A Limited Liability Company (LLC) is an unincorporated business entity that merges various aspects, mostly positive, of partnerships and corporations. LLCs facilitate America’s capitalist spirit by allowing entrepreneurs to create separate legal entities that generally remove personal liability of their members, or owners, to third parties. While there is a federal Uniform Limited Liability Company Act (ULLCA) in place, these codes are not law until states ratify them as state statutes. Many states have adopted most or all of the ULLCA’s codes, however, it must be noted that individual LLC laws may vary slightly from state to state but are generally quite similar for the purposes of an overview.
Forming A LLC: Articles of Organization & Articles of Amendment
Most LLCs are formed to start a business. In order to do so, the process must be followed as according to the respective state’s statutes and this involves articles of organization. These articles are the documents that are to be filed in the state where the LLC is being formed and are absolutely crucial to the process. Under UCLLA § 203, the articles of organization must include certain information including the LLC’s name, contact information of each organizer, whether or not an LLC is at-will (meaning it has no duration) or a term LLC (meaning it has a definite duration), and perhaps one of the most important items – “whether one or more of the members of the LLC are to be personally liable for the LLC’s debts and obligations”. If they chose to do so, members of an LLC can also include additional terms and can file an articles of amendment with the state if they wish to change anything at a later time.
LLC Costs & Certificate of Interest
After the members of an LLC file, they must choose what each of them will contribute for the operational and start-up costs of the LLC. This doesn’t include just cash; all sorts of other property can be considered such as promissory notes, intangible property, contracts for service, etc. Upon contributing to a LLC, each member will receive a certificate of interest that proves they have ownership interest. Under ULLCA § 405(a), the profits and losses of an LLC are to be “allocated on a per capita basis”. However, this can be modified by the LLC operating agreement and certainly proves useful in situations where, for example, one member contributes 30% capital and the other contributes 70%. Chances are, the member contributing 70% does not want to equally share the profit with the member who holds less interest. If a member of an LLC does not make a contribution as contracted, the other members of the LLC may seek out remedies for damages and losses.
The Liability and Protection of LLCs
LLCs have the ability to protect their members from many third party claims as they create a separate legal entity. Therefore, under ULLCA §302, a LLC is liable for losses and injuries that occur as a result of a wrongful action by a person directly associated with the LLC (member, employee, etc.) that occurs during the “normal course of business.” This means, that if 3 members each contribute an amount to their LLC and the company goes out of business while simultaneously incurring a debt that is larger than the original amount of funds contributed by the members, creditors will not be able to pursue individual members to collect on their debts outside of the LLC. An exception to this rule is if an appointed manager or member of the LLC commits a tortious act. They would be considered a tortfeasor and could be held personally liable for their behavior.
The Dissolution of LLCs : Winding-Up & Articles of Termination
LLCs do not always go as planned, and whether this is due to poor management or other economic troubles, they sometimes need to be dissolved. Under ULLCA § 602(b), a member may withdraw from an LLC, unless otherwise specified in the original agreement. If a member withdraws before the term LLC expires or withdraws when the original agreement specifically disallows this action, then the member has engaged in a wrongful disassociation. In this instance, that member would be liable by damages caused to the LLC from the disassociation. As with all the other activities in forming and operating an LLC, a statement of disassociation must be filed with the state to ensure that the member’s name is removed from the articles organization. When an LLC is dissolved, or terminated by all of the members, the LLC must participate in “winding-up”. This means, that the LLC must pay off all the creditors and any money left over can be divided amongst the members as provided in the original operating agreement. Lastly, they must file articles of termination with the state to officially dissolve the LLC.