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Limited Liability Companies – LLC Basics

WHAT ARE LIMITED LIABILITY COMPANIES AND WHY CREATE ONE?

Our firm routinely encounters an employer having “LLC” after its name. What is the impact of this designation on our client’s ability to collect his settlement, award, or judgment? We generally sue corporations, not individuals, for corporations are the named employers and have the necessary resources to compensate our clients for wrongful termination. But what happens when Corporations are “members” of a “Limited Liability Company?”

A member of a “Limited Liability Company” or “LLC” has limited liability. A Corporate Member of an LLC has liability limited to the member’s investment contribution to the LLC. This means that if Parent Company Inc. is a member of an LLC, Parent Company’s exposure to pay the debts and liabilities of the LLC is limited to the investment of assets and capital Parent Company has placed with the LLC. An employee of the LLC cannot recover his damages for wrongful termination directly against the Parent Company.

But maybe the biggest reason large corporations use the LLC device is the “pass through” of LLC income without federal taxation to the LLC. The taxable income or losses of the LLC pass through the LLC to be separately reported on tax returns by the individual corporate “members.” Of course, the distributions from the LLC will depend on the member contributions and the “Operating Agreement” of the LLC.

HOW LIMITED LIABILITY COMPANIES ARE CREATED.

Most people are familiar with the idea that Corporations are formed by filing “Articles of Incorporation.” An LLC however is created by filing with the Secretary of State or Department of Corporations of a State a document known as “articles of organization” or sometimes called a “certificate of organization” or “certificate of formation”.

LIMITED LIABILITY COMPANIES CONSISTING OF OTHER LIMITED LIABILITY COMPANIES

Most people are also familiar with the idea of a parent-subsidiary relation. That is, a parent corporation has stock ownership and some overlapping controls over a separate subsidiary corporation. An LLC can also set up this “parent-subsidiary” relationship of multiple LLC’s engaged in a common enterprise. Why do so? The structure allows still additional layers of protection from liability. If one of the LLC members fails or incurs an overwhelming debt, the other LLC members are shielded from exposure except for whatever they contributed to the failed LLC member.

IMPLICATIONS FOR CREDITORS AND EMPLOYEES OF LIMITED LIABILITY COMPANIES

An LLC cannot by law issue stock. Its investment capital is derived from its members, and whatever private debt it can muster. But unless the LLC is maintained as a shell to defraud creditors, it is often sufficiently financed by its corporate members and other LLC participants to cover our client’s claims.

An LLC ends when one of the members elects to leave the LLC. However, the operating agreement can provide for a buy-out of the departing member’s interest, and the continuation of the LLC. Without such a contingency in the Operating Agreement, a new LLC must be formed. The reality is that your target employer-defendant may dissolve if one of the LLC members leaves. Diligent attorneys suing an LLC will obtain a copy of the Operating Agreement to identify all members and to be assured of continued operations.