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Limited liability companies (LLCs) have become one of the most popular forms of business entity in the United States. An LLC is a non-corporate entity that provides limited liability and full management rights to all of its owners (generally called members). Although it is not a corporation, its legal identity is separate from that of its owners.
LLCs combine the advantages of a corporation with the advantages of a partnership. A properly formed LLC can possess both the limited liability of a corporation and the pass-through tax treatment of a partnership. Like partnerships, LLCs are characterized by informality of organization and internal governance by contract. Like corporations, they protect their members from investor-level liability.
The flexible management structure allows owners to shape the LLC to meet the needs of the business. An LLC member may be an individual, a corporation, a partnership, another limited liability company or any other legal entity.
State Laws Enable Creation of LLCs
The LLC is a creation of law. An LLC can be formed and exist only under a state law that enables the creation of LLCs. Each of the 50 states and the District of Columbia have an LLC law, but LLC requirements differ from state to state. For example, in some states single-member LLCs are permitted. Others require a minimum of two members.
Written Operating Agreement
Generally, the members of an LLC are required to adopt a written operating agreement. The operating agreement establishes the rights, powers, duties, liabilities and obligations of the members between themselves and with respect to the LLC.
Fiduciary Duties of Members
A fiduciary is one who acts legally on behalf and in the best interests of another. Members of a manager-managed LLC have no fiduciary duty to the company or to the other members solely by reason of being members, but they may agree to impose fiduciary duties on the members.
The members of a member-managed LLC owe fiduciary duties of loyalty and care to the company and its other members. Members in a member-managed LLC may restrict or even eliminate fiduciary duties as long as any such restriction or elimination is not unreasonable.
Fiduciary Duties of Managers
The managers of a manager-managed LLC, like members of a member-managed LLC, owe fiduciary duties of loyalty and care to the company and its other members.
Duty of Loyalty
The duty of loyalty includes the obligations to account to the company, to refrain from dealing with the company in a manner that is adverse to it and to refrain from competing with the company before the dissolution of the LLC.
Duty of Care
The duty of care is an obligation to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner reasonably believed to be in the best interests of the company. Members and managers are not liable when they reasonably rely in good faith on the opinions and advice of competent professionals and other reliable sources.
Non-Fiduciary Duties of Members and Managers
Although not a fiduciary duty, each member owes to each other member and the LLC the implied contractual obligation to discharge its obligations and exercise its rights in good faith and consistent with fair dealing.
You may want to consult an experienced business law attorney if you are trying to decide whether an LLC is the right structure for your company or to review your operating agreement.