chapter 38

the limited liability company

LLC is a hybrid that combines the limited liability aspects of a corporation and the tax advantage of a partnership. The LLC has been available for only a few decades, but it has become the preferred structure for many small business. LLC are governed by state statues , which vary from state to state. in attempt to creat more uniformity the national conference of commissioners on uniform state laws issued the uniform limited liability company ACT ( ULLCA) . less the fifth one states have adopted it

The formation of the LLC

LLCs are creatures of statue and thus must follow state statutory requirements

The Nature of the LLC

LLCs share many characteristics with corporations. like corporations , LLCs must formed and operated in compliance with state law. like sharholders of a corporation , the owners of an LLC, who are called memebers, enjoy limited liability

advantages of the LLcs

The LLCs offers many advantages to businesspersons, which is why this form of business organizations has become increasingly popular.

disadvantages of the LLC

The main disadvantages of the LLC is that statutes are not uniform. therefore, business that operate in more than one state may not receive consistent treatment in these states. Generally, most states apply to a foreign LLC( an LLC formed in another state) the law of the state where the LLC was formed. difficulties can raise, though, when one state courts must interpret and apply another states law.

When limited liability may be imposed

The members of an LLC, like the shareholders in a corporation , can lose their limited personal liability in certain circumstances for instance, when an individual guarantees payment of a business loan to the LLC , that individual is personally liable for the business obligations. In addition , if an LLC member fails to comply with certain formalities , such as by commingling personal and business funds, a court can impose personal liability. under various principles of corporate law , courts may hold the owner of a business liable for its debts.

limited liability

a key advantage of the LLC is the limited liability of its memebers. the LLc as an entity can be held liable for any loss or injury caused by the wrongful acts or omissions of its members. as we have seen, however, members themselves generally are not personally liable.

flexibility in taxation

another advantage of the LLC is its flexability in regard to taxation. An LLC that has two or more members can choose to be taxed as either a partnership or a corporation. A corporate entity normally must pay income taxes on its profits , and the shareholders must then pay personal income taxes on any of those profits that are distributed as dividends. An LLC that wants to distribute profits to its members almost always prefer to be taxed as a partnership to avoid the double taxation that is characteristics of the corporate entity. unless an LLC indicates that it wishes to be taxed as a corporation, the internal revenue services automatically taxes its as a partnership. this mean the LLc entity pays no taxes

Management and foreign investors

another advantage of the LLc for businesspersons is the flexibility its offers in terms of business operations and management , as will be discussed shortly. foreign investors are allowed to become LLC members , so organizing as an LLC can enable a business to attract investors from other countries Nations including france, germany , japan and place in latin america - have particular business forms that provide for limited liability much like an LLC

Other Similarities to Corporations

another similarity between corporation and LLCs is that LLCs are legal entities apart from their owners. As a legal person, the LLC can sue or be sued , enter into contracts and hold title property . the terminology used to describe LLCs formed in other states or nations is also similiar to that used in corporate law . for instance , an LLC formed in one state but doing business in another state is referred to in the second state as a foreign LLC

jurisdictional requirements

as we have seen, LLCs and corporations share several characteristics , but a significant difference between these organizational forms involve federal jurisdictional statue, a corporation is deemed and maintains its principal place of business. the statue does not mention the state citizenship of partnerships,LLCs and others unincorporated associations , the courts, however, have tended to regard these entities as citizens of every state of which their memebers are citizens . the state citizenship comes into play when a part sues the LLCs based on diversity of citizenship. remember that when parties to a lawsuit are form different states and the amount in controversy exceeds 75,000 a federal court can exercise diversity jurisdiction

management of an LLC

basically , LLC members have two options for managing in the firms , as shown in . The firm can be either a " member - managed" LLC or a " manager-manged" LLC. most state LLC statutes and the ULLCA provide that unless the articles of organizations specify otherwise, an LLC is assumed to be member managed . In a member managed LLC, all of the members participate in managment ,and decisions are made made by majority voter. in a member managed LLC , the member, both members and nonmembers , or only nonmembers

Preformation Contracts

businesspersons sometimes enter into crontract on behalf of a business organization that is not yet formed. person who are forming a corporations , for instance, may enter into contracts during the process of incorporation but before the corporation becomes a legal entity. these contracts are referred to as preincorporation contracts ( by means of a novation, which substitutes a new contract for the old contract) , it can enforce the contract terms,

Limited Liability of members

members of LLCs are shielded from personal liability in most situations. in other words, the liability of members is normally limited to the amount of their investments.

dissociation and dissolution of an LLC

recall that in a partnership dissocation occurs when a partner ceases to be associated in the carrying on of the partnership business. the same concept applies to LLCs. and like a partner in a partnership , a member of an LLC has the power to dissociate at any time but may not have the right to dissociate.

LLC Management and operation

the members of an LLC have considerable flexibility in managing and operating the business. here, we discuss management options, fiduciary duties owed, and the operating agreement and general operating procedures of LLCs

The LLC operating agreement

the members of the LLC can decide how to operate the various aspects of the business by formatting an operating agreement . in many states , an operating agreement is not required for an LLc to exist, and if there is one, it need not be in writting. Genreally though LLC members should protect their intrest by creating a written operating agreement

Articles of organization

to form an LLC articles of organization must filed with a central state agency- usually the secretary of states office typically, the articles must include the name of the business its principal address , the name and address of registerd agent, the members names, and how the LLC will be managed . The business name must include the words limited liability company or the initials LLC . although the majority of the states permit one member LLCs, some state require at least two members.

fiduciary duties

under the ULLCA mangers in a manger managed LLC owe fiduciary duties ( the duty of loyalty and the duty of care ) to the LLC and its members. ( this same rule applies in corporate law - corparte directors and officers owe fiduciary duties to the corporation and its shareholders) because not all states have adopted the ULLCA, though , some state statues provide that managers owe fiduciary duties only to the llc and to the llc members to whom the fiduciary duties are owed can affect the outcome of litigation

Effects of dissociation

when a member dissociates from an LLC, he or she loses the right to particpate in management and the right to act as an gent for the LLc. the memeber duty of loyalty to the llc also terminates , and the duty of care continues only with respect to event that occurred before dissociation