Business organizations 1 LLC
Redemption Offer of Minority Member in Closely Held LLCs: The Limited Exception in Allen v. Devon Energy Where Members Owe Members a Formal Fiduciary Duty
(1) When a closely held LLC's member-manager (2) communicates a redemption offer (3) to the minority members (4) courts recognize a limited formal fiduciary duty of disclosure material facts affecting value of corporate stock.
Q: What if a member dies? What if a member's spouse dies? What about divorce?
101.106(a-1), (a-2), 101.1115 If the member's interest is CP and the member dies, it DWAPs and the heirs / devisees are assignees. If the member's interest is CP and the non-member dies, it DWAPs and the members and heirs are assignees.
Q: When does Ch. 8 Indemnification apply to LLCs? 8.002.
8.002. The indemnification and advancement provisions ONLY apply to LLCs that adopt the provisions in their governing documents. (a) Except as provided by Subsection (b), this chapter does not apply to a: (1) GP; or (2) LLC. (b) The governing documents of a GP or LLC may adopt provisions of this chapter or may contain other provisions, which will be enforceable, relating to: (1) indemnification; (2) advancement of expenses; or (3) insurance or another arrangement to indemnify or hold harmless a governing person
Q: What Else Can a Protected or Registered Series Do?
A series is not technically a separate entity* , but it has the power and capacity in its own name to: • sue or be sued; contract, acquire, sell and hold title to assets; grant liens and security interests in its assets; serve as an organizer, owner, or manager of an organization; and • exercise any power or privilege necessary or appropriate to conduct the business of the series. *But Note: A protected or registered series is included in the definition of "persons" in the TBOC and UCC.
Q: Savannah contributed $9,000, and Olivia and Paul each contributed $500, and the 3 of them are the governing persons, i.e., the members of a member-managed LLC or managers of a managermanaged LLC. What happens if O & P propose and vote to approve a merger, conversion, or interest exchange but S does not?
A: A majority of all members can approve these transactions, so O & P could approve a plan of merger that resulted in S being eliminated as member or being a member of a surviving LLC with a very different CA. In LLC context, members do not have dissenting rights—only in corp. context do they get bought out for fair value.
Asserting Claims for Breach of Fiduciary Duty Owed to LLC Q: How are governing persons held accountable if they are accused of breaching their duties to the LLC or otherwise resist pursuit of a claim by the LLC?
A: A member or assignee may bring derivative claims—Chapter 101 contains derivative suit provisions patterned after the corporate derivative suit provisions—subject to contemporaneous ownership and fair representation requirement, demand requirement, and ability of company to obtain dismissal after review by independent, disinterested governing persons or court appointed panel.
Q: Does a member or manager associated with series have any liability?
A: A member or manager associated with a series is protected from liability for the debts / obligations of the series just like a member or manager is protected generally from debts / obligations in an LLC. § 101.606(a). Ownership Splits: Series can have different members associated with each series, different management, different federal tax treatment (proposed Treas. Regs. treat each series as a separate eligible entity under the check-the-box rules).
Q: Where do gov. persons get actual authority?
A: Actual authority comes from the gov. documents OR from the management body.
Winding Up Q: When does an LLC Wind Up?
A: An LLC may make a voluntary decision to wind up . A voluntary decision to wind up the LLC requires the vote of a majority of all members as a default rule. TBOC § 101.552. A: An LLC must wind up if the CA or COF contains a limited period of duration or specified event requiring winding up. TBOC § 101.052, 11.051. A: An LLC must wind up if the last remaining member is terminated unless the legal representative or successor of the last remaining member agrees to continue the LLC and become a member or designates another successor member. TBOC § 11.056. A: An LLC may wind up if a Court decrees winding up when: • economic purpose is likely to be frustrated, • it is not reasonably practicable to carry on with another member, or • it is not reasonably practicable to carry on in accordance with the CA. TBOC § 11.314
Q: Does an LLC have to have officers?
A: An LLC may, but is not required to, have officers, who may or may not be members or managers, and who are chosen by the managers or members. TBOC § 3.103. 101.052.
Alternative Claims to Veil Piercing Q: What other claims might you want to assert if you were the plaintiff in McCarthy in the event that the court does not take such a broad view of what constitutes causing the entity to be used to perpetrate an actual fraud for the direct personal benefit of the defendant? Is there any other theory of recovery from Marcie McCarthy or the other entities to whom funds or assets were diverted? McCarthy v. Wani Venture, A.S. (case illustration)
A: Argue that these are distributions. If made when the entity was insolvent, then you'd have a claim for wrongful distributions and TUFTA transfers (see "Fraudulent Transfers").
Informal Fiduciary Duty Based on Pre-Existing Relationship Q: What if S & O gang up on P and take actions that disadvantage him with respect to SOP, LLC? What constraints will there be on their actions?
A: As a default rule, S & O will not be able to amend the CA or COF or directly expel him without his consent.
Q: What remedy would the judgment creditor of a member of a PLLC have with respect to the member's membership interest?
A: Charging Order. Ch. 101 for LLCs applies.
Q: Are there Prohibitions on Distributions? If so, What are the Consequences of Prohibited Distributions under § 101.206?
A: Distributions are prohibited if LLC's liabilities would exceed its assets. • EXCEPTION. Reasonable compensation or a reasonable payment under a bona fide retirement plan or benefits program is not a "distribution"). A: Member is not required to return a prohibited distribution absent knowledge unless the company agreement or "other state or federal law" such as Bankruptcy or TUFTA* requires the return. *Even without knowledge of insolvency, still have to cough up distributions.
Q: What are some relative advantages and disadvantages of the permissible choices?
A: Each entity varies in term of liability protection (including cost and durability of that protection)31, federal income tax, state franchise tax, flexibility re governance and structure, etc.
Agency Principals in LLC Context (§ 101.254) Q: Are gov. persons agents of an LLC?
A: Each governing person is an agent of the LLC for purposes of carrying out the business of the LLC, as well as being a voice in the collective decision-making process of the governing authority.
Q: Are officers agents of LLC? When?
A: Each officer, if any, vested with actual or apparent authority by the governing authority, is an agent for purposes of carrying out the business of the LLC.
Nature of an LLC Q: Would an LLC be liable for attorney's fees in a suit filed against the LLC before September 1, 2021, for breach of contract in Texas? Would an LLC be able to recover attorney's fees in a suit by the LLC for breach of contract? See TCP&RC § 38.0012
A: Even in the absence of a provision for attorney's fees in the contract, the prevailing party can get attorney fees because § 38.001 now allows for the recovery of attorney's fees against LLCs and partnerships.
Financial Matters Profits, Losses, and Distributions Q: How are Profits, Losses, and Distributions allocated?
A: First, Look to CA: Profits, losses, and distributions are allocated as addressed in the CA because members have freedom to contract. A: Second, Apply Statutory Default: If not in CA, profits, losses, and distributions are shared / made in proportion to agreed value of contributions as reflected in the records of the LLC. TBOC § 101.201, 101.203.
Q: What changes with regard to dissenting rights in a Closely Held LLC?
A: For closely held LLCs—< 35 members and not listed on exchange or securities market—there is a carve-out for derivative claims against member, manager, or officer. The statutory standing, demand, dismissal requirements do not apply. If justice requires, plaintiff can obtain direct recovery
Q: What is the federal income tax classification of SOP, LLP, a general partnership that has registered as an LLP, assuming no elections? What elections are available to SOP, LLP?
A: For federal tax purposes, an LLP follows the same entity classification rules as the LLC. That is, it can elect to be taxed as a corporation or as a partnership. Most LLPs choose to be taxed as partnerships, however.
Q: What is Required to form an effective Series that Isolates Liability?
A: For the series to be effective to isolate liability such that only the assets of that series (and not the assets of any other series or the rest of the LLC) are liable for the liabilities of that series: • COF must contain language that puts the world on notice that the LLC may create series with liability limitation. • CA must contain language regarding the liability limitation with respect to the series. • Records of the LLC maintained for the series must be kept in a manner that assets of the series can be separately identified and accounted for. The enabling/notice language in the COF does not mean an LLC necessarily has series—it just makes it possible for the LLC to create series that isolate liabilities. No filing of Certificate of Registered Series with the SOS is required to create a protected series, but the LLC itself must still file a COF.
Q: What can member demand from LLC?
A: However, unless the governing documents provide otherwise, a member is entitled to demand only cash from a LLC, and, regardless of the nature of the member's contribution to the company, may not demand a specific item of property or type of property. Tex. Bus. Orgs. Code § 101.202].
Q: What forms of business are available to persons engaged in licensed activities?
A: In general, a sole proprietor or partnership (including a traditional general partnership, LLP, LP, or LLLP) may engage in occupations or professional services subject to licensing requirements for the particular occupation or profession. Determining whether activities that require a license can be carried on by a for-profit corporation, PC, PA, LLC, or PLLC can be complicated and involves unclear interplay between the TBOC and other statutes and regulations governing particular occupations and professions. The SOS has a very helpful Guide to Determining Permissible Entity Types (on its website and as the last part of this section of the outline) listing approximately 100 licensed occupations or professions. This is not law but their conclusions are based on research.
Q: How would we analyze a self-dealing transaction between the governing persons of a PA, PC, or PLLC and the entity?
A: Interested Director statutes in Ch. 21 and Ch. 101 address it.
Q: Can a Member Withdraw?
A: It depends. As a default, no, a member cannot withdraw because the default rule under the statute is that a member cannot withdrawal or be expelled. However, a member can withdraw or be expelled ONLY if allowed by the CA. This statute deprives a member of both the right AND power to withdraw if not conferred in the CA. In other words, members are generally locked in. TBOC § 101.107. • This is similar to rule for limited partners. • In a member-managed LLC, this could be problematic if the member has fiduciary duties to the LLC.
LLC Q: What are Contributions?
A: Like LPs and Corps., a member's contribution may consist of any tangible or intangible benefit to the LLC or other property of any nature, including cash, a promissory note, services to be performed, a contract for services to be performed, or other interests in securities or obligations of any entity.
Q: What is the federal income tax classification of M, LLC, an LLC whose sole member is Miller? What elections are available to M, LLC?
A: M, LLC is a disregarded entity because it only has 1 owner, so all income and deductions go on 1 individual's tax return. Same as sole proprietorship for tax purposes. NOTE: If the single owner was a corporation, then all income and deductions go on corp.'s tax return.
Q: What if they stop making distributions and hire themselves to perform services for the LLC for compensation?
A: Members have specific statutory remedies to enforce their distribution rights. Subject to restrictions on the company's right to make a distribution, at the time that a member becomes entitled to receive a distribution, that member has the status of a creditor and is entitled to all remedies available to receive payment for the distribution that a creditor of the LLC would have.
Q: Must Members Make Contributions?
A: No, the CA may provide that a person may be admitted as a member and acquire a membership interest without making a contribution to the LLC or assuming an obligation to make a contribution. TBOC § 101.102(b).
Q: Savannah contributed $9,000, and Olivia and Paul each contributed $500, and the 3 of them are the governing persons, i.e., the members of a member-managed LLC or managers of a manager-managed LLC. What happens if S proposes to change janitorial/cleaning service and S votes yes, O & P vote no?
A: O & P get their way because this is an ordinary course matter and MJ of those present at quorum is required.
Q: Well, What If the Member Dies?!?
A: Obviously, the statute cannot prevent an individual member from dying (or an entity member from terminating—voluntarily or involuntarily—its existence). On death, the successors of the member are assignees. • If the CA permits withdrawal, it will ordinarily address buyout. • If the CA permits withdrawal and does not provide for the rights of the withdrawn member with respect to the interest, the member is entitled to be paid the fair value of the interest within a reasonable time.
Q: What's the Winding Up Process?
A: Once an event requiring winding up occurs, the LLC must cease to carry on business except as necessary to wind up, give written notice to known claimants, collect and liquidate assets, satisfy or make adequate provision for liabilities, distribute any remaining assets to members. TBOC § 11.052. Upon completion of the winding up process, the LLC must file a certificate of termination and pay filing fee with SOS, thereby ending LLC's existence.* TBOC § 11.102. *The LLC continues its existence for at least 3 years after filing certificate of termination for limited purposes to deal with any loose ends and complete the winding up process, including litigation of existing claims. *An existing claim is extinguished IF the action is not brought within 3 years after the termination of the entity. TBOC § 11.359(a).
Q: What are Special Requirements of PAs, PCs, PLLCs?
A: PAs, PCs, and PLLCs must: (1) have a purpose clause in COF, which cannot be "any and all lawful business"—it must specify the type of professional service, which can only be ONE32 type unless TX law expressly allows entity to provide more than one type. TBOC § 2.004, 3.014. (2) have designator/indicator in name (e.g., "P.C.", "P.A.", "P.L.L.C."). (3) comply with restrictions on ownership. (4) comply with restrictions on governing persons and officers.
Q: What is the federal income tax classification of PGI Development Group, L.P. absent any elections?
A: PGI, L.P. is classified as a partnership for income tax purposes because it has 2 owners (1) Peterson 1 Reality GP, Inc., which is a C or S corp., and (2) Yu.
Q: What is the federal income tax classification of PLTQ Lotus Group, L.P. absent any elections (assuming the sole member of the general partner LLC is Dr. Nguyen and the sole limited partner of PLTQ is Dr. Nguyen)?
A: PLTQ Lotus Group, L.P. is classified as a disregarded entity for income tax purposes because it only has 1 owner (because Nguyen, LLC is a disregarded entity itself).
Three Stat. Default Voting/Decision Making Rules: Q: What is default vote per member? Are member's votes equal?
A: Per capita voting as a default rule. In other words, each member has 1 vote regardless of their investments, profit shares. TBOC § 101.354.
Q: What is the federal income tax classification of Peterson Group, Inc. absent any elections? What elections are available?
A: Peterson Group, Inc. is classified as a corporation—either a C corp. or an S corp.—for income tax purposes.
Q: Can a Member's Contribution Obligation be Released? What if the Member Dies, is Disabled, or Circumstances Change?
A: Release of a member's contribution obligation requires consent of all members. The member's obligation is not affected by the member's death, disability, or other change in circumstances unless otherwise provided in the CA. TBOC § 101.152.
Q: What elections are available to SOP, LLC?
A: SOP, LLC can elect to be a (1) C corp. or an (2) S corp. if < 100 SH U.S. individuals and CA carefully drafted so only one class of shares. See "Tax" in Corporation Section.
Q: What is the federal income tax classification of SOP, LLC assuming no elections?
A: SOP, LLC is a partnership (it's a flow-through) for fed. tax law because it has 2+ owners.
Q: Must New Members Acquire a Membership Interest? If Not, Is That Person a "0% Member"?
A: The CA can provide that a person may be admitted as a member without acquiring a membership interest in the LLC so long as 1+ persons own a membership in the LLC. TBOC § 101.102(c). Yes, this member would be called a "0% Member" and is useful in transactions involving asset-backed securities requiring special purpose vehicles in which a non-economic member has veto-powers over certain decisions such as the filing of a bankruptcy petition. Cf. Financial Matters
Q: What are the Consequences of Failing to Make a Contribution under TBOC § 101.153?
A: The CA may specify consequences of failure to make a contribution, including: • reduction of the member's interest, 24 See notes on electronic signature requirements at near end of outline. Page 116 of 137 • subordination of the member's interest to that of other non-defaulting members, • forced sale of the member's interest, • forfeiture of the member's interest, • the lending of money to the defaulting member by other members of the amount necessary to meet the commitment, • determination of the value of the defaulting member's interest by appraisal or formula and redemption or sale of the membership interest at that value.
Q: Are there fiduciary duties in LLCs? What duties and who owes them and to whom are they owed?
A: The Uniform LLC Act and statutes in numerous states expressly provide that members of a membermanaged LLC and managers of a manager-managed LLC owe duties of care and loyalty. A: The Texas LLC statute does not expressly describe or impose fiduciary duties, but what provisions imply that such duties are owed? Additionally, governing persons and officers are agents and would owe fiduciary duties under agency law.
McCarthy v. Wani Venture, A.S. (case illustration) Q: How would Marcie's liability (or that of the other entities) as a transferee under TUFTA differ from liability pursuant to veil piercing?
A: These are not as favorable as VP because VP makes the owner directly liable. If wrongful distribution or fraudulent transfer, the measure is amount wrongfully transferred.
Q: Would a person be able to assert a claim under TB&CC § 27.01 in a case where the person purchased a membership interest in an LLC based on false representations made by the LLC or a member?
A: Though 27.01 applies to "Fraud in a transaction involving real estate or stock in a corporation or joint stock company... Yes, some courts have held that purchase of an interest in an LLC fell within the scope of Section 27.01 of the TBOC Code. B Choice Ltd. v. Epicentre Dev. Ass'n LLC.
Q: What rights or remedies are available to a judgment creditor of a member?
A: Though a JC of an LLC can go after the LLC's property, a JC of a member may go to court and obtain a charging order with respect to the membership interest of a member or assignee, and the charging order is the judgment creditor's exclusive remedy with respect to the membership interest. TBOC § 101.112. NOTE: This is consistent with Texas partnership statutes.
Q: How are Promises to Make a Future Contributions Enforced?
A: To be enforceable under the Statute of Frauds, a member's obligation to make a future contribution must be in writing AND signed by the member. 24 TBOC § 101.151.
LLC Property and Membership InterestsQ: What if Paul wants to sell or gift his membership interest?
A: Under § 101.108(a), a member's interest in an LLC is assignable, but the assignment only entitles the assignee to receive distributions—i.e., economic rights—and does not entitle the assignee to participate in management or to become or exercise the rights of a member UNLESS otherwise provided in the CA.
Q: What is Paul's status after the transfer? What are the rights of Paul's assignee?
A: Under § 101.108-101.111, an assignee of a membership interest like Paul may only become a member upon the consent of all members UNLESS otherwise provided in the CA. A: Paul's rights as an assignee are to reasonable information and inspection of records similar to assignees in partnerships. TBOC § 101.109(a)(2).
Q: Why would anyone want a "registered" series if that costs an extra $300 filing?
A: Use of the registered series is often driven by third parties, such as lender or other influential third parties who are dealing with the series and who desire greater transparency regarding the series, the ability to verify the existence of the series in the SOS records, or clarity regarding the status of the series as a registered organization for purposes of a security interest in the assets of the series.
Q: What if they take action without meetings so he no longer knows what is going on? Does a governing person or member have information rights?
A: Yes, A member or an assignee (or their representative), on written request and for a proper purpose, may examine and copy at any reasonable time and at the member's or assignee's expense: (1) records required under Sections 3.151 (Books and Records for All Filing Entities) and 101.501 (Supplemental Records Required for Limited Liability Companies); and (2) other information regarding the business, affairs, and financial condition of the company that is reasonable for the person to examine and copy. (c) A LLC shall provide a free copy of: (1) the company's COF, including any amendments to or restatements; (2) if in writing, the CA, including any amendments to or restatements; (3) any tax returns described by Section 101.501 (Supplemental Records Required for Limited Liability Companies)(a)(2). Sec. 101.502. Right to Examine Records and Certain Other Information.
Q: Can a Member-Manager Resign or Be Removed?
A: Yes, an LLC manager can resign or be removed by the members, so a member who is a manager could shed the fiduciary duties owed as a governing person BUT they would still be locked in as a member.
Q: Can an LLC Revoke Winding Up?
A: Yes, the TBOC contains provisions for the revocation of a voluntary decision to wind up, cancellation of an event requiring winding up, and reinstatement after termination. TBOC § 11.151, 11.152, 11.201, and 101.552.
Q: What if there are 5 members or 5 managers, 3 present at meeting, and 2 vote in favor?
A: Yes, this is sufficient for vote of governing persons for matters that fall in ordinary course business decision such as the removal of manager because 3 present = quorum and 2 is MJ of those present. But note that a matter outside ordinary course but not specifically covered elsewhere requires majority of all governing persons (101.356(b)).
Q: What if the actions don't necessarily damage the LLC but injure P?
ASK MILLER
Q: What other actions could they take, as a majority of the members and governing persons, assuming the default rules of the statute have not been altered in the CA or COF to protect him?
ASK MILLER
Q: Would O & P have any duties that would constrain them from approving a merger, conversion, or interest exchange?
ASK MILLER
LLCs: Formation Certificate of Formation
An LLC is formed by filing a COF with the SOS ($300 filing fee). The COF must state: • The LLC's name (availability, designator) o The name of the LLC must contain the words "Limited Liability Company" or "Limited Company," or an abbreviation of one of those phrases such as "Limited," "Ltd." or "L.C." • The type of filing entity being formed • The purpose or purposes (can be "any lawful purpose") • Period of duration if not perpetual • Registered office (street address), registered agent • Initial mailing address (eff. 1/1/2022) • Name(s) and address(es) of initial manager(s) or initial member(s) • Name and address of organizer
Limited Liability Companies The Basics
An LLC is sometimes described as a hybrid because it provides: (1) limited liability for all owners like corporation and (2) partnership (or disregarded entity) tax treatment for federal income tax purposes. LLCs are governed by the "Texas Limited Liability Company Law." Misconceptions: Some people think of an LLC as a type of corporation, but a "limited liability corporation" is a mythical creature and a badge of ignorance. Other people think of it as a type of partnership that provides liability protection.
Management Management Structure
COF: The COF of a Texas LLC (and numerous other jurisdictions) must specify whether the LLC will or will not initially have managers and identify the initial managers or members. • Manager-Managed: An LLC with managers is often referred to as a "manager-managed" LLC. The governing authority/governing persons of a manager-managed LLC are the managers. • Member-Managed: An LLC without managers is often referred to as a "member-managed" LLC. The governing authority/governing persons of a member- managed LLC are the members.
Q: What if they form SO, LLC to take advantage of an opportunity to start a related business next door to SOP, LLC's business? What duties are implicated by S & O's hiring of themselves and pursuing the business opportunity next door?
DOL. not sure what this is
Estahbanati — An Example Where the Distinction Matters Outside of Tax Treatment: Subtle differences in statutory or regulatory provisions may be important.
In SJ Medical Center LLC v. Estahbanati, a medical center LLC sought to invoke immunity as a hospital district contractor based on a provision of the Health & Safety Code applicable to a "nonprofit corporation, partnership, or sole proprietorship." The LLC was classified as a partnership for tax purposes, but that didn't make the LLC a partnership because it is a distinct form of entity under state law. The LLC used to be a limited partnership before it converted into an LLC. Oops!
2. Fundamental Changes* or Actions Outside Ordinary Course:
Majority of all members (i.e., Supermajority).
. Ordinary Course:
Majority of those present at a meeting with a quorum. TBOC § 101.355 is an Implied Catch-All
Management and Decision Making Manner of decision making:
Meetings may be w/notice OR notice can be waived in writing or by participating w/o objecting. • Meetings can be in person or by telephone or other means of electronic comm. • Proxies are allowed for members as default rule, but only for managers if CA permits. • Written consent signed by persons whose vote would be required if all persons entitled to vote were present at meeting (i.e., members and managers can act by nonunanimous (majority) written consent) (101.358) • Informal means—any other manner of taking a vote (e.g., telephone poll, combining written consent and meeting); consent of all members, which could be tacit or implied (101.359) • Minutes not required to be kept unless CA or COF requires (but obviously advisable to have record of decisions made) (3.151(c))
LLC: Fiduciary Duties - When are the Fiduciary Duties in the LLC context? Default Rule:
Numerous courts in Texas have recognized that, as a default rule, managing members, managers, and officers of LLCs owe fiduciary duties—i.e., duty of care and duty of loyalty—to the LLC based on implication from the statute, analogy to corporate law, and/or agency law. However, Courts generally hold that members do NOT owe a formal fiduciary duty to other members.
Q: What is the standard for a veil-piercing claim that does not arise out of or relate to a contract of the LLC?
Remember, the claim for alter ego / sham to perpetrate a fraud requires a showing of "actual fraud or direct personal benefit." See TBOC § 21.223. • If the plaintiff is trying to hold the LLC liable for the tort of an EE, then there is no requirement for actual fraud. See TBOC § 21.223.
Q: When does an act bind an LLC?
TBOC § 101.254. Statutory Codification of Apparent Authority Binding LLC. • An act binds the LLC if is the act of a: o manager of a manager-managed LLC, o member of a member- managed LLC, or o officer vested with authority • and it is apparently carrying out the ordinary course of business even if the actor lacks actual authority unless the third person knows of the lack of authority. • In other words, an act by member, manager, or officer binds the LLC unless: o (1) the manager lacks authority to act for the LLC; and o (2) the third party knows that the manager lacks authority.
Q: What is Required to form an effective "Registered" Series that Isolates Liability?
TL;DR A: A "registered" series must file an SOS Certificate of Registered Series filing. As of June 1, 2022, Texas—following recent amendments in Delaware—provides for 2 types of series: • one that is created without an SOS filing ("protected series"); and • one that requires an SOS filing ("registered series"). NOTE: The Uniform Protected Series Act requires a filing with the SOS to create a "protected" series.
EZ Auto, LLC v. H.M. JR. Auto Sales:
Terminating Actual Authority May Require Notice Actual authority is created by conduct of the principal directed to the agent, and includes the authority that the principal, by want of ordinary care, allows an agent to believe himself to possess. The lack of notice terminating actual authority can be important in determining whether an agent still posseses actual authority.
LLCs: Company Agreement
Though a Texas LLC is not required to have a CA, ideally the LLC will have a written detailed CA that memorializes voting rules, governance, economic percentages, etc. • NOTE: If an LLC has operated to any significant extent, it is hard to imagine that there are not some matters that have been agreed to by the members explicitly or implicitly even if the LLC has no formal written CA. To the extent that the members have not agreed otherwise, the statutory default rules apply. There is vast contractual freedom with respect to the structure and affairs of an LLC. Very few matters are not subject to variation by the CA. § 101.054 The CA is any agreement, written or oral, of the members concerning the affairs or conduct of the business of an LLC. The fact that the company agreement of a single-member LLC only has one party to the agreement does not make it unenforceable. § 101.001
3. Extraordinary Matters* :
Unanimous consent or approval.
Veil-Piercing in Texas LLC
Until 2011, the Texas LLC statutes were silent as to veil piercing but now courts have held that the standards mirror the corporate statute, which requires "actual fraud for direct personal benefit." VP is an equitable doctrine that applies to LLCs like it applies to corps. McCarthy v. Wani Venture, A.S. (case illustration)
Amendment to the CA requires
consent of all members UNLESS otherwise provided in the CA or COF. TBOC § 101.053, 101.054, 101.051. Any provision that may be contained in the CA may be contained in the COF (and a reference to the CA in the statute includes the COF). § 101.051
Q: What forms of business are available to a lawyer(s)? What forms of business are available to a medical doctor(s)? What forms of business are available to dentists and other similar professions?
see chart
Q: Are members / managers liable for an LLC's obligations?
§ 101.114. Liability for Obligations. A: Except as and to the extent the CA specifically provides otherwise, a member or manager is not liable for a debt, obligation, or liability of a limited liability company, including a debt, obligation, or liability under a judgment, decree, or order of a court.
Q: What remedies does a minority member when majority is "piling on"?
Exercise information rights (written request, proper purpose) and recover attorney's fees if improperly denied access (101.502-101.503) • Assert claims as breach of fiduciary duty to LLC using closely held LLC carve-out provision of derivative suit provisions and seek direct recovery (consider equitable remedies as well as damages) • Argue court should recognize duties between members in some situations based on analogy to partnerships (courts in Texas have tended to analogize to corporations when addressing duties in LLCs, but some courts have suggested that partnership analogy may be appropriate; even in limited partnership context, many claims must be brought derivatively) • Receivership (11.404, 11.405 apply to LLCs also). This is not a satisfactory remedy but could leverage a settlement because it could convince court to put someone in charge. This requires oppression, waste, illegality, deadlock. See corp. statute. o Liquidated receivership—only available if you get receivership that fails. • Judicial decree of winding up (11.314) o If member is desperate to get out because economic purpose is frustrated, deadlock, dysfunctional, direct path to WU. Same as for partnership. o NOTE: 11.314 applies to GP, LP, and LLC, not corp.
Contractual Flexibility re: Duties, Exculpation, and Indemnification Q: What can LLC do with regard to liabilities?
General Rule: An LLC is free to expand or eliminate, as between themselves, any and all potential liability of a manager of the LLC as the members see fit. Allen v. Devon Energy Holdings.
LLCs (and Partnerships): Tax Treatment
o 2+ owners is classified as a partnership for federal income tax purposes unless an election to be classified as a corporation (C or S corporation) is filed with the IRS. o 1 owner-unincorporated entity is "disregarded" as an entity separate from its owner for tax purposes unless it elects to be treated as a corporation (C or S corporation).
