Limited Liability Companies (LLCs)

Question 1

Limited Liability Companies (LLCs)

Limited Liability Company

Answer 1

an unincorporated entity that provides limited liability and pass through tax to its owners (members)

Question 2

Limited Liability Companies (LLCs)

Liability

Answer 2

Any debt, obligation, or other liability of the LLC is solely the liability of the LLC. ULLCA § 304

No Personal Liability

Members and managers do not face personal liability solely by virtue of their member/manager status, even after dissolution and even if the Member participates in management.

Members and managers are liable for their own misconduct

The court may issue charging orders against member’s LLC interests

Question 3

Limited Liability Companies (LLCs)

Liability
Veil Piercing

Answer 3

The failure of an LLC to observe formalities relating to the exercise of its powers or management of its activities and affairs is not grounds for piercing the veil. ULLCA § 304(b)

However, some courts have applied veil piercing and reverse veil piercing to LLCs

Single-Member LLCs may face more risk of veil piercing

Question 4

Limited Liability Companies (LLCs)

Taxation

Answer 4

Default Rules

Single-member LLCs –> disregarded as a separate entity  treated as sole proprietorships

2+ Member LLCs –> classified as a partnership for tax purposes unless affirmatively elected to be taxed as corporation

Disregarded or Partnership Tax Regimes

Members declare their share of the LLC income on their individual tax returns

Question 5

Limited Liability Companies (LLCs)

Formation

Answer 5

1. Articles of Organization
2. Operating Agreement

Articles of Organization

An LLC is created when the articles of organization is filed with the state and when at least one person becomes a member of the LLC. ULLCA § 201

Operating Agreement

This is a private document that is not filed with any state agency

Some states require the operating agreement be a written agreement, but most states and the ULLCA allow oral agreement. ULLCA § 102(13)**

Question 6

Limited Liability Companies (LLCs)

Management & Control
Operating Agreement

Answer 6

Where the management and operation rules should be specified, including:

1. Management Style
2. Meetings
3. Voting
4. Agency & Authority
5. Fiduciary Duties and Fiduciary Waivers

Question 7

Limited Liability Companies (LLCs)

Management Styles

Answer 7

1. Member-Managed
2. Manager-Managed

An LLC is presumed to be member-managed under the ULLCA.

Question 8

Limited Liability Companies (LLCs)

Member-Managed

Answer 8

Each member has equal rights in the management and conduct of the LLC’s activities and affairs. ULLCA § 407(b)

Under default rules, ordinary course matters may be decided by a majority of the members

Question 9

Limited Liability Companies (LLCs)

Manager-Managed

Answer 9

Each manager has equal rights in the management and conduct of the company’s activities and affairs. ULLCA § 407(c)(2)

Ordinary course matters may be decided by a majority of the managers. ULLCA § 407(c)(1)

Managers do not have to be members

Managers are similar to a board of directors

Question 10

Limited Liability Companies (LLCs)

Meetings

Answer 10

Most state statutes and the ULLCA do not impose requirements for meetings on an LLC, but the operating agreement should address the rules related to the holding of meetings.

Question 11

Limited Liability Companies (LLCs)

Voting:
Operating Agreement Requirements

Answer 11

The Operating Agreement should specify whether voting:

1. Will occur on a per capita or a pro rata basis, and
2. What voting standards–unanimous, majority, super-majority, or
3. Other requirements

Question 12

Limited Liability Companies (LLCs)

Voting Models

Answer 12

ULLCA Rules
Voting is on an equal basis, unless otherwise stated in the operating agreement

Corporate Model
If the operating agreement is silent, voting is in proportion to ownership interests (CA + Other states)

Question 13

Limited Liability Companies (LLCs)

Voting
Decisions Generally Requiring Unanimous Member Approval

Answer 13

1. Matters outside the ordinary course of business
2. Amending the operating agreement
3. Agreement to dissolve the LLC
4. Agreement to sell all of the LLC’s assets

Question 14

Limited Liability Companies (LLCs)

Agency & Authority of Members

Answer 14

A member of an LLC is not an agent of an LLC solely by reason of being a member. ULLCA § 301(a)

There is no statutory rule granting agency status to members

A member may have actual or apparent authority, based on specific facts and circumstances, to bind the LLC on a contract. ULLCA § 301(b)

Question 15

Limited Liability Companies (LLCs)

Agency & Authority of Members
Operating Agreement Requirements

Answer 15

The Operating Agreement should specify:

1. Who is authorized to act on behalf of the LLC, in a manner that is consistent with the chosen management structure
2. The nature and extent of authority, and
3. Any limitations on that authority

Question 16

Limited Liability Companies (LLCs)

Member-Managed
Fiduciary Duties

Answer 16

Members in a member-managed LLC have fiduciary duties (Loyalty & Care) to the LLC and other members, as well as obligations of good faith and fair dealing

Question 17

Limited Liability Companies (LLCs)

Manager-Managed
Fiduciary Duties

Answer 17

Members in a manager-managed LLC do not have fiduciary duties solely based on their membership, but they do have obligations of good faith and fair dealing

Managers in a manager-managed LLC have fiduciary duties (Loyalty & Care) to the LLC and other members, as well as obligations of good faith and fair dealing

Question 18

Limited Liability Companies (LLCs)

Altered/Waived Fiduciary Duties

Answer 18

Members may agree via the operating agreement to alter a member’s duty of care and loyalty, so long as it is not manifestly unreasonable

Manifestly Unreasonable

1. Unreasonable Objective or Unreasonable Means to Achieve Objective
2. Based only on Circumstances Existing at the time

Question 19

Limited Liability Companies (LLCs)

Members’ Interest

Answer 19

A member’s right to LLC distributions is a type of personal property. ULLCA § 102(24)

Transferability

Unless otherwise provided in the Operating Agreement, a member may transfer or assign their right to distributions. ULLCA § 502

Transfer of the right to distribution does not by itself cause a person’s dissociation as a member. ULLCA § 502

Question 20

Limited Liability Companies (LLCs)

Allocations & Distributions
Operating Agreement

Answer 20

The Operating Agreement may alter distribution rules to allow distributions so long as after the distribution is made the company’s total assets are not less than the sum of its total liabilities. ULLCA § 105(d)(1)(B)

Question 21

Limited Liability Companies (LLCs)

Allocations & Distributions

Answer 21

The ULLCA provides for the equal allocation of distributions, except as necessary to comply with a transfer or charging order

Many state LLC statutes provide for pro rata distributions

Potential Insolvency

An LLC may not make distributions if it is, or would be as a result of the distribution, insolvent. ULLCA § 405

Question 22

Limited Liability Companies (LLCs)

Effect of Member Dissociation

Answer 22

The default rule for LLCs do not require dissolution after a member dissociation

Once a person is dissociated, they no longer have the right to participate in management. ULLCA § 603(a)(1)

Question 23

Limited Liability Companies (LLCs)

Events Causing Dissociation

Answer 23

A member may withdraw or dissociate according to the terms of the Operating Agreement or Articles of Organization. ULLCA § 602

Default Rules

A member may withdraw upon giving notice to the LLC. ULLCA § 601

A person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will. ULLCA §§ 601 & 602(1)

Question 24

Limited Liability Companies (LLCs)

Wrongful Dissociation

Answer 24

A wrongfully dissociating member is liable for damages caused by the dissociation. ULLCA § 601

This liability is in addition to any debt, obligation, or other liability of the member to the company or the other members

Question 25

# Limited Liability Companies (LLCs) **ULLCA Dissociation Events**

Answer 25

1. An event occurs that has been **agreed to** in the Operating Agreement 2. A member is **expelled** 3. A member **files for bankruptcy** (in a *member-managed* LLC) 4. A member **dies**

Question 26

# Limited Liability Companies (LLCs) **Events Causing Dissolution**

Answer 26

The **dissociation** of a member **does not automatically result** in the **dissolution** of the LLC, nor require winding up LLC follows the same approach as RUPA **Dissolution Events** 1. An **event** occurs that has been **specified** in the Operating Agreement 2. **All** members **consent** to dissolve a. Some states (CA & NY) require only a **majority** vote, **not unanimous**) 3. *90 days* pass with **no LLC members** 4. A **judicial decree** is entered that a. It is **not reasonably practicable** to carry on the LLC business b. The managers are **acting fraudulently**, illegally, or in a manner that is oppressive and harmful to the applicant 5. The secretary of state signs and files a **statement of administrative dissolution**

Question 27

# Limited Liability Companies (LLCs) **Winding Up Process**

Answer 27

1. **Distribution of Assets** a. **Discharge obligations** to creditors, including members. ULLCA § 702 b. Any **surplus is paid to members** in accordance with their rights to distributions 2. File **Articles of Termination/Dissolution**

Question 28

# Limited Liability Companies (LLCs) **Actions by Members**

Answer 28

A member of an LLC may bring **direct** or **derivative actions** ``` ``` **ULLCA Derivative Actions** A member may maintain a derivative action **only if **the member 1. First **makes a demand**, _or_ pleads with particularity **demand-futility**, and 2. Satisfied all other **procedural and substantive requirements**

Question 29

# Limited Liability Companies (LLCs) **Conversions, Mergers, & Domestications**

Answer 29

Same rules as corporations. LLCs may operate in foreign states but generally require an **application to transact business**

Question 30

# Limited Liability Companies (LLCs) **Other Forms of LLCs**

Answer 30

1. Professional LLCs (PLLCs) 2. Family LLCS 3. Low-Profit LLCs (L3Cs)

Question 31

# Limited Liability Companies (LLCs) **Professional LLCs**

Answer 31

Generally, the professions retain liability for their own negligence and that of others under their supervision **Protects** the members' **personal assets** from obligations of the PLLC Membership is usually **restricted to licensed professionals** **Many states do not allow LLCs** to offer banking or insurance services **California does not allow** professions to be organized as LLCs