LAW Chapter 17: Limited Liability Business Forms

What is a limited liability company (LLC)?

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

What is the primary governing authority for LLCs?

State statutes, which vary from state to state.

What is the purpose of the Uniform Limited Liability Company Act (ULLCA)?

To create more uniformity in LLC laws across different states.

What are the owners of an LLC called?

Members.

What is the general extent of an LLC member's personal liability?

Liability is normally limited to the amount of their investment in the company.

Under what specific circumstance might an LLC member be held personally liable for tortious conduct?

When the member has significantly contributed to the LLC's tortious conduct.

What does it mean to 'pierce the corporate veil' in the context of an LLC?

It refers to a court ignoring the LLC structure to hold members personally liable, usually to achieve justice.

How can an LLC member lose their limited liability protection regarding business loans?

By personally guaranteeing payment of a business loan for the LLC.

What action, regarding business finances, can lead to a court imposing personal liability on LLC members?

Failing to comply with formalities, such as commingling personal and business funds.

In what capacity is an LLC viewed by the law?

As a legal entity separate from its owners, capable of suing, being sued, entering contracts, and holding property.

What is a 'foreign LLC'?

An LLC formed in one state but doing business in a different state.

What document must be filed to form an LLC?

Articles of organization.

Where are articles of organization typically filed?

With a central state agency, usually the secretary of state's office.

What naming requirement must an LLC follow?

The business name must include the words 'Limited Liability Company' or the initials 'LLC'.

What are the two primary tax classification options for an LLC with two or more members?

Partnership or corporation.

What is the default tax treatment for an LLC with two or more members if no election is made?

It is automatically taxed as a partnership.

What is the primary tax advantage of being taxed as a partnership rather than a corporation?

It avoids the 'double taxation' characteristic of corporate entities.

How are profits that are taxed in an LLC treated as a partnership?

Profits 'pass through' the LLC to the members, who then personally pay taxes on them.

How is a one-member LLC taxed by default?

As a sole proprietorship.

What is the main disadvantage of the LLC structure?

State LLC statutes are not uniform, which can lead to inconsistent treatment for businesses operating in multiple states.

What are the two management options for an LLC?

Member-managed or manager-managed.

What is the default management structure for an LLC if the articles of organization do not specify otherwise?

Member-managed.

What fiduciary duties do managers in a manager-managed LLC owe under the ULLCA?

The duty of loyalty and the duty of care.

To whom do managers owe fiduciary duties in states that have not adopted the ULLCA?

Some state statutes provide that managers owe fiduciary duties only to the LLC itself, not to the individual members.

Can an LLC be held liable for the wrongful acts of its members?

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

What is the purpose of an LLC operating agreement?

It is an agreement where members set forth the details of how the business will be managed and operated.

Is an LLC operating agreement required to be in writing?

No, in many states, an operating agreement is not required for an LLC to exist, and if one exists, it does not need to be in writing.

What governs an LLC dispute if there is no operating agreement covering the topic?

The state LLC statute governs the outcome.

What legal principles do courts often apply when an issue is not covered by an operating agreement or an LLC statute?

Courts often apply principles of partnership law.

Define dissociation in the context of an LLC.

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

Does a member of an LLC have the right to dissociate at any time?

A member has the power to dissociate at any time, but they may not have the legal right to do so.

List four events that trigger a member's dissociation under the ULLCA.

Voluntary withdrawal, expulsion by other members, court order, incompetence, bankruptcy, or death.

What happens to a member's right to participate in management upon dissociation?

The member loses their right to participate in management.

Does a member's duty of loyalty continue after dissociation?

No, the member's duty of loyalty to the LLC terminates upon dissociation.

How is a dissociated member's interest typically valued if the operating agreement does not specify a buyout price?

The interest is usually purchased at fair value.

What is the consequence of a dissociation that 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.

Does a dissociated member have the right to force the LLC to dissolve?

Normally, no; the remaining members can opt to either continue or dissolve the business.

Under what circumstances might a court order the dissolution of an LLC?

When members have engaged in illegal or oppressive conduct, or when it is no longer feasible to carry on the business.

Who is eligible to participate in the winding-up process of an LLC?

Any members who did not wrongfully dissociate.

What is the priority for distributing assets during the winding-up of an LLC?

First, debts to creditors (including member-creditors) are paid; second, capital contributions are returned; third, remaining amounts are distributed according to the agreement or equally.

What is the Tennessee equivalent of the ULLCA?

The Tennessee Revised Limited Liability Company Act (TRLLCA).

What duties does the TRLLCA impose on members of member-managed LLCs?

It imposes a duty of loyalty and a duty of care.

What happens to a member's duty of care after they dissociate from an LLC?

The duty of care continues only with respect to events that occurred before the dissociation.

Can an LLC continue to operate after a member dies?

Yes, the other members may continue to carry on the business unless the operating agreement provides otherwise.

What is the effect of dissociation on a member's agency power?

The member loses their right to act as an agent for the LLC.

What is the 'winding-up' process in an LLC?

The process of collecting, liquidating, and distributing the LLC's assets after dissolution.

Are members authorized to perform acts during the winding-up process?

Yes, members continue to have the authority to perform reasonable acts in conjunction with winding up, and the LLC remains bound by those acts.

How does the ULLCA differ from some state statutes regarding fiduciary duties?

Some state statutes provide that managers owe fiduciary duties only to the LLC and not to the individual members.

What is the primary difference between having the 'power' to dissociate and the 'right' to dissociate?

Having the power means the member can physically or legally leave, but doing so without the right (e.g., in violation of an agreement) makes the dissociation 'wrongful' and subject to damages.

What is the main goal of members during the winding-up phase regarding assets?

To collect, liquidate, and distribute assets, potentially preserving them for a reasonable time to optimize the return.