Category: LLC Definitions

DISSOLUTION VS. LIQUIDATION

By , January 21, 2015 9:28 am

Another basic distinction you should be aware of in forming LLCs is the distinction between an LLC dissolution and an LLC liquidation.  Click here for to read a post about this distinction in the excellent LLC blog called LLC Law Monitor.

APPARENT VS. ACTUAL AUTHORITY

By , January 21, 2015 9:22 am

In handling LLC formations, you need to understand the difference between actual and apparent LLC member and manager authority.   For a clear explanation of the difference in the context of litigation in a New York court, click here for a recent post in an excellent LLC blog called LLC Law Monitor.

 

WHAT DOES “MATERIAL” MEAN?

By , January 19, 2015 10:45 am

The term “material” is often a useful one to include in LLC operating agreements, even though the precise meaning of the term is usually quite unclear.  For example, many operating agreements provide that the managers must promptly disclose to the members all material information of which the managers become aware that may affect the LLC.  The following link briefly discusses this issue under Delaware law and includes a link to a very recent Delaware case on the issue:

http://www.delawarebusinesslitigation.com/2015/01/articles/case-summaries/ma/court-of-chancery-explains-what-is-a-material-disclosure/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DelawareBusinessLitigationReport+%28Delaware+Business+Litigation+Report%29.

MEANING OF THE TERM “LLC INTEREST”

By , August 7, 2014 9:15 am

Even experienced LLC lawyers sometimes refer to LLC members’ memberships as “LLC interests.”  However, under most LLC statutes, the term “LLC interest” means only a member’s right to allocations of LLC profits and losses and to distributions of LLC cash and other assets.  It does not mean a member’s LLC membership rights in their entirety (including, for example, management and fiduciary rights).

The above meaning of the term “LLC interest” is the basis for an interesting recent LLC charging order case.  The cite is Young v. Levy, 140 So.3d 1109 (District Court of Appeal of Florida, Fourth District, June 18, 2014).

THE MEANING OF “LIMITED LIABILITY”

By , June 23, 2014 1:18 pm

Whenever you form an LLC for your clients, you should explain to them the meaning of key LLC statutory rules and terms relevant to them.  The most relevant term of all is often the term “limited liability.”   In this blog post, Doug Batey discusses two issues concerning limited liability that often arise in LLC formations and operations.

WHAT IS AN LLC “MANAGER”?

By , March 22, 2014 10:38 am

The term “manager” is one of the most basic terms in LLC business organization law, but I know of no LLC act that defines the term.  This post in a Morris James LLP blog entitled “Delaware Business Litigation Report” discusses a recent Delaware district court decision that defines it.  Basically, the case holds that in LLCs that are governed by a board, the board members are “managers” for purposes of the relevant Delaware personal jurisdiction statute but the officers to whom the board delegates management functions and authority are not.  The case citation is Wakley Limited v. Ensotran LLC, C.A. 12-728-GMS (March 18, 2014).

I think the Wakley decision is of questionable validity, but, unless overturned on appeal, it is likely to be influential not only in Delaware but also in many other states.

SENTENCE OUTLINE ON LLC STATUTORY “PICK-YOUR-PARTNER” PROVISIONS AND CHARGING ORDER PROVISIONS

By , April 25, 2012 3:53 pm

The “pick-your-partner” provisions in LLC statutes prevent creditors from levying on LLC member’s management rights.  The “charging order provisions” in LLC statutes permit creditors to obtain distributions from LLCs that would otherwise go to member-debtors; they prevent creditors from levying on LLC assets in satisfaction of member debts; and some of them prevent creditors from levying on members’ “LLC interests”—i.e., their allocation and distribution rights.  Pick-your-partner provisions and charging order provisions are among the most important provisions in any LLC act.

If you don’t have a detailed practical understanding of the pick-your-partner provisions and charging order provisions in your state’s LLC statute, you shouldn’t engage in LLC practice.

On April 25, 2012 from 2 pm to 3:30 pm, I will be teaching a national teleconference seminar on LLC statutory pick-your-partner provisions and charging order provisions for National Business Institute.  For a PDF version of the sentence outline I will use in the seminar, click here.

“BEST PRACTICES IN LLC FORMATIONS” (Post #2)—Defining the Term “Best Practices”

By , January 18, 2012 8:09 pm

For purposes of LLC formation practice, I propose (subject to your comments as a reader of this blog) to define “best practices” as follows in quotes:

“A best practice in forming LLCs means a method of performing a particular task in the formation that meets each of these four tests:

  1. It produces an optimal result.
  2. It produces this result at least as reliably as any alternative method.
  3. It is not inferior to any alternative method in any significant respect.
  4. It is superior to all alternative methods in one or more respects.

What constitutes an “optimal result” in performing a particular task varies, of course, depending on the task in question.

In theory, there may be two or more methods of performing the task, both or all of which produce an optimal result. However, in this circumstance, one method may be better than the others because it is easier to learn, easier to implement or faster to implement than the other methods.

EXAMPLE. A key task in any LLC formation is non-tax choice of entity—i.e., the analytical process of choosing between LLCs and other types of business organizations for a business start-up on non-tax grounds (such as the strength of their liability shields, their ability to confer statutory charging order protections, or the legal and other costs of their formation and operation).

In my experience, the best method for doing non-tax choice of entity is, briefly, the following three-step method.

  1. Determine which types of business organizations are available to the business start-up client in question under applicable state law. For example, the state-law business organizations available to an individual forming a single-owner business are, in most or all states, (i) sole proprietorships, (ii) single-shareholder corporations and (iii) single-member LLCs. To perform this step, you must, of course, have a complete list of potentially relevant state-law business organizations.
  2. Identify the non-tax advantages and disadvantages of each of these organizations for your client. To perform this step, you must, of course, have a complete list of potentially relevant non-tax advantages and disadvantages. In the example, the obvious chief non-tax advantage of LLCs and single-shareholder corporations over sole proprietorships is that they provide liability shields, while sole proprietorships do not.
  3. Choose among these organizations for your client by netting these advantages and disadvantages. In the example, the chief non-tax advantage of a single-member LLC over a single-shareholder corporation for most individuals forming single-owner businesses is the greater informality and flexibility of single-member LLCs, particularly with respect to their management structure.

In my experience, the above three-step method is the only method for doing non-tax choice of entity that will yield an optimal result. Thus, there is no need to compare this method with alternative methods before characterizing it as the non-tax choice of entity “best practice.”

It is true that, in seminars and other forums, lawyers sometimes suggest that non-tax choice of entity and tax choice of entity cannot be analytically separated in an LLC formation and thus must be done simultaneously. In my view, this position is manifestly wrong, since the factors relevant in non-tax and tax choice of entity are entirely different from one another. Thus, the two methods should never be mixed. Rather, you should apply each of the two methods processes independently of the other and should then reconcile any difference in outcome.