CHAPTER 6 LIMITED LIABILITY COMPANIES © 2013 Delmar Cengage Learning

An Introduction to Limited Liability Companies LIMITED LIABILITY COMPANY DEFINED A limited liability company is a business organization that offers the benefits of partnerships and corporations. It is owned by members who manage the company or delegate that responsibility to others. Owners are not liable for company debts. Income and losses are allocated to the owners who then pay tax on their allocated share. © 2013 Delmar Cengage Learning

Limited Liability Company Characteristics Limited personal liability for members Flexible management Continuity of life Restricted transferability of interest Unrestricted ownership Certain formalities for formation Partnership taxation status © 2013 Delmar Cengage Learning

Limited Liability Companies PROFESSIONAL LIMITED LIABILITY COMPANIES Membership may be restricted to licensed professionals of a single profession. Members are personally liable for any acts of malpractice. The name of the professional LLC must include the words “Professional Limited Liability Company” or the initials “PLLC.” © 2013 Delmar Cengage Learning

Law Governing Limited Liability Companies State limited liability laws Uniform Limited Liability Company Act Revised Uniform Limited Liability Company Act State and federal securities laws © 2013 Delmar Cengage Learning

© 2013 Delmar Cengage Learning Advantages & Disadvantages of Doing Business as a Limited Liability Company ADVANTAGES DISADVANTAGES Limited liability for all owners Unrestrictive ownership Ability to raise capital for the business Beneficial tax treatment Flexibility of management Limited transferability of ownership Possibility of piercing the LLC veil Lack of uniformity in state laws Formalities and reporting requirements © 2013 Delmar Cengage Learning

Limited Liability Company Powers Under the Uniform Limited Liability Company Act, LLCs have the same powers as individuals to do all things necessary or convenient to carry on business. © 2013 Delmar Cengage Learning

Member Rights and Responsibilities LLC members are granted certain rights by state statute and by the company’s operating agreement. The company’s operating agreement may amend certain rights granted by state statute—but not all rights may be amended. All members of a member-managed LLC are considered agents of the company. Only managers are considered agents of a manager- managed limited liability company. © 2013 Delmar Cengage Learning

Member Rights and Responsibilities MEMBERS AS AGENTS If the LLC is member managed, each member is an agent of the company. If the LLC is manager managed, the managers are agents of the company. © 2013 Delmar Cengage Learning

Limited Liability Company Formation In most states, a limited liability company may be formed by any one adult individual acting as the organizer. A limited liability company is formed when the proper document is filed with the designated state authority. Articles of organization typically include: Name and office address of LLC Name and address of initial agent (if required) Name and address of each organizer Duration of existence Name and address of managers (if manager managed) Information concerning member liability © 2013 Delmar Cengage Learning

Limited Liability Company Operation and Management Member-managed limited liability company: each member has the right to act on behalf of the LLC. Manager-managed limited liability company: company organizers elect a board of managers who act as agents for the LLC. Certain extraordinary events require the consent of all members. The operating agreement sets forth the agreement of the members of the LLC. LLCs in most states are subject to annual reporting requirements with the secretary of state’s office. © 2013 Delmar Cengage Learning

Financial Structure of a Limited Liability Company MEMBER CONTRIBUTIONS, REIMBURSEMENTS AND DISTRIBUTIONS The initial assets of a limited liability company are typically contributions of the members. Members who must make expenditures on behalf of the LLC are entitled to reimbursement. Distributions are set forth in the operating agreement. Most state statutes dictate that distributions must be made in equal shares to members. Distributions from the LLC may be prohibited by state statute if the limited liability company is unable to pay its debts after the distribution. © 2013 Delmar Cengage Learning

Limited Liability Company Lawsuits Lawsuits may be brought by the LLC Derivative suits Actions by members © 2013 Delmar Cengage Learning

Dissolution of the Limited Liability Company MEMBER’S DISSOCIATION One or more members may be dissociated from the LLC without causing its dissolution. A limited liability company may be dissolved when an event specified in the operating agreement or articles of organization occurs, by member consent, or when dictated by statute or judicial decree. © 2013 Delmar Cengage Learning

Dissolution of the Limited Liability Company WINDING UP THE LIMITED LIABILITY COMPANY AND DISTRIBUTION OF ASSETS Any member who has not wrongfully dissociated from the LLC may wind up its business. Final distributions are made pursuant to the articles of organization or operating agreement. Articles of termination or a similar document must be filed to terminate the LLC’s existence. © 2013 Delmar Cengage Learning

Transacting Business as a Foreign LLC TRANSACTING BUSINESS AS A FOREIGN LIMITED LIABILITY COMPANY If an LLC conducts business in a state where it is considered a foreign LLC, it must first get a certificate of authority from the secretary of state of the foreign state. An LLC may register its name in a foreign state to preserve its use for the future when it is not currently “transacting business” in that state. © 2013 Delmar Cengage Learning

TASKS PERFORMED BY PARALEGALS WORKING WITH LLCS The Paralegal’s Role TASKS PERFORMED BY PARALEGALS WORKING WITH LLCS Limited liability company research Drafting limited liability documentation © 2013 Delmar Cengage Learning