How Does an LLC Work?

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

The state in which you create your limited liability company will impose minimum requirements and standards you must follow in operating the business. However, most jurisdictions in the country impose similar laws. Using the LLC structure allows you to conduct operations with minimal government intervention, provided at least one LLC member exists and you operate a bona fide business.

The state in which you create your limited liability company will impose minimum requirements and standards you must follow in operating the business. However, most jurisdictions in the country impose similar laws. Using the LLC structure allows you to conduct operations with minimal government intervention, provided at least one LLC member exists and you operate a bona fide business.

Member Liability

The LLC is solely liable for the debts and obligations that arise through contracts, torts and loan agreements. The members of the LLC have no responsibility to fulfill any obligation that the LLC fails to meet. Furthermore, the failure of the LLC to observe formalities or business norms when exercising its management power does not by itself warrant the imposition of personal liability of members. However, if a member acts beyond the scope of his authority when conducting LLC business, he may be personally liable to the LLC and other members for those actions.

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Fiduciary Duties

All members and managers owe the LLC a minimum standard of fiduciary duties. These duties include the promise to refrain from acting in a grossly negligent manner that may potentially cause damage to the LLC, and to not intentionally or recklessly break any law while conducting LLC business. Importantly, most state laws impose a duty of loyalty on members and managers. This requires the member or manager to always put the interests of the LLC before personal interests when conducting business, and to not usurp potential opportunities of the LLC for personal gain. Breaches of fiduciary duties cause the member or manager to incur personal liability for any resulting damage or loss of profit.

Dissociation

LLC members may leave the business for any purpose and at any time. However, the LLC's operating agreement may require members who wish to dissociate to fulfill certain obligations prior to terminating the membership. The member wrongfully dissociates if the departure violates a clause of the operating agreement. Although the dissociation is still effective, the member may incur personal liability for damage or loss the LLC suffers as a direct result of the breach. For example, if you are a member-manager and the operating agreement requires you to provide 60 days notice to other members of your intention to dissociate, you may be liable for the expense the LLC incurs in finding an adequate replacement.

Dissociation Events

Other LLC members may force the involuntary dissociation of another member if done pursuant to the requirements set forth in the operating agreement. Remaining members may also agree unanimously to expel a member if it becomes unlawful to carry on business activities with the presence of that member, or the member transfers all interests in the LLC to a third party. Alternatively, members may seek judicial intervention and obtain an order expelling a member who engages in activity that adversely affects the business interests of the LLC or consistently breaches the operating agreement.

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LLC Fiduciary Responsibilities

References

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