Chapter 6 – Limited Liability Companies

• Limited Liability Company – Entity providing full protection for its members from all personal liability, whether arising in tort or contract
• Comparison between LLCs and LLPs
  • LLPs are a species of partnership and are governed primarily by partnership principles; LLCs are an entirely new form of business enterprise.
  • Only full shield states offer full protection from liability for LLP partners for wrongful acts of co-partners and contractual obligations, whereas a hallmark of LLC statutes is full protection from personal liability for all LLC members whether the liability arises in tort or contract.
  • All states permit a one-person LLC; LLPs, however, because they are a form of partnership, must always have at least two partners.
• Comparison between LLCs and LLPs
  
  • LLPs, as a variety of partnership, must be formed for a profit-making purpose. In most states, LLCs may be formed for nonprofit purposes.
  • Generally, the traditional professions (such as law, accounting, and medicine) comprise the majority of LLPs, whereas businesses in the “emerging” professions (computer consulting, marketing, and management services) tend to adopt the LLC form.
• Advantages of LLCs
  • Members may be active in management and yet retain their limited liability
  • Flexible management
  • One-person LLCs are permitted in all jurisdictions
  • Pass-through tax status
• Disadvantages of LLCs
  • Limits on transfer of interest from one member of an LLC to another
  • Case law interpreting LLCs still evolving
  • Formation can be slightly complex and expensive
  • Although each state recognizes LLCs, and an LLC may thus conduct business in numerous states, the variations among state statutes may make it somewhat complicated for a business to operate nationwide as an LLC.
• Formation of llc
  • An LLC is created by filing of a document, called the articles of organization (or the certificate of organization, per the ULLCA) with the appropriate state agency.
• Provisions of an LLC Operating Agreement
  • Name of LLC
  • Names and Addresses of Members
  • Recitals
  • Purpose
  • Address
  • Term
  • Financial Provisions
  • Operations of the LLC
  • Meetings and Voting
  • Admission of New Members and Dissociation of Members
  • Transferability of Interest
  • Dissolution
  • Miscellaneous Provisions
• Transferability of interest
  • Most states and the ULLCA provide that a member’s financial interest in an LLC, namely, the right to profits or distributions, is personal property, and as such may be freely assigned to another.
• Events causing Dissociation of llc
  • The member provides notice of his or her express will to withdraw
  • An event agreed to in the operating agreement
  • A member’s expulsion
  • A member’s bankruptcy (in a manager-managed LLC)
  • A member’s death
• Events causing dissolution and winding up
  • An event specified in the operating agreement
  • All members consent to dissolve (or majority of members in states where unanimity is not required)
  • The passage of 90 days without an LLC members
  • Upon entry of a judicial decree that is not reasonably practicable to carry on the LLC business or that the managers are acting fraudulently, illegally, or are oppressing the rights of LLC members
• Low-profit limited liability company (l3C)
  • A new type of LLC organized for a social purpose; profit-making is secondary
• Key Features of Limited Liability Companies
  • LLCs offer their members full protection from personal liability whether it arises in tort or contract. Only the LLC itself is liable for debts and obligations (although members retain liability for their own wrongful acts).
  • LLCs may be managed by their members or by appointed managers. A manager need not be an LLC member.
  • LLCs are formed filing of articles of organization with the secretary of state.
  • LLCs are governed by their operating agreements.
  • In many instances, a member’s dissociation does not cause a dissolution of the LLC.
  • The LLC provides the pass-through taxation of a general partnership.