There are separate bodies of law governing the formation, operation and dissolution of limited liability companies in every state and the District of Columbia. However, most jurisdictions adopt some form of the Revised Uniform Limited Liability Company Act, which results in greater uniformity across jurisdictions. Although you can operate the business in all 50 states, you must adhere to the specific rules and regulations of the jurisdiction that authorizes the creation of your LLC.
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A majority of jurisdictions do not require an LLC to have an operating agreement. However, an operating agreement in multi-member LLCs can prove beneficial for standardizing operating procedures. Operating agreements generally provide limitations on members' authority, voting requirements for amending the agreement and making important business decisions, enhancements to the state fiduciary duty requirements, and guidelines for the amount and timing of profit distributions. LLC members have great latitude in drafting the agreement, but may not enforce clauses that are contrary to the state’s laws.
LLC members do not hold an identifiable interest in a specific piece of property the LLC owns. Rather, each member owns a percentage of all assets held by the LLC. LLC members are entitled to a right to participate in LLC management activities, and a member may decide to sell or exchange an interest in the LLC to a third party. However, most state laws preclude the transferee of a membership interest from participating in the operations of the business. The transferee only obtains the original member’s financial interest in the LLC, which is equal to his proportionate share of LLC assets and future profits.
Right to Distribution
Most jurisdictions do not impose a requirement on the LLC to make profit distribution payments to members. However, if the LLC decides to issue a distribution, all current members have an equal right to it unless the operating agreement provides another acceptable allocation method. Members who dissociate prior to the distribution have no claim against the LLC for the payment. Those who purchase the financial interest from a member receive the same treatment as other members for purposes of financial distributions. In the event the LLC fails to pay one of the members, that member has a rightful legal claim against the LLC in the amount of the delinquent payment.
Improper Distribution Liability
When an LLC pays a distribution that exceeds the jurisdiction’s limit, the members or managers who authorize the distribution are personally liable for the improper distribution amount. Additionally, any member who knowingly accepts an improper distribution shares personal liability with the individual authorizing its payment. However, these individuals bear no personal liability if the operating agreement of the LLC delegates liability to another member who has the ultimate authority for granting final approval of the distribution. Incurring personal liability for the improper amount allows the LLC and other members to legally recover amounts from the member or manager’s personal assets.
References & Resources
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, Ph.D.; 2010