Limited Liability Companies

Transcription

1 Limited Liability Companies by Shaun Courtney, Tim Sanders and Robert Hershey The University of Arizona NativeNet Professional Development Series

2 2 The University of Arizona NativeNet

3 Limited Liability Companies 3 How To Use This Book This booklet is one of a series designed to serve as a resource for tribal officials on topics relating to: 1. Governance 2. Economic Development 3. Lands & Resources 4. Safe & Healthy Communities 5. Comparative & International Indigenous Peoples Law Throughout this guide, the following icons may appear. These icons are visual guides to help the user identify areas that may require special attention. Multiple options exist. You will need to choose which direction to go An important point to be aware of Practical tip; helpful hint Should you choose to address matters discussed in this guide that require the assistance of an attorney, this booklet can serve as a foundation for facilitating discussions regarding these matters. This book is not meant to constitute legal advice or to substitute for the advice of a qualified attorney on legal matters.

4 4 The University of Arizona NativeNet Limited Liability Company (LLC) Statute Overview A Resource for Tribal Leaders A Project of the University of Arizona Indigenous Peoples Law and Policy Program and the Native Nations Institute Table of Contents Use This Book as a Resource Introduction Code: General Provisions Code: Organization Code: Members and Managers Code: Non-Liquidating Distributions Code: Merger, Conversion, and Domestication Code: Dissolution and Winding Up Code: Wholly-Owned Tribal Entities Forming a Company Further Reading About the Project

5 Use this Book as a Resource Limited Liability Companies 5 This booklet is designed to be a resource for tribal officials to help them navigate the process of creating an LLC code. It is organized into chapters that correspond to categories you will want to address in your code. Within each chapter you will find sections about specific provisions that warrant detailed explanation or that present important decisions that will need to be made as you consider your own code. Visual guides are included to help you identify areas that require special attention: Throughout the booklet, references will be made to both the Ho-Chunk Limited Liability Code (5HCC03) and the Uniform Limited Liability Company Act (ULLCA); both documents are incorporated as appendices to this booklet. In addition, specific provisions are included in the text of this booklet where appropriate; in these excerpts, any references to a state in the ULLCA have been changed to denote a reservation. A tribe wishing to enact an LLC code is encouraged to choose one of these two exemplars as a template and modify it according to the tribe s specific needs after reviewing the information in this booklet. Of course, your tribe may choose to draft a completely new statute with the assistance of a qualified attorney, in which case this booklet can serve as a guide to the different types of provisions you will want to consider including. When you see a box like this, it contains the text of provisions from the Ho-Chunk Code or the Uniform LLC Code. The choice of template depends on the tribe s particular needs. In general, the Uniform Code is much more descriptive than the Ho-Chunk Code, although both contain very similar provisions. In several cases, the Uniform Code imposes more restrictive constraints on how LLCs may undertake certain operations;

6 6 The University of Arizona NativeNet in these cases, you will need to consider the tribe s goals regarding control over LLCs and which template is better suited to those goals. A tribe considering using one of these two templates must balance concern for detail and specificity with brevity and flexibility. For several provisions, this booklet outlines the difference between these two codes and allows for a comparison of the two legislative styles. Once a template is chosen, the tribe should not omit any of the provisions without careful consideration of the effect of leaving out the provisions. Any enactment of tribal statutes should only be carried out after consultation with an attorney. This book is not meant to constitute legal advice or to substitute for the advice of a qualified attorney on legislative matters. Introduction The allure of the limited liability company is its unique ability to bring together the best features of all other business forms in a single business organization. If the company incurs a debt, the amount of responsibility that the owners, or members, are accountable for is limited. Often this responsibility varies according to the amount contributed to fund or invest in the company. While anything up to that amount may be lost, the company s members are not personally liable beyond that contribution. In this way, the individuals are protected, similar to a corporation. Partnerships do not have such protection for their owners. In addition, a limited liability company itself is not taxed. Instead, the individual members pay taxes on the profits or dividends that the company distributes to them. Corporations are taxed and their owners, or shareholders, pay taxes again on the dividends the corporation pays to them. In that way, corporate profit is taxed twice. Like partnerships however, limited liability companies only pay taxes once. Corporations, including those having made a Subchapter Selection, do not offer their shareholders

7 Limited Liability Companies 7 all the pass-through tax benefits of a partnership. The purpose of this guide is to share the basic framework of typical limited liability codes and highlight areas of decisions in drafting and common issues that should be addressed such as: should the tribe recognize limited liability companies not organized under tribal law to accommodate the widespread multistate activities of modern businesses; should the tribe require more than one owner to incorporate and operate an LLC; may an LLC be formed for purposes other than to make a profit; should owners have the power and right to withdraw from a company and receive a distribution of the fair value of their interests; should a member's dissociation cause a dissolution of the company; who has the apparent authority to bind the company and what are the limits of that authority; what are the legal fiduciary duties owners and managers owe to the company and to each other; how are the rights to manage a company allocated among its owners and managers; do the owners have the right to sue a company and its other owners in their own right as well as derivatively on behalf of the company; may existing partnerships and corporations be converted to limited liability companies and may limited liability companies merge with other limited liability companies and other business organizations; what law should govern foreign limited liability companies; and, are any or all of these and other rules simply default rules that may be modified by agreement or are they nonwaivable? The tribe can include as few or as many rules as it deems

8 8 The University of Arizona NativeNet necessary into its limited liability code. What is not cemented in tribal law, or their limited liability company code, is left to the companies to determine in an agreement among the members. Provisions can be included in the code as a default subject to sophisticated agreements between companies. The fewer rules the tribe has, the more space it leaves the members to design a company that will meet their needs. Unfortunately, this does not protect companies that do not have access to the expertise of limited liability company attorneys. The default provisions can be relied on for protection in such instances. To further protect these companies, the law can include nonwaivable provisions. Some codes group their nonwaivable provisions in a single section. On the other hand, the tribe can create a less strict framework that is very flexible and inviting to limited liability companies. General Code Provisions Definitions: This section defines terms used throughout the act, confining interpretation to those definitions when provided. This can limit parties from using definitions that may be more beneficial or detrimental to their case in the event of litigation. The tribe can use this section to selectively limit or expand the meaning of specific terms. When developing this section, the tribe should take care to thoroughly review the issues regarding the specific terms it selects to include in its definitions section. For a comparison of definitions used in different codes, see ULLCA 102 and 5HCC03 5.

9 Nature and Purpose: Limited Liability Companies 9 Denoting the limited liability company as a "separate entity" aids in shielding the members from liability. The purpose can limit the limited liability companies only to those that are organized for profit or expand it to include charitable organizations. (a) A limited liability company is an entity distinct from its members. (b) A limited liability company may have any lawful purpose, regardless of whether for profit. (c) A limited liability company has perpetual duration. -ULLCA 104 LLC codes typically indicate that an LLC may be formed for any lawful purpose, and some enumerate several examples of activities an LLC may undertake. Your tribe s decision whether or not to include specific examples will depend on how large you want the LLC code to be as well as the extent to which you wish to stimulate business formation and growth by providing such examples. Some courts may interpret the enumeration of examples as an intent to exclude anything not mentioned. Regardless of how your tribal court has ruled on similar issues in the past, you should carefully consider this possibility in your decision and, at minimum, include specific language stating that the examples are not intended to be exhaustive or to exclude other purposes not listed.

10 10 The University of Arizona NativeNet A limited liability company may be organized under this Act for any lawful purpose. Unless otherwise provided in article of operation [sic], a LLC organized and existing under this Act has the same powers as an individual to do all things necessary and convenient to carry out it business, including but not limited to all of the following. [ ]g. Lend money, invest and reinvest its funds, and receive and hold real or personalproperty as security for repayment. [ ]l. Make donations to and otherwise devote its resources for the public welfare or forcharitable, scientific, educational, humanitarian, philanthropic, or religious purposes. [ ]p. Provide benefits or payments to members, managers, employees, and agents of the LLC, and to their estates, families, dependants or beneficiaries in recognition of the past services of the members, managers, employees, and agents of the LLC. -5HCC03 9 Duration: Companies exist indefinitely and terminate at-will unless the articles of incorporation set a specific duration of time the company will exist and stipulate that the company is to expire at the end of that term. Generally, members of an at-will company may demand a payment of the fair value of their interests at any time. Owners of a term company must generally wait until the expiration of the term to obtain the value of their interests. The tribe can limit the lifespan of a company by dissolving it at a certain time or upon the occurrence of a specific event, or the tribe may allow it to exist indefinitely, or in perpetuity. The tribe may want to consider providing avenues to override perpetuity such as member con sent or other terms or events specified in

11 Limited Liability Companies 11 the operating agreement. If the operating agreement includes its own duration provision that would override this default rule and the tribe does not require the limited liability company to file its operating agreement and make it public, it may not be public knowledge whether the company is for a term or is at-will. Principles of Law, Powers, and Sovereign Immunity: The tribe can prohibit the operating agreement from altering the capacity for the company to sue and be sued. In addition, the tribe will want to demarcate the boundaries of its sovereign immunity and clarify that tribal law will govern the affairs of the company. This is covered below in the section on Sovereign Immunity. The code should clarify whether affairs includes member actions with third parties, as members may not be considered to be part of the internal affairs of the company, which could include their torts or actions and decisions that bind the company. SECTION 105. POWERS. A limited liability company has the capacity to sue and be sued in its own name and the power to do all things necessary or convenient to carry on its activities. SECTION 106. GOVERNING LAW. The law of this [tribe] governs: (1) the internal affairs of a limited liability company; and (2) the liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of a limited liability company. SECTION 107. SUPPLEMENTAL PRINCIPLES OF LAW. Unless displaced by particular provisions of this [act], the principles of law and equity supplement this [act]. -ULLCA Office and Agent: A fundamental element of a limited liability code is a process for designating a person who will be accountable for receiving and confirming delivery of documents for a company. To hold a company liable for its obligations, other entities must be able to

12 12 The University of Arizona NativeNet locate the company. Therefore, the company must designate one person at a specified address who will always be able to deliver documents to the company. In this way, if a company is not located on the tribe s land or nearby, the company can still be found easily through the designated agent. Because of the importance of the contact agent, the code is often very specific about transferring the responsibility and seamlessly changing agents so that there is someone designated at all times to serve in this capacity. The tribe should choose whether or not to re - quire LLCs to designate and continuously maintain an office on tribal land and/or an agent who is a tribal member. Not including these requirements can allow businesses to operate off of tribal lands more easily. Some tribes require the office and agent to be located in one place on the reservation, as serving process on a company is simplified when all of the tribal companies agents are centrally located. OFFICE AND AGENT FOR SERVICE OF PROCESS. (a) A limited liability company shall designate and continuously maintain [on this reservation]: (1) an office, which need not be a place of its activity [on this reservation]; and (2) an agent for service of process. (b) A foreign limited liability company that has a certificate of authority under Section 802 shall designate and continuously maintain [on this reservation] an agent for service of process. (c) An agent for service of process of a limited liability company or foreign limited liability company must be an individual who is a resident of this [reservation] or other person with authority to transact business [on this reservation]. -ULLCA 113

13 Limited Liability Companies 13 Registered Office and Registered Agent. A limited liabilities [sic] company s registered agent is the company s agent for service of process, notice, or demand required or permitted by law to be served on the company under the laws of the Nation. a. Each LLC shall continuously maintain a registered office and a registered agent. The registered office may, but need not, be the same as any of its places of business. The agent may be the same person then serving in a designated office of the Nation rather than a specified person if the Nation is a Member in the LLC of which the Nation s officer is the appointed agent. b. An LLC may change its registered office or registered agent, or both, by including the name of its registered agent and the street address of its registered office, as changed, in articles of amendment to its articles of organization or in articles of merger.[ ] -5HCC03 7 Organization This chapter describes several documents that codes typically require to initiate the legal formation of the company and the accompanying liability; to provide the tribe with the rules the company has agreed will govern it; and to share information with the tribe through annual reports or otherwise. This section can also include procedures for amending documents which were filed with the tribe. Certificate/Articles of Organization: This section provides the process by which a limited liability company becomes an organization. The tribe can outline what information it needs to know about the company and require that information, labeled here as a certificate of organization, to be

14 14 The University of Arizona NativeNet filed with the tribe. Typically, the company comes into existence at the time the certificate is filed. Some codes allow the person who files the certificate to file the certificate but delay the effective date. In addition, while a person may orchestrate the formation of a company, that person may or may not actually be a part of the company or have any future interest in the company. In such a case where there are no members, the code may provide a window of time to secure at least one member before allowing the company to legally form and assume liability. Some statutes explicitly require each LLC to have at least one member. This decision is typical of those mentioned at the beginning of this booklet where the tribe must choose between specificity and flexibility; your tribe may want to allow an LLC to start with no members and to name them later, or it may wish to require all LLCs to always have members. You will also need to decide whether to require the organizers to be members and which pieces of information are mandatory. Articles of Organization. a. [ ] The organizer(s) need not be members of the LLC at the time of organization or thereafter. b. A limited liability company shall have one or more members. -5HCC03 13 Operating Agreement: The operating agreement is essentially the contract that governs the affairs of a limited liability company. Although many agreements will be in writing, the agreement and any amendments may be oral or in the form of a record. The rules of the limited liability code are the default in the absence of any agreement made in an operating agreement between the parties.

15 Limited Liability Companies 15 The agreement can include the scope and limits of the company s, members, and managers powers, rights, and responsibilities, as well as all internal issues. The loyalty, care, and fiduciary duties can be altered or eliminated altogether (except the duty of care which may be governed by a different area of law, such as contract under tribal law), although it should be noted that negotiating these protections can leave weaker parties dangerously vulnerable. This section can potentially allocate extraordinary amounts of power, and it should be noted that those allocations can conflict with other agreements such as a contract between a member and a manager. The operating agreement can provide protections against unshielded mergers, allow members to define the managerial roles, or provide indemnification and exculpation processes. Since they are binding on all members, amendments must usually be approved by all members unless otherwise provided in the agreement. The code or operating agreement can mandate the unanimous consent of disinterested, independent decision makers to change the operating agreement, or can make the requirement less stringent if there is full disclosure. The operating agreement is vitally important to the organization and should be developed carefully with a thorough examination by an expert of the effects and implications of establishing each provision. To ensure the effectiveness of limited liability company operating agreements, the tribe might explicitly state in the code that the limited liability company may enforce its operating agreement. Your tribe will need to decide whether or not to include provisions that spell out the structural requirements and legal implications of operating agreements. For an example of this level of specificity, see ULLCA

16 16 The University of Arizona NativeNet Court Actions: Members or managers can bring a court action on behalf of themselves or the company regarding their rights against another member, a manager, or the company. To bring an action on behalf of him or herself, the member must have suffered harm beyond that suffered by the company, otherwise they would simply be suing on behalf of the company. Codes vary regarding whether managers and members can sue and under what conditions. The section on court actions lays out those procedures, including the number of votes required to support a court action and whether such votes include members with an interest in the outcome. 7. Liability of Members to Third Parties. The debts, obligations, and liabilities of a LLC, whether arising in contract, tort, or otherwise, shall be solely the debts, obligations, and liabilities of the LLC. Except as otherwise specifically provided in this Act, a member or manager of a LLC is not personally liable for any debt, obligation, or liability of a LLC, as defined in the Articles of Operation. 18. Parties to Action. A member of a LLC is not a proper party to a proceeding by or against a LLC solely by reason of being a member of the LLC, except if any of the following exist. a. The object of the proceeding is to enforce a member s right against or liability to the LLC. b. The action is brought by a member under Section Authority to Sue. Unless otherwise provided in articles of operation an action on behalf of a LLC may be brought in the name of the LLC by: a. One or more members of the LLC, if authorized by a majority in interest of members, excluding the vote of any member who has an interest in the outcome of the action that is adverse to the interest of the LLC. b. One or more managers of a LLC if the management of the LLC is vested in one or more managers, or if the managers are authorized to sue by a majority in interest if members. -5HCC

17 Members and Managers Becoming a Member: Limited Liability Companies 17 The tribe will want to outline what is required for a person to become a member at startup or after the company is formed. The code might allow admission of members to occur in a variety of ways, including a vote unanimous or not by the existing members, a contribution, or acquisition of interest in the company via a transfer or otherwise. It might also note how the initial member(s) came to be members and if there was any requirement beyond naming them on the certificate of organization. It will also be necessary to specify whether all members have equal shares of membership or whether some members may have a greater share than others. The Uniform Code, for instance, appears to require all members to have equal shares (see below), whereas the Ho-Chunk Code allows for varying degrees of membership interest (based on several references to majority in interest as opposed to majority of members ; see below). (a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502 and any charging order in effect under Section ULLCA 404(a) (b) After a limited liability company complies with subsection (a), any surplus must be distributed in the following order, subject to any charging order in effect under Section 503: [ ](2) in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section ULLCA 708(b)

18 18 The University of Arizona NativeNet l. Majority in Interest means members contributing more than fifty percent (50%) of the value of total capital contributions to the limited liability company excluding any interest which is not to be counted as voting on a matter as described elsewhere in this Act. -5HCC03 5(l) Becoming a Manager: Managers are those who handle the day to day operations of the company. The managers may or may not be members, and most statutes allow companies to select whether to be membermanaged or manager-managed. If your code allows both styles of management, it is important to examine all sections of proposed code dealing with persons acting for the company and ensure that such sections account adequately for both management styles. Contributions: Here, the tribe can generate an exhaustive or selective list of the types of contributions companies are allowed to accept to establish membership interest, such as money, services, property, contracts, promises, etc. FORM OF CONTRIBUTION. A contribution may consist of tangible or intangible property or other benefit to a limited liability company, including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed. -ULLCA 402

19 Limited Liability Companies 19 Contributions. a. A member s contributions to a LLC may consist of cash, property, or services rendered, or promissory notes or other written obligations to provide cash or property or to perform services. b. The value of a member s contribution shall be determined in the manner provided in articles of operation. If the articles of operation does not fix a value to a contribution, the value of a contribution shall be approved by a majority in interest of the members, shall be properly reflected in the records and information kept by the LLC under paragraph 24a. The value of contributions so determined shall be binding and conclusive on the LLC and its members. -5HCC03 27 Duties: The articles of incorporation must clarify whether the members will manage the company or whether the members will hire others to manage the company. The default law can be construed so that unless the articles reflect that a company will be managed by managers, the company will be managed by its members. This designation controls whether the members or managers have apparent agency authority or management authority, and the nature of fiduciary duties in the company. Members who are not managers are not subject to fiduciary duties. Often the responsibilities are divided equally among the members including voting, the selection and removal of managers, managing in specific instances, making decisions regarding mergers and property, and amendment. This section can outline how disagreements will be resolved. When there is a manager vacancy and the company is a manager-managed company, the code can provide for a member to assume managerial duties during the interim; otherwise if members begin to manage companies in transition there can be confusion regarding who is to be held legally liable for those management decisions. This also makes liability clear regarding the

20 20 The University of Arizona NativeNet information that the member has access to as an interim manager so that it is not used after the member ceases to fill that role. The Limited Liability Company code will need to account for the duties of both members and managers. These duties should be split into separate sections describing duties of each party in a member-managed company and duties of each party in a manager-managed company. Duties can be defined affirmatively (by dictating what members and managers must do) or negatively (by dictating what members and managers must not do); see below for an example of both of these approaches. Your tribe will probably want to incorporate elements of both. Duties. Unless otherwise provided in articles of operation: a. No member or manager shall act or fail to act in a manner that constitutes any of the following: (1) A willful failure to deal fairly with the LLC or its members in connection with a matter in which the member or manager has a material conflict of interest. (2) A violation of criminal law, unless the member or manager had reasonable cause to believe that the person s conduct was lawful or no reasonable cause to believe that the conduct was unlawful. (3) A transaction from which the member or manager derived an improper personal profit. (4) Willful misconduct. b. Every member and manager shall account to the LLC and hold as trustee for it any improper personal profit derived by that member or manager without the consent of a majority of the disinterested members or managers, or other persons participating in the management of the LLC, from any of the following: (1) A transaction connected with the organization, conduct, or winding up of the LLC. (2) A use by a member or manager of the property of a LLC, including confidential or proprietary information or other matters entrusted to the person as a result of the person s status as member or manager. (3) Articles of operation may impose duties on its members and managers that are in addition to, but not in abrogation of, those provided in paragraph a, above. -5HCC03 21

21 Limited Liability Companies 21 Agency Power: Agency power is the legal authority to act on behalf of the company. An agent is a person who is authorized to make decisions, enter into contracts, and generally conduct the operations of the company. The owners or members of a company may not be able to commit the time or effort to run the day to day operations of the company, so such power is often vested in an agent. `In order to ensure that it is clear who is authorized to act on behalf of the company, it is advisable to enumerate default rules regarding agency power in both member-managed and managermanaged companies. Agency Power of Members and Managers. a. Except as provided in paragraph b, below: (1) Each member is an agent of the LLC, but not of the other members or any of them, for the purpose of its business. (2) The act of any member, including the execution in the name of the LLC of any instrument for apparently carrying on in the ordinary course of business the business of the LLC, binds the LLC in the particular matter, unless the person with whom the member is dealing has knowledge that the member has no authority to act in this matter. (3) If the Nation is a Member, the Nation s authority shall be exercised only by a duly adopted resolution of the Legislature. b. If management of the LLC is vested in one or more managers: (1) No member, solely by being a member, is an agent of the LLC or of the other members or any of them. (2) Each manager is an agent of the LLC, but not of the members or any of them, for the purpose of its business. The act of any manager, including the execution in the name of the LLC of any instrument for apparently carrying on the ordinary course of business of the LLC, binds the LLC unless the manager has, in fact, no authority to act for the LLC in the particular matter, and the person with whom the manager is dealing has knowledge that the manager has no authority to act in the matter. c. No act of a member or, if management of the LLC is vested in one or more managers, of a manager that is not apparently for the carrying on in the ordinary course of business the business of the LLC shall bind the LLC unless in fact authorized at the of the transaction or at any other time. -5HCC03 14