The LLC is a business format which is widely available in the United States. The format is specifically available in New York. The concept here is to separate the individual who operates the LLC and protect this person from liability much in the way that the business corporation protects its directors, officers and shareholders from personal liability. In an LLC the business operator is protected from liability unless the party seeking to recover as against the LLC can "Pierce the Corporate Veil". The burden in this situation is upon the person seeking to recover to show that the LLC was being operated as a criminal enterprise or as something other than a legitimate business enterprise. A prominent example of this would be the infamous Bernard Madoff enterprise which was known as "Madoff LLC". It should be noted that Piercing the Corporate Veil is a very high burden for a plaintiff to traverse in the context of any litigation.

The law permits the formation of an LLC for any legitimate business purpose. The law requires that the intention in creating an LLC is to create a profit making enterprise. In New York an LLC may be formed and operated by a single individual. In this way the sole proprietor can legally protect their personal assets from liability while engaging in the operation of the business. In an earlier lecture we considered the sole proprietorship which was called Joe Smith d/b/a Joe's Bicycle Shop. In this business format Joe Smith was liable for any matters that might have occurred in the context on the business' operations. Joe Smith can now protect himself from personal liability by simply modifying his business from a sole proprietorship into an LLC. Thus Joe's Bicycle Shop, LLC when operated as a legitimate business protects Joe Smith from personal liability for acts or events that occur within his business operation.

An LLC not unlike a business corporation is considered to be a "juridical person". By definition this is a legally created entity which has all of the capabilities of humans in the conduct of business. Thus an LLC not unlike a business corporation can enter into contracts, open bank accounts, sue or be sued.

Formation of an LLC

An LLC is formed by one or more persons called "Organizers". The LLC begins its business life with the filing of "Articles of Organization" with the appropriate filing authority. In New York State the filing officer is the New York State Secretary of State . The document is filed with the Albany, New York office of the Secretary of State. The document has similarities to the Certificate of Incorporation filed for a business corporation. After this filing the LLC remains viable until the Articles of Organization are canceled.

Any name can be chosen for the LLC for its initial filing provided it is sufficiently dissimillar from that of any other LLC. This determination is initially made by the NYS Secretary of State however if the name is approved, legal action may still challenge the use of a name which is too similar to that of another LLC. The law in New York.

The Articles of Organization must contain certain essential information regarding the LCC. This includes the following:

1) The name of the LLC

2) The location of the LLC's principal office.

3) The expiration date of the LLC. All LLC's must indicate an expiration date. The expiration date is often twenty or thirty years in the future.

4) The designation of an agent to accept service of process in the event that the LLC is sued. Regardless of whether an agent for service is designated, the law in New York designates the Secretary of State as the universal agent for service for all LLC's.

5) You can also designate an individual in the Articles of Organization who will accept personal liability for certain acts of the LLC. This acts as a contractual guarantor for the LLC.

Management of the LLC

The law in New York mandates that all members of the LLC enter into an "Operating Agreement".

The LLC may be managed either by the members of the LLC or by a professional manager. This issue is specifically set forth in the LLC Operating Agreement. Where an LLC is member managed, each member of the LLC is considered to be in a principal/agency relationship with the other members of the LLC. In a professionally managed LLC a decision or act of the manager is not considered to be in a principal/agency with the member of the LLC. Where the LLC is professionally a decision or act of the manager which is not related to the business operation of the LLC will not bind the LLC to the decision.

The liability of the LLC manager can be shielded or indemnified under the terms of the LLC's Operating Agreement. An LLC's manager however cannot be shielded for an act of bad faith. Once again we may consider the management of Madoff LLC in this regard.

Winding Up of the LLC

The winding up process for the LLC is similar to that of other business formats.

1) Wage earners of the LLC are paid from the LLC's resources and assets

2) Tax authorities both Federal and state must be compensated.

3) Creditors of the LLC must be compensated. Secured creditors are compensated prior to unsecured creditors.

4) Sums due and payable to the members of the LLC .

5) Capital contributions of the LLC members are then returned.

Question:

Discuss the relative advantages and disadvantages of operating a business as either a sole proprietorship or an LLC.