Chapter 39

Under the ULLCA, the articles of organization must set forth:

1. The name of the LLC 2. The address of the LLC's initial office 3. The name and address of the initial agent for service of process 4. The name and address of each organizer 5. Whether the LLC is a term LLC and, if so, the term specified 6. Whether the LLC is to be a manager-managed LLC and, if so, the name and address of each manager 7. Whether one or more of the members of the LLC are to be personably liable for the LLC's debts and obligations.

Statement of Dissociation

A document filed with the secretary of state stating the name of the LLC and the name of the member disassociated from the LLC that gives constructive notice that a member has disassociated from an LLC. This notice is effective against any person who later deals with the disassociating member, whether the person was aware of the notice or not. For two years after a member disassociates him or herself from an LLC that continues in business, the disassociating member has an 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 in the the LLC's operating agreement that demonstrates evidence of a member's ownership interest in an LLC. Acts the same as a stock certificate issued by a corporation.

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 not to act adversely to the interests of the LLC. Includes the duty not to usurp the LLC's opportunities, make secret profits, deal with the LLC secretly, or compete with the LLC secretly.

Duty of Care

A duty owed by a member of a member-managed LLC and a manager of a manger-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. A member of a member-managed LLC and a manager of a manger-managed LLC is liable to the LLC for any damages the LLC incurs because of such conduct. 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.

Distribution Interest

A member's ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC. A member's distributional interest in an LLC is personal property and may be transferred in whole or in part. 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 entitles. A transferee of a distributional interest becomes a member of the LLC if it is so provided in the operating agreement or if all the other members of the LLC consent. A transferor who transfers his or her distributional interest in not released from liability for the debts, obligation, and liabilities of the LLC.

Uniform Limited Liability Company Act (ULLCA)

A model that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs. Issued in 1996 by the National Conference of Commissioners on Uniform State Laws (a group of lawyers, judges, and legal scholars. Codifies LLC law. Not law unless a state adopts it as its LLC statute. Revised in 2006 and called the Revised Uniform Limited Liability Company Act (RULLCA) Many states have adopted all or part of the ULLCA or the RULLCA as their LLC law.

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 of an LLC, whether they are members or not, are paid compensation and benefits as specified in their employment agreements. An LLC is obligated to reimburse members and managers for payments made on behalf of the LLC (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.

Limited Liability Partnership (LLP)

A special form of partnership in which all partners are limited partners, and there are no general partners. In most states, the law restricts the use of LLPs to certain types of professionals such as accountants, lawyers, and doctors. LLPs are creatures of state law, not federal law. AN LLP can be created only pursuant to the laws of the state in which the LLP is being organized. These statutes, commonly referred to as limited liability partnership codes regulate the formation, operation, and dissolution of LLPs. The state legislature may amend its LLP statues at any time, The courts interpret state LLP statutes to decide LLP and member disputes.

Liability of Tortfeasors

A tortfeasor is a person who intentionally or unintentionally (negligently) causes injury or death to another person. The 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.

Member-Managed LLC

AN LLC that has not been designated as a manager-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. Any matters relating to the business of the LLC is decided by a majority vote of the members.

Limited Liability Company

AN unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations. May elect to be taxed as a partnership, the owners can manage the business, and the owners have limited liability for the debts and obligations of the partnership. Many beginner entrepreneurs choose the LLC as their legal form for conducting business. Creatures of state law, not federal law. Can only be created in pursuant to the laws of the state in which the LLC is being organized. These statutes, commonly referred to as limited liability codes, regulate the formation, operation, and dissolution of LLCs. Is a separate legal entity (or legal person), distinct from its members. 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.

Powers of an LLC

An LLC has the 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 ; borrowing and lending money; and issuing notes and bonds; suing and being sued.

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. The duration of the term is specified in the articles of organization. The duration may be specified in any manner that sets forth a specific and final date for the dissolution of the LLC>

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 manage the LLC. The members and nonmembers who are designated members control the management. The members who are non-managers have no rights to manage unless otherwise provided in the operating agreement. 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 the 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 of the LLC. These actions include: 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. A member of a manager-managed LLC who is not a manger owes no fiduciary duty of loyalty or care to the LLC or its other members and it treated equally to a shareholder in a corporation.

At-Will LLC

An LLC that has no specified term or duration. Default form of LLCs.

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 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.

Member

An owner of an LLC. Some states refer to owners of LLCs as shareholders.

COntinuaton of an LLC

At the expiration of its term a term LLC can be continues in two situations. First, the members of the LLC may vote prior to the expiration date to continue the LLC for an additional specified term. This requires a 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. Second, 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.

COnversion of an Existing Business to an LLC

General partnerships, limited partnerships, and corporations may be converted to LLCs to obtain its tax benefits and limited liability shield. The conversion takes affect 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.

Payment of Distributional Interest

If a member disassociates from an at-will LLC without causing wrongful disassociation, the LLC must purchase the disassociated member's distributional interest. The price and terms of a distributional interest may be fixed in the operating agreement. If the price is not agreed on in the operating agreement, the LLC must pay the fair market value of the distributional interest. If a member disassociates him 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.

Agency Authority to Bind an LLC to COntracts

In a member-managed LLC, all members have agency authority to bind the LLC to contracts. In a manager-managed LLC, the managers have authority to bind the LLC to contracts, but non-manager members cannot. An LLC is bound to contracts that members or managers have properly entered into on its behalf in the ordinary course of business.

Foreign LLC

In order to do business in other states, the LLC must register as a foreign LLC in any state in which it wants to do business.

Winding Up and LLC's Business

Involves preserving and selling the assets of the LLC and distributing the money and property to creditors and members. The assets of an LLC that are being dissolved must be applied to first pay off the creditors; thereafter, the surplus amount is distributed to the members in equal shares, unless the operating agreement provides otherwise. It is good practice for members to specify in the operating agreement how distributions will be made to members.

Taxation of LLPs

LLPs enjoy the "flow-through" tax benefit of other types of partnerships; that is, there is no tax paid at the partnership level, and all profits and losses are reported on the individual partners' income tax returns.

Liability of Managers

Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage.

Capital COntribution to an LLC

May be in the form of money, personal property, real property, other tangible property, intangible property, 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 promise contribution may enforce the promised obligation.

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. An LLC may be organized by one or more persons. Some states require at least two persons to organize an LLC. If the articles are in proper form, the secretary of state will file the articles. The existence of an LLC begins when the articles of organization are filed. The filing of the articles of organization by the secretary of state is conclusive proof that the organizers have satisfied all the conditions necessary to create the LLC. The articles may set forth provisions from the members; operating agreement and any other matter not inconsistent with law. AN LLC can amend its articles of organization at any time by filing articles of amendment with the secretary of state.

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. This is a public document. The LLP is a domestic LLP in the state in which it is organized. The LLP laws of the state governs the operations of the LLP. AN LLP may do business in other states by registering as a foreign LLP in any states 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 pro quo for permitting partners to have limited liability.

Limited Liability of Members of LLCs

The liability of LLC members for 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, whether arising from contracts or torts. The failure of an LLC to observe the usual company formalities is not grounds for imposing personal liability on the members of the LLC> For example, if the LLC does not keep minutes of the company's meeting, the members do not become personally liable for the LLC's debts.

Limited Liability of Partners of LLPs

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

taxation of LLCs

Under the Internal Revenue Code and regulations adopted by the IRS for federal income tax purposes, 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 in a process called flow-through taxation. This avoids double taxation,. Most LLCs accept the default status of being taxed as a partnership.

Dissolution of an LLC

Unless an LLC's 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 dissociates hm 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.

Dividing an LLCs Profits and Losses

Unless otherwise agreed, the ULLCA mandated that a member has the right to an equal share in the LLC's profits. This is a default rule that the members can override by agreement and is usually a provision in their operating agreement. This would normally occur if the capital contributions of the members were unequal. Losses from an LLC are shared equally unless otherwise agree. Sometimes members will not want to divide losses equally and maybe not even in the same way as their capital contributions. If the LLC has chosen to be taxed as a partnership, the losses form an LLC flow to the individual's income tax returns. Losses from an LLC can sometimes be offset against members' gains from other sources. Therefore, the members may want to agree to divide the losses so that the members who can use them to offset other income will receive a greater share of the losses. Profits and losses from an LLC do not have to be distributed in the same proportion.

Wrongful Dissassociation

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.