1. Chapter 31: Other Organizational Forms for Small Businesses
Miller
Chapter 31: Other Organizational Forms for Small Businesses

2. §1: The Limited Liability Company
An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.
LLC’s are increasingly the entity of choice for businesses.

3. The Limited Liability Company
Nature of the LLC.
LLC’s are creatures of state law.
Owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).

4. The Limited Liability Company
Nature of the LLC.
Limited Liability of Members.
Even when sued by employees of the firm.
Liability under the Alter-Ego Theory.
As with corporations, courts may ‘pierce the veil’ of the LLC and hold members personally liable. 

5. The Limited Liability Company
Nature of the LLC.
Liability under the Alter-Ego Theory.
CASE ORX Resources, Inc. v. MBW Exploration, LLC (2010). 

6. The Limited Liability Company
Nature of the LLC.
Other Similarities to Corporations.
Separate legal entity from owners.
Can hold property separately.
‘Foreign’ designation, doing business in another state.

7. The Limited Liability Company
Formation of the LLC.
Requires filing articles of organization with central state authority.
Contents of the Articles:
Name of Business.
Principal Address. 

8. The Limited Liability Company
Formation of the LLC.
Contents of the Articles:
Name and Address of Registered Agent.
Names of the Owners. 

9. The Limited Liability Company
Formation of the LLC.
Preformation Contracts.
Prior to charter, owners of the firm are called “promoters”.
If a promoter forms a “preincorporation contract” prior to formation, they may be personally liable.

10. The Limited Liability Company
Jurisdictional Requirements.
An LLC is a legal entity separate from its owners.
For federal diversity jurisdiction, the LLC may be treated differently than a corporation. 

11. The Limited Liability Company
Jurisdictional Requirements.
Citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.

12. The Limited Liability Company
Advantages of the LLC.
Limited Liability: to amount of investment.
Flexibility in Taxation.
Two or members can choose to be taxed as partnership (pass through) or corporation (double-tax)

13. The Limited Liability Company
Advantages of the LLC.
Management and Foreign Investors.
LLC’s allow foreign investors to own LLC interests and flexible management (see §2 below). 

14. The Limited Liability Company
Disadvantages of the LLC.
The main disadvantage is the lack of uniformity with state laws.
Therefore businesses that operate in multiple states may not receive consistent treatment.

15. §2: LLC Management and Operation
Management of an LLC.
Either member-managed, or manager-managed.
In member management, all members participate in management and decisions. 

16. LLC Management and Operation
Fiduciary Duties.
Managers and members owe fiduciary duties to the LLC and to each other.
CASE Polk v. Polk (2011).

17. LLC Management and Operation
LLC Operating Agreement:
Analogous to corporation’s bylaws.
Not required for LLC to exist, but strongly recommended the agreement be in writing.

18. LLC Management and Operation
LLC Operating Agreement:
(1) Management and how future managers will be chosen.
(2) How profits will be divided.
(3) How membership interests may be transferred. 

19. LLC Management and Operation
LLC Operating Agreement:
(4) Dissociation procedures.
(5) Whether formal meetings will be held.
(6) How voting rights will be apportioned.

20. LLC Management and Operation
LLC Operating Agreement:
State Statute Fills in the Gaps: LLC statute governs where operating agreement is silent.
Partnership Law May Apply. If LLC statute is silent, courts may apply partnership principles.

21. §3: Dissociation and Dissolution of an LLC
An LLC member has the power, but not right, to dissociate from the LLC at any time.
Dissociation of an LLC is triggered by events similar to partnership. 

22. Dissociation and Dissolution of an LLC
Effect of Dissociation.
Dissociating member loses the right to participate in the management , and the right to act as an agent.
Member also has the right to have her interest bought out by other members. 

23. Dissociation and Dissolution of an LLC
Effect of Dissociation.
If the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages.

24. Dissociation and Dissolution of an LLC
Dissociated member has no right to force the LLC to dissolve.
Remaining members can choose to continue or dissolve.
Operating agreement ‘trigger’ events will cause dissolution. 

25. Dissociation and Dissolution of an LLC
CASE Venture Sales, LLC v. Perkins (2012).
Winding Up.
Members who did not wrongfully dissociate may participate in the winding up process. 

26. Dissociation and Dissolution of an LLC
Winding Up.
Members must collect and liquidate the assets.
After all assets are sold, proceeds distributed to pay creditors, then capital contributions, then remaining $ distributed pro-rata.

27. §4: Special Business Forms
Joint Venture.
When two or more entities combine efforts or property for a single transaction or project.
Unless agreed otherwise, JV’s share profits and losses equally. 

28. Special Business Forms
Joint Venture.
Common in international transactions.
Similarities to Partnership. Resembles a partnership and is taxed like a partnership with equal rights of management. 

29. Special Business Forms
Joint Venture.
Differences from Partnerships.
A JV is limited in time and scope, whereas a partnership is an ongoing business.
JV members have less implied and apparent authority than partners. 

30. Special Business Forms
Joint Venture.
Death of JV member does not terminate JV.
JV ordinarily terminates when project is completed.

31. Special Business Forms
Syndicate (Investment Group):
Group of individuals getting together to finance a particular project. 

32. Special Business Forms
Joint Stock Company.
Hybrid of partnership and corporation:
(1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

33. Special Business Forms
Business Trust.
Written agreement setting forth the interests of beneficiaries, and obligations and powers of trustees.
Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.

34. Special Business Forms
Cooperative.
Association organized to provide a not-for-profit service to members.

35. §5: General Considerations For Small Businesses
Limitations on Liability.
Maintain insurance.
Conduct of Owners.
Tax Considerations.
Pass-through or double taxed.
Continuity of Life. 

36. General Considerations For Small Businesses
Legal Formality and Expense.
Requirements for all Business Forms.
Business name registration.
Occupational licensing.
State tax registration. 

37. General Considerations For Small Businesses
Requirements for all Business Forms.
Health and environmental permits.
Zoning and building codes.
Import/export regulations. 

38. General Considerations For Small Businesses
Converting an LLC into a Corporation.
Protecting Intellectual Property.
Trademarks.
Trade Secrets.

39. §6: Financial Capital
Raising Capital is critical to growth of a small business.
Loans.
Venture Capital.
Pros and cons of venture capital.
Requires a business plan.

40. Financial Capital Crowdfunding. Specialized sites: www.appfunder.com.
Less Regulation: JOBS Act (Jump-start Our Business Start-ups.)