Basic Components of an LLC
II. LIMITED LIABILITY COMPANY: statutory hybrid of traditional corporation & p’ship
A. Basic Components
- artificial jural person, created by registration w with Sec of State
- members are protected from personal liability just like corporations SH’s – piercing the corporate veil the same for LLC’s as corps
- LLC’s governed largely through operating agreement: K between members; more flexible in governance
- LLC’s can elect how they want to be taxed- p’ship (most), S Corp, or C corp
- elect whether to be member- or manager-managed
- elect whether to be at-will or for a term
The Operating Agreement
B. The Operating Agreement: can vary almost all provisions of the statute, so highly customized governance
- is a comprehensive governance agreement between the members
- doesn’t have to be in writing! (there’s always an operating agreement just not always on in writing); if not in writing, look to:
a) agreements between members (unwritten)
b) operation over time (course of operation)
c) uncontradicted statutory default rules
Restrictions on Flexibility of Operating Agreement
- Operating agreement CANNOT:
a) unreasonably restrict members’ access to info. or records
b) eliminate the duty of loyalty to managers or managing members
c) unreasonably reduce the duty of care of managers or managing members
d) eliminate the obligation of good faith and fair dealing
e) vary the right to expel a member by judicial determination
Organization of LLC
C. Organization
- LLC begins by filing the Articles of Organization with the Secretary of State; must include:
a) the LLC’s name
b) the address of its initial designated office
c) the name and street address of its initial agent for process
d) the name and address of each organizer
e) whether LLC is to be at will or a term company (if for a term, term must be specified)→ at will is the statutory default
f) whether LLC is to be manager managed or member managed→ member-managed is the statutory default
g) whether one or more members are to be personally liable for the LLC’s obligations
- each LLC must maintain an agent and street address for process, registered with the Secretary of State
Member Managed LLCs
- Member-Managed: statutory default: like a partnership because every member has the apparent authority to bind the company in the ordinary course of business
a) if a member leaves the company/dissociates, has apparent authority to bind the company for two years unless a statement of dissociation is filed with the Secretary of State, in which case the authority expires 90 days after filing
b) any member may sign and deliver any instrument affecting the co’s interest in real property
c) members have equal rights in management, majority rules- can’t make decisions requiring unanimous consent of members
Manager Managed LLCs
a) members have no authority to bind the company, only have to approve the list of things requiring member approval below;
(1) members are NOT agents solely by reason of being members, however it is possible for them to become agents or servants of the company based on the usual rules of agency
b) managers have apparent authority to bind the company in the ordinary course of business, unless they act outside their actual authority and the third party knew or had notice of the limit
(1) any manager can sign and deliver any instrument affecting the co’s interest in real property
c) managers have equal rights in management, majority rules- can’t make decisions requiring unanimous approval of members
For Term or at Will
E. For a term or At-will
- At-will: statutory default: a member can withdraw or dissociate at any time;
- For a term: member can’t dissociate prior to the expiration of its term without the dissociation being wrongful;
Corporate Veil - LLC
F. LIABILITY past exam question
1. same corporate veil as a corporation, EXCEPT: failure of an LLC to follow company formalities is not a ground for piercing the veil
- unauthorized acts may render the member or manager liable to the company
- Respondeat Superior: the LLC is vicariously liable for all actionable conduct of a member or manager acting either in the ordinary course of business or with the authority of the company
LLC - K Liability and Tort Liability
- LLC – Contract Liability
a) A member of an LLC is not personally liable for the obligations of an LLC unless they make themselves liable in some way, such as by committing a tort or by acts leading a third party reasonably to rely on their personal credit instead of or in addition to the credit of the company. - LLC - Tort Liability
a) An LLC is vicariously liable for actionable conduct of a member or manager acting either in the ordinary course of business or with the authority of the company. The member is liable if they are the tortfeasor.
Relations of Members to Each Other and to the LLC
G. Relations of Members to Each Other & to the LLC
- becoming a member: requires unanimous approval (unless otherwise provided in Articles)
a) consideration for membership = contribution & sufficiency of value of contribution must be consented to by ALL members - members who work for LLC: are not paid (stat. default)
Matters Requiring Unanimous Approval of the Members
H. Matters requiring unanimous approval of members:
- amendment of operating agreement
- ratification of acts that would otherwise violate the duty of loyalty
- amendment of the articles
- compromise of obligation to make a contribution
- making interim distributions, including redemption of an interest
- admission of a new member
- use of company assets to redeem a charging order
- dissolution
- merger
- disposition of all assets outside the ordinary course
Distributions
I. Distribution: any value paid to a member because of that person’s status as a members
- types:
a) interim distributions: distributions of profits while carrying on business
b) redemption of a membership
c) payment in liquidation - distribution can’t be made if
a) equity insolvency test: the company would not be able to pay its debts as they become due in the ordinary course of business, or
b) balance sheet test: the company’s total assets would be less than its total liabilities - don’t have to use GAAP (is a good idea); can use any accounting method or valuation reasonable in the circumstances
Access to Books and Records
J. Members have unlimited access to company books and records
Duties of Members
K. Duties
- Members in member-managed & Managers in manager-managed: 3 –part duty of loyalty
a) account to the company for any profit made in the course of the company’s business or using the company’s property
b) not to compete with the company
c) not to deal with the company as, or on behalf of, an adverse party - Members in a manager-managed LLC owe no duties to the company or its members solely by reason of being a member (may if they exercise the power of a manager)
Member Distributional Interest
L. Members have no transferable interest in the property of the company
- have a “distributional interest” which is personal property and can be transferred, giving assignee right to distributions
- this does not necessarily make assignee a member, unless all members agree or operating agreement provides for it, only get right to receive distributions & seek judicial dissolution
- distributions can be attached by a charging order, which can be redeemed by any member, or if permitted by the operating agreement, by the company
- if a member dies, estate because owner of members distributional interest (not a member)
Dissociations
M. Dissociation: events inconsistent with a person remaining a member, may lead to dissolution, winding up & termination
- default rule: withdraw at any time and this initiates dissolution & winding up
- events of dissolution
a) notice of member’s decision to withdraw
b) an event described in operating agreement as event of dissociation
c) transfer of all of a member’s distributional interest (except pledge as security or not foreclosed charging lien)
d) expulsion by operating agreement, vote of all members upon certain circumstances, or by judicial determination based on persistent violation of the OA or other actions harmful to co.
e) a member becoming bankrupt or anything similar
f) death or incapacity, or if not a human being, termination - If a member dissociates, the company must purchase their distributionary interest for fair value:
a) At-will immediately
b) For a term: at the end of the term - If the dissociation is wrongful, company can set-off damages for wrongful dissociation and any other amounts owing to the company
a) wrongful if in violation of the operating agreement OR in a term company (by expression of will, expulsion by judicial determination, becoming bankrupt or termination)
Distribution Causing Winding Up and Termination
- Distribution causes winding up & termination WHEN:
a) an event or a vote specified in the OA takes place
b) consent of the # or % of members specified in the OA
c) an event making the carrying on of the company’s business unlawful
d) an application to a court by a transferee, should a court deem it equitable
e) by judicial decree upon application of a member based on
(1) economic frustration of purchase
(2) failure to purchase a members’ distributional interest as required or
(3) the managers or controlling members acting in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to a member
Member’s Dissociations when LLC is Not Wound Up
N. Member’s Dissociation when LLC Not Wound Up: buy dissociating members distributional interest as of date of dissociation (at will) or as of date of expiration of term (for a term)
- payment: fixed by negotiation or operating agreement; member can petition court for valuation if not determined within 120 days of dissociation
- if company defaults, dissociated member may bring action to have the company dissolved
- damages are set-off against the payment
Winding Up
O. Winding up
- LLC continues in existence but only for purposes of winding up
a) corporate veil continues
b) any member that did not wrongfully dissociate may participate in winding up and get reas. compensation
c) apparent authority of members and managers continues to the extent appropriate for winding up; liable for injury caused to company during winding up
d) a unanimous vote of members, including a member whose dissociation caused the dissolution, can waive the right to wind up and terminate, and the LLC will resume business as if dissolution had not occurred - Distributions
a) first to creditors, including members who are creditors
b) then to members, return of contributions and any surplus in equal shares - Statutes of Repose for known & unknown creditors
Termination
P. Termination: at any time after winding up is completed by filing articles of termination with the Secretary of State
Adminstrative Dissolution
Q. Administrative Dissolution: by the Secretary of State if the LLC does not pay taxes or fees within 60 days of the due date
- must give LLC notice of any intent to dissolve it & LLC has 60 days to cure the cause
- administratively dissolved LLC may continue business only for purposes of winding up
- can apply for reinstatement for two years following distribution, if granted reinstatement relates back to the time of dissolution
Conversions
R. Conversions
- must be approved by all partners
- accomplished by filing articles of conversion w/ Sec of State
Merger
S. Merger
- can merge w LLC, corp, partnership, LP, any other foreign or domestic entity
- plan of merger must be approved by all members of any LLc/ partners to a partnership or as required by law
- accomplished by filing articles of merger w/ Secretary of State
Foreign LLCs
T. Foreign LLC’s: that do business in the state must obtain a certificate of authority from Sec. of State; or SC courts will be closed to it, SC Sec. of State will be its agent for process and Attorney General can take action to constrain transaction of business in this state
