LLC Rules & Guidelines

By Jeff Franco J.D./M.A./M.B.A.

Entrepreneurs who wish to create a limited liability company for their business must adhere to the prevailing laws of each state. Limited liability company formation requirements across various jurisdictions have many similarities. Almost all require the filing of a Certificate of Organization with the jurisdiction’s Secretary of State as a prerequisite to legal formation.

Entrepreneurs who wish to create a limited liability company for their business must adhere to the prevailing laws of each state. Limited liability company formation requirements across various jurisdictions have many similarities. Almost all require the filing of a Certificate of Organization with the jurisdiction’s Secretary of State as a prerequisite to legal formation.

Contribution Liability

Although no state law requires it, a member can contribute tangible or intangible property, past and future services, promissory notes and cash upon joining the LLC. The operating agreement of the LLC may require new members to make certain periodic contributions to the LLC. If you agree to these terms, your obligation remains enforceable by the LLC and is not excusable in the event of death, disability or any other reason that makes you unable to perform. In the event a creditor provides financing to the LLC on the assurance that members are required to make contributions, the lender can enforce a member’s obligation to make contributions if noncompliance results in the LLC defaulting on repayment.

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Fiduciary Duties

All members and managers of the LLC owe a fiduciary duty to the business. A duty of due care to the LLC requires members and managers to not be grossly negligent in business activities that may cause damage to the LLC. However, due care does not cover activities that are deemed as ordinary negligence. To rise to the level of gross negligence, there must be a flagrant disregard of normal practices. A manager’s oversight of a significant detail that actually results in damage to the LLC is an example of ordinary negligence. Those members and managers that the LLC determines act grossly negligent can be liable to the LLC for the resulting damages.

Management

Unless otherwise agreed, all members automatically receive a management interest in the LLC’s business activities. This includes the right to oversee the day-to-day operations, vote on firm business and have access to all books and records. Only those members whom the LLC provides a specific management role may receive compensation from the business in addition to their rightful share of LLC profit distributions. The non-managing members of the LLC can select a non-member manager to run the operations of the business. These managers have no interest in the LLC beyond that of an ordinary employee.

Dissolution

If all members agree, they can dissolve the LLC at any time for any reason. In addition to a unanimous decision, the LLC is subject to dissolution on the occurrence of an event that the operating agreement makes dissolution contingent on or in the absence of a single LLC member for a term of 90 days or more. A member may also request a state court to intervene and force dissolution if sufficient evidence exists proving that the LLC consistently engages in illegal activity. In this situation, the court has discretion to order dissolution regardless of whether other members agree.

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Information on the California Limited Liability Act

References

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