S 0824 General Bill, By H.S. Stilwell, Bryan, Drummond, Hayes, Passailaigue, 
M.T. Rose, Thomas, Waldrep and Wilson

Similar(S 1151, H 4283)
 A Bill to amend Title 33, Code of Laws of South Carolina, 1976, relating to
 corporations, by adding Chapter 43 so as to enact the "South Carolina Limited
 Liability Company Act".

   06/03/93  Senate Introduced and read first time SJ-22
   06/03/93  Senate Referred to Committee on Judiciary SJ-22

A BILL

TO AMEND TITLE 33, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO CORPORATIONS, BY ADDING CHAPTER 43 SO AS TO ENACT THE "SOUTH CAROLINA LIMITED LIABILITY COMPANY ACT".

Be it enacted by the General Assembly of the State of South Carolina:

SECTION 1. Title 33 of the 1976 Code is amended by adding:

"Section 33-43-101. Short Title.

This chapter shall be known and may be cited as the South Carolina Limited Liability Company Act."

All current statutes have short title provisions, so it is appropriate to start the Chapter in the same manner.

"Section 33-43-102. Definitions.

As used in this chapter, unless the context otherwise requires:

(A) `Articles of Organization' means articles filed under Section 33-43-201, and those articles as amended or restated.

(B) `Corporation' means a corporation formed under the laws of any state or foreign country.

(C) `Court' includes every court having jurisdiction in the case.

(D) `Event of dissociation' means an event that causes a person to cease to be a member as provided in Section 33-43-802.

(E) `Foreign Limited Liability Company' means an organization that is:

(1) an unincorporated association;

(2) organized under laws of a state other than the laws of this State, or under the laws of any foreign country;

(3) organized under a statute pursuant to which an association may be formed that affords to each of its members limited liability with respect to the liabilities of the entity; and

(4) not required to be registered or organized under any statute of this State other than this chapter.

(F) `Limited liability company' or `domestic limited liability company' means an organization formed under this chapter.

(G) `Limited liability company interest' or `interest in the limited liability company' means the interest that can be assigned under Section 33-43-704 and charged under Section 33-43-705.

(H) `Limited partnership' means a limited partnership formed under the laws of any state or foreign country.

(I) `Manager' or `managers' means, with respect to a limited liability company that has set forth in its articles of organization that it is to be managed by managers, the person or persons designated in accordance with Section 33-43-401.

(J) `Member' or `Members' means a person or persons who have been admitted to membership in a limited liability company as provided in Section 33-43-801 and who have not ceased to be members as provided in Section 33-43-802.

(K) `Operating agreement' means any agreement, written or oral, among all of the members as to the conduct of the business and affairs of a limited liability company.

(L) `Person' means an individual, a general partnership, a limited partnership, a domestic or foreign limited liability company, a trust, an estate, an association, a corporation, or any other legal entity.

(M) `Professional service' means a service that may be rendered lawfully only by a person licensed or otherwise authorized by a licensing authority in this State to render the service and that may not be lawfully rendered by a business corporation under Chapters 1 through 17 of Title 33.

(N) `State' means a state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico."

Articles of organization: This is the formal legal document which, when filed, brings the LLC into existence. See Section 206, which sets forth the effect of acceptance of the articles for filing, and Section 202, which sets forth the contents of the articles.

Event of dissociation: Various terms, such as "bankrupt", which are found in the definitional sections of similar chapters, such as UPA or RULPA, are not defined in the Chapter. Instead, terms such as "event of dissociation," which are more explicitly defined elsewhere in the Chapter, are narrowly defined in the definitional section. The forms of bankruptcy and other events related to insolvency that cause dissociation of a member are described in Section 802.

Foreign limited liability company: This definition is intended to make it clear that qualification under the Chapter as a foreign limited liability company is not restricted to U.S. limited liability companies. For further discussion of this definition, see the Commentary to Section 1001.

Limited liability company interest or interest in the limited liability company: By cross-referencing Sections 704 and 705, these terms refer to the economic rights of members and exclude the rights of members to participate in the management of the LLC.

Manager or managers: The management of an LLC may be delegated in whole or in part to managers. As used in the Chapter, the terms "manager" and "managers" refers to such delegations which take place as a result of a public notice via the articles of organization that the LLC is to be managed by managers.

Member or members: This definition is designed to make it clear that a member has all rights incident to ownership, not merely economic rights. A mere assignee is not a member because only the economic rights of a member are subject to assignment. See Sections 704, 706, and 801.

Operating agreement: This is the contract that governs the affairs of the LLC. There is no requirement that the operating agreement be a public document. An operating agreement differs from other sorts of agreements among the members (e.g., voting trusts, options to purchase, etc.) in that it is binding upon all of the members.

Throughout the Chapter, the statutory text refers to "operating agreement," which in the view of some committee members, reflects that an LLC may be governed by multiple operating agreements, or have no operating agreement (other than the agreement to form the LLC). However, several members of the Committee prefer the usage "the operating agreement," and believe that use of the definite article will avoid possible confusion and adequately provide for the aggregation of multiple operating agreements as "the operating agreement" for the purpose of applying the provisions of the Chapter.

There is no general requirement that the operating agreement be in writing, although later sections of this Chapter require certain provisions to be in writing. Because LLCs will often operate informally, a requirement that operating agreements be in writing might frustrate the legitimate expectations of the members.

Person: This is defined broadly and is adapted from RULPA Section 101(11).

"Section 33-43-103. Name.

(A) The name of each limited liability company as set forth in its articles of organization must contain the words `limited liability company' or `limited company' or the abbreviation `L.L.C.', `L.C.', `LLC', `LC'. The word `limited' may be abbreviated as `LTD.' and the word `company' may be abbreviated as `CO.'

(B) A limited liability company name may not be the same as or deceptively similar to:

(1) the name of any limited liability company, limited partnership, or corporation existing under the laws of this State or foreign limited liability company or foreign corporation authorized to transact business in this State; or

(2) any name reserved under Section 33-43-104.

(C) The provisions of subsection (B) shall not apply if the applicant files with the Secretary of State either of the following:

(1) the written consent of the holder of a reserved or registered name or filed name to use a deceptively similar name if one or more words are added, altered, or deleted to make the name distinguishable from the reserved or registered or filed name; or

(2) a certified copy of a final decree of a court of competent jurisdiction establishing the prior right of the applicant to the use of the name of this State."

Limited liability company statutes require that the name of an LLC contain specified language identifying its status as an LLC. Section 103(A), while requiring that an LLC name contain specified language, adopts virtually all of the permissible names and abbreviations contained in the LLC statutes adopted to date. Although the Texas Act allows LLC names to contain only the word "limited" or the abbreviation "ltd.", Texas art. 2.03(A)(l), Section 103(A) does not do so because of the possible confusion caused by the fact that many state corporation statutes allow corporations to be identified by those same designations.

Section 103(B) is modeled on RULPA Section 102(3), upon which several LLC statutes have based similar provisions. See, e g., Wyoming Section 17-15-105(a)(ii); Colorado Section 7-80-201(3). Although some LLC statutes have followed RMBCA Section 4.01(b) in requiring that an LLC name "must be distinguishable upon the records" of the relevant office or agency from other names (see, e.g., Virginia Section 13.1-1012(C); Utah Section 48-2b-106(3)), section 106(B) includes the "deceptively similar" standard because of its current widespread use, not only in LLC statutes, but in limited partnership and corporation statutes, and also because of the additional ambiguities that may arise when determining whether names are "distinguishable on the records" of the relevant office or agency. Although the Utah Act recognizes this issue by defining "differences [that] are not distinguishing" (Utah Section 48-2b-106(6)), it is believed that section 103(B) will provide practitioners and other interested persons with greater predictability.

Section 103(C) is modeled on MBCA Section 8(c), which has served as the basis for similar provisions in several LLC statutes. See, e.g., Colorado Section 7-80-201(5); Arizona Section 29-602.3.

Some LLC statutes impose liability for damages caused by the omission of specified words when using the name of an LLC. See, e.g., Wyoming Section 17-15-105(b); Utah Section 48-2b-108(2). Section 103 does not contain a similar provision because of the belief that it would unnecessarily duplicate liability that would otherwise exist under other legal theories, such as estoppel or fraud.

In contrast to several LLC statutes, section 103 does not prohibit an LLC name from including a word or phrase that indicates or implies that it is not organized for a purpose other than one of the purposes contained in the LLC's articles of organization. See, i.e., Wyoming Section 17-15-105(a)(1); Colorado Section 7-80-201(2); Nevada Section 86-171(1)(a). This is consistent with the fact that section 202, governing information that must be included in an LLC's articles of organization, does not require a statement regarding the purpose for which an LLC is

organized.

Several LLC statutes require that specified language, such as "a limited liability company," must appear after the name of an LLC on all correspondence, stationery, checks, invoices, and other documents and papers executed by an LLC. See, e.g., Wyoming Section 17-15-105(c); Nevada Section 86.171(3). Like RULPA Section 102, Section 103 does not include this requirement.

"Section 33-43-104. Reservation and Registration of Name.

(A) A person may reserve the exclusive use of a `limited liability company' name, including a designated name provided for in Section 33-43-1003 for a foreign limited liability company 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 limited liability company name applied for is available, he shall reserve the name for the applicant's exclusive use for a nonrenewable one hundred twenty-day period.

(B) The owner of a reserve limited liability company may transfer the reservation to another person by delivering to the Secretary of State a signed notice of the transfer that states the name and address of the transferee.

(C) A foreign limited liability company registers its name that satisfies the requirements of Section 33-43-104.

(D) A foreign limited liability company registers its name by delivering to the Secretary of State for filing an application:

(1) setting forth its limited liability company name, 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 document of similar import) from the state or country of organization.

(E) The name is registered for the applicant's exclusive use upon the effective date of the application.

(F) A foreign limited liability company whose registration is effective may renew it for successive years by delivering to the Secretary of State for filing a renewal application, which complies with the requirements of subsection (D), between October first and December thirty-first of the preceding year. The renewal application, when filed, renews the registration for the following calendar year.

(G) A foreign limited liability company whose registration is effective may qualify thereafter as a foreign limited liability company under the registered name or consent in writing to the use of that name by a limited liability company thereafter incorporated under this Chapter or by another foreign limited liability company thereafter authorized to transact business in this State. The registration terminates when the domestic limited liability company is incorporated or the foreign limited liability company qualifies or consents to the qualification of another foreign limited liability company under the registered name."

This section is modeled closely on RULPA Section 104. The early LLC statutes in Wyoming and Florida did not provide for name reservation. More recent LLC statutes have included name reservation provisions modeled on RULPA Section 103. See, e.g., Colorado Section 7-80-202; Utah Section 48-2b-106(9).

Section 104(C) is modeled on Virginia Section 13.1-1013(B). See also Utah Section 48-2b-106(10); Colorado 7-80-202(2); Arizona Section 29-603.

"Section 33-43-105. Registered office and registered agent.

(A) A limited liability company shall continuously maintain in this State:

(1) a registered office that may, but need not, be the same as its place of business; and

(2) a registered agent for service or process on the limited liability company that is an individual resident of this State, a limited liability company, a foreign limited liability company authorized to transact business in this State, or a corporation formed under the laws of or authorized to transact business in this State.

(B) A limited liability company may change its registered office or registered agent by delivering to the Secretary of State for filing a statement of change that sets forth:

(1) the name of the limited liability company;

(2) the street address of its current registered office;

(3) if the current registered office is to be changed, the street address of the new registered office;

(4) the name of its current registered agent;

(5) if the current registered agent is to be changed, the name of the new registered agent and the new agent's written consent (either on the statement or attached to it) to the appointment; and

(6) that after the change or changes are made, the street addresses of its registered office and the business office of its registered agent will be identical.

(C) If a registered agent changes the street address of his business office, he may change the street address of the registered office of any limited liability corporation for which he is the registered agent by notifying the limited liability company in writing of the change and signing (either manually or in facsimile) and delivering to the Secretary of State for filing a statement that complies with the requirements of subsection (A) and recites that the limited liability company has been notified of the change:

(1) A registered agent may resign his agency appointment by signing and delivering to the Secretary of State for filing the signed original and two exact or conformed copies of a statement or resignation. The statement may include a statement that the registered office is also discontinued;

(2) After filing the statement the Secretary of State shall mail one copy to the registered office (if not discontinued) and the other copy to the corporation at its principal office;

(3) The agency appointment is terminated, and the registered office discontinued if so provided, on the thirty-first day after the date on which the statement was filed."

Section 105 is based on RULPA Section 104 and provisions of some LLC statutes.

Section 105(A) is based upon RULPA Section 104. Although virtually all LLC statutes contain a similar provision, see, e.g., Wyoming Section 17-15-110; Virginia Section 13.1-1015(A); Utah Section 48-2b-123(1)-(2), the persons or entities that may serve as registered agent for service of process vary significantly from state to state. In a few states, a domestic or foreign corporation may serve as registered agent in addition to a natural person who is a resident of the state. See, e.g., Wyoming Section 17-15-110(a)(ii); Florida Section 608.415(1)(b); Utah Section 48-2b-123(2); Nevada Section 86.231(1)(b). The Texas Act, on the other hand, allows the registered agent to be either an individual resident of Texas "or a person organized under or authorized to transact business in [Texas] which has a business office identical with [the] registered office [of the limited liability company]." Tex. art. 2.05(A)(2).

Section 105(A)(2), similar to Arizona Section 29-604.A.2, takes a somewhat more expansive view as to permissible registered agents than most LLC statutes by allowing domestic and foreign limited liability companies to serve as registered agents in the same fashion that domestic and foreign corporations are allowed to do so.

Section 105(B) is modeled on Arizona Section 29-604.B. The first clause of section 105(B) recognizes the fact that section 202(B) requires the registered agent to be designated in an LLC's articles of organization. If the registered agent signs the articles of organization pursuant to section 201, a separate statement in writing under section 105(B) would not be required.

Section 105(C) is modeled on MBCA Section 13, which has served as a model for similar provisions in several limited liability company statutes. See, e.g., Wyoming Section 17-15-lll(a); Virginia Section 13.1-1016(A). Section 105(C) varies slightly from MBCA Section 13 and the cited LLC statutes by including language referencing the change of the registered agent's address. See Arizona Section 29-605.A.5.

Section 105(D) makes it clear that the statement is effective on delivery to the Secretary of State, unless a new registered agent is being appointed, in which case the writing required by Section 105(B) must also be delivered to the Secretary of State.

Several LLC statutes have provisions similar to section 105(E) regarding the resignation of a registered agent. See Florida Section 608.416(3); Colorado Section 7-80-302(3).

Several LLC statutes have provisions similar to section 105(P). See, e.g., Colorado Section 7-80-302(1) (change in the business address of the registered agent must be reported to the Secretary of State within 15 days of the change); Virginia Section 13.1-1016(C). As discussed above in connection with section 105(C), several LLC statutes do not contain provisions dealing with the change of a registered agent's address.

"Section 33-43-106. Nature of business.

A limited liability company may be organized under this chapter for any lawful purpose. If the purpose for which a limited liability company is organized or its activities make it subject to a special provision of law, the limited liability company shall also comply with that provision."

Many states require that certain regulated industries, such as banking and insurance, be carried on only by entities meeting the requirements of special statutes, and it is contemplated that LLCs would be subject to any additional requirements that may be mandated by those statutes. Individual states have imposed restrictions upon the activities in which an LLC may engage. See, e.g., Colorado Section 7-80-103 (limiting the activities of an LLC to those that may be conducted by a limited partnership); Texas art. 2.01 (allowing an LLC to be formed for any lawful purpose, except that specific statutes for the regulation of particular kinds of businesses will govern).

An issue that is expected to continue to be the subject of considerable debate is the use of LLCs by professionals, such as doctors, lawyers, and accountants. A professional is liable for his or her own acts and omissions and, under general partnership principles, is also personally liable for the acts or omissions of his or her partners. If professionals are allowed to use the LLC form, each professional would be liable only for his or her own acts or omissions unless an LLC statute otherwise provides. See, e.g., Utah Sections 48-2b-104 and 48-2b-111(2) (allowing an LLC to be used for the rendering of professional services and providing that "[n]o member, manager, or employee of a limited liability company is personally liable for the acts or omissions of any other member, manager, or employee of the limited liability company"); Arizona Sections 29-841 to -847.

Section 106 can be adapted to accommodate either the inclusion or exclusion of specified professional activities. If a particular state legislature concludes that LLCs cannot engage in a specified professional activity, this prohibition should be addressed in the statute regulating the activity. The Committee did not undertake to determine the kinds of ownership restrictions and other statutory provisions that should be applicable to professional LLCs in order to satisfy the ethical rules of the legal or any other profession.

This Chapter does not contain a "powers" provision. Statutory provisions enumerating the powers of an LLC are based on similar provisions regarding corporate powers. See RMBCA Section 3.02; Delaware Code Ann. tit. 8, Section 122 (1991). Such provisions should not be extended to LLCs. These provisions are the vestiges of an old view of the corporation that regarded such firms as artificial legal entities that were created by state law and given only limited powers. This view is best exemplified by Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), in which Justice Marshall described the corporation as:

[A]n artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. 17 U.S. (4 Wheat.) at 636.

This view may no longer properly describe even corporations, which many now regard as the product of contract rather than creations of state law. See J. Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780-1970 (1970); Butler & Ribstein, State Anti-Takeover Statutes and the Contract Clause, 57 U. Cin. L. Rev. 611, 618-22 (1988). While powers provisions of state statutes remain as a vestige of this bygone era, they no longer serve the function they once did. Now, ultra vires really refers to allocation of authority within the business. This is supported by the fact that ultra vires cannot generally be used as a defense to a corporate contract unless it would be "equitable" to set aside the chapter. See Delaware Code Ann. tit. 8, Section 124 (1991); RMBCA Section 3.04. In determining whether an injunction would be "equitable," courts look to whether the chapter was apparently authorized. See, e.g., Goodman v. Ladd Estate Co., 427 P.2d 102 (Ore. 1967) (refusing to enjoin enforcement of a guarantee because the shareholder whose shares were transferred to plaintiff participated in the allegedly ultra vires act).

Even if powers clauses and ultra vires retain some modern function in corporations, they should have no function in LLCs. LLCs are similar to partnerships which, unlike corporations, never were regarded as state created "entities" possessing only the powers endowed by their state "creators." See Butler & Ribstein, supra at 619. Not surprisingly, neither limited nor general partnership statutes include lists of powers the firm may exercise. Indeed, by adopting this corporate feature, LLC statutes would lend support to the argument that LLCs should be treated as corporations for tax purposes.

The only argument for listing powers in LLC statutes is that this would satisfy title insurers, creditors and other third parties that the LLC has the power to own property, borrow money, and do other important acts. However, even if the "firm" has the power, the creditor would still need to know whether the agent is authorized. Indeed, listing powers can create confusion between the outmoded ultra vires concept and power in the agency-authority sense. Power in the latter sense cannot be definitively established by means of a general statutory provision because agents' authority differs within the firm and among firms. It is best to eliminate the concept of powers of the LLC. However, the Committee acknowledges that most, if not all, LLC statutes contain powers clauses and that the practicalities of comforting third parties can be a powerful argument against the theoretical concepts underlying the omission of a powers section.

Section 33-43-201. Formation.

Two or more persons may form a limited liability company by signing articles of organization and delivering the signed articles to the Secretary of State for filing. The persons who form a limited liability company must be members of the limited liability company at the time of formation."

This section is modeled on Arizona Section 29-631. Section 201 allows one person to perform the ministerial act of signing and filing the articles of organization with the Secretary of State. The second sentence of Section 201 makes it clear that the person or persons signing and filing articles of organization with the Secretary of State need not be members of the LLC either at the time of formation or after formation has occurred. Cf. Colorado Section 7-80-203(1); Virginia Section 13.1-1010 (persons need not be members at the time of formation).

Most LLC statutes require that there be at least two members at the time of formation. Wyoming Section 17-15-106; Florida Section 608.405; Utah Section 48-2b-103; Nevada Section 86.151. These statutes require that two or more persons organize the LLC and that two or more persons be members of the LLC at formation. Other statutes allow one person to organize the LLC but explicitly require that there be at least two members at formation. Colorado Section 7-80-203(2); Kansas Section 17-7605; Virginia Sections 13.1-1002 and 13.1-1010. The Texas Act only requires one "organizer" to form the LLC and contains no additional requirement that there be at least two members at formation. Texas art. 3.01.

LLCs must have at least two members at formation to initially secure partnership status for federal tax purposes, and must continue to have at least two members at all time to avoid terminating for tax purposes. The Internal Revenue Code defines the term partnership to include a "syndicate, group, pool, joint venture, or other unincorporated organization" that carries on any business. I.R.C. Sections 761(a) and 7701(a)(2) (1986). The very essence of a partnership contemplates two or more partners joining together as coproprietors to engage in business and share the profits. Treas. Reg. Sections 1.761-l(a), 301.7701-3(a); Commissioner v. Culbertson, 337 U.S. 733 (1949); Luna v. Commissioner, 42 T.C. 1067 (1964); Ian T. Allison, 35 T.C.M. (CCH) 1069 (1976). Moreover, the regulations state that a partnership's business is no longer carried on by the partners if there is only one remaining partner; consequently, such a partnership will terminate. Treas. Reg. Section 1.708-l(b)(l)(i). See generally Keatinge, Ribstein, Hamill, Gravelle & Connaughton, The Limited Liability Company, A Study of The Emerging Entity, 47 Bus. Law. 375 (1992); Gazur & Goff, Assessing the Limited Liability Company, 41 Case W. Res. L. Rev. 387, 396-98 (1991).

Section 201 does not require an LLC to have two or more members at the time of its formation because of the concern that such a requirement may raise questions about the proper organization of an LLC that fails to have two or more members at the exact moment of its formation. If, for example, the ministerial act of signing and filing articles of organization with the Secretary of State occurs on a Monday, and a written operating agreement among several members is finalized on the next day, a question may arise as to whether the LLC was properly formed. Section 201 is intended to avoid this concern. Although for tax purposes the LLC will not be recognized until the LLC has at least two members, failure to have two members at the time of formation should not result in the LLC not being properly formed for other purposes. This was the approach taken in the Arizona Act, although that act includes, as a reminder to practitioners, a requirement that the articles of organization state that there are at least two members at the time of formation. Arizona Section 29-632.A.3. If this statement turns out not to be true, the formation of the Arizona LLC will not be in jeopardy, although its tax status may be.

A firm that has not been formed pursuant to this section is not a "limited liability company" as defined in section 102(F), and therefore the parties' relationships are not necessarily governed by the provisions of this Chapter. However, nothing in this section prevents enforcement of contracts among the parties to a firm or between the firm and third parties with regard to a firm that purports to be an LLC but that has not met the technical requirements for formation under this section. Thus, a court may enforce any underlying contract between the parties, including the parties' mutual expectations that provisions of the Chapter be applied and creditors' expectations that members of the would-be LLC have limited liability. This is consistent with the courts' willingness to enforce corporations by "estoppel" unless specifically precluded by applicable corporation statutes. See Cranson v. International Business Machines Corp., 200 A.2d 33 (Md. 1964); Harry Rich Corp. v. Feinberg, 518 So. 2d 377 (Fla. App. 1987) (interpreting "assuming to act" statute as not imposing liability where defendant did not know of failure to incorporate); H.F. Phillipsborn & Co. v. Suson, 322 N.E.2d 45 (Ill. 1974); Sherwood & Roberts-Oregon, Inc. v. Alexander, 525 P.2d 135 (Or. 1974) (holding that promoter was not liable despite assuming-to-act statute); Molander v. Raugust-Mathwig, Inc., 722 P.2d 103 (Wash. App. 1986). It is also consistent with decisions enforcing underlying limited partnership agreements among the partners even in the absence of filing. See, e.g., Betz v. Chena Hot Springs Group, 657 P.2d 831 (Alaska 1982); Hoefer v. Hall, 411 P.2d 230 (N.M. 1966); Rond v. Yeaman-Yordan-Hale Productions, 681 P.2d 1240 (Utah 1984).

"Section 33-43-202. Articles of organization.

The articles of organization shall set forth:

(A) A name for the limited liability company that satisfies the requirements of Section 33-43-103;

(B) The address of the registered office and the name and business, residence, or mailing address of the registered agent required to be maintained by Section 33-43-105;

(C) The latest date upon which the limited liability company is to dissolve; and

(D) If management of the limited liability company is vested in a manager or managers, a statement to that effect."

Existing LLC statutes contemplate a broad range of possible required inclusions in the articles of organization. Some statutes require purpose statements, details about contributions, and lists of members or managers. See, e.g., Wyoming Section 17-15-107; Florida Section 608.407. The Virginia Act, by comparison, requires only the name, latest date of dissolution and winding up, principal office, registered office, and registered agent. Virginia Section 13.1-1011. Section 202 reflects what appears to be the emerging trend in LLC statutes, namely that the articles of organization should be required to contain a minimum amount of information. The articles of organization are not intended to be a substantive agreement; that is the function of an operating agreement. Consequently, information regarding past and future capital contributions is better addressed in an operating agreement.

Section 202(A) is modeled on Virginia Section 13.1-1011(A)(l), which also cross-references the statutory section governing permissible names for an LLC.

Virtually all LLC statutes have a provision similar to section 202(B).

Several LLC statutes provide that the articles of organization must specify the period of the LLC's duration, which may not exceed 30 years. See, e.g., Wyoming Section 17-15-107(a)(ii); Colorado Section 7-80-204(1)(b); Nevada Section 86.161(1)(b). This 30-year limitation is not sufficient, in and of itself, to cause the LLC to lack the continuity of life characteristic. See generally Gazur & Goff, Assessing the Limited Liability Company, 41 Case W. Res. L. Rev. 387, 399-400 (1991). Consequently, Section 202 does not contain this limitation on the duration of an LLC. Section 202(C), which is modeled on RULPA Section 201(a)(4), has been substituted in place of the 30-year limitation. Some members of the Committee question whether even subsection (C) serves any significant useful purpose, especially because there may be no business reason for forcing the ultimate dissolution at any time of an "LLC at will".

Several LLC statutes require the articles of organization to disclose whether management of the LLC is vested in managers or reserved to the members. See, e.g., Wyoming Section 17-15-107(a)(ix); Utah Section 48-2b-116(1)(f); Nevada Section 86.161(2); Arizona Section 29-632.A.5. The Virginia Act does not require any such disclosure. Virginia Section 13.1-1011. If management of the LLC is vested in managers, section 202(D) requires this fact to be disclosed in the articles of organization. Unlike several LLC statutes, however, Section 202 does not require that the names or addresses of members or managers be disclosed in the articles of organization. Cf. Wyoming Section 17-15-107(a)(ix); Utah Section 48-2b-116(1)(f); Nevada Section 86.161(2); Arizona Section 29-632.A.6 (requiring names of initial managers or members to be included in articles of organization).

Several LLC statutes contain a provision that allows the articles of organization to contain other provisions that are elected to be included. See, e.g., Wyoming Section 17-15-107(a)(x); Florida Section 608.407(1)(j); Arizona 2932.B; Virginia Section 13.1-1011(B); Nevada Section 86.161(1)(g). Section 202 does not contain such a provision because of the concern that optional provisions should not be used to impart actual or constructive notice to third parties of the information contained in such provisions. Some members of the Committee believe, however, that optional provisions would provide a useful device to impart actual knowledge to third parties who actually have read the articles of organization.

"Section 33-43-203. Amendment of articles of organization; restatement.

(A) The articles of organization of a limited liability company may be amended by filing articles of amendment with the Secretary of State. The articles of amendment shall set forth:

(1) the name of the limited liability company;

(2) the date the articles of organization were filed; and

(3) the amendment to the articles of organization.

(B) The articles of organization may be amended in any respect as may be desired, so long as the articles of organization, as amended, contain only provisions that may be lawfully contained in articles of organization at the time of making the amendment.

(C) The articles of organization of a limited liability company must be amended when:

(1) there is a change in the name of the limited liability company;

(2) there is a change in the character of the business of the limited liability company specified in the articles of organization;

(3) there is a false or erroneous statement in the articles of organization;

(4) there is a change in the time, as stated in the articles of organization, for the dissolution of the limited liability company;

(5) there is a change in the names and street addresses of the managers of the limited liability company, or if the limited liability company is managed by its members, the names and street addresses of the members;

(6) the members determine to fix a time, not previously specified in the articles of organization, for the dissolution of the limited liability company; or

(7) the members desire to make a change in any other statement in the articles of organization in order for the articles to accurately represent the agreement among them.

(D) Articles of organization may be restated at any time. Restated articles of organization shall be filed with the Secretary of State and shall be specifically designated as such in the heading and shall state either 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 articles of organization."

All LLC statutes specify the procedures necessary to amend an LLC's articles of organization. Most require the articles of organization to be amended under certain circumstances. See, e.g., Wyoming Section 17-15-129(b) (requiring amendments (i) for a name change, (ii) for a change in the character of the LLC's business, (iii) when the articles of organization contain a false or erroneous statement, (iv) when there is a change in the time stated in the articles of organization for the dissolution of the LLC,(v) when a time is fixed for the dissolution of the LLC if no time is specified in the articles of organization, or (vi) if the members desire to make any other change to accurately represent the agreement between them); Florida Section 608.411(1) (identical to Wyoming's provision); Colorado Section 7-80-209(1) (requiring amendments (i) for a name change, (ii) when the articles of organization contain a false or erroneous statement, (iii) when there is a change in the time stated in the articles of organization for the dissolution of the LLC, and (iv) when the members desire to make any other change to accurately represent the agreement between them); Utah Section 48-2b-121 (requiring amendments (i) for a name change, (ii) to reflect a change in the character of the business of the LLC,(iii) when there is a false or erroneous statement in the articles of organization, (iv) when there is a change in the time stated in the articles of organization for the dissolution of the LLC,(v) when there is a change in the names and street addresses of the managers or members of the LLC, depending on whether managers or members manage the LLC,(vi) when the members determine to fix a time, not previously specified in the articles of organization, for the dissolution of the LLC, or (vii) the members desire to make a change in the articles of organization to accurately represent the agreement among them). But see Virginia Section 13.1-1014 (all amendments to articles of organization are permissive); Texas art. 3.05 (same).

Section 203(A) specifies the information that must be contained in the articles of amendment filed with the Secretary of State. Several limited liability company statutes simply provide that the articles of amendment shall be in the form designated by the state office or agency with which the articles of amendment will be filed. See, e.g., Colorado Section 7-80-209(2). Other limited liability company statutes specify the contents of the articles of amendment. See, e g., Virginia Section 13.1-1014(C). From a policy perspective, both of these approaches seem to be acceptable.

Section 203 follows the approach taken by the Texas and Virginia Acts by providing that all amendments to the articles of organization are permissive. The articles of organization are not intended to be a substantive agreement. Moreover, Section 202 requires less information to be disclosed in the articles than is required under other statutes. Of course, there are situations in which an LLC should amend its articles of organization, but the LLC will have independent incentives to do so. If, for example, the members of a "member-managed" LLC decide to vest management authority in one or more managers, the LLC must amend the articles of organization in order to limit the authority of the members to bind the LLC under Section 301. The "permissive" amendatory approach taken by Section 203 also reflects the concern that amendments to articles of organization should not be required if there are no specified consequences for failing to effect such amendments.

Section 203(C) allows the original articles of organization and all subsequent amendments to be restated in one document. See RMBCA Section 10.07; Arizona Section 29-633.D.

"Section 33-43-204. Execution of documents.

(A) Unless otherwise provided in any other section of this chapter, any document required by this chapter to be filed with the Secretary of State shall be executed:

(1) if management of the limited liability company is vested in one or more managers by any manager;

(2) if management of the limited liability company is reserved to the members by any member;

(3) if the limited liability has not been formed by the persons forming the limited liability company; or

(4) if the limited liability company is in the hands of a receiver, trustee, or other court-appointed fiduciary by that fiduciary.

(B) The person executing the document shall sign it and state beneath or opposite his signature the person's name and the capacity in which he signs.

(C) The person executing the document may do so as an attorney-in-fact. Powers of attorney relating to the execution of the document need not be provided to or filed with the Secretary of State."

Sections 204(A) and (B) are based on Virginia Sections 13.1-1003(F) and (G), which are in turn based on MBCA Sections 1.20(f) and (g). The first clause of Section 204(A) recognizes that other sections of the chapter provide for the filing of documents with the Secretary of State by persons not specified in clauses (1)-(3) of Section 204(A). See, e.g., Section 103(C) (filing related to the use of a name that is deceptively similar to an existing name); Section 104(B) (filing for a name reservation); Section 105 (various documents to be delivered to the Secretary of State in connection with an LLC's registered office and statutory agent).

Section 204(C) is based on RULPA Section 204(b), except that Section 204(C) makes it clear that powers of attorney relating to the execution of a document do not need to be provided to or filed with the Secretary of State. Several LLC statutes allow a person to execute documents by an attorney-in-fact. See, e.g., Utah Section 48-2b-134(2) (also requiring the powers of attorney to be "retained by the company"); Maryland Section 4A-206(b).

"Section 33-43-205. Filing with the Secretary of State.

The original signed copy, together with a duplicate copy that may be either a signed, photocopied, or conformed copy, of the organization or any other document required to be filed pursuant to this chapter, shall be delivered to the Secretary of State. If the Secretary of State determines that the documents conform to the filing provisions of this chapter, it shall, when all required filing fees have been paid:

(1) endorse on each signed original and duplicate copy the word `filed' and the date and time of the document's acceptance for filing;

(2) retain the signed original in the Secretary of State's files; and

(3) return the duplicate copy to the person who filed it or the person's representative."

Section 205(A) is modeled closely on RULPA Section 206(a). Several other LLC statutes contain provisions similar to section 205(A). See, e.g., Wyoming Section 17-15-108(a); Colorado Section 7-80-205; Utah Section 48-2b-117(1).

The procedures specified in Section 205(B) are modeled on Arizona Section 29-634.B. They provide those persons wishing to form an LLC and practitioners with the certainty that an LLC has been formed in situations in which the timing of an LLC's formation is important and the relevant state office or agency is unable to make the filing determination at the time the articles of organization are delivered for filing.

"Section 33-43-206. Effect of delivery or filing of articles of organization.

(A) A limited liability company is formed when the articles of organization are filed by the Secretary of State.

(B) Each copy of the articles of organization stamped `filed' and marked with the filing date is conclusive evidence that all conditions precedent required to be performed by the organizers have been complied with and that the limited liability company has been legally organized and formed under this chapter."

Most LLC statutes provide that an LLC is formed upon filing of articles of organization or upon the issuance of a certificate by the relevant state office or agency. See, e.g., Colorado Section 7-80-207(1)(a) (an LLC is formed upon the filing of articles of organization); Virginia Section 13.1-1004(B) (an LLC is formed on the date on which the State Corporation Commission issues a "certificate of organization"). While section 206(B) follows this general approach, section 206(A), which is modeled on Arizona Section 29-635.A, recognizes the fact that an LLC is formed upon the delivery of articles of organization to the Secretary of State. See Section 205(B) and the accompanying Commentary.

Section 33-43-301. Agency power of members and managers.

(A) Except as provided in subsection (B), every member is an agent of the limited liability company for the purpose of its business or affairs, and the act of any members including, but not limited to, the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business or affairs of the limited liability company of which he is a member, binds the limited liability company, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom the member is dealing has knowledge of the fact that the member has no such authority.

(B) If the articles of organization provide that management of the limited liability company is vested in a manager or managers:

(1) No member, solely by reason of being a member, is an agent of the limited liability company; and

(2) Every manager is an agent of the limited liability company for the purpose of its business or affairs, and the act of any manager including, but not limited to, the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business or affairs of the limited liability company of which he is a manager binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom the manager is dealing has knowledge of the fact that the manager has no such authority.

(C) An act of a manager or a member which is not apparently for the carrying on in the usual way the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with an operating agreement at the time of the transaction or at any other time.

(D) An act of a manager or member in contravention of a restriction on authority shall not bind the limited liability company to persons having knowledge of the restriction."

This section is similar to Arizona Section 29-654 and applies the agency principles governing a general partner's authority under subsections (1), (2) and (4) of UPA Section 9 to the members and managers of an LLC. Under this section, only the managers (and not the members) will have apparent authority under the Chapter to bind an LLC that is managed by managers. It should be contrasted with Section 401, which provides for allocation of governance functions within the LLC under the operating agreement. Pursuant to Section 401, the members have the flexibility to provide for any form of governance they wish in the operating agreement. Under Section 301, the parties' choice of governance form affects third parties only to the extent that the articles of organization state whether the LLC is managed by managers or by members. By the same token, the enforcement of the management rights and restrictions as between the parties to the operating agreement does not turn on the disclosure in the articles of organization.

Unless the articles of organization provide for management by managers, this section would cause the act of any member to bind the company to the same extent as the act of a general partner in a general partnership. The agency extends to transactions which are carried on in the usual way of the business or affairs of the LLC in order to address those situations where it is unclear whether the activities of the limited liability company rise to the level of a "business". As under the UPA, acts which are outside the usual course of business may be actually authorized, and acts which otherwise would be apparently authorized are not binding to the extent that creditors know of a restriction on the member's authority. Because this section is based closely on the UPA, courts are likely to apply partnership precedents.

The chapter contains no equivalent to subsection (3) of UPA Section 9, which specifies categories of transactions that are outside a member's agency power. Specifying such transactions reduces the firm's, and minority members', exposure to and need to monitor for unauthorized actions. The specification may even decrease creditors' costs of dealing with the firm to the extent that it helps them predict when the courts will hold transactions to be unauthorized. On the other hand, if the categories are vague or tend to surprise creditors, this may increase litigation and the firm's cost of credit. Indeed, the categories listed in the UPA do seem rather surprising and vague, particularly those, like the confession of judgment and arbitration provisions, that are based on outmoded ideas about what is, and is not, extraordinary.

If the articles of organization provide that management is vested in managers, this section would cause the act of any manager to bind the company, so long as the act is for carrying on the LLC's business or affairs in the usual way. Conversely, members would have no apparent authority as such to bind the firm. In this situation, the member's acts have no greater effect than those of a corporate shareholder or limited partner, assuming the member is not acting in some other capacity. This puts a burden on creditors to know whether LLCs in the relevant jurisdiction are member or manager-managed by checking the articles of organization and then to determine who the managers are.

Several considerations support the approach of this section. First, LLCs arguably would be exposed to greater burdens than creditors if they had no way of limiting those who can bind the LLC. Second, creditors always can obtain documentary proof of authority in important transactions. Third, in contrast to the LLC statutes discussed in the next paragraph, this section represents a compromise in that creditors can rely on a member's apparent authority in acting other than as a member, including acts of the LLC that lead third parties to believe that the member is a manager. Fourth, the LLC creditor's burdens arguably are no different than those of a creditor of a corporation. Indeed, even in limited partnerships it is not clear that the designation of general partners in the certificate actually prevents limited partners from binding the firm if they are represented to be general partners. Any costs to LLC members are mitigated under the chapter by requiring the third party to prove that one who was not designated as a manager in the certificate or operating agreement was actually or apparently authorized to act as one.

Some LLC statutes explicitly provide that a debt can be contracted or liability incurred for an LLC only by a member in a member-managed LLC. See, e.,Y., Florida Section 608.424(2). In some statutes the provisions are subject to contrary terms in the articles of organization. It is not clear whether such provisions are intended to supplant the law of agency, so that no nonmember can contract for debts of a member-managed LLC even if the non-member would otherwise be authorized under the law of agency. If so, this may unduly increase creditors' costs of dealing with LLCs. Thus, a strong argument can be made that rules restricting nonmembers' authority should be subject to the parties' agreement and agency law.

This section is not intended to preclude an LLC from authorizing any person, including a member in a manager-managed LLC or a non-member in either kind of LLC, to act as an agent, just as a corporation can designate a shareholder or a third party to serve in an agency capacity.

This section distinguishes between the actual authority of managers and the members' and managers' apparent authority to bind the LLC in transactions with third parties. The Committee adopted an approach similar to that found in the Maryland Act. Under Maryland Section 4A-401, any person may be vested by the members with a broad continuum of management functions ranging from none, to those analogous to a corporate officer (i.e., administrative but not "policy-setting" management functions), to those associated with a general partner of a limited partnership (i.e., both administrative and policy-setting functions). However, a member's or manager's apparent authority under section 301 is not affected by the extent of his or her actual authority granted by the members. Several members of the Committee believe that it is unnecessary and unwise to create any apparent authority under the chapter for those persons in whom management rights are vested (i.e., members in a member-managed LLC or managers in a manager-managed LLC). In their view, the task of demonstrating actual or apparent authority under principles of agency is not so burdensome that it is necessary to create the presumption that each member of the management "group" (whether managers or members) is an agent of the LLC for carrying on its business in the usual way. This view reflects an orientation that is closer to the corporate model, in which none of the directors of a corporation are given apparent authority by statute to bind the corporation. In contrast, the view underlying this Section 301 is patterned after the partnership model, in which each of the general partners in a general or limited partnership have the power to bind the partnership. The proponents of the partnership model believe that it conforms more closely to the expectations of third parties and will serve as a great convenience to most LLCs. Further, the partnership model may also help to avoid income tax classification as a corporation, especially with regard to the corporate characteristic of centralized management and, perhaps, continuity of life.

This section grants broad apparent authority to those persons in whom management is vested to bind the LLC to all transactions in the usual way of the business and affairs of the LLC. The section is based on UPA Section 9, with additional language dealing with manager-managed LLCs. Some Committee members advocated allowing the LLC to limit the apparent authority of such persons by setting forth the restrictions on the agent's authority directly in articles of organization or, indirectly, by a reference in the articles of organization that the operating agreement restricts the authority of all or certain agents. The problem with this approach is that it may impose excessive costs on creditors by forcing them to investigate agents' authority, thereby deterring them from dealing with LLCs. One compromise position would be to enforce such restrictions in real estate or similar transactions in which third parties would be likely to check the record in any event. Section 14-8-10.1(g) of the Georgia UPA follows a similar approach for statements of partnership. In most cases, however, a manager or member taking these actions could not bind the LLC because the transactions would not be in the usual way of the LLC's business in any event.

Kansas Section 17-7614 and Utah Section 48-2b-125 are generally consistent with this section. Colorado Section 7-80-406 and Texas art. 2.21 are also consistent, except that they apply to managers. Nevada Section 86.301 is consistent with respect to managers, but provides that, in a member-managed LLC, a member can contract for debts as provided in the operating agreement.

"Section 33-43-303. Limited liability company charged with knowledge of or notice to member of manager.

(A) Except as provided in subsection (B), notice to any member of any matter relating to the business or affairs of the limited liability company, and the knowledge of the member acting in the particular matter, acquired while a member or known at the time of becoming a member, and the knowledge of any other member who reasonably could and should have communicated the knowledge to the acting member, operate as notice to or knowledge of the limited liability company, except in the case of fraud on the limited liability company committed by or with the consent of that member.

(B) If the articles of organization provide that management of the limited liability company is vested in a manager or managers:

(1) notice to any manager of any matter relating to the business or affairs of the limited liability company, and the knowledge of the manager acting in the particular matter, acquired while a manager known at the time of becoming a manager, and the knowledge of any other manager who reasonably could and should have communicated the knowledge to the acting manager, operate as notice to or knowledge of the limited liability company, except in the case of a fraud on the limited liability company committed by or with the consent of that manager; and

(2) notice to or knowledge of any member of a limited liability company while the member is acting solely in the capacity of a member is not notice to or knowledge of the limited liability company."

This section is based on UPA Section 12, with changes to deal with manager-managed LLCs.

The Committee had considerable difficulty with the question of the extent to which the LLC should be liable for members' wrongs. This question is not dealt with in Section 301, which applies only to contract-type situations in which the appearance of authority is relevant. Most LLC statutes provide that "no . . . liability [shall be] incurred by" an LLC except by a manager if the firm is managed by managers or a member if member-managed. See, e.g., Wyoming Section 17-15-117. This language seems to apply to tort as well as contract liability although, if the rule is "except as otherwise provided . . . in the articles of organization," this exception obviously should not apply to non-consensual tort liability.

Early in its deliberations, the Committee approved the following provisions, based generally on UPA Sections 13-14:

Sections . LIMITED LIABILITY COMPANY BOUND BY MEMBER OR MANAGER'S WRONGFUL ACT.

(A) EXCEPT AS PROVIDED IN SUBSECTION (B), WHERE, BY ANY WRONGFUL ACT OR OMISSION OR OTHER ACTIONABLE CONDUCT OF ANY MEMBER, ACTING IN THE ORDINARY COURSE OF THE BUSINESS OF THE LIMITED LIABILITY COMPANY, OR OTHERWISE WITH AUTHORITY, LOSS OR INJURY IS CAUSED TO ANY PERSON. OR ANY PENALTY IS INCURRED, THE LIMITED LIABILITY COMPANY IS LIABLE THEREFOR TO THE SAME EXTENT AS THE MEMBER SO ACTING OR OMITTING TO ACT.

(B) IF THE ARTICLES OF ORGANIZATION PROVIDE THAT MANAGEMENT OF THE LIMITED LIABILITY IS VESTED IN A MANAGER OR MANAGERS:

(1) WHERE BY ANY WRONGFUL ACT OR OMISSION OR OTHER ACTIONABLE CONDUCT OF ANY MANAGER, ACTING IN THE ORDINARY COURSE OF THE BUSINESS OF THE LIMITED LIABILITY COMPANY, OR OTHERWISE WITH AUTHORITY, LOSS OR INJURY IS CAUSED TO ANY PERSON, OR ANY PENALTY IS INCURRED, THE LIMITED LIABILITY COMPANY IS LIABLE THEREFOR TO THE SAME EXTENT AS THE MANAGER SO ACTING OR OMITTING TO ACT: AND

(2) THE LIMITED LIABILITY COMPANY IS NOT LIABLE FOR THE ACT OF ANY MEMBER OF A LIMITED LIABILITY COMPANY ACTING SOLELY IN THE CAPACITY OF A MEMBER.

Sections . LIMITED LIABILITY COMPANY BOUND BY MEMBER'S OR MANAGER'S BREACH OF TRUST

(A) EXCEPT AS PROVIDED IN SUBSECTION (B), THE LIMITED LIABILITY COMPANY IS BOUND TO MAKE GOOD THE LOSS WHERE A MEMBER, ACTING WITHIN THE SCOPE OF THE MEMBER'S APPARENT AUTHORITY, RECEIVES MONEY OR PROPERTY OF A PERSON WHO IS NOT A MEMBER OR MANAGER OF THE LIMITED LIABILITY COMPANY AND MISAPPLIES IT.

(B) IF THE ARTICLES OF ORGANIZATION PROVIDE THAT MANAGEMENT OF THE LIMITED LIABILITY COMPANY IS VESTED IN A MANAGER OR MANAGERS:

(1) THE LIMITED LIABILITY COMPANY IS BOUND TO MAKE GOOD THE LOSS WHERE A MANAGER ACTING WITHIN THE SCOPE OF THE MEMBER'S APPARENT AUTHORITY RECEIVES MONEY OR PROPERTY OF A THIRD PERSON AND MISAPPLIES IT; AND

(2) THE LIMITED LIABILITY IS NOT BOUND TO MAKE GOOD THE LOSS FOR PROPERTY RECEIVED BY A MEMBER ACTING SOLELY IN THE CAPACITY OF A MEMBER AND MISAPPLIED BY THAT MEMBER.

(C) THE LIMITED LIABILITY COMPANY IS BOUND TO MAKE GOOD THE LOSS WHERE IN THE COURSE OF BUSINESS OF THE LIMITED LIABILITY COMPANY IT RECEIVES MONEY OR PROPERTY OF A THIRD PERSON AND THE MONEY OR PROPERTY SO RECEIVED IS MISAPPLIED BY ANY MEMBER OR MANAGER WHILE IT IS IN THE CUSTODY OF THE LIMITED LIABILITY COMPANY.

However, the Committee ultimately decided not to endorse these provisions because it was uncertain about two questions. First, it is not clear to what extent LLC members should be regarded as "servants" of the LLC under the general law of vicarious liability. The important distinction between members of an LLC and partners in a general partnership is that the members of an LLC may be passive non-employees.

Second, the Committee was uncertain about whether, even if members in member-managed LLCs should be treated as servants under the general law of vicarious liability, the same should be true of a member acting solely as a member in a manager-managed LLC. A member who is acting in the capacity of a member may or may not be acting as a servant of the LLC in the course of its business even in a manager-managed LLC. Therefore, the Committee was unwilling to endorse a rule that would, in effect, allow the LLC to "opt out" of vicarious tort liability simply by vesting management in managers. This, of course, would be different from using the articles to limit authority as to consensual creditors.

"Section 33-43-304. Liability of members to third parties.

(A) A person who is a member of a limited liability company is not liable, solely by reason of being a member, under a judgment, decree, or order of a court, or in any other manner for a debt, obligation, or liability of the limited liability company, whether arising in contract, tort, or otherwise or for the acts or omission of any other member, manager, agent, or employee of the limited liability company.

(B) Each individual who renders professional services as an employee of a domestic or foreign limited liability company is liable for a negligent or wrongful act or omission in which he personally participates to the same extent as if he rendered the services as a sole practitioner. An employee of a domestic or foreign limited liability company which renders professional services (as defined in Section 33-43-102) is not liable; however, for the conduct of other employees of the limited liability company unless he is at fault in appointing, supervising, or cooperating with them.

(C) A domestic or foreign limited liability company which renders professional services (as defined in Section 33-43-102) whose employees perform professional services within the scope of their employment or of their apparent authority to act for the limited liability company is liable to the same extent as its employees.

(D) Except as otherwise provided by statute, the personal liability of a member of a domestic or foreign limited liability company which renders professional services (as defined in Section 33-43-102), is no greater in any respect than that provided in Section 33-43-304."

This section sets forth one of the major characteristics of the LLC-a member, as such, is not liable for the debts and obligations of the LLC or for the conduct of managers, employees, agents or members of the LLC. Virginia Section 13.1-1019 is consistent. Wyoming Section 17-15-113, Florida Section 608.436 and Kansas Section 17-7620 are similar but do not specify non-liability "solely by reason" of member status.

This section is not intended to relieve a member from liability arising out of the member's own acts or omissions to the extent those acts or omissions would be actionable, either in contract or in tort, against the member if the member were acting in his individual capacity. For instance, a member may become liable in contract to a third party creditor of the LLC through a guarantee or similar arrangement. A member also may become liable in tort for claims against the LLC as a result of the member's negligence in appointing, supervising, or participating in the activity in question with a manager, employee, agent or other member of the LLC. Accordingly, with respect to his liability for the debts and obligations of the LLC, a member is analogous to a limited partner or a stockholder. The Committee takes no position as to whether or not the concept of piercing the corporate veil applies to an LLC.

This section does not address a manager's liability for the debts and obligations of the LLC because, like a corporate officer, a manager serves only as an agent of the LLC. Consequently, as a general rule, there should be no grounds for imposing such liability on the manager.

Note, by comparison, that members' liability under Articles 5 and 6 for failure to make agreed contributions and for wrongful distributions technically is to the LLC, rather than to individual creditors, although the members' liability can be enforced in bankruptcy for the benefit of creditors. The liability is not based on the size of the LLC's debts, but rather on the extent of the member's promised contribution to the LLC.

"Section 33-43-305. Parties to actions.

A member of a limited liability company is not a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except where the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement."

Because members, in their status as such, are not liable for the debts of the LLC, they should not be proper parties in third-party actions against the LLC. This section is intended to affirm that the LLC is an entity separate and apart from its members for purposes of litigation by or against the LLC. For similar provisions see Kansas Section 17-7631; Utah Section 48-2b-112; Nevada Section 86.381; Texas art. 4.03 and Virginia Section 13.1-1020. Note that Section 1102 does not provide for derivative suits unless authorized under the operating agreement, in which event the terms of the operating agreement may require or permit a member to be a party to the derivative action.

Section 33-43-401. Management.

(A) Unless an `articles of organization' vests management of the limited liability company in a manager or managers, management of the business or affairs of the limited liability company shall be vested in the members.

(B) If an articles of organization vests management of the limited liability company in one or more managers, then the manager or managers shall have exclusive power to manage the business and affairs of the limited liability company except to the extent otherwise provided in an operating agreement. Unless otherwise provided in an operating agreement, managers:

(1) shall be designed, appointed, elected, removed, or replaced by a vote, approval or consent of more than one-half by number of the members;

(2) except as provided in paragraph (C) of this section need not be members of the limited liability company or natural persons; and

(3) unless they are sooner removed or sooner resign, shall hold office until their successors shall have been elected and qualified.

(C) `All of the managers of a limited liability company which renders a "professional service" as defined in Section 33-43-102 shall be individuals who are authorized by law in this or another state to render a professional service which is rendered by the limited liability company.'"

The emerging LLC model adopted by most LLC statutes provides, as a "default rule", for management directly by the members. This is based on several important factors. First, because LLC interests are not freely transferable, members who are dissatisfied with their investments must resort to active involvement rather than simply exiting the firm like stockholders of a public corporation. In this critical respect, LLCs necessarily resemble close corporations. Second, vesting management in one or more managers may result in centralized management for tax purposes under Section 7701 of the Internal Revenue Code. Accordingly, a company would need to lack free transferability and continuity of life to qualify for partnership tax treatment. Third, although many LLCs may prefer centralized management, default provisions should anticipate the preferences of the relatively small LLCs that are most likely not able to incur the costs of entering into a customized operating agreement. Those firms are likely to prefer management directly by members.

The management authority and duties of a member (in a member-managed LLC) are analogous to those of a general partner in a limited partnership-that is, they can manage and make policy decisions (subject to any restrictions in the operating agreement or this Chapter).

This section is based on the premise that LLC members should have maximum flexibility to agree on management and governing provisions. Accordingly, this section rejects the approach of Colorado Section 7-80-01, which mandates management by managers. Because the parties can restrict or enlarge the management rights of any one member, manager or group or class of members or managers by the terms of the operating agreement, the persons in whom management is vested may be given in the operating agreement a continuum of management rights and powers ranging from those of a corporate officer (i.e., generally administrative but not "policy-setting" management authority) to those of a general partner or a combined corporate officer and director (i.e., both administrative and policy-setting management authority).

It is important to keep in mind that the rights and duties under this section are separate from the authority of members and managers to bind the LLC provided for in section 301. Irrespective of the provisions in the operating agreement, whether an LLC is "manager-managed," as that phrase is used in the Chapter, depends on whether articles of organization so provide. Similarly, irrespective of the operating agreement, if the articles provide for management by managers, the managers have the authority set forth in Section 301 except to the extent that third parties are aware of restrictions on this authority. However, no provision in the articles of organization is necessary to provide for management by one or more specifically designated members or other persons under an operating agreement pursuant to Section 401. In other words, the statute makes clear that the filing is necessary only for purposes of binding third parties. This avoids a potential trap for the unwary under close corporation statutes that require a filing in order for the firm to be stockholder-managed. Compare Zion v. Kurtz, 405 N.E.2d 681 (N.Y. 1980) (required filing not made, but court enforced shareholder agreement on estoppel theory).

Subsection (B) is intended to be a simple default provision for manager-managed companies that do not have detailed operating agreements. It is expected that larger, more sophisticated, companies will be able to craft more detailed provisions in operating agreements that suit their specific needs. For smaller and simpler LLCs that are likely to adopt default rules, these rules should not be unduly formal or detailed. In any event, it is difficult if not impossible to draft precise statutory standards that would generally be acceptable to every company in every situation. Parties should be able to weigh the additional contracting costs against the benefits to be derived from adopting customized rules.

Consistent with these premises, and like RULPA, this section does not specify any qualifications for managers or persons vested with governance authority. Moreover, the members have the flexibility to follow the partnership model and designate managers who, like a general partner of a limited partnership, may serve in such capacity for an indefinite period of time, or to follow the corporate model and provide for election, removal and replacement of managers on an annual or other basis. Annual meetings for election of managers are unnecessarily costly for the small LLCs that are likely to operate by the default rule. Companies that want annual meetings or other corporate formalities may provide for them in operating agreements.

Some LLC statutes provide for removal of managers with or without cause in the manner provided in the operating agreement. Because the managers clearly are agents of the firm, the members ordinarily would expect to be able to remove the managers, probably by the same vote required for election, at least in the absence of contrary agreement. Even if the managers are employed pursuant to an employment agreement that provides for a definite term, the members probably have the authority to remove the manager from office, subject to a cause of action for damages for premature termination.

LLC managers exercise their management power in accordance with the rules set forth in the operating agreement. Voting by managers is provided for in Section 403.

Florida Section 608.422, Kansas Section 17-7612, Nevada Section 86.291, Utah Section 48-2b-125, and Wyoming Section 17-25-116 provide for management to be vested in the members unless otherwise provided in the articles of organization.

Texas art. 2.12 and Virginia Sections 13.1-1022 and -1024 provide for management by members but permit parties to agree in the regulations or operating agreement to management by managers.

Virginia Section 13.1-1024(D)-(F) and Texas art. 2.15 are the primary sources of subsection (B). Colorado Sections 7-80-402 to -405 provides detailed rules regarding annual election, removal and classification of managers. Florida Section 608.422 and Wyoming Section 17-15-116 provide for the annual election of managers.

"Section 33-43-402. Fiduciary duties of managers and members.

Unless otherwise provided in an operating agreement:

(A) A member or manager shall not be liable, responsible, or accountable in damages or otherwise to the limited liability company or to the members of the limited liability company for any action taken or failure to act on behalf of the limited liability company unless the act or omission constitutes gross negligence or wilful misconduct.

(B) Every member and manager must account to the limited liability company and hold as trustee for it any profit or benefit derived by that person without the consent of more than one-half by number of the disinterested managers or members, or other persons participating in the management of the business or affairs of the limited liability company, from (1) any transaction connected with the conduct or winding up of the limited liability company; or (2) any use by the member or manager of its property including, but not limited to, confidential or proprietary information of the limited liability company or other matters entrusted to the person as a result of his status as manager or member."

This section sets forth the fiduciary duties of managers and managing members of LLCs. This section is based on the premise that such managers and managing members are comparable in many ways to corporate officers and directors and general partners of a limited partnership in that they are the agents of the LLC and have policy-making authority. However, in interpreting and applying this section it is important to observe distinctions between types of business entities and among specific firms.

The duties defined in this section are the "default" duties that apply in the absence of contrary agreement. LLC members can define or limit the members' and managers' duties in the operating agreement or by informed consent at the time of the transaction. This is consistent both with UPA Section 21 and with Delaware RULPA Section 17-1101(c)-(d). For example, the operating agreement may enlarge or constrict the manager's duty of care, or may permit the manager to engage in outside activities or transactions with the LLC that would otherwise breach the duty of loyalty.

Subsection (A) sets forth the gross negligence standard of care for those participating in management. This is similar to the standard commonly applied to corporate directors, managing partners, or general partners of limited partnerships. ln general, as long as managers avoid self-interested and grossly negligent conduct, their actions are protected by the business judgment rule. With respect to general partnerships, see RUPA Section 404(d).

Although the duty of care has been formulated in similar terms for managers of all types of firms, as noted above there are important differences among firms that may result in variations in applying the general standard. The duty of care may be lower in a general partnership because the partners' individual liability makes it likely not only that managing partners will manage carefully, but that non-managing partners will at least take an active interest in management. At the other end of the spectrum, limited partners or shareholders in a publicly-traded corporation may not participate in management and may rely more heavily on the fiduciary duties of the general partners or directors. LLCs have members with limited liability, but can be expected to be closely held because management rights are not freely transferable, and therefore may lie between these two extremes. Moreover, there will be differences among LLCs. It is likely that the precise boundaries of the duty will be left to develop by case law and operating agreement rather than by statutory provision.

Subsection (B), which is based on UPA Section 21, sets forth the duty of loyalty of LLC managers and managing members-that is, the duty to act without being subject to an obvious conflict of interest. The more extensive corporate rules on conflict of interest are unwieldy in the informal context of closely held LLCs.

The duty of loyalty under this section is defined to include two major components: "self-dealing," or a manager's reaping an individual profit by or through an LLC transaction in which the manager participated; and liability for appropriating for personal use property belonging to the LLC without the firm's consent. Such appropriation would amount to, in effect, unauthorized compensation. This duty is based on the fact that LLC property is owned by the firm as a whole rather than by individual managers or members. Note that "property" is defined to include records of the LLC that are in the manager's control. Because of the similarity of this section with the UPA, it is anticipated that the courts will interpret a section such as this to impose duties similar to those in the general partnership, including the duty not to appropriate partnership opportunities.

Subsection (C) makes clear that members who do not act as managers, like corporate shareholders and limited partners, do not have the fiduciary duties of managers described in this Chapter. However, they may have fiduciary duties if they engage in control transactions or act in some capacity other than merely as a member. See Donahue v. Rodd Electrotype Company of New England. Inc., 328 N.E.2d 505 (Mass. 1975) (liability of controlling shareholder in close corporation). Moreover, even if a member is not involved in management, the member has no right to appropriate for personal use property belonging to the LLC. See Tri-Growth Centre City. Ltd. v. Silldorf, 265 Cal. Rptr. 330 (Cal. App. 1989). In addition, members, like other contracting parties, must exercise their powers in good faith. For example, it may be bad faith to expel a member solely or primarily in order to appropriate the value of the member's interest. In general, while the Committee believes that some type of "partner-like" duties should be imposed upon non-managing members, it concluded that the exact nature of those duties and whether they should be applied to all members or only managing members is an area best left to the courts.

Colorado Section 7-80-409, Maryland Section 4A-405 and Virginia Section 13.1-1026 authorize members to engage in business transactions with the company. It is not clear why such a rule regarding managers or members is necessary. The rule muddies the prohibition on self-interested transactions and creates the risk of "negative pregnant" construction that could limit members' and managers' freedom to engage in non-self-dealing transactions.

"Section 33-43-403. Voting.

(A) Unless otherwise provided in an operating agreement or this chapter, and subject to subsection (B), the affirmative vote, approval or consent of more than one-half by number of the members, if management of the limited liability company is vested in the members, or of the managers if the management of the limited liability company is vested in managers, shall be required to decide any matter connected with the business of the limited liability company.

(B) Unless otherwise provided in writing in an operating agreement, the affirmative vote approval of all members shall be required to:

(1) amend a written operating agreement; or

(2) authorize a manager or member to do any act on behalf of the limited liability company that contravenes a written operating agreement, including any written provision thereof which expressly limits the purpose, business, or affairs of the limited liability company or the conduct thereof."

This section discusses the rights among the members or managers to control management of the LLC. The power of the members or managers to bind the LLC in transactions with third parties is dealt with in Article 3. This section states default rules, subject to variation in the operating agreement.

With the exception of Arizona Section 29-681.D, all of the LLC statutes reviewed by the Committee that allocate voting rights among members provide that members vote according to their capital contributions, as in the case of limited partnerships, rather than per capita as in general partnerships. Although this capital-based voting system sensibly aligns members' voting rights with their investment, the Committee adopted a default per capita rule because of potential problems of determining capital contributions, particularly in the sort of informal firms that are likely to adopt the default rule. For instance, capital-based voting would necessitate a determination of the parties' relative contributions each time a vote is to be taken. Moreover, it would not be clear whether a member's unperformed promise to contribute cash, property or, in particular, services, should be considered.

Existing LLC statutes usually do not specify what vote of managers and members is necessary to approve a transaction in the absence of contrary agreement. Some default rule is necessary for the informally run business, although it is expected that the parties will provide for more detailed rules in the operating agreement. Accordingly, this section rejected the approach of Colorado Sections 7-80-707 to -711 and Kansas Section 17-7613, which provide detailed rules concerning voting, meetings, and quorum.

This section adopts the majority vote rule that applies to partners under UPA Section 18(h). Note that such vote or consent may be made through course of dealing or failure to dissent within a reasonable time after the transaction. In other words, the members' or managers' right to vote on an ordinary transaction may arise only if they manifest a difference of opinion regarding a proposed transaction.

Legislatures that want to provide specific default provisions as to what can be decided by a majority of the members might consider the following language:

(1) RESOLVE ANY DIFFERENCES AS TO ANY MATTER CONNECTED WITH CARRYING ON IN THE USUAL WAY THE BUSINESS OR AFFAIRS OF THE LIMITED LIABILITY COMPANY:

(2) AUTHORIZE A MANAGER, MEMBER OR OTHER PERSON TO DO ANY ACT ON BEHALF OF THE LIMITED LIABILITY COMPANY IN CONNECTION WITH ITS BUSINESS AND AFFAIRS THAT IS OTHERWISE NOT WITHIN THE AUTHORITY OF THE MANAGER OR MEMBER UNDER THIS ACT OR AN OPERATING AGREEMENT, OR THEREAFTER TERMINATE THE AUTHORITY SO GRANTED;

(3) AUTHORIZE THE DISTRIBUTION OF CASH OR OTHER PROPERTY OF THE LIMITED LIABILITY COMPANY TO ITS MEMBERS;

(4) AUTHORIZE THE REPURCHASE BY THE LIMITED LIABILITY COMPANY OF ALL OR A PART OF A MEMBER'S INTEREST IN THE LIMITED LIABILITY COMPANY: OR

(5) AUTHORIZE ANY AMENDMENT TO THE ARTICLES OF ORGANIZATION.

The more difficult question, which the Committee considered at length, is whether and to what extent the statute should provide, in the absence of contrary agreement, for a unanimous vote for certain acts. Members of closely held LLCs may expect to be able to veto "important" decisions, but there are significant problems with a unanimity rule. Negotiating the consent of all members even in a relatively small LLC may be costly. A minority member may seek to use his veto power to exact concessions from the other members. A veto power does not offer large countervailing benefits to a minority in an LLC because the majority cannot impose additional personal liability on an LLC member as they can in a general partnership. Moreover, in an informal LLC (in which the unanimity rule would apply), a disgruntled member is protected by his statutory right to withdraw and cause a dissolution, or at least be paid the value of his interest. While the majority can use the same power to dissolve to resolve a deadlock, the dissenter can exercise hold-up power by blocking continuation of the LLC. Conversely, if the dissenter withdraws, LLC statutes generally allow the remaining members to carry on the LLC. Although the potential harm from a statutory default rule is mitigated by the fact that parties can draft around the rule, it may be costly to anticipate problems with the statutory rule and to draft a customized agreement. Thus, the statutory rule may inflict costs on LLCs for which unanimity is inappropriate. Moreover, the statutory rule remains the default for cases that are not covered by the agreement and may even be applied contrary to the parties' expectations where the agreement did not clearly avoid the statute.

The Committee also had difficulty determining the transactions to which a unanimity rule should apply. Extending the veto to extraordinary transactions as in UPA Section 18(h) may raise a difficult line-drawing problem. Applying the unanimity provision to an amendment of the operating agreement raises questions concerning when an act amends the agreement because the operating agreement may be oral and may even include the parties' course of dealing. Any change in the LLC's method of operation arguably could require unanimous consent. Although some LLCs undoubtedly will want to provide for unanimity at least with regard to some matters, it is difficult to draft a statute that sufficiently or adequately identifies the matters with respect to which most LLCs will want a veto power.

This section represents an attempt to anticipate the expectations of the parties, recognizing the costs and benefits of a unanimity rule. The Committee concluded that if the owners of an LLC put certain matters in writing, they probably have decided that these matters are important. Accordingly, in the absence of contrary written agreement, it is appropriate to assume that the parties would not expect these terms to be changed except by a unanimous vote. Several members of the Committee believe that oral operating agreements ought also be protected by a unanimous default rule.

"Section 33-43-404. Limitation of liability and indemnification of members and managers.

An operating agreement may:

(A) eliminate or limit the personal liability of a member or manager for monetary damages for breach of any duty provided for in Section 33-43-402; and

(B) provide for indemnification of a member or manager for judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which a person is a party because the person is or was a member or manager."

This section, like Section 402, makes clear that the duties of LLC managers and members are subject to variation by the agreement. Indeed, consideration should be given to omitting subsection (A) as redundant of Section 402. Some LLC statutes, including Colorado Section 7-80-410, Texas art. 2.20, Kansas Section 17-7604 and Nevada Sections 86.411 to 86.481, adopt corporate-type indemnification provisions. However, this section provides for more flexibility and less formality than the corporate model, which is designed for firms with dispersed holders. If the parties desire, they may adopt the more extensive corporate indemnification provisions in the operating agreement.

Other comparisons:

Florida Section 608.404 and Wyoming Section 17-15-104(a)(ix) permit indemnification of managers and members except to the extent of an adjudication of negligence or misconduct in the performance of duty. Virginia Section 13.1-1009(16) permits indemnification and Section 13.1-1025 provides for mandatory limitation of the liability of members or managers to the LLC or its members, for other than willful misconduct or knowing criminal violations, to the greater of $100,000 or preceding year's cash compensation, and permits the elimination of all liability except for willful misconduct or knowing criminal violations.

"Section 33-43-405. Records and information.

(A) Unless otherwise provided in writing in an operating agreement, a limited liability company shall keep at its principal place of business the following:

(1) a current and a past list, setting forth the full name and last known mailing address of each member and manager, if any, set forth in alphabetical order;

(2) a copy of the articles of organization and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the articles of amendment have been executed;

(3) copies of the limited liability company's federal, state, and local tax returns and financial statements, if any, for the six most recent years or, if those returns and statements were not prepared for any reason, copies of the information and statements provided to, or which should have been provided to, the members to enable them to prepare their federal, state, and local tax returns for the period;

(4) copies of any effective written operating agreements, and all amendments thereto, and copies of any written operating agreements no longer in effect;

(5) unless contained in writing in an operating agreement:

(a) a writing setting out the amount of cash, if any, and a statement of the agreed value of other property or services, if any, contributed by each member and the times at which or events upon the happening of which any additional contributions are to be made by each member;

(b) a writing stating events, if any, upon the happening of which the limited liability company is to be dissolved and its affairs wound up; and

(c) other writings prepared pursuant to a requirement, if any, in any operating agreement.

(B) Upon reasonable request, a member may, at the member's own expense, inspect and copy during ordinary business hours any limited liability company record, wherever the record is located.

(C) Members, if the management of the limited liability company is vested in the members, or managers, if management of the limited liability company is vested in managers, shall render, to the extent the circumstances render it just and reasonable, true and full information of all things affecting the members to any member and to the legal representative of any deceased member or of any member under legal disability.

(D) Failure of the limited liability company to keep or maintain any of the records or information required pursuant to this section shall not be grounds for imposing liability on any member or manager for the debts and obligations of the limited liability company."

Because the operating agreement may be oral, designating the location and specifying that certain records must be maintained provides members and prospective members with an opportunity to obtain needed documentation of their rights. Colorado Sections 7-80-411 and -712 and Virginia Section 13.1-1028 are generally consistent.

Subsection (A) is permissive in the sense that it only specifies where the relevant documents must be kept if they are prepared. Although the benefits of producing certain fundamental information regarding the LLC outweigh the costs of potential abuses and added litigation, it is not clear which records should be required, or what the consequences should be of failing to prepare the records. Presumably, LLCs generally will keep the records listed in this section for business and tax reasons. Moreover, most written agreements relating to such matters as contributions and events of dissolution would fall within the broad definition of an operating agreement and therefore would be required to be maintained by this section.

Many of the existing statutes provide for records concerning member contributions. These should not be required for LLC members any more than they are required for corporate shareholders, except to the extent necessary to inform members of their relative rights that are based upon contributions. The consensus of the Committee was that unless otherwise provided in the operating agreement, records would only be rebuttable evidence with respect to the matters set forth therein. In other words, there are no other sections of the chapter that refer to the records kept under this section as the basis on which rights or duties are to be determined.

Because any duty to prepare records must be provided for in the operating agreement, that agreement also should specify who in the LLC has this duty. This section also leaves it to the members to specify in the operating agreement who bears the cost of reproducing information if the records were not prepared or maintained as required. The Committee concluded that in the absence of contrary agreement the LLC should bear the expense of preparing records which were not prepared or were incorrectly prepared.

Subsection (C) is based on the Georgia version of UPA Section 20. Georgia Code Ann. Section 14-8-20 (1989).

Because of the failure to specify in subsection (A) whose duty it is to keep the centralized records, at least one member of the Committee believes that the subsection (A) default rule should apply only to manager-managed LLCs and that each manager should have the duty to make sure accurate records are kept (obviously, subject to the operating agreement). In the case of member-managed LLCs, each member would have the right to obtain the records listed in subsection (A) from any other member who possesses or has access to such records, subject to the operating agreement.

Section 33-43-501. Contributions to capital.

A limited liability company interest may be issued in exchange for case, property, services rendered, or a promissory note, or other obligation to contribute cash or property or to perform services."

This section is modeled after RULPA Section 501 and Arizona Section 29-701.A. The Colorado, Virginia, Utah, Texas, and Nevada statutes are essentially identical, while neither Wyoming nor Florida permits contributions of services or obligations to perform services. Kansas permits the contribution of cash, property, services or the obligation to contribute services or other valuable consideration.

Allowing the promises of future property or services or guarantees to be consideration for a current interest in the LLC provides flexibility. A promise to contribute in the future is present consideration under long-standing contract principles. A question might arise concerning the different treatment of a "return" of the obligation, under section 502(B) below (i.e. the compromise of the obligation), from the return of other types of contributions, but the same rules should apply. Some Committee members believe that a promise should not be considered consideration until the promise is actually performed. The definition of consideration is intended to include the guarantee of an obligation of the limited liability company, although there is some question with respect to the valuation. The Committee discussed whether to expressly include guarantees in the list and concluded that although guarantees would be valid consideration for an LLC interest, they need not be expressly listed.

"Section 33-43-502. Liability for contributions.

(A) A promise by a member to contribute to the limited liability company is not enforceable unless set forth in a writing signed by the member.

(B) Unless otherwise provided in an operating agreement, a member is obligated to the limited liability company to perform any enforceable promise to contribute cash or property or to perform services, even if the member is unable to perform because of death, disability, or other reason.

(C) If a member does not make the required contribution of property or services, the member is obligated, at the option of the limited liability company, to contribute cash equal to that portion of value of the stated contribution that has not been made.

(D) Unless otherwise provided in an operating agreement, the obligation of a member to make a contribution may be compromised only with the unanimous consent of the members.

(E) Notwithstanding the compromise, a creditor of a limited liability company who extends credit or otherwise acts in reliance on that obligation after the member signs a writing which reflects the obligation and before the compromise may enforce the original obligation."

The Committee considered whether the chapter should provide a mechanism for enforcing the members' obligations to make contributions or should simply let the entity rely on general state law remedies. The Committee considered and rejected the following provision:

AN OPERATING AGREEMENT MAY PROVIDE THAT THE INTEREST OF A MEMBER WHO FAILS TO MAKE ANY CONTRIBUTION OR OTHER PAYMENT THAT THE MEMBER IS REQUIRED TO MAKE SHALL BE SUBJECT TO SPECIFIED REMEDIES FOR, OR SPECIFIED CONSEQUENCES OF, THE FAILURE. THE REMEDY OR CONSEQUENCE MAY TAKE THE FORM OF REDUCING THE DEFAULTING MEMBER'S INTEREST IN THE LIMITED LIABILITY COMPANY, SUBORDINATING THE DEFAULTING MEMBER'S INTEREST IN THE LIMITED LIABILITY COMPANY TO THAT OF THE NONDEFAULTING MEMBERS, A FORCED SALE OF THE INTEREST IN THE LIMITED LIABILITY COMPANY, FORFEITURE OF THE INTEREST IN THE LIMITED LIABILITY COMPANY, THE LENDING BY THE NONDEFAULTING MEMBERS OF THE AMOUNT NECESSARY TO MEET THE COMMITMENT, A FIXING OF THE VALUE OF THE MEMBER'S INTEREST IN THE LIMITED LIABILITY COMPANY BY APPRAISAL OR BY FORMULA AND REDEMPTION AND SALE OF THE MEMBER'S INTEREST IN THE LIMITED LIABILITY COMPANY AT THAT VALUE, OR OTHER REMEDY OR CONSEQUENCES.

The Committee also concluded that there should be no provision for creditors' rights in the event of compromise of an obligation, thus remitting creditors to state law on fraudulent conveyances. This is consistent with the fact that the articles of organization are not likely to contain a statement of the amounts contributed or obligated to be contributed to the LLC, as was formerly required in the case of a certificate of limited partnership prior to the 1985 RULPA amendments. Therefore, creditors are not likely to be relying on statements in any statutory filings when extending credit to the LLC and, accordingly, should have the same rights and remedies as creditors of a corporation in the case of the compromise of a shareholder's obligation.

The Committee suggests the following language, based on RULPA Section 502(c), for a statute that addresses the creditors' rights:

Colorado, Florida, Kansas, Maryland, Texas, Virginia and Wyoming have similar provisions. The Arizona Act limits this provision further by stating that the obligation is not enforceable by a creditor unless the member has specifically consented to the enforcement or the LLC has assigned the claim to the creditor. Arizona Section 29-702.C.

This section makes enforceable only written contribution obligations. Some Committee members suggested that, given the informality of some LLCs, a writing could frustrate expectations based on a clear oral agreement. However, the Committee concluded that this limitation on enforceability is appropriate. Wyoming, Florida, Colorado, Virginia, Texas, and Nevada require obligations to contribute to be written in order to be enforceable, while Kansas and Florida are less clear on the provision.

"Section 33-43-503. Sharing of profits.

Unless otherwise provided in writing in an operating agreement, each member shares equally in the profits."

This section provides that LLC members share per capita in profits unless otherwise agreed. Although virtually all LLCs with any degree of sophistication will want to have a capital account distribution scheme, the complexity of drafting a default scheme that meets expectations in all cases was not justified.

The Maryland, Virginia, Colorado, Utah and Texas statutes provide, consistent with RULPA, for capital-based profit and loss sharing. Wyoming, Florida, Kansas, and Nevada do not address the manner in which these items are to be dealt with if they are not mentioned in an operating agreement.

Some Committee members questioned whether this section serves any useful purpose and suggested, instead, that the chapter not include any statement of the rights of members other than regarding distributions, which are discussed in the following article 6. That would be consistent with the Florida Act.

Section 33-43-601. Sharing of interim distributions.

Except as otherwise provided in Sections 33-43-602 and 33-43-905, distributions of cash or other assets of a limited liability company shall be shared among the members and among classes of members in the manner provided in writing in an operating agreement. If an operating agreement does not so provide in writing, each member shall share equally in any distribution. A member is entitled to receive distributions described in this section from a limited liability company to the extent and at the times or upon the happening of the events specified in an operating agreement or at the times determined by the members or managers pursuant to Section 33-43-403."

The most important economic right in a partnership or LLC is the right to participate in cash flow. The distribution scheme operates not only to determine the right to participate in current distributions, but also the value of the members' interest in the limited liability company. This section provides for a per capita sharing rule based loosely on UPA Section 18(a). The excepted sections refer to the distribution rules in the event of withdrawal or liquidation, both of which will have to take into account the value of the member's interest.

The draft of the act presented at the August 11, 1991, American Bar Association meeting provided:

EXCEPT AS OTHERWISE PROVIDED IN AN OPERATING AGREEMENT, MEMBERS SHALL BE ENTITLED TO DISTRIBUTIONS FROM THE LIMITED LIABILITY COMPANY IN PROPORTION TO THEIR RESPECTIVE RIGHTS TO SHARE IN THE PROFITS OF THE LIMITED LIABILITY COMPANY.

The October 15, 1991, and March 4, 1992 drafts provided:

DISTRIBUTIONS OF CASH OR OTHER ASSETS OF A LIMITED LIABILITY COMPANY SHALL BE ALLOCATED AMONG THE MEMBERS AND AMONG CLASSES OF MEMBERS IN THE MANNER PROVIDED IN WRITING IN AN OPERATING AGREEMENT. IF AN OPERATING AGREEMENT DOES NOT SO PROVIDE IN WRITING, THE DISTRIBUTIONS SHALL BE MADE ON THE BASIS OF THE VALUE, AS STATED IN THE LIMITED LIABILITY COMPANY RECORDS REQUIRED TO BE KEPT PURSUANT TO SECTION _, OF THE CONTRIBUTIONS MADE BY EACH MEMBER TO THE EXTENT THEY HAVE NOT BEEN RECEIVED BY THE LIMITED LIABILITY COMPANY AND HAVE NOT BEEN RETURNED

These earlier versions provide, in conjunction with the sections of the chapter setting forth the basis upon which profit and loss will be allocated and a member's interest will be calculated, a format that minimizes the risk that the members will make a special allocation that lacks economic substance. For this and other reasons, a per capita rule is not necessarily a rule that many LLCs will want. However, the difficulty of having a provision defining profit sharing ratios based upon a capital account analysis was considered unnecessarily complex. Moreover, the Committee concluded that any LLC that would not go to the trouble to set forth an agreement as to distributions, which may be the most important aspect of many LLCs, would probably not keep adequate records of capital accounts, so the certainty that such a regime would provide would be illusory.

The Colorado, Utah and Virginia statutes provide for capital-based sharing under the statutory default rule. Wyoming and Florida do not address the issue of how distributions are to be made in the absence of an agreement, while Kansas does not address distributions at all. Arizona Section 29-703.B provides that pre-liquidation distributions will be shared equally after the members' contributions have been returned.

Consistent with RULPA Section 504, an overriding operating agreement provision must be in writing. Although this chapter generally eliminates the requirement of a written operating agreement, any deviation from a per capita division arrangement should be in writing because of the detail and potential for litigation involved in such a provision.

The last sentence of this section sets forth the time for the distributions other than on withdrawal or liquidation. In prior drafts this sentence was an independent section. Because section 601 deals exclusively with interim distributions, it is logical to combine the two sections. The cross-reference to Section 403 in the last clause in effect allows a majority of the members or the managers to determine when distributions may be made unless this would be contrary to a written operating agreement. The title has been changed to reflect that both Section 601 and Section 602 deal with interim distributions.

Most of the more recent LLC acts have provisions on the timing of distributions analogous to this one. See, e.g., Virginia Section 13.1-1031 and Colorado Section 7-80-601. The Florida, Kansas, and Wyoming Acts each provide that the LLC may distribute its property "from time to time." This may, in effect, accomplish the same thing that this section is intended to accomplish, but it is much less precise.

"Section 33-43-602. Distributions on an event of dissociation.

Upon the occurrence of an event of dissociation under Section 33-43-802 which does not cause dissolution, other than an event of dissociation described in Section 33-43-802(A)(3)(b), a dissociating member is entitled to receive any distribution which the member was entitled to receive prior to the event of dissociation. If an operating agreement does not provide the amount of or a method for determining the distribution to a dissociating member, the member shall receive within a reasonable time after dissociation the fair value of the member's interest in the limited liability company as of the date of dissociation based upon the member's right to share in distributions from the limited liability company."

Committee members differed concerning the manner in which the amount of the distribution was to be determined. The concept of fair value to some extent leaves the question to judicial interpretation as it does with existing statutory dissenter's rights provisions. It does not apply a minority discount or control premium concept as might be the case with "fair market value."

This section only applies to a dissociation "which does not cause dissolution." In the case of a dissociation that causes dissolution, the rules applicable to a winding up entity would apply to the departing member.

The Colorado and Virginia provisions apply only to resignations and not to dissociations generally. The Florida, Kansas, Maryland, Utah and Wyoming Acts have no corresponding provisions.

Any damages arising from wrongful withdrawal are recoverable under Section 802(C).

"Section 33-43-603. Distribution in kind.

Unless otherwise provided in an operating agreement:

(A) A member, regardless of the nature of the member's contribution, has no right to demand and receive any distribution from the limited liability company in any form other than cash.

(B) A member may not be compelled to accept from the limited liability company a distribution of any asset in kind to the extent that the percentage of the asset distributed to the member exceeds the percentage that the member would have shared in a cash distribution equal to the value of the property at the time of distribution."

Providing that no member may demand property in kind unless the operating agreement calls for it is consistent with the concept of the LLC as an entity. Subsection (B), which is based on RULPA Section 605, prevents the LLC from distributing a disproportionate amount of undesirable property upon a member. The Maryland statute contains a provision identical to subsection (A). The Colorado, Virginia, West Virginia, Arizona and Delaware statutes include provisions similar to both subsections.

"Section 33-43-603.1. Restrictions on distributors.

(A) No distribution may be made if, after giving effect to the distribution:

(1) the limited liability company would not be able to pay its debts as they become due in the usual course of business; or

(2) the limited liability company's assets would be less than the sum of its liabilities plus, unless otherwise provided in an operating agreement, the amount that would be needed, if the limited liability company were to be dissolved at the time of the distribution, to satisfy the preferential rights of other members upon dissolution which are superior to the rights of the member receiving the distribution.

(B) The limited liability company may base a determination that a distribution is not prohibited under subsection (A) either on:

(1) financial statements prepared on the basis of accounting practices and principles that are reasonable under the circumstances; or

(2) a fair valuation or other method that is reasonable under the circumstances.

(C) Except as provided in subsection (E), the effect of a distribution under subsection (a) is measured as of (a) the date the distribution is authorized if the payment occurs within one hundred twenty days after the date of authorization; or (b) the date 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 limited liability company's indebtedness to its general unsecured creditors, except to the extent subordinated by agreement.

(E) If terms of the indebtedness provide that payment of principal and interest is to be made only if, and to the extent that, payment of a distribution to members could then be made under this section, indebtedness of a limited liability company, including indebtedness issued as a distribution, is not a liability for purposes of determinations made under subsection (B).

(F) If 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 actually made."

These tests establish a safe harbor against member or manager liability. Like RMBCA Section 6.40, this section requires consideration of the rights both of creditors and equity owners that are superior to those of the recipient. RULPA Section 607 appears to allow the partnership to disregard all liabilities to partners on account of their partnership interests.

All LLC statutes enacted to date restrict distributions (and provide for liability for wrongful distributions), but except for the Maryland Act, which contains a nearly identical provision, see Maryland Section 4A-503, they treat the restrictions on making distributions in a more abbreviated manner than the alternative language proposed immediately above. Colorado, Florida, Kansas and Wyoming limit distributions only if the distributions render the limited liability company insolvent based upon a "fair value" test. These states and Virginia also distinguish between distributions of contributed capital and other distributions.

Because the Committee determined to leave the question of wrongful distribution to the general law of fraudulent conveyances, there is no section on liability for wrongful distributions. This is consistent with the Committee's decision in drafting Section 502 to omit any reference to liability to creditors for compromised contribution obligations. As discussed above, by using those rules, it will be possible for the law dealing with LLCs in the area to conform with the law as it develops in other areas with respect to fraudulent conveyances, rather than have a different or additional rule here.

"Section 33-43-603.2. Liability upon wrongful distribution.

(A) A member or manager who votes for or assents to a distribution in violation of an operating agreement of Section 33-43-603.1 is personally liable to the limited liability company for the amount of the distribution that exceeds the amount that could have been distributed without violating Section 33-43-603.1 or an operating agreement if it is established that such member or manager did not comply with Section 33-43-603.1.

(B) Each member or manager held liable under subsection (A) for a wrongful distribution is entitled to contribution:

(1) from each other member or manager who could be held liable under subsection (A) for the wrongful distribution; and

(2) from each member for the amount the member received in violation of Section 33-43-603.1. or an operating agreement.

(C) A proceeding under this section is barred unless it is commenced within two years after the date on which the effect of the distribution is measured under Section 33-43-603.1."

The Committee previously concluded that in the case of the rightful return of a contribution (one that is not in violation of the operating agreement and which does not render the LLC insolvent), this Chapter should not permit recovery. As originally drafted, this optional section resembled RULPA Section 608(b), which provides liability for wrongful distributions. Utah and Colorado provide for the recovery of contributions even when the funds were not distributed improperly. See Utah Section 48-26-133(4) and Colorado Section 7-80-607. The Committee, after extensive discussion, determined that LLC members should be treated like corporate shareholders. This alternative language is taken from RMBCA Section 8.33.

Section 33-43-701. Ownership of limited liability company property.

(A) Property transferred to or otherwise acquired by a limited liability company is property of the limited liability company and not of the members individually.

(B) Property may be acquired, held, and conveyed in the name of the limited liability company. Any interest in real property may be acquired in the name of the limited liability company, and title to any interest so acquired shall vest in the limited liability company rather than in the members individually."

The first sentence of subsection (A) is from RUPA Section 203. This section clarifies that, unlike a partnership under the UPA, LLC property is owned by the firm itself rather than nominally or otherwise by the members. This ensures that the "tenancy in partnership" which has confused partnership law will not plague LLCs. It is implicit in this section that a member may use LLC property for LLC purposes provided the member is authorized to do so.

With respect to subsection (B), most LLC statutes include provisions similar to Wyoming Section 17-15-118, which provides in part:

REAL AND PERSONAL PROPERTY OWNED OR PURCHASED BY A LIMITED LIABILITY COMPANY SHALL BE HELD AND OWNED, AND CONVEYANCE MADE, IN THE LIMITED LIABILITY COMPANY NAME.

This Wyoming provision could be interpreted to imply that any property not held in the LLC's name (e.g., held in the name of an individual member) is not LLC property. However, it probably was intended only to provide that an LLC can own and convey property in its name. The unintended implication is avoided under the language of subsection (A) of the Chapter. Conveyance of property of the LLC is covered by Section 702.

"Section 33-43-702. Transfer of property.

(A) Except as provided in subsection (E), property of the limited liability company held in the name of the limited liability company may be transferred by an instrument of transfer executed by any member in the name of the limited liability company.

(B) Property of the limited liability company that is held in the name of one or more members or managers with an indication in the instrument transferring the property to them of their capacity as members or managers of a limited liability company or of the existence of a limited liability company, if the name of the limited liability company is not indicated, may be transferred by an instrument of transfer executed by the persons in whose name title is held.

(C) Property of the limited liability company held in the name of one or more persons other than the limited liability company without an indication in the instrument transferring title to the property to them of their capacity as members or managers of a limited liability company or of the existence of a limited liability company, may be transferred free of any claims of the limited liability company or the members by the persons in whose name title is held to a transferee who gives value without having notice that it is property of the limited liability company.

(D) If the articles of organization provide that management of the limited liability company is vested in a manager or managers:

(1) title to property of the limited liability company that is held in the name of the limited liability company may be transferred by an instrument of transfer executed by any manager in the name of the limited liability company; and

(2) a member, solely by reason of being a member, shall not have authority to transfer property of the limited liability company."

This section is based on RUPA Section 302, with changes to deal with manager-managed LLCs. Note that, unlike UPA Section 10, the RUPA provision places the burden of proving lack of authority on the firm. Moreover, unlike UPA Section 10(3), this section provides that where property is held in a manner that does not disclose the firm's interest, the transfer is binding even if it is not authorized. Thus, this section provides more security for third parties than does UPA Section 10. Some LLC statutes flatly provide that documents relating to real and personal property transactions are binding if executed by one or more managers of a manager-managed LLC or by one or more members of a member-managed LLC. See, e P., Florida Section 608.425. These provisions go too far, in the Committee's view, in protecting transferees of real property at the expense of non-acting LLC members.

This section also provides rules protecting remote transferees. This goes beyond most LLC statutes, which merely provide that real and personal property owned or purchased in LLC name shall be held, owned and conveyed in LLC name (See, Section 702 and Commentary), and do not explain what happens if this directive is not followed. The omission of such rules is probably explained by the fact that many LLC statutes are patterned on limited partnership statutes, which incorporate rules on transfer of property from the UPA. Courts will probably apply partnership-type rules to the extent LLC statutes are unclear. Note that, unlike UPA Section 10,RUPA Section 302 and this section deny any "equitable" effect to transfers outside the chain of title.

"Section 33-43-703. Nature of limited liability company interest.

A limited liability company interest is personal property."

This is based upon RULPA Section 701. The member's interest in the LLC includes the member's share in the firm's profits and rights to receive distributions or return of contributions and is personal property.

The member's interest is defined in section 102(G) to include the members' financial rights - that is, the member's share in profits and losses and right to receive distributions. The member's interest differs from his broader rights in the firm. A member has both governance rights to participate in management and control and financial rights to share in profits and losses and receive distributions. In order to clarify the rights of members, assignees, creditors and heirs, the statute defines what a member conveys by transfer in the absence of contrary agreement. The most important differences between members' rights and their LLC interests are that the latter do not include the rights to participate in management and control and to inspect the books and records of the LLC.

"Section 33-43-704. Assignment of limited liability company interest.

(A) Unless otherwise provided in writing in an operating agreement:

(1) a limited liability company interest is assignable in whole or in part;

(2) an assignment entitles the assignee to receive, to the extent assigned, only the distributions to which the assignor would be entitled;

(3) an assignment of a limited liability company interest does not dissolve the limited liability company or entitle the assignee to participate in the management and affairs of the limited liability company or to become or exercise any rights of a member;

(4) until the assignee of a limited liability company interest becomes a member, the assignor continues to be a member and to have the power to exercise any rights of a member, subject to the other members' right to remove the assignor pursuant to Section 33-43-802(A)(3)(b);

(5) until an assignee of a limited liability company interest becomes a member, the assignee has no liability as a member solely as a result of the assignment; and

(6) the assignor of a limited liability company interest is not released from his liability as a member solely as a result of the assignment.

(B) Unless otherwise provided in an operating agreement, the pledge of, or granting of a security interest, lien, or other encumbrance in or against, any or all of the limited liability company interest of a member is not an assignment and shall not cause the member to cease to be a member or to cease to have the power to exercise any rights or powers of a member."

This section is based on Georgia RULPA Section 14-9-702, which is a significantly revised version of RULPA Section 702. All of its provisions are subject to contrary agreement.

With respect to subsection (a)(1), unlike a corporate shareholder, but like a partner, an LLC member can freely transfer only financial rights, at least in the absence of contrary agreement. The requirement of a writing is suggested because members would expect to have the right to assign and should not be denied the right by a mere oral agreement. Note that authority in the partnership context for invalidating restriction on transferability might be applied to LLCs. Because assignment of an LLC interest transfer only financial rights, it follows that a transfer does not constitute a change in membership and therefore does not dissolve the LLC. The transfer of management rights is dealt with in Section 706.

With respect to subsection (A)(2), there is some question concerning precisely which financial rights are transferred by assignment of an LLC interest. Not that section 102(G) defines "limited liability company interest" to include both profit and loss shares and distribution rights. Although assignees, as non-members, have no rights in undistributed property of the LLC, they may expect to receive all tax benefits and the burdens of the assigned interest under principles of flow-through taxation, including allocations of income, gain, loss, deductions and credits. Accordingly, Delaware Section 18-702(b)(1) provides:

AN ASSIGNMENT ENTITLES THE ASSIGNEE TO SHARE IN SUCH PROFITS AND LOSSES, TO RECEIVE SUCH DISTRIBUTION OR DISTRIBUTIONS, AND TO RECEIVE ALLOCATION OF INCOME GAIN LOSS DEDUCTION, OR CREDIT OR SIMILAR ITEM TO WHICH THE ASSIGNOR ENTITLED, TO THE EXTENT ASSIGNED...

The Committee decided not to include this provision. It concluded that the LLC statute should not deal with tax matters such as allocations. (In that connection, it should be noted that federal income tax law treats the assignee as a partner.) Moreover, the assignee's primary interest, apart from tax considerations, is in distributions as distinguished from profits or losses.

The chapter does not specifically define the "distributions" to which assignees have a right. An assignee probably would expect to receive, in the absence of contrary agreement, a financial interest analogous to that received by the transferee of corporate stock. This includes the member's capital contribution and residual claim to the assets of the LLC after all fixed claims, including debts to members, have been paid. It does not include rights the member has other than on account of his capital investment, such as repayment of loans, indemnification and accrued salaries.

Subsection (A)(3) is intended to deny assignees of LLC interests not only voting and management rights, but also rights to information and to compel dissolution of the LLC. Some language in this subsection is from Virginia Section 13.1-1039. Some LLCs may want to give assignees a right to compel winding up to prevent them from being completely frozen in, and a right to information they need for federal income tax purposes and to protect them from unfair dealing by the members. Language in subsection (C) concerning participation in management is from the Virginia Act. Note that if all of the financial interests are assigned, this might be deemed to dissolve the LLC by consent of all the members.

Under subsection (a)(4), the assignor retains management and information rights notwithstanding the transfer. However, the Delaware statute provides that a member ceases to be such upon the assignment of all of his LLC interest. Delaware Section 18-702(b)(2). This may be wise, since the assignor might lack adequate incentives to exercise control for the benefit of the LLC. But denying the assignor management rights would effectively separate ownership and control with respect to the assigned interest. If the assignor retains management rights, at least the assignor and assignee can contract or coordinate regarding exercise of these rights. Accordingly, perhaps the assignor should retain management and information rights in the absence of contrary agreement. Note also that if the assignor ceases to be a member on assignment, this may be deemed to cause a dissolution of the LLC. The Committee decided on the compromise solution of providing in section 802 that, subject to contrary provision in the operating agreement, the non-assigning members have the power to expel an assignor. This is consistent with Georgia RULPA Section 14-9-702(a)(4).

Subsection (as)(5) clarifies a point implicit in RULPA and the LLC statutes based on it that an assignee of an LLC interest does not have any of the obligations of a member until the assignee becomes a member, at which point, pursuant to Section 706, the assignee acquires obligations as well as rights of membership. Delaware RULPA Section 17-702(c) and Delaware Section 18-702(d) include similar language. Transfer of obligations is discussed below in the Commentary to Section 706.

Subsection (B) is based on Delaware Section 18-702(b). Even without such a provision, there is arguably no statutory impediment to issuing certificates. Issuing certificates may facilitate allocation of members' financial and voting interests in proportion to contributions, rather than per capita, by reducing problems related to the effect of distributions, valuation and disclosure. Thus, certification may be a desirable feature for many LLCs. However, perhaps caution should be used in adopting statutory language for certificates of LLC interests until the Internal Revenue Service has clarified its position regarding free transferability of interests in the context of LLCs.

Subsection (C) is from Delaware Section 18-702(a)(4), except that this section makes explicit that the encumbrance is not an assignment. The Committee concluded that an order or agreement directing that payments be made to the creditor should not, without more, result in the encumbrance being characterized as an assignment because the duration of the payments depends on discharge of the debt.

"Section 33-43-705. Rights of judgment creditor.

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the member's limited liability company interest with payment of the unsatisfied amount of judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the member's limited liability company interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to his limited liability company interest."

This section is based upon RULPA Section 703, with appropriate changes of terminology for LLCs.

Just as LLC members cannot individually assign the firm's specific property, so they cannot individually make it available to their creditors to satisfy their individual debts. Members can, however, pledge their interests in the LLC as security on a debt.

This section provides that unsecured creditors can obtain from a court a "charging order," which is a sort of attachment or garnishment, against the member's interest. Under this section, the charging order is available only to judgment creditors of members. It is therefore not available to others with rights against members other than those of judgment creditors. It also cannot be used by judgment creditors of members' assignees.

A charging creditor has the rights of an assignee to the extent that the interest is charged. This implies that the creditor need not foreclose on the interest to acquire the full rights of an assignee. If assignees are given any other rights under the statute, such as the right to compel a judicial dissolution, legislatures should consider risking the charging creditor's right to become an assignee contingent on judicial approval, in order to give a court an opportunity to consider the effect of the transfer on the non-debtor members.

While the section gives debtor members the benefit of any exemptions applicable under state law to LLC interests, the member cannot claim an exemption in specific LLC property, because the member lacks a direct ownership interest in specific LLC property.

"Section 33-43-706. Right of assignee to become a member.

(A) Unless otherwise provided in writing in an operating agreement, an assignee of a limited liability company interest may become a member only if the other members unanimously consent. The consent of a member may be evidenced in any manner specified in writing in an operating agreement, but in the absence of such specification, consent shall be evidenced by a written instrument dated and signed by the member.

(B) An assignee who becomes a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of a member under the articles of organization, any operating agreement and this chapter. An assignee who becomes a member also is liable for any obligations of the assignor to make contributions under Section 33-43-502. However, the assignee is not obligated for liabilities of which the assignee had no knowledge at the time he became a member and which could not be ascertained from any written records of the limited liability company kept pursuant to Section 33-43-405.

(C) Unless otherwise provided in writing in an operating agreement, an assignor is not released from his liability to the limited liability company under Section 33-43-502, whether or not an assignee of a limited liability company interest becomes a member.

(D) Unless otherwise provided in writing in an operating agreement, a member who assigns his entire limited liability company interest ceases to be a member or to have the power to exercise any rights of a member when the assignee becomes a member with respect to the entire assigned interest."

Subsection (A) is consistent with Texas Art. 4.07 and Delaware Section 18-704. The Virginia statute does not include the introductory phrase "unless otherwise provided in writing in an operating agreement ...." The purpose of this phrase is to give the members of an LLC the maximum flexibility to devise, by their mutual agreement, the extent to which all management and other rights associated with member status will be freely transferable by the members. For example, this language is intended to permit an operating agreement to provide for the admission of an assignee with the consent of a majority of the other members or with the consent of only the assigning member.

A statute that permits variation of the unanimous consent rule by agreement of the members will enable the members to create the corporate characteristic of free transferability of interests for federal income tax classification purposes, perhaps inadvertently. At present, it is not certain whether a majority consent requirement would be sufficient, in the view of the Internal Revenue Service, to avoid the characteristic of free transferability of interests. If it is considered desirable to adopt a statute that, to the extent possible, will ensure the absence of this corporate characteristic, the introductory phrase of subsection (A) should be deleted.

One point bearing on the desirability of such a provision is whether the Internal Revenue Service will issue a favorable published revenue ruling regarding the classification of an LLC under a statute that permits the variation by agreement of the unanimous consent rule for the admission of assignees as members. Although it is not certain at the present time, it appears that the Service will publish such a ruling.

Apart from tax considerations, giving LLCs flexibility in this regard is highly desirable. Restricting transfer of management rights may involve significant costs for LLCs, including the increased costs of negotiation and of giving each member the power to veto transfers for selfish reasons. These costs of requiring unanimous, or even majority, consent often outweigh the benefits of a veto power in an LLC, particularly if the firm has passive members and centralized management where members have little reason to care who their co-members are.

If the introductory phrase is deleted, the members may nevertheless agree among themselves to give their consent in the future to the admission of assignees as members. The effect of such an agreement on the tax classification of the LLC is uncertain at the present time, especially if the agreement to give consent is enforceable under state law by specific performance. A statutory provision that expressly precludes the specific enforcement of such agreements should be considered if it is desired to obtain maximum assurance that LLCs formed under the chapter will lack free transferability of interests.

Legislatures should consider whether subsection (A) should provide for permitting an assignee to become a member by majority vote unless otherwise provided in the operating agreement, particularly if this is determined not to create free transferability for tax purposes. This rule may be more consistent with the expectations of most LLC members than a unanimous vote rule.

Subsection (B) is based upon RULPA Section 704(b) with appropriate changes of terminology, the deletion of the reference to obligations to return unlawful distributions, and the reference to obligations which can be determined from a written operating agreement.

It is not clear as a policy matter that the assignor's obligations to the LLC should pass to the assignee, at least as long as the assignor remains obligated. Adding an obligor obviously benefits non-assigning members and creditors (which, in turn, may reduce the LLC's credit costs). At the same time, transfer of obligations reduces the marketability of LLC interests. This cost may exceed the benefit to the LLC because of the assignee's uncertainty about the extent of the assigned liabilities. Accordingly, perhaps the statute should provide that obligations are not assigned unless the parties so provide, or allow the members to contract around this consequence. At the least, as provided in this section, the statute should minimize the assignee's risk by eliminating liability for unknown contribution obligations not reflected in the LLC's official records.

Subsection (C) is based upon RULPA Section 704(c), except that the introductory phrase has been altered to remove any implication that an assignor might be released from liability if the assignee does not become a member and to remove any reference to liability for unlawful distributions. The assignor's retention of contribution obligations, like the transfer of this liability to assignees, may impede transferability, since the assignor may be forced to monitor the assignee to ensure that the contribution is made. However, permitting the assignor unilaterally to transfer these obligations could injure the other members and creditors by giving members with contribution obligations the incentive to transfer them cheaply to impecunious assignees. Moreover, particularly with respect to a service obligation, the members may be relying on performance by a particular member. Accordingly, it is sensible not to allow transfer of a member's obligations.

"Section 33-43-707. Powers of estate of a deceased or incompetent member.

If a member who is an individual dies or a court of competent jurisdiction adjudges the member to be incompetent to manage his person or property, the member's executor, administrator, guardian, conservator, or other legal representative shall have all of the rights of an assignee of the member's interest."

This provision differs from RULPA Section 705 by making it clear that the representative is an assignee, which would probably be the case in the absence of this section. No analogous provision appears in the Virginia, Nevada, Utah, Wyoming, Florida, Kansas or Texas Acts. The Colorado Act includes a counterpart of RULPA Section 705. There is also a similar provision in the Delaware Act.

Note that a member's divorced spouse, like the member's assignee, creditor or heir, may have community property or equitable distribution rights in the member's interest in the LLC, but not in specific firm property. Unlike these other types of claimants, the spouse may receive an interest in property of the LLC, including goodwill, rather than merely in its distributions.

Legislatures should consider the advisability of including analogous provisions dealing with dissolution, merger and other changes in form of members that are business associations.

This section should be read in conjunction with Section 802 regarding death as an event of dissociation, and the Commentary to that section regarding the members' ability to agree that death is not an event of dissociation.

Section 33-43-801. Admission of members.

(A) Subject to subsections (B) and (C), a person may become a member in a limited liability company:

(1) in the case of a person acquiring a limited liability company interest directly from the limited liability company, upon compliance with an operating agreement or, if an operating agreement does not so provide in writing, upon the written consent of all members; and

(2) in the case of an assignee of a limited liability company interest, as provided in Section 33-43-706.

(B) The effective time of admission of a member to a limited liability company shall be the later of:

(1) the date the limited liability company is formed; or

(2) the time provided in an operating agreement or, if not such time is provided therein, then when the person's admission is reflected in the records of the limited liability company.

(C) `A domestic limited liability company formed in South Carolina and which renders "professional service"' as is defined in paragraph (M) of Section 33-43-102, may only admit as members:

(1) individuals who are authorized by law in this or another state to render a professional service the limited liability company practices;

(2) general partnerships in which all the partners are licensed in one or more states to practice a professional service which the limited liability company practices, and at least one partner is authorized by law in this State to render such professional service; and

(3) professional corporations, domestic or foreign, authorized by law in this State to render a professional service which the limited liability company practices.

If a licensing authority with jurisdiction over a professional considers it necessary to prevent violations of the ethical standards of the profession, the authority by rule may restrict or condition, or revoke in part, the authority of limited liability companies subject to its jurisdiction to permit persons or organizations to be members."

This "switching" provision is based on Georgia RULPA Section 14-9-301, which is basically a simplified version of RULPA Section 301.

"Section 33-43-802. Events of dissociation.

(A) A person ceases to be a member of a limited liability company upon the occurrence of one or more of the following events:

(1) the member withdraws by voluntary act from the limited liability company as provided in subsection (c);

(2) the member ceases to be a member of the limited liability company as provided in Section 33-43-706;

(3) the member is removed as a member:

(a) in accordance with an operating agreement; or

(b) unless otherwise provided in writing in an operating agreement, when the member assigns all of his interest in the limited liability company, by an affirmative vote of a majority of the members who have not assigned their interests.

(4) unless otherwise provided in writing in an operating agreement or by the written consent of all members at the time, the member:

(a) makes an assignment for the benefit of creditors;

(b) files a voluntary petition in bankruptcy;

(c) is adjudicated a bankrupt or insolvent;

(d) files a petition or answer seeking for the member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation;

(e) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the member in any proceeding of this nature; or

(f) seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of the member or of all or any substantial part of the member's properties.

(5) unless otherwise provided in writing in an operating agreement or by the written consent of all members at the time, if within one hundred twenty days after the commencement of any proceeding against the member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation, the proceeding has not been dismissed, or if within one hundred twenty days after the appointment without his consent or acquiescence of a trustee, receiver, or liquidator of the member or of all or any substantial part of his properties, the appointment is not vacated on stayed or if within one hundred twenty days after the expiration of any stay, the appointment is not vacated;

(6) unless otherwise provided in writing in an operating agreement or by the written consent of all remaining members at the time, in the case of a member who is an individual;

(a) the member's death; or

(b) the entry of an order by a court of competent jurisdiction adjudicating the member incompetent to manager his person or estate.

(7) unless otherwise provided in writing in an operating agreement or by the written consent of all other members at the time, in the case of a member who is a trust or is acting as a member by virtue of being a trustee of a trust, the termination of the trust, but not merely the substitution of a new trustee;

(8) unless otherwise provided in writing in an operating agreement or by the written consent of all members at the time, in the case of a member that is a separate limited liability company, the dissolution and commencement of winding up of the separate limited liability company;

(9) unless otherwise provided in writing in an operating agreement or by the written consent of all members at the time, in the case of a member that is a corporation, the filing of a certificate of its dissolution or the equivalent for the corporation or the revocation of its charter and the lapse of ninety days after notice to the corporation of revocation without a reinstatement of its charter; or

(10) unless otherwise provided in writing in an operating agreement or by the written consent of all members at the time, in the case of an estate, the distribution by the fiduciary of the estate's entire interest in the limited liability company.

(B) The members may provide in writing in an operating agreement for other events the occurrence of which shall result in a person ceasing to be a member of the limited liability company.

(C) Unless an operating agreement provides in writing that a member has no power to withdraw by voluntary act from a limited liability company, the member may do so at any time by giving thirty days' written notice to the other members, or such other notice as is provided for in writing in an operating agreement. If the member has the power to withdraw but the withdrawal is a breach of an agreement, or the withdrawal occurs as a result of otherwise wrongful conduct of the member, the limited liability company may recover from the withdrawing member damages for breach of the operating agreement or as a result of the wrongful conduct, including the reasonable costs of obtaining replacement of the service the withdrawn member was obligated to perform and may offset the damages against the amount otherwise distributable to him, in addition to pursuing any remedies provided for in an operating agreement or otherwise available under applicable law. Unless otherwise provided in an operating agreement, in the case of a limited liability company for a definite term or particular undertaking, a withdrawal by a member before the expiration of that term is a breach of the operating agreement."

This section is based on Georgia RULPA Section 14-9-602, which in turn combines with some changes RULPA Sections 402 and 602. The principal changes from RULPA Section 402 are a clarification of the extent of the members' ability to contract around the events of dissociation and to provide by agreement for other events of dissociation, and the clarification in subsection (C) of the elements of wrongful withdrawal.

LLC statutes, and Section 901, provide that a member's death, bankruptcy, expulsion or other dissociation from the LLC dissolves the firm. This dissolution of the LLC ensures payment to the dissociating member unless the agreement provides for or the members consent to continuation of the LLC. If the LLC is continued, the distribution rights of the dissociating member will be determined under Section 602. However, the LLC statutes generally do not describe or define all of the events that trigger member dissociation. By providing that a member, on withdrawal, is entitled to receive distributions to which the member is entitled as well as the fair value of his interest, these statutes strongly imply that the member has the right and power to withdraw at any time.

This section clarifies the events that entitle the member to payment under Section 602 or to demand dissolution of the LLC under Section 901. Note that this section refers to member "dissociation," which is a broad term that includes the voluntary act of "withdrawal." The events specified in this section constitute sufficient dissociation to dissolve a general partnership and to cause the cessation of a general partner's status as such in, and dissolution of, a limited partnership. By contrast, in the absence of contrary agreement, these events apparently do not cause the withdrawal of a limited partner or the dissolution of a limited partnership. LLC members should be treated more like general partners than like limited partners because, under most LLC statutes and this Chapter, LLC members are assumed to be active in management unless the agreement provides otherwise. Accordingly, the termination of a member's ability to participate in management because of death or other cessation of existence would sufficiently frustrate the members' expectations that dissociation of the member and dissolution of the LLC should follow under the default rule.

It is not clear that bankruptcy should dissociate LLC members as it does general partners. An important reason why bankruptcy causes dissociation of a partner is that its effect on the partner's personal liability for the firm's debts changes the terms of the parties' bargain. This obviously does not apply to LLCs. The mere fact that bankruptcy causes an assignment of the member's entire interest to the trustee does not justify dissociation because such assignments do not terminate the member's interest in the LLC. However, this section follows RULPA and includes bankruptcy and similar events as grounds of dissociation because this language has been significant in ensuring lack of continuity of life for federal income tax purposes.

LLC statutes do not provide for grounds for expulsion of members, although they do recognize the potential for expulsion by providing that a member's expulsion dissolves the LLC. Courts are likely to enforce agreements providing for expulsion as they do in partnerships. Also, some LLC statutes provide procedures for removing managers that are similar to procedures for removing corporate directors.

Subsection (B) is consistent with existing LLC statutes which commonly provide that the LLC dissolves at the time or on the happening of events specified in the agreement. Thus, the members clearly can agree that events other than withdrawal, death or bankruptcy of a member constitutes sufficient termination of membership to cause a dissolution.

The LLC statutes enacted so far leave unclear what acts constitute voluntary withdrawal. Under these statutes, voluntary withdrawal may include an active member's ceasing to participate in management of a member-managed LLC. However, "withdrawal" is unclear for passive investors. Subsection (C) adds needed clarity by providing for written notice of withdrawal unless otherwise agreed. It also provides for advance notice of withdrawal in order to avoid a "limbo" period during which it is uncertain whether the LLC is continuing or winding up and to give the firm time to arrange for payment for the withdrawing member's interest. This is dealt with further in Section 901.

In effect, all of the dissociation events in this section are subject to contrary written provision in the operating agreement (that is true of events described in (A)(1) and (2) by reason of Sections 802(C) and 706(D)). Accordingly, the operating agreement may provide that, for example, death or bankruptcy does not constitute an event of dissociation or that the member cannot withdraw by voluntary act. The effect of such an agreement is not to bind the member to the LLC in "involuntary servitude" or even to expose the member to indefinite personal liability as in a partnership. Rather, it is simply to provide that an LLC member, like a corporate shareholder, has no right to "put" his interest back to the firm. While such a put may be a suitable default term in the absence of a public market for LLC interests, it is also potentially costly for the firm. Accordingly, the parties probably should be able by agreement to avoid this term where they determine that the costs outweigh the benefits.

Even if the operating agreement does not negate the power to withdraw it may, by providing for a minimum term, negate the members' right to withdraw voluntarily. It is important to note that merely providing for a minimum term does not negate the power to withdraw; in order to negate the power the members must do so by explicit terms. The Committee concluded that the members generally will desire to have some remedy for a member's withdrawal prior to an agreed upon term. Subsection (C) provides the terms of such an agreement.

At least one member of the Committee believes that the members should not be able to contract around death as a cause of dissociation and that the introductory phrase "Unless otherwise provided in writing in an operating agreement" should be deleted from subsections (A)(6) through (A)(10). The reasons underlying this view are both conceptual and practical. First, it is difficult to conceive of a dead person's remaining a member. Second, the problem of voting the dead member's interest may be acute if the dead member controlled a majority of the voting rights, because Section 707 provides that his executor cannot vote the interest unless and until the executor is admitted as a member. In order to avoid an undesired "put" of the dead member's interest back to the LLC, the members may agree (i) under section 602 to fashion an acceptable deferred distribution right upon dissociation and (ii) under section 901 to avoid dissolution of the LLC. If the members entered into such agreements, death would not have any of the adverse effects of an event of dissociation. However, the majority Committee view is that the members should be permitted in their operating agreement to provide clearly that death is not an event of dissociation. Moreover, a statutory provision forbidding this type of agreement might be a trap for unwary members who attempt to provide that death is not an event of dissociation but are unaware of the prohibition.

An agreement that restricts dissociation may have adverse tax characterization consequences. However, this possibility is minimized by the clear distinction in the chapter between the power and right to withdraw, and by the fact that the power to withdraw is eliminated only by an agreement that expressly provides for its elimination and not by an agreement that merely provides for a minimum term or undertaking. In any event, the Committee concluded, consistent with other provisions of this chapter, that drafting flexibility is more important than providing "bulletproof" terms that ensure partnership tax characterization.

Section 33-43-901. Dissolution.

A limited liability company is dissolved and its affairs shall be wound up upon the happening of the first to occur of the following:

(A) at the time or upon the occurrence of events specified in writing in the articles of organization or an operating agreement;

(B) the written consent of all members;

(C) an event of dissociation of a member, unless (1) the business of the limited liability company is continued by the consent of all the remaining members on or before the ninetieth day following the occurrence of any such event or (2) otherwise provided in writing in an operating agreement; or

(D) entry of a decree of judicial dissolution under Section 33-43-902."

There is a basic question whether member dissociation (including voluntary withdrawal) should dissolve the LLC. The principal function of dissolution-at-will is to provide liquidity for the members' interests. Although this could be accomplished by allowing members to withdraw and cash out (Section 602), in very closely held LLCs accurate valuation may be difficult or impossible without a sale of all the assets. Moreover, in such LLCs the parties may be relying on their co-members' management skills, and so would expect to liquidate when one of them leaves. Valuation problems and interdependence of the members would tend to be less for larger firms. However, the default provisions in the statute should be designed for smaller LLCs, which are less likely to have detailed agreements. Thus, dissolution-at-will should be the default statutory rule.

However, it is important to keep in mind that allowing any member to compel sale of the LLC's assets may entail significant costs, and thereby may give the member considerable leverage against the other members. Also, as indicated above, members of larger LLCs would expect the firm to continue despite dissociation of a member. Accordingly, as discussed in more detail below, the statute certainly should allow members to provide for continuity.

Apart from these business concerns, it is important to keep in mind that dissolution provisions in LLC statutes are driven by tax considerations, discussed below in this Commentary. Dissolution-at-will is an important partnership characteristic for tax purposes. As a result, irrespective of the policy considerations just discussed, dissolution-at-will probably will continue to be a feature of LLC statutes.

Subsection (A) permits the members to make the LLC one of limited duration, or for the accomplishment of a particular undertaking. They can also provide in their operating agreement for dissolution on occurrence of an event such as the express will of one or more members. Note that, depending upon how the provisions regarding a specified term or undertaking are drafted, a member's early withdrawal may constitute a breach of the operating agreement. See the Commentary accompanying section 802. In other words, subsection (A) contemplates maximum terms, not minimum terms. The term must be provided for in writing because of its significant effect on members' rights. Note that Section 202(C) requires the parties to state in the articles the latest date on which the LLC dissolves in order to alert creditors of an event that could affect their rights.

As noted above in the Commentary to Section 202, some Committee members believe that the requirement of a maximum term is unnecessary. If an LLC statute omits such a requirement, subsection (A) would need to be modified accordingly.

Subsection (B) provides for dissolution on unanimous written consent of the members. Once again, a writing is appropriate in view of dissolution's significant effect on members' rights. This dissolution cause is significant mainly where the members have agreed that the LLC will not dissolve upon the withdrawal or other dissociation of a member prior to the completion of a specified term or undertaking.

With respect to subsection (C), most LLC statutes refer broadly to events such as "death," "withdrawal" and "bankruptcy" that terminate a member's continued membership in the firm but fail to define these events. Thus, it is not clear, for example, at what stage in the bankruptcy of a member, the dissolution of a business entity member or the termination of a trust member the LLC dissolves. These points are clarified in this subsection by the reference to events of dissociation, which are defined in section 802.

Under subsection (C), dissolution occurs on dissociation of a member, but the operating agreement may provide that the LLC continues notwithstanding the dissociation. In addition, and irrespective of the operating agreement, the LLC may be continued by a unanimous vote of the members within ninety days after dissociation. Because of the significance of a continuation provision, a written agreement is required to avoid the unanimity requirement.

There are strong reasons for allowing the members, in their operating agreement, to agree to continue the LLC after member dissociation. Not only may dissolution be costly, as discussed above, but dissolution may be unnecessary because LLC members (unlike partners) do not normally need the protection of having the firm's debts paid when they leave. The members, in weighing the costs and benefits of dissolution in their particular firm, could agree that the LLC will not dissolve at all when a member leaves. Alternatively, they might agree that a majority can vote to continue after a member leaves. In this way, a single member would not have the power to block a continuation that is beneficial to the firm as a whole, or to extract concessions from the other members for the member's consent to continue.

The ninety-day time period for consent to continue shortens the period of uncertainty about whether the LLC is continuing and required to pay off the ex-member, or dissolving and required to wind up its transactions. Note that because voluntary withdrawal is effective only after the expiration of a thirty-day notice period under Section 802(C), there is an opportunity to conduct the continuation vote before withdrawal becomes effective.

With respect to continuation, it is important to keep in mind that dissolution is a key factor in tax classification. Under Treas. Reg. Section 301.7701-2(b)(2) dissolution is described as follows:

For purposes of this paragraph, dissolution of an organization means an alteration of the identity of an organization by reason of a change in the relationship between its members as determined under local law. For example, since the resignation of a partner from a general partnership destroys the mutual agency which exists between such partner and his copartners and thereby alters the personal relation between the partners which constitutes the identity of the partnership itself, the resignation of a partner dissolves the partnership. A corporation, however, has a continuing identity which is detached from the relationship between its stockholders. The death, insanity, or bankruptcy of a shareholder or the sale of a shareholder's interest has no effect on the identity of the organization. An agreement by which an organization is established may provide that the business will be continued by the remaining members in the event of the death or withdrawal of any member, but such agreement does not establish continuity of life if under local law the death or withdrawal of any member causes a dissolution of the organization. Thus, there may be a dissolution of the organization and no continuity of life although the business is continued by the remaining members.

The ability to avoid continuity of life despite a continuation of the firm after dissolution has been approved for both limited partnerships and limited liability companies. As summarized in Rev. Rul. 88-76:

Section 301.7701-2(b)(1) of the regulations provides that if the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member will cause a dissolution of the organization, continuity of life does not exist. Section 301.7701-2(b)(2) provides that an agreement by which an organization is established may provide that the business will be continued by the remaining members in the event of the death or withdrawal of any member, but such agreement does not establish continuity of life if under local law the death or withdrawal of any member causes a dissolution of the organization.

Under the [Wyoming] Act, unless the business of M is continued by the consent of all the remaining members, M is dissolved upon the death, retirement, resignation, expulsion, bankruptcy, dissolution of a member or occurrence of any other event that terminates the continued membership of a member in the company. If a member of M ceases to be a member of M for any reason, the continuity of M is not assured, because all remaining members must agree to continue the business. Consequently, M lacks the corporate characteristic of continuity of life.

The foregoing Revenue Ruling does not specify the tax consequences of providing in a statute or LLC agreement that the LLC may be continued on a less than unanimous vote following member dissociation. In order to ensure that an LLC formed under a particular statute will be deemed to lack the corporate characteristic of continuity of life under the above tax criteria, the statute could provide that the LLC dissolves unless it is continued by the unanimous consent of the remaining members, perhaps conditioned on such a provision being in the operating agreement. This "bulletproof" provision is not necessary to obtain a ruling from the Internal Revenue Service that LLCs formed under a particular statute should be treated as partnerships for tax purposes, but would avoid exposing counsel to possible malpractice liability for failure to advise LLC clients of the tax consequences of a continuation provision upon a less than unanimous vote. A middle-ground approach would permit continuation by a majority vote if so provided in writing in the operating agreement. However, the Committee concluded that the costs of drafting inflexibility under either of these alternatives were not sufficiently counterbalanced by tax benefits, particularly in light of the possibility of a relaxation in current tax rules.

Dissolution by court decree referred to in subsection (D) is discussed in the Commentary to section 902.

"Section 33-43-901.1. Grounds for administrative dissolution.

(A) The Secretary of State shall commence a proceeding under Section 33-14-210(a) to dissolve a limited liability company administratively if:

(1) the limited liability company does not pay when they are due any franchise taxes, taxes payable under Chapter 7 of Title 12, or penalties imposed by law;

(2) the limited liability company does not deliver its annual report to the Tax Commission when it is due;

(3) the limited liability company is without a registered agent or registered office in this State;

(4) the limited liability company does not notify the Secretary of State that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or

(B) The Secretary of State shall dissolve a limited liability company under Section 33-14-210(c) if he is notified by the Tax Commission that the limited liability company has failed to file a required tax return within sixty days of the notice required by Section 12-7-1675.

Section 33-43-901.2. Procedure for and effect of administrative dissolution.

(A) If the Secretary of State determines that grounds exist under Section 33-14-200(a) for dissolving a limited liability company, he shall mail written notice of his determination to the limited liability company.

(B) If the limited liability 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 the notice required by subsection (A) was mailed, the Secretary of State shall dissolve the limited liability company administratively by signing a certificate of dissolution that recites the grounds for dissolution and its effective date. The Secretary of State shall file the original of the certificate and send a copy to the limited liability company by registered or certified mail addressed to its registered agent at its registered office.

(C) If the Secretary of State is notified by the Tax Commission that the limited liability company has failed to file a required tax return within sixty days of the notice required by Section 12-7-1675, the Secretary of State shall dissolve the limited liability company administratively by signing a certificate of dissolution that recites the grounds for dissolution and its effective date. The Secretary of State shall file the original of the certificate and send a copy to the limited liability company by registered or certified mail addressed to its registered agent at its registered office.

(D) A limited liability company dissolved administratively may wind up its business and affairs pursuant to the provisions of Section 33-43-904, distribute its assets as provided in Section 33-43-905, file articles of dissolution pursuant to Section 33-43-906, and notify claimants pursuant to Section 33-43-907 and Section 33-43-908.

(E) The administrative dissolution of a limited liability company does not terminate the authority of its registered agent.

Section 33-43-901.3. Reinstatement following administrative dissolution.

(A) A limited liability company dissolved administratively under Section 33-43-901.2 may apply to the Secretary of State for reinstatement at any time after the effective date of dissolution. The applicant must:

(1) recite the name of the limited liability company and the effective date of its administrative dissolution;

(2) state that the grounds for dissolution either did not exist or have been eliminated;

(3) state that the limited liability company's name satisfies the requirements of Section 33-43-103; and

(4) contain a certificate from the South Carolina Tax Commission reciting that all taxes, penalties, and interest owed by the limited liability company, whether assessed or not, 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, he shall cancel the certificate of dissolution and prepare a certificate of reinstatement that recites his determination and the effective date of reinstatement, file the original of the certificate, and send a copy to the corporation.

(C) When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution, and the limited liability company resumes carrying on its business as if the administrative dissolution had never occurred.

Section 33-43-901.4. Appeal from denial of reinstatement.

(A) If the Secretary of State denies a limited liability company's application for reinstatement following administrative dissolution, he shall send a written notice that explains the reasons for denial to the corporation by registered or certified mail addressed to its registered agent at its registered office.

(B) The limited liability company may appeal the denial of reinstatement to the court of common pleas for Richland County within thirty days after the notice of denial was received. The limited liability 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 limited liability 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 limited liability company or may take other action the court considers appropriate.

(D) The court's final decision may be appealed as in other civil proceedings.

Section 33-43-902. Judicial dissolution.

On application by or for a member, the court of common pleas in the county of the principal place of business may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement."

As with member consent to dissolution, dissolution by court decree is important mainly when the parties' agreement limits a member's power to dissolve at will.

The "not reasonably practicable" language probably includes at least some of the causes of dissolution provided for in partnership law, particularly including partner misconduct. Note that insanity, which is a ground for judicial dissolution of a partnership, is a ground for cessation of membership under Section 802.

Some LLC statutes also provide for involuntary judicial dissolution on grounds similar to those for involuntary dissolution of a corporation under most corporation statutes. The corporate approach to dissolution would cause dissolution of the LLC upon the occurrence of such events as:

(A) procuring the articles of organization through fraud;

(B) exceeding or abusing the authority conferred upon it by law;

(C) failing to appoint and maintain a registered agent;

(D) failing to file a statement of change of registered agent;

(E) committing a violation of any provision of law whereby the LLC has forfeited its charter;

(F) carrying on, conducting, or transacting its business in a persistently fraudulent or illegal

manner; or

(G) abuse of its powers contrary to the public policy of the state.

If an LLC could be judicially dissolved (and the members arguably subjected to personal liability) for such indefinite concepts as the violation of public policy, disgruntled members and creditors would be encouraged to make this sort of allegation in limited liability company breakups.

"Section 33-43-903. Winding up.

Unless otherwise provided in writing in an operating agreement:

(A) The business or affairs of the limited liability company may be wound up:

(1) by the members or managers who have authority pursuant to Section 33-43-401 to manage the limited liability company prior to dissolution except that;

(2) if one or more of such members or managers have engaged in wrongful conduct, or upon other cause shown, by the application of any court of common pleas or any member's legal representative or assignee.

(B) The persons winding up the business or affairs of the limited liability company may, in the name of, and for and on behalf of, the limited liability company:

(1) prosecute and defend suits;

(2) settle and close the business of the limited liability company;

(3) dispose of and transfer the property of the limited liability company;

(4) discharge the liabilities of the limited liability company; and

(5) distribute to the members any remaining assets of the limited liability company."

COMMENTARY

Pursuant to Section 901, winding up begins upon the occurrence of an event of dissolution and is not contingent on the filing of articles of dissolution. Nor is there a requirement of notice to creditors. However, the LLC has the incentive to file articles of dissolution and to notify creditors of dissolution as soon as possible after an event of dissolution in order to avoid lingering apparent authority under Section 904.

A "winding up" may involve the LLC's sale as a going concern to existing members or third parties rather than its liquidation and termination. Although dissolution seems technical in this situation, it may affect the rights of the creditors of the pre-dissolution LLC and whether the LLC is deemed to have corporate-type continuity of life for tax purposes. The members of the continuing business are subject to all the rules applicable to a continuing LLC, while those who left the LLC in connection with the dissolution are subject to the rules of a winding up business, particularly restrictions on the managers' or members' post-dissolution authority to bind the LLC.

There is no apparent reason for excluding ex-members from winding up. Virginia Section 13.1-1048 provides that, in the absence of contrary agreement, the LLC can be wound up only by "members who have not wrongfully dissolved a limited liability company." This is drawn from the analogous UPA Section 37. However, in an LLC, unlike a partnership, the other members often have the power to avoid dissolution by consenting to continuation, and are particularly likely to do so if the operating agreement specifies a minimum term. Thus, there does not appear to be a compelling policy reason, at least in the absence of contrary agreement, to exclude members who have dissolved "wrongfully" in the sense of withdrawing prior to the expiration of an agreed term or undertaking. While it may be appropriate to exclude members who have been guilty of misconduct which caused a judicial dissolution, this problem can be addressed through judicial dissolution under Section 902 or judicial winding up under this section. Partnership precedents provide some guidance as to the circumstances that justify judicial winding up. Several members of the Committee, however, believe that the statutory default rule should be the same as in the case of general partnerships: that a member who wrongfully causes a dissolution should be excluded from management during winding up.

During the winding up period, managers' or members' actual authority to bind the firm is modified to reflect the effect of dissolution on the scope and nature of the firm's business. The members or managers who manage the firm during winding up have implied actual authority to engage in business that is appropriate for winding up, including completion of executory contracts, sale of assets, satisfaction of payables, defense of claims, receipt of payment, and enforcement of receivables. The list of winding up acts in this section is based on Georgia RULPA Section 14-9-803 and Delaware Section 18-803(b).

LLC statutes do not specify the basis for compensating members or managers who perform the winding up. By analogy to partnerships, the parties' pre-dissolution compensation arrangements probably will be regarded as continuing in effect. The most complex problems regarding compensation for post-dissolution work concern completion of work-in-process of professional firms. Extensive partnership precedents probably will be applied in resolving this issue.

"Section 33-43-904. Agency power of managers or members after dissolution.

(A) Except as provided in subsections (C), (D), and (E), after dissolution of the limited liability company, each of the members having authority to wind up the limited liability company's business and affairs can bind the limited liability company:

(1) by any act appropriate for winding up the limited liability company's affairs or completing transactions unfinished at dissolution; and

(2) by any transaction that would have bound the limited liability company if it had not been dissolved, if the other party to the transaction does not have notice of the dissolution.

(B) The filing of the articles of dissolution shall be presumed to constitute notice of dissolution for purposes of subsection (A)(2).

(C) An act of a member which is not binding on the limited liability company pursuant to subsection (A) is binding if it is otherwise authorized by the limited liability company.

(D) An act of a member which would be binding under subsection (A) or would be otherwise authorized but which is in contravention of a restriction on authority shall not bind the limited liability company to persons having knowledge of the restriction.

(E) If the articles of organization vest management of the limited liability company in managers, a manager shall have the authority of a member provided for in subsection (A), and no member shall have such authority if the member is acting solely in the capacity of a member."

UPA Section 35 provides complex rules for determining when partners continue to have post-dissolution apparent authority to bind the firm to non-winding-up transactions. Briefly, only those who "extended credit" to the partnership prior to the dissolution are entitled to "notice," while others who knew of the partnership are bound by an advertisement in a general circulation newspaper. Moreover, the partnership is not bound by a non-winding-up act even as to creditors who lacked notice if the partnership business is unlawful, or the acting partner is bankrupt.

These rules are not suitable for LLCs which, unlike general partnerships, are expected to file articles of dissolution. Moreover, even for partnerships the rules are cumbersome. This section provides for a simple notice rule which is based on RUPA Section 806(b)-(c). Unlike the RUPA draft, this section provides that filing of articles of dissolution is presumed to limit authority as of the time of filing, rather than canceling authority after ninety days under RUPA Section 806(c). While this requires third parties to check the record, they must do so in any event in order to determine whether the LLC is managed by members or managers pursuant to Article 4. Moreover, this section does not leave third parties in significantly worse position than creditors of partnerships under UPA Section 35 who may be bound by "notice" in a general circulation newspaper. The presumption of notice in subsection (B) is intended to be a rebuttable presumption. Accordingly, despite the filing of articles of dissolution, a court may determine that a third party lacks notice if, for example, he had recently checked the record and the event causing dissolution was not notorious.

At least one member of the Committee believes that there ought to be no presumption of third-party notice attaching to the filing of notice of dissolution and, furthermore, that the risk of a member's taking action not appropriate for winding up should not be shifted to third parties simply because the third party is aware of the dissolution, contrary to the basic policy underlying section 904. Under this point of view, the entire section is unnecessary.

Legislatures that adopt Section 908 might consider conditioning restrictions on post-dissolution authority on the publication required by that section. This publication would be of some benefit to creditors and would entail no additional cost for LLCs that would publish the notice in any case in order to bar creditor claims.

Note that this section, when read together with Section 903(A)(1), gives a withdrawn member the same authority as other members to bind the LLC after a dissolution caused by his withdrawal. This is consistent with the fact that a withdrawn member may continue to participate in management during winding up pursuant to Section 903. As noted in the Commentary under Section 903, some members of the Committee believe that the statutory default rule ought to exclude a withdrawn member whose withdrawal was wrongful.

Under subsection (C) the law of agency can expand the authority of members beyond that provided for in subsection (A).

The LLC can limit the authority of members (and a withdrawn member) by informing third parties

pursuant to subsection (D), which is based on UPA Sections 9(1) (last clause) and 9(4).

Subsection (E), consistent with Section 301, clarifies that managers and not members have exclusive power to bind a manager-managed LLC.

"Section 33-45-905. Distribution of assets.

Upon the winding up of a limited liability company, the assets shall be distributed as follows:

(A) Payment, or adequate provision for payment, shall be made to creditors including, to the extent permitted by law, members who are creditors in satisfaction of liabilities of the limited liability company;

(B) Unless otherwise provided in writing in an operating agreement, to members or former members in satisfaction of liabilities for distributions under Section 33-43-601 and Section 33-43-602; and

(C) Unless otherwise provided in writing in an operating agreement, to members and former members first for the return of their contributions and second in proportion to the members' respective rights to share in distributions from the limited liability company prior to dissolution."

All LLC statutes give first priority to creditors' claims consistent with the usual expectations of owners and creditors. The statutes treat member-creditors and non-member creditors alike as to non-equity claims-that is, claims other than for distributions or on account of members' contributions. Note, however, that if an LLC is in bankruptcy, members may be subject to equitable subordination of their claims on a variety of grounds.

LLC statutes differ, at least superficially, regarding the priority of members' equity claims. There are three principal variations on the order of priority, all subject to contrary member agreement, and all paid pro rata within priority categories:

(1) The approach adopted by this section, based on RULPA Section 804.

(2) The ULPA Section 23 approach: (a) liabilities to members in respect of their shares of profit and other income on their contributions; and (b) liabilities in respect of capital contributions.

(3) The UPA Section 40 approach: (a) liabilities in respect of capital contributions; and (b) liabilities in respect of shares of profits and other income on members' contributions.

This section is based on the theory that members have creditors' rights as to distributions declared or otherwise accrued prior to dissolution. What is left of the assets is essentially an equity claim. The priority for capital contributions over other amounts due in respect of the members' interests means in effect that capital contributions are entitled to a sort of liquidation preference. It is important to keep in mind that capital can be contributed in virtually any form, including past services. Thus, the priority for capital allocates property according to the members' total contributions to the LLC.

Variation 2 can be largely reconciled with Variation 1 by assuming that liabilities in respect of profits consist mainly of the sort of distributions or allocations of income that the members would claim as creditors under Variation 1. However, the two approaches are not completely consistent because Variation 2 does not establish separate categories for capital and for amounts remaining after all distribution obligations have been satisfied and capital contributions returned. Since Variation 2 includes no liquidation preference for capital contributions, it is probably inconsistent with the members' expectations in most situations.

Variation 3, like Variation 1, provides for a liquidation preference for capital contributions but, unlike Variation 1, does not make any separate allowance for amounts owed to members as declared distributions. Variation 3 can be largely reconciled with Variation 1 if members can claim priority as creditors for amounts they are owed on account of declared distributions. Under this interpretation, the difference between Variations 1 and 3 is that under the latter members could claim declared distributions pro rata with first-priority outside creditors instead of as second-priority inside creditors. This approach makes some sense, because there is little reason to distinguish among types of debt claims.

"Section 33-43-906. Articles of dissolution.

After the dissolution of the limited liability company pursuant to Section 33-43-901, the limited liability company may file articles of dissolution with the Secretary of State which set forth:

(A) the name of the limited liability company;

(B) the date of filing of its articles of organization and all amendments thereto;

(C) the reason for filing the articles of dissolution;

(D) the effective date (which shall be a date certain) of the articles of dissolution if they are not to be effective upon the filing; and

(E) any other information the members or managers filing the certificate shall deem proper."

This section follows the approach of RULPA Section 203 of providing for the filing articles of dissolution at the commencement of winding up. This is also consistent with RMBCA Section 14.03. Some states, including Colorado, Florida, Kansas and Wyoming, require some sort of notice of intent to dissolve. However, because this section provides for filing the articles of dissolution at the time of dissolution rather than at the time of completion of winding up there is no need for a notice of intent to dissolve. This also avoids the logical inconsistency of stating that the LLC intends to dissolve after it has already dissolved under the statute, and the need to certify that all debts have been paid or provided for.

A problem with applying the corporate model to LLCs (as well as to limited partnerships) is that, while corporations dissolve by an act of the firm as a whole or by judicial or administrative act, dissolution of an LLC can be triggered by dissociation of a single member. If dissolution is deemed to occur at the time of a triggering cause, then the effect of failure to file the appropriate certificate or articles is not clear. On the other hand, if dissolution were deemed to occur only at the time of filing, this might interfere with members' ability to exit, as well as seeming to permit corporate-type continuity of life.

This section makes clear that dissolution occurs pursuant to Section 901, that dissolution is not contingent on a filing, and that no filing is required. This is consistent with Georgia RULPA Section 14-9-203. LLCs should have incentive to delay a filing and should have significant incentives to make a filing as soon as possible in order to limit the authority of members or managers pursuant to Section 904 and to bar creditors' claims under Sections 907 and 908. Indeed, beyond these notice functions it is not clear what other effects the failure to file articles of dissolution would have under LLC statutes that mandate filing.

"Section 33-43-907. Known claims against dissolved limited liability.

(A) Upon dissolution, a limited liability company may dispose of the known claims against it by filing articles of dissolution pursuant to Section 33-43-906 and following the procedures described in this section.

(B) The limited liability company shall notify its known claimants in writing of the dissolution at any time after the effective date of dissolution. The written notice must:

(1) describe information that must be included in a claim;

(2) provide a mailing address where a claim may be sent;

(3) state the deadline, which may not be fewer than one hundred twenty days after the later of the date of the written notice or the filing of articles of dissolution pursuant to Section 33-43-906, by which the limited liability company must receive the claim; and

(4) state that the claim will be barred if not received by the deadline.

(C) A claim against the limited liability company is barred:

(1) if a claimant who was given written notice under subsection (B) does not deliver the claim to the limited liability company by the deadline;

(2) if a claimant whose claim was rejected by the limited liability company does not commence a proceeding to enforce the claim within ninety days after the date of the rejection notice.

(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."

"Section 33-43-908. Unknown claims against dissolved limited liability company.

(A) A limited liability company may publish notice of its dissolution pursuant to this section which requests that persons with claims against the limited liability company present them in accordance with the notice.

(B) The notice must:

(1) be published once in a newspaper of general circulation in the county where the limited liability company's principal office (or, if none in this state, its registered office) is located:

(2) describe the information that must be included in a claim and provide a mailing address where the claim may be sent; and

(3) state that a claim against the limited liability company will be barred unless a proceeding to enforce the claim is commenced within five years after the publication of the notice.

(C) If the limited liability company publishes a newspaper notice in accordance with subsection (B) and files articles of dissolution pursuant to Section 33-43-906, the claim of each of the following claimants is barred unless the claimant commences a proceeding to enforce the claim against the limited liability company within five years after the later of the publication date of the newspaper notice or the filing of the articles of dissolution:

(1) a claimant who did not receive written notice under Section 33-43-907;

(2) a claimant whose claim was timely sent to the limited liability company but not acted on; or

(3) a claimant whose claim is contingent or based on an event occurring after the effective date of dissolution.

(D) A claim may be enforced under this section:

(1) against the 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 limited liability company to the extent of the assets of the limited liability company distributed to him 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 him."

It is not clear under most LLC statutes what creditors' rights are against the "dissolved" or "cancelled" firm. (Utah Section 48-2b-140 does provide for limited existence of the LLC following the articles of dissolution.) Sections 907 and 908 are based on RMBCA Sections 14.06 and 14.07, except that they make barring known and unknown claims contingent on filing the articles of dissolution. No such contingency is necessary in corporate acts, because corporations, unlike LLCs, dissolve by means of the requisite filing. See the Commentary to section 906. Note that the corporate rather than the limited partnership model is appropriate for LLCs because, unlike limited partnerships, LLCs have no general partners who remain liable for the firm's debts after the assets have been distributed.

Section 33-43-1001. Law governing.

Subject to the constitution of the State, the laws of the State or other jurisdiction under which a foreign limited liability company is organized shall govern its organization and internal affairs and authority of its managers and members."

Under Restatement (Second) Conflict of Laws, Section 6(1), a statutory provision like this section binds the courts of the enacting state to apply formation state law. This section is similar to RULPA Section 901 and to several LLC acts. Some other LLC statutes include different language but probably have the same effect. The Utah statute provides that it "does not govern the organization and internal affairs of a foreign limited liability company." See Utah Section 48-2b-143(1). This negative language probably has the same effect as statutes providing affirmatively that the foreign law does apply. The Nevada statute directs that LLCs register by complying with the procedures for foreign limited partnerships. See Nevada Section 86.551. It is not clear whether this means that foreign state law will apply to LLCs that do not register. However, the statute supports this result, since it refers to the limited partnership provision, Nev. Rev. Stat. Section 88.570 (1991), which recognizes foreign state law regarding internal affairs and limited partner liability of foreign limited partnerships.

RUPA Section 106 provides as to partnerships that the law of the state in which the partnership has its chief executive office applies. This approach should be rejected as to LLCs for three reasons. First, even as to partnerships, it is contrary to the conflicts rule which generally applies the law chosen by parties to a contract. See Restatement (Second) Conflict of Laws, Section 187. If the parties elect to form the partnership under the law of a particular state, this represents a contractual choice of law even if the parties fail explicitly to designate some other applicable law.

Second, most of the following general factors under Restatement (Second) Conflict of Laws, Section 6(2) support application of formation state law regarding internal governance matters:

[W]hen there is no [statutory] directive [on choice of law], the factors relevant to the choice of the applicable rule of law include (a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interest of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.

Note that section 1307 may be relevant to application of a state's LLC statute in jurisdictions other than that of formation.

Third, according to the RUPA comments, the rule is based on the difficulty of determining where a partnership is formed. Because a filing is required to form an LLC and to register as a foreign LLC (see section 1002 and Commentary), this consideration does not apply to LLCs. Accordingly, LLCs should be treated more like corporations, to which the "internal affairs" rule is applied as a matter of the common law of conflict of laws. See Restatement (Second) Conflict of Laws, Section 307.

Even if the statute does not provide for application of the law of the state of formation, a forum state's application of its own law to an LLC rather than the law of the formation state may be unconstitutional under one or more constitutional provisions. The Constitution provides that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." U.S. Const., art. IV, Section 1. Full faith and credit may require application of formation state law to business firms. The most important recent case on constitutional standards for choice of law is Allstate Ins. Co. v. Hague, 449 U.S. 302 (1981), in which the Supreme Court upheld on due process and full faith and credit grounds the application of forum law in interpreting uninsured motorist coverage of an insured who was employed in the state but whose policy was issued by an out-of-state insurer in another state. This case suggests that the Supreme Court will apply only minimal scrutiny to choice of law. On the other hand, it arises in a context that is very different from application of forum law to an LLC deliberately organized with reference to the law of another state. Both the majority and a concurring opinion in Hague emphasized the potential importance of the parties' expectations.

The Commerce Clause (U.S. Const., art. I, Section 8, cl. 3) grants to Congress the power to regulate interstate commerce. The "negative" version of the Commerce Clause limits the states' power to regulate in this area. In Edgar v. MITE Corp., 457 U.S. 624 (1982), the Supreme Court invalidated a statute that applied to takeovers made in the state by corporations formed elsewhere. By contrast, in CTS Corporation v. Dynamics Corporation of America, 481 U.S. 69 (1987), the Court upheld an anti-takeover statute that applied to firms incorporated in the enacting state, citing both the lack of danger of inconsistent regulation and states' interest in regulating the internal governance of locally incorporated firms. These rationales support not only the enforcement of formation state law, but also invalidation of forum state rules that would override the law of the formation state.

Assuming formation-state law applies, there is a question concerning precisely which issues it applies to. This section applies foreign law regarding the liability and authority of members. Although these are not clearly matters of internal organization, they are matters that are commonly dealt with in LLC statutes. The courts may apply local law as to veil-piercing or other matters that may not appear to involve internal organization. However, the courts should recognize that limited liability is part of the contract that creditors make with debtor firms, and therefore that creditors generally should be bound by the law of the formation state.

The Committee elected not to include a Virginia type of provision that a foreign limited liability company may have no greater rights, powers or privileges than a domestic LLC. See Virginia Section 13.1-1051. This should be the case even without such a provision, because otherwise foreign limited liability company provisions could be used to evade formation-state restrictions on the activities of firms and individuals. Moreover, the Virginia language is susceptible to the misinterpretation that it limits the effect of the internal affairs rule stated in the opening clause of subsection (A). Accordingly, it is better simply to rely on that language to limit the effect of the rule. Thus, while formation state law applies as to such things as members' voting and distribution rights, it does not permit LLCs to engage in businesses from which LLCs are barred in other states. A possible exception to this rule would be member liability in professional firms, which may be a matter regulated by the LLC statute but where an inconsistent formation state rule almost certainly would not be recognized in other states. Yet this is not a true exception, because professional liability appropriately is a matter for regulation of the professions generally rather than one governed specifically by LLC statutes.

There is an additional question concerning the types of firms that are covered by this provision. The definition in section 102(E) is a modified version of the Virginia definition. See Virginia Section 13.1-1002. Note that the definition includes foreign-country firms, and may be broad enough to permit the registration as foreign limited liability companies of offshore entities, such as limited. This is consistent with most LLC statutes, which generally define a "foreign limited liability company" as one formed under the laws of any other jurisdiction. By more precisely defining the organizations that are included, the definition is intended to make clear that it refers to a broad category of firms, and not merely firms that have the same rules of internal organization as domestic LLCs. Subsection 102(E)(4) is intended to ensure that the definition will not become a "back door" for evading other statutes, such as those dealing with business trusts. A substantial minority of the Committee opposed including this subsection on the ground that it imposes a vague and uncertain limit on the foreign firms that are excluded from registration.

The Committee considered and rejected two other specific definitions of "foreign limited liability company." Delaware Section 18-101(4) defines "foreign limited liability company" to include only firms that are denominated as limited liability companies under the foreign law. Texas art. 1.02(9) provides:

"FOREIGN LIMITED LIABILITY COMPANY" MEANS AN ENTITY FORMED UNDER THE LAWS OF A JURISDICTION OTHER THAN THIS STATE (A) THAT IS CHARACTERIZED AS A LIMITED LIABILITY COMPANY BY SUCH LAWS OR (B) ALTHOUGH NOT SO CHARACTERIZED BY SUCH LAWS, THAT ELECTS TO PROCURE A CERTIFICATE OF AUTHORITY PURSUANT TO ARTICLE 7.01 OF THIS ACT, THAT IS FORMED UNDER LAWS WHICH PROVIDES [SIC] THAT SOME OR ALL OF THE PERSONS ENTITLED TO RECEIVE A DISTRIBUTION OF THE ASSETS THEREOF UPON THE ENTITY'S DISSOLUTION OR OTHERWISE OR TO EXERCISE VOTING RIGHTS WITH RESPECT TO AN INTEREST IN THE ENTITY SHALL NOT BE LIABLE FOR THE DEBTS, OBLIGATIONS OR LIABILITIES OF THE ENTITY AND WHICH IS NOT AUTHORIZED TO QUALIFY TO DO BUSINESS IN THIS STATE UNDER ANY OTHER STATUTE.

"Section 33-43-1002. Application for certificate of authority.

(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 limited liability company that satisfies the requirements of Section 33-43-1004;

(2) the name of the state or country under which it is organized;

(3) its date of organization and the latest date upon which the limited liability company is to dissolve;

(4) the address of its proposed registered office in this State and the name of its proposed registered agent at that office;

(5) the names and usual business addresses of its current managers and members;

(6) if management of the limited liability company is vested in a manager or managers, a statement to that effect.

(B) The foreign limited liability company shall deliver with the completed application a certificate of existence (or a document of similar import) duly authenticated by the Secretary of State or other official having custody or corporate records in the state or country under which law it is incorporated.

(C) The foreign limited liability company shall deliver with the completed application the initial annual report of the limited liability company as specified in Section 12-19-20.

(D) If the foreign limited liability company renders `professional services' as defined in Section 33-43-102(M), a statement that all of its members are licensed in one or more states to render the professional services which the foreign limited liability company practices.

(E) A foreign limited liability company authorized to transact business in this State must obtain an amended certificate of authority from the Secretary of State if it changes:

(1) its limited liability name;

(2) the period of its duration; or

(3) the state or country of its limited liability company.

(F) The requirements of this section for obtaining an original certificate of authority apply to obtaining an amended certificate under this section."

All of the more recent LLC statutes include registration provisions, although the Florida and Wyoming statutes do not. The Nevada Act permits foreign LLCs to register by complying with the provisions applicable in Nevada to foreign limited partnerships. Nevada Section 86.551. Some states, including Indiana and Georgia, provide for qualification of LLCs under a special qualification statute. See, e g. Ind. Code Ann. Sections 23-16-10.1-1 to -10.1-4 (Burns Supp. 1992); Ga. Code Ann. Sections 14-11-1 to 14-11-19 (1992).

The purpose of a registration provision is to provide notice to third parties of the applicable law and other information concerning foreign LLCs. Although filings in each state may not be cost justified for such purposes, the fact that they are universally required for foreign corporations and foreign limited partnerships virtually compels adoption of the same rule for LLCs.

The preamble, as well as subsections (A) through (E) are based on RULPA Section 902, although some language is borrowed from the Delaware Act. The preamble has been revised in this draft to conform with the filing provisions in Section 205 and to make clear that an application for registration is to be executed by a person with authority to do so under the laws of the state of the foreign LLC's organization.

Subsections (C) and (D) may need to be adapted to conform with individual state practices regarding service of process on foreign LLCs. It is expected that these rules will be based closely on those regarding service on domestic LLCs (see Section 105).

Subsection (F) is based on Virginia Section 13.1-1052(7), and is intended to alleviate the burden on the Secretary of State of determining whether foreign LLCs meet the statutory definition.

The Committee considered and rejected adding an open-ended duty to include information required by the Secretary of State. It also considered requiring foreign LLCs to produce certificates that they are in good standing in their jurisdiction of formation, and rejected the requirement on the ground that it could impose a significant burden, particularly on foreign-country LLCs, that are not worth the benefits.

Several acts also require information regarding the general character of the business that the foreign LLC proposes to transact. However, it is unclear whether such a provision would provide any useful information in light of the broad catchall language (i.e., "engage in any lawful act or activity") that will be used in many articles of organization to describe the general character of the LLC's business. Moreover, the chapter does not require that this information be included in the articles of organization of a domestic LLC.

Section 1007 and the Commentary to that section deal with the consequences of failing to register, including the effect of such failure on the application of the law of the formation state.

"Section 33-43-1003. Issuance of registration.

(A) If the Secretary of State finds that an application for registration conforms to the provisions of this article and all requisite fees have been paid, the Secretary shall:

(1) endorse on each signed original and duplicate copy the word `filed' and the date and time of its acceptance for filing;

(2) retain the signed original in the Secretary of State's files; and

(3) return the duplicate copy to the person who filed it or the person's representative.

(B) If the Secretary of State is unable to make the determination required for filing by subsection (A) at the time any documents are delivered for filing, the documents are considered to have been filed at the time of delivery if the Secretary of State subsequently determines that:

(1) the documents as delivered conform to the filing provisions of this chapter; or

(2) within twenty days after notification of nonconformance is given by the Secretary of State to the person who delivered the documents for filing or the person's representative, the documents are brought into conformance.

(C) If the filing and determination requirements of this Chapter are not satisfied within the time prescribed in subsection (B)(2), the documents shall not be filed."

This section is similar to RULPA Section 903 and to most of the more recent LLC acts, except that it has been conformed to the provisions for the filing of the articles of organization in Section 205. Note that the uncertainty regarding whether a firm organized in another country may register as a foreign LLC (see the Commentary to Section 1001) places a burden on the Secretary of State and may necessitate an additional delay in filing beyond the twenty days provided for in subsection (B)(2).

"Section 33-43-1004. Name.

No certificate of registration shall be issued to a foreign limited liability company unless the name of such company satisfies the requirements of Section 33-43-103. If the name under which a foreign limited liability is registered in the jurisdiction of its formation does not satisfy the requirements of Section 33-43-103, to obtain or maintain a certificate of registration the foreign limited liability company may use a designated name that is available, and which satisfies the requirements of Section 33-43-103."

This section is similar to Virginia Section 13.1-1054. The Colorado and Maryland Acts require that foreign LLC's names be those available to domestic LLCs, while Kansas requires the name to be distinguishable from those of other LLCs.

"Section 33-43-1005. Amendments.

(A) The application for registration of a foreign limited liability company is amended by filing articles of amendment with the Secretary of State signed by a person with authority to do so under the laws of the State or other jurisdiction of its formation. The articles of amendment shall set forth:

(1) the name of the foreign limited liability company;

(2) the date the original application for registration was filed; and

(3) the amendment to the application for registration.

(B) The application for registration may be amended in any way, provided that the application for registration, as amended, contains only provisions that may be lawfully contained in an application for registration at the time of the amendment."

This section conforms with Section 203 concerning filing of articles of amendment by domestic LLCs. Like Virginia Section 13.1-1052, this section provides for execution by a person with authority under the laws of the state of organization. Colorado Section 7-80-906 provides that the correcting statement be signed by a manager, member or other authorized agent, Kansas Section 17-7637 provides that a member should execute the certificate, and Maryland Section 4A-1002 provides that an authorized person should execute the certificate.

Note that, unlike the analogous provisions in RULPA and other LLC acts, this section does not mandate amendments to reflect changes. This is consistent with the lack of such a requirement for articles of organization. As explained in the Commentary to Section 203, a duty to amend is unnecessary in the light of the limited amount of information required in the filing, and confusing if no consequences are specified for failure to amend. It is expected that foreign LLCs will amend their applications to reflect changes in order to avoid potential personal liability of members and other adverse consequences based on fraud, veil-piercing or other common law doctrines. Some members of the Committee advocated imposing a duty to amend regarding changes of name. Note that failure to reflect such changes may be sanctioned by fictitious name statutes.

"Section 33-43-1006. Cancellation of registration.

(A) A foreign limited liability company authorized to transact business in this State may cancel its registration upon procuring from the Secretary of State a certificate of cancellation. In order to procure such certificate, the foreign limited liability company shall deliver to the Secretary of State an application for cancellation, which shall set forth:

(1) the name of the foreign limited liability company and the state or other jurisdiction under the laws of which it is formed;

(2) that the foreign limited liability company is not transacting business in this State;

(3) that the foreign limited liability company surrenders its certificate of registration to transact business in this State;

(4) that the foreign limited liability company revokes the authority of its registered agent for service of process in this State and consents that service of process in any action, suit, or proceeding based upon any cause of action arising in this State may thereafter be made on such foreign limited liability company by service thereof upon the Secretary of State; and

(5) an address to which a person may mail a copy of any process against the foreign limited liability company.

(B) The application for cancellation shall be in the form and manner designated by the Secretary of State and shall be executed on behalf of the foreign limited liability company by a person with authority to do so under the laws of the State or other jurisdiction of its formation, or, if the foreign limited liability company is in the hands of a receiver, trustee, or other court-appointed fiduciary by that fiduciary.

(C) A cancellation does not terminate the authority of the Secretary of State to accept service of process on the foreign limited liability company with respect to causes of action arising out of the doing of business in this State."

Cancellation of the registration terminates the duties (including fees and maintenance of a registered office) of a registered LLC.

Several LLC acts, including Colorado, Virginia and Texas, specify procedures for cancellation, although Colorado calls it "withdrawal". In Nevada, cancellation of registration is accomplished by filing articles of dissolution. The disclosures in this section are similar to those required by the Virginia Act. Texas requires additional information relating to the status of the limited liability company's debts and litigation. RULPA, the Delaware, Kansas and Maryland LLC Acts and the Indiana qualification statute provide for cancellation but contain less detail concerning procedures and disclosures.

Some legislatures may want to consider permitting foreign LLCs to maintain their statutory agent after cancellation of their registration.

"Section 33-43-1007. Transaction of business without registration.

(A) A foreign limited liability company transacting business in this State may not maintain an action, suit, or proceeding in a court of this State until it has registered in this State.

(B) The failure of a foreign limited liability company to register in this State does not:

(1) impair the validity of any contract or act of the foreign limited liability company;

(2) affect the right of any other party to the contract to maintain any action, suit, or proceeding on the contract; or

(3) prevent the foreign limited liability company from defending any action, suit, or proceeding in any court of this State.

(C) A foreign limited liability company, by transacting business in this State without registration, appoints the Secretary of State as its agent for service of process with respect to a cause of action arising out of the transaction of business in this State.

(D) A foreign limited liability company which transact business in this State without registration shall be liable to the State for the years or parts thereof during which it transacted business in this State without registration in an amount equal to all fees which would have been imposed by this chapter upon that foreign limited liability company had it duly registered, and all penalties imposed by this chapter, the Attorney General may bring proceedings to recover all amounts due this State under the provisions of this section.

(E) A foreign limited liability company which transacts business in this State without registration shall be subject to a civil penalty, payable to the State of ten dollars per day, not to exceed one thousand dollars per year.

(F) The civil penalty set forth in subsection (E) may be recovered in an action brought within a court by the Attorney General. Upon a finding by the court that a foreign limited liability company has transacted business in this State in violation of this chapter, the court shall issue, in addition to the imposition of a civil penalty, an injunction restraining further transactions of the business of the foreign limited liability company and the further exercise of any limited liability company's rights and privileges in this State. The foreign limited liability company shall be enjoined from transacting business in this State until all civil penalties plus any interest and court costs which the court may assess have been paid and until the foreign limited liability company has otherwise complied with the provisions of this article.

(G) A member or manager of a foreign limited liability company is not liable for the debts and obligations of the limited liability company solely because the limited liability company transacted business in this State without registration."

Because registration is required to provide information to third parties dealing with foreign LLCs, particularly including notice as to the state of formation, some penalties are necessary to ensure that the firm will register. However, denial of any recognition of the existence of the firm and limited liability of its members has been deemed too severe a penalty for LLCs, just as it has for corporations and limited partnerships.

Note that Section 1001 concerning the applicable law would ensure limited liability for the members of non-registered foreign LLCs, independently of this provision, as long as they fall within the definition of "foreign limited liability company."

Subsections (A) through (C) of this section are based on RULPA Section 907. The Colorado, Delaware, Kansas, Maryland and Virginia Acts have nearly identical provisions, although the Maryland and Virginia Acts use the term "doing business" instead of "transacting business." Subsection (B) has been changed from the RULPA model to follow the Delaware Act. See Delaware Section 18-907(b). The Utah Act has provisions similar to subsections (A), (B) and (G). See Utah Section 48-2b-146.

Subsections (D) through (G) are based on Colorado Section 7-80-910. The Maryland and Virginia Acts have provisions that, like subsection (E), provide for civil penalties and liabilities of members and managers. The Kansas Act authorizes the attorney general to seek equitable remedies. The Committee concluded that provisions for fines and back fees are appropriate in order to give foreign LLCs an incentive to register. In light of the availability of these sanctions, it should be clear that imposition of personal liability on members and managers is inappropriate.

"Section 33-43-1008. Authority to transact business required.

(A) A foreign limited liability company may not transact business in this State until it obtains a certificate of authority from the Secretary of State.

(B) The following activities, among others, do not constitute transacting business within the meaning of subsection (A):

(1) maintaining, defending, or settling any proceeding;

(2) holding meetings of the members or managers or carrying on other activities concerning internal affairs;

(3) maintaining bank accounts;

(4) maintaining offices or agencies for the transfer, exchange, and registration of the corporation'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 any indebtedness, mortgages, and security interests in real or personal property;

(8) securing or collecting any debts or enforcing mortgages, security interests, or any other rights in property securing debts;

(9) owning, without more, real or personal property;

(10) conducting an isolated transaction that is completed within thirty days and that is not one in the course of repeated transactions of like nature;

(11) transacting business in interstate commerce;

(12) owning and controlling a subsidiary or limited liability company incorporated in or transacting business within this State;

(13) is a member or manager of a limited liability company or foreign limited liability company that is transacting business.

(C) A foreign limited liability company which renders a professional service is not required to obtain a certificate of authority to transact business in this State unless it maintains or intends to maintain an office in this State for the conduct of business or professional practice.

(D) The list of activities in subsection (B) is not exhaustive."

This section is based on RMBCA Section 15.01, and is similar to the Maryland, Texas and Virginia Acts and the Indiana qualification statute. There is, however, no similar provision in RULPA, the Colorado or Kansas Acts. The acts listed in the section are those which are unlikely to bring the LLC into direct dealings with third parties within the state who could benefit from the information provided in the registration.

Subsection (B) is based on a draft of the proposed California Act. The acts listed in this subsection may involve liability to third parties in the state, but do not require registration because the third parties will in any event be able to locate the entity controlled by the LLC.

Some states have modified the RMBCA formulation in their corporate and partnership statutes, among other ways, to provide that the ownership of income-producing real or tangible property will constitute transacting business. The Committee considered and rejected this alternative.

States may wish to conform their LLC statutes with their corporate or partnership statutes, or to simply adopt the corporate provision by reference in the LLC statute.

Although section 1008(B) does not exclude from the definition of "transacting business" a foreign LLC's status as a general partner of a partnership, this omission does not reflect the Committee's affirmative judgment that status as a general partner constitutes transacting business in all cases. Nevertheless, several Committee members believe that it would be appropriate to provide explicitly that an LLC will not be deemed to transact business merely because it serves as a general partner of a limited partnership that is transacting business within the state. A domestic limited partnership will have already filed with the Secretary of State, and the same is presumably true of a foreign limited partnership. If the partnership is registered, there is arguably no need to impose an overlapping registration requirement on each LLC general partner.

"Section 33-43-1009. Rendering professional services.

(A) A domestic or foreign limited liability company may render professional services in this State only through individuals licensed or otherwise authorized in this State to render the services.

(B) Subsection (A) does not:

(1) require an individual employed by a limited liability company to be licensed to perform services for the limited liability company if a license is not required otherwise;

(2) prohibit a licensed individual from rendering professional services in his individual capacity although he is a member or manager of a domestic or foreign limited liability company which also renders professional services; or,

(3) prohibit an individual licensed in another state from rendering professional services for a domestic or foreign limited liability company in this State if not prohibited by the licensing authority.

Section 33-43-1010. Confidential relationships.

(A) The relationship between an individual rendering professional services as an employee of a domestic or foreign limited liability company which renders professional services as defined in Section 33-43-102(M), and his client or patient, is the same as if the individual were rendering the services as a sole practitioner.

(B) The relationship between a domestic or foreign limited liability company which renders professional services as defined in Section 33-43-102(M) and the client or patient for whom its employees are rendering professional services is the same as that between the client or patient and the employee.

Section 33-43-1011. Privileged communications.

A privilege applicable to communications between an individual rendering professional services and the person receiving the services recognized under the statute or common law of this State is not affected by this chapter. The privilege applies to a domestic or foreign professional limited liability company which renders professional services, as defined in Section 33-43-102(M), and to its employees in all situations in which it applies to communications between an individual rendering professional services on behalf of the limited liability company (which renders professional services) and the person receiving the services.

Section 33-43-1012. Purposes.

(A) Except to the extent authorized by subsection (B), a South Carolina limited liability company whose purpose is to render professional services, may only: (i) render professional services within a single profession, and (ii) render services ancillary to the professional services. It may not engage in other business activities except as authorized by subsection (B).

(B) A limited liability company may render professional services in two or more professions (and engage in any lawful business authorized by Section 33-43-106), to the extent the combination of professional purposes or of professional and business purposes is authorized by the licensing law of this State applicable to each profession in the combination.

Section 33-43-1101. Suits by and against the limited liability company.

Suit may be brought by or against a limited liability company in its own name."

Several LLC statutes provide that the LLC has the power to sue in the firm's name, while other statutes provide generally that unincorporated associations may sue in their own names. See Ill. Ann. Stat. ch. 110, Section 2-209.1 (Smith-Hurd Supp. 1992); New Mexico Stat. Ann. Section 53-10-6. Without this provision, if the applicable jurisdiction does not authorize partnerships to sue in their own name, it might be argued that the same rule applies to other unincorporated associations, including LLCs. But even in this situation, the predominant "entity" nature of LLCs, coupled with the erosion of the rule against suits by partnerships, should persuade a court to allow suits in the LLC's name. If the jurisdiction authorizes suits in partnership name by statute or case law, this authorization arguably should extend to LLCs.

Note that Section 305 complements this section by providing, consistent with the entity character of LLCs, that members and managers are not, as such, proper parties to suits involving LLCs.

Section 33-43-1201. Merger.

(A) Unless otherwise provided in writing in an operating agreement, and subject to any law applicable to business entities other than limited liability companies, one or more limited liability companies may merge with another limited liability company as the merger or consolidation agreement shall provide being the surviving or resulting limited liability company or other business entity.

(B) Rights or securities of or interests in a business entity that is a party to the merger or consolidation may be exchanged for or converted into cash, property, obligations, rights or securities of, or interests in the surviving or resulting business entity or of any other business entity."

The Kansas, Virginia, Utah, Maryland, Oklahoma, Arizona, West Virginia and Delaware Acts provide for mergers of LLCs. The Act does not explicitly provide, as does RUPA Section 907, that LLCs may be merged in any other manner provided by law. This provision leaves unclear whether a combination that does not comply with the section is technically a "merger."

The merger and consolidation provisions in this Chapter are generally modeled on the merger provisions of the RMBCA and the Delaware General Corporation law. RULPA has no merger provisions, although several states have passed statutes providing for limited partnership mergers. RUPA includes provisions permitting mergers, as already mentioned. Some states may want to align their LLC merger provisions with those applying to other entities, although they should consider carefully whether different treatment is justified regarding, for example, the requisite vote and the need for formalities and appraisal rights.

Combinations of LLCs and between LLCs and other entities can be accomplished in several ways apart from complying with statutory merger provisions. An LLC, or its members, could acquire the assets of another entity, or vice versa, in exchange for ownership interests or cash, followed by the dissolution of the disappearing entity. In this situation, the members of the acquired firm could end up as members of the LLC.Alternatively, an LLC, or its members, could purchase all or a controlling portion of the shares of another entity, or vice versa, with the acquired firm being operated as a subsidiary of the acquiring firm, or the acquired firm could be dissolved and its assets distributed to the acquiring firm. If the LLC or its members paid for the shares of the acquired entity with interests in the LLC, the acquired entity or its owners could end up as members of the LLC. This article is not intended to preclude other such combinations. Rather, it clarifies the rights and obligations of the constituent entities and their members who wish to accomplish the effects of a merger.

There is a question concerning what types of business entities should be covered by the merger provisions. Virginia includes domestic and foreign LLCs, limited partnerships and corporations. Kansas, Utah and West Virginia provide for mergers only with LLCs. Maryland includes business trusts, and the Oklahoma and Delaware Acts include essentially all other business entities. The Committee was equally divided regarding whether to expand this section to permit mergers with general and limited partnerships because of a perception that many existing partnerships might desire to convert to LLC status. Others objected to this expansion on the ground that it might expose unwary members to transactions that would cause them to lose limited liability.

Most Committee members opposed expanding the section to include other entities, such as business trusts, that are not even defined in the statute. Providing for merger with all entities may create questions concerning, for example, whether the merger provisions apply to borderline transactions such as acquisition of a sole proprietorship, and how the rights of members and managers of constituent entities are affected by the merger. It is expected that states will vary regarding which types of business entities are included. Moreover, it must be remembered that these provisions are simply a standard form and that, as discussed above, the consequences of a merger or consolidation can be accomplished through other types of transactions.

Note that jurisdictions that permit mergers between LLCs and other forms of business entities must make conforming changes in the statutes relating to those other entities, or adopt special statutes on inter-entity mergers. A separate inter-entity merger statute would avoid the need to comply with multiple, and possibly conflicting, sets of merger provisions.

As made clear in this section, when an LLC combines with, or converts into or from something other than a domestic LLC, the restrictions and procedures of the statutes controlling those other business forms apply, including filing requirements, limitations on combinations, and consequences of dissolution of the disappearing entities. See also Section 1203.

The act does not provide for "conversion" as do RUPA and Virginia regarding limited and general partnerships, and Virginia and West Virginia regarding partnerships and LLCs. Although RUPA Section 903 provides that a conversion does not change the preexisting "entity," and the Virginia and West Virginia statutes provide that there is no dissolution, it is uncertain what effect courts will give to these provisions. Moreover, consequences to other types of entities converting to or from LLCs should be dealt with in the statutes applicable to those entities. In particular, with respect to a partnership conversion, partnership statutes should make clear what happens to the partners' personal liability. See RUPA Sections 901-902.

"Section 33-43-1202. Approval of merger.

(A) Unless otherwise provided in writing in an operating agreement, a limited liability company that is a part to a proposed merger shall approve the merger agreement by the consent of two-thirds of the number of the members.

(B) Each corporation and foreign limited liability company that is a party to a proposed merger or consolidation shall approve the merger or consolidation in the manner and by the vote required by the laws applicable to such business entity.

(C) Each business entity that is a party to the merger shall have such rights to abandon the merger as are provided for in the merger agreement or in the laws applicable to the business entity."

The per capita majority voting requirement is consistent with the usual voting rule in Section 403. Some states, however, including Maryland and Arizona, provide for a unanimous vote default rule. Virginia permits approval over member's dissent only if the member consented to a non-unanimous-vote provision. Virginia Section 13.1-1071(A).

Corporate statutes provide that the merger ordinarily must be instituted by a resolution adopted by the board of directors which is then approved by a vote of the constituent shareholders. This gives significant power to the managers to decide when a merger will take place. LLCs, on the other hand, may be managed directly by the members. Even LLCs that are managed by managers probably are closely held, so the members would expect to participate directly in the approval process. Of course LLCs can provide for approval procedures different from the default procedures provided for here.

Corporate shareholders who dissent from a merger normally are entitled to be paid the appraised value of their shares. However, this Act, like LLC statutes generally (with the exception of West Virginia), does not provide for appraisal rights, although they may be provided for in the operating agreement. Appraisal rights may introduce costly uncertainty or delay. Whether appraisal rights offer significant protection that outweighs the cost depends on members' other remedies for unfair mergers, including fiduciary duty protection against self-dealing and carelessness by those who have the power to bind the firm to the merger, and the members' right to withdraw or dissolve the LLC. Such dissenters rights probably are unnecessary in LLCs, because members normally can obtain equivalent protection by withdrawing and claiming the fair value of their interests. Indeed, where both rights are potentially available there may be some confusion about which applies.

Several members of the Committee believe that the default rule for approval of a merger should require unanimous vote, especially in the absence of a statutory dissenter appraisal right, in order to protect minority owners. In general, because of the potential for general partner liability, the Committee members who advocate expanding inter-entity mergers to include partnerships also favor a unanimous vote rule. Furthermore, a unanimous vote requirement may be necessary to prevent the amendment of an operating agreement by majority vote under Section 1203(E) and the circumvention of the unanimity requirement in Section 403(B)(l).

This section does not provide a procedure for abandonment of a merger by an LLC as is provided for in some LLC statutes, although it does permit the parties to agree to such a procedure. A formal abandonment procedure is more appropriate for a corporation in which there are more formalities, a shareholder vote may be more difficult to arrange, and market conditions are likely to change between the agreement and the closing. Some Committee members also noted a need for a procedure that would allow the members to cancel articles of merger filed with a delayed effective date in the event of an intervening abandonment.

Nor is there a provision for approval of a "plan of merger" as in a corporation. RUPA Section 904 requires a "plan" for partnership mergers, and the Arizona and Virginia LLC Acts require a plan for LLC mergers. Some Committee members believed that there was a need for a statute of frauds that would require written plans of merger. On the other hand, a requirement of a writing may frustrate the expectations of parties to informal LLCs. Moreover, if the plan must include certain terms, there is bound to be uncertainty and litigation over whether it does include these terms. If the plan need not be in writing, there is further uncertainty about how terms are supplied.

If a legislature wishes to require a plan, it might consider the following provisions, which are similar to those in the Arizona and Virginia Acts and were included in an earlier draft of this Act. In any event, these provisions provide some guidance as to the appropriate provisions for a merger agreement.

"Section 33-43-1202.5. Plan of merger.

(A) Each business entity shall enter into a written plan of merger or consolidation, which shall be approved in accordance with Section 33-43-1202.

(B) The plan of merger shall set forth:

(1) the name of the business entity that is a party to the merger and the name of the surviving business entity into which each other business entity proposes to merge;

(2) the terms and conditions of the proposed merger or consolidation;

(3) the manner and basis of converting the interests in each limited liability company of the surviving business entity or the new business entity, or of any other business entity, or, in whole or in part, into cash or other property;

(4) in the case of a merger, such amendments to the articles of organization of a limited liability company of the surviving business entity as are desired to be effected by the merger, or that no such changes are desired;

(5) such other provisions relating to the proposed merger as are considered necessary or desirable.

Section 33-43-1203. Articles of merger.

(A) The business entity surviving or resulting from the merger shall deliver to the Secretary of State articles of merger executed by each constituent entity setting forth:

(1) the name and jurisdiction of formation or organization of each business entity which is to merge;

(2) that an agreement of merger has been approved and executed by each business entity which is a party to the merger or consolidation;

(3) the name of the surviving or resulting business entity;

(4) the future effective date of the merger (which shall be a date or time certain) if it is not to be effective upon the filing of the articles or merger;

(5) that the agreement of merger is on file at a place of business of the surviving or resulting business entity, and the address of that place of business;

(6) that a copy of the agreement of merger will be furnished by the surviving or resulting business entity, on request and without cost, to any person holding an interest in any business entity which is to merge; and

(7) if the surviving or resulting entity is not a business entity organized under the laws of this State, a statement that such surviving or resulting business entity;

(a) agrees that it may be served with process in this State in any proceeding for enforcement of any obligation of any business entity party to the merger that was organized under the laws of this State, as well as for enforcement of any obligation of the surviving business entity or the new business entity arising from the merger; and

(b) appoints the Secretary of State as its agent for service of process in any such proceeding, and the surviving business entity or the new business entity shall specify the address to which a copy of the process shall be mailed to it by the Secretary of State.

(B) A merger takes effect upon the later of the effective date of the filing of the articles of merger or the date set forth in the articles of merger.

(C) The articles of merger shall be executed by a limited liability company that is a party to the merger in the manner provided for in Section 33-43-204 and shall be filed with the Secretary of State in the manner provided for in Section 33-43-205.

(D) Articles of merger shall constitute articles of dissolution for a limited liability company which is not the surviving or resulting business entity in the merger.

(E) An agreement of merger approved in accordance with Section 33-43-1202 may effect any amendment to an operating agreement or effect the adoption of a new operating agreement for a limited liability company if it is the surviving or resulting limited liability company in the merger. An approved agreement of merger may also provide that the operating agreement of any constituent limited liability company to the merger (including a limited liability company formed for the purpose of consummating a merger shall be the operating agreement of the surviving or resulting limited liability company. Any amendment to an operating agreement of adoption of a new operating agreement made pursuant to this subsection (E) shall be effective at the effective time or date of the merger."

COMMENTARY

Subsection (A) is based closely on Delaware Section 18-209(c), although similar provisions are found in other LLC statutes, including Arizona and Oklahoma.

Subsections (D) and (E) are also based on Delaware Section 18-209. As to (D), some LLC statutes, including Kansas and Utah, require any LLC that is not the successor in the merger to file articles of dissolution effective on or before the effective date of the merger. This extra procedure is unnecessary, and the consequences of failing to comply are unclear, particularly since no articles of dissolution are required Section 906.

"Section 33-43-1204. Effects of merger.

A merger has the following effects:

(A) The business entities that are parties to the merger agreement shall be a single entity, which, in the case of a merger as the surviving entity;

(B) Each party to the merger agreement, except the surviving entity or the new entity, shall cease to exist;

(C) The surviving entity or the new entity shall thereupon and thereafter possess all the rights, privileges, immunities, and powers of each constituent entity and shall be subject to all the restrictions, disabilities, and duties of each of such constituent entities;

(D) All property real, personal, and mixed, and all debts due on whatever account, including promises to make capital contributions and subscriptions for shares, and all other choses in action, and all and every other interest of belonging to or due to each of the constituent entities shall be vested in the surviving entity or the new entity without further act or deed;

(E) The title to all real estate and any interest therein, vested in any such constituent entity shall not revert or be in any way impaired by reason of such merger;

(F) The surviving entity or the new entity shall thenceforth be liable for all liabilities and obligations of each of the constituent entities so merged and any claim existing or action or proceeding pending by or against any such constituent entity may be prosecuted as if such merger had not taken place, or the surviving entity or the new entity may be substituted in the action;

(G) Neither the rights of creditors nor any liens on the property of any constituent entity shall be impaired by the merger;

(H) The interests in a limited liability company and the former holders thereof are entitled only to the rights provided in the merger agreement or the rights otherwise provided in the merger agreement or the rights otherwise provided by law."

If the LLC statute does not provide for a merger, the parties may accomplish nearly the same thing by filing articles of dissolution for merged entities and providing by agreement for transfer of rights, property and obligations to the successor. However, under this procedure any rights and property not effectively transferred remain with the dissolved firm, to be distributed in accordance with the dissolution provisions. Also, there is no effective novation as to debts, so creditors may continue to have rights against the dissolved LLC as in any

dissolution as well as against the successor.

Note that the effects of a merger between a domestic LLC and a non-LLC business entity or an LLC formed under the laws of another state may be complex. If a domestic or qualified foreign LLC merges into a foreign LLC that is not qualified to do business in the state, and the non-qualified foreign LLC survives, the resulting firm must meet the qualification provisions of Article 10 and, as provided in Section 1203, the service-of-process rules of the state in which it does business.

In a merger between a corporation and an LLC, there must be a conversion of the corporate or LLC management and financial structure into that of the surviving firm. This may include a shift from shares to LLC interests or vice versa, and a shift from a director/officer centralized management structure into decentralized management. All these effects are left by this act to the parties' agreement and, pursuant to Section 1201, to the law governing the resulting entity.

As indicated above, this chapter does not provide for mergers that include general or limited partnerships as parties. A merger of an LLC into a limited partnership would involve additional problems connected with conversion from a limited liability to a personal-liability firm. A strong argument could be made that LLC members should not be converted to partners, with personal liability, without their consent. However, since these members may themselves be corporations or other limited liability firms, a veto power may be unnecessarily costly. Moreover, the members probably have the power to withdraw in response to the merger. As noted previously, there are profound disagreements among the Committee members regarding whether the statutory default rules should require unanimous approval of mergers and whether the statute should permit mergers with limited and general partnerships.

The merger or conversion of a limited partnership into an LLC also involves the question of what happens to the partners' personal liabilities. Clearly the merger or consolidation should not affect the general partners' liability for debts accrued prior to the merger or consolidation, or for post-merger debts with third parties who had no knowledge or notice of the change. However, this is a matter that is best dealt with by the partnership statute.

"Section 33-43-1301. Filing, service, and copying fees.

(A) The Secretary of State shall charge fifty dollars for filing any document required to be filed pursuant to this chapter.

(B) 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 corporation:

(1) for copying, one dollar for the first page and fifty cents for each additional page; and

(2) two dollars for the certificate.

(C) Before filing any of the following documents, the Secretary of State shall collect the following taxes which shall be remitted to the State Treasurer for use of the State:

(1) articles of organization, one hundred dollars;

(2) amendment to articles of organization, one hundred dollars;

(3) articles of merger, one hundred dollars;

(4) application by a foreign limited liability company for a certificate of authority to do business in South Carolina, one hundred dollars;

(5) amendment by a foreign limited liability company of its certificate of authority, one hundred dollars."

It is expected that each state will provide for its own fee schedule.

"Section 33-43-1302. Execution by judicial act.

Any person who is adversely affected by the failure or refusal of any person to execute and file any articles or other document to be filed under this chapter may petition the court of common pleas in the county where the registered office of the limited liability company is located to direct the execution and filing of the articles or other document. If the court finds that it is proper for the articles or other documents to be executed and filed and that there has been failure or refusal to execute and file such documents, it shall order the Secretary of State to file the appropriate articles or other documents.

Section 33-43-1303. Definition of knowledge.

(A) A person has `knowledge' of a fact within the meaning of this chapter not only when he has actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances shows bad faith.

(B) A person has `notice' of a fact within the meaning of this chapter when the person who claims the benefit of the notice:

(1) states the fact to such person; or

(2) delivers through the mail, or by other means of communication, a written statement of the fact to such person or to a proper person at his place of business or residence."

This section is based on UPA Section 3(1). The Committee believes that legislatures also should consider adding a provision based on UPA Section 3(2).

"Section 33-43-1304. Rules of construction.

(A) It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.

(B) Unless displaced by particular provisions of this chapter, the principles of law and equity supplement this chapter.

(C) Rules that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter."

Subsection (A) is based on Delaware Section 18-1101(b).

Subsection (B) is based on RUPA Section 104(a). It makes clear that principles of law and equity do not apply where displaced by the provisions of this Chapter-that is, these principles do not apply in all cases. For example, general principles of agency are displaced by provisions of this Chapter relating to the agency power of members and managers.

Subsection (D) explicitly provides that amendments to this Chapter may not change existing contracts. By contrast, Delaware Section 18-1106 and RUPA Section 107 provide that existing firms are subject to amendments. Because such provisions weaken the security of contracts, they seem unwise as a policy matter and may be contrary to the Contract Clause of the Constitution, art. I, Section 10, cl. 1.

"Section 33-43-1305. Jurisdiction of the circuit court.

The circuit courts shall have jurisdiction to enforce the provisions of this chapter.

Section 33-43-1306. Severability.

If any provision of this chapter or its application to any person or circumstances 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. To this end, the provisions of this chapter are severable.

Section 33-43-1307. Interstate application.

A limited liability organized and existing under this chapter may conduct its business, carry on its operations, and have and exercise the powers granted by this chapter in any state or foreign country."

This is based on the Wyoming statute. Although such provisions are not necessarily binding on other states, they may be helpful for purposes of applying choice of law and constitutional principles in establishing the legislature's intent that the law be applied extraterritorially.

SECTION 2. This act takes effect upon approval by the Governor.