III. The Characteristics of LLC

III. The Characteristics of LLC

The LLC is best understood in terms of four general characteristics;

1. Limited liability ;
2. Partnership     tax features;

     3.Chameleon management—that is , the ability to choose between centralized and direct member - management; and

4. Creditor - protection provisions. These characteristics, in turn, are best understood in light of the development of the LLC as an alternative to existing business forms.

© Robert R. Keatinge,et al. ,The Limited Liability Company: A Study of an Emerging Entity,47 Bus. Law. 378,385 (1992).

4. Formation

1. A Limited Liability Company Can Be Organized for Any Lawful Purpose.

LLCs cannot without further legislation be formed to conduct the activities of such entities as insurance companies, banks and other financial institutions and railroads. Because of the re­quirements that an LLC not have too many corporate characteristics, they would not likely be suitable for many of these entities. Professionals would also need enabling legislation (or in the case of lawyers) to practice in LLCs.

2. Operating Agreement

The Operating Agreement is the LLC counterpart to a partnership agreement and consti­tutes the agreement of the members regarding the operation of the business of the LLC. This is the operative document governing not only the operation of the LLC but containing provisions which will be critical to establishing the treatment of the LLC as a partnership for taxation pur­poses.

The Operating Agreement may be oral; however, given the critical nature of its terms and provisions,a written agreement is recommended.

5. Liability

. A member,manager,agent or an employee of an LLC is not personally liable for the debts, obligations or liabilities of the LLC,whether arising in contract,tort or otherwise,or for the acts or omissions of any other member,manager,agent or employee of the LLC.

The member, manager, agent or employee may be personally liable for the person’s own acts or omissions. It does not alter any applicable law governing the relationship between a per­son rending professional services and a person receiving professional services, including liability arising out of the professional services.

Members or managers are not liable for damages to the LLC or to the members of the LLC for any action taken or failure to act unless the act or omission constitutes willful misconduct or recklessness.

The written Operating Agreement can eliminate or limit the personal liability of a member or manager for monetary damages for the breach of the prescribed standard of conduce, it also can provide for indemnification of a member or manager for judgments, settlements, penalties, fines or expenses incurred in a proceeding to which the person is a party because the person is or was a member or manager.

6. The Scope of Fiduciary Duties in an LLC

Should the scope of fiduciary duties in an LLC be analogized to those of general partner­ship, a limited partnership, or a corporation? Should an LLC have the power to define the scope of fiduciary duty in its operating agreement? Specific states have adopted various positions. Cal­ifornia and Illinois provide that an LLC member or manager has fiduciary duties to the LLC similar to those of a partner in a partnership. Cal. Corp. Code § 17153 (Supp. 1998); 111. Stat. Ch. 805, § 180/15 - 3. ULLCA adopts an approach that is similar to the duties owed by direc­tors to a corporation,ULLCA §409(a) -(d) (though a controversial exception is made for members who are not managers of the LLC). Delaware adopts the most liberal position,in effect allowing each LLC to elect the fiduciary regime it desires.