LAW JOURNAL ARTICLE ABOUT LLCS AS CONTRACTUAL ENTITIES

By , September 19, 2018 11:25 am

A thoughtful law journal article explores the extent to which LLCs really are the purely contractual entities they are often described as being under the Delaware Limited Liability Company Act.  The citation to the article and the abstract of it are below.

42 Del. J. Corp. L. 391
Delaware Journal of Corporate Law
2018
Article
Mohsen Manesh
Copyright © 2018 by Widener University Delaware Law School; Mohsen Manesh
CREATURES OF CONTRACT: A HALF-TRUTH ABOUT LLCS

ABSTRACT

Courts reflexively describe LLCs–the nation’s most popular form of business entity–as “creatures of contract,” the contract being, of course, the LLC agreement that governs the rights and obligations of the parties that own and manage the entity. The judicial reflex to use this maxim is especially pronounced in Delaware, where today LLCs outnumber corporations by more than two to one. And because Delaware LLC law, like its corporate law, enjoys an outsized influence in the business world, courts in other jurisdictions have now predictably embraced the “creatures of contract” maxim, too.

But to describe LLCs as “creatures of contract,” while perhaps a useful shorthand, is simply misleading. LLCs are also creatures of statute. And they are also creatures of equity. This claim is not normative; it is a legal reality.

Therefore, the singular aim of this Article is to puncture the persistent fantasy that LLCs are “creatures of contract.” More accurately, this Article shows that LLCs embody a complex interaction of contract terms, statutory rules, and judge-made doctrine. Thus, LLCs are creatures of contract, statute, and equity.

CAN AN ENTITY BE A PARTNERSHIP AND A CORPORATION AT THE SAME TIME?

By , September 14, 2018 8:29 am

The post in Peter Mahler’s business divorce blog under the link below addresses the above fascinating question.

Here’s the link:  https://www.nybusinessdivorce.com/2018/05/articles/partnerships/corporate-frankenstein-partnership-form-corporation-lives-another-day/

LAW JOURNAL ARTICLE ABOUT LLCS

By , September 11, 2018 10:16 am

Peter Molk, a leading LLC scholar, has published an article about LLCs.  The title, citation, and introduction of are below:

51 U.C. Davis L. Rev. 2129
U.C. Davis Law Review
June, 2018
Article
Peter Molk
Copyright © 2018 by Peter Molk
PROTECTING LLC OWNERS WHILE PRESERVING LLC FLEXIBILITY

LLC statutes allow owners to restrict or completely waive standard governance protections required of other business forms. Corporate law mandatory stalwarts like fiduciary duties can be entirely eliminated in an LLC. This flexible approach has the potential to generate maximally efficient governance relationships: tailored negotiation among LLC investors can produce an optimal set of governance terms that corporate law’s mandatory protections cannot. Yet when owners lack sophistication or bargaining power, contractual freedom allows for terms that lead to mispriced capital, reduced investment, and inefficiently allocated capital across LLCs.

A series of cases has brought this problem to the fore. Recommendations for reform have focused on doing nothing, imposing mandatory protections, or relying on ad-hoc judicial interventions, but these solutions are each ultimately unsatisfying. Instead, I show how a model inspired by securities law’s accredited investor concept has the most promise to ensure LLCs‘ continued viability as a distinct organizational form, with favorable liability and tax treatment to everyday investors and the freedom to craft unique governance relationships for sophisticated ones.

THE CRITICAL IMPORTANCE OF HAVING BULLET-PROOF PROCEDURES FOR ENSURING RECEIPT AND ACTION ON SERVICE OF PROCESS

By , September 5, 2018 1:21 pm

The very sobering discussion under the link below makes clear the critical importance to LLCs, their members and their managers of having bullet-proof procedures for ensuring receipt of service of process and response to service of process.  If the registered agent of an LLC is its law firm, this will generally not be an issue.  However, the registered agent of many smaller LLCs is one or the LLC’s members or managers or even a friend or relative of one of these persons.  This arrangement can lead to a legal disaster.

Here’s the link:

https://www.lexology.com/library/detail.aspx?g=b9ec7017-af86-40d0-806b-d780c6a82a8a&l=81R0H12

THE POTENTIAL PITFALLS OF USING SOCIAL MEDIA IN HIRING

By , August 30, 2018 1:38 pm

The post under the link below contains a very practical discussion of the legal issues inherent in searching for and using Google information in connection with employee matters.  The post is probably relevant to many of our clients.

To Google or Not to Google: The Potential Pitfalls of Using Social Media in Hiring

PURPOSE CLAUSES IN LLC OPERATING AGREEMENTS

By , August 28, 2018 3:08 pm

The post by Peter Mahler under the link below shows the potential complexity and the land mines lurking in operating agreement purpose clauses approving “any lawful purpose.”  Maybe in some cases the solution is to provide that the members by majority or supermajority vote may specify or limit their LLC’s purpose from time to time.  In any event, thanks to Peter, I find I’m looking at “standard” purpose clauses with a new level of caution.

Here’s the link:  https://www.nybusinessdivorce.com/2018/02/articles/llcs/purposeless-purpose-clause-makes-comeback/

MASSACHUSETTS LLC CASE

By , August 24, 2018 10:42 am

The case cited and summarized below obviously has critical importance for lawyers representing Massachusetts LLC, but it may also have an impact in other jurisdictions.  Here are the cite and the summary:

62-WTR B. B.J. 9
Boston Bar Journal
Winter, 2018
Case Focus
Michael Cohen William Cushing
Copyright © 2018 by Boston Bar Association; Michael Cohen, William Cushing
MASSACHUSETTS APPEALS COURT PERMITS CLAIM FOR BREACH OF FIDUCIARY DUTIES AGAINST COMPANY COUNSEL BY MINORITY LLCMEMBERS

In Baker v. Wilmer Cutler Pickering Hale and Dorr LLP, 91 Mass. App. Ct. 835 (2017), decided this past July, the Massachusetts Appeals Court allowed the minority members of a Massachusetts limited liability company to sue the LLC’s outside counsel for breach of fiduciary duty relating to counsel’s involvement in an alleged “freeze-out” scheme that benefited the majority members. Although the Supreme Judicial Court had previously held that counsel to closely-held corporations may owe fiduciary duties to individual stockholders, Baker is the first case in which a Massachusetts appellate court has permitted a claim for breach of fiduciary duty to proceed against outside company counsel by minority owners. Corporate lawyers should be acutely aware of the Baker decision and its implications.

BINDING MEDIATION

By , August 21, 2018 11:15 am

Dispute resolution provisions are among the most important provisions in any multi-member LLC operating agreement.  The post by Peter Mahler under the link below discusses a court decision about a form of contractual dispute resolution I’d never heard of—“binding mediation.”  His post is food for thought for every LLC lawyer.

Here’s the link:  https://www.nybusinessdivorce.com/2018/05/articles/deadlock/anyone-think-binding-mediation-break-deadlock-good-idea/

“TRADE OR BUSINESS”

By , August 17, 2018 10:19 am

A key issue in any Section 199A analysis for clients is whether their business is a “trade or business” under IRC section 162.  The Tax Court case cited below contains a useful discussion about the procedural issues courts apply in addressing this issue, and the case holds that merely preparing to start a new business does not constitute a trade or business under Section 162.

Here’s the cite:

HOMAYOUN SAMADI AND SARABANO SAMADI,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
UNITED STATES TAX COURT
Filed May 24, 2018

IS THIS ENTITY A PARTNERSHIP?

By , August 15, 2018 3:13 pm

Some of our clients operate their business entity very informally before they come to us, and in such a way that even the federal tax regimen of the entity is unclear.  The attached excellent post about that issue by Lou Vlahos of Farrell Fritz addresses this issue under the link below.

https://www.taxlawforchb.com/2018/07/its-not-an-llc-its-not-an-lp-but-is-it-a-partnership/