WHAT IS LLC (LIMITED LIABILITY COMPANY)?

Tutorials on basics of Limited Liability Company (LLC)

So what does LLC mean?

The first of the limited liability entities to be introduced into the United States, and currently the most prevalent, is the limited liability company. The limited liability company (LLC) is a type of non corporate entity that offers many of the benefits of both partnerships and corporations.

Limited Liability Company Defined

The limited liability company (LLC) is a non-corporate entity that offers limited personal liability to its owners. It is somewhat of a cross between a partnership and a corporation. The LLC is owned by members who either manage the company directly or delegate management responsibility to managers or officers. 

Like a corporation, the owners of a limited liability company are usually not liable for company debts and obligations. Like a partnership, the LLC’s income and losses are allocated to the owners who then pay tax on the limited liability income and profits allocated to them.

Limited Liability Company Characteristics

The limited liability company is an unincorporated entity based on the concept of freedom of contract. It is a legal entity distinct from its owners. The owners of a limited liability company are generally referred to as its members.

The characteristics of any limited liability company will depend on its members’ objectives and the statutes of the state in which it is formed. However, most limited liability companies have common characteristics, including limited liability, flexible management, continuity of life, restricted transferability of interest, unrestricted ownership, certain formalities for formation, and partnership taxation status.

LIMITED LIABILITY 

Like a corporation, the owners of a limited liability company typically have no personal liability for the debts and obligations of the company.

MANAGEMENT 

Management of the limited liability company is very flexible. All members of the limited liability company are granted the right to manage its business unless otherwise provided for in the limited liability company’s articles of organization. 

State statutes typically permit the owners of a limited liability company to allocate management authority among its members in any manner they choose. They may decide to be managed by one individual, by committee, or by the majority of the owners. 

Most limited liability companies appoint a board of managers, similar to a corporation’s board of directors. A written agreement among the members, referred to as an operating agreement, sets forth the details concerning the management of the limited liability company.

Major decisions of a limited liability company are usually made by the members holding a majority of the limited liability company interest, unless otherwise provided for in the operating agreement or by statute.

CONTINUITY OF LIFE 

The statutes of most states provide that a limited liability company may be designed for continuity. Unless the articles of organization provide that the limited liability company will be a term company that will dissolve on a certain future date or event, the limited liability company will be an entity at will, meaning that it exists indefinitely, until the members dissolve it. 

The statutes of some states, however, require that the articles of organization filed with the state must specify a period of duration for the limited liability company.

The death or dissociation of one or more of the members of a limited liability company does not necessarily cause the dissolution of the limited liability company. The statutes of some states provide that the members of a limited liability company must give six months’ notice of their intent to dissociate from the company.

TRANSFERABILITY OF INTEREST 

State statutes place restrictions on the transfer of the ownership interest of the members of limited liability companies. Many of these restrictions may be modified by the company’s operating agreement.

Members of a limited liability company are not considered to be co-owners of the company’s property. That property is owned by the limited liability company itself. A member may usually transfer or assign his or her right to receive distributions to another person. 

This transfer does not necessarily make the new owner of the right to receive distributions a member of the limited liability company. The transferee of a member’s financial rights to a limited liability company does not have the same rights to participate in the management and operation of the limited liability company that members do. 

A person may become a member of a limited liability company only if he or she is substituted, or admitted, to the limited liability company as provided by the company’s articles of organization.

OWNERSHIP 

There are very few restrictions on the number or type of owners who may own limited liability companies. Most state statutes provide that a limited liability company may be formed by one or more persons. That definition of persons usually includes corporations, partnerships, trusts, and other entities.

FORMALITIES OF ORGANIZATION 

The limited liability company is formed in much the same way that the limited partnership or business corporation is formed. Articles of organization are filed with the secretary of state or other appropriate state authority.

In addition, a limited liability company may be subject to annual reporting requirements imposed by the state in which it was organized.

TAXATION 

One of the most important benefits to forming a limited liability company is the partnership taxation status, which is preferable to corporation taxation for most members.

In 1997, the Internal Revenue Service adopted Check the Box regulations,1 which make it simple for a limited liability company to be taxed as a partnership. When the members of a limited liability company file an income tax return for the LLC it is classified, by default, as a partnership. 

If the members prefer, they can simply check the box on an election form and elect to be taxed as a corporation. Single-member limited liability companies are disregarded as entities separate from their owners for federal income taxation purposes unless the sole member elects to be taxed as a corporation.

Most states follow the federal scheme for limited liability company income taxation. However, some states, especially those that do not have a personal state income tax, may either treat limited liability companies as corporations for income taxation purposes, or they may assess special taxes on limited liability companies.

LAWFUL WORKERS COMPENSATION AND TORTS BASIC INFORMATION AND TUTORIALS

Every state has a workers’ compensation system that operates to automatically compensate, or pay, employees who are injured on the job. Employers make regular contributions to a state fund or buy
insurance for this purpose.

Workers are compensated for injuries that occur in the course of their employment. However, they
do not have to go to court to prove that their employer was at fault. Workers also receive a portion of their salary while they are recovering and unable to work.

Many states provide employees with two-thirds of their regular salary. In exchange, the injured employee usually gives up the right to sue his or her employer. Accidents that occur while the employee is commuting to or from work are rarely covered.

Unlike the plaintiffs in typical tort cases, workers can usually recover monetary damages for their injuries even if they were negligent.

However, workers’ compensation statutes generally deny recovery when the accident was caused by the employee’s intoxication. In addition, nearly half of the states either reduce or prohibit recovery when a worker’s refusal to follow safety rules caused the accident.

For example, a welder who is blinded on the job after ignoring repeated warnings to wear safety goggles would not be able to recover money under workers’ compensation statutes in some states.

The amount of money awarded for a specific injury is limited according to a schedule the state determines. The schedule sets the amount a worker can recover based on the seriousness of the injury, the amount of time the worker is expected to be out of work, and the worker’s average weekly wage.

Workers cannot usually recover additional damages from the employer through a civil tort action. This means that workers’ compensation is the exclusive remedy, or the only compensation for on-the-job injuries.

A worker who is injured on the job must notify the employer. Often the employer will ask a doctor to certify the injury. Then either the employer or the injured employee will file a claim.

After the claim is filed, the injured employee will regularly receive a workers’ compensation payment, just like a paycheck. The payments will continue until the employee can return to work or recovers from the injury.

Many states have a workers’ compensation commission that hears claims and decides how much money will be given to injured workers. If the commission decides that little or no money should be given, the injured person may appeal to a court.

PROMISSORY ESTOPPEL DEFINITION BASIC INFORMATION AND TUTORIALS

WHAT IS PROMISSORY ESTOPPEL?

Promissory estoppel
A doctrine in which a court may enforce a promise made by the defendant even when there is no contract, if the defendant knew that the plaintiff was likely to rely on the promise, the plaintiff did in fact rely, and enforcement of it is the only way to avoid injustice.

A fierce fire swept through Dana and Derek Andreason’s house in Utah, seriously damaging it. The good news was that agents for Aetna Casualty promptly visited the Andreasons and helped them through the crisis.

The agents reassured the couple that all the damage was covered by their insurance, instructed them on which things to throw out and replace, and helped them choose materials for repairing other items. The bad news was that the agents were wrong: the Andreasons’ policy had expired six weeks before the fire.

When Derek Andreason presented a bill for $41,957 worth of meticulously itemized work that he had done under the agents’ supervision, Aetna refused to pay.

The Andreasons sued—but not for breach of contract, because the insurance agreement had expired. They sued Aetna under the legal theory of promissory estoppel:

Even when there is no contract, a plaintiff may use promissory estoppel to enforce the defendant’s promise if he can show that:

• Th e defendant made a promise knowing that the plaintiff would likely rely on it;
• Th e plaintiff did rely on the promise; and
• Th e only way to avoid injustice is to enforce the promise.

Aetna made a promise to the Andreasons, namely, its assurance that all the damage was covered by insurance. The company knew that the Andreasons would rely on that promise, which they did by ripping up a floor that might have been salvaged, throwing out some furniture, and buying materials to repair
the house.

Is enforcing the promise the only way to avoid injustice? Yes, ruled the Utah Court of Appeals.1 Th e Andreasons’ conduct was reasonable, based on what the Aetna agent said.

Under promissory estoppel, the Andreasons received virtually the same amount they would have obtained had the insurance contract been valid.