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Chapter Summary

Limited Liability Company (LLC)

An LLC is a special form of unincorporated business entity that combines the tax benefits of a partnership and limited liability attribute of a corporation.

  1. Uniform Limited Liability Company Act (ULLCA). The ULLCA is a model act that provides comprehensive and uniform rules for the formation, operation, and dissolution of LLCs.
  2. Taxation of LLCs. “Flow-through” taxation. For federal income tax purposes, an LLC is taxed as a partnership unless it elects to be taxed as a corporation.
  3. Powers of an LLC. An LLC has the same powers as an individual to do all things necessary or convenient to carry on its business or affairs [ULLCA Section 112].

Formation of an LLC

Articles of Organization

The articles of organization is a document that owners of an LLC must execute, sign, and file with the secretary of state of the appropriate state to form an LLC.

  1. Name of an LLC. The name of an LLC must contain the words limited liability company or limited company or the abbreviation L.L.C., LLC, L.C., or LC. Limited may be abbreviated as Ltd., and company may be abbreviated as Co.
  2. Duration of an LLC. An LLC is an at-will LLC unless it is designated as a term LLC and the duration of the term is specified in the articles of organization.
  3. Capital contribution to an LLC. A member’s capital contribution to an LLC may be in the form of money, personal property, real property, other tangible property, intangible property (e.g., a patent), services performed, contracts for services to be performed, promissory notes, or other agreements to contribute cash or property.
  4. Certificate of interest. The certificate of interest evidences a member’s ownership interest in an LLC.
  5. Operating agreement. An operating agreement is an agreement between members that governs the affairs and business of the LLC and relations among members, managers, and the LLC.
  6. Conversion of an existing business to an LLC. An agreement of conversion is a document that sets forth the terms for converting general partnerships, limited partnerships, and corporations to an LLC.
  7. Dividing an LLC’s profits and losses. Unless otherwise agreed, the ULLCA mandates that a member has the right to an equal share in an LLC’s profits and losses. Members may agree in an operating agreement how profits and losses of an LLC will be shared by the members.
  8. Distributional interest. Distributional interest is a member’s ownership interest in an LLC. This interest is personal property that may be transferred in whole or in part.

Liability of an LLC

Liability of an LLC

An LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a member, a manager, an agent, or an employee of the LLC who commits the wrongful act while acting within the ordinary course of business of the LLC or with authority of the LLC.

Liability of Managers

Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage. A member is personally liable for the debts of an LLC if he or she personally guarantees the repayment of the LLC’s debts.

Members’ Limited Liability

Members are liable for an LLC’s debts, obligations, and liabilities only to the extent of their capital contributions. Members are not personally liable for the debts, obligations, and liabilities of the LLC.

Liability of Tortfeasor

  1. Tortfeasor. A tortfeasor is a person who intentionally or unintentionally (negligently) causes injury or death to another person.
  2. Liability of a tortfeasor. A member or manager of an LLC who intentionally or unintentionally (negligently) causes injury or death to another person is personally liable to the injured person or the heirs of a deceased person.

Management of an LLC

Member-Managed LLC

In a member-managed LLC, the members have not designated managers to manage the LLC. A member-managed LLC is managed by its members.

Manager-Managed LLC

In a manager-managed LLC, the members have designated certain members or nonmembers to manage the LLC. A manager-managed LLC is managed by the designated managers; nonmanager members have no right to manage the LLC.

Agency Authority to Bind an LLC to Contracts

  1. Member-managed LLC. In a member-managed LLC, all members have agency authority to bind the LLC to contracts.
  2. Manager-managed LLC. In a manager-managed LLC, the managers have authority to bind the LLC to contracts; the nonmanager members cannot bind the LLC to contracts.
  3. LLC liability for contracts. An LLC is bound to contracts that members or managers have properly entered into on its behalf in the ordinary course of business or that the LLC has authorized.

Fiduciary Duties

  1. Duty of loyalty. A member of a member-managed LLC and a manager of a manager-managed LLC owe a duty of care to the LLC. This means that these parties must act honestly in their dealings with the LLC. These parties are liable to the LLC for any secret profits made by them and damages caused to the LLC by a violation of their duty of loyalty.
  2. Duty of care. A member of a member-managed LLC and a manager of a manager-managed LLC owe a duty of care to the LLC not to engage in:
    1. A known violation of law
    2. Intentional conduct
    3. Reckless conduct
    4. Grossly negligent conduct
      A covered member or manager is liable to the LLC for any damages the LLC suffers because of such breaches of the duty of care.
  3. Limited duty of care. A covered member or manager is not liable to the LLC for damages caused to the LLC because of their ordinary negligence.
  4. No fiduciary duty owed by nonmanager member. A member of a manager-managed LLC who is not a manager owes no fiduciary duty of loyalty or care to the LLC.

Dissolution of an LLC

Disassociation from an LLC

  1. Member’s power to disassociate. Unless the operating agreement provides otherwise, members have the power to withdraw from both at-will and term LLCs.
  2. Wrongful disassociation.
    1. Term LLC. The disassociation of a member from a term LLC before the expiration of the specified term is wrongful.
    2. At-will LLC. The disassociation of a member from an at-will LLC is not wrongful unless the power to withdraw is eliminated in the operating agreement.
    3. Liability for wrongful disassociation. A member who wrongfully disassociates himself or herself from an LLC is liable to the LLC and to the other members for any damages caused by the member’s wrongful disassociation.
  3. Notice of disassociation.
    1. Statement of disassociation. This document, filed with the secretary of state, states the name of the member disassociated from the LLC. This statement is constructive notice that is effective against persons, whether those persons are aware of the notice or not.
    2. Apparent authority. A disassociated member has apparent authority to bind an LLC to contracts in the ordinary course of business for two years after disassociation, unless either (1) the other party knew of the disassociation or (2) constructive notice of the disassociation was given.
  4. Continuation of an LLC. At the expiration of a term LLC, the LLC can be continued by all or some of its members.
  5. Winding up. If an LLC is not continued, an LLC’s business is wound up. This consists of preserving and selling the assets of the LLC and distributing the money and property to creditors and members.





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