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Flashcards in Chapter 38 Deck (20)
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1
Q

Limited Liability Company

A

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

2
Q

Members

A

Owners of an LLC

3
Q

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

A
  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)
4
Q

LLCs are recognized as…

A

a legal entity apart from owners

5
Q

Formation of LLCs

A
  1. Articles of Organization
  2. Federal Diversity Jurisdiction
6
Q

Articles of Organization

A

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

7
Q

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

A

Yes

8
Q

Federal Diversity Jurisdiction

A

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.

9
Q

Advantages of an LLC

A
  1. Limited Liability
  2. Flexible Taxation
  3. Management and Foreign Investors
10
Q

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?

A

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

11
Q

Flexible Taxation

A

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.

12
Q

Management and Foreign Investors

A

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

13
Q

What is a disadvantage to LLCs?

A

LLC statutes aren’t uniform

14
Q

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?

A

No - only the wealth management LLC.

15
Q

Member-Managed LLC

A

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

16
Q

Manager-Managed LLC

A

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

17
Q

Operating Agreement

A

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

18
Q

Do states require an operating agreement?

A

No

19
Q

Does an operating agreement have to be in writing?

A

No

20
Q

What do most operating agreements contain?

A
  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