Chapter 38

Question 1

Limited Liability Company

Answer 1

a hybrid form of business that combines the limited liability of a corporation and the tax advantages of a partnership

Question 2

Members

Answer 2

Owners of an LLC

Question 3

What are some things that members can do to be liable?

Answer 3

1. do a guarantee for something business related
   (EX: personal guarantee at the bank for the business)
2. LLCs are really horrible at keeping records
   (If you co-mingling accounts you could be liable for fraud)
3. Extraordinary circumstances that look like the LLC was created for fraud
   (Members would be liable)

Question 4

LLCs are recognized as…

Answer 4

a legal entity apart from owners

Question 5

Formation of LLCs

Answer 5

1. Articles of Organization
2. Federal Diversity Jurisdiction

Question 6

Articles of Organization

Answer 6

(Includes LLC, number, address, registered agent, primary business purpose, duration of LLC)

Question 7

Is it possible to form an LLC with one sole owner?

Answer 7

Yes

Question 8

Federal Diversity Jurisdiction

Answer 8

courts often say an LLC is a citizen of every state in which its members are citizens. Ordinarily the LLC is considered to be a citizen of wherever the members are citizens.

Question 9

Advantages of an LLC

Answer 9

1. Limited Liability
2. Flexible Taxation
3. Management and Foreign Investors

Question 10

The plaintiff is the family of Donald Hodge. Hodge is hunting in the deer stand, which is hanging from a tree. The stand fell, and Donald was killed. Ken Killen is the sole owner of Strong Built International (there was probably liability insurance that is not enough to cover the wrongful death, there aren’t enough assets in the LLC, so they are looking to hold Killen accountable). Is Killen liable?

Answer 10

No. Killen is not liable because the entity is an LLC.

Question 11

Flexible Taxation

Answer 11

LLCs have a choice on how to be taxed. LLCs of two or more people can choose to be taxed as a partnership or as a corporation.
If you are a single member LLC you cannot be taxed as a partnership (requires 2 people), so instead they are taxed as a sole proprietor.

Question 12

Management and Foreign Investors

Answer 12

LLC rules allow foreign investors to be members (HUGE advantage to C Corp or S Corp).

Question 13

What is a disadvantage to LLCs?

Answer 13

LLC statutes aren’t uniform

Question 14

2 financial planners wish to start a company for wealth management. They will be equal partners in this venture and contribute equal capital. Because of the liability risk, but the desire for personal taxation rates, an LLC is the way to go.
They also express an interest in purchasing real estate, specifically a building for their business but in the future other properties too. So another LLC can be set up to purchase the building and the wealth management LLC pays rent to the building LLC.

Also, in the future when the wealth management LLC wishes to add members (like partners – other co-owners), do these members have ownership in the building?

Answer 14

No - only the wealth management LLC.

Question 15

Member-Managed LLC

Answer 15

all the members all have equal voice (or based off ownership interest)
makes sense for small group of members, not so much for a larger group

Question 16

Manager-Managed LLC

Answer 16

a lot of flexibility here. Managers owe duty of loyalty and care to the LLC and to the members

Question 17

Operating Agreement

Answer 17

“LLC regulations”
Agreement between the members on how you are going to run the business

Question 18

Do states require an operating agreement?

Answer 18

No

Question 19

Does an operating agreement have to be in writing?

Answer 19

No

Question 20

What do most operating agreements contain?

Answer 20

1. How Managers may be chosen and management in general
2. How to divide profits (divided equally unless specified)
3. Transfer of membership interests (bring a new member)
4. Dissociation events (divorce, death, bankruptcy)
5. Members meetings
6. Apportioning of voting rights