LLC

Question 1

3 Characteristics/Benefits of LLCs

Answer 1

• Limited liability for the obligations of the
  company
• Pass-through tax treatment
• Freedom to contractually arrange the internal operations

Question 2

LLC

Charter

Answer 2

Certificate of Formation
Articles of Organization
Certificate of Organization

Question 3

LLC

Governing Document

Answer 3

Operating Agreement
or LLC Agreement

Question 4

Name of the owners

Partnership

Answer 4

parters (general or limited)

Question 5

Name of the owners

Corporation

Answer 5

Shareholders or stockholders

Question 6

Name of the owners

LLC

Answer 6

Members

Question 7

LLC

Charter Document includes

Answer 7

Name of the LLC
* DE - Must contain Limited Liability Company or the LLC abbreviation
* RULLCA – Must contain Limited Liability Company, Limited Company, LLC or LC
* Can’t take someone else’s name

Address of the registered office
* In DE, the agent’s business office address to be identical to the LLC’s registered office address.

Name and address of registered agent

Will be signed

Question 8

LLC

Miscellaneous Formation Provisions

Answer 8

Comes into existence with the certificate/articles are filed.
* Substantial compliance with formation statute in DE

You can have a single member LLC

You can convert from another entity type.

Operating/LLC agreements are required in DE
* Backdating is your friend
* Operating Agreements technically can be oral. They should not be.

Question 9

If the certificate/articles and operating/LLC agreements conflict:

Answer 9

• Most states don’t address it
• NY – certificate
• RULLCA –§ 112(d) makes the operating agreement the governing document for
  disputes among the “insiders” of the firm (members, managers, and
  transferees), while the certificate of organization controls for disputes involving
  “outsiders” of the firm

Question 10

LLC: Role of Contract and General
Governance

Answer 10

“It is the policy of this chapter to
give the maximum effect to the
principle of freedom of contract
and to the enforceability of limited
liability company agreements

your on your own kid, llc can face it

Question 11

LLC

2 Options for Governance

Answer 11

• Member Managed
• Manager Managed
  (Members can be elected as Managers)

Question 12

LLC Multiple Classes

Answer 12

• Some LLC statutes specifically authorize multiple classes of membership interests.

Question 13

DE Authority

Answer 13

Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company

Question 14

LLC

power of members

Answer 14

The Members shall have the power to exercise any and all rights or powers granted to Members pursuant to the express terms of this
Agreement and the Delaware Act. Except as otherwise specifically provided by this
Agreement or required by the Delaware Act, no Member, in its capacity as a
Member, shall have the power to act for or on behalf of, or to bind, the Company

Question 15

DE Authority

Generally, officers will be appointed, and they will

Answer 15

sign on behalf of the LLC
- If no officers are appointment, managers or members (as applicable) would sign.

Question 16

A member is not an agent of a limited liability company solely by reason of

Answer 16

being a member

Question 17

Member-managed LLC

Actual authority – look at operating agreement

Answer 17

• Single member (where there are multiple) doesn’t have actual authority outside the ordinary course
• Single member (where there are multiple) has authority in the ordinary course UNLESS reason to know other members might disagree

Question 18

Member-managed LLC

Apparent Authority

Answer 18

• 3rd party knows or has reason to know about the management structure
• Being a member alone doesn’t establish apparent authority
• Look to course of dealing

Question 19

Manager-managed LLC

Actual authority – look at operating agreement

Answer 19

• Look at management contracts
• Course of dealing
• Single manager (where there are multiple) **doesn’t have **actual authority outside
  the ordinary course
• Single manager (where there are multiple) has authority in the ordinary course UNLESS reason to know other managers might disagree

Question 20

Manager-managed LLC

Apparent

Answer 20

• 3rd party knows or has reason to know about the management structure
• Being a manager may establish apparent authority by virtue of position
• Look to course of dealing

Question 21

LLC- Documentation of Decisions

Written consent

Answer 21

DE - Unless the operating/LLC agreement says
otherwise, written consents of the managers or
members are allowed if they contain needed
votes (DLLCA § 18-302 and 18-404)

Question 22

LLC - Documentation of Decisions

Resolution at a meeting

Answer 22

Always allowed

Question 23

LLC

Allocations

Answer 23

• Could be set up to allocate profits and loss based on what was put into the LLC (contributions).
• Could be equal allocations per member.
• Practically will be set out in the LLC/operating
  agreement.

Question 24

LLC

Allocations vs. Distributions

Answer 24

• Allocations are what is on your score card. Distributions is when $ comes out.
• If profits are allocated to a member, the member has to pay taxes on that regardless of if distributions are made.
  (Add a provision in the LLC/operating agreement
  requiring the company to make distributions to cover
  tax payments)

Question 25

# LLC Protections for Creditors

Answer 25

* If you commit to make a contribution, you have to. (DLLCA § 18-502; RULLCA § 403) * You can’t receive distributions that would make the LLC insolvent. (DLLCA § 18-607; RULLCA § 406)

Question 26

To see LLC authoruty look at the

Answer 26

operating agreement

Question 27

# LLC General Rules on Liability

Answer 27

Members and managers are generally not liable for the obligations of the LLC solely because they are members/managers. Obligations, in an individual capacity, aren’t protected from the LLC. - Undisclosed/unidentified principal problems cans still exist * Everyone is still liable for their own torts

Question 28

Piercing the LLC Veil

Answer 28

- (1) disregard economic separateness (doesn’t include failure to follow internal formalities) * (2) Inadequate capitalization at the outset or draining too much out * (3) Prevent fraud and achieve fairness

Question 29

Fiduciary Duties (Member Managed)

Answer 29

Members owe the LLC and the other members fiduciary duties of loyalty and care and the contractual obligation of good faith and fair dealing (RULLCA § 409(a))

Question 30

# Fiduciary Duties (Member Managed) Duty of Loyalty

Answer 30

account to the LLC for property, profit or benefits received; don’t deal as an adverse party unfairly and don’t compete with the LLC * Transactions or acts can be cleansed of what would otherwise be violations of the Duty of Loyalty by approval of (default is all but could be less) members after disclosure of material facts (RULLCA § 409(f)) * Can have interested transactions if fair

Question 31

# Fiduciary Duties (Member Managed) Duty of Care

Answer 31

Subject to the business judgment rule, care that a person in a like position would reasonably exercise

Question 32

Fiduciary Duties (Manager Managed)

Answer 32

Managers owe the LLC and the members fiduciary duties of loyalty and care and the contractual obligation of good faith and fair dealing * Members in manager-managed LLCs have no fiduciary duties to the LLC or their fellow members solely by reason of being a member. * A controlling member, or a member of a controlling group, can be found to have fiduciary obligations Members have the obligation of good faith and fair dealing (Default is all) members can cleanse violations of the duty of loyalty of managers

Question 33

RULLCA Disclosure

Answer 33

LLC must furnish to a member in a member-managed or “without demand” * any information concerning the company’s activities, financial condition and other circumstances which the company knows AND * is material to the proper exercise of the member’s rights and duties. LLC must furnish to a member in a member-managed“ on demand” * Other information concerning the company’s activities, financial condition and other circumstances UNLESS the demand is improper or unreasonable.

Question 34

# LLC DE Fiduciary Duties Default

Answer 34

* Default is that there are duties of care and loyalty and an obligation of good faith and fair dealing for members (in a member-managed) and managers (in a manager-managed).

Question 35

# LLC Duty of care req

Answer 35

* Care of a reasonably prudent person * Business judgment rule can apply to substance of a decision

Question 36

# LLC duty of loyalty req

Answer 36

* Usurpation of opportunity * Conflict of interest * Competition * Use of company’s assets

Question 37

# Waiver of Fiduciary Duties - llc Duty of Loyalty

Answer 37

* Can restrict or eliminate parts of the duty of loyalty in the operating agreement **if not manifestly unreasonable** (RULLCA §110 (c)(4) and (d)(1)) * You can specify what activities do not violate the duty of loyalty **if not manifestly unreasonable** (RULLCA §110 (d)(2))

Question 38

# Waiver of Fiduciary Duties duty of care

Answer 38

Can alter the duty of care **if not manifestly unreasonable** and **doesn’t authorize a knowing violation of law **(RULLCA §110

Question 39

# RULLCA Waiver of Fiduciary Duties Good Faith

Answer 39

* **Can’t eliminate ** the good faith and fair dealing obligation (RULLCA §110 (c)(5) (d)(5)) * You can **prescribe standards** by which to measure the obligation of good faith and fair dealing if the standards are not manifestly unreasonable (RULLCA §110 (d)(5))

Question 40

# RULLCA Waiver of Fiduciary Duties Disclosure

Answer 40

Can’t unreasonably restrict access to books and records

Question 41

DE and NC LLC Waiver of Fiduciary Duties

Answer 41

* Can completely eliminate duty of loyalty and care in the Operating Agreement. * Have to keep the obligation of good faith and fair dealing

Question 42

3 corp tools that apply to llc

Answer 42

* Insurance * Indemnification * Exculpation

Question 43

Exculpation and Indemnity under RULLCA

Answer 43

The operating agreement can eliminate or limit a member/manager’s liability to the LLC and/or member for $ damages OR indemnify except for: * (1) breach of the duty of loyalty * (2) financial benefit received * (3) improper distributions * (4) intentional infliction of harm on the LLC or a member * (5) intentional violation of criminal law

Question 44

# LLC Exculpation under DE The operating agreement can eliminate or limit a member/manager’s liability for breaches of duty except

Answer 44

for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.