Quiz 38: Limited Liability Companies and Special Business Forms


Not necessarily. LLCs can fully protect LLC members as long as they do not use the corporation as a shell for their own personal actions. Members should maintain corporate formalities and avoid mixing personal and professional actions. As long as their personal and professional personas remain separate, then a court will not pierce the corporate veil because there will not be evidence of fraud.

Case Facts: Mr., L and T has formed a limited liability company with contributions of 60, 20 and 20 percent each. They dispute over the division of profits. Profits Division: In a limited liability corporation whose profit division has not been stated in the operation agreement under the Uniform Limited Liability Company Act (ULLCA) , then state law will determine the division of profits. Usually in the absence of an agreement, states have divided profits equally among the members. Operating Agreement: An operating agreement for an LLC spells out the details of how the business will be managed and operated. Additionally, the terms for settling profits and losses may be specified. Court opinion: The court may determine that the partners will receive an equal division of profits. Courts usually rely on the principles of partnership law. Therefore, in order to avoid the tension of discord between partners it is best to spell out how the company will be managed as well as profit and loss division in an operation agreement.

Jointly and severally means that all members would be liable for the damages as a group. However, in the case that one fails to pay, there is a possibility that one member could carry the entire burden for the rest of the members. ORX would prefer the corporation be held liable because they will have more financial assets to go after. If only W was found liable, there is a chance that his personal assets could be drained before ORX receives their money.

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