC

conversion of an existing business to an LLC (for tax benefits and the limited liability shield)

conversion takes effect when the articles of organization are filed with the secretary of state or at any later date specified in the articles of organization; when the conversion takes effect, 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

taxation of LLPs

flow-through taxation ... no tax paid at the partnership level, and all profits and losses are reported on the individual partners' income tax returns

dividing an LLC's profits and losses

if members have unequal contributions, and do not want equal distribution of profits, it must be specified in the operating agreement; losses from an LLC are shared equally unless otherwise agreed; losses can sometimes be offset against members' gains from other sources; profits and losses do not have to be distributed in the same proportion (i.e. 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)

winding up of an LLC

involves preserving and selling the assets of the LLC and distributing the money and property to creditors and members; dissolved assets must first pay off creditors, thereafter, the surplus amount is distributed to the members in equal shares, unless otherwise stated in an operating agreement

liability of managers of LLCs

managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they mange

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 ... state legislature may amend its LLP statutes at any time

powers of an LLC

same powers 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, etc.

taxation of LLCs

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 (flow through taxation) ... avoids double taxation

domestic LLC

the LLC is a domestic LLC in the state in which it is organized .... the LLC must register as a foreign LLC in any state in which it wants to conduct business

articles of termination

the documents that are filed with the secretary of state to terminate an LLC as of the date of filing or on 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

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; 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 guarantees that injured parties will have compensation to recover for their injuries and is a quid pro quo for permitting partners to have limited liability

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

limited liability of partners of LLPs

the liability of LLP partners for the LLP's debts, obligations, and liabilities is limited only to the extent of their capital contributions; partners are not personally liable for the LLPs' debts, obligations, and liabilities

agency authority - manager-managed LLC

the managers have authority to bind the LLC to contracts, but non-manger members cannot bind the LLC to contracts

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