Chapter 6 - Limited Liability Companies
in Texas, an operating agreement is also called
a company agreement, which may be either written or oral and must be between at least 2 members
examples of extraordinary business decisions
admission of new members decision to dissolve the LLC decision to modify or amend operating agreement
modifications to operating agreement require
all members' signatures
member-managed LLCs: member liability
despite managing the business, members enjoy limited liability
operating agreement (or "company agreement")
document containing provisions for operation and governance of the LLC
the LLC (does/does not) has/have the option to check the box to be taxed like a corporation
does
benefit of attaching member names and addresses to operating
easier to revise in the future
provisions setting forth events that will trigger dissolution
expiration of the period fixed for the duration of the LLC written agreement of all members to dissolve the LLC death or bankruptcy of any member, unless some percentage of the remaining members agrees to continue doing business Court determination that is not reasonably practicable to continue the business
personal liability protection of LLCs
full everywhere
has Texas adopted the ULLCA?
no
LLC continuity of existence
once formed, LLC exists perpetually unless otherwise provided in its Certificate of Formation
ownership of an LLC
one or more human beings or other business entities, called members
federal income taxation of an LLC
pass-through tax status
taxation of an LLC
pass-through tax status
Uniform LLC Act (ULLCA):
released by ULC in 1996, but not all jurisdictions have adopted it
governing state law of limited liability companies
state LLC statutes supply default provisions where operating/company agreements are silent and impose some mandatory terms. state law also regulates assumed/trade names, business licenses, and sales/unemployment/state income taxes
merger
voluntary combination of 2 business organizations into one with the result that 1 of the original businesses survives and the other original business is extinguished
In Texas, can an operating agreement be oral?
yes
example of converstion
LLP converts to an LLC
Limitations of limited liability partnerships
Must be for-profit At least 2 or more owners required Some states (not Texas) limit LLPs to businesses that provide professional services In partial-shield states, partners in LLPs still have personal liability for debts and contractual obligations of the partnership itself In LLPs with numerous general partners, the registration fee and subsequent annual fees required in TX can be extremely costly
In TX, what form is filed to form a LLC
Certificate of Formation - Limited Liability Company
title of form filed in Texas to form a PLLC
Certificate of Formation - PLLC (form 206)
In Texas, after winding up process is complete, the LLC must file:
Certificate of Termination of a Domestic Entity with the SoS
state franchise taxes
In Texas, LLC's must pay
professional LLC (PLLC)
LLC formed for the purpose of providing a professional service
manager-managed LLC
LLC managed by appointed managers, who may or may not be members; common in larger LLCs, in which members elect a managing committee or a board of managers
member-managed LLC
LLC managed by its members
pass-through tax status of LLC:
LLC's income passes through to individual members, who declare and pay their share of the LLC income on their individual tax returns. Similarly, losses sustained by the LLC may be used to offset LLC members' other income and thereby decrease their tax liability
similarities between limited liability company and corporation
LLC's members have no personal liability for wrongdoing of other members or debts and contractual obligations of the company itself
Law firms in Texas now tend to operate as...
LLCs (called professional LLCs or PLLCs) to avoid state's high per-partner registration and annual fees for LLPs
differences between LLPs and LLCs
LLPs: traditional professions like law, accounting, and medicine; LLCs: emerging professions like marketing, computer consulting, and management services
LLC name must contain what signal?
Limited Liability Company or Limited Company, or an abbreviation of one of the 2
do LLC changes of conversion, domestication, or merger affect the entities' property, debts, or obligations or enable the original entity to evade liability?
No, it does not affect the property, debts, or obligations
variations of LLC
Professional LLC Series LLC Low-Profit LLC (L3C)
LLC name requirements
cannot be deceptively similar to that of another filing entity, a registered foreign filing entity, a name that has been reserved, or a name that has been registered - unless the other entity consents in writing to the use of the similar name
distribution of assets before dissolution
capital accounts: way of keeping each members' assets separate and distinct for purposes of distribution upon dissolution; distributions made according to capital account balances
members' initial contributions to an LLC
cash, services, or property
domestication
changing a business organization's state of formation or incorporation
an LLC that dissolves will wind up by:
collecting LLC assets pay creditors pay any surplus to members in accordance with their rights to distributions
preamble of operating agreement
date of agreement; names of members
events requiring dissolution in Texas, unless operating agreement provides otherwise
expiration of any period of duration specified in the agreement voluntary decision to wind up the business event specified in agreement requiring the winding up, dissolution, or termination of the LLC Court decree requiring the winding up, dissolution, or termination of the LLC termination of membership of last remaining member, unless within 90 days his or her legal representative or successor agrees to continue the business and becomes a member or designates another person to become a member
True or false: Limited liability companies are incorporated
false; they are unincorporated
federal governing law of LLCs
federal income tax laws, anti-discrimination laws, OSHA regulations, etc.
LLC formation
filing entity; disadvantage: formation can be slightly complicated because of the various forms and documents required
operating agreement is very similar to...
general partnership agreement, but it is tailored to LLC
with a manager-managed LLC, what should the operating agreement state
how elections of managers will be held term of office for each manager duties of manager; and any restrictions on manager's conduct
limited liability company agreement
if LLC has 2 or more members, operating agreement (or company agreement) is required - oral, written, or implied; if LLC has 1 member, no operating agreement or company agreement required
wrongful withdrawal
if a member withdraws in breach of the operating agreement; in this situation, the member may be liable for any damages caused
Majority in interest
in proportion to each member's capital contribution
sharing of profits and losses in an LLC - Texas requirement
in proportion to their contributions
rare disadvantages with respect to personal liability in an LLC
in some instances, as with corporations, if an LLC is a mere instrumentality or alter ego of its members and this fact causes fraud or injustice, the shield of limited liability may be pierced so that members are liable for the entity's obligations
what type of return does the LLC itself file
informational
administrative dissolution
involuntary dissolution of a business entity by the state authority for some technical reason, such as failure to file the required documents
purpose provision in operating agreement should be stated broadly enough so that...
it can expand and grow without requiring amendment of the agreement
When Texas Secretary of State may administratively dissolve an LLC
it has failed to maintained a registered agent in Texas; or it has failed to pay its franchise taxes
LLCs can be managed by either...
its members, or like corporations, an appointed manager who is not a member (such as corporations do)
Both LLPs and LLCs
protect partners/members against personal liability for negligence of another member or partner; and debts and contractual obligations of the business (except in partial-shield states for LLPs) offer pass-through taxes offer flexible management
miscellaneous provisions
provisions regarding ADR Location of books and records reimbursement for expenses any other pertinent matters
Sharing of profits or losses in Texas LLCs
recordkeeping and location requirement: an LLC must keep at its principal place of business a list stating the percentage or other interest in the LLC owned by each member How profits must be allocated: must be allocated to each member on the basis of the agreed value of the contributions made by each member, as stated in these records
LLCs are governed by
the law of the state in which they are formed
managers have no personal liability for their decisions affecting the LLC unless..
they breach a certain duty (such as fiduciary duty), violated a law, or acted in bad faith or with conscious disregard of the LLC's best interests
All statutes have LLC statutes, but...
they differ widely from state to state
conversion
transformation from one business organizational form into another
True or false: LLC is a filing entity
true
extraordinary decisions of LLC normally require what kind of vote?
unanimous vote of members
ULLCA view (not Texas view) of profits/losses allocation of an LLC
unless operating agreement provides otherwise, members share profits and losses equally
deadline to cure most defects to obtain reinstatement of LLC
usually can be reinstated if the noncompliance is cured within 3 years after termination
transferee of a member's financial interest in the LLC
will not become a member unless: operating agreement so provides; or, all other members consent
in Texas, may LLCs be perpetual?
yes
option to reserve a name for up to how many days?
120 days upon applying to reserve it
advent of LLCs
1977
merger formula
A + B = B
Filing Fee to file Certificate of Formation - LLC in TX
$300
permissible business activity of LLCs
any for-profit or nonprofit business (if legal)
In what type of business can Texas LLCs engage?
any lawful business
professional service
any type of service that requires, as a condition precedent to the rendering of the service, the obtaining of a license in Texas
what document must be filed with the Secretary of State in order to form an LLC
articles of organization must be prepared, signed, and filed with the SoS (or equivalent official) of the state of the LLC's organization
Texas's Limited Liability Company Act is codified in...
Texas Business Organizations Code Title 3
Series LLC
a separate and distinct LLC created within an LLC that has its own members and assets and is responsible for its own obligations
disadvantages of state LLC statutes
because LLC is a relatively new form of business, little case law interpreting LLC law exists; variations among state LLC statutes may complicate an LLC's operation of a nationwide business
Limited liability companies were the legislature's solution to the weaknesses of...
limited liability partnerships
most ordinary business decisions of the LLC are made by what kind of vote?
majority vote of members
business judgment rule
managers of LLC will have no liability to owners for mistakes or errors of judgment that damaged company, provided managers acted in good faith, and to promote the best interest of the company
impact of restricted transferability of interest of an LLC
may restrict growth within an LLC
2 management options
member-managed LLC; or, manager-managed LLC
in a member-managed LLC, in Texas, unless the operating or company agreement provides otherwise...
members manage company equally - very similar to partners in general partnerships
personal liability in a limited liability company
members retain limited liability even if they are active in management; however
Texas (not all states) default provision with respect to profit-loss allocation in LLCs
members share in profits and losses in proportion to their capital contributions to the LLC
profits-losses allocation of LLCs
members share losses; members share profits
Transferability of interest: in Texas, unless operating agreement provides otherwise...
membership may be wholly or partly assigned; but, such an assignment: is not an event requiring the winding up of the company; and does not entitle the assignee to (1) participate in the management and affairs of the company, (2) become a member of the company, or (3) exercise any rights of a member of the company
common changes to a business's structure
merger, conversion, domestication
a general LLC can form how many series LLCs?
multiple
limited liability company
new form of business recognized in all states, that offers both the limited personal liability of a corporation and the pass-through tax status of a partnership
In Texas, if agreement is silent on the issue, may a member withdraw from an LLC?
no
is the operating agreement filed with the secretary of state?
no
management advantage of LLCs over corporations
not subject to cumbersome requirements of issuing stock, maintaining certain records, holding annual shareholders' meetings, etc.
Limited liability companies are a hybrid form of business, having characteristics of both
partnership and corporation while actually being neither
similarities between limited liability companies and partnerships
pass-through tax status; all money earned by the LLC passes through directly to the members, who pay tax on the money at their individual rates. The LLC itself does not pay tax on its earnings.
advantages of LLC ownership
permits sole proprietors to form an LLC and thereby protect their assets from personal liability while still maintaining sole decision-making, management, and control; if business grows, LLC can easily accommodate admission of new members
examples of professional sercices
personal services rendered by: dentists, attorneys, physicians; and veterinarians
