S 1337 Session 111 (1995-1996)
S 1337 General Bill, By Hayes
Similar(H 4830)
A Bill to amend Title 33, Code of Laws of South Carolina, 1976, relating to
corporations, by adding Chapter 44 so as to enact the Uniform Limited
Liability Company Act of 1996 so as to provide for the manner, conditions, and
procedures under which limited liability companies shall be operated and
governed beginning generally on January 1, 2001, in conformity with recent
changes in federal regulatory decisions regarding limited liability companies;
to amend Section 12-54-240, as amended, relating to the prohibition against
the Department of Revenue and Taxation disclosing taxpayer records and
reports, so as to permit disclosure of such information to the Secretary of
State under certain conditions; and to repeal Chapter 43 of Title 33 relating
to limited liability companies effective January 1, 2001.
04/04/96 Senate Introduced and read first time SJ-15
04/04/96 Senate Referred to Committee on Judiciary SJ-15
04/24/96 Senate Committee report: Favorable with amendment
Judiciary SJ-18
04/25/96 Senate Recommitted to Committee on Judiciary SJ-84
COMMITTEE REPORT
April 24, 1996
S. 1337
Introduced by SENATOR Hayes
S. Printed 4/24/96--S.
Read the first time April 4, 1996.
THE COMMITTEE ON JUDICIARY
To whom was referred a Bill (S. 1337), to amend Title 33, Code of
Laws of South Carolina, 1976, relating to corporations, etc.,
respectfully
REPORT:
That they have duly and carefully considered the same, and
recommend that the same do pass with amendment:
Amend the bill, as and if amended, page 82, beginning on line 13,
as contained in SECTION 2, by striking Section 33-44-1202 in its
entirety and inserting therein the following:
/Section 33-44-1202. This chapter may be cited as the South
Carolina Uniform Limited Liability Company Act of 1996./.
Amend the bill further, as and if amended, page 83, beginning on
line 39, as contained in SECTION 2, by striking Section 33-44-1206
in its entirety and inserting therein the following:
/Section 33-44-1206. (a) Before January 1, 2001, this chapter
governs only a limited liability company organized:
(1) after the effective date of this chapter, unless the company
is continuing the business of a dissolved limited liability company
under Section 33-43-901.3; and
(2) before the effective date of this chapter, which elects, as
provided by subsection (c), to be governed by this chapter.
(b) On and after January 1, 2001, this chapter governs all limited
liability companies.
(c) Before January 1, 2001, a limited liability company
voluntarily may elect, in the manner provided in its operating
agreement or by law for amending the operating agreement, to be
governed by this chapter.
(d) Before January 1, 2001, this chapter governs only a foreign
limited liability company which applies for a certificate of authority
(or amended certificate) to transact business in this State after the
effective date of this chapter, or which first transacts business in this
State after the effective date of this chapter.
(e) Notwithstanding any other provision of this chapter, after
January 1, 2001, the Secretary of State may commence a proceeding
to dissolve a limited liability company under Section 33-44-809, if
the company was formed prior to the effective date of this act and its
articles of organization are not in conformity with Section 33-44-203.
(f) Notwithstanding any other provision of this chapter, after
January 1, 2001, the Secretary of State may revoke a foreign limited
liability company's certificate of authority under Section 33-44-1006,
if the company was granted a certificate of authority prior to the
effective date of this act and its latest application for a certificate or
amended certificate of authority does not set forth the information
required by Section 33-44-1002./.
Amend title to conform.
DONALD H. HOLLAND, for Committee.
A BILL
TO AMEND TITLE 33, CODE OF LAWS OF SOUTH CAROLINA,
1976, RELATING TO CORPORATIONS, BY ADDING CHAPTER
44 SO AS TO ENACT THE UNIFORM LIMITED LIABILITY
COMPANY ACT OF 1996 SO AS TO PROVIDE FOR THE
MANNER, CONDITIONS, AND PROCEDURES UNDER WHICH
LIMITED LIABILITY COMPANIES SHALL BE OPERATED AND
GOVERNED BEGINNING GENERALLY ON JANUARY 1, 2001,
IN CONFORMITY WITH RECENT CHANGES IN FEDERAL
REGULATORY DECISIONS REGARDING LIMITED LIABILITY
COMPANIES; TO AMEND SECTION 12-54-240, AS AMENDED,
RELATING TO THE PROHIBITION AGAINST THE
DEPARTMENT OF REVENUE AND TAXATION DISCLOSING
TAXPAYER RECORDS AND REPORTS, SO AS TO PERMIT
DISCLOSURE OF SUCH INFORMATION TO THE SECRETARY
OF STATE UNDER CERTAIN CONDITIONS; AND TO REPEAL
CHAPTER 43 OF TITLE 33 RELATING TO LIMITED LIABILITY
COMPANIES EFFECTIVE JANUARY 1, 2001.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. This act is derived from the Uniform Limited Liability
Company Act approved and recommended for enactment in all states
in August 1995 by the National Conference of Commissioners on
Uniform State Laws. The act and the comments following most
sections were prepared by the National Committee that acted for the
National Conference of Commissioners on Uniform State Laws in
preparing the act. This National Committee included Dean Harry J.
Haynsworth, IV, formally a professor at the University of South
Carolina School of Law and draftsman of many South Carolina
business statutes. The comments are intended to assist those who use
and interpret this act to determine the intention of the drafters and the
interrelationship between the various sections. They are reproduced
with permission.
The act is intended to be flexible with a comprehensive set of
default rules designed to substitute as the essence of the bargain for
small entrepreneurs and others. The act is flexible in the sense that the
vast majority of its provisions may be modified by the owners in a
private agreement. To simplify, those nonwaivable provisions are set
forth in a single subsection. Thus, sophisticated parties will negotiate
their own deal. On the other hand, recognizing that small
entrepreneurs without the benefit of counsel should have access to the
act, the great bulk of the act sets forth default rules designed to
operate a limited liability company without sophisticated agreements
and to recognize that members may also modify the default rules by
oral agreements defined in part by their own conduct.
South Carolina first adopted a Limited Liability Company Act in
1994. The original act was prepared by a committee organized by the
South Carolina Secretary of State's Office and chaired by Burnet R.
Maybank, III, Director of the Department of Revenue and Taxation.
The committee included Scott Y. Barnes, partner of Warren &
Sinkler, L.L.P., Attorneys at Law, Charleston; Professor James R.
Burkhard of the University of South Carolina School of Law; Lollie
B. Coward, Executive Director of the South Carolina Association of
Certified Public Accountants; Stephen T. Draffin, Deputy Director
and Attorney of the Legislative Council's Office; Rick Handel, Chief
Counsel for Policy of the Department of Revenue and Taxation; and
Professor Martin C. McWilliams, Jr., of the University of South
Carolina School of Law and Executive Director of the South Carolina
Law Institute. The original Limited Liability Company Act was
largely written in 1992 and did not include a series of pro-taxpayer
pronouncements issued by the Internal Revenue Service in 1994 and
1995. Since the Uniform Limited Liability Company Act deals with
these issues, the decision was made to completely replace the South
Carolina act with the uniform act.
SECTION 2. Title 33 of the 1976 Code is amended by adding:
"CHAPTER 44
Uniform Limited Liability Company Act of 1996
Article 1
General Provisions
Section 33-44-101. Definitions.
Section 33-44-102. Knowledge and Notice.
Section 33-44-103. Effect of Operating Agreement; Nonwaivable Provisions.
Section 33-44-104. Supplemental Principles of Law.
Section 33-44-105. Name.
Section 33-44-106. Reserved Name.
Section 33-44-107. Registered Name.
Section 33-44-108. Designated Office and Agent for Service of Process.
Section 33-44-109. Change of Designated Office or Agent for
Service of Process.
Section 33-44-110. Resignation of Agent for Service of Process.
Section 33-44-111. Service of Process.
Section 33-44-112. Nature of Business and Powers.
Definitions
Section 33-44-101. In this chapter:
(1) `Articles of organization' means initial, amended, and restated
articles of organization, and articles of merger. In the case of a
foreign limited liability company, the term includes all records
serving a similar function required to be filed in the Office of the
Secretary of State or other official having custody of company
records in the State or country under whose law it is organized.
(2) `At-will company' means a limited liability company other
than a term company.
(3) `Business' includes every trade, occupation, profession, and
other lawful purpose, whether or not carried on for profit.
(4) `Debtor in bankruptcy' means a person who is the subject of
an order for relief under Title 11 of the United States Code or a
comparable order under a successor statute of general application or a
comparable order under federal, state, or foreign law governing
insolvency.
(5) `Distribution' means a transfer of money, property, or other
benefit from a limited liability company to a member in the member's
capacity as a member or to a transferee of the member's distributional
interest.
(6) `Distributional interest' means all of a member's interest in
distributions by the limited liability company.
(7) `Entity' means a person other than an individual.
(8) `Foreign limited liability company' means an unincorporated
entity organized under laws other than the laws of this State which
afford limited liability to its owners comparable to the liability under
Section 33-44-303 and is not required to obtain a certificate of
authority to transact business under any law of this State other than
this chapter.
(9) `Limited liability company' means a limited liability company
organized under this chapter.
(10) `Manager' means a person, whether or not a member of a
manager-managed company, who is vested with authority under
Section 33-44-301.
(11) `Manager-managed company' means a limited liability
company which is so designated in its articles of organization.
(12) `Member-managed company' means a limited liability
company other than a manager-managed company.
(13) `Operating agreement' means the agreement under Section
33-44-103 concerning the relations among the members, managers,
and limited liability company. The term includes amendments to the
agreement.
(14) `Person' means an individual, corporation, business trust,
estate, trust, partnership, limited liability company, association, joint
venture, government, governmental subdivision, agency, or
instrumentality, or any other legal or commercial entity.
(15) `Principal office' means the office, whether or not in this
State, where the principal executive office of a domestic or foreign
limited liability company is located.
(16) `Record' means information that is inscribed on a tangible
medium or that is stored in an electronic or other medium and is
retrievable in perceivable form.
(17) `Sign' means to identify a record by means of a signature,
mark, or other symbol, with intent to authenticate it.
(18) `State' means a state of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, or any territory or
insular possession subject to the jurisdiction of the United States.
(19) `Term company' means a limited liability company in which
its members have agreed to remain members until the expiration of a
term specified in the articles of organization.
(20) `Transfer' includes an assignment, conveyance, deed, bill of
sale, lease, mortgage, security interest, encumbrance, and gift.
Comment
Uniform Limited Liability Company Act (`ULLCA') definitions,
like the rest of the act, are a blend of terms and concepts derived from
the Uniform Partnership Act (`UPA'), the Uniform Partnership Act
(1994) (`UPA 1994', also previously known as the Revised Uniform
Partnership Act or `RUPA'), the Revised Uniform Limited
Partnership Act (`RULPA'), the Uniform Commercial Code (`UCC'),
and the Model Business Corporation Act (`MBCA'), or their revisions
from time to time; some are tailored specially for this act.
`Business.' A limited liability company may be organized to engage
in an activity either for or not for profit. The extent to which
contributions to a nonprofit company may be deductible for federal
income tax purposes is determined by federal law. Other state law
determines the extent of exemptions from state and local income and
property taxes.
`Debtor in bankruptcy.' The filing of a voluntary petition operates
immediately as an `order for relief.' See Sections 33-44-601(7)(i) and
33-44-602(b)(2)(iii).
`Distribution.' This term includes all sources of a member's
distributions including the member's capital contributions,
undistributed profits, and residual interest in the assets of the
company after all claims, including those of third parties and debts to
members, have been paid.
`Distributional interest.' The term does not include a member's
broader rights to participate in the management of the company. See
Comments to Article 5.
`Foreign limited liability company.' The term is not restricted to
companies formed in the United States.
`Manager.' The rules of agency apply to limited liability
companies. Therefore, managers may designate agents with whatever
titles, qualifications, and responsibilities they desire. For example,
managers may designate an agent as `President.'
`Manager-managed company.' The term includes only a company
designated as such in the articles of organization. In a
manager-managed company agency authority is vested exclusively in
one or more managers and not in the members. See Sections
33-44-101(10) (manager), 33-44-203(a)(6) (articles designation), and
33-44-301(b) (agency authority of members and managers).
`Member-managed limited liability company.' The term includes
every company not designated as `manager-managed' under Section
33-44-203(a)(6) in its articles of organization.
`Operating agreement.' This agreement may be oral. Members may
agree upon the extent to which their relationships are to be governed
by writings.
`Principal office.' The address of the principal office must be set
forth in the annual report required under Section 33-44-211(a)(3).
`Record.' This act is the first uniform act promulgated with a
definition of this term. The definition brings this act in conformity
with the present state of technology and accommodates prospective
future technology in the communication and storage of information
other than by human memory. Modern methods of communicating
and storing information employed in commercial practices are no
longer confined to physical documents.
The term includes any writing. A record need not be permanent or
indestructible, but an oral or other unwritten communication must be
stored or preserved on some medium to qualify as a record.
Information that has not been retained other than through human
memory does not qualify as a record. A record may be signed or may
be created without the knowledge or intent of a particular person.
Other law must be consulted to determine admissibility in evidence,
the applicability of statute of frauds, and other questions regarding the
use of records. Under Section 33-44-206(a), electronic filings may be
permitted and even encouraged.
Knowledge and notice
Section 33-44-102. (a) A person knows a fact if the person has
actual knowledge of it.
(b) A person has notice of a fact if the person:
(1) knows the fact;
(2) has received a notification of the fact; or
(3) has reason to know the fact exists from all of the facts
known to the person at the time in question.
(c) A person notifies or gives a notification of a fact to another by
taking steps reasonably required to inform the other person in
ordinary course, whether or not the other person knows the fact.
(d) A person receives a notification when the notification:
(1) comes to the person's attention; or
(2) is duly delivered at the person's place of business or at any
other place held out by the person as a place for receiving
communications.
(e) An entity knows, has notice, or receives a notification of a
fact for purposes of a particular transaction when the individual
conducting the transaction for the entity knows, has notice, or
receives a notification of the fact, or in any event when the fact would
have been brought to the individual's attention had the entity
exercised reasonable diligence. An entity exercises reasonable
diligence if it maintains reasonable routines for communicating
significant information to the individual conducting the transaction
for the entity and there is reasonable compliance with the routines.
Reasonable diligence does not require an individual acting for the
entity to communicate information unless the communication is part
of the individual's regular duties or the individual has reason to know
of the transaction and that the transaction would be materially
affected by the information.
Comment
Knowledge requires cognitive awareness of a fact, whereas notice
is based on a lesser degree of awareness. The act imposes
constructive knowledge under limited circumstances. See Comments
to Sections 33-44-301(c), 33-44-703, and 33-44-704.
Effect of operating agreement; nonwaivable provisions
Section 33-44-103. (a) Except as otherwise provided in
subsection (b), all members of a limited liability company may enter
into an operating agreement, which need not be in writing, to regulate
the affairs of the company and the conduct of its business, and to
govern relations among the members, managers, and company. To the
extent the operating agreement does not otherwise provide, this
chapter governs relations among the members, managers, and
company.
(b) The operating agreement may not:
(1) unreasonably restrict a right to information or access to
records under Section 33-44-408;
(2) eliminate the duty of loyalty under Section 33-44-409(b) or
33-44-603(b)(3), but the agreement may:
(i) identify specific types or categories of activities that do
not violate the duty of loyalty, if not manifestly unreasonable; and
(ii) specify the number or percentage of members or
disinterested managers that may authorize or ratify, after full
disclosure of all material facts, a specific act or transaction that
otherwise would violate the duty of loyalty;
(3) unreasonably reduce the duty of care under Section
33-44-409(c) or 33-44-603(b)(3);
(4) eliminate the obligation of good faith and fair dealing under
Section 33-44-409(d), but the operating agreement may determine the
standards by which the performance of the obligation is to be
measured, if the standards are not manifestly unreasonable;
(5) vary the right to expel a member in an event specified in
Section 33-44-601(6);
(6) vary the requirement to wind up the limited liability
company's business in a case specified in Section 33-44-801(b)(4) or
(b)(5); or
(7) restrict rights of a person, other than a manager, member,
and transferee of a member's distributional interest, under this
chapter.
Comment
The operating agreement is the essential contract that governs the
affairs of a limited liability company. Since it is binding on all
members, amendments must be approved by all members unless
otherwise provided in the agreement. Although many agreements will
be in writing, the agreement and any amendments may be oral or may
be in the form of a record. Course of dealing, course of performance
and usage of trade are relevant to determine the meaning of the
agreement unless the agreement provides that all amendments must
be in writing.
This section makes clear that the only matters an operating
agreement may not control are specified in subsection (b).
Accordingly, an operating agreement may modify or eliminate any
rule specified in any section of this act except matters specified in
subsection (b). To the extent not otherwise mentioned in subsection
(b), every section of this act is simply a default rule, regardless of
whether the language of the section appears to be otherwise
mandatory. This approach eliminates the necessity of repeating the
phrase `unless otherwise agreed' in each section and its commentary.
Under subsection (b)(1), an operating agreement may not
unreasonably restrict the right to information or access to any records
under Section 33-44-408. This does not create an independent
obligation beyond Section 33-44-408 to maintain any specific
records. Under subsections (b)(2) to (4), an irreducible core of
fiduciary responsibilities survive any contrary provision in the
operating agreement. Subsection (b)(2)(i) authorizes an operating
agreement to modify, but not eliminate, the three specific duties of
loyalty set forth in Section 33-44-409(b)(1) to (3) provided the
modification itself is not manifestly unreasonable, a question of fact.
Subsection (b)(2)(ii) preserves the common law right of the members
to authorize future or ratify past violations of the duty of loyalty
provided there has been a full disclosure of all material facts. The
authorization or ratification must be unanimous unless otherwise
provided in an operating agreement, because the authorization or
ratification itself constitutes an amendment to the agreement. The
authorization or ratification of specific past or future conduct may
sanction conduct that would have been manifestly unreasonable under
subsection (b)(2)(i).
Supplemental principles of law
Section 33-44-104. (a) Unless displaced by particular provisions
of this chapter, the principles of law and equity supplement this
chapter.
(b) If an obligation to pay interest arises under this chapter and
the rate is not specified, the rate is that specified in Section 34-31-20.
Comment
Supplementary principles include, but are not limited to, the law of
agency, estoppel, law merchant, and all other principles listed in UCC
Section 1-103 (Section 36-1-103), including the law relative to the
capacity to contract, fraud, misrepresentation, duress, coercion,
mistake, bankruptcy, and other validating and invalidating clauses.
Other principles such as those mentioned in UCC Section 1-205
(Section 36-1-205) (Course of Dealing and Usage of Trade) apply as
well as course of performance. As with UPA 1994 Section 104, upon
which this provision is based, no substantive change from either the
UPA or the UCC is intended. For a similar provision in South
Carolina's Uniform Partnership Act see Section 33-41-50. Section
33-44-104(b) establishes the applicable rate of interest in the absence
of an agreement among the members.
Name.
Section 33-44-105. (a) The name of a limited liability company
must contain `limited liability company' or `limited company' or the
abbreviation `L.L.C.', `LLC', `L.C.', or `LC'. `Limited' may be
abbreviated as `Ltd.', and `company' may be abbreviated as `Co.'.
(b) Except as authorized by subsections (c) and (d), the name of a
limited liability company must be distinguishable upon the records of
the Secretary of State from:
(1) the name of any corporation, limited partnership, or
company incorporated, organized or authorized to transact business,
in this State;
(2) a name reserved or registered under Section 33-44-106 or
33-44-107;
(3) a fictitious name approved under Section 33-44-1005 for a
foreign company authorized to transact business in this State because
its real name is unavailable.
(c) A limited liability company may apply to the Secretary of
State for authorization to use a name that is not distinguishable upon
the records of the Secretary of State from one or more of the names
described in subsection (b). The Secretary of State shall authorize use
of the name applied for if:
(1) the present user, registrant, or owner of a reserved name
consents to the use in a record and submits an undertaking in form
satisfactory to the Secretary of State to change the name to a name
that is distinguishable upon the records of the Secretary of State from
the name applied for; or
(2) the applicant delivers to the Secretary of State a certified
copy of the final judgment of a court of competent jurisdiction
establishing the applicant's right to use the name applied for in this
State.
(d) A limited liability company may use the name, including a
fictitious name, of another domestic or foreign company which is
used in this State if the other company is organized or authorized to
transact business in this State and the company proposing to use the
name has:
(1) merged with the other company;
(2) been formed by reorganization with the other company; or
(3) acquired substantially all of the assets, including the name,
of the other company.
Reserved name
Section 33-44-106. (a) A person may reserve the exclusive use
of the name of a limited liability company, including a fictitious name
for a foreign company whose name is not available, by delivering an
application to the Secretary of State for filing. The application must
set forth the name and address of the applicant and the name proposed
to be reserved. If the Secretary of State finds that the name applied for
is available, it must be reserved for the applicant's exclusive use for a
nonrenewable one hundred twenty-day period.
(b) The owner of a name reserved for a limited liability company
may transfer the reservation to another person by delivering to the
Secretary of State a signed notice of the transfer which states the
name and address of the transferee.
Comment
A foreign limited liability company that is not presently authorized
to transact business in the State may reserve a fictitious name for a
nonrenewable one hundred twenty-day period. When its actual name
is available, a company will generally register that name under
Section 33-44-107 because the registration is valid for a year and may
be extended indefinitely.
Registered name
Section 33-44-107. (a) A foreign limited liability company may
register its name subject to the requirements of Section 33-44-1005, if
the name is distinguishable upon the records of the Secretary of State
from names that are not available under Section 33-44-105(b).
(b) A foreign limited liability company registers its name, or its
name with any addition required by Section 33-44-1005, by
delivering to the Secretary of State for filing an application:
(1) setting forth its name, or its name with any addition
required by Section 33-44-1005, the State or country and date of its
organization, and a brief description of the nature of the business in
which it is engaged; and
(2) accompanied by a certificate of existence, or a record of
similar import, from the State or country of organization.
(c) A foreign limited liability company whose registration is
effective may renew it for successive years by delivering for filing in
the office of the Secretary of State a renewal application complying
with subsection (b) between October first and December thirty-first of
the preceding year. The renewal application renews the registration
for the following calendar year.
(d) A foreign limited liability company whose registration is
effective may qualify as a foreign company under its name or consent
in writing to the use of its name by a limited liability company later
organized under this chapter or by another foreign company later
authorized to transact business in this State. The registered name
terminates when the limited liability company is organized or the
foreign company qualifies or consents to the qualification of another
foreign company under the registered name.
Designated office and agent for service of process
Section 33-44-108. (a) A limited liability company and a foreign
limited liability company authorized to do business in this State shall
designate and continuously maintain in this State:
(1) an office, which need not be a place of its business in this
State; and
(2) an agent and street address of the agent for service of
process on the company.
(b) An agent must be an individual resident of this State, a
domestic corporation, another limited liability company, or a foreign
corporation or foreign company authorized to do business in this
State.
Comment
Limited liability companies organized under Section 33-44-202 or
authorized to transact business under Section 33-44-1004 are required
to designate and continuously maintain an office in the State.
Although the designated office need not be a place of business, it
most often will be the only place of business of the company. The
company must also designate an agent for service of process within
the State and the agent's street address. The agent's address need not
be the same as the company's designated office address. The initial
office and agent designations must be set forth in the articles of
organization, including the address of the designated office. See
Section 33-44-203(a)(2) to (3). The current office and agent
designations must be set forth in the company's annual report. See
Section 33-44-211(a)(2). See also Section 33-44-109 (procedure for
changing the office or agent designations), Section 33-44-110
(procedure for an agent to resign), and Section 33-44-111(b) (the
filing officer is the service agent for the company if it fails to
maintain its own service agent).
Change of designated office or agent for service of process
Section 33-44-109. A limited liability company may change its
designated office or agent for service of process by delivering to the
Secretary of State for filing a statement of change which sets forth:
(1) the name of the company;
(2) the street address of its current designated office;
(3) if the current designated office is to be changed, the street
address of the new designated office;
(4) the name and address of its current agent for service of
process; and
(5) if the current agent for service of process or street address of
that agent is to be changed, the new address or the name and street
address of the new agent for service of process.
Resignation of agent for service of process
Section 33-44-110. (a) An agent for service of process of a
limited liability company may resign by delivering to the Secretary of
State for filing a record of the statement of resignation.
(b) After filing a statement of resignation, the Secretary of State
shall mail a copy to the designated office and another copy to the
limited liability company at its principal office.
(c) An agency is terminated on the thirty-first day after the
statement is filed in the office of the Secretary of State.
Service of process
Section 33-44-111. (a) An agent for service of process appointed
by a limited liability company or a foreign limited liability company
is an agent of the company for service of any process, notice, or
demand required or permitted by law to be served upon the company.
(b) If a limited liability company or foreign limited liability
company fails to appoint or maintain an agent for service of process
in this State or the agent for service of process cannot with reasonable
diligence be found at the agent's address, the Secretary of State is an
agent of the company upon whom process, notice, or demand may be
served.
(c) Service of any process, notice, or demand on the Secretary of
State may be made by delivering to and leaving with the Secretary of
State, or a clerk in the limited liability company department of the
Secretary of State's office duplicate copies of the process, notice, or
demand. If the process, notice, or demand is served on the Secretary
of State, the Secretary of State shall forward one of the copies by
registered or certified mail, return receipt requested, to the company
at its designated office. Service is effected under this subsection at the
earliest of:
(1) the date the company receives the process, notice, or
demand;
(2) the date shown on the return receipt, if signed on behalf of
the company; or
(3) five days after its deposit in the mail, if mailed postpaid and
correctly addressed.
(d) The Secretary of State shall keep a record of all processes,
notices, and demands served pursuant to this section and record the
time of and the action taken regarding the service.
(e) This section does not affect the right to serve process, notice,
or demand in any manner otherwise provided by law.
Comment
Service of process on a limited liability company and a foreign
company authorized to transact business in the State must be made on
the company's agent for service of process whose name and address
should be on file with the filing office. If for any reason a company
fails to appoint or maintain an agent for service of process or the
agent cannot be found with reasonable diligence at the agent's
address, the filing officer will be deemed the proper agent.
Nature of business and powers
Section 33-44-112. (a) A limited liability company may be
organized under this chapter for any lawful purpose, subject to any
law of this State governing or regulating business.
(b) Unless its articles of organization provide otherwise, a limited
liability company has the same powers as an individual to do all
things necessary or convenient to carry on its business or affairs,
including power to:
(1) sue and be sued, and defend in its name;
(2) purchase, receive, lease, or otherwise acquire, and own,
hold, improve, use, and otherwise deal with real or personal property,
or any legal or equitable interest in property, wherever located;
(3) sell, convey, mortgage, grant a security interest in, lease,
exchange, and otherwise encumber or dispose of all or any part of its
property;
(4) purchase, receive, subscribe for, or otherwise acquire, own,
hold, vote, use, sell, mortgage, lend, grant a security interest in, or
otherwise dispose of and deal in and with, shares or other interests in
or obligations of any other entity;
(5) make contracts and guarantees, incur liabilities, borrow
money, issue its notes, bonds, and other obligations, which may be
convertible into or include the option to purchase other securities of
the limited liability company, and secure any of its obligations by a
mortgage on or a security interest in any of its property, franchises, or
income;
(6) lend money, invest and reinvest its funds, and receive and
hold real and personal property as security for repayment;
(7) be a promoter, partner, member, associate, or manager of
any partnership, joint venture, trust, or other entity;
(8) conduct its business, locate offices, and exercise the powers
granted by this chapter within or without this State;
(9) elect managers and appoint officers, employees, and agents
of the limited liability company, define their duties, fix their
compensation, and lend them money and credit;
(10) pay pensions and establish pension plans, pension trusts,
profit sharing plans, bonus plans, option plans, and benefit or
incentive plans for any or all of its current or former members,
managers, officers, employees, and agents;
(11) make donations for the public welfare or for charitable,
scientific, or educational purposes; and
(12) make payments or donations, or do any other act, not
inconsistent with law, that furthers the business of the limited liability
company.
Comment
A limited liability company may be organized for any lawful
purpose unless the State has specifically prohibited a company from
engaging in a specific activity. For example, many states require that
certain regulated industries, such as banking and insurance, be
conducted only by organizations that meet the special requirements.
Also, many states impose restrictions on activities in which a limited
liability company may engage. For example, the practice of certain
professionals is often subject to special conditions.
A limited liability company has the power to engage in and
perform important and necessary acts related to its operation and
function. A company's power to enter into a transaction is
distinguishable from the authority of an agent to enter into the
transaction. See Section 33-44-301 (agency rules).
Article 2
Organization
Section 33-44-201. Limited Liability Company as Legal Entity.
Section 33-44-202. Organization.
Section 33-44-203. Articles of Organization.
Section 33-44-204. Amendment or Restatement of Articles of Organization.
Section 33-44-205. Signing of Records.
Section 33-44-206. Filing in Office of Secretary of State.
Section 33-44-207. Correcting Filed Record.
Section 33-44-208. Certificate of Existence or Authorization.
Section 33-44-209. Liability for False Statement in Filed Record.
Section 33-44-210. Filing By Judicial act.
Section 33-44-211. Annual Report for Secretary of State.
Limited liability company as legal entity
Section 33-44-201. A limited liability company is a legal entity
distinct from its members.
Comment
A limited liability company is legally distinct from its members
who are not normally liable for the debts, obligations, and liabilities
of the company. See Section 33-44-303. Accordingly, members are
not proper parties to suits against the company unless an object of the
proceeding is to enforce members' rights against the company or to
enforce their liability to the company.
Organization
Section 33-44-202. (a) One or more persons may organize a
limited liability company, consisting of one or more members, by
delivering articles of organization to the office of the Secretary of
State for filing.
(b) Unless a delayed effective date is specified, the existence of a
limited liability company begins when the articles of organization are
filed.
(c) The filing of the articles of organization by the Secretary of
State is conclusive proof that the organizers satisfied all conditions
precedent to the creation of a limited liability company.
Comment
Any person may organize a limited liability company by
performing the ministerial act of signing and filing the articles of
organization. The person need not be a member. As a matter of
flexibility, a company may be organized and operated with only one
member to enable sole proprietors to obtain the benefit of a liability
shield. The effect of organizing or operating a company with one
member on the federal tax classification of the company is
determined by federal law.
The existence of a company begins when the articles are filed.
Therefore, the filing of the articles of organization is conclusive as to
the existence of the limited liability shield for persons who enter into
transactions on behalf of the company. Until the articles are filed, a
firm is not organized under this act and is not a `limited liability
company' as defined in Section 33-44-101(9). In that case, the parties'
relationships are not governed by this act unless they have expressed
a contractual intent to be bound by the provisions of the act. Third
parties would also not be governed by the provisions of this act unless
they have expressed a contractual intent to extend a limited liability
shield to the members of the would-be limited liability company.
Articles of organization
Section 33-44-203. (a) Articles of organization of a limited
liability company must set forth:
(1) the name of the company;
(2) the address of the initial designated office;
(3) the name and street address of the initial agent for service
of process;
(4) the name and address of each organizer;
(5) whether the company is to be a term company and, if so,
the term specified;
(6) whether the company is to be manager-managed, and, if so,
the name and address of each initial manager; and
(7) whether one or more of the members of the company are to
be liable for its debts and obligations under Section 33-44-303(c).
(b) Articles of organization of a limited liability company may set
forth:
(1) provisions permitted to be set forth in an operating
agreement; or
(2) other matters not inconsistent with law.
(c) Articles of organization of a limited liability company may
not vary the nonwaivable provisions of Section 33-44-103(b). As to
all other matters, if any provision of an operating agreement is
inconsistent with the articles of organization:
(1) the operating agreement controls as to managers, members,
and members' transferees; and
(2) the articles of organization control as to persons, other than
managers, members and their transferees, who reasonably rely on the
articles to their detriment.
Comment
The articles serve primarily a notice function and generally do not
reflect the substantive agreement of the members regarding the
business affairs of the company. Those matters are generally reserved
for an operating agreement which may be unwritten. Under Section
33-44-203(b), the articles may contain provisions permitted to be set
forth in an operating agreement. Where the articles and operating
agreement conflict, the operating agreement controls as to members
but the articles control as to third parties. The articles may also
contain any other matter not inconsistent with law. The most
important is a Section 33-44-301(c) limitation on the authority of a
member or manager to transfer interests in the company's real
property.
A company will be at-will unless it is designated as a term
company and the duration of its term is specified in its articles under
Section 33-44-203(a)(5). The duration of a term company may be
specified in any manner which sets forth a specific and final date for
the dissolution of the company. For example, the period specified
may be in the form of `50 years from the date of filing of the articles'
or `the period ending on January 1, 2020.' Mere specification of a
particular undertaking of an uncertain business duration is not
sufficient unless the particular undertaking is within a longer fixed
period. An example of this type of designation would include `2020
or until the building is completed, whichever occurs first.' When the
specified period is incorrectly specified, the company will be an
at-will company. Notwithstanding the correct specification of a term
in the articles, a company will be an at-will company among the
members under Section 33-44-203(c)(1) if an operating agreement so
provides. A term company that continues after the expiration of its
term specified in its articles will also be an at-will company.
A term company possesses several important default rule
characteristics that differentiate it dramatically from an at-will
company. An operating agreement may alter any of these rules. Any
dissociation of an at-will member dissolves a member-managed
company unless a specified percentage of the remaining members
agree to continue the business of the company. Before the expiration
of its term, only specified dissociation events (excluding voluntary
withdrawal) of a term member will dissolve a member-managed
company unless a specified percentage of the remaining members
agree to continue the business of the company. See Comments to
Sections 33-44-601 and 33-44-801(b)(3). Also, even if the
dissociation of an at-will member does not result in a dissolution of a
member-managed company, the dissociated member is entitled to
have the company purchase that member's interest for its fair value.
Unless the company earlier dissolves, a term member must generally
await the expiration of the agreed term to withdraw the fair value of
the interest. See Comments to Section 33-44-701(a).
A company will be member-managed unless it is designated as
manager-managed under Section 33-44-203(a)(6). Absent further
designation in the articles, a company will be a member-managed
at-will company. The designation of a limited liability company as
either member- or manager-managed is important because it defines
who are agents and have the apparent authority to bind the company
under Section 33-44-301 and determines whether the dissociation of
members who are not managers will threaten dissolution of the
company. In a member-managed company, the members have the
agency authority to bind the company. In a manager-managed
company only the managers have that authority. The effect of the
agency structure of a company on the federal tax classification of the
company is determined by federal law. The agency designation
relates only to agency and does not preclude members of a
manager-managed company from participating in the actual
management of company business. See Comments to Section
33-44-404(b).
In a member-managed company, the dissociation of any member
will cause the company to dissolve unless a specified percentage of
the remaining members agree to continue the business of the
company. In a manager-managed company, only the dissociation of
any member who is also a manager threatens dissolution of the
company. Only where there are no members who are also managers
will the dissociation of members who are not managers threaten
dissolution of a manager-managed company. See Comments to
Section 33-44-801.
Amendment or restatement of articles of organization
Section 33-44-204. (a) Articles of organization of a limited
liability company may be amended at any time by delivering articles
of amendment to the Secretary of State for filing. The articles of
amendment must set forth the:
(1) name of the limited liability company;
(2) date of filing of the articles of organization; and
(3) amendment to the articles.
(b) A limited liability company may restate its articles of
organization at any time. Restated articles of organization must be
signed and filed in the same manner as articles of amendment.
Restated articles of organization must be designated as such in the
heading and state in the heading or in an introductory paragraph the
limited liability company's present name and, if it has been changed,
all of its former names and the date of the filing of its initial articles
of organization.
Comment
An amendment to the articles requires the consent of all the
members unless an operating agreement provides for a lesser number.
See Section 33-44-404(c)(3).
Signing of records
Section 33-44-205. (a) Except as otherwise provided in this
chapter, a record to be filed by or on behalf of a limited liability
company in the office of the Secretary of State must be signed in the
name of the company by a:
(1) manager of a manager-managed company;
(2) member of a member-managed company;
(3) person organizing the company, if the company has not
been formed; or
(4) fiduciary, if the company is in the hands of a receiver,
trustee, or other court-appointed fiduciary.
(b) A record signed under subsection (a) must state adjacent to
the signature the name and capacity of the signer.
(c) Any person may sign a record to be filed under subsection (a)
by an attorney-in-fact. Powers of attorney relating to the signing of
records to be filed under subsection (a) by an attorney-in-fact need
not be filed in the office of the Secretary of State as evidence of
authority by the person filing but must be retained by the company.
Comment
Both a writing and a record may be signed. An electronic record is
signed when a person adds a name to the record with the intention to
authenticate the record. See Sections 101(16) (`record' definition) and
33-44-101(`7) (`signed' definition).
Other provisions of this act also provide for the filing of records
with the filing office but do not require signing by the persons
specified in clauses (1) to (3). Those specific sections prevail.
Filing in Office of Secretary of State
Section 33-44-206. (a) Articles of organization or any other
record authorized to be filed under this chapter must be in a medium
permitted by the Secretary of State and must be delivered to the office
of the Secretary of State. Unless the Secretary of State determines that
a record fails to comply as to form with the filing requirements of this
chapter, and if all filing fees have been paid, the Secretary of State
shall file the record and send a receipt for the record and the fees to
the limited liability company or its representative.
(b) Upon request and payment of a fee, the Secretary of State
shall send to the requester a certified copy of the requested record.
(c) Except as otherwise provided in subsection (d) and Section
33-44-207(c), a record accepted for filing by the Secretary of State is
effective:
(1) at the time of filing on the date it is filed, as evidenced by
the Secretary of State's date and time endorsement on the original
record; or
(2) at the time specified in the record as its effective time on
the date it is filed.
(d) A record may specify a delayed effective time and date, and if
it does so the record becomes effective at the time and date specified.
If a delayed effective date but no time is specified, the record is
effective at the close of business on that date. If a delayed effective
date is later than the ninetieth day after the record is filed, the record
is effective on the ninetieth day.
Comment
The definition and use of the term `record' permits filings with the
filing office under this act to conform to technological advances that
have been adopted by the filing office. However, since Section
33-44-206(a) provides that the filing `must be in a medium permitted
by the Secretary of State', the act simply conforms to filing changes as
they are adopted.
Correcting filed record
Section 33-44-207. (a) A limited liability company or foreign
limited liability company may correct a record filed by the Secretary
of State if the record contains a false or erroneous statement or was
defectively signed.
(b) A record is corrected:
(1) by preparing articles of correction that:
(i) describe the record, including its filing date, or attach a
copy of it to the articles of correction;
(ii) specify the incorrect statement and the reason it is
incorrect or the manner in which the signing was defective; and
(iii) correct the incorrect statement or defective signing; and
(2) by delivering the corrected record to the Secretary of State
for filing.
(c) Articles of correction are effective retroactively on the
effective date of the record they correct except as to persons relying
on the uncorrected record and adversely affected by the correction. As
to those persons, articles of correction are effective when filed.
Certificate of existence or authorization
Section 33-44-208. (a) A person may request the Secretary of
State to furnish a certificate of existence for a limited liability
company or a certificate of authorization for a foreign limited liability
company.
(b) A certificate of existence for a limited liability company must
set forth:
(1) the company's name;
(2) that it is duly organized under the laws of this State, the
date of organization, whether its duration is at-will or for a specified
term, and, if the latter, the period specified;
(3) if payment is reflected in the records of the Secretary of
State and if nonpayment affects the existence of the company, that all
fees, taxes, and penalties owed to this State have been paid;
(4) whether its most recent annual report required by Section
33-44-211 has been filed with the Secretary of State;
(5) that articles of termination have not been filed; and
(6) other facts of record in the office of the Secretary of State
which may be requested by the applicant.
(c) A certificate of authorization for a foreign limited liability
company must set forth:
(1) the company's name used in this State;
(2) that it is authorized to transact business in this State;
(3) if payment is reflected in the records of the Secretary of
State and if nonpayment affects the authorization of the company, that
all fees, taxes, and penalties owed to this State have been paid;
(4) whether its most recent annual report required by Section
33-44-211 has been filed with the Secretary of State;
(5) that a certificate of cancellation has not been filed; and
(6) other facts of record in the office of the Secretary of State
which may be requested by the applicant.
(d) Subject to any qualification stated in the certificate, a
certificate of existence or authorization issued by the Secretary of
State may be relied upon as conclusive evidence that the domestic or
foreign limited liability company is in existence or is authorized to
transact business in this State.
Liability for false statement in filed record
Section 33-44-209. If a record authorized or required to be filed
under this chapter contains a false statement, one who suffers loss by
reliance on the statement may recover damages for the loss from a
person who signed the record or caused another to sign it on the
person's behalf and knew the statement to be false at the time the
record was signed.
Filing by judicial act
Section 33-44-210. If a person required by Section 33-44-205 to
sign any record fails or refuses to do so, any other person who is
adversely affected by the failure or refusal may petition the circuit
court to direct the signing of the record. If the court finds that it is
proper for the record to be signed and that a person so designated has
failed or refused to sign the record, it shall order the Secretary of
State to sign and file an appropriate record.
Annual report for Secretary of State
Section 33-44-211. (a) A limited liability company, and a foreign
limited liability company authorized to transact business in this State,
shall deliver to the Secretary of State for filing an annual report that
sets forth:
(1) the name of the company and the State or country under
whose law it is organized;
(2) the address of its designated office and the name and
address of its agent for service of process in this State;
(3) the address of its principal office; and
(4) the names and business addresses of any managers.
(b) Information in an annual report must be current as of the date
the annual report is signed on behalf of the limited liability company.
(c) The first annual report must be delivered to the Secretary of
State between January first and April first of the year following the
calendar year in which a limited liability company was organized or a
foreign company was authorized to transact business. Subsequent
annual reports must be delivered to the Secretary of State between
January first and April first of the ensuing calendar years.
(d) If an annual report does not contain the information required
in subsection (a), the Secretary of State shall promptly notify the
reporting limited liability company or foreign limited liability
company and return the report to it for correction. If the report is
corrected to contain the information required in subsection (a) and
delivered to the Secretary of State within thirty days after the
effective date of the notice, it is timely filed.
Comment
Failure to deliver the annual report within sixty days after its due
date is a primary ground for administrative dissolution of the
company under Section 33-44-809. See Comments to Sections
33-44-809 to 33-44-812.
Article 3
Relations of Members and Managers to Persons
Dealing
with Limited Liability Company
Section 33-44-301. Agency of Members and Managers.
Section 33-44-302. Limited Liability Company Liable for Member's or Manager's Actionable Conduct.
Section 33-44-303. Liability of Members and Managers.
Agency of members and managers
Section 33-44-301. (a) Subject to subsections (b) and (c):
(1) Each member is an agent of the limited liability company
for the purpose of its business, and an act of a member, including the
signing of an instrument in the company's name, for apparently
carrying on in the ordinary course the company's business or business
of the kind carried on by the company binds the company, unless the
member had no authority to act for the company in the particular
matter and the person with whom the member was dealing knew or
had notice that the member lacked authority.
(2) An act of a member which is not apparently for carrying on
in the ordinary course the company's business or business of the kind
carried on by the company binds the company only if the act was
authorized by the other members.
(b) Subject to subsection (c), in a manager-managed company:
(1) A member is not an agent of the company for the purpose
of its business solely by reason of being a member. Each manager is
an agent of the company for the purpose of its business, and an act of
a manager, including the signing of an instrument in the company's
name, for apparently carrying on in the ordinary course the company's
business or business of the kind carried on by the company binds the
company, unless the manager had no authority to act for the company
in the particular matter and the person with whom the manager was
dealing knew or had notice that the manager lacked authority.
(2) An act of a manager which is not apparently for carrying on
in the ordinary course the company's business or business of the kind
carried on by the company binds the company only if the act was
authorized under Section 33-44-404.
(c) Unless the articles of organization limit their authority, any
member of a member-managed company or manager of a
manager-managed company may sign and deliver any instrument
transferring or affecting the company's interest in real property. The
instrument is conclusive in favor of a person who gives value without
knowledge of the lack of the authority of the person signing and
delivering the instrument.
Comment
Members of a member-managed and managers of
manager-managed company, as agents of the firm, have the apparent
authority to bind a company to third parties. Members of a
manager-managed company are not as such agents of the firm and do
not have the apparent authority, as members, to bind a company.
Members and managers with apparent authority possess actual
authority by implication unless the actual authority is restricted in an
operating agreement. Apparent authority extends to acts for carrying
on in the ordinary course the company's business and business of the
kind carried on by the company. Acts beyond this scope bind the
company only where supported by actual authority created before the
act or ratified after the act.
Ordinarily, restrictions on authority in an operating agreement do
not affect the apparent authority of members and managers to bind the
company to third parties without notice of the restriction. However,
the restriction may make a member or manager's conduct wrongful
and create liability to the company for the breach. This rule is subject
to three important exceptions. First, under Section 33-44-301(c), a
limitation reflected in the articles of organization on the authority of
any member or manager to sign and deliver an instrument affecting an
interest in company real property is effective when filed, even to
persons without knowledge of the agent's lack of authority. The effect
of such a limitation on authority on the federal tax classification of
the company is determined by federal law. Secondly, under Section
33-44-703, a dissociated member's apparent authority terminates two
years after dissociation, even to persons without knowledge of the
dissociation. Thirdly, under Section 33-44-704, a dissociated
member's apparent authority may be terminated earlier than the two
years by filing a statement of dissociation. The statement is effective
ninety days after filing, even to persons without knowledge of the
filing. Together, these three provisions provide constructive
knowledge to the world of the lack of apparent authority of an agent
to bind the company.
Limited liability company liable for member's or manager's actionable
conduct
Section 33-44-302. A limited liability company is liable for loss or
injury caused to a person, or for a penalty incurred, as a result of a
wrongful act or omission, or other actionable conduct, of a member or
manager acting in the ordinary course of business of the company or
with authority of the company.
Comment
Since a member of a manager-managed company is not as such an
agent, the acts of the member are not imputed to the company unless
the member is acting under actual or apparent authority created by
circumstances other than membership status.
Liability of members and managers
Section 33-44-303. (a) Except as otherwise provided in
subsection (c), the debts, obligations, and liabilities of a limited
liability company, whether arising in contract, tort, or otherwise, are
solely the debts, obligations, and liabilities of the company. A
member or manager is not personally liable for a debt, obligation, or
liability of the company solely by reason of being or acting as a
member or manager.
(b) The failure of a limited liability company to observe the usual
company formalities or requirements relating to the exercise of its
company powers or management of its business is not a ground for
imposing personal liability on the members or managers for liabilities
of the company.
(c) All or specified members of a limited liability company are
liable in their capacity as members for all or specified debts,
obligations, or liabilities of the company if:
(1) a provision to that effect is contained in the articles of
organization; and
(2) a member so liable has consented in writing to the adoption
of the provision or to be bound by the provision.
Comment
A member or manager, as an agent of the company, is not liable for
the debts, obligations, and liabilities of the company simply because
of the agency. A member or manager is responsible for acts or
omissions to the extent those acts or omissions would be actionable in
contract or tort against the member or manager if that person were
acting in an individual capacity. Where a member or manager
delegates or assigns the authority or duty to exercise appropriate
company functions, the member or manager is ordinarily not
personally liable for the acts or omissions of the officer, employee, or
agent if the member or manager has complied with the duty of care
set forth in Section 33-44-409(c).
Under Section 33-44-303(c), the usual liability shield may be
waived, in whole or in part, provided the waiver is reflected in the
articles of organization and the member has consented in writing to be
bound by the waiver. The importance and unusual nature of the
waiver consent requires that the consent be evidenced by a writing
and not merely an unwritten record. See Comments to Section
33-44-205. The effect of a waiver on the federal tax classification of
the company is determined by federal law.
Article 4
Relations Of Members To Each Other
And To Limited Liability Company
Section 33-44-401. Form of Contribution.
Section 33-44-402. Member's Liability for Contributions.
Section 33-44-403. Member's and Manager's Rights to Payments
and Reimbursement.
Section 33-44-404. Management of Limited Liability Company.
Section 33-44-405. Sharing of and Right to Distributions.
Section 33-44-406. Limitations on Distributions.
Section 33-44-407. Liability for Unlawful Distributions.
Section 33-44-408. Member's Right to Information.
Section 33-44-409. General Standards of Member's and Manager's Conduct.
Section 33-44-410. Actions by Members.
Section 33-44-411. Continuation of Term Company After
Expiration of Specified Term.
Form of contribution
Section 33-44-401. A contribution of a member of a limited
liability company may consist of tangible or intangible property or
other benefit to the company, including money, promissory notes,
services performed, or other agreements to contribute cash or
property, or contracts for services to be performed.
Comment
Unless otherwise provided in an operating agreement, admission of
a member and the nature and valuation of a would-be member's
contribution are matters requiring the consent of all of the other
members. See Section 33-44-404(c)(7). An agreement to contribute
to a company is controlled by the operating agreement and therefore
may not be created or modified without amending that agreement
through the unanimous consent of all the members, including the
member to be bound by the new contribution terms. See Section
404(c)(1).
Member's liability for contributions
Section 33-44-402. (a) A member's obligation to contribute
money, property, or other benefit to, or to perform services for, a
limited liability company is not excused by the member's death,
disability, or other inability to perform personally. If a member does
not make the required contribution of property or services, the
member is obligated at the option of the company to contribute
money equal to the value of that portion of the stated contribution
which has not been made.
(b) A creditor of a limited liability company who extends credit
or otherwise acts in reliance on an obligation described in subsection
(a), and without notice of any compromise under Section
33-44-404(c)(5), may enforce the original obligation.
Comment
An obligation need not be in writing to be enforceable. Given the
informality of some companies, a writing requirement may frustrate
reasonable expectations of members based on a clear oral agreement.
Obligations may be compromised with the consent of all of the
members under Section 33-44-404(c)(5), but the compromise is
generally effective only among the consenting members. Company
creditors are bound by the compromise only as provided in Section
33-44-402(b).
Member's and manager's rights to payments and reimbursement
Section 33-44-403. (a) A limited liability company shall
reimburse a member or manager for payments made and indemnify a
member or manager for liabilities incurred by the member or manager
in the ordinary course of the business of the company or for the
preservation of its business or property.
(b) A limited liability company shall reimburse a member for an
advance to the company beyond the amount of contribution the
member agreed to make.
(c) A payment or advance made by a member which gives rise to
an obligation of a limited liability company under subsection (a) or
(b) constitutes a loan to the company upon which interest accrues
from the date of the payment or advance.
(d) A member is not entitled to remuneration for services
performed for a limited liability company, except for reasonable
compensation for services rendered in winding up the business of the
company.
Comment
The presence of a liability shield will ordinarily prevent a member
or manager from incurring personal liability on behalf of the company
in the ordinary course of the company's business. Where a member of
a member-managed or a manager of a manager-managed company
incurs such liabilities, Section 33-44-403(a) provides that the
company must indemnify the member or manager where that person
acted in the ordinary course of the company's business or the
preservation of its property. A member or manager is therefore
entitled to indemnification only if the act was within the member or
manager's actual authority. A member or manager is therefore not
entitled to indemnification for conduct that violates the duty of care
set forth in Section 33-44-409(c) or for tortious conduct against a
third party. Since members of a manager-managed company do not
possess the apparent authority to bind the company, it would be more
unusual for such a member to incur a liability for indemnification in
the ordinary course of the company's business.
Management of limited liability company
Section 33-44-404. (a) In a member-managed company:
(1) each member has equal rights in the management and
conduct of the company's business; and
(2) except as otherwise provided in subsection (c) or in Section
33-44-801(b)(3)(i), any matter relating to the business of the company
may be decided by a majority of the members.
(b) In a manager-managed company:
(1) each manager has equal rights in the management and
conduct of the company's business;
(2) except as otherwise provided in subsection (c) or in Section
33-44-801(b)(3)(i), any matter relating to the business of the company
may be exclusively decided by the manager or, if there is more than
one manager, by a majority of the managers; and
(3) a manager:
(i) must be designated, appointed, elected, removed, or
replaced by a vote, approval, or consent of a majority of the members;
and
(ii) holds office until a successor has been elected and
qualified, unless the manager sooner resigns or is removed.
(c) The only matters of a member or manager-managed
company's business requiring the consent of all of the members are:
(1) the amendment of the operating agreement under Section
33-44-103;
(2) the authorization or ratification of acts or transactions under
Section 33-44-103(b)(2)(ii) which would otherwise violate the duty of
loyalty;
(3) an amendment to the articles of organization under Section
33-44-204;
(4) the compromise of an obligation to make a contribution
under Section 33-44-402(b);
(5) the compromise, as among members, of an obligation of a
member to make a contribution or return money or other property
paid or distributed in violation of this chapter;
(6) the making of interim distributions under Section
33-44-405(a), including the redemption of an interest;
(7) the admission of a new member;
(8) the use of the company's property to redeem an interest
subject to a charging order;
(9) the consent to dissolve the company under Section
33-44-801(b)(2);
(10) a waiver of the right to have the company's business wound
up and the company terminated under Section 33-44-802(b);
(11) the consent of members to merge with another entity under
Section 33-44-904(c)(1); and
(12) the sale, lease, exchange, or other disposal of all, or
substantially all, of the company's property with or without goodwill.
(d) action requiring the consent of members or managers under
this chapter may be taken without a meeting.
(e) A member or manager may appoint a proxy to vote or
otherwise act for the member or manager by signing an appointment
instrument, either personally or by the member's or manager's
attorney-in-fact.
Comment
In a member-managed company, each member has equal rights in
the management and conduct of the company's business unless
otherwise provided in an operating agreement. For example, an
operating agreement may allocate voting rights based upon capital
contributions rather than the subsection (a) per capita rule. Also,
member disputes as to any matter relating to the company's business
may be resolved by a majority of the members unless the matter
relates to a matter specified either in subsection (c) (unanimous
consent required) or in Section 33-44-801(b)(3)(i) (special consent
required). Regardless of how the members allocate management
rights, each member is an agent of the company with the apparent
authority to bind the company in the ordinary course of its business.
See Comments to Section 33-44-301(a). A member's right to
participate in management terminates upon dissociation. See Section
33-44-603(b)(1).
In a manager-managed company, the members, unless also
managers, have no rights in the management and conduct of the
company's business unless otherwise provided in an operating
agreement. If there is more than one manager, manager disputes as to
any matter relating to the company's business may be resolved by a
majority of the managers unless the matter relates to a matter
specified either in subsection (c) (unanimous member consent
required) or Section 33-44-801(b)(3)(i) (special consent required).
Managers must be designated, appointed, or elected by a majority of
the members. A manager need not be a member and is an agent of the
company with the apparent authority to bind the company in the
ordinary course of its business. See Sections 33-44-101(10) and
33-44-301(b).
To promote clarity and certainty, subsection (c) specifies those
exclusive matters requiring the unanimous consent of the members,
whether the company is member- or manager-managed. For example,
interim distributions, including redemptions, may not be made
without the unanimous consent of all the members. Unless otherwise
agreed, all other company matters are to be determined under the
majority of members or managers rules of subsections (a) and (b).
Sharing of and right to distributions
Section 33-44-405. (a) Any distributions made by a limited
liability company before its dissolution and winding up must be in
equal shares.
(b) A member has no right to receive, and may not be required to
accept, a distribution in kind.
(c) If a member becomes entitled to receive a distribution, the
member has the status of, and is entitled to all remedies available to, a
creditor of the limited liability company with respect to the
distribution.
Comment
Recognizing the informality of many limited liability companies,
this section creates a simple default rule regarding interim
distributions. Any interim distributions made must be in equal shares
and approved by all members. See Section 33-44-404(c)(6). The rule
assumes that: profits will be shared equally; some distributions will
constitute a return of contributions that should be shared equally
rather than a distribution of profits; and property contributors should
have the right to veto any distribution that threatens their return of
contributions on liquidation. In the simple case where the members
make equal contributions of property or equal contributions of
services, those assumptions avoid the necessity of maintaining a
complex capital account or determining profits. Where some
members contribute services and others property, the unanimous vote
necessary to approve interim distributions protects against unwanted
distributions of contributions to service contributors. Consistently,
Section 33-44-408(a) does not require the company to maintain a
separate account for each member, the act does not contain a default
rule for allocating profits and losses, and Section 33-44-806(b)
requires that liquidating distributions to members be made in equal
shares after the return of contributions not previously returned. See
Comments to Section 33-44-806(b).
Section 33-44-405(c) governs distributions declared or made when
the company was solvent. Section 33-44-406 governs distributions
declared or made when the company is insolvent.
Limitations on distributions
Section 33-44-406. (a) A distribution may not be made if:
(1) the limited liability company would not be able to pay its
debts as they become due in the ordinary course of business; or
(2) the company's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the company
were to be dissolved, wound up, and terminated at the time of the
distribution, to satisfy the preferential rights upon dissolution,
winding up, and termination of members whose preferential rights are
superior to those receiving the distribution.
(b) A limited liability company may base a determination that a
distribution is not prohibited under subsection (a) on financial
statements prepared on the basis of accounting practices and
principles that are reasonable in the circumstances or on a fair
valuation or other method that is reasonable in the circumstances.
(c) Except as otherwise provided in subsection (e), the effect of a
distribution under subsection (a) is measured:
(1) in the case of distribution by purchase, redemption, or other
acquisition of a distributional interest in a limited liability company,
as of the date money or other property is transferred or debt incurred
by the company; and
(2) in all other cases, as of the date the:
(i) distribution is authorized if the payment occurs within
one hundred twenty days after the date of authorization; or
(ii) payment is made if it occurs more than one hundred
twenty days after the date of authorization.
(d) A limited liability company's indebtedness to a member
incurred by reason of a distribution made in accordance with this
section is at parity with the company's indebtedness to its general,
unsecured creditors.
(e) Indebtedness of a limited liability company, including
indebtedness issued in connection with or as part of a distribution, is
not considered a liability for purposes of determinations under
subsection (a) if its terms provide that payment of principal and
interest are made only if and to the extent that payment of a
distribution to members could then be made under this section. If the
indebtedness is issued as a distribution, each payment of principal or
interest on the indebtedness is treated as a distribution, the effect of
which is measured on the date the payment is made.
Comment
This section establishes the validity of company distributions,
which in turn determines the potential liability of members and
managers for improper distributions under Section 33-44-407.
Distributions are improper if the company is insolvent under
subsection (a) at the time the distribution is measured under
subsection (c). In recognition of the informality of many limited
liability companies, the solvency determination under subsection (b)
may be made on the basis of a fair valuation or other method
reasonable under the circumstances.
The application of the equity insolvency and balance sheet tests
present special problems in the context of the purchase, redemption,
or other acquisition of a company's distributional interests. Special
rules establish the time of measurement of such transfers. Under
Section 33-44-406(c)(1), the time for measuring the effect of a
distribution to purchase a distributional interest is the date of
payment. The company may make payment either by transferring
property or incurring a debt to transfer property in the future. In the
latter case, subsection (c)(1) establishes a clear rule that the legality of
the distribution is tested when the debt is actually incurred, not later
when the debt is actually paid. Under Section 33-44-406(e),
indebtedness is not considered a liability for purposes of subsection
(a) if the terms of the indebtedness itself provide that payments can be
made only if and to the extent that a payment of a distribution could
then be made under this section. The effect makes the holder of the
indebtedness junior to all other creditors but senior to members in
their capacity as members.
Liability for unlawful distributions
Section 33-44-407. (a) A member of a member-managed
company or a member or manager of a manager-managed company
who votes for or assents to a distribution made in violation of Section
33-44-406, the articles of organization, or the operating agreement is
personally liable to the company for the amount of the distribution
which exceeds the amount that could have been distributed without
violating Section 33-44-406, the articles of organization, or the
operating agreement if it is established that the member or manager
did not perform the member's or manager's duties in compliance with
Section 33-44-409.
(b) A member of a manager-managed company who knew a
distribution was made in violation of Section 33-44-406, the articles
of organization, or the operating agreement is personally liable to the
company, but only to the extent that the distribution received by the
member exceeded the amount that could have been properly paid
under Section 33-44-406.
(c) A member or manager against whom an action is brought
under this section may implead in the action all:
(1) other members or managers who voted for or assented to
the distribution in violation of subsection (a) and may compel
contribution from them; and
(2) members who received a distribution in violation of
subsection (b) and may compel contribution from the member in the
amount received in violation of subsection (b).
(d) A proceeding under this section is barred unless it is
commenced within two years after the distribution.
Comment
Whenever members or managers fail to meet the standards of
conduct of Section 33-44-409 and vote for or assent to an unlawful
distribution, they are personally liable to the company for the portion
of the distribution that exceeds the maximum amount that could have
been lawfully distributed. The recovery remedy under this section
extends only to the company, not the company's creditors. Under
subsection (a), members and managers are not liable for an unlawful
distribution provided their vote in favor of the distribution satisfies
the duty of care of Section 33-44-409(c).
Subsection (a) creates personal liability in favor of the company
against members or managers who approve an unlawful distribution
for the entire amount of a distribution that could not be lawfully
distributed. Subsection (b) creates personal liability against only
members who knowingly received the unlawful distribution, but only
in the amount measured by the portion of the actual distribution
received that was not lawfully made. Members who both vote for or
assent to an unlawful distribution and receive a portion or all of the
distribution will be liable, at the election of the company, under either
but not both subsections.
A member or manager who is liable under subsection (a) may seek
contribution under subsection (c)(1) from other members and
managers who also voted for or assented to the same distribution and
may also seek recoupment under subsection (c)(2) from members
who received the distribution, but only if they accepted the payments
knowing they were unlawful.
The two-year statute of limitations of subsection (d) is measured
from the date of the distribution. The date of the distribution is
determined under Section 33-44-406(c).
Member's right to information
Section 33-44-408. (a) A limited liability company shall provide
members and their agents and attorneys access to its records, if any, at
the company's principal office or other reasonable locations specified
in the operating agreement. The company shall provide former
members and their agents and attorneys access for proper purposes to
records pertaining to the period during which they were members.
The right of access provides the opportunity to inspect and copy
records during ordinary business hours. The company may impose a
reasonable charge, limited to the costs of labor and material, for
copies of records furnished.
(b) A limited liability company shall furnish to a member, and to
the legal representative of a deceased member or member under legal
disability:
(1) without demand, information concerning the company's
business or affairs reasonably required for the proper exercise of the
member's rights and performance of the member's duties under the
operating agreement or this chapter; and
(2) on demand, other information concerning the company's
business or affairs, except to the extent the demand or the information
demanded is unreasonable or otherwise improper under the
circumstances.
(c) A member has the right upon written demand given to the
limited liability company to obtain at the company's expense a copy
of any written operating agreement.
Comment
Recognizing the informality of many limited liability companies,
subsection (a) does not require a company to maintain any records.
In general, a company should maintain records necessary to enable
members to determine their share of profits and losses and their rights
on dissociation. If inadequate records are maintained to determine
those and other critical rights, a member may maintain an action for
an accounting under Section 33-44-410(a). Normally, a company will
maintain at least records required by state or federal authorities
regarding tax and other filings.
The obligation to furnish access includes the obligation to insure
that all records, if any, are accessible in intelligible form. For
example, a company that switches computer systems has an
obligation either to convert the records from the old system or retain
at least one computer capable of accessing the records from the old
system.
The right to inspect and copy records maintained is not conditioned
on a member or former member's purpose or motive. However, an
abuse of the access and copy right may create a remedy in favor of
the other members as a violation of the requesting member or former
member's obligation of good faith and fair dealing. See Section
33-44-409(d).
Although a company is not required to maintain any records under
subsection (a), it is nevertheless subject to a disclosure duty to furnish
specified information under subsection (b)(1). A company must
therefore furnish to members, without demand, information
reasonably needed for members to exercise their rights and duties as
members. A member's exercise of these duties justifies an unqualified
right of access to the company's records. The member's right to
company records may not be unreasonably restricted by the operating
agreement. See Section 33-44-103(b)(1).
General standards of member's and manager's conduct
Section 33-44-409. (a) The only fiduciary duties a member owes
to a member-managed company and its other members are the duty of
loyalty and the duty of care imposed by subsections (b) and (c).
(b) A member's duty of loyalty to a member-managed company
and its other members is limited to the following:
(1) to account to the company and to hold as trustee for it any
property, profit, or benefit derived by the member in the conduct or
winding up of the company's business or derived from a use by the
member of the company's property, including the appropriation of a
company's opportunity;
(2) to refrain from dealing with the company in the conduct or
winding up of the company's business as or on behalf of a party
having an interest adverse to the company; and
(3) to refrain from competing with the company in the conduct
of the company's business before the dissolution of the company.
(c) A member's duty of care to a member-managed company and
its other members in the conduct of and winding up of the company's
business is limited to refraining from engaging in grossly negligent or
reckless conduct, intentional misconduct, or a knowing violation of
law.
(d) A member shall discharge the duties to a member-managed
company and its other members under this chapter or under the
operating agreement and exercise any rights consistently with the
obligation of good faith and fair dealing.
(e) A member of a member-managed company does not violate a
duty or obligation under this chapter or under the operating agreement
merely because the member's conduct furthers the member's own
interest.
(f) A member of a member-managed company may lend money
to and transact other business with the company. As to each loan or
transaction, the rights and obligations of the member are the same as
those of a person who is not a member, subject to other applicable
law.
(g) This section applies to a person winding up the limited
liability company's business as the personal or legal representative of
the last surviving member as if the person were a member.
(h) In a manager-managed company:
(1) a member who is not also a manager owes no duties to the
company or to the other members solely by reason of being a
member;
(2) a manager is held to the same standards of conduct
prescribed for members in subsections (b) through (f);
(3) a member who pursuant to the operating agreement
exercises some or all of the rights of a manager in the management
and conduct of the company's business is held to the standards of
conduct in subsections (b) through (f) to the extent that the member
exercises the managerial authority vested in a manager by this
chapter; and
(4) a manager is relieved of liability imposed by law for
violation of the standards prescribed by subsections (b) through (f) to
the extent of the managerial authority delegated to the members by
the operating agreement.
Comment
Under subsections (a), (c), and (h), members and managers, and
their delegates, owe to the company and to the other members and
managers only the fiduciary duties of loyalty and care set forth in
subsections (b) and (c) and the obligation of good faith and fair
dealing set forth in subsection (d). An operating agreement may not
waive or eliminate the duties or obligation, but may, if not manifestly
unreasonable, identify activities and determine standards for
measuring the performance of them. See Section 33-44-103(b)(2) to
(4).
Upon a member's dissociation, the duty to account for personal
profits under subsection (b)(1), the duty to refrain from acting as or
representing adverse interests under subsection (b)(2), and the duty of
care under subsection (c) are limited to those derived from matters
arising or events occurring before the dissociation unless the member
participates in winding up the company's business. Also, the duty not
to compete terminates upon dissociation. See Section 33-44-603(b)(3)
and (b)(2). However, a dissociated member is not free to use
confidential company information after dissociation. For example, a
dissociated member of a company may immediately compete with the
company for new clients but must exercise care in completing
on-going client transactions and must account to the company for any
fees from the old clients on account of those transactions. Subsection
(c) adopts a gross negligence standard for the duty of care, the
standard actually used in most partnerships and corporations.
Subsection (b)(2) prohibits a member from acting adversely or
representing an adverse party to the company. The rule is based on
agency principles and seeks to avoid the conflict of opposing interests
in the mind of the member agent whose duty is to act for the benefit
of the principal company. As reflected in subsection (f), the rule does
not prohibit the member from dealing with the company other than as
an adversary. A member may generally deal with the company under
subsection (f) when the transaction is approved by the company.
Subsection (e) makes clear that a member does not violate the
obligation of good faith under subsection (d) merely because the
member's conduct furthers that member's own interest. For example, a
member's refusal to vote for an interim distribution because of
negative tax implications to that member does not violate that
member's obligation of good faith to the other members. Likewise, a
member may vote against a proposal by the company to open a
shopping center that would directly compete with another shopping
center in which the member owns an interest.
Actions by members
Section 33-44-410. (a) A member may maintain an action
against a limited liability company or another member for legal or
equitable relief, with or without an accounting as to the company's
business, to enforce:
(1) the member's rights under the operating agreement;
(2) the member's rights under this chapter; and
(3) the rights and otherwise protect the interests of the member,
including rights and interests arising independently of the member's
relationship to the company.
(b) The accrual, and any time limited for the assertion, of a right
of action for a remedy under this section is governed by other law. A
right to an accounting upon a dissolution and winding up does not
revive a claim barred by law.
Comment
During the existence of the company, members have under this
section access to the courts to resolve claims against the company and
other members, leaving broad judicial discretion to fashion
appropriate legal remedies. A member pursues only that member's
claim against the company or another member under this section.
Article 11 governs a member's derivative pursuit of a claim on behalf
of the company.
A member may recover against the company and the other
members under subsection (a)(3) for personal injuries or damage to
the member's property caused by another member. One member's
negligence is therefore not imputed to bar another member's action.
Continuation of term company after expiration of specified term
Section 33-44-411. (a) If a term company is continued after the
expiration of the specified term, the rights and duties of the members
and managers remain the same as they were at the expiration of the
term except to the extent inconsistent with rights and duties of
members and managers of an at-will company.
(b) If the members in a member-managed company or the
managers in a manager-managed company continue the business
without any winding up of the business of the company, it continues
as an at-will company.
Comment
A term company will generally dissolve upon the expiration of its
term unless either its articles are amended before the expiration of the
original specified term to provide for an additional specified term or
the members or managers simply continue the company as an at-will
company under this section. Amendment of the articles specifying an
additional term requires the unanimous consent of the members. See
Section 33-44-404(c)(3). Therefore, any member has the right to
block the amendment. Absent an amendment to the articles, a
company may only be continued under subsection (b) as an at-will
company. The decision to continue a term company as an at-will
company does not require the unanimous consent of the members and
is treated as an ordinary business matter with disputes resolved by a
simple majority vote of either the members or managers. See Section
33-44-404. In that case, subsection (b) provides that the members'
conduct amends or becomes part of an operating agreement to
`continue' the company as an at-will company. The amendment to the
operating agreement does not alter the rights of creditors who suffer
detrimental reliance because the company does not liquidate after the
expiration of its specified term. See Section 33-44-203(c)(2).
Preexisting operating-agreement provisions continue to control the
relationship of the members under subsection (a) except to the extent
inconsistent with the rights and duties of members of an at-will
company with an operating agreement containing the same
provisions. However, the members could agree in advance that, if the
company's business continues after the expiration of its specified
term, the company continues as a company with a new specified term
or that the provisions of its operating agreement survive the
expiration of the specified term.
Article 5
Transferees and Creditors of Member
Section 33-44-501. Member's Distributional Interest.
Section 33-44-502. Transfer of Distributional Interest.
Section 33-44-503. Rights of Transferee.
Section 33-44-504. Rights of Creditor.
Member's distributional interest
Section 33-44-501. (a) A member is not a co-owner of, and has
no transferable interest in, property of a limited liability company.
(b) A distributional interest in a limited liability company is
personal property and, subject to Sections 33-44-502 and 33-44-503,
may be transferred in whole or in part.
(c) An operating agreement may provide that a distributional
interest may be evidenced by a certificate of the interest issued by the
limited liability company and, subject to Section 33-44-503, may also
provide for the transfer of any interest represented by the certificate.
Comment
Members have no property interest in property owned by a limited
liability company. A distributional interest is personal property and is
defined under Section 33-44-101(6) as a member's interest in
distributions only and does not include the member's broader rights to
participate in management under Section 33-44-404 and to inspect
company records under Section 33-44-408.
Under Section 33-44-405(a), distributions are allocated in equal
shares unless otherwise provided in an operating agreement.
Whenever it is desirable to allocate distributions in proportion to
contributions rather than per capita, certification may be useful to
reduce valuation issues. The effect of certification on the federal tax
classification of the company is determined by federal law.
Transfer of distributional interest
Section 33-44-502. A transfer of a distributional interest does not
entitle the transferee to become or to exercise any rights of a member.
A transfer entitles the transferee to receive, to the extent transferred,
only the distributions to which the transferor would be entitled.
Comment
Under Sections 33-44-501(b)and 33-44-502, the only interest a
member may freely transfer is that member's distributional interest. A
member's transfer of part, all, or substantially all of a distributional
interest will threaten the dissolution of the company under Section
33-44-801(b)(3)(i) only if the transfer constitutes an event of
dissociation. See Section 33-44-601(3). Member dissociation has
defined dissolution consequences under Section 33-44-801(b)(3)(i)
depending upon whether the company is an at-will or term company
and whether it is member- or manager-managed. Only the transfer of
all or substantially all of a member's distributional interest constitutes
or may constitute a member dissociation. A transfer of less than
substantially all of a member's distributional interest is not an event of
dissociation. A member ceases to be a member upon the transfer of all
that member's distributional interest and that transfer is also an event
of dissociation under Section 33-44-601(3). Relating the event of
dissociation to the member's transfer of all of the member's
distributional interest avoids the need for the company to track
potential future dissociation events associated with a member no
longer financially interested in the company. Also, all the remaining
members may expel a member upon the transfer of `substantially all'
the member's distributional interest. The expulsion is an event of
dissociation under Section 33-44-601(5)(ii).
Rights of transferee
Section 33-44-503. (a) A transferee of a distributional interest
may become a member of a limited liability company if and to the
extent that the transferor gives the transferee the right in accordance
with authority described in the operating agreement or all other
members consent.
(b) A transferee who has become a member, to the extent
transferred, has the rights and powers, and is subject to the restrictions
and liabilities, of a member under the operating agreement of a
limited liability company and this chapter. A transferee who becomes
a member also is liable for the transferor member's obligations to
make contributions under Section 33-44-402 and for obligations
under Section 33-44-407 to return unlawful distributions, but the
transferee is not obligated for the transferor member's liabilities
unknown to the transferee at the time the transferee becomes a
member.
(c) Whether or not a transferee of a distributional interest
becomes a member under subsection (a), the transferor is not released
from liability to the limited liability company under the operating
agreement or this chapter.
(d) A transferee who does not become a member is not entitled to
participate in the management or conduct of the limited liability
company's business, require access to information concerning the
company's transactions, or inspect or copy any of the company's
records.
(e) A transferee who does not become a member is entitled to:
(1) receive, in accordance with the transfer, distributions to
which the transferor would otherwise be entitled;
(2) receive, upon dissolution and winding up of the limited
liability company's business:
(i) in accordance with the transfer, the net amount otherwise
distributable to the transferor;
(ii) a statement of account only from the date of the latest
statement of account agreed to by all the members;
(3) seek under Section 33-44-801(b)(6) a judicial
determination that it is equitable to dissolve and wind up the
company's business.
(f) A limited liability company need not give effect to a transfer
until it has notice of the transfer.
Comment
The only interest a member may freely transfer is the member's
distributional interest. A transferee may acquire the remaining rights
of a member only by being admitted as a member of the company by
all of the remaining members. The effect of these default rules and
any modifications on the federal tax classification of the company is
determined by federal law.
A transferee not admitted as a member is not entitled to
participate in management, require access to information, or inspect
or copy company records. The only rights of a transferee are to
receive the distributions the transferor would otherwise be entitled,
receive a limited statement of account, and seek a judicial dissolution
under Section 33-44-801(b)(6).
Subsection (e) sets forth the rights of a transferee of an existing
member. Although the rights of a dissociated member to participate in
the future management of the company parallel the rights of a
transferee, a dissociated member retains additional rights that accrued
from that person's membership such as the right to enforce Article 7
purchase rights. See and compare Sections 33-44-603(b)(1) and
33-44-801(b)(5) and Comments.
Rights of creditor
Section 33-44-504. (a) On application by a judgment creditor of
a member of a limited liability company or of a member's transferee,
a court having jurisdiction may charge the distributional interest of
the judgment debtor to satisfy the judgment. The court may appoint a
receiver of the share of the distributions due or to become due to the
judgment debtor and make all other orders, directions, accounts, and
inquiries the judgment debtor might have made or which the
circumstances may require to give effect to the charging order.
(b) A charging order constitutes a lien on the judgment debtor's
distributional interest. The court may order a foreclosure of a lien on a
distributional interest subject to the charging order at any time. A
purchaser at the foreclosure sale has the rights of a transferee.
(c) At any time before foreclosure, a distributional interest in a
limited liability company which is charged may be redeemed:
(1) by the judgment debtor;
(2) with property other than the company's property, by one or
more of the other members; or
(3) with the company's property, but only if permitted by the
operating agreement.
(d) This chapter does not affect a member's right under exemption
laws with respect to the member's distributional interest in a limited
liability company.
(e) This section provides the exclusive remedy by which a
judgment creditor of a member or a transferee may satisfy a judgment
out of the judgment debtor's distributional interest in a limited
liability company.
Comment
A charging order is the only remedy by which a judgment creditor
of a member or a member's transferee may reach the distributional
interest of a member or member's transferee. Under Section
33-44-503(e), the distributional interest of a member or transferee is
limited to the member's right to receive distributions from the
company and to seek judicial liquidation of the company.
Article 6
Member's Dissociation
Section 33-44-601. Events Causing Member's Dissociation.
Section 33-44-602. Member's Power to Dissociate; Wrongful Dissociation.
Section 33-44-603. Effect of Member's Dissociation.
Events causing member's dissociation
Section 33-44-601. A member is dissociated from a limited
liability company upon the occurrence of any of the following events:
(1) the company's having notice of the member's express will to
withdraw upon the date of notice or on a later date specified by the
member;
(2) an event agreed to in the operating agreement as causing the
member's dissociation;
(3) upon transfer of all of a member's distributional interest, other
than a transfer for security purposes or a court order charging the
member's distributional interest which has not been foreclosed;
(4) the member's expulsion pursuant to the operating agreement;
(5) the member's expulsion by unanimous vote of the other
members if:
(i) it is unlawful to carry on the company's business with the
member;
(ii) there has been a transfer of substantially all of the member's
distributional interest, other than a transfer for security purposes or a
court order charging the member's distributional interest which has
not been foreclosed;
(iii) within ninety days after the company notifies a corporate
member that it will be expelled because it has filed a certificate of
dissolution or the equivalent, its charter has been revoked, or its right
to conduct business has been suspended by the jurisdiction of its
incorporation, the member fails to obtain a revocation of the
certificate of dissolution or a reinstatement of its charter or its right to
conduct business; or
(iv) a partnership or a limited liability company that is a
member has been dissolved and its business is being wound up;
(6) on application by the company or another member, the
member's expulsion by judicial determination because the member:
(i) engaged in wrongful conduct that adversely and
materially affected the company's business;
(ii) willfully or persistently committed a material breach of
the operating agreement or of a duty owed to the company or the
other members under Section 33-44-409; or
(iii) engaged in conduct relating to the company's business
which makes it not reasonably practicable to carry on the business
with the member;
(7) the member's:
(i) becoming a debtor in bankruptcy;
(ii) executing an assignment for the benefit of creditors;
(iii) seeking, consenting to, or acquiescing in the appointment
of a trustee, receiver, or liquidator of the member or of all or
substantially all of the member's property; or
(iv) failing, within ninety days after the appointment, to have
vacated or stayed the appointment of a trustee, receiver, or liquidator
of the member or of all or substantially all of the member's property
obtained without the member's consent or acquiescence, or failing
within ninety days after the expiration of a stay to have the
appointment vacated;
(8) in the case of a member who is an individual:
(i) the member's death;
(ii) the appointment of a guardian or general conservator for
the member; or
(iii) a judicial determination that the member has otherwise
become incapable of performing the member's duties under the
operating agreement;
(9) in the case of a member that is a trust or is acting as a
member by virtue of being a trustee of a trust, distribution of the
trust's entire rights to receive distributions from the company, but not
merely by reason of the substitution of a successor trustee;
(10) in the case of a member that is an estate or is acting as a
member by virtue of being a personal representative of an estate,
distribution of the estate's entire rights to receive distributions from
the company, but not merely the substitution of a successor personal
representative; or
(11) termination of the existence of a member if the member is
not an individual, estate, or trust other than a business trust.
Comment
The term `dissociation' refers to the change in the relationships
among the dissociated member, the company and the other members
caused by a member's ceasing to be associated in the carrying on of
the company's business. Member dissociation for any reason from a
member-managed at-will company will cause a dissolution of the
company under Section 33-44-801(b)(3) unless a specified percentage
of the remaining members agree to continue the business of the
company. If the dissociation does not dissolve the company, the
dissociated member's distributional interest must be immediately
purchased by the company under Article 7. Member dissociation from
a member-managed term company, but only for the reasons specified
in paragraphs (7) to (11), will cause a dissolution of the company
under Section 33-44-801(b)(3) unless a specified percentage of the
remaining members agree to continue the business of the company.
Member dissociations specified in paragraphs (1) to (6) do not
threaten dissolution under Section 33-44-801(b)(3) of a
member-managed term company. If the dissociation does not dissolve
the company, it is not required to purchase the dissociated member's
distributional interest until the expiration of the specified term that
existed on the date of the member's dissociation. If an at-will
company or a term company is manager-managed, only the
dissociation of a member who is also a manager or, if there is none,
any member specified above threatens dissolution. The effect on the
federal tax classification of the company creating a member-manager
with a minimal interest in the company is determined by federal law.
A member may be expelled from the company under paragraph
(5)(ii) by the unanimous vote of the other members upon a transfer of
`substantially all' of the member's distributional interest other than for
a transfer as security for a loan. A transfer of `all' of the member's
distributional interest is an event of dissociation under paragraph (3).
Although a member is dissociated upon death, the effect of the
dissociation where the company does not dissolve depends upon
whether the company is at-will or term and whether
manager-managed. Only the decedent's distributional interest
transfers to the decedent's estate which does not acquire the decedent
member's management rights. See Section 33-44-603(b)(1). Unless
otherwise agreed, if the company was at-will, the estate's
distributional interest must be purchased by the company at fair value
determined at the date of death. However, if a term company, the
estate and its transferees continue only as the owner of the
distributional interest with no management rights until the expiration
of the specified term that existed on the date of death. At the
expiration of that term, the company must purchase the interest of a
dissociated member if the company continues for an additional term
by amending its articles or simply continues as an at-will company.
See Sections 33-44-411 and 33-44-701(a)(2) and Comments. Before
that time, the estate and its transferees have the right to make
application for a judicial dissolution of the company under Section
33-44-801(b)(5) as successors in interest to a dissociated member. See
Comments to Sections 33-44-801, 33-44-411, and 33-44-701. Where
the members have allocated management rights on the basis of
contributions rather than simply the number of members, a member's
death will result in a transfer of management rights to the remaining
members on a proportionate basis. This transfer of rights may be
avoided by a provision in an operating agreement extending the
Section 33-44-701(a)(1) at-will purchase right to a decedent member
of a term company.
Member's power to dissociate; wrongful dissociation
Section 33-44-602. (a) Unless otherwise provided in the
operating agreement, a member has the power to dissociate from a
limited liability company at any time, rightfully or wrongfully, by
express will pursuant to Section 33-44-601(1).
(b) If the operating agreement has not eliminated a member's
power to dissociate, the member's dissociation from a limited liability
company is wrongful only if:
(1) it is in breach of an express provision of the agreement; or
(2) before the expiration of the specified term of a term
company:
(i) the member withdraws by express will;
(ii) the member is expelled by judicial determination under
Section 33-44-601(6);
(iii) the member is dissociated by becoming a debtor in
bankruptcy; or
(iv) in the case of a member who is not an individual, trust
other than a business trust, or estate, the member is expelled or
otherwise dissociated because it wilfully dissolved or terminated its
existence.
(c) A member who wrongfully dissociates from a limited liability
company is liable to the company and to the other members for
damages caused by the dissociation. The liability is in addition to any
other obligation of the member to the company or to the other
members.
(d) If a limited liability company does not dissolve and wind up
its business as a result of a member's wrongful dissociation under
subsection (b), damages sustained by the company for the wrongful
dissociation must be offset against distributions otherwise due the
member after the dissociation.
Comment
A member has the power to withdraw from both an at-will
company and a term company although the effects of the withdrawal
are remarkably different. See Comments to Section 33-44-601. At a
minimum, the exercise of a power to withdraw enables members to
terminate their continuing duties of loyalty and care. See Section
33-44-603(b)(2) to (3).
A member's power to withdraw by express will may be eliminated
by an operating agreement. The effect of a such a provision on the
federal tax classification of the company is determined by federal law.
An operating agreement may eliminate a member's power to
withdraw by express will to promote the business continuity of an
at-will company by removing the threat of dissolution and to
eliminate the member's right to force the company to purchase the
member's distributional interest. See Sections 33-44-801(b)(3) and
33-44-701(a)(1). However, such a member retains the ability to seek
a judicial dissolution of the company. See Section 33-44-801(b)(5).
If a member's power to withdraw by express will is not eliminated
in an operating agreement, the withdrawal may nevertheless be made
wrongful under subsection (b). All dissociations, including
withdrawal by express will, may be made wrongful under subsection
(b)(1) in both an at-will and term company by the inclusion of a
provision in an operating agreement. Even where an operating
agreement does not eliminate the power to withdraw by express will
or make any dissociation wrongful, the dissociation of a member of a
term company for the reasons specified under subsection (b)(2) is
wrongful. The member is liable to the company and other members
for damages caused by a wrongful dissociation under subsection (c)
and, under subsection (d), the damages may be offset against all
distributions otherwise due the member after the dissociation. Section
33-44-701(f) provides a similar rule permitting damages for wrongful
dissociation to be offset against any company purchase of the
member's distributional interest.
Effect of member's dissociation
Section 33-44-603. (a) If under Section 33-44-801 a member's
dissociation from a limited liability company results in a dissolution
and winding up of the company's business, Article 8 applies. If a
member's dissociation from the company does not result in a
dissolution and winding up of the company's business under Section
33-44-801:
(1) in an at-will company, the company must cause the
dissociated member's distributional interest to be purchased under
Article 7; and
(2) in a term company:
(i) if the company dissolves and winds up its business on or
before the expiration of its specified term, Article 8 applies to
determine the dissociated member's rights to distributions; and
(ii) if the company does not dissolve and wind up its
business on or before the expiration of its specified term, the
company must cause the dissociated member's distributional interest
to be purchased under Article 7 on the date of the expiration of the
term specified at the time of the member's dissociation.
(b) Upon a member's dissociation from a limited liability
company:
(1) the member's right to participate in the management and
conduct of the company's business terminates, except as otherwise
provided in Section 33-44-803, and the member ceases to be a
member and is treated the same as a transferee of a member;
(2) the member's duty of loyalty under Section 33-44-409(b)(3)
terminates; and
(3) the member's duty of loyalty under Section 33-44-409(b)(1)
and (2) and duty of care under Section 33-44-409(c) continue only
with regard to matters arising and events occurring before the
member's dissociation, unless the member participates in winding up
the company's business pursuant to Section 33-44-803.
Comment
Dissociation from an at-will company that does not dissolve the
company causes the dissociated member's distributional interest to be
immediately purchased under Article 7. See Comments to Sections
33-44-602 and 33-44-603. Dissociation from a term company that
does not dissolve the company does not cause the dissociated
member's distributional interest to be purchased under Article 7 until
the expiration of the specified term that existed on the date of
dissociation.
Subsection (b)(1) provides that a dissociated member forfeits the
right to participate in the future conduct of the company's business.
Dissociation does not however forfeit that member's right to enforce
the Article 7 rights that accrue by reason of the dissociation.
Similarly, where dissociation occurs by death, the decedent member's
successors in interest may enforce that member's Article 7 rights. See
and compare Comments to Section 33-44-503(e).
Dissociation terminates the member's right to participate in
management, including the member's actual authority to act for the
company under Section 33-44-301, and begins the two-year period
after which a member's apparent authority conclusively ends. See
Comments to Section 33-44-703. Dissociation also terminates a
member's continuing duties of loyalty and care, except with regard to
continuing transactions, to the company and other members unless the
member participates in winding up the company's business. See
Comments to Section 33-44-409.
Article 7
Member's Dissociation When Business Not Wound
Up
Section 33-44-701. Company Purchase of Distributional Interest.
Section 33-44-702. Court action to Determine Fair Value of Distributional Interest.
Section 33-44-703. Dissociated Member's Power to Bind Limited Liability Company.
Section 33-44-704. Statement of Dissociation.
Company purchase of distributional interest
Section 33-44-701. (a) A limited liability company shall
purchase a distributional interest of a:
(1) member of an at-will company for its fair value determined
as of the date of the member's dissociation if the member's
dissociation does not result in a dissolution and winding up of the
company's business under Section 33-44-801; or
(2) member of a term company for its fair value determined as
of the date of the expiration of the specified term that existed on the
date of the member's dissociation if the expiration of the specified
term does not result in a dissolution and winding up of the company's
business under Section 33-44-801.
(b) A limited liability company must deliver a purchase offer to
the dissociated member whose distributional interest is entitled to be
purchased not later than thirty days after the date determined under
subsection (a). The purchase offer must be accompanied by:
(1) a statement of the company's assets and liabilities as of the
date determined under subsection (a);
(2) the latest available balance sheet and income statement, if
any; and
(3) an explanation of how the estimated amount of the payment
was calculated.
(c) If the price and other terms of a purchase of a distributional
interest are fixed or are to be determined by the operating agreement,
the price and terms so fixed or determined govern the purchase unless
the purchaser defaults. If a default occurs, the dissociated member is
entitled to commence a proceeding to have the company dissolved
under Section 33-44-801(b)(5)(iv).
(d) If an agreement to purchase the distributional interest is not
made within one hundred twenty days after the date determined under
subsection (a), the dissociated member, within another one hundred
twenty days, may commence a proceeding against the limited liability
company to enforce the purchase. The company at its expense shall
notify in writing all of the remaining members, and any other person
the court directs, of the commencement of the proceeding. The
jurisdiction of the court in which the proceeding is commenced under
this subsection is plenary and exclusive.
(e) The court shall determine the fair value of the distributional
interest in accordance with the standards set forth in Section
33-44-702 together with the terms for the purchase. Upon making
these determinations, the court shall order the limited liability
company to purchase or cause the purchase of the interest.
(f) Damages for wrongful dissociation under Section
33-44-602(b), and all other amounts owing, whether or not currently
due, from the dissociated member to a limited liability company, must
be offset against the purchase price.
Comment
This section sets forth default rules regarding an otherwise
mandatory company purchase of a distributional interest. Even though
a dissociated member's rights to participate in the future management
of the company are equivalent to those of a transferee of a member,
the dissociation does not forfeit that member's right to enforce the
Article 7 purchase right. Similarly, if the dissociation occurs by
reason of death, the decedent member's successors in interest may
enforce the Article 7 rights. See Comments to Sections 33-44-503(e)
and 33-44-603(b)(1).
An at-will company must purchase a dissociated member's
distributional interest under subsection (a)(1) when that member's
dissociation does not result in a dissolution of the company. The
purchase price is equal to the fair value of the interest determined as
of the date of dissociation. Any damages for wrongful dissociation
must be offset against the purchase price.
Dissociation from a term company does not require an immediate
purchase of the member's interest but certain types of dissociation
may cause the dissolution of the company. See Section
33-44-801(b)(3). A term company must only purchase the
dissociated member's distributional interest under subsection (a)(2) on
the expiration of the specified term that existed on the date of the
member's dissociation. The purchase price is equal to the fair value of
the interest determined as of the date of the expiration of that
specified term. Any damages for wrongful dissociation must be offset
against the purchase price.
The valuation dates differ between subsections (a)(1) and (a)(2)
purchases. The former is valued on the date of member dissociation
whereas the latter is valued on the date of the expiration of the
specified term that existed on the date of dissociation. A subsection
(a)(2) dissociated member therefore assumes the risk of loss between
the date of dissociation and the expiration of the then stated specified
term. See Comments to Section 33-44-801 (dissociated member may
file application to dissolve company under Section 33-44-801(b)(6)).
The default valuation standard is fair value. See Comments to
Section 33-44-702. An operating agreement may fix a method or
formula for determining the purchase price and the terms of payment.
The purchase right may be modified. For example, an operating
agreement may eliminate a member's power to withdraw from an
at-will company which narrows the dissociation events contemplated
under subsection (a)(1). See Comments to Section 33-44-602(a).
However, a provision in an operating agreement providing for
complete forfeiture of the purchase right may be unenforceable where
the power to dissociate has not also been eliminated. See Section
33-44-104(a).
The company must deliver a purchase offer to the dissociated
member within 30 days after the date determined under subsection
(a). The offer must be accompanied by information designed to
enable the dissociated member to evaluate the fairness of the offer.
The subsection (b)(3) explanation of how the offer price was
calculated need not be elaborate. For example, a mere statement of
the basis of the calculation, such as `book value,' may be sufficient.
The company and the dissociated member must reach an agreement
on the purchase price and terms within one hundred twenty days after
the date determined under subsection (a). Otherwise, the dissociated
member may file suit within another one hundred twenty days to
enforce the purchase under subsection (d). The court will then
determine the fair value and terms of purchase under subsection (e).
See Section 33-44-702. The member's lawsuit is not available under
subsection (c) if the parties have previously agreed to price and terms
in an operating agreement.
Court action to determine fair value of distributional interest
Section 33-44-702. (a) In an action brought to determine the fair
value of a distributional interest in a limited liability company, the
court shall:
(1) determine the fair value of the interest, considering among
other relevant evidence the going concern value of the company, any
agreement among some or all of the members fixing the price or
specifying a formula for determining value of distributional interests
for any other purpose, the recommendations of any appraiser
appointed by the court, and any legal constraints on the company's
ability to purchase the interest;
(2) specify the terms of the purchase, including, if appropriate,
terms for installment payments, subordination of the purchase
obligation to the rights of the company's other creditors, security for a
deferred purchase price, and a covenant not to compete or other
restriction on a dissociated member; and
(3) require the dissociated member to deliver an assignment of
the interest to the purchaser upon receipt of the purchase price or the
first installment of the purchase price.
(b) After the dissociated member delivers the assignment, the
dissociated member has no further claim against the company, its
members, officers, or managers, if any, other than a claim to any
unpaid balance of the purchase price and a claim under any agreement
with the company or the remaining members that is not terminated by
the court.
(c) If the purchase is not completed in accordance with the
specified terms, the company is to be dissolved upon application
under Section 33-44-801(b)(5)(iv). If a limited liability company is
so dissolved, the dissociated member has the same rights and
priorities in the company's assets as if the sale had not been ordered.
(d) If the court finds that a party to the proceeding acted
arbitrarily, vexatiously, or not in good faith, it may award one or more
other parties their reasonable expenses, including attorney's fees and
the expenses of appraisers or other experts, incurred in the
proceeding. The finding may be based on the company's failure to
make an offer to pay or to comply with Section 33-44-701(b).
(e) Interest must be paid on the amount awarded from the date
determined under Section 33-44-701(a) to the date of payment.
Comment
The default valuation standard is fair value. Under this broad
standard, a court is free to determine the fair value of a distributional
interest on a fair market, liquidation, or any other method deemed
appropriate under the circumstances. A fair market value standard is
not used because it is too narrow, often inappropriate, and assumes a
fact not contemplated by this section -- a willing buyer and a willing
seller.
The court has discretion under subsection (a)(2) to include in its
order any conditions the court deems necessary to safeguard the
interests of the company and the dissociated member or transferee.
The discretion may be based on the financial and other needs of the
parties.
If the purchase is not consummated or the purchaser defaults, the
dissociated member or transferee may make application for
dissolution of the company under subsection (c). The court may deny
the petition for good cause but the proceeding affords the company an
opportunity to be heard on the matter and avoid dissolution. See
Comments to Section 33-44-801(b)(5).
The power of the court to award all costs and attorney's fees
incurred in the suit under subsection (d) is an incentive for both
parties to act in good faith. See Section 33-44-701(c).
Dissociated member's power to bind limited liability company
Section 33-44-703. For two years after a member dissociates
without the dissociation resulting in a dissolution and winding up of a
limited liability company's business, the company, including a
surviving company under Article 9, is bound by an act of the
dissociated member which would have bound the company under
Section 33-44-301 before dissociation only if at the time of entering
into the transaction the other party:
(1) reasonably believed that the dissociated member was then a
member;
(2) did not have notice of the member's dissociation; and
(3) is not deemed to have had notice under Section 33-44-704.
Comment
A dissociated member of a member-managed company does not
have actual authority to act for the company. See Section
33-44-603(b)(1). Under Section 33-44-301(a), a dissociated member
of a member-managed company has apparent authority to bind the
company in ordinary course transactions except as to persons who
knew or had notice of the dissociation. This section modifies that rule
by requiring the person to show reasonable reliance on the member's
status as a member provided a Section 33-44-704 statement has not
been filed within the previous ninety days. See also Section
33-44-804 (power to bind after dissolution).
Statement of dissociation
Section 33-44-704. (a) A dissociated member or a limited
liability company may file in the office of the Secretary of State a
statement of dissociation stating the name of the company and that
the member is dissociated from the company.
(b) For the purposes of Sections 33-44-301 and 703, a person not
a member is deemed to have notice of the dissociation ninety days
after the statement of dissociation is filed.
Article 8
Winding Up Company's Business
Section 33-44-801. Events Causing Dissolution and Winding Up of Company's Business.
Section 33-44-802. Limited Liability Company Continues After Dissolution.
Section 33-44-803. Right to Wind Up Limited Liability Company's Business.
Section 33-44-804. Member's or Manager's Power and Liability as Agent After Dissolution.
Section 33-44-805. Articles of Termination.
Section 33-44-806. Distribution of Assets in Winding Up Limited Liability Company's Business.
Section 33-44-807. Known Claims Against Dissolved Limited
Liability Company.
Section 33-44-808. Other Claims Against Dissolved Limited
Liability Company.
Section 33-44-809. Grounds for Administrative Dissolution.
Section 33-44-810. Procedure for and Effect of Administrative Dissolution.
Section 33-44-811. Restatement Following Administrative
Dissolution.
Section 33-44-812. Appeal from Denial of Reinstatement.
Events causing dissolution and winding up of company's business
Section 33-44-801. (a) In this section, `future distributions'
means the total distributions that, as of the date of dissociation, are
reasonably estimated to be made to the remaining members if the
company were continued until the projected date of its termination,
reduced by the amount of distributions that would have been made to
the remaining members if the business of the company were dissolved
and wound up on the date of dissociation.
(b) A limited liability company is dissolved, and its business must
be wound up, upon the occurrence of any of the following events:
(1) an event specified in the operating agreement;
(2) consent of the number or percentage of members specified
in the operating agreement;
(3) dissociation of a member who is also a manager or, if none,
a member of an at-will company, and dissociation of a member who
is also a manager or, if none, a member of a term company but only if
the dissociation was for a reason provided in Section 33-44-601(7)
through (11) and occurred before the expiration of the specified term,
but the company is not dissolved and required to be wound up by
reason of the dissociation if:
(i) within ninety days after the dissociation, the business of
the company is continued by the agreement of:
(a) the remaining members that would be entitled to
receive a majority of any distributions that would be made to them
assuming the business of the company were dissolved and wound up
on the date of the dissociation; and
(b) the remaining members that would be entitled to
receive a majority of any future distributions that would be made to
them assuming the business of the company were continued after the
date of the dissociation; or
(ii) the business of the company is continued under a right to
continue stated in the operating agreement;
(4) an event that makes it unlawful for all or substantially all of
the business of the company to be continued, but any cure of illegality
within ninety days after notice to the company of the event is
effective retroactively to the date of the event for purposes of this
section;
(5) on application by a member or a dissociated member, upon
entry of a judicial decree that:
(i) the economic purpose of the company is likely to be
unreasonably frustrated;
(ii) another member has engaged in conduct relating to the
company's business that makes it not reasonably practicable to carry
on the company's business with that member;
(iii) it is not otherwise reasonably practicable to carry on the
company's business in conformity with the articles of organization
and the operating agreement;
(iv) the company failed to purchase the petitioner's
distributional interest as required by Section 33-44-701; or
(v) the managers or members in control of the company have
acted, are acting, or will act in a manner that is illegal, oppressive,
fraudulent, or unfairly prejudicial to the petitioner; or
(6) on application by a transferee of a member's interest, a
judicial determination that it is equitable to wind up the company's
business:
(i) after the expiration of the specified term, if the company
was for a specified term at the time the applicant became a transferee
by member dissociation, transfer, or entry of a charging order that
gave rise to the transfer; or
(ii) at any time, if the company was at will at the time the
applicant became a transferee by member dissociation, transfer, or
entry of a charging order that gave rise to the transfer.
Comment
The dissolution rules of this section are mostly default rules and
may be modified by an operating agreement. However, an operating
agreement may not modify or eliminate the dissolution events
specified in subsection (b)(4) (illegal business) or subsection (b)(5)
(member application). See Section 33-44-103(b)(6).
The relationship between member dissociation and company
dissolution is set forth under subsection (b)(3). In order for member
dissociation to cause the dissolution of a company, the dissociation
must be recognized as one that triggers a dissolution vote and a
specified percentage of the remaining members must fail to agree
within ninety days after the dissociation to avoid dissolution under
subsection (b)(3)(i). See Comments to Section 33-44-601. The means
of voting and standard for avoiding dissolution may be modified in an
operating agreement and would constitute a right to continue'
recognized under subsection (b)(3)(ii). The effect on the federal tax
classification of the company altering the specified percentage vote is
determined by federal law.
Decision-making under this act is normally by a majority in
number of the members or managers for ordinary matters and
unanimity for specified extraordinary matters. See Section
33-44-404(a) to (c). The majority of members holding requisite
distributions rights varies this rule and is used only in subsection
(b)(3)(i). Under this act, distributions are shared on a per capita basis.
See Comments to Section 33-44-405. Therefore, under the default
rule, a majority in number would also be a majority of members
holding requisite distributions rights.
A member or dissociated member whose interest is not required to
be purchased by the company under Section 33-44-701 may make
application under subsection (b)(5) for the involuntary dissolution of
both an at-will company and a term company. A transferee may make
application under subsection (b)(6). A transferee's application right,
but not that of a member or dissociated member, may be modified by
an operating agreement. See Section 33-44-103(b)(6). A dissociated
member is not treated as a transferee for purposes of an application
under subsections (b)(5) and (b)(6). See Section 33-44-603(b)(1). For
example, this affords reasonable protection to a dissociated member
of a term company to make application under subsection (b)(5) before
the expiration of the term that existed at the time of dissociation. For
purposes of a subsection (b)(5) application, a dissociated member
includes a successor in interest, e.g., surviving spouse. See Comments
to Section 33-44-601.
In the case of applications under subsections (b)(5) and (b)(6), the
applicant has the burden of proving either the existence of one or
more of the circumstances listed under subsection (b)(5) or that it is
equitable to wind up the company's business under subsection (b)(6).
Proof of the existence of one or more of the circumstances in
subsection (b)(5), may be the basis of a subsection (b)(6) application.
Even where the burden of proof is met, the court has the discretion to
order relief other than the dissolution of the company. Examples
include an accounting, a declaratory judgment, a distribution, the
purchase of the distributional interest of the applicant or another
member, or the appointment of a receiver. See Section 33-44-410.
A court has the discretion to dissolve a company under subsection
(b)(5)(i) when the company has a very poor financial record that is
not likely to improve. In this instance, dissolution is an alternative to
placing the company in bankruptcy. A court may dissolve a company
under subsections (b)(5)(ii), (b)(5)(iii), and (b)(5)(iv) for serious and
protracted misconduct by one or more members. Subsection (b)(5)(v)
provides a specific remedy for an improper squeeze-out of a member.
In determining whether and what type of relief to order under
subsections (b)(5) and (b)(6) involuntary dissolution suits, a court
should take into account other rights and remedies of the applicant.
For example, a court should not grant involuntary dissolution of an
at-will company if the applicant member has the right to dissociate
and force the company to purchase that member's distributional
interest under Sections 33-44-701 and 33-44-702. In other cases,
involuntary dissolution or some other remedy such as a buy-out might
be appropriate where, for example, one or more members have (i)
engaged in fraudulent or unconscionable conduct, (ii) improperly
expelled a member seeking an unfair advantage of a provision in an
operating agreement that provides for a significantly lower price on
expulsion than would be payable in the event of voluntary
dissociation, or (iii) engaged in serious misconduct and the applicant
member is a member of a term company and would not have a right
to have the company purchase that member's distributional interest
upon dissociation until the expiration of the company's specified term.
Limited liability company continues after dissolution
Section 33-44-802. (a) Subject to subsection (b), a limited
liability company continues after dissolution only for the purpose of
winding up its business.
(b) At any time after the dissolution of a limited liability company
and before the winding up of its business is completed, the members,
including a dissociated member whose dissociation caused the
dissolution, may unanimously waive the right to have the company's
business wound up and the company terminated. In that case:
(1) the limited liability company resumes carrying on its
business as if dissolution had never occurred and any liability
incurred by the company or a member after the dissolution and before
the waiver is determined as if the dissolution had never occurred; and
(2) the rights of a third party accruing under Section
33-44-804(a) or arising out of conduct in reliance on the dissolution
before the third party knew or received a notification of the waiver
are not adversely affected.
Comment
The liability shield continues in effect for the winding up period
because the legal existence of the company continues under
subsection (a). The company is terminated on the filing of articles of
termination. See Section 33-44-805.
Right to wind up limited liability company's business
Section 33-44-803. (a) After dissolution, a member who has not
wrongfully dissociated may participate in winding up a limited
liability company's business, but on application of any member,
member's legal representative, or transferee, the circuit court, for
good cause shown, may order judicial supervision of the winding up.
(b) A legal representative of the last surviving member may wind
up a limited liability company's business.
(c) A person winding up a limited liability company's business
may preserve the company's business or property as a going concern
for a reasonable time, prosecute and defend actions and proceedings,
whether civil, criminal, or administrative, settle and close the
company's business, dispose of and transfer the company's property,
discharge the company's liabilities, distribute the assets of the
company pursuant to Section 33-44-806, settle disputes by mediation
or arbitration, and perform other necessary acts.
Member's or manager's power and liability as agent after dissolution
Section 33-44-804. (a) A limited liability company is bound by a
member's or manager's act after dissolution that:
(1) is appropriate for winding up the company's business; or
(2) would have bound the company under Section 33-44-301
before dissolution, if the other party to the transaction did not have
notice of the dissolution.
(b) A member or manager who, with knowledge of the
dissolution, subjects a limited liability company to liability by an act
that is not appropriate for winding up the company's business is liable
to the company for any damage caused to the company arising from
the liability.
Comment
After dissolution, members and managers continue to have the
authority to bind the company that they had prior to dissolution
provided that the third party did not have notice of the dissolution.
See Section 33-44-102(b) (notice defined). Otherwise, they have only
the authority appropriate for winding up the company's business. See
Section 33-44-703 (agency power of member after dissociation).
Articles of termination
Section 33-44-805. (a) At any time after dissolution and winding
up, a limited liability company may terminate its existence by filing
with the Secretary of State articles of termination stating:
(1) the name of the company;
(2) the date of the dissolution; and
(3) that the company's business has been wound up and the
legal existence of the company has been terminated.
(b) The existence of a limited liability company is terminated
upon the filing of the articles of termination, or upon a later effective
date, if specified in the articles of termination.
Comment
The termination of legal existence also terminates the company's
liability shield. See Comments to Section 33-44-802 (liability shield
continues in effect during winding up). It also ends the company's
responsibility to file an annual report. See Section 33-44-211.
Distribution of assets in winding up limited liability company's
business
Section 33-44-806. (a) In winding up a limited liability
company's business, the assets of the company must be applied to
discharge its obligations to creditors, including members who are
creditors. Any surplus must be applied to pay in money the net
amount distributable to members in accordance with their right to
distributions under subsection (b).
(b) Each member is entitled to a distribution upon the winding up
of the limited liability company's business consisting of a return of all
contributions which have not previously been returned and a
distribution of any remainder in equal shares.
Known claims against dissolved limited liability company
Section 33-44-807. (a) A dissolved limited liability company
may dispose of the known claims against it by following the
procedure described in this section.
(b) A dissolved limited liability company shall notify its known
claimants in writing of the dissolution. The notice must:
(1) specify the information required to be included in a claim;
(2) provide a mailing address where the claim is to be sent;
(3) state the deadline for receipt of the claim, which may not be
less than one hundred twenty days after the date the written notice is
received by the claimant; and
(4) state that the claim will be barred if not received by the
deadline.
(c) A claim against a dissolved limited liability company is
barred if the requirements of subsection (b) are met, and:
(1) the claim is not received by the specified deadline; or
(2) in the case of a claim that is timely received but rejected by
the dissolved company, the claimant does not commence a
proceeding to enforce the claim within ninety days after the receipt of
the notice of the rejection.
(d) For purposes of this section, `claim' does not include a
contingent liability or a claim based on an event occurring after the
effective date of dissolution.
Comment
A known claim will be barred when the company provides written
notice to a claimant that a claim must be filed with the company no
later than at least one hundred twenty days after receipt of the written
notice and the claimant fails to file the claim. If the claim is timely
received but is rejected by the company, the claim is nevertheless
barred unless the claimant files suit to enforce the claim within ninety
days after the receipt of the notice of rejection. A claim described in
subsection (d) is not a `known' claim and is governed by Section
33-44-808. This section does not extend any other applicable statutes
of limitation. See Section 33-44-104. Depending on the management
of the company, members or managers must discharge or make
provision for discharging all of the company's known liabilities before
distributing the remaining assets to the members. See Sections
33-44-806(a), 33-44-406, and 33-44-407.
Other claims against dissolved limited liability company
Section 33-44-808. (a) A dissolved limited liability company
may publish notice of its dissolution and request persons having
claims against the company to present them in accordance with the
notice.
(b) The notice must:
(1) be published at least once in a newspaper of general
circulation in the county in which the dissolved limited liability
company's principal office is located or, if none in this State, in which
its designated office is or was last located;
(2) describe the information required to be contained in a claim
and provide a mailing address where the claim is to be sent; and
(3) state that a claim against the limited liability company is
barred unless a proceeding to enforce the claim is commenced within
five years after publication of the notice.
(c) If a dissolved limited liability company publishes a notice in
accordance with subsection (b), the claim of each of the following
claimants is barred unless the claimant commences a proceeding to
enforce the claim against the dissolved company within five years
after the publication date of the notice:
(1) a claimant who did not receive written notice under Section
33-44-807;
(2) a claimant whose claim was timely sent to the dissolved
company but not acted on; and
(3) a claimant whose claim is contingent or based on an event
occurring after the effective date of dissolution.
(d) A claim not barred under this section may be enforced:
(1) against the dissolved limited liability company, to the
extent of its undistributed assets; or
(2) if the assets have been distributed in liquidation, against a
member of the dissolved company to the extent of the member's
proportionate share of the claim or the company's assets distributed to
the member in liquidation, whichever is less, but a member's total
liability for all claims under this section may not exceed the total
amount of assets distributed to the member.
Comment
An unknown claim will be barred when the company publishes
notice requesting claimants to file claims with the company and
stating that claims will be barred unless the claimant files suit to
enforce the claim within five years after the date of publication. The
procedure also bars known claims where the claimant either did not
receive written notice described in Section 33-44-807 or received
notice, mailed a claim, but the company did not act on the claim.
Depending on the management of the company, members or
managers must discharge or make provision for discharging all of the
company's known liabilities before distributing the remaining assets
to the members. See Comment to Section 33-44-807. This section
does not contemplate that a company will postpone member
distributions until all unknown claims are barred under this section. In
appropriate cases, the company may purchase insurance or set aside
funds permitting a distribution of the remaining assets. Where
winding up distributions have been made to members, subsection
(d)(2) authorizes recovery against those members. However, a
claimant's recovery against a member is limited to the lesser of the
member's proportionate share of the claim or the amount received in
the distribution. This section does not extend any other applicable
statutes of limitation. See Section 33-44-104.
Grounds for administrative dissolution
Section 33-44-809. The Secretary of State may commence a
proceeding to dissolve a limited liability company administratively if
the company does not:
(1) pay any fees, taxes, or penalties imposed by this chapter or
other law within sixty days after they are due; or
(2) deliver its annual report to the Secretary of State within sixty
days after it is due.
Comment
Administrative dissolution is an effective enforcement mechanism
for a variety of statutory obligations under this act and it avoids the
more expensive judicial dissolution process. When applicable,
administrative dissolution avoids wasteful attempts to compel
compliance by a company abandoned by its members. See also the
transitional provisions in Section 33-44-1207.
Procedure for and effect of administrative dissolution
Section 33-44-810. (a) If the Secretary of State determines that a
ground exists for administratively dissolving a limited liability
company, the Secretary of State shall enter a record of the
determination and serve the company with a copy of the record.
(b) If the company does not correct each ground for dissolution or
demonstrate to the reasonable satisfaction of the Secretary of State
that each ground determined by the Secretary of State does not exist
within sixty days after service of the notice, the Secretary of State
shall administratively dissolve the company by signing a certification
of the dissolution that recites the ground for dissolution and its
effective date. The Secretary of State shall file the original of the
certificate and serve the company with a copy of the certificate.
(c) A company administratively dissolved continues its existence
but may carry on only business necessary to wind up and liquidate its
business and affairs under Section 33-44-802 and to notify claimants
under Sections 33-44-807 and 33-44-808.
(d) The administrative dissolution of a company does not
terminate the authority of its agent for service of process.
Comment
A company's failure to comply with a ground for administrative
dissolution may simply occur because of oversight. Therefore,
subsections (a) and (b) set forth a mandatory notice by the filing
officer to the company of the ground for dissolution and a sixty day
grace period for correcting the ground.
Reinstatement following administrative dissolution
Section 33-44-811. (a) A limited liability company
administratively dissolved may apply to the Secretary of State for
reinstatement within two years after the effective date of dissolution.
The application must:
(1) recite the name of the company and the effective date of its
administrative dissolution;
(2) state that the ground for dissolution either did not exist or
have been eliminated;
(3) state that the company's name satisfies the requirements of
Section 33-44-105; and
(4) contain a certificate from the Department of Revenue and
Taxation reciting that all taxes owed by the company have been paid.
(b) If the Secretary of State determines that the application
contains the information required by subsection (a) and that the
information is correct, the Secretary of State shall cancel the
certificate of dissolution and prepare a certificate of reinstatement that
recites this determination and the effective date of reinstatement, file
the original of the certificate, and serve the company with a copy of
the certificate.
(c) When reinstatement is effective, it relates back to and takes
effect as of the effective date of the administrative dissolution, and
the company may resume its business as if the administrative
dissolution had never occurred.
Appeal from denial of reinstatement
Section 33-44-812. (a) If the Secretary of State denies a limited
liability company's application for reinstatement following
administrative dissolution, the Secretary of State shall serve the
company with a record that explains the reason or reasons for denial.
(b) The company may appeal the denial of reinstatement to the
circuit court within 30 days after service of the notice of denial is
perfected. The company appeals by petitioning the court to set aside
the dissolution and attaching to the petition copies of the Secretary of
State's certificate of dissolution, the company's application for
reinstatement, and the Secretary of State's notice of denial.
(c) The court may summarily order the Secretary of State to
reinstate the dissolved company or may take other action the court
considers appropriate.
(d) The court's final decision may be appealed as in other civil
proceedings.
Article 9
Conversions and Mergers
Section 33-44-901. Definitions.
Section 33-44-902. Conversion of Partnership or Limited Partnership To Limited Liability Company.
Section 33-44-903. Effect of Conversion; Entity Unchanged.
Section 33-44-904. Merger of Entities.
Section 33-44-905. Articles of Merger.
Section 33-44-906. Effect of Merger.
Section 33-44-907. Article Not Exclusive.
Definitions
Section 33-44-901. In this article:
(1) Corporation' means a corporation organized under this Title, a
predecessor law, or comparable law of another jurisdiction.
(2) `General partner' means a partner in a partnership and a
general partner in a limited partnership.
(3) `Limited partner' means a limited partner in a limited
partnership.
(4) `Limited partnership' means a limited partnership created
under the Uniform Limited Partnership Act, Chapter 42 of this title, a
predecessor law, or comparable law of another jurisdiction.
(5) `Partner' includes a general partner and a limited partner.
(6) `Partnership' means a general partnership under the Uniform
Partnership Act, Chapter 41 of this title, a predecessor law, or
comparable law of another jurisdiction.
(7) `Partnership agreement' means an agreement among the
partners concerning the partnership or limited partnership.
(8) `Shareholder' means a shareholder in a corporation.
Comment
Section 33-44-907 makes clear that the provisions of Article 9 are
not mandatory. Therefore, a partnership or a limited liability company
may convert or merge in any other manner provided by law.
However, if the requirements of Article 9 are followed, the
conversion or merger is legally valid. Article 9 is not restricted to
domestic business entities.
Conversion of partnership or limited partnership to limited liability
company
Section 33-44-902. (a) A partnership or limited partnership may be
converted to a limited liability company pursuant to this section.
(b) The terms and conditions of a conversion of a partnership or
limited partnership to a limited liability company must be approved
by all of the partners or by a number or percentage of the partners
required for conversion in the partnership agreement.
(c) An agreement of conversion must set forth the terms and
conditions of the conversion of the interests of partners of a
partnership or of a limited partnership, as the case may be, into
interests in the converted limited liability company or the cash or
other consideration to be paid or delivered as a result of the
conversion of the interests of the partners, or a combination thereof.
(d) After a conversion is approved under subsection (b), the
partnership or limited partnership shall file articles of organization in
the office of the Secretary of State which satisfy the requirements of
Section 33-44-203 and contain:
(1) a statement that the partnership or limited partnership was
converted to a limited liability company from a partnership or limited
partnership, as the case may be;
(2) its former name;
(3) a statement of the number of votes cast by the partners
entitled to vote for and against the conversion and, if the vote is less
than unanimous, the number or percentage required to approve the
conversion under subsection (b); and
(4) in the case of a limited partnership, a statement that the
certificate of limited partnership is to be canceled as of the date the
conversion took effect.
(e) In the case of a limited partnership, the filing of articles of
organization under subsection (d) cancels its certificate of limited
partnership as of the date the conversion took effect.
(f) A conversion takes effect when the articles of organization are
filed in the office of the Secretary of State or at any later date
specified in the articles of organization.
(g) A general partner who becomes a member of a limited
liability company as a result of a conversion remains liable as a
partner for an obligation incurred by the partnership or limited
partnership before the conversion takes effect.
(h) A general partner's liability for all obligations of the limited
liability company incurred after the conversion takes effect is that of a
member of the company. A limited partner who becomes a member as
a result of a conversion remains liable only to the extent the limited
partner was liable for an obligation incurred by the limited
partnership before the conversion takes effect.
Comment
Subsection (b) makes clear that the terms and conditions of the
conversion of a general or limited partnership to a limited liability
company must be approved by all of the partners unless the
partnership agreement specifies otherwise.
Effect of conversion; entity unchanged
Section 33-44-903. (a) A partnership or limited partnership that
has been converted pursuant to this article is for all purposes the same
entity that existed before the conversion.
(b) When a conversion takes effect:
(1) all property owned by the converting partnership or limited
partnership vests in the limited liability company;
(2) all debts, liabilities, and other obligations of the converting
partnership or limited partnership continue as obligations of the
limited liability company;
(3) an action or proceeding pending by or against the
converting partnership or limited partnership may be continued as if
the conversion had not occurred;
(4) except as prohibited by other law, all of the rights,
privileges, immunities, powers, and purposes of the converting
partnership or limited partnership vest in the limited liability
company; and
(5) except as otherwise provided in the agreement of
conversion under Section 33-44-902(c), all of the partners of the
converting partnership continue as members of the limited liability
company.
Comment
A conversion is not a conveyance or transfer and does not give rise
to claims of reverter or impairment of title based on a prohibited
conveyance or transfer. Under subsection (b)(1), title to all
partnership property, including real estate, vests in the limited
liability company as a matter of law without reversion or impairment.
Merger of entities
Section 33-44-904. (a) Pursuant to a plan of merger approved
under subsection (c), a limited liability company may be merged with
or into one or more limited liability companies, foreign limited
liability companies, corporations, foreign corporations, partnerships,
foreign partnerships, limited partnerships, foreign limited
partnerships, or other domestic or foreign entities.
(b) A plan of merger must set forth:
(1) the name of each entity that is a party to the merger;
(2) the name of the surviving entity into which the other
entities will merge;
(3) the type of organization of the surviving entity;
(4) the terms and conditions of the merger;
(5) the manner and basis for converting the interests of each
party to the merger into interests or obligations of the surviving
entity, or into money or other property in whole or in part; and
(6) the street address of the surviving entity's principal place of
business.
(c) A plan of merger must be approved:
(1) in the case of a limited liability company that is a party to
the merger, by all of the members or by a number or percentage of
members specified in the operating agreement;
(2) in the case of a foreign limited liability company that is a
party to the merger, by the vote required for approval of a merger by
the law of the State or foreign jurisdiction in which the foreign
limited liability company is organized;
(3) in the case of a partnership or domestic limited partnership
that is a party to the merger, by the vote required for approval of a
conversion under Section 33-44-902(b); and
(4) in the case of any other entities that are parties to the
merger, by the vote required for approval of a merger by the law of
this State or of the State or foreign jurisdiction in which the entity is
organized and, in the absence of such a requirement, by all the owners
of interests in the entity.
(d) After a plan of merger is approved and before the merger
takes effect, the plan may be amended or abandoned as provided in
the plan.
(e) The merger is effective upon the filing of the articles of
merger with the Secretary of State, or at such later date as the articles
may provide.
Comment
This section sets forth a `safe harbor for cross-entity mergers of
limited liability companies with both domestic and foreign:
corporations, general and limited partnerships, and other limited
liability companies. Subsection (c) makes clear that the terms and
conditions of the plan of merger must be approved by all of the
partners unless applicable state law specifies otherwise for the
merger. The tax effects of a merger are determined by federal and
state tax law. A merger under section 33-44-904 may not be tax free.
Articles of merger
Section 33-44-905. (a) After approval of the plan of merger
under Section 33-44-904(c), unless the merger is abandoned under
Section 33-44-904(d), articles of merger must be signed on behalf of
each limited liability company and other entity that is a party to the
merger and delivered to the Secretary of State for filing. The articles
must set forth:
(1) the name and jurisdiction of formation or organization of
each of the limited liability companies and other entities that are
parties to the merger;
(2) for each limited liability company that is to merge, the date
its articles of organization were filed with the Secretary of State;
(3) that a plan of merger has been approved and signed by each
limited liability company and other entity that is to merge;
(4) the name and address of the surviving limited liability
company or other surviving entity;
(5) the effective date of the merger;
(6) if a limited liability company is the surviving entity, such
changes in its articles of organization as are necessary by reason of
the merger;
(7) if a party to a merger is a foreign limited liability company,
the jurisdiction and date of filing of its initial articles of organization
and the date when its application for authority was filed by the
Secretary of State or, if an application has not been filed, a statement
to that effect; and
(8) if the surviving entity is not a limited liability company, an
agreement that the surviving entity may be served with process in this
State and is subject to liability in any action or proceeding for the
enforcement of any liability or obligation of any limited liability
company previously subject to suit in this State which is to merge,
and for the enforcement, as provided in this chapter, of the right of
members of any limited liability company to receive payment for
their interest against the surviving entity.
(b) If a foreign limited liability company is the surviving entity of
a merger, it may not do business in this State until an application for
that authority is filed with the Secretary of State.
(c) The surviving limited liability company or other entity shall
furnish a copy of the plan of merger, on request and without cost, to
any member of any limited liability company or any person holding
an interest in any other entity that is to merge.
(d) Articles of merger operate as an amendment to the limited
liability company's articles of organization.
Effect of merger
Section 33-44-906. (a) When a merger takes effect:
(1) the separate existence of each limited liability company and
other entity that is a party to the merger, other than the surviving
entity, terminates;
(2) all property owned by each of the limited liability
companies and other entities that are party to the merger vests in the
surviving entity;
(3) all debts, liabilities, and other obligations of each limited
liability company and other entity that is party to the merger become
the obligations of the surviving entity;
(4) an action or proceeding pending by or against a limited
liability company or other party to a merger may be continued as if
the merger had not occurred or the surviving entity may be substituted
as a party to the action or proceeding; and
(5) except as prohibited by other law, all the rights, privileges,
immunities, powers, and purposes of every limited liability company
and other entity that is a party to a merger vest in the surviving entity.
(b) The Secretary of State is an agent for service of process in an
action or proceeding against the surviving foreign entity to enforce an
obligation of any party to a merger if the surviving foreign entity fails
to appoint or maintain an agent designated for service of process in
this State or the agent for service of process cannot with reasonable
diligence be found at the designated office. Upon receipt of process,
the Secretary of State shall send a copy of the process by registered or
certified mail, return receipt requested, to the surviving entity at the
address set forth in the articles of merger. Service is effected under
this subsection at the earliest of:
(1) the date the company receives the process, notice, or
demand;
(2) the date shown on the return receipt, if signed on behalf of
the company; or
(3) five days after its deposit in the mail, if mailed postpaid and
correctly addressed.
(c) A member of the surviving limited liability company is liable
for all obligations of a party to the merger for which the member was
personally liable before the merger.
(d) Unless otherwise agreed, a merger of a limited liability
company that is not the surviving entity in the merger does not
require the limited liability company to wind up its business under
this chapter or pay its liabilities and distribute its assets pursuant to
this chapter.
(e) Articles of merger serve as articles of dissolution for a limited
liability company that is not the surviving entity in the merger.
Comment
The tax effects of a merger are determined by federal and state tax
law. A merger under section 33-44-904 may not be tax free.
Article not exclusive
Section 33-44-907. This article does not preclude an entity from
being converted or merged under other law.
Article 10
Foreign Limited Liability Companies
Section 33-44-1001. Law Governing Foreign Limited Liability Companies.
Section 33-44-1002. Application for Certificate of Authority.
Section 33-44-1003. Activities Not Constituting Transacting Business.
Section 33-44-1004. Issuance of Certificate of Authority.
Section 33-44-1005. Name of Foreign Limited Liability
Company.
Section 33-44-1006. Revocation of Certificate of Authority.
Section 33-44-1007. Cancellation of Authority.
Section 33-44-1008. Effect of Failure to Obtain Certificate of
Authority.
Section 33-44-1009. Action by Attorney General.
Law governing foreign limited liability companies
Section 33-44-1001. (a) The laws of the State or other
jurisdiction under which a foreign limited liability company is
organized govern its organization and internal affairs and the liability
of its managers, members, and their transferees.
(b) A foreign limited liability company may not be denied a
certificate of authority by reason of any difference between the laws
of another jurisdiction under which the foreign company is organized
and the laws of this State.
(c) A certificate of authority does not authorize a foreign limited
liability company to engage in any business or exercise any power
that a limited liability company may not engage in or exercise in this
State.
Comment
The law where a foreign limited liability company is organized,
rather than this act, governs that company's internal affairs and the
liability of its owners. Accordingly, any difference between the laws
of the foreign jurisdiction and this act will not constitute grounds for
denial of a certificate of authority to transact business in this State.
However, a foreign limited liability company transacting business in
this State by virtue of a certificate of authority is limited to the
business and powers that a limited liability company may lawfully
pursue and exercise under Section 33-44-112.
Application for certificate of authority
Section 33-44-1002. (a) A foreign limited liability company
may apply for a certificate of authority to transact business in this
State by delivering an application to the Secretary of State for filing.
The application must set forth:
(1) the name of the foreign company or, if its name is
unavailable for use in this State, a name that satisfies the requirements
of Section 33-44-1005;
(2) the name of the State or country under whose law it is
organized;
(3) the street address of its principal office;
(4) the address of its initial designated office in this State;
(5) the name and street address of its initial agent for service of
process in this State;
(6) whether the duration of the company is for a specified term
and, if so, the period specified;
(7) whether the company is manager-managed, and, if so, the
name and address of each initial manager; and
(8) whether the members of the company are to be liable for its
debts and obligations under a provision similar to Section
33-44-303(c).
(b) A foreign limited liability company shall deliver with the
completed application a certificate of existence or a record of similar
import authenticated by the Secretary of State or other official having
custody of company records in the State or country under whose law
it is organized.
(c) By applying for a certificate of authority to transact business
in this State, the foreign limited liability company agrees to be subject
to the jurisdiction of the Department of Revenue and Taxation and the
South Carolina courts to determine its South Carolina tax liability,
including withholding and estimated taxes, together with any related
interest and penalties, if any. Applying for a certificate of authority is
not an admission of tax liability.
Comment
As with articles of organization, the application must be signed and
filed with the filing office. See Sections 33-44-105, 33-44-107 (name
registration), 33-44-205, 33-44-206, 33-44-209 (liability for false
statements), and 33-44-1005.
Activities not constituting transacting business
Section 33-44-1003. (a) activities of a foreign limited liability
company that do not constitute transacting business in this State
within the meaning of this article include:
(1) maintaining, defending, or settling an action or proceeding;
(2) holding meetings of its members or managers or carrying
on any other activity concerning its internal affairs;
(3) maintaining bank accounts;
(4) maintaining offices or agencies for the transfer, exchange,
and registration of the foreign company's own securities or
maintaining trustees or depositories with respect to those securities;
(5) selling through independent contractors;
(6) soliciting or obtaining orders, whether by mail or through
employees or agents or otherwise, if the orders require acceptance
outside this State before they become contracts;
(7) creating or acquiring indebtedness, mortgages, or security
interests in real or personal property;
(8) securing or collecting debts or enforcing mortgages or other
security interests in property securing the debts, and holding,
protecting, and maintaining property so acquired;
(9) conducting an isolated transaction that is completed within
30 days and is not one in the course of similar transactions of a like
manner; and
(10) transacting business in interstate commerce.
(b) For purposes of this article, the ownership in this State of
income-producing real property or tangible personal property, other
than property excluded under subsection (a), constitutes transacting
business in this State.
(c) This section does not apply in determining the contacts or
activities that may subject a foreign limited liability company to
service of process, taxation, or regulation under any other law of this
State.
Issuance of certificate of authority
Section 33-44-1004. Unless the Secretary of State determines
that an application for a certificate of authority fails to comply as to
form with the filing requirements of this chapter, the Secretary of
State, upon payment of all filing fees, shall file the application and
send a receipt for it and the fees to the limited liability company or its
representative.
Name of foreign limited liability company
Section 33-44-1005. (a) If the name of a foreign limited
liability company does not satisfy the requirements of Section
33-44-105, the company, to obtain or maintain a certificate of
authority to transact business in this State, must use a fictitious name
to transact business in this State if its real name is unavailable and it
delivers to the Secretary of State for filing a copy of the resolution of
its managers, in the case of a manager-managed company, or of its
members, in the case of a member-managed company, adopting the
fictitious name.
(b) Except as authorized by subsections (c) and (d), the name,
including a fictitious name to be used to transact business in this
State, of a foreign limited liability company must be distinguishable
upon the records of the Secretary of State from:
(1) the name of any corporation, limited partnership, or
company incorporated, organized, or authorized to transact business
in this State;
(2) a name reserved or registered under Section 33-44-106 or
33-44-107; and
(3) the fictitious name of another foreign limited liability
company authorized to transact business in this State.
(c) A foreign limited liability company may apply to the
Secretary of State for authority to use in this State a name that is not
distinguishable upon the records of the Secretary of State from a
name described in subsection (b). The Secretary of State shall
authorize use of the name applied for if:
(1) the present user, registrant, or owner of a reserved name
consents to the use in a record and submits an undertaking in form
satisfactory to the Secretary of State to change its name to a name that
is distinguishable upon the records of the Secretary of State from the
name of the foreign applying limited liability company; or
(2) the applicant delivers to the Secretary of State a certified
copy of a final judgment of a court establishing the applicant's right to
use the name applied for in this State.
(d) A foreign limited liability company may use in this State the
name, including the fictitious name, of another domestic or foreign
entity that is used in this State if the other entity is incorporated,
organized, or authorized to transact business in this State and the
foreign limited liability company:
(1) has merged with the other entity;
(2) has been formed by reorganization of the other entity; or
(3) has acquired all or substantially all of the assets, including
the name, of the other entity.
(e) If a foreign limited liability company authorized to transact
business in this State changes its name to one that does not satisfy the
requirements of Section 33-44-105, it may not transact business in
this State under the name as changed until it adopts a name satisfying
the requirements of Section 33-44-105 and obtains an amended
certificate of authority.
Revocation of certificate of authority
Section 33-44-1006. (a) A certificate of authority of a foreign
limited liability company to transact business in this State may be
revoked by the Secretary of State in the manner provided in
subsection (b) if:
(1) the company fails to:
(i) pay any fees, taxes, and penalties owed to this State;
(ii) deliver its annual report required under Section
33-44-211 to the Secretary of State within 60 days after it is due;
(iii) appoint and maintain an agent for service of process as
required by this article; or
(iv) file a statement of a change in the name or business
address of the agent as required by this article; or
(2) a misrepresentation has been made of any material matter
in any application, report, affidavit, or other record submitted by the
company pursuant to this article.
(b) The Secretary of State may not revoke a certificate of
authority of a foreign limited liability company unless the Secretary
of State sends the company notice of the revocation, at least sixty
days before its effective date, by a record addressed to its agent for
service of process in this State, or if the company fails to appoint and
maintain a proper agent in this State, addressed to the office required
to be maintained by Section 33-44-108. The notice must specify the
cause for the revocation of the certificate of authority. The authority
of the company to transact business in this State ceases on the
effective date of the revocation unless the foreign limited liability
company cures the failure before that date.
Cancellation of authority
Section 33-44-1007. A foreign limited liability company may
cancel its authority to transact business in this State by filing in the
office of the Secretary of State a certificate of cancellation.
Cancellation does not terminate the authority of the Secretary of State
to accept service of process on the company for claims for relief
arising out of the transactions of business in this State.
Effect of failure to obtain certificate of authority
Section 33-44-1008. (a) A foreign limited liability company
transacting business in this State may not maintain an action or
proceeding in this State unless it has a certificate of authority to
transact business in this State.
(b) The failure of a foreign limited liability company to have a
certificate of authority to transact business in this State does not
impair the validity of a contract or act of the company or prevent the
foreign limited liability company from defending an action or
proceeding in this State.
(c) Limitations on personal liability of managers, members, and
their transferees are not waived solely by transacting business in this
State without a certificate of authority.
(d) If a foreign limited liability company transacts business in this
State without a certificate of authority, it appoints the Secretary of
State as its agent for service of process for claims for relief arising out
of the transaction of business in this State.
Action by Attorney General
Section 33-44-1009. The Attorney General may maintain an
action to restrain a foreign limited liability company from transacting
business in this State in violation of this article.
Article 11
Derivative Actions
Section 33-44-1101. Right of action.
Section 33-44-1102. Proper Plaintiff.
Section 33-44-1103. Pleading.
Section 33-44-1104. Expenses.
Right of action
Section 33-44-1101. A member of a limited liability company
may maintain an action in the right of the company if the members or
managers having authority to do so have refused to commence the
action or an effort to cause those members or managers to commence
the action is not likely to succeed.
Comment
A member may bring an action on behalf of the company when the
members or managers having the authority to pursue the company
recovery refuse to do so or an effort to cause them to pursue the
recovery is not likely to succeed. See Comments to Section
33-44-411(a) (personal action of member against company or another
member).
Proper plaintiff
Section 33-44-1102. In a derivative action for a limited liability
company, the plaintiff must be a member of the company when the
action is commenced; and
(1) must have been a member at the time of the transaction of
which the plaintiff complains; or
(2) the plaintiff's status as a member must have devolved upon the
plaintiff by operation of law or pursuant to the terms of the operating
agreement from a person who was a member at the time of the
transaction.
Pleading
Section 33-44-1103. In a derivative action for a limited liability
company, the complaint must set forth with particularity the effort of
the plaintiff to secure initiation of the action by a member or manager
or the reasons for not making the effort.
Comment
There is no obligation of the company or its members or managers
to respond to a member demand to bring an action to pursue a
company recovery. However, if a company later decides to
commence the demanded action or assume control of the derivative
litigation, the member's right to commence or control the proceeding
ordinarily ends.
Expenses
Section 33-44-1104. If a derivative action for a limited liability
company is successful, in whole or in part, or if anything is received
by the plaintiff as a result of a judgment, compromise, or settlement
of an action or claim, the court may award the plaintiff reasonable
expenses, including reasonable attorney's fees, and shall direct the
plaintiff to remit to the limited liability company the remainder of the
proceeds received.
Article 12
Miscellaneous Provisions
Section 33-44-1201. Uniformity of Application and Construction.
Section 33-44-1202. Short Title.
Section 33-44-1203. Severability Clause.
Section 33-44-1204. Fees.
Section 33-44-1205. Term `Partnership' Includes Limited Liability
Company.
Section 33-44-1206. Transitional Provisions.
Section 33-44-1207. Savings Clause.
Uniformity of application and construction
Section 33-44-1201. This chapter shall be applied and construed
to effectuate its general purpose to make uniform the law with respect
to the subject of this chapter among states enacting it.
Short title
Section 33-44-1202. This chapter may be cited as the Uniform
Limited Liability Company Act of 1996.
Severability clause
Section 33-44-1203. If any provision of this chapter or its
application to any person or circumstance is held invalid, the
invalidity does not affect other provisions or applications of this
chapter which can be given effect without the invalid provision or
application, and to this end the provisions of this chapter are
severable.
Fees
Section 33-44-1204. (a) The Secretary of State shall collect the
following fees when the following documents described in this
subsection are delivered to him for filing:
(1) Articles of organization of a limited liability company: one
hundred and ten dollars.
(2) Amendment or restatement of the articles of organization of
a limited liability company: one hundred and ten dollars.
(3) Articles of merger involving a domestic or foreign limited
liability company: one hundred and ten dollars.
(4) Application by a foreign limited liability company for a
certificate of authority to transact business in South Carolina: one
hundred and ten dollars.
(5) Amendment by a foreign limited liability company of its
certificate of authority: one hundred and ten dollars.
(6) Application for reservation of a limited liability company
name: twenty-five dollars.
(7) Notice of transfer of a reserved limited liability company
name: ten dollars.
(8) Annual application for registration (or renewal) of a foreign
limited liability company name: ten dollars.
(9) Annual report of a domestic or foreign limited liability
company: ten dollars.
(10) Statement of change of designated office or agent for the
service of process, or both: ten dollars.
(11) Articles of termination: ten dollars.
(12) Application for reinstatement after administrative
dissolution: twenty-five dollars.
(13) Application for certificate of cancellation: ten dollars.
(14) Application for certificate of existence or authorization: ten
dollars.
(15) Any other document required or permitted to be filed
pursuant to this chapter: two dollars.
(b) The Secretary of State shall collect a fee of ten dollars each
time process is served on him under this chapter. The party to a
proceeding causing service of process is entitled to recover this fee as
costs if he prevails in the proceeding.
(c) The Secretary of State shall collect the following fees for
copying and certifying the copy of any filed document relating to a
domestic or foreign limited liability company:
(1) for copying, one dollar for the first page and fifty cents for
each additional page; and
(2) two dollars for each certificate.
Term partnership includes limited liability company
Section 33-44-1205. Except (1) as otherwise required by the
context, (2) as inconsistent with the provisions of this chapter, and (3)
for this chapter, Chapters 41 and 42 of Title 33, and Title 12, the term
`partnership' or `general partnership', when used in any other statute
or in any regulation, includes and also means `limited liability
company.'
Transitional provisions
Section 33-44-1206. (a) Before January 1, 2001, this chapter
governs only a limited liability company organized:
(1) after the effective date of this chapter, unless the company
is continuing the business of a dissolved limited liability company
under Section 33-43-901.3; and
(2) before the effective date of this chapter, which elects, as
provided by subsection (c), to be governed by this chapter.
(b) On and after January 1, 2001, this chapter governs all limited
liability companies.
(c) Before January 1, 2001, a limited liability company
voluntarily may elect, in the manner provided in its operating
agreement or by law for amending the operating agreement, to be
governed by this chapter.
(d) Notwithstanding any other provision of this chapter, after
January 1, 2001, the Secretary of State may commence a proceeding
to dissolve a limited liability company under Section 33-44-809, if
the company was formed prior to the effective date of this act and its
articles of organization are not in conformity with Section 33-44-203.
(e) Notwithstanding any other provision of this chapter, after
January 1, 2001, the Secretary of State may revoke a foreign limited
liability company's certificate of authority under Section 33-44-1006,
if the company was granted a certificate of authority prior to the
effective date of this act and its latest application for a certificate or
amended certificate of authority does not set forth the information
required by Section 33-44-1002.
Comment
Under subsection (a)(1), the application of the act is mandatory for
all companies formed after the effective date of the act determined
under Section 33-44-1204. Under subsection (a)(2), the application of
the act is permissive, by election under subsection (c), for existing
companies for a period of time specified in subsection (b) after which
application becomes mandatory. This affords existing companies and
their members an opportunity to consider the changes effected by this
act and to amend their operating agreements, if appropriate. If no
election is made, the act becomes effective after the period specified
in subsection (b).
Savings clause
Section 33-44-1207. This chapter does not affect an action or
proceeding commenced or right accrued before the effective date of
this chapter."
SECTION 3. Chapter 43 of Title 33 is repealed effective January 1,
2001.
SECTION 4. Section 12-54-240(B) of the 1976 Code is amended by
adding an appropriately numbered item to read:
"( ) disclosure of information to the Secretary of State
regarding a taxpayer who failed to pay a tax or fee or file a return,
where the Secretary of State has the power to administratively
dissolve the taxpayer or to revoke the taxpayer's authority to transact
business in this State for failure to pay taxes, fees, or file
returns."
SECTION 5. The catch lines before each section of Chapter 44 of
Title 33 as contained in Section 2 and the comments appearing after
such sections are provided for informational purposes only and are
not considered part of the code sections themselves.
SECTION 6. Unless otherwise stated, this act takes effect on the
first day of the first month following approval of the Governor.
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