Limited Liability Companies – LLC Basics

WHAT ARE LIMITED LIABILITY COMPANIES AND WHY CREATE ONE?

Our firm routinely encounters an employer who has “LLC” after their name. What is the impact of this designation on our client’s ability to collect their settlement, award, or judgment? We generally sue corporations, not individuals, because corporations are the named employers and have the resources to compensate our clients for wrongful termination. But what happens when corporations are “members” of a “limited liability company”?

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

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

HOW LIMITED LIABILITY COMPANIES ARE CREATED.

Most people are familiar with the idea that corporations are formed by filing “articles of incorporation.” However, an LLC is created by filing with the Secretary of State or Department of Corporations of a State a document known as “articles of organization” or sometimes called “certificate of organization” or “certificate of formation.”

LIMITED LIABILITY COMPANIES FORMED BY OTHER LIMITED LIABILITY COMPANIES

Most people are also familiar with the idea of ​​a parent-child relationship. That is, a parent corporation has stock ownership and some overlapping controls over a separate subsidiary corporation. An LLC can also establish this “parent-subsidiary” relationship of multiple LLCs that participate in a joint venture. Why do it? The structure still allows for additional layers of protection against liability. If one of the LLC members fails or incurs overwhelming debt, the other LLC members are protected from exposure, except for what they contributed to the failed LLC member.

IMPLICATIONS FOR CREDITORS AND EMPLOYEES OF LIMITED LIABILITY COMPANIES

An LLC cannot by law issue shares. Your investment capital is derived from your members and from any private debt you may incur. But unless the LLC remains a shell to defraud creditors, it is often sufficiently funded by its corporate members and other LLC participants to cover our clients’ claims.

An LLC ends when one of the members chooses to leave the LLC. However, the operating agreement may stipulate a purchase of the outgoing member’s interest and continuation of the LLC. Without such a contingency in the Operating Agreement, a new LLC must be formed. The reality is that your target employer-defendant can be dissolved if one of the LLC members leaves. Diligent attorneys suing an LLC will obtain a copy of the Operating Agreement to identify all members and ensure that operations continue.