Limited Liability Companies (LLLs) are hybrid business entities established under state law. In the case of companies, there are three layers of structure for ownership and management - shareholders (owners), board of directors, officers. The most held LLCs have only one layer. LLC members hold all positions analogous to company shareholders, directors and officers. On its face, the LLC structure appears to be simpler; however, appearance can be deceiving. LLC actions in most states are rather vague in terms of LLC members' rights and obligations to each other. The articles of association leave a wide range of discretion to the LLC members in the drafting of their LLC operating agreement to control how the company operates in practice and the remedies given to aggrieved members once the operating agreement has been violated.
Necessary capital contributions
In many states, a member's pledge to provide capital contributions to the LLC cannot be enforced unless the pledge is in writing (usually the operating agreement) signed by the member against whom the application is being made. See Florida Stat. Section 608.4211 (2) and California Corporate Code Section 17200. Each operating agreement shall specify the amount of capital that each member shall provide to the LLC, when the contributions are to be provided by, and the form in which the contributions are to be filed (i.e., cash or other property). If a member is to contribute property instead of cash, a list of the property to be contributed and the agreed value are attached to the operating agreement. What happens if a member does not make a capital contribution as required by the LLC operating agreement? A simple and effective remember is to reduce the insulting member's ownership interest in LLC in relation to the unpaid capital contribution. However, to the best of my knowledge, LLC members lack the authority to unilaterally reduce a member's ownership interest in order not to provide the necessary capital grants unless this remedy is included in the operating agreement.
Another hidden problem that comes back to bite minority LLC members is secondary required capital contributions required after repze llc begins operations. Let us assume that your LLC loses money in the first years of operation and creates a need for additional capital. Minority shareholders should carefully read the terms of the agreement on whether minority members may be forced to make secondary capital contributions, otherwise it may come as an unpleasant surprise when a capital call comes from the majority member. If secondary capital calls require the unanimous approval of all members, minority members are protected against involuntary capital calls.
Distribution of capital
LLCs are flow-through entities for federal tax purposes. This means that all LLC income is allocated annually to the members, regardless of whether the members actually receive a capital distribution from the LLC corresponding to the income distribution. It comes as a shock to some members of minority LLC that they may be taxed on LLC income distribution in cases where LLC decides to keep capital and not distribute all or part of the income to the members. One way to protect minority LLC members is to require that a certain percentage of allocated income be distributed to LLC members no less than annually, unless all members unanimously agree otherwise. Forty percent is a secure percentage that ensures that each member receives a distribution from the LLC that is sufficient to cover his or her tax liabilities generated by the LLC income distribution. For example, suppose LLC X has $ 200,000 in revenue in 2010, resulting in member 1 owning a 20% stake being allocated $ 40,000 in LLC revenue ($ 200,000 x 20%) for that year. If the LLC operating agreement stipulates that members must be allocated 40% of their annual income distribution, member 1 will receive a check for at least $ 16,000 ($ 40,000 x 40%) from the LLC as its required capital distribution. This protects members of minority LLCs from incurring tax liability that they do not receive capital allocation from LLCs to cover.
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