How Do We Issue LLC Membership Interests?
When one forms a limited liability company (LLC) without a lawyer, there is a high likelihood that LLC membership interests will not be issued properly. This post describes how to issue LLC membership interests. It is adapted from a Quora question about LLC membership vesting that I answered.
Properly-Issued LLC Membership Interests
If LLC membership interests are issued properly, one would expect to see several things. (more…)
Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership
Future services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).
Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.
However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.
Can I Sell a Partnership Interest in California?
I recently answered an Avvo question about whether one can sell a partnership interest. The question and answer are paraphrased below (with emphasis added).
Q. In California, is a general partnership terminated upon the sale of one partner’s interest to a third party? How would the remaining partner and new partner continue business? Would a new entity need to be formed? There is no written partnership agreement.
A. Corporations Code Section 16201 states that “A partnership is an entity distinct from its partners.” Therefore, a membership change does not, by itself, create a new partnership.
Are LLC Memberships Securities that Must be Registered?
The following are (somewhat edited) an Avvo question and my answer: Q. Is it necessary to file a Form D securities exemption when forming a California limited liability company (LLC) and only issuing an interest to the forming members?
A. The short answer is “no“. The somewhat longer answer is as follows: (more…)
Can an LLC have Members with a Non-ownership Economic Interest?
Today I answered a LinkedIn question about forming an LLC where some members have no ownership of the LLC but receive a share of cash resulting from the business’s profits (their economic interest). The question and answer are reproduced, in somewhat edited form, below. (Since I first wrote this post, LinkedIn has shut down its Q&A feature, so you no longer can find this question there.)
Q: Can you have a Manager Managed LLC where Members have zero ownership interest but receive a share of economic interest? So, the Operating agreement would look like this: 2 Manager Members w/ 50/50% ownership share and 25/25% economic share; 2 Additional Members w/ 0% ownership share and 25/25% economic share. (more…)
Can I Assign My LLC Membership?
Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.
Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
The applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:
Should We Issue LLC Membership Certificates?
A friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.
The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
Here are the points that I made in my response. (more…)
How to Form an LLC
I am writing this post about how to form an LLC (limited liability company) because of a question that I answered on Quora. Please see What are the basic requirements for forming of a LLC in US?
The following is an overview of the steps required to form an LLC properly in the U.S.: (more…)
Units are to LLCs as Shares are to Corporations
I am writing this post about limited liability company (LLC) units because of a question that I answered on Quora. Please see Why would an operating agreement for an LLC have a Schedule A and also a quantity of Class A interests?
LLC Membership Interests: Percentages
We can specify LLC membership interests in either of two ways. (more…)
What is Successor Liability and Why Should I Care?
This post about successor liability is prompted by a question that I answered recently on Quora. (See Can I dissolve my corporation and transfer its website to my personal ownership?)
The following is oriented somewhat toward California law, but similar considerations likely apply in other states. (more…)
How Do We Issue Corporate Shares?
Several weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.
To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized. (more…)
How Do We Add a New LLC Member?
Recently, I have seen several limited liability company (LLC) members ask, online, how they can add a new LLC member. This post provides the answer, which is pretty simple.
Short answer: One must amend the Operating Agreement to add a new LLC member.
Slightly longer answer: An Operating Agreement (OA) can be oral or written. A written OA is better because it clearly documents the members’ agreement concerning the LLC.
Single-Member LLCs – What’s the Deal?
From time to time, I receive question from entrepreneurs about alleged deficiencies in single-member LLCs (limited liability companies). (As is discussed below, single-member LLCs are different from multi-member LLCs.) This post is adapted from a question about single-member LLCs that I answered on Avvo.
Single-Member LLCs Provide Limited Liability Protection
Q. What is a best way to include a relative-foreigner as LLC member in CA? I formed single-member LLC in CA. Unfortunately I found later that single-member LLCs do not provide usual limited liability protection. (more…)
How Can I Have Reverse Vesting in an LLC?
I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.
Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement? (more…)
Attention LLC Members: You Have the Right to Be Heard
I have written about annual meetings of corporations’ shareholders (Annual Meetings: The Basics). Although limited liability companies (LLCs) have no obligation to hold, and typically do not hold, annual meetings of their members, meetings of members can take place.
Section references? below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
For California LLCs,? meetings of members are governed by Corporations Code Section 17704.07.
Can Personal Creditors Threaten My LLC?
I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.
Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)
Funding Your LLC: Avoiding Mistakes
I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.
Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan? (more…)
Can I Form an LLC without a Lawyer?
Recently, several start-up entrepreneurs have asked me whether they can form a limited liability company – LLC – without a lawyer available to help. The following answer reflects practices in California.
Filing Articles of Organization for an LLC without a Lawyer is Easy
The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required. (Unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable.)
How to Dissolve a Delaware Corporation or LLC
This post discusses how to dissolve a Delaware corporation or LLC (limited liability company) – i.e., how to terminate the entity’s existence.
For information about dissolving California entities, see How to Kill Your Company when that’s the Only Choice. (more…)
Should My Corporation Provide Stock Certificates to Shareholders?
Let’s assume that you are one of the founders of a new corporation. Should the corporation provide stock certificates to shareholders when their shares are issued?
For most startups formed in California, the answer is “yes” – and not merely because the founders will feel good having tangible evidence of their ownership interests. (more…)
Can I compete with my own LLC?
I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.
Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?
Can we kick one of the members out of our LLC?
I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.
The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)
