Articles Tagged with Limited Liability Company

photo-LLC-law-change-225x300All good things come to an end and that could include a limited liability company or LLC. California law will change in 2017 and make it easier to dissolve and to wind up its affairs. If you’re involved in an LLC and thinking it’s run its course and time to pull the plug, depending on the circumstances, you may want to wait another couple months.

An LLC is a hybrid business entity. It’s a combination of a partnership and corporation.

  • Its main advantage over a partnership is like the shareholders of a corporation the LLC’s owners’ (members’) liability for its debts and obligations is limited to their financial investment.
  • However LLC members can participate in its management and profits or losses flow through to its members like a partnership.
  • An LLC can’t be formed for businesses that provide professional services that require a state professional license, such as a legal or a medical practice.
  • Forming an LLC is easier to form and maintain than a corporation. LLC’s don’t issue stock, are not required to hold annual meetings or keep written minutes, which a corporation must to preserve the liability protection for its owners.
  • Articles of organization must be filed with the state and LLC members must enter into an operating agreement. An oral one will suffice but a formal, written agreement is a better idea for all those involved.
  • An LLC is normally managed by its members, but they can agree to hire a manager to handle its affairs.
  • For state income tax purposes an LLC will be classified as a partnership if there is more than one owner but members can elect to have it taxed as a corporation.

Earlier this year the California legislature made minor language changes to the Revised Uniform Limited  Liability Company Act (RULLCA) and they will go into effect in January. RULLCA currently states that an LLC could be dissolved and its activities wound up if, among other things, a majority of its members voted to dissolve it. Continue reading

photo - fiduciary duties Ha (by 2brg8)Those who manage Limited Liability Companies (LLC’s) have many responsibilities. It’s up to them to run a business and make a profit while living up to their responsibilities to fellow company members. Most managing partners, if their businesses aren’t making record profits, at least managed honestly and ethically. James Ha was not one of those managers.

Members of LLC’s owe duties of care and loyalty (called fiduciary duties) to the LLC and its members. Mr. Ha was the managing member of the 139 S. Occidental Blvd., LLC, which was started in 2005 to purchase a building in Los Angeles, tear it down, build condos and sell them. The project was abandoned.

He was sued by the LLC in 2006 for breach of contract, fraud and breach of fiduciary duties. A trial court found in the plaintiff’s favor and an appellate court affirmed the decision. 139 S. Occidental Blvd., LLC, v. Ha, 2013 WL 2421073

According to the appellate decision,

  • Ha was responsible for real property ownership, management and proposed development.
  • He made a $34,120 commission from the sale of the property which wasn’t reported to fellow LLC members.
  • Ha opened a bank account in the name of the LLC with an initial deposit of $150,000, which was provided by members other than Ha and member Nam Kyung Cho. The bank account, as well as the LLC operating agreement, required that any check over $10,000 be signed by both Ha and member Hyon Mi Yi.
  • Soon after the account was set up, Ma withdrew several checks for less than $10,000 for a total of $60,000 to supposedly pay back a loan to the LLC by Cho. There was no such loan agreement produced during the trial and there was no explanation as to what happened to the extra $10,000.
  • Cho paid Ha $216,065.29 for a 12.5% interest in the proposed building. Ha deposited the money into his personal account.
  • In 2006 members of the LLC voted Ha out as managing member and sued Ha and Cho.

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2013_03_23__5015st of 2014 by the new California Revised Uniform Limited Liability Company Act (RULLCA). The new provisions of RULLCA significantly alter the default and mandatory rules that previously governed California based LLCs. Although many of the provisions are similar to the previous act, in many cases the new provisions are more robust. These new provisions may become the source of member disputes so members should review the following changes to ensure that these provisions will not conflict with their expectations.

Management and Consent Requirements

RULLCA requires that both the articles of organization and the operating agreement contain a statement establishing the LLC as a manager-managed LLC. Prior to this only the articles of incorporation required a statement establishing the LLC as manager-managed. This new default gives minority members more power, and it also means that minority members can assert veto power over the decisions of a manager by claiming that the decision was not made in the ordinary course of business. Defining ordinary course of business in the operating agreement is strongly recommended because that term is undefined in RULLCA.

Additionally, minority members will have veto power over the will of the majority in votes to amend the operating agreement. Under the prior law if an operating agreement was silent regarding the voting threshold only a majority of LLC interest was required to pass an amendment.

Limits on Managerial Powers

Under RULLCA managers will be expressly forbidden to undertake several acts without approval of all members or express authority via the operating agreement. This includes the ability to sell, lease, or exchange all or substantially all of the LLC’s assets.

Fiduciary Duties

RULLCA defines the duty of loyalty as the duty to account, the duty to refrain from self-dealing, and the duty to refrain from competing. These duties are not itself new, but RULLCA allows an operating agreement to alter the scope of the duty of loyalty by designating certain acts as not violating the duty. However, the duty of loyalty may not be eliminated via the list, and the standards may not be so low that the duty of loyalty becomes manifestly unreasonable.

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IMG_0645When the investors or entrepreneurs set up a limited liability company (LLC) for their business ventures, most of the time they want the endeavor to be successful and lasting. However, there are times when the members will need to dissolve the business affairs of the LLC, either as the result of unforeseeable circumstances or for strategic reasons. The Corporations Code §17350 provides that an LLC shall be dissolved and its affairs wound up after the following events:

1.   At a Time Specified in the Article

During the formation of the LLC, if the investors specify that the LLC will only exist for a definite length of time or if there is a specific date for the termination of the LLC, the LLC may be dissolved when this date has been reached. This is sometimes done when a specific date for terminating an LLC is important to the investor. Before the expiration date, however, the investor can always change or delete this condition from the Article.

2.  Upon an Event Specified in the Article or Operating Agreement

In addition to reaching a specific time for dissolving an LLC, investors can also set a specific event to trigger this, designated either in the Article or the Operating Agreement. For example, the members of the LLC can state that when a specific real estate project is sold, completed, or developed, the LLC will be dissolved. This way, the members can be assured that the LLC they invested in will only serve that particular purpose, and they can always create a new one for a different purpose. This example pertains to real estate transactions. As to the LLC in different segments of business, the condition can be set upon a condition of certain gross sales or net profits being generated for a specific business. Almost any legitimate business purpose can be set as a condition.

3.  By the Majority Vote of the Members

The most obvious method for dissolving an LLC is when the majority of the members vote to dissolve the LLC. This right cannot be waived, and the Operating Agreement cannot withdraw the members’ right to vote on dissolution. However, the Operating Agreement can set a condition for the vote, such as to increase the vote from a majority to unanimity.

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