Limited Liability Companies: Management Rights and Liabilities (UBE & NextGen UBE)

With fewer subjects now tested on both the UBE and the NextGen UBE, each tested subject is likely to get a deeper dive. You've got be ready for some questions on limited liability companies. 

A limited liability company ("LLC")  is sort of a hybrid between a partnership and a corporation. It's taxed like a partnership (for the most part) but offers its owners (sometimes called members, and sometimes called managers) the limited liability of shareholders of a corporation. 

It's important to view the operation agreement of any LLC, since that agreement can displace nearly all statutory provisions and can also alter the duties owed by members or managers. 

The default rule to keep in mind is that an LLC will be member managed, though this can be altered by stating that the LCC will be manager managed. Each member has equal management rights. A majority vote of the members is required to approve most decisions in the ordinary course of business. Each member has the authority to bind the LLC to contracts that are apparently carrying on the ordinary course of business for the company, unless the member lacks actual authority and the other party knows this. 

Importantly, in a manager managed LLC, only the managers (and not the members) have the rights outlined above. In both member-managed and manager-managed LLC's, a unanimous vote is required to approve extraordinary business decisions (outside of the ordinary course).

As for liabilities, both members and managers are not personally liable for the LCC's obligations. That's to say, the amount they can lose is capped by the amount of their investment in the company. Courts, however, may pierce the LLC veil to reach both members and managers' personal assets. A court may do so, for example, if the members or managers commingle their funds with the LLC such that the LLC is a mere alter ego of the members or managers., Some other reasons for piercing the veil are fraud/deceit, or if the LCC is intentionally formed without enough capital or insurance to reasonably cover its foreseeable business risks and liabilities (often deemed "inadequate capitalization"). This might look familiar since it's the same analysis used when determining whether to pierce the corporate veil.