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