In this 6 week series we are discussing topics relating to Selecting a Business Entity. Last week we discussed some of the distinguishing factors among business entities. There are several different business structures to choose from but we will begin by discussing a Limited Liability Company or LLC.
III. TYPES OF BUSINESS ENTITIES
Limited Liability Company
The LLC is a creation of state law that combines limited liability protection for all of the equity owners without sacrificing the right of any owner to participate in the management of the enterprise.
A limited liability company is a separate, legal entity formed by filing a certificate of organization with the Secretary of State. LLC statutes contemplate, but do not require, the adoption of an “operating agreement” to govern the operation and management of the LLC. One of the primary purposes of the operating agreement is to define the relationships of the business owners and to facilitate governance of the business and any transfer of interest. Most statutory provisions may be altered by agreement in the operating agreement.
The members may reserve all management powers to themselves, in which case the members become mutual agents for one another in much the same way as a general partnership. Alternatively, members may opt for the decentralized management of the corporate form by delegating management powers to one or more appointed managers, and the managers will be solely responsible for the management of the business.
Regardless of the management structure of the LLC, as a general matter, neither the members of an LLC nor its managers are liable for the debts or liabilities of the LLC. Assuming that all of the statutory requirements are satisfied, the LLC member’s liability to the LLC is generally limited to the extent of any unpaid capital contributions.
With respect to changes in ownership and continuity of existence, LLCs tend to be similar to general partnerships. In most cases, absent a contrary provision in the operating agreement, the LLC statutes provide that unless a proposed transfer has been unanimously approved by the other members, a transferee of a member’s interest cannot participate in the management of the LLC or become a member, although the transferee is entitled to receive the share of profits attributable to the transferred interest. As for the death, retirement, or other event of withdrawal of a member of an LLC, the LLC will be dissolved unless the statute provides for continuation of the business by all or some portion of the remaining members.
Next week we will begin a discussion of Corporate Forms of Business Organization.