As discussed in the last few weeks and will continue in the next several weeks This Week in Real Estate is examining Limited Liability Partnerships (LLP) and Limited Liability Companies (LLC); their history and similarities and differences. This week continues with discussing the traits of the LLC.
Generally speaking, LLCs have the following traits pursuant to most LLC statutes.
Like LLPs, LLCs are independent, autonomous entities. This means that LLCs are legal persons separate and distinct from their members and that they may act and own property in their own names. Unlike LLPs, that require at least two partners, LLCs may have as few as one member but may have any greater number.
Any type of person may be a member of an LLC. Persons include, individuals and entities such as corporations, partnerships, and LLCs, and in some jurisdictions, statutory trusts. In addition, many LLC acts expressly include common law trusts as “persons” and as thus allowing trusts to be members of LLCs.
Similar to LLP statutes, LLC statutes bestow limited liability on its members. These statutes provide that just because a person is a member of LLC does not make the person liable for LLC obligations. However, there are many situations in which a person may have this liability despite their LLC liability shield. One primary example is situations in which the member engages in personal misconduct on the LLC’s behalf.
Like LLPs, LLCs, generally, may be formed for any purpose, including a non-profit purpose. Nevertheless, before anyone forms any type of entity, the governing statute should be consulted to make sure the purpose can be conducted by that particular entity. Under all LLC acts, LLCs may exercise any powers necessary or useful in pursuing their lawful purposes.
LLC members have substantial contractual freedom to tailor their LLCs in their operating agreements to meet member needs and interests, and the courts must defer to this freedom. To provide for maximum contractual freedom, most of the provisions in most LLC acts that are significant in LLC deals—e.g., provisions concerning contributions, allocations, distributions, and fiduciary duties—are default provisions that members may alter in their operating agreements. The concept of LLC freedom of contract will be examined further in next week’s edition of This Week in Real Estate.
Under most LLC acts, LLCs are not subject to the statutory formalities to which corporations are subject. Thus, for example, under most LLC acts, LLCs need not issue membership certificates, adopt bylaws, maintain minute books, or hold annual member or manager meetings.
Under most LLC acts, the default management structure is management by the members, but in their operating agreements, the members may reserve LLC management to one or more persons appointed as managers. The management structure of a member-managed multi-member LLC is generally similar to that of a general partnership. That of a manager-managed multi-member LLC is generally similar to that of a limited partnership, but manager-managed multi-member LLCs may also have corporate management structures.
Most if not all LLC acts provide members with “pick-your-partner” and “charging order” protections. Pick-your-partner provisions protect the management rights of LLC members from third-party claims. Charging order provisions protect members’ rights to receive allocations of LLC income and distributions of LLC cash and other assets.
Keep in mind that in order to effectively tailor their LLCs to meet their needs, members of both single-member and multi-member LLCs need written operating agreements. Many LLC acts provide that not only written but also oral and implied operating agreements are legally valid. However, proving the terms of oral and implied operating agreements can be difficult or impossible.
As noted above, next week, This Week in Real Estate will discuss the concept of LLC freedom of contract and specifically Delaware’s LLC Act as it relates to that concept.
ABOUT JAMES LANDON
Jim Landon has practiced real estate law since 2002 and has been involved in real estate investment and construction for most of his life. Jim’s practice focuses on real estate transactions and land use.
Jim represents individuals and privately and publicly held companies in the purchase, sale, leasing, financing, and development of real property. He also represents title insurance companies on commercial purchases and refinancing transactions, as well as providing third-party legal opinions regarding Delaware law related to Delaware entities.
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