Study Notes for Limited Liability Companies

Chapter Six: Limited Liability Companies

Limited Liability Company

  • Definition: A Limited Liability Company (LLC) is an entity that provides full protection for its members from all personal liability, whether such liability arises in tort or contract.

  • Compliance with Statutes: LLCs must comply with applicable statutes.

Comparison Between LLCs and LLPs

  • Management Structure:

    • LLCs: Can be managed by appointed managers who need not be members of the LLC.

    • LLPs (Limited Liability Partnerships): Generally co-managed by all partners.

  • Operating Agreements:

    • LLCs: Some statutes require a written operating agreement.

    • LLPs: The partnership agreement may be oral or written.

  • Personal Liability Protection:

    • LLCs: Offer full protection from personal liability for all members, regardless of whether the liability arises in tort or contract.

    • LLPs: Only full shield states provide full protection from personal liability for LLP partners regarding wrongful acts of co-partners and contractual obligations.

  • Profit and Loss Sharing:

    • LLPs: If no agreement is made regarding sharing profits and losses, these will be shared equally among partners (partnership model).

    • LLCs: Profits and losses are usually allocated in the same ratio as members' unreturned contributions (corporate model). The Uniform Limited Liability Company Act allows for equal distributions.

  • Member Requirements:

    • LLCs: All states allow a one-person LLC, making it attractive for sole proprietors to convert to LLCs for personal liability protection.

    • LLPs: Must always have at least two partners due to being a form of partnership.

  • Business Type:

    • LLCs: Under the Uniform Limited Liability Company Act, not-for-profit businesses may operate as LLCs.

    • LLPs: Must operate with the expectation of making a profit.

Corporate Transparency Act

  • Definition: A federal statute requiring certain private companies to disclose ownership information to the Treasury Department to deter money laundering and other crimes.

Advantages of LLCs

  • Pass-Through Tax Status: LLCs typically enjoy a pass-through tax treatment, avoiding double taxation.

  • Limited Liability and Full Management: Members are protected from personal liability for the debts and obligations of the LLC.

  • One-Person LLCs: Formation of one-member LLCs is permitted.

  • International Recognition: LLCs are recognized in many jurisdictions, facilitating international business operations.

Disadvantages of LLCs

  • Limits on Transfer of Interest: There may be restrictions when transferring interests from one member to another.

  • Evolving Case Law: Interpretation of LLCs in case law is still developing, which may impact predictability.

  • Complex and Expensive Formation: The process of forming an LLC can be complex and carry associated costs.

Provisions of an LLC Operating Agreement

  • Name of LLC: Official title identifying the business entity.

  • Names and Addresses of Members: Listing of all members involved in the LLC.

  • Recitals: Statements outlining the background or purpose of the LLC.

  • Purpose: Specific statement of what the LLC will do or its business objectives.

  • Address: The main office location of the LLC.

  • Term: Duration of the LLC’s existence, whether it is fixed or indefinite.

  • LLC Powers: Outline of powers and authority granted to the LLC and its members.

  • Financial Provisions: Terms related to financial management and distributions among members.

  • Operations of the LLC: Rules governing day-to-day operations.

  • Meetings and Voting: Regulations about annual meetings, voting rights, and special meetings.

  • Members’ Rights and Duties: Detailed description of what is expected of each member regarding conduct and responsibilities.

  • Admission of New Members: Procedures and requirements for admitting new members to the LLC.

  • Dissociation of Members: Conditions under which members can withdraw from the LLC.

  • Transferability of Interests: Policies governing how and if memberships can be transferred.

  • Dissolution: Protocols and reasons for dissolving the LLC.

  • Miscellaneous Provisions: Any additional clauses deemed necessary for the agreement.

Events Causing Dissociation

  • A member provides notice of their express will to withdraw.

  • An event that has been agreed upon in the operating agreement occurs.

  • A member is expelled in accordance with governance laws.

  • A member files for bankruptcy (in a member-managed LLC).

  • A member dies, causing potential operational changes.

Events Causing Dissolution and Winding Up

  • Under the UCCLA, an LLC will dissolve and business must wind up if the following events occur:

    • An event specified in the operating agreement occurs.

    • All members consent to dissolve the LLC.

    • Ninety days pass without any LLC members.

    • A judicial decree is entered, stating it is impracticable to continue business or that managers are acting fraudulently or illegally, or oppressing rights of members.

Key Features of Limited Liability Companies

  • Hybrid Structure: LLCs are not fully corporations or partnerships but a unique hybrid, combining advantageous aspects of both.

  • Protection from Personal Liability: Members are protected from personal liability for debts and obligations of the LLC, with only the LLC itself being liable (members still retain liability for their wrongful acts).

  • Management: LLCs can be managed by their members or appointed managers.

  • State Compliance: Formation requires compliance with state statutes, necessitating the filing of articles of organization with the relevant state agency.

  • Governance: The LLC is governed by its operating agreement, generally written, and if silent on specific issues, state statutes will apply.

  • Admission of New Members: Unanimous approval is usually necessary for adding new members unless otherwise stated in the operating agreement.

  • Dissociation and Business Continuity: In many cases, a member's exit does not lead to the dissolution of the LLC.

  • Taxation: LLCs afford the same pass-through taxation benefits as general partnerships.

LLC Variations

  • Series LLCs: A formation including multiple groups within an LLC, each with its own members and assets.

  • Professional LLCs: Formed by licensed professionals; members retain liability for their own negligence.

  • Low-Profit LLCs: Designed for social purposes where profit is a secondary focus.

  • Family LLC: Established by family members primarily for estate planning and liability protection.

  • Benefit LLC: Created to advance a public benefit and operate in a socially responsible manner.

  • Shelf LLC: An LLC that is formed without any initial members, keeping it available for future use.

Uniform Business Organizations Code

  • Definition: A comprehensive uniform code for all business entities prepared by the Uniform Law Commission.