Limited Liability Companies

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What is an LLC?

Limited Liability Company (NOT corporation). It's not a corporation; do not think corporation. Non-corporate business structure.

What are the primary characteristics of LLCs?

1) Owners are called Members
2) Members provided w/ limited liability (full shield). Only thing members liable for is own personal misconduct.
3) Tremendous contractual freedom, can contract around almost every defautl rule
4)Pass-through taxation (avoids corporate double-tax)

Compare the LLC to the LP.

LLC has much better liability protection (at least compared to RULPA 1985). In limited partnerships: Control rule issues, general partners still unlimited in liability.

Compare LLC to LLP

1) LLPs have some holes in the shield (supervisor liability, notice/knowledge) (although those are closing now).
2) Possible difference in franchise taxes
3) LLP has advantage of still being a p'ship (so old p'ship can keep its tried-and-test p'ship agreement).
4) Remember RUPA provides a full shield for LLPs, so in those j/ds LLC&LLPs are similar

Compare LLC to S-Corp in Delaware

1) S-Corp has limitations such as the # of SHs (100), but no such limit for LLCs
2) S-Corp only allows 1 class of stock, but LLC lets you have complicated capital structure
3) S-Corp won't let certain types of trusts and foreigners be owners (no restriction w/ LLCs)

When is an LLC formed?

An LLC is formed at the time of filing (so that's when you get lim liab)

Do LLCs have to register with the Secretary of State?

Yes.

Why do people think that LLCs have superior freedom of contract?

Delaware 18-1101(b)- policy of this chapter to give maximum effect to principle of freedom of K.

Must the Operating Agreement in an LLC be written down?

DLLCA § 18-101(7): Defined as: written OR oral agreement "among the members" (implies unanimous)

In Delaware, can LLC members eliminate every duty? Even to the point that they can defraud each other w/o problem?

DLLCA § 18-1101(c): to the extent that member or manager has duties (including fiduciary duties), duties may be "expanded or restricted or eliminated" by provisions in the op agr, but cannot eliminate the implied contractual covenant of good faith and fair dealing

In Delaware, can the operating agreement eliminate liability for breach of fiduciary duties?

Yes. DLLCA § 18-1101(e).
This allows members to sue for injunctive relief but not monetary relief (assuming that you keep the duty but eliminate liability)

How are LLCs managed?

Choice between Member-Managed LLC and Manager-Managed LLC.

What is the default management scheme for LLCs?

In most j/ds, the default is member-managed (both DLLCA and ULLCA say member-managed).
Texas's default rule is manager-managed, but that's in the vast minority.

In a Member-Managed LLC, how is the Company managed?

Members themselves have default mgmt power (like GP b/c owners are managing it). May be preferable because it's difficult to cash out

What are the management rules for Manager-Managed LLCs?

ONLY managers, who may or may not be members, have default mgmt power (centralized mgt). May be preferable when you have a huge amount of members; if you have managers with special skills; to limit agency authority; don't need as much control because limited liability

What are the default voting rules in member-managed LLCs?

Split between:
1) Per capita voting [ULLCA]. One member, one vote. Default rule in p'ships (makes sense there b/c unlimited liability).
2) Pro rata voting [DLLCA]. Voting is pro rata based on profit allocation. This is also the default rule in corporations, and makes sense in LLC setting b/c ltd liability.

When would you prefer per-capita voting?

a) All contributions to the business are relatively equal; or
b) When its difficult to put a value on things contributed (ie: services)

When woudl you prefer pro-rata voting?

1) Especially when contributions are vastly unequal.
2) Typically preferable b/c it doesn't make sense that a minority of the contributing capital should be able to hold up a company

What vote is required for ordinary decisions?

Majority vote of either per capita or pro rata (depending on the LLC's structure). Majority vote usually the case in both member and manager-managed LLCs

What vote required for extraordinary decisions in LLCs?

Member managed- votes can require majority, unanimity, or supermajority. DLLCA- just requires majority. ULLCA requires unanimity.

How are managers elected and removed in Manager-Managed LLCs?

ULLCA default- Managers elected OR removed by Majority of members.
DLLCA default- the LLC must provide for appt & removal in operating agreement. DLLCA does not provide a default rule.

Do LLC statutes typically include provisions that address governance formalities?

Nope. On one hand it's bad b/c if the Op Ag doesn't address it then no governing law. OTOH, it's good b/c such formalities are often onerous and unnecessary in CHCs AND may make it more difficult to pierce the veil when formalities aren't required by statute.

Do Members possess authority to bind the LLC in member-managed LLCs?

ALL Members possess P'ship-like agency authority to bind the LLC (if its in the ordinary course of business) [ULLCA § 301(a)] [DLLCA § 18-402]

Do Members possess authority to bind the LLC in manager-managed LLCs?

ULLCA: only managers possess p'ship-like agency authority to bind the LLC. Non-manager members may have other CL forms of agency, but none solely b/c they are members.
DLLCA: Every member & maanager has agency authority to bind the LLC.

Regarding authority, what is a benefit of the LLC vs. the GP'ship?

G P'ship: all Ps have apparent authority, so you cannot cut off the apparent authority of partners.
LLC: By statute you can cut off the apparent authority of members (by becoming manager-managed)

What is the default profit sharing rule under ULLCA?

Distributions must be made in "equal shares" (doesn't say profits too, but comment assumes that this includes profits) (there doesn't appear to be a default rule - they're assuming that ppl at least make an oral agreement to this) [ULLCA § 405]

What is the default profit sharing rule under DLLCA?

Pro rata according to contribution. [DLLCA § 18-503]- based on Op Ag, and, if silent, based on "agreed value ... of the contributions make by each member

How does DLLCA handle distributions?

You get a distribution when the Op Agr says you get one [DLLCA § 18-601]

What if there is no Operating Agreement, what does DLLCA say about distributions?

1. If they have NO operating agreement, but they all unanimously agreed to distribute profits: two views:
1) They don't have an op Ag, so they can't distribute
2) The operating agreement was oral! (which is OK under DLLCA)

What is the scope of liability for Members of an LLC for the LLC's obligations?

no member or manager of an LLC is liable for the obligations of the LLC, in tort or contract, solely because of their status as a member or manager. Full vicarious liability shield.

Are members liable for torts committed before the LLC was formed?

Yes. Pepsi-Cola v. Handy. Also always liable for your own torts.

Can plaintiffs pierce the LLC veil?

Yes. All cases that look at this issue allow piercing for LLCs. Moll- no doctrinal difference between LLCs & Corps.

Any difference between piercing in LLC and Corporate contexts?

Moll: Failure to follow formalities will NOT be a factor in the LLC analysis.

It wouldn't make sense to look at whether formalities were followed because there usually are no statutory formalities requirements for LLCs and some statutes that address this issue state clearly that failure to follow formalities is not a factor to consider

In Delaware, are fiduciary duties in LLCs codified?

Nope! Delaware generally bases LLC statute on the corporate model. Remember that in Delaware the FDs in corporations are not codified (it's all common lawl).

In those states that do have fiduciary duties in their LLC statutes, what fiduciary duties do members of LLCs owe?

Members typically owe fiduciary duties of care and loyalty to the LLC and, occasionally, to other members. Some statues impose what seems like ordinary negligence, others are gross neg.

What are the LLC default rules regarding ownership interests & transferability?

Every LLC statute default rule follows the p'ship rule. Can only sell financial rights. Cannot sell all of the other rights of an LLC interest.

Generally, what are the exit rights & dissolution defaults for LLCs?

LLCs used to follow p'ship, but now it's not easy to dissolve an LLC if you're an individual member. Like a corporation, if you don't contract for some sort of buy-out, you're probably stuck (like CHC).

What are the reasons why you DO NOT want an LLC?

1) Difference in filing fees & franchise tax (can be more expensive in some states)
2) Relative complexity of LLC. LLC requires detailed operating ag (& attendant transaction costs)
3) Familiarity of business owners & lawyers w/ Corporation & P'ship structure
4) Sparse case law
5) Lack of exit rights
6) Desire to go public

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