I recently stumbled upon an article that I found absolutely fascinating considering my line of work.  In the July 7, 2010 edition of Masuda Funai’s Business Update, Stephen Proctor asks,” Is a limited liability company bound by its own operating agreement?”

Now let’s think about this.  How could the LLC not be bound by its own agreement?  I mean it is the operating agreement, after all, that set the guidelines for management and ownership of the LLC. However, after reading further I found the real issue at hand is whether or not the LLC itself be required to sign the agreement, and if not, is the LLC really bound to it.  There are state statutes that unsuccessfully define “parties” to the agreement, or even bind the LLC as an entity separate from its members.   So what does that really mean and does it even matter?  Well, as you’re about to read, failure to clearly define such terms allowed the managing member of a Wisconsin LLC misappropriate funds and there was nothing the LLC could do about.  What you’ll also find in the article is how once again Delaware sets the bar for all things corporate.  See the excerpt of Proctor’s article below:

One of the early cases dealing with this issue held that a Wisconsin limited liability company that did not sign the operating agreement was not bound by it. (Bubbles & Bleach, LLC v. Becker No. 97 C 1320, 1997 WL 285938 (N.D. IL May 23, 1997) In Bubbles & Bleach, the limited liability company brought suit in Illinois federal court against the managing member for misappropriation of funds. The managing member moved to dismiss the Illinois federal case. The operating agreement included an arbitration clause that required arbitration in Wisconsin under Wisconsin law. The operating agreement was binding on the “parties” to the agreement, but the term “parties” was not defined. Further, Wisconsin defined an operating agreement as an agreement among the members. The court found that there was no indication that Wisconsin intended to bind the limited liability company as an entity distinct from its members. So the limited liability company was not bound by the arbitration provision in the operating agreement.

Delaware takes a completely opposite approach. In 2002, Delaware amended its limited liability company law to provide explicitly:

“A limited liability company is not required to execute its limited liability company agreement. A limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” (Delaware Limited Liability Company Act Section 18-101, as amended by 73 Delaware Laws, c. 295, Sections 1 and 2)

(As an aside, Delaware’s defined term is “limited liability company agreement,” but it can be referred to as an operating agreement, so the references are to the same agreement.)

It might have seemed that Delaware, considered a bellwether in these matters, would have settled this issue. But, as a recent Illinois case illustrates, the issue is far from settled. (Trover v. 419 OCR, Inc. 921 N.E. 2d 1249, Illinois Appellate Court, Fifth District, January 12, 2010).

Trover was a member of Far Oaks Development Group, LLC (FODG). Trover and the other members of FODG authorized the managing member, Halloran, to transfer land held by FODG to 419 OCR, Inc. (419 OCR, Inc. was owned by Halloran and Macaluso who were also members of FODG.) But Trover alleged that the agreement transferring the land included an oral promise by Halloran and Mancuso, representing 419 OCR, Inc., to pay FODG, in addition to the estimated price of the land to be sold, an additional sum of money to be determined as the land was developed and sold. Although the land was developed and sold at a profit, no additional funds were paid to FODG. The litigation by Trover was based on a derivative action on behalf of FODG alleging breach of contract and fraud.

Halloran and Macaluso sought to compel arbitration under the operating agreement of FODG. The trial court denied the motion to compel arbitration and the defendants appealed.

The court acknowledged that the arbitration provision in the operating agreement was broadly worded. In this case, some of the claims involved defendants (such as 419 OCR, Inc.) who were not members of FODG and were not parties to the operating agreement. Clearly, with respect to these defendants, arbitration could not be compelled. But the more interesting question was whether the limited liability company itself was considered a party to and bound by the terms of the operating agreement that created the limited liability company.

To read the full article click HERE. (requires free account to log on)

If you had to guess which entity is number one in Delaware – would you say an Inc. or LLC?  According to a recent report found in the Fordham Journal of Corporate and Financial Law; the statistics are staggering. Since 2004 the number of LLC’s filed in Delaware has surpassed the number of Incorporations by almost 3 – 1.

The total number of LLC’s filed in DE from 2004 to 2009 was 519,000. The total number of Inc.’s filed during the same period was 189,000. There were 329,000 more LLC’s filed in DE than Inc.’s in that six year period. The most dramatic increase in the LLC’s filed occurred between 2005 and 2007. Through that two-year period there was an increase of 40% more LLC’s filed when compared to 2004. In 2007, there were 112,982 LLC’s filed in DE versus 68,807 filed in 2004. The total number of Incorporations has fallen every year since 2005. The dramatic economic crisis which began in 2008 had an impact on each entity type; although the LLC still out paced the Inc. by more than 50%. Why are these numbers important? What can we learn from them?

Well, first of all when you consider that the Delaware Incorporation has been in existence since the 1800’s and the Delaware LLC since 1991 – this change has obviously occurred over a very short period of time. The LLC is now the most popular type of entity filed in America. In fact; according to the study, the LLC is being filed by almost 11 to one over the Inc. in some other states.

Business people from all walks of life are placing a great deal of trust in this relatively young corporate entity type. In the past, most business endeavors sought the structure of the corporation to provide stability. The security, flexibility and informalities associated with the LLC have made it an obvious choice for many entrepreneurs and investors. We now live in a world that is more litigious than ever and your business deserves ample protection as do you and your assets. The LLC can typically shelter any type of business or assets and provide separation for the individuals involved. It is very simple to operate and the burden of management associated with a stock company is greatly reduced.

However, the most important factor is still – trust. The LLC has withstood the legal challenges of the past 19 years and has established itself as a very worthy entity. Also, we can conclude that the LLC is helping many individuals and small groups realize their business potential. The LLC is very well suited for a more intimate business strategy. The privacy offered is also appealing to many; since we are all faced with the threat of identity theft in this age of immediate information.

Harvard Business Services, Inc. has been filing LLC’s since 1991. We know firsthand how valuable the LLC is to most business people. The LLC may be just right for you and if there is strength in numbers…..well you will be joining a very strong group!  We can help you file your LLC today.

Bajo la ley de Delaware, una LLC puede ser compuesta de series individuales de interés de membrecía. Este tipo de entidad se llama “LLC de Series”. Cada serie esta tratado como entidad separada – las deudas, responsabilidades, obligaciones y gastos de una serie no puede ser aplicado contra otra series de la LLC o contra la LLC en conjunto. Cada series puede tener su propio capital, miembros, realizar sus propios operaciones y seguir objetivos comerciales diferentes, pero se mantiene aislado de reclamaciones de miembros, acreedores, litigantes persiguiendo el capital de o haciendo reclamaciones contra otra series. La LLC de Series es la versión de Delaware de las “segregated portfolio companies” que se usan frecuentemente en las Islas Cayman, Jersey, British Virgin Islands y otros jurisdicciones fuera de EE.UU.

La forma de la LLC de Series rebaja las tarifas en el inicio y el mantenimiento anual a comparación de constituir y mantener varias entidades separados para cada inversión. Una única cuota es lo requerido para formar una LLC de Series sin importar el número de series que va a contener, a diferencia de las tarifas múltiples que serian en la creación de entidades separadas. Además, una LLC de Series está tratada como entidad individual, para los propósitos de impuestos de franquicia y representante autorizado. Esto quiere decir, que una LLC de Series tendría que pagar solamente una tarifa anual de $250 al estado y una tarifa anual de representante autorizado, en vez de pagar tarifas separadas que serian aplicadas a tener entidades múltiples.

El Acuerdo Operativo de la LLC de Series de Delaware (que no tiene que ser publicado) puede proporcionar cualquier número de series. Como sea, El Certificado de Formación para una LLC de Series tiene que mencionar específicamente que la LLC está dividida en series distintas y que el capital y obligaciones de una serie son atribuibles solamente a esa serie. Además, series pueden ser agregadas o terminadas en cualquier momento haciendo una modificación al Acuerdo Operativo de la LLC. Para poder mantener la distinción legal entre las series, una LLC de Series debe de mantener documentos documentando el capital y responsabilidades de cada serie; desde un punto práctico, los documentos deben ser organizados como si cada serie fuera su propia entidad separada.

Aunque sigue ganado popularidad, hay un cierto grado de dudas de la forma de la LLC de Series. Por ejemplo, la separación legal del capital y las responsabilidades de cada serie en una LLC de Series no ha sido probada en la corte tribunal. Aunque la ley de Delaware distintamente proviene para la separación legal de cada serie, no está claro si los tribunales en otros estados o otras jurisdicciones reconocerían la separación legal del capital y responsabilidades dentro de lo que es una sola entidad técnicamente. Por lo tanto, aunque una LLC de Series de Delaware está operando bien con documentos distintos sobre el capital y responsabilidades de cada serie, un tribunal en otra jurisdicción puede determinar el hecho de no reconocer la separación legal que este determinado bajo la ley de Delaware.

Además, el tratamiento de impuestos federales de cada serie no está asegurado. Aunque en Enero de 2008 el IRS ha dicho que las series distintas de la LLC de Series por lo general tendrían que pagar impuestos como si fueran entidades separadas para intenciones de impuestos federales. Muchos estados no han dado información concreta de los efectos de la distinción de series para impuestos estatales.

Harvard Business Services, Inc tiene más de 10 años creando Las LLC de Series y tiene la experiencia y conocimiento que le deja aprovechar de la flexibilidad de esta tipo de entidad. Si piensa que la LLC de Series puede ser la entidad adecuada para usted, llámenos para más detalles.

To read the English version of this blog posts click HERE.