Sunday, March 12, 2017

Limited Liability Companies

Limited Liability Companies ("LLC's") is a trendy topic on the MEE.  So much so that the most recent update to my book MEE Essentials will contain a more in-depth discussion of this topic.  A foundational area to understand here is the differences between member-managed LLC's and manager-manager LLC's.

Member-Managed LLC's:
With this type of management structure, each member owes to each other member as well as to the LLC duties of care and loyalty.  In addition, each member must discharge their obligations consistent with good faith and fair dealing. Most importantly to remember here is that there are obligations that members have that they do not necessarily have under other management structures such as will be listed below (under manager-managed LLC's).

Regarding the duty of loyalty, a member must account to the LLC for any benefit derived in connection with the LLC's business and must refrain from dealing adversely with the LLC (unless the transaction is deemed fair by the LLC).  Further, the members must refrain from competing with the LLC's business.  These acts, however, may be authorized even though they would generally violate the duty of loyalty if authorization is provided by the other members after full disclosure has been provided to the other members.

Under the duty of care, members must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interest of the LLC.  This standard shows up elsewhere and is known as the 'business judgement rule.'

Manager-Managed LLC's:
Here, the duties of loyalty and care are different for managers and members.  Although both retain the obligation of good faith and fair dealing, only the managers are subject to the duties of loyalty and care as discussed above for member-managed LLC's.  Further, only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty.

Lastly, it should be noted a member-managed LLC is presumed unless the operating agreement of the LLC provides otherwise.

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