ch 17 limited liability business forms

what is a limited liability company (LLC)?

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

T or F: the LLC has become the preferred structure for many small businesses

TRUE

what are LLCs governed by?

state statutes, which vary from state to state

what was created to attempt to create more uniformity for LLCs?

the Uniform Limited Liability Company Act (ULLCA)

how are LLCs similar to corporations?

LLCs must be formed and operated in compliance with state law, like corporations

the owners of an LLC, who are called members, enjoy limited liability, like the shareholders of a corporation

LLCs are legal entities apart from their owners

who is a member in an LLC?

a person who has an ownership interest in a limited liability company

how are members of LLCs shielded from personal liability?

the liability of members normally is limited to the amount of their investments

how can a member of an LLC lose their limited personal liability?

when an individual guarantees payment of a business loan to the LLC

if an LLC member fails to comply with certain formalities, such as by commingling personal and business funds

as a legal person, the LLC can:

sue or be sued

enter into contracts

hold title to property

how must an LLC be formed?

articles of organization must be filed with a central state agency — usually the secretary of state’s office

what are the articles of organization?

the document that is filed with the appropriate state official, usually the secretary of state, when an LLC is formed and that contains basic information about the business, including:

• name of the business (must include LLC)

• business’s principal address

• the name and address of a registered agent

• the members’ name

• how the LLC will be managed

why are LLCs becoming more popular?

they offer many advantages to businesspersons

what are key advantages of LLCs?

limited liability of its members

its flexibility in regard to taxation

why do LLCs have limited liabilities for their members?

the LLC as an entity can be held liable for any loss or injury caused by the wrongful acts or omissions of its members

• members themselves are generally not personally liable

how are LLCs with two or more members taxed?

as either a partnership or corporation

how is an LLC with only one member taxed?

as sole proprietorships, not as a partnership

(unless they indicate that they wish to be taxed as corporations)

what is the main disadvantage of an LLC?

state LLC statutes are not uniform

what occurs because state statutes regarding LLCs are not uniform?

businesses that operate in more than one state may not receive consistent treatment in these states

what is another area (besides taxation) of flexibility that members of an LLC have?

in managing and operating the business

what are the two options for managing the firm for LLC members?

1. a “manager-managed” LLC

2. a “member-managed” LLC

do managers in a manager-managed LLC owe fiduciary duties to anyone?

yes, to the LLC and its members

what is an operating agreement?

an agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated

• in many states, it is not required for an LLC to exist

when will the state LLC statute govern an outcome?

if a dispute arises and there is no agreement covering the topic under dispute

when do courts apply principles of partnership law?

when an issue is not covered by an operating agreement or by an LLC statute

when does dissociation occur in an LLC?

when a member ceases to be associated in the carrying on of the LLC business

when does a member of an LLC have the power to dissociate?

at any time, but they may not have the right to do so

under the ULLCA, the events that trigger a member’s dissociation from an LLC include:

voluntary withdrawal

expulsion by other members

court order

incompetence

bankruptcy

death

what happens if a member dies or otherwise dissociates from an LLC?

the other members may continue to carry on the LLC business unless the operating agreement provides otherwise

what happens when a member dissociates from an LLC?

the member loses his or her right to participate in management

the member loses his or her right to act as an agent for the LLC

the member’s duty of loyalty to the LLC terminates

the member’s duty of care continues only with respect to events that occurred before dissociation

the member has a right to have his or her interest in the LLC bought out by the other members

what happens if a member’s dissociation violates the LLC’s operating agreement?

it is considered legally wrongful, and the dissociated member can be held liable for damages caused by the dissociation

T or F: the dissociated member has the right to force the LLC to dissolve only if the dissociation was wrongful

FALSE

the dissociated member has absolutely no right to force the LLC to dissolve, regardless whether the member’s dissociation was wrongful or rightful

what happens when an LLC is dissolved?

any members who did not wrongfully dissociate may participate in the winding-up process

what must member’s do to wind up the business?

must collect, liquidate, and distribute the LLC’s assets

what happens to the proceedings from the assets that were sold during the winding-up process?

1. debts to creditors are paid first (including debts to members who were creditors to the LLC)

2. the members’ capital contributions are returned next

3. any remaining amounts are then distributed to members in equal shares or according to their operating agreement