LLCs

n  Limited Liability Company (LLC): A hybrid form of business, which is

n  taxed like a partnership while offering its owners

n  the limited liability of a corporation.

n  As a fictional person, an LLC can sue or be sued, enter into contracts, and own property.

n  An LLC is composed of one or more owners, called members, who must file articles of organization with the appropriate state authority.

n  Some states’ statutes require that an LLC have at least two members; other statutes are silent on the number of members required to form an LLC.

n  Corporations, partnerships, or foreign investors can own an LLC, in whole or in part, which need not be “closely-held” – meaning that it may have unlimited investors.

n  An LLC must include the words “Limited Liability Company” or the initials “LLC” in its business name, as reflected on its articles of organization.

LLC PROS AND CONS

n  Key Advantages:

n  a member’s personal liability is limited to the amount they invested into the LLC;

n  LLCs with two or more members may elect to be taxed as a corporation or a partnership; and

n  flexibility in management and operations.

n  Key Disadvantage: Non-uniform state LLC statutes create uncertainty as to personal liability and the respective authority of the LLC and its members.

LLC OPERATION AND MANAGEMENT

n  Operating Agreement: An agreement among the members of an LLC, addressing management, profit-sharing, transfer of ownership, dissolution, and other important issues.

n  The operating agreement may also include provisions governing decisionmaking procedures, voting rights, members’ meetings, and the like.

n  Even if the relevant state does not require a formal operating agreement, much less a written one, LLC members are wise to have both to clearly delineate the members’ rights and responsibilities.

n  Management: LLCs are typically either member-managed – meaning that all of the owners of the LLC participate in its management – or manager-managed – meaning that a designated group of persons, some or all of whom may be non-members, manage the LLC.

n  In the absence of a contrary agreement, all members of an LLC are entitled to participate in its management.

LLC DISSOCIATION

n  Dissociation: Unless the operating agreement says otherwise, a member may dissociate from the LLC voluntarily.  In addition, the Uniform Limited Liability Company Act (ULLCA) allows members to be dissociated

(1)   by vote of the other members,

(2)   by judicial (or arbitral) order, or

(3)   due to death, incapacity, bankruptcy, or assigning her partnership interest for the benefit of creditors.

n  A member’s dissociation generally does not cause the LLC to cease doing business.

n  A member who ceases to be associated with a LLC

(1)   is normally entitled to have the remaining members purchase his interest,

(2)   forfeits his authority to act for the LLC and to participate in its management, and

(3)   ceases to owe the LLC a duty of loyalty and continues to owe it a duty of care only with respect to events that occurred before his dissociation.

LLC DISSOLUTION AND WINDING UP

n  Dissolution: An LLC can be dissolved by

(1)   the occurrence of some event stipulated in the LLC agreement,

(2)   vote of the (non-dissociated) members, or

(3)   judicial decree.

n  Winding Up: Once an LLC’s dissolution is formalized and any required notice has been given, the members must wind up the LLC’s affairs (i.e., collect and preserve LLC assets, pay LLC debts, and account to each member for the value of his interest in the LLC).

n  LLC assets are distributed as follows:

(1)   payment of third party debts and refunds of loans or advances made by members to or for the LLC; then

(2)   return of each member’s capital contribution and distribution of profits to the members in equal shares, unless otherwise agreed.

JOINT VENTURES

n  Joint Venture: A business venture where two or more persons or entities combine their interests in a particular enterprise and agree to share in the losses or profits equally or in proportion to their capital and asset contributions.

n  A joint venture resembles a partnership and is taxed like a partnership.  However, there are some differences:

n  Joint venturers have less implied and apparent authority because the activities of a joint venture are more limited, as a matter of law, than those of a partnership.

n  The death of a joint venturer generally does not terminate the joint venture.

n  Joint venturers owe one another the same fiduciary duties owed to partners.

n  Because joint ventures sometimes overlap with one or more of the joint venturer’s other business, conflicts of interest need to be disclosed and dealt with openly.

JOINT STOCK COMPANIES

n  Joint Stock Company: A hybrid of a partnership and corporation that

n  is formed by agreement (rather than by statute),

n  issues transferable shares of stock,

n  is managed by directors and officers, and

n  has perpetual existence; but

n  is not treated as a legal entity for purposes of a lawsuit, and

n  does not afford its shareholders limited liability.

n  Like a partnership, the property of a joint stock company is held in the names of the members, rather than in the name of the company.

n  But, members of a joint stock company do not owe one another the same fiduciary duties owed by one partner to another.