UNDERSTANDIING THE LIMITED LIABILITY COMPANY IN PENNSYLVANIA
By: Cornelius Van Galen, Esq. (vangalenlaw.com)
This article is not meant to be comprehensive, or to be relied upon as a substitute for advice from an attorney. The purpose of this article is to increase the reader's general understanding of a Limited Liability Company, and if you are thinking of forming one, to give you a starting point for your discussion with your attorney as to how your new LCC will operate.
In my practice the Limited Liability Company, or LLC, has become the entity of choice for clients wishing to start a new small business. Likewise, an individual operating his current business as a sole proprietorship might consider moving his business into an LLC to avoid personal liability for the future debts of his business. An LLC is relatively inexpensive to form, is not demanding with regard to day to day procedural upkeep, is flexible in that it can be configured to the specific goals of its members, and can receive the same tax treatment as does a subchapter S corporation. However, there are specific rules which govern a Pennsylvania Limited Liability Company. Those rules are contained in the Pennsylvania Limited Liability Company Law of 1994, found at 15 Pa. C.S. sections 8901, et. seq.
An LLC has the legal capacity of a natural person to act. A Limited Liability Company may conduct any lawful business, except insurance. A licensed insurance agency may be an LLC.
An LLC is formed by the filing of a Certificate of Organization with the Pennsylvania Department of State. The person who signs the Certificate of Organization need not be an owner of the Limited Liability Company. The Certificate of Organization identifies the name and registered address of the LLC, as well as the identity of the individual forming the LLC. The LLC can be owned by one or more persons. The owner of the LLC is called a member, just as the owner of a partnership is called a partner, and the owner of a corporation is called a shareholder.
An ownership interest in an LLC may be issued in exchange for cash, property, services rendered, a promissory note, or a written promise to contribute cash, property or to perform services. If a member promises to contribute property or services then fails to live up to that promise, the LLC can compel that member to contribute cash equal to the value of the contribution not made.
Generally, the interest of a member in a Limited Liability Company is the personal property of that member and as such may be transferred or assigned as provided in the written Operating Agreement. Unless otherwise provided in writing in the Operating Agreement, all of the non-transferring members of the LLC must approve the transfer of a member's interest in the LLC if the party receiving that interest is to be a member and have the right to participate in the management of the LLC. In the absence of that consent, the transferee is only entitled to receive the distributions and the return of contributions to which the transferor member would otherwise be entitled.
An Operating Agreement contains the rules or procedures adopted by the members for the governance of the Limited Liability Company and the conduct of its business. The Operating Agreement can be oral, or in writing. The Operating Agreement is not recorded with the Commonwealth of Pennsylvania. As a practical matter, even if your new LLC only has one member it will probably need a written Operating Agreement. If your LLC borrows money from a bank, that bank is going to ask for a copy of your Operating Agreement to make sure your LLC is authorized to enter into the transaction. The same may be true of a landlord, or in any other transaction with a high dollar value.
Furthermore, if a creditor of your LLC does bring suit against a member personally claiming that member operated the business as though the LLC did not exist, and is therefore liable for its debts, evidence that the business was run as required by a written Operating Agreement would help refute the creditor's claims.
A Limited Liability Company may make distributions and allocate the profits and losses of its business to its members as stipulated in its Operating Agreement, or if not so stated, then per capita. Cash is the only form of distribution a member is entitled to. Likewise, a member cannot be compelled to accept from the company a distribution in a form other than cash.
An Operating Agreement may provide that a member may not voluntarily dissociate from the Limited Liability Company or assign his membership interest prior to the dissolution of the company. If that is the case, an attempt to dissociate voluntarily or assign a membership interest would be ineffective.
With certain exceptions which require a unanimous vote, the affirmative vote or consent of a majority of the members or managers of the LLC is required to decide any matter.
A member's ownership interest in the LLC may be evidenced by a membership certificate, similar to a share of stock, or not, at the members' discretion.
Management of the company can either be vested in its members, or in a manager if the company's Certificate of Organization so provides. A person may be a member and a manager at the same time. If the company is to be run by a manager, then the manager may either be named in the Operating Agreement, or selected pursuant to the procedure identified by the Operating Agreement. A manager need not be a member of the LLC, or even a natural person. A manager serves for one year, which service can be extended on a year to year basis, or serves until removed or he resigns.
A member or a manager may be an employee of the company.
Generally, the members of a Limited Liability Company are not personally liable for its debt, although they may assume that liability if they so choose. The Certificate of Organization may provide that some or all of the members shall be liable for some or all of the LLC's debt.
An LLC can own, buy and sell real estate, equipment, or any other type of property.
An LLC is dissolved when one of the following occur:1) the happening of an event of dissolution as described in the Certificate of Organization; 2) the happening of an event of dissolution as described in the Operating Agreement; 3) except as otherwise stated in the Operating Agreement, by unanimous written consent of all of the members; 4) except as otherwise stated in the Operating Agreement, upon a member becoming a bankrupt or the death of a member, unless within 180 days a majority in interest vote to continue the LLC or the Certificate of Organization states the LLC shall have perpetual existence; 5) or entry of an order of dissolution by a Court.
Generally, a Court will not grant a member's request for an order for the dissolution of a Limited Liability Company so long as the LLC is being operated in accordance with the written Operating Agreement. However, if a member is being wrongfully excluded from a role in managing the LLC, or in receiving distributions or other benefits to which he is entitled, or in possession of the LLC's property, then the Court may order the dissolution of the LLC, and the distribution of its assets. Likewise, if the members or managers are deadlocked so that they cannot make decisions necessary for the conduct of business as described by the written Operating Agreement, the Court may order the dissolution of the LLC.
If a member wishes to disassociate from the LLC, and the dissociation does not result in the dissolution of the LLC, then the member who is leaving is entitled to receive any distribution to which that member is entitled under the Operating Agreement on the terms provided in the Operating Agreement, as well as the fair value of the interest of that member in the company based on the right of the member to share distributions from the company.
Upon dissolution, the debts of the LLC are paid according to their priority, and the remaining assets are distributed, all according to statue and the Operating Agreement.
Once an LLC is formed and starts to conduct business, it is important that it is treated as an entity separate and apart from the individuals who are its members. The LLC should have separate bank accounts and tax identification number(s). Personal and company assets and obligations should not be comingled. Whenever the businesses name appears on a document, the business should be identified as an LLC.
If you are located in Southeastern Pennsylvania and would like to learn more about a Limited Liability Company, please feel free to e-mail me at [email protected]