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The Uniform Limited Liability Company Act:
Summary & Analysis
By Carter G. Bishop*
The National Conference of Commissioners on Uniform State Laws

(Conference) adopted the Uniform Limited Liability Company Act
(ULLCA) in 1994. To coordinate with subsequent developments in federal
tax guidelines regarding manager-managed limited liability companies
(LLCs), the Conference adopted minor changes to ULLCA's dissolution
provisions in 1995. More recently, the Internal Revenue Service (IRS)
announced a proposal to release all unincorporated business organizations
from the burden of complying with its federal tax classification regulations
distinguishing partnerships from corporations.' Because state LLC laws
*Carter G. Bishop is a Visiting Professor of Law at the Suffolk University Law School in
Boston, Massachusetts and is a Professor of Law and the Founding Director of the Graduate
Tax Program at the William Mitchell College of Law in Saint Paul, Minnesota. Professor
Bishop was the reporter for the Uniform Limited Liability Company Act and is the reporter
for the Limited Liability Partnership Act drafting project. Portions of this Article are from
Carter G. Bishop & Daniel S. Kleinberger, LIMITED LIABILITY COMPANIES: TAx AND BUSI-
NESS LAW (Warren, Gorham & Lamont 1995) and Carter G. Bishop, Treatment of Members
Upon Their Death and WithdrawalFrom A Limited Liability Company: The Case ForA Uniform Para-
digm, 25 STETSON L. REV. 255 (1995).
1. I.R.S. Notice 95-14, 1995-14 I.R.B. 7. See Daniel Shefter, Check The Box Partnership
ClassificationAction: A Legitimate Exercise in Tax Simplfication, 67 TAX NOTE.ZS 279 (1995). The
release is the first step in the eventual decline of the importance of the four classification tests
outlined in the tax classification regulations which draw artificial lines in an attempt to
distinguish partnerships from corporations. A revision of the regulations is an impossible task
without a governing paradigm and, after some study, the IRS has astutely recognized the
impossibility of developing such a paradigm. Treas. Reg. §§ 301.7701-2, 301.7701-3 (1995).
In the release, the IRS announced that it is considering scrapping the current four factor
classification system in favor of a "check-the-box" system. See I.R.S. Notice 95-14, supra, at
8. Under the system, a new unincorporated business organization with two or more members
simply elects to be treated either as a partnership or as a corporation by filing the appropriate
tax return unless another Internal Revenue Code provision prohibits the chosen classification
(such as the § 7704 publicly-traded partnership provisions). The release applies prospectively
and, once made, can be changed only with the consent of all owners. Incorporated organi-
zations would not be permitted to use the election because corporate formation is a deemed
election of corporate tax status, Because the release covers unincorporated organizations, it
would govern the classification of all LLCs, limited liability partnerships (general partnerships
with a liability shield), and limited liability limited partnerships (limited partnership with a
52 The Business Lawyer; Vol. 51, November 1995
were drafted to comply with the soon to be anachronistic classification

regulations, 2 every state will eventually consider whether to amend its laws
general partnership liability shield).

The release will encourage states to amend their LLC laws to eliminate artificial statutory
constraints imposed to comply with the old regulations. These restraints related to the cor-
porate concepts of limited liability, centralized management, free transferability, and conti-
nuity of life. As the amendment process begins, a corporate-styled liability shield for owners
likely will survive much in its current form as will flexible management structures which
permit owners to specify either member- or manager-management. Because the free trans-
ferability and continuity of life corporate criteria were the primary basis of LLC partnership
taxation, however, these two factors created strict rules to guarantee partnership taxation.
Under the release, these rules which restrict the transfer of membership interest and rely on
membership termination to threaten dissolution are no longer necessary. Of these two, con-
tinuity of life provisions are the most likely to be seriously revised.
Under the release, free transferability revisions now may contemplate different manage-
ment structures. For example, as with a centrally managed corporation subject to the pub-
licly-traded partnership provisions, non-manager member interests in manager-managed
LLCs now may be freely transferable. Because these members do not directly participate in
management, other than through the election of managers, there are few non-tax reasons
for restricting their transfer as a default rule. Ownership interests in member-managed LLCs
and essentially all limited liability partnerships convey a more direct management partici-
pation. Therefore, these owners may wish to continue the current rules which permit some
or all the members to "pick their partners."
Even with the flexibility accorded by the release, it is not certain that statutory modifica-
tions will occur. For example, even after the release of Rev. Proc. 95-10, 1995-3 I.R.B. 20,
ULLCA drafters rejected a modification of the "pick-your-partner" rule that would have
permitted a majority-in-interest of the member-managers to admit transferees of a current
member as a member. See UNl'. LIMITE.D LIABILITY COMPANY ACT §§ 503(a), 103(b) (1994)
[hereinafter ULLCA] (all members must agree to admit a transferee as a member unless
otherwise provided in an operating agreement).
Continuity of life revisions now may contemplate severing the current tax-mandated re-
lationship between owner dissociation and organization dissolution. For example, the release
may signal the welcome end of rules that provide that the death of a member terminates the
decedent's management rights where death does not dissolve the company. Under this rule,
the decedent's heirs take only the decedent's economic rights. Any statutory modification
may well conform to the organization's management structure in order to preserve the "pick-
your-partner" rule. Such a revision would make an LLC more like a corporation. At the
same time, the introduction of this corporate similarity promises a new look at the lock-in
effect applicable to corporate shareholders. Organizations with a perpetual existence, no
fixed term, and no established market for owner interests face minority and passive owner
protection issues. These issues may be addressed through a combination of enhanced judicial
dissolution statutes and statutory buy-out rights triggered by specified events ranging from
mere owner dissociation to control misconduct. Statutory buy-out provisions, in effect, sub-
stitute for private buy-sell agreements which are very expensive and complex to draft (perhaps
explaining why few corporations actually have such agreements).
It is difficult to predict whether Notice 95-14 will be the progenitor of significant state law
development and modification, other than simply to create more flexibility and adjust current
default rules. Sophisticated tax analysis already has had a noticeable effect on state law.
Minor impact would support the interpretation that the IRS has made only minor conces-
sions while promoting a sound tax policy goal-greater tax classification certainty.
2. Many first generation state laws were drafted to assure that limited liability partnership
tax classification was "bullet proof." This system eliminated drafting flexibility with regard
The Uniform Limited Liability Company Act 53
to accommodate this new flexibility. Given the obvious advantages of uni-

form state laws governing interstate business activities of LLCs, the
3
ULLCA will receive important consideration during this review process.
This Article is intended only as a summary of the ULLCA's primary pro-
visions.
The ULLCA is best understood by analyzing its critical drafting para-
digms. The ULLCA provides two pathways by which organizing members
can ensure that their intent regarding the duration and the management
structure of the company will be safeguarded. Both pathways are activated
by required provisions in the articles of organization. The first pathway
involves the intended duration of the company with primary impact on
the timing of the company's required purchase of a dissociated member's
interest. The second pathway involves the management structure of the
company with primary impact on whether a member's dissociation threat-
ens dissolution by triggering a vote to continue the company's business.
Both pathways are variable. They are simply default rules that the mem-
bers may alter by specially tailored provisions in an oral or written oper-
ating agreement. In fact, all the ULLCA sections may be altered by the
agreement of the members except for a very narrow range of core rules
regarding the fiduciary behavior of members and managers.
This Article is divided into three distinct sections, each representing a
particular phase in the life cycle of an LLC. The first part explores the
most important rules regarding the organization of an LLC; the second
part discusses the most important rules regarding the operation of a com-
pany; and the last part considers the most important rules applicable to
the dissolution and winding up of a company.
to the critical corporate characteristics of free transferability of interests and continuity of

life. Members could not alter this outcome by private agreement. An LLC formed under
such statutes lacked: (i) free transferability of interests because a transferee of a member's
membership interest could not be admitted as a member without the consent of all the
remaining members and (ii) continuity of life because the dissociation of a member caused
the dissolution of the company unless all the remaining members agreed, within 90 days
after the dissociation, to continue the business of the company. See, e.g., COLO. REV. STAT.
ANN. § 7-80-702(1) (West Supp. 1995) (transferability); WyO. SI'AT. § 17-15-123(a)(iii) (1989)
(dissolution). More recent state laws permit drafting flexibility regarding all corporate char-
acteristics. An LLC formed under these statutes may lack: (i) free transferability of interests
because a transferee of a member's membership interest may not be admitted as a member
without the consent of a "majority in interest" of the remaining members; (ii) continuity of
life because the dissociation of a member will cause the dissolution of the company only if a
"majority in interest" of all the remaining members agreed, within 90 days after the disso-
ciation, to continue the business of the company; (iii) centralized management because the
members possess the apparent authority to bind the company; and (iv) limited liability be-
cause the members are personally liable for the obligations of the company simply by virtue
of being a member. Moreover, each of these rules may be modified by an operating agree-
ment. See, e.g., N.Y. LTD. LIAB. Co. LAW §§ 604(a) (transferability), 412(a) (management),
609(b) (liability shield) (McKinny Supp. 1995).
3. For a general discussion regarding the advantages of uniformity, see Fred H. Miller,
The Future of Uniform State Legislation in the Private Law Area, 79 MINN. L. REV. 861 (1995).
ORGANIZING A LIMITED LIABILITY COMPANY

ARTICLES OF ORGAJVIZATION
Filing
5
An LLC is a legal entity4 distinct from its one or more member owners.
6 7
It may be created for any lawful purpose by one or more persons deliv-
ering its articles of organization to the office of the Secretary of State or
similar state official for filing. Filing the articles by the Secretary of State
is conclusive proof that all conditions precedent to the creation of the
8
company have been satisfied.
The articles must set forth certain information, 9 may set forth addi-
tional information,' 0 must be signed" by a person organizing the com-
4. ULLCA § 201.
5. Id. § 202(a). The IRS consistently has reserved judgment regarding the federal tax
classification of a one-member LLC as a partnership because most state partnership acts
require the presence of at least two persons for the existence of a partnership. See Uniform
Partnership Act § 6(a) (1969) [hereinafter UPA] and Revised Uniform Partnership Act
§ 10 1(4) (1994) [hereinafter RUPA] (a partnership is "an association of two or more persons
to carry on as co-owners a business for profit"). For a discussion of the tax classification and
statutory issues associated with a one-member LLC, see Marshall B. Paul & Stuart Levine,
One-Member LLCs Pose Often-Overlooked State Law Issues, I J. LIMrED LIABILITY COMPANIES
162 (1995); Jerry S. Williford & Donald H. Standley, How Should Single-Member LLCs Be
Class ied for Federal Tax Purposes?, 2 J. LIMITED LIABILITY COMPANIES 27 (1995) (specific
discussion regarding the likely effect of Rev. Proc. 95-10, 1995-3 I.R.B. 20). Under Revenue
Procedure 95-10, the IRS will not rule that a one-member LLC is taxed like a partnership
and that a favorable partnership ruling issued to a company with more than one member
will lapse if the company has only subsequently one member. Rev. Proc. 95-10, 1995-3
I.R.B. § 4.01, at 21.
6. ULLCA § 112(a). The lawful purpose power is subject to any contrary state law. For
example, professionals may use an LLC unless state law otherwise restricts their ability to do
so. Id. § 112 cmt. A business is defined to include every trade, occupation, profession, and
other lawful purpose, whether or not carried on for profit. Id. § 10 1(3). Together, the lawful
purpose statute and the business definition mean that an LLC may be used for a purpose
other than to pursue profit. For example, an LLC may be used for family estate planning
purposes. Given the existing federal tax provision enabling a donor to take a tax deduction
for charitable contributions to a "corporation," it is unlikely that LLCs will have a significant
role in a donor recipient capacity. See I.R.C. § 501(c)(3) (1988 & West Supp. 1995). This tax
restriction would not, however, prevent two tax-exempt § 501 (c)(3) organizations from using
an LLC to conduct a profitable joint venture.
7. ULLCA § 202(a). The term "person" is broadly defined to include an individual, cor-
poration, business trust, estate trust, partnership, LLC, association, joint venture, govern-
ment, governmental subdivision, agency or instrumentality, or any other legal or commercial
entity. Id. § 101(14).
8. Id. § 202(c). Organizers deliver the articles for the Secretary of State to file. Therefore,
the existence and availability of the company's liability shield depends upon actual filing. Id.
§ 202 cmt. The Secretary of State must file the articles unless it is determined that the content
of the document fails to conform to the requirements of ULLCA or that all filing fees have
not been paid. Id. § 206(a).
9. Id. § 203(a).
10. Id. § 203(b).
11. Section 101(17) of the ULLCA sets forth the Uniform Commercial Code § 1-201(39)
pany,12 must be delivered to the Secretary of State for filing,'13 and must
be accompanied by the required filing fee. 1 4 The effective date of the
existence of a company begins when the articles are filed 15 unless the
articles specify a delayed effective date. 16 The articles may be amended or
restated at any time. 17
Required Information
The articles must set forth four items of required information: (i) the
name of the company,18 (ii) the address of the initial designated office, (iii)
(1990) definition of signed ("identify a record by means of a signature, mark, or other symbol,
with intent to authenticate it"). If the articles contain a false statement, any person who
signed the articles and knew the statement to be false is liable to any person who suffered
loss by reliance on the false statement. ULLCA § 209, If any person required to sign a record
refuses to do so, any person adversely affected thereby may seek a court order to require the
Secretary of State to sign and file. Id. § 210. The ULLCA does not require a false record to
be corrected. Rather, the correction is permissive because the person who signed is liable for
any false statement. Id. § 207(a).
12. Id. § 205(a)(3).
13. Id. § 202(a). The ULLCA contemplates electronic filing of documents through its
comprehensive definition of the new term "record" ("information that is inscribed on a
tangible medium or that is stored in an electronic or other medium and is retrievable in
perceivable form"). Id. § 101(16). Electronic filing is only authorized where the Secretary of
State otherwise permits such electronic filings. Id. § 206(a).
14. Id. § 206(a).
15. The filing is evidenced by the Secretary of State's date and time endorsement on the
original copy of the articles. Id. § 206(c)(1).
16. Id. § 202(b). The delayed effective date is effective at the time specified in the articles.
Id. § 206(c)(2). If a delayed effective date is set forth, but no time is specified, the articles are
effective at the close of business on that date. A delayed effective date may not be selected
beyond 90 days from the date of filing. Id. § 206(d).
17. Section 204(a) of the ULLCA makes all amendments permissive rather than man-
datory, but when an amendment is filed, it must contain certain required information. Unless
otherwise provided in an operating agreement, the consent of all the members is required
to amend the articles. Id. § 404(c)(3). See supra note 11.
18. Id. § 203(a)(1). The name of the company must contain specified information such as
"Limited Liability Company" or "LLC" designed to put those who deal with the company
on notice of the company's liability shield. Id. § 105(a). The name must be distinguishable
from the names of other LLCs, corporations, and limited partnerships authorized to transact
business in the state. If not, the applicant may nevertheless use the name if either the current
holder of the right to use the indistinguishable name consents to the applicant's use and
changes its own name or the applicant obtains a court judgment establishing its right to use
the name. Id. § 105(c). Where the applicant was organized in another state and seeks to
transact business under its name in the new state, it may adopt a fictitious name if its existing
name is indistinguishable from another name already in use. Where a company yet to be
formed or a preexisting company formed in another state wishes to protect a particular
distinguishable name for future use, the name may be either reserved or registered. Exclusive
name reservations are available for a nonrenewable 120-day period. Id. § 106(a). Name
registrations are effective for one year and may be indefinitely renewed at the end of each
calendar year. Id. § 107(c).
the name and address of the initial agent for service,' 9 and (iv) the name
and address of each organizer. 2° Three additional items of information
are required in the articles to alter special default rules. First, unless the
articles specify that a company's duration is for a specified term 2 1 thereby
making the company a term company, 22 it is an at-will company. 23 This
distinction has important effects on a member's right to require the com-
pany to purchase the member's interest immediately upon dissociation for
fair value because member dissociation often occurs without also causing
the dissolution of a company.
Secondly, unless the articles specify that a company's management
structure is managed by managers and sets forth the name and address
of the initial manager, 24 thereby making the company a manager-
managed company, 25 the company is a member-managed com-
19. Id. § 203(a)(2)-(3). An LLC must both designate and maintain an office within the
state, which need not be its principal place of business in the state, and the name and address
of an agent for service of process within the state. Id. § 108(a). An agent for service of process
must be a resident individual, corporation, or LLC organized in or authorized to transact
business in the state. Id. § 108(b). The office or agent may be changed and the agent may
resign by following specified procedures. Id. §§ 109-110. If a company fails to properly main-
tain an agent for service of process or if the agent cannot be found at the agent's address
with reasonable diligence, the Secretary of State is a proper agent for service. Id. § 11 (b).
20. Id. § 203(a)(4).
21. Id. § 203(a)(5).
22. Section 10 1(19) of the ULLCA defines a "term company" as an LLC in which its
members have agreed to remain members until the expiration of a term specified in the
articles.
23. Section 101(2) of the ULLCA defines an "at-will company" as an LLC other than a
term company. This useful drafting paradigm means that all LLCs are either term or at-will
companies. A third type of company is not possible. A term company that continues beyond
its specified term is generally regarded as an at-will company. Id. § 410.
24. ULLCA § 203(a)(6).
25. Section 101(11) of the ULLCA defines a manager-managed company as an LLC
designated as such in the articles. When combined with the definition of a member-managed
company, the definitions distinguish management structure solely by the location of the
agency power of members. In a member-managed company, the members are agents of the
company with the apparent authority to bind the company in the ordinary course of the
company's business. ULLCA § 30 1(a). In a manager-managed company, the managers are
agents of the company with the apparent authority to bind the company in the ordinary
course of the company's business. Id. § 101(11). Members do not have power to bind simply
as members. Id. §§ 101(10), 301(b). Because of the extreme difficulties relating to the precise
definition of a company by reference to member management rights when the members
exercise diverse responsibilities regardless of titles and positions, the definition of a manager-
managed company is intentionally related to the simple and bright line test regarding whether
the company is designated as such in its articles. In fact, neither the two company definitions
nor the articles actually substantively "define" the characteristics of a manager-managed
company. Interpreting the term "manager-managed company" in its context, however, re-
quires that a manager-managed company have the following characteristics: (i) the presence
of at least one manager who need not also be a member, (ii) that manager is vested with
agency authority, and (iii) no member is vested with agency authority simply because that
person is a member.
pany. 26 A company's management structure has important effects on a

member's power to bind the company and otherwise actively participate in
management and, after the Conference's 1995 amendments, on whether
any member's dissociation will threaten dissolution of the company by trig-
27
gering a vote to determine whether to continue the company's business.
Finally, unless the articles specify that one or more members of a com-
pany are liable for all or specified debts of the company, all members have
the protection of a full corporate-like liability shield.2 8 This flexible pro-
vision permits the members to create unlimited personal liability for at
least one member in order for the entity to lack the limited liability char-
acteristic which, in turn, allows the company to possess another corporate
29
characteristic.
26. Section 101 (12) of the ULLCA defines a member-managed company as an LLC other
than a manager-managed company thereby assuring that only one of two possible manage-
ment structures govern an LLC.
27. See ULLCA § 801(b)(3); see also infra notes 118-25. Other important collateral conse-
quences flow from the management structure designation. For example, general partners of
general and limited partnerships are subject to a self-employment tax on their distributive
share of partnership income or loss while limited partners of limited partnerships generally
are not subject to the tax. Subject to special qualifications, nonmanaging members of a
manager-managed company are not subject to the tax while all other members (including
the members of a member-managed company and the managing members of a manager-
managed company) are subject to the tax. For a further discussion and analysis of this topic,
see Robert R. Keatinge & Risa L. Wolf-Smith, Proposed Self-Employment Tax RegulationsEnhance
the Use Of LLCs, 1J. LIMITED LIABIuITY COMPANIES 170 (1995). Also, a member manager
of a manager-managed LLC may be a tax matters partner. See Carter G. Bishop & Allan G.
Donn, TMP ProposedRegulations Clarif LLC Designations and Selections, 2 J. LIMITED LIABILITY
COMPANIES 131 (1995).
28. ULLCA §§ 203(a)(7), 303(c). In order for the articles specification to be valid, the liable
member must have consented in writing either to the adoption of the provision in the articles
or to be otherwise bound by the provision. Id. § 303(c)(2).
An LLC ordinarily possesses the federal tax classification corporate characteristic of limited
liability because, like a corporation, its members are not personally liable for the company's
debts and obligations merely as owners of the company. Treas. Reg. § 301.7701-2(d)(1)
(1995). The release of Rev. Proc. 95-10, 1995-3 I.R.B. 20, however, may alter this landscape
in the future. Section 5.04 of the Revenue Procedure provides that an LLC lacks limited
liability only where at least one member is personally liable for all the obligations of the
company pursuant to express authority granted in the controlling statute and also possesses
a net worth equal to 10% of the total contributions to the company. This aspect of the release
compares an LLC to a limited partnership with a general partner personally liable for all
partnership obligations. For a further discussion of this topic, see Barbara C. Spudis & Susan
Pace Hamill, Ruling Standards For LLCs ClariedBy Rev. Proc. 95-10, 1J. LIMITED LIABILITY
COMPANIES 147 (1995). The IRS release would not find a member liable in a general
partnership sense unless that member is liable, like a general partner, for all company obli-
gations.
29. If the IRS ultimately adopts the "check-the-box" position expressed in Notice 95-14,
1995-14 I.R.B. 7, there would be less incentive to take advantage of the flexibility expressed
by this provision.
Optional Information
In addition to these "required" items, the articles may also set forth two
other items of information. First, the articles may set forth any provisions
30
permitted to be set forth in an operating agreement. Secondly, the ar-
ticles may set forth other matters not inconsistent with the law, 3' provided
32
the provisions do not alter certain nonwaivable fiduciary duty standards.
The most important item to be included in the latter category is permissive
limitations on authority regarding real estate. 33 For example, when the
articles contain a limitation on the general agency authority of members
and managers, a single designated person may possess the exclusive au-
thority to transfer company real estate. When such a person is appropri-
ately designated in the articles, a person who gives value without knowl-
edge of any actual authority limitations may accept the real estate transfer
34
instrument as conclusive.
Conflict Between Articles and Operating Agreement

The articles serve primarily a notice function to those dealing with the
company. 35 Accordingly, when members have a choice between placing
agreement provisions in the operating agreement or in the articles, they
will ordinarily choose the operating agreement unless there is an important
public notice function served by placing the provision in the articles. Be-
cause a matter could appear in both places, however, it is important that
one document supersede the other when an inconsistency conflict exists.
Two rules exist depending on who has relied on the inconsistent provision
in the articles. First, the operating agreement overrules an inconsistent
provision in the articles as to managers, members, and transferees of mem-
bers. 36 Second, the articles overrule an inconsistent provision in the op-
erating agreement as to all other persons who reasonably rely on the ar-
37
ticles to their detriment.
For example, where the articles set forth a permissive limitation on
authority regarding real estate, the person designated in the articles has
the conclusive authority to execute real estate documents with innocent
30. ULLCA § 203(b)(1).

31. Id. § 203(b)(2).
32. Id. § 203(c).
33. Id. § 301(c).
34. The special authority provisions have both positive and negative authority implica-
tions. The text discussion illustrates the positive authority implications regarding the desig-
nated person. The negative implication is that the normal agency authority of nonnamed or
undesignated members is terminated, even to third persons without actual knowledge of the
provision in the articles. Id. § 301(c) cmt. This means that all third parties dealing with an
LLC with respect to a real estate matter should always check the articles at closing.
35. Id. § 203 cmt.
36. Id. § 203(c)(1).
37. Id. § 203(c)(2).
third parties. When the members have revoked that authority in an op-
erating agreement, the designated person would be liable to the company
for a breach of authority. The company would nevertheless be bound by
the transaction.
Liability Shield
The filing of the articles of organization by the Secretary of State is
conclusive proof that the organizers have satisfied all the conditions prec-
edent to the creation of the company. 38 As a result, the liability shield is
available to all persons who enter transactions on behalf of the company;
however, until the articles are filed, the organization is not an LLC and
the shield is not available. 39 Because the act of filing rather than the act
of delivery to the Secretary of State creates the liability shield, reasonable
care should be taken to deliver the articles for filing as soon as practicable
and to make certain the articles comply with the filing requirements.
Basically, the Secretary of State must file the articles if they comply with
filing requirements and the appropriate filing fees are paid. 40 Fortunately,
the required provisions of the articles are straightforward and not burden-
some. Compliance with such low level requirements is not a high price
for establishing a liability shield.
Character of the Shield

The liability shield has several components. First, the debts, obligations,
and liabilities of a company are solely those of the company and not the
members or managers regardless of whether they arise in contract, tort,
or otherwise. 4 1 Secondly, a member or manager is not personally liable
for company debts, obligations, and liabilities solely by reason of being or
42
acting as a member or manager.
Together, these two provisions make clear that a member or manager
is not personally responsible for company obligations. Therefore, once it
is determined that a particular obligation belongs to the company versus
a personal obligation of the member or manager, the company bears sole
and ultimate responsibility for the obligation, at least as between the com-
pany and the member or manager.
Determinations of whether a liability created by a member or manager
is in fact a company liability versus the personal liability of the member
or manager are beyond the scope of this Article; however, the determi-
nation generally depends on whether the member or manager acted in
the ordinary course of the company's business when the liability was cre-
38. Id. § 202(c).

39. Id. § 202(c) cmt.
40. Id. 206(a) (second sentence).
41. Id. § 303(a) (first sentence).
42. Id. § 303(a) (second sentence).
ated. Some third party liabilities will clearly not belong solely to the com-
pany or to the member or manager but rather to both. When such a
liability accrues, it is important to determine how the ultimate responsi-
bility for the liability will be allocated between the company and the mem-
ber or manager.
A company must reimburse a member or manager for payments made
and indemnify a member or manager for liabilities incurred in the ordi-
nary course of their business of the company or for the preservation of its
property. 43 Accordingly, provided that the liability was created in the or-
dinary course of the company's business, the member or manager is en-
titled to reimbursement/indemnification from the company. Where the
member or manager is also liable to the third party, however, the reim-
bursement/indemnification will only be useful where the company's assets
are sufficient.
Member or agent conduct that is in the ordinary conduct of the com-
pany's business is not defined in the ULLCA. Conduct that violates the
member or manager's duty of care, 44 however, will not be covered by the
indemnification language. 45 Generally, this means that all conduct of the
member or agent that is not grossly negligent, reckless, intentional, or a
knowing violation of the law will be covered by the indemnification stan-
dard. Accordingly, even simple matters of ordinary negligence will be in-
demnified. 46 The theory of the provision is that since the company shares
the profit from often unchecked negligent behavior, it would be unjust for
it to disclaim liability to the member or manager when the culpable con-
duct creates liability to that member or manager.
Piercing the Shield

The ULLCA clearly contemplates that an affected third party may at-
tempt to pierce the company liability shield to create personal liability to
members for company debts, obligations, and liabilities. Because a com-
pany may often be a small and informal operation, however, the ULLCA
provides that the failure to observe the usual company formalities is not a
ground for piercing the liability shield. 47 The determination of "usual" is
not set forth but, presumably, the standard is objective, referring to the
level of formality for similarly situated companies.
43. Id. § 403(a). See infra notes 132-35 (indemnification discussion).

44. Id. § 409(c).
45. Id. § 403 cmt.
46. Id. The comment reflects that tortious conduct may not be subject to indemnification.
In context, the comment suggests that the degree of negligence (e.g., gross versus ordinary
negligence) will be the determining factor.
47. Id. § 303(b).
Shield Limitations
The ULLCA liability shield primarily cuts off a member's vicarious
personal liability for the actionable conduct of other members. Therefore,
the shield does not attach to various components of personal but not vi-
carious conduct. For example, a member is personally liable for company
obligations where the articles so provide, 48 where the company liability
shield is pierced, 49 for conduct that violates the duty of care, 50 for unpaid
contributions, 51 for signed false statements in filed records, 52 and for cer-
53
tain unlawful distributions.
OPERATING AGREEMENT
Like most state laws, the ULLCA provides that the operating agreement
is the central and most important document among the members 54 be-
56
cause it is the essential contract 55 that governs the affairs of an LLC.
Several of its provisions, however, are unique.
First, an operating agreement is optional rather than mandatory. 57 Sec-
ondly, because an operating agreement need not be in writing, 58 an oral
agreement of the members regarding the business and affairs of the com-
pany will be governed by its provisions. Course of performance 59 will
therefore be part of the operating agreement which at first simply may be
a tacit oral agreement to abide by the ULLCA's default rules. All amend-
ments must be unanimous 60 and oral amendments may modify written
48. Id. §§ 203(a)(7) & 303(c).
49. Id. § 303(b).
50. Id. §§ 403(a) & 409(c). Such conduct is not available for company indemnification.
51. Id. § 402(a).
52. Id. § 209.
53. Id. § 407.
54. Section 103(a) of the ULLCA contemplates that only "members" may enter into an
operating agreement, but the agreement governs the relations among the "members, man-
agers, and company." See also ULLCA § 101(13) (definition referencing an agreement under
ULLCA § 103). The effects clause coupled with contract law applicable by way of ULLCA
§ 104(a) means that even non-member managers may execute and be bound by the agree-
ment.
55. Section 103(a) of the ULLCA does not mention whether the agreement is binding on
transferees and assignees of an executing member's interest. When the agreement provides
that it is binding on such persons, however, the provision should be effective under contract
law. See ULLCA § 104(a). Moreover, because the ULLCA provides that a transferee of a
member will be admitted as a member only if the remaining members so consent, the consent
may be conditioned on a formal execution of the agreement by the transferee.
56. Id. § 103 cmt.
57. Id. § 103(a) (members "may" enter into an operating agreement).
58. Id. § 103(a).
59. Id. § 104(a).
60. Id. § 404(c)(1). Of course, the operating agreement could provide for an amendment
procedure that requires less than unanimous consent. Although a unanimity requirement
fully protects the contract rights of each member, it also subjects the will of the majority or
even super-majority to the will of a single member.
terms unless otherwise set forth in the agreement. 6 1 When in conflict with
the articles of organization, the operating agreement controls as to the
members, 62 but the articles control as to third persons who detrimentally
63
rely on contrary provisions in the articles.
The conflict provision elevates the operating agreement to a position of
central importance, at least among the members. The conflict rule is only
a default rule-the members may agree otherwise in an operating agree-
ment. 64 Some danger exists with the rule, however, because an operating
agreement may be an oral agreement. 6 5 Accordingly, to promote certainty
and enforcement of written article and operating agreement provisions,
the operating agreement should be in writing and contain a provision that
it may be changed only by a written amendment adopted by a specified
percentage of the members. 66
OPERATING A LIMITED LIABILITY COMPANY

MEMBERSHIP
Record Requirement
Unlike many state laws, the ULLCA does not require an LLC to main-
tain any records. 67 As a default rule, this respects informal operating pro-
cedures of small companies. Nevertheless, because of the broad definition
of the term "record", 68 most companies will in fact have records and must
offer members reasonable access to them at the member's own expense. 69
Becoming a Member
A person generally becomes a member of an LLC by making a contri-
bution to the capital of the company which may be in any form 70 or, if a
transferee of a member, by being admitted as a member through the
61. Because oral agreements and course of performance may modify the terms of a written
operating agreement, the certainty of the written agreement may be advanced by including
a provision that requires all amendments to be in writing.
62. Id. § 203(c)(1).
63. Id. § 203(c)(2).
64. Id. § 103(b) (this item is not mentioned in the list of nonwaivable provisions).
65. Id. § 103(a). This oral operating agreement rule was selected because of the greater
protection offered to small, informal LLCs.
66. Unless otherwise provided in the operating agreement, the agreement may only be
amended by all the members bound thereby. Id. § 404(c)(1). This provision simply reinforces
contract law. Id. § 104(a).
67. Id. § 408(a).
68. Id. § 101 (16); seesupra note 13 (definition of the term "record").
69. Id. § 408(a). The company must, however, furnish any member making a written
demand a copy of a special record and any written operating agreement at the company's
expense. Id. § 408(c).
70. Id. § 401.
consent of all the other members. 7 1 Thus, the statutory default rule re-
quires the unanimous consent of the remaining members to admit a trans-
feree as a member rather than a lesser majority-in-interest or other stan-
dard. This default rule protects the "pick your partner rule." Because an
unadmitted transferee acquires only the transferor member's rights to dis-
tributions as they normally occur, 72 the default rule ensures that the com-
pany will lack the corporate characteristic of free transferability of inter-
73
ests.
Profits, Losses & Distributions

The ULLCA does not expressly state a default rule for the allocation
of profits and losses. Interim distributions, however, must be made per
capita 74 and liquidating distributions must first be applied to return all
contributions not previously returned with any remainder per capita. 75
Together, these concepts assume that, in most small and informal LLCs,
the members will share items of profit, loss, and distributions equally. 7 6 In
other cases, members may simply alter these rules in an operating agree-
77
ment which need not be in writing.
Also, any distribution made when the company is "insolvent" is unlaw-
ful and improper as to creditors. 78 Each member or manager who violates
their fiduciary duties in casting their vote for or assent to the making of
an unlawful distribution is personally liable for the amount of the distri-
71. Id. § 503(a).

72. Id. § 502.
73. There are significant differences between former members and mere transferees. Un-
der ULLCA § 603(b)(1), a transferee of a member, unless admitted as a member by all the
other members, is not entitled to participate in management, have access to information
concerning company transactions, or inspect or copy any company records. Id. § 503(d). A
transferee is only entitled to receive the distributions to which the transferor would otherwise
have been entitled, a limited statement of account, and to seek a judicial determination that
it is equitable to wind up the company's business. Id. § 503(e).
Dissociated members have greater rights than mere transferees who were never members.
First, former members have a right of access to the company's books and records for the
period of their membership. Compare id. § 408(a) (former members) and id. § 503(d) (transfer-
ees). Also, dissociated members retain broader rights to seek judicial dissolution of the com-
pany. Compare id. § 801 (b)(5) (dissociated members) and id. § 801 (b)(6) (term company trans-
ferees may not seek judicial dissolution until the end of the term, but at-will company
transferees can seek dissolution any time but on narrower grounds than applicable to dis-
sociated members).
74. Id. § 405(a). Also, no interim distributions may be made without the consent of all
members.
75. Id. § 806(b).
76. Id. § 405 cmt.
77. See id. § 103(b). This is one example where the course of performance of actual dis-
tributions may set the terms of the future distribution rights by becoming the "agreement"
as to distributions.
78. Id. § 406(a). The insolvency considers the liquidity to meet debts in the ordinary course
as well as a balance sheet test.
bution in excess of the amount that could have been properly paid. 7 9 In
addition, a nonmanaging member of a manager-managed company is
personally liable for the amount of an unlawful distribution actually re-
ceived only where the member knew the distribution was improperly
made.8 0 In other circumstances, the member would be entitled to retain
the distribution. A member manager who is sued under the provisions
may implead all other responsible members and managers and compel
contribution.8 1 An action must be commenced within two years after the
82
alleged unlawful distribution occurs.
Annual Report
Like many state laws, the ULLCA requires a company to file an annual
report.8 3 The report, however, requires only minimum information in-
cluding the names and addresses of any managers of a manager-managed
company. 84 Regardless of whether the company is member- or manager-
managed, the report does not require the more confidential name or ad-
dress of any nonmanaging member. The failure to file an annual report
is a basis for the Secretary of State to seek an administrative dissolution
85
of the company.
Mergers & Foreign Companies

The ULLCA contains express provisions regarding conversions and
cross entity mergers, 86 and foreign LLCs obtaining authorization to trans-
act business in a state. 87 These provisions, however, are more technical
and, as such, beyond the scope of this Article.
79. Id. § 407(a).

80. Id. § 407(b). This rule greatly reduces the liability exposure of those who neither par-
ticipated in the decision to make the distribution nor knew of its impropriety.
81. Id. § 407(c).
82. Id. § 407(d).
83. Id. § 211.
84. Id. § 211 (a)(4).
85. Id. § 809(2). The dissolution procedure is set forth in the ULLCA § 810. Essentially,
the Secretary of State may administratively dissolve a company that does not correct the
ground of dissolution within 60 days of receiving a notice of violation. Id. § 8 10(b). A dissolved
company may seek reinstatement under ULLCA § 811, and when the statement does occur,
it relates back and takes effect as of the date of the earlier administrative dissolution. Id.
§ 811 (c). An affected company may appeal the Secretary of State's determination under
ULLCA § 812.
86. Id. §§ 901-907. These provisions do not contain dissent and appraisal rights because
all matters must be approved by all members unless the organization documents provide
otherwise.
87. Id. §§ 1001-1009.
Transition Rules
Because the adoption of the ULLCA will affect existing LLCs formed
under other pre-existing state laws, it contains several important transition
rules. 88 Nearly every state considering the adoption of the ULLCA will
already have adopted its own LLC laws. All new LLCs formed after the
89
ULLCA effective adoption date will be governed by the ULLCA. Com-
panies already in existence on the effective date may elect at any time to
be governed by the ULLCA. 90 Where no election is made, an existing
company will nevertheless be governed by the ULLCA after the expiration
of a specified transition period. 9 1 The last rule assures that, after some
period of time, all companies will be governed by one set of laws. This
rule may cause some alteration in the rights of members and will, there-
fore, alter original expectations. The transition period, however, provides
adequate time for a reexamination of these issues.
GOVERNANCE
Overview
92 93
Unless the articles specify that a company is manager-managed, it
is member-managed. 9 4 Therefore, the default management structure pro-
vides for management by members. These management structure terms
are defined solely by reference to whether members qua members are
agents of the company and have the power to bind the company, not by
the decision making authority of the members. The two structures are
based on the centralized management corporate characteristic under the
federal tax classification regulations 95 and permit flexibility in splitting the
agency and decision making authority in a single company. Regardless of
the management structure, a member or manager is not entitled to receive
compensation for services performed for an LLC unless the operating
96
agreement provides otherwise.
Decision Making Authority

In a member-managed company, each member has equal rights in
management and, except for specified "extraordinary" matters, all matters
88. Id. §§ 1201-1206.

89. Id. § 1205(a)(1).
90. Id. § 1205(a)(2).
91. Id. § 1205(b). A five-year period may become the standard transaction period. Id.
§ 1205(b) cmt.
92. Id. § 203(a)(6).
93. Id. § 101(11).
94. Id. § 101(12).
95. Treas. Reg. § 301.7701-2(c)(4) (1995).
96. ULLCA § 403(d).
are decided by a majority vote of the members.97 In a manager-managed

company, the members have no rights in management and, except for
specified "extraordinary" matters, all matters may be decided exclusively
by a majority vote of the managers. 98 These rules are subject to a special
voting rule that provides that the dissolution of a company threatened by
the dissociation of a member or member-manager may only be avoided
by the remaining members holding a specified percentage of the distri-
bution rights.99
Specified extraordinary matters require the consent of all the members
regardless of whether the company is member- or manager-managed. 0 0
Unless the operating agreement sets forth additional items, these items are
the only matters requiring this elevated member vote. The list contains
twelve items including amendments to the operating agreement' 0 ' or ar-
ticles, 10 2 making interim distributions, 03 and the consent to merge with
another entity. 104 Any action requiring member or manager consent may
be taken with or without a meeting10 5 and votes or consent may be cast
06
by proxy. 1
Agency Authority
In a member-managed company, the members are agents of the com-
10 7
pany with the authority to bind the company in the ordinary course of
the company's business.' 08
In a manager-managed company, the
managers 10 9 are agents of the company with the authority to bind the
company in the ordinary course of the company's business. " 0 Members
do not have the power to bind the company in their capacity as members
97. Id. § 404(a), (c).

98. Id. § 404(b), (c).
99. Id. § 801 (b)(3); see also discussion infra notes 171-75.
100. Id. § 404(c). Of course, the unanimous consent rule may be altered by an operating
agreement. Id. § 103(b).
101. Id. § 404(c)(1).
102. Id. § 404(c)(3).
103. Id. § 404(c)(6).
104. Id. § 404(c)(11).
105. Id. § 404(d).
106. Id. § 404(e).
107. The term "ordinary course" is not defined; an implication is created, however, by
the management provisions that provide only certain matters require unanimous consent.
See id. § 404(c). All other matters are decided by a majority vote unless otherwise provided
in an operating agreement. This paradigm creates a strong inference that only the matters
requiring unanimous vote are not in the ordinary course. The term was adapted from the
RUPA § 301 which was in turn adapted from the UPA § 9(1).
108. ULLCA § 301 (a).
109. Managers of a manager-managed company are appointed by the consent of a ma-
jority of the members and serve until a successor is appointed unless earlier resignation or
removal. Id. § 404(b)(3).
110. Id. §§ 101(10), 301(b).
in a manager-managed company."I ' In a member-managed company,

member dissociation terminates that member's power to bind the com-
pany on the earlier of either two years after the dissociation' 12 or ninety
days after a company files voluntarily a statement of dissociation.113
These explicit agency rules make clear that an LLC is a very effective
and efficient enterprise to limit agency authority. For example, in a UPA
4
general partnership, each partner has equal rights in management1 with
management disputes as to ordinary matters resolved by a simple majority
vote of partners and extraordinary matters resolved by a unanimous
vote.' '5 Each member has the actual and apparent authority to bind the
partnership as to matters necessary to carry on the business of the part-
nership in the usual way." 16 Although the partnership agreement may limit
the actual authority of any member, the authority limitation is only effec-
tive to third persons who have knowledge of the limitation.
In contrast, the management rights of members of an LLC depend upon
the management structure of the company. A member-managed company
is like a general partnership. In a manager-managed company, however,
the members have no authority to bind the company simply because they
are members. Only managers have agency authority. Accordingly, a com-
pany may use the manager-management designation to effectively control
and limit the apparent authority of members to bind the company to
persons without notice of the authority limitation. By way of contrast, a
partner who exceeds actual authority is liable to the other partners but
nevertheless binds the partnership to third parties without actual knowl-
edge of the authority limitation. '17 Accordingly, when authority limitations
are important, an LLC offers a vastly superior approach to a general
partnership.
There are other significant advantages to a manager-management des-
ignation not expressed in the default statutory structure but permissible if
detailed in an operating agreement. First, if the member-managers of a
manager-managed company own, in the aggregate, in excess of twenty
percent of the total interest in the company, the company will lack the
corporate characteristic of centralized management for federal tax pur-
l 11. Id. § 301(b)(1) (first sentence). This means that third parties dealing with a manager-
managed company have the risk of knowing the management structure to determine whether
members have agency authority. Unfortunately, there are no name differences to put third
parties on notice of the structure. They therefore have the burden to ask or check the articles.
112. Id. § 703.
113. Id. § 704.
114. UPA § 18(e).
115. Id. § 18(h).
116. Id. §9(a).
117. Id. § 9(a).
poses even if the company is manager-managed.11 When applicable, this

permits a properly structured manager-managed company to elect to pos-
sess the corporate characteristic of free transferability of interests and still
maintain partnership tax classification status because it lacks the corporate
characteristics of centralized management and continuity of life.
Secondly, a manager-managed company will lack free transferability of
interests where the necessary consent to transfer more than twenty
percent 1 19 of the interests in the company is exercised by a simple
majority 120 of the member-managers, rather than a specified percentage
of the remaining members.121 This flexible feature will encourage the use
of LLCs rather than limited partnerships. The ULLCA default transfer
consent rule provides that the consent to admit a transferee as a member
must be exercised by all the remaining members. 22 The operating agree-
ment can modify this rule and provide that the transfer consent may be
exercised by the member-manager or, if more than one, by a majority of
the member-managers. 123 In the event there are no member-managers at
the time of a transfer, the IRS requires that a majority of the remaining
124
members exercise the consent.
Finally, an LLC will lack a limitation on liability when one or more of
its members are personally liable for all the debts and obligations of the
company and the liability arises under a statute permitting the personal
118. See supra note 27. Rev. Proc. 95-10, § 5.03(2), 1995-3 I.R.B. 20 (interpreting Treas.
Reg. § 301.7701-2(c)(4) (1995) (fifth sentence)). Where the member-managers own in excess
of 20% of the interests in the company, the non-managing members do not own "substan-
tially all" the interests in the company under Rev. Pro. 89-12, 1989-1 C.B. 798. See also Rev.
Proc. 92-33, 1992-1 C.B. 782. The theory appears to be that member-managers who own
in excess of 20% of the company act in their own self-interest and not solely in a represen-
tative capacity on behalf of the remaining non-managing members. In order for the rule to
prevail, the member-managers must not be subject to periodic elections or substantially
unrestricted removal. See Rev. Proc. 95-10, § 5.03(2), 1995-3 I.R.B. 20 (interpreting Treas.
Reg. § 301.7701-2(c)(4) (1995) (sixth sentence)).
119. Rev. Proc. 95-10, § 5.02(1), 1995-3 I.R.B. 20 (interpreting Treas. Reg. § 301.7701-
2(e)(1) (1995) (first sentence)). The transfer restriction on at least 20% of the interests means
that substantially all the interests are not transferable within the meaning of the regulation.
As a practical matter, all interests in a company are likely to be encumbered with the same
transfer restrictions because some members will not desire to restrict their own interests while
freeing the transfer of others. Also, even if member-managers are willing to restrict their own
interests as managers while freeing other interests because they are not involved in manage-
ment, it is unlikely that the managers will own in excess of 2 0% since they most often expect
to receive their interest in the company for services rendered or to be rendered.
120. The majority standard may be satisfied by either a majority of the interests, capital,
profits, or persons. This definition should be contrasted to the more vague majority-in-interest
standard. See Rev. Proc. 95-10, § 5.02(3), 1995-3 I.R.B. 20.
121. Id.
122. ULLCA §§ 503(a), 404(c)(7).
123. Id. § 103(b).
124. Rev. Proc. 95-10 1995-3 I.R.B. 20 § 5.02(2).
liability. 125 This provision will encourage companies to impose personal

general partner liability on member-managers.
These dramatic effects will encourage all companies to elect manager-
management, even those previously organized as member-managed com-
panies. In the latter case, a pre-existing company may need to amend its
articles of organization.
FIDUCIARY DUTY
Duties of Care and Loyalty
The default rules regarding member and manager fiduciary duties are
patterned after the normative corporate standards as expressed in RUPA.
The ULLCA specifies, in one section, all of the fiduciary duties of care
and loyalty and the obligation of good faith and fair dealing owed by
members and managers to the company and the other members and man-
agers. 126 These duties and obligations may be expanded or reasonably
restricted; they may not be entirely eliminated by an operating agreement
127
or otherwise.
Generally, a member's duty of loyalty requires the member to account
for any benefit or profit derived in the conduct of the company's business
28
and to refrain from adverse dealing or competing with the company. A
member's duty of care requires the member to refrain from engaging in
grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of law. 129 All duties and rights are to be exercised in a manner
consistent with the obligation of good faith and fair dealing. 30 These
125. Id. § 5.04 The state law liability rule attempts to distinguish between contractual
guarantees of company obligations by one or more members and liability imposed under
local law. Therefore, state law must permit this result. See ULLCA § 303(c) (permitting one
or more specified members of a company to be personally liable for some or all of the
company's obligations provided the articles permit the result and the members so liable
consent in writing); see also id. § 203(a)(7) (required provision in the articles of organization).
These provisions permit, for example, a member-manager of a manager-managed company
to accept personal liability for company obligations and allows the company more flexibility
in its business structure while continuing to be taxed like a partnership for federal tax pur-
poses. While the ULLCA provisions permit personal liability for some or all of the company
obligations, the Revenue Procedure requires liability for all company obligations. Also, the
Revenue Procedure requires the members who are liable to maintain a net worth equal to
10% of all capital contributions throughout the duration of the company. See Rev. Proc. 95-
10, § 5.04, supra. The net worth standard, however, may not apply provided the members
with the liability are also managers and are not considered in the absolute control of the
other members. See Treas. Reg. § 301.7701-2(d)(2) (1995) (first sentence).
126. ULLCA § 409 cmt.
127. Id. § 103(b).
128. Id. § 409(b).
129. Id. § 409(c).
130. Id. § 409(d).
duties generally terminate upon the member's dissociation except as to

certain continuing transactions. 131
LLC Indemnifcation of Members and Managers

The ULLCA contains specific rules regarding member and manager
reimbursement and indemnification rights. Unless otherwise provided in
an operating agreement, an LLC must reimburse for payments made and
indemnify for liabilities incurred by a member or manager in the ordinary
course of the business of the company or for the preservation of its business
or property. 132 A payment or advance creating a right of reimbursement
constitutes a loan to the company which accrues interest from the date of
133
payment or advance.
The critical phrase is "in the ordinary course of the business of the
company or for the preservation of its business or property." If the member
or manager is acting in the ordinary course of the company's business,
liabilities incurred engaging in that conduct must be indemnified by the
company. A member or manager bears the sole responsibility for conduct
outside the ordinary course. The comments make clear that, as between
the LLC and the affected member or manager, this issue is resolved by
reference to the member or manager's actual authority. Conduct which
breaches a member or manager's duty of care to an LLC or its other
1 34
members or managers, however, will not be subject to indemnification.
Accordingly, unless an operating agreement provides otherwise, a member
or manager is not entitled to indemnification for grossly negligent or reck-
less conduct, or intentional misconduct, or for a knowing violation of
law.135 This means that an LLC will normally be required to indemnify
an affected member or manager where that person commits an act of
ordinary negligence while acting in the ordinary course of the company's
business.
Member Derivative Suits

The ULLCA authorizes members to institute two separate legal actions.
First, a member may institute a personal action directly against the com-
pany or another member. 136 Secondly, a member may institute a deriv-
ative action on behalf of the company and in the company's name. 137 A
131. Id. § 603(b).

132. Id. § 403(a). See also supra notes 43-46.
133. Id. § 403(c).
134. Id. § 403 cmt.
135. Id. § 409(c).
136. Id. § 410. The action may be for legal or equitable relief, with or without an ac-
counting, to enforce the member's rights under ULLCA or an operating agreement, and
also to protect any interests of the member arising independently of the relationship with the
company.
137. Id. § 1101.
member may institute a derivative action only where the members or

managers having the authority to do so either refuse to do so or an effort
to cause them to do so is not likely to succeed. 138 A member's derivative
complaint must set forth the member's specific efforts to secure initiation
of the action by an appropriate member or manager or the reasons for
39
not making the effort.1
A derivative action plaintiff must be a member both at the time the
action is commenced and at the time of the alleged wrongful transac-
tion. 140 The second requirement may be satisfied where plaintiff obtains
automatic membership under an operating agreement from a member
14 1
who satisfied the requirement.
Since a derivative action is brought on behalf of the company and is
not a personal action, any damages awarded in such an action belong to
the company. 142 Of course, as a member, a derivative plaintiff shares in
the reward proportionate to company ownership. Where the action was
successful in securing any recovery for the company whatsoever, whether
by way ofjudgment, compromise, or settlement, the court may award the
43
plaintiff reasonable expenses, including reasonable attorney fees. 1
EFFECTOF MEMBER DISSOCIATION

Overview
The ULLCA stabilizes the important matter concerning the effects of
member dissociation on the member's right to require the company to
purchase the interest and its effect on the business continuity of the com-
pany. In essence, the ULLCA continues the trend of other uniform part-
nership acts by characterizing the nature of an owner's interest by refer-
ence to the agreement of all the members relating to the expected duration
of the entity.
Member Exit Rights

Where the members agree that the duration of the company is for a
specified term, the ULLCA freezes-in the interest of members who with-
draw, die, or otherwise "dissociate" before the end of the specified term
until the end of the term. 144 Where the members have not agreed that the
138. Id.§I10l(a).
139. Id. § 1103.
140. Id. § 1102.
141. Id. § 1102(2).
142. Id. § 1104 (last clause).
143. Id. § 1104. Although the language implies that the plaintiff's reasonable expenses are
to be obtained as a set off against the proceeds of any recovery, it is clear that the court has
the authority to order the company to pay such expenses even where they exceed the recovery
proceeds.
144. Id. § 701(a)(2) and cmt.
duration of the company is for a specified term, the company is an at-will

company from which members may withdraw, die, or "dissociate" at any
time and require the company to purchase their interest at the time of
45
dissociation. 1
DissolutionAvoidance Consent
The ULLCA continues the partnership feature regarding the use of
business continuation agreements by making it easier for less than all of
the remaining members in a company to agree to continue the business
of the company in the event of a dissociation. Also, in a manager-managed
company, only the dissociation of a member who is also a manager threat-
ens dissolution which, in turn, may be avoided by less than all of the
remaining members.
At-Will Company Concept

The ULLCA at-will concept is not expressly recognized by any state
LLC law. Every state LLC law, however, provides that the articles of
146
organization must set forth some variation of a duration specification,
but the nature of the duration provision and its relationship to mandatory
dissolution at the end of that duration is unclear. The articles are required
to be filed with the Secretary of State, but that filing office routinely fails
to police whether the articles adequately set forth an adequate duration
designation. Even when the duration is set forth appropriately in the ar-
ticles, the Secretary of State's office cannot be expected to police whether
the members simply continue the company beyond the duration specifi-
cation. In both cases, the LLC would presumably operate as an at-will
company in concept; state law, however, does not concern itself with the
issue. Also, even though state laws universally create what the ULLCA
defines as a "term company,"' 47 the rights accorded to members of those
companies do not always parallel the rights accorded to term partnership
entities. In many cases, member rights are more similar to the withdrawal
and distribution rights accorded to at-will partnership members. For all
these reasons, the ULLCA treats and considers both types of entities under
148
a single organizational umbrella.
145. Id. § 701(a)(1) and cmt. See generally Carter G. Bishop, Treatment Upon Their Death and
Withdrawal From A Limited Liability Company: The Casefor A Uniform Paradigm, 25 SrETrSON L.
REV. 255 (1995) and HarryJ. Haynsworth, At- Will and Term LLCs are Treated Differently Under
Uniform Act, 2 J. LInI rD LIABILITY COMPANIES 12 (1995).
146. Some states permit a perpetual designation. Because this designation does not express
any finite or determinable duration, it should also be regarded as an at-will designation.
147. Id. § 101(19).
148. Presumably, the fact that ULLCA sets forth two types of organizations under one
act will not negatively affect the estate valuation issues of membership interest under I.R.C.
§ 2704 (1988 & West Supp. 1995). Persons may elect to form either a general or limited
Dissociation Defined
The ULLCA uses the term "dissociation" to refer to the change in
relationships among the members and the LLC caused by a member ceas-
ing to be associated in the carrying on of the company's business for any
reason. 149 Withdrawa1 50 and death' 5 1 are specific examples of member
dissociation. 152 The effect of the dissociation on both the member's finan-
cial and management interests and on the continuation of the company's
business depends upon the duration and management structure of the
LLC.
At formation, the articles of organization must designate its manage-
ment structure 153 and the company's duration status as either at-will or
for a specified term.154 Member dissociation has different effects under
both designations and combinations thereof. The duration designation
primarily affects the timing of the company's purchase of a dissociated
member's interest and, to a lesser degree, also threatens dissolution. The
management designation primarily affects whether the dissociation threat-
ens dissolution by triggering a vote to continue the company's business.
Because a member's interest is, in effect, purchased 155 by the company if
the member's dissociation results in the company's dissolution and liqui-
dation, the single most important aspect of dissociation is whether it results
in the dissolution of the company. If not, the critical focus shifts to whether
partnership with dramatically different estate valuation results. Therefore, it should not mat-
ter that the same result can be achieved by simply designating that a company will be a term
company in the articles. The "designation" act is not more than a business entity choice and
should not therefore be considered an applicable restriction for purposes of I.R.C. § 2704
(1988 & West Supp. 1995). In that event, a decedent member's interest would presumably
be valued as if an at-will company designation existed.
149. ULLCA § 601 cmt. The primary source for ULLCA's dissociation concept is RUPA
§ 601.
150. ULLCA § 60 1(1). The statute provides that a member is dissociated from a company
when the company has "notice" of that member's express will to withdraw. The withdrawal
is effective the date of the notice or on a later date specified by the member. See also id.
§ 102(b), (d), (e).
151. Id. § 609(7)(i).
152. The ULLCA lists 11 separate events which result in a member's dissociation. See id.
§ 601(1)-(11). All dissociation events are merely default rules which may be eliminated or
modified in the operating agreement. Id. § 103(b).
153. Id. § 203(a)(6). See discussion supra notes 24-27. Unless the articles specify that the
company is to be manager-managed, it will be member-managed. Thus, the default man-
agement structure is member-management.
154. Id. § 203(a)(5). See discussion supra notes 21-23. Unless the articles set forth that the
company will be a term company and the duration of the term, the company will be an at-
will company. Thus, the default duration is at-will.
155. If the company's business is sold to outsiders for a cash purchase, the dissociated
member will receive a share of the value of company goodwill. The presumption is that
liquidating distributions will be paid in money unless the members otherwise agree. See id.
§ 806(a).
the dissociation forces an immediate, or merely deferred, purchase of the

dissociated member's interest in the company.
Duration of a Company
Unless the articles specify that the duration of a company is for a spec-
ified term thereby making the company a term company,1 56 its duration
is that of an at-will company. 157 Under the at-will default rule, a company
must ordinarily purchase a dissociated member's interest sooner than in
a term company. 15 A member has the power to dissociate by voluntarily
withdrawing unless that power is removed by the operating agreement.1 59
Other important effects of member dissociation include a termination of
the dissociated member's (i) power to bind the company; 160 (ii) duties of
care and loyalty, except as to company transactions continuing after the
156. Id. § 203(a)(5). A term company is defined as a company in which the members have
agreed to remain members until the expiration of a term specified in the articles. Id. § 10 1(19).
The specification of the duration must set forth a specific and final date for the dissolution
of the company. Specification of a particular undertaking is too indefinite unless set forth
within a longer fixed date. See id. § 203 cmt. The specificity requirement avoids the indefinite
time problems associated with a specific undertaking. See, e.g., RUPA § 101(6). Also, the
continuation of a term company after the expiration of a specified term is generally as an
at-will company. Id. § 411.
157. ULLCA § 203(a)(5). An at-will company is defined as any company other than a
term company. Id. § 101(2). Even where the articles fail to provide that a company is to be
a term company and, therefore, result in the creation of an at-will company, the members
could agree that the company will be regarded as a term company among themselves. The
designation in the articles is controlling as to third parties who rely on the designation but
not to the members. Compare id. § 203(c)(1) with id. § 203(c)(2). Presumably, this paradox would
be rare because the members could simply specify a term in the articles if they so desired.
158. The ULLCA default rules were chosen to represent the Drafting Committee's sense
of the reasonable expectations of small, informal companies. The members must affirmatively
elect to be a term company which possesses far greater business continuity than an at-will
company and freezes the fair value of the member's interest in the company until the end
of the specified term. Even though the term specification in the articles may be well known,
the consequences may be more obscure. Nevertheless, the inherent lock-in effects associated
with a term company exist only if the articles expressly create a term. Even then, the members
could override the effect of the term designation by a provision in the operating agreement,
which need not be in writing, setting forth that the company will be regarded as an at-will
company or similarly reversing the lock-in effect.
159. See ULLCA §§ 103(b), 602(a). Because the power to dissociate is not listed as a non-
waivable provision, it may be eliminated. This is reinforced by the § 602(a) introductory
clause "[u]nless otherwise provided in the operating agreement .... " This is a rare statutory
expression of the drafting paradigm created by § 103(b). See id. § 602 cmt.
160. A dissociated member retains the lingering apparent authority to bind the company
for two years if the third party reasonably believed the dissociated member was a member
and did not have notice of the dissociation. Id. §§ 703 (power to bind), 102 (notice defined).
A company may, however, terminate the dissociated member's power to bind earlier by filing
a statement of dissociation. Id. § 704. The filed statement is valid even against persons without
notice or knowledge of the dissociation and is effective 90 days after filing.
dissociation;1 6 1 and (iii) rights to participate in the management and con-

duct of the company's business, except to participate in the winding up of
the company's business if the company dissolves and the dissociation is
not wrongful. 162 If the company does not dissolve and does not purchase
the dissociated member's interest for whatever reason, the dissociated
member ceases to be a member and is treated the same as a transferee of
63
a member. 1
At- Will Company

Management Structure
Depending on the management structure 164 and unless otherwise pro-
vided in an operating agreement, 165 member dissociation in a member-
managed at-will company has consequences affecting both the continu-
ance of the company and the timing of the company's purchase of the
dissociating member's interest at its fair value. 166 Unless manager-man-
aged, dissociation of any member for any reason 16 7 will dissolve the com-
pany unless a specified percentage 168 of the remaining members agree,
within ninety days after the dissociation, to avoid the threatened dissolu-
tion and continue the business of the company. In a manager-managed
at-will company, however, only the dissociation of a member who is also
a manager triggers a dissolution vote. 169 If no member is also a manager,
then the dissociation of any member threatens dissolution. 70 Thus, the
management structure of an at-will company can affect its duration by
reducing incidences of a required dissolution vote. This will encourage all
at-will companies to elect manager-management even if all the members
are also managers.
161. Members and managers are only subject to a duty of care based on a gross negligence
standard. Id. § 409(c), (h).
162. Id. § 603(b).
163. Id. § 603(b)(1). A transferee of a member, unless admitted as a member by all the
other members, is not entitled to participate in management, have access to information
concerning company transactions, or inspect or copy any company records. Id. § 503(d). A
transferee is only entitled to receive the distributions to which the transferor would otherwise
have been entitled, a limited statement of account, and an opportunity to seek a judicial
determination that it is equitable to wind up the company's business. Id. § 50 3 (e).
164. Contrary to the rule for member-managed companies, member dissociations in a
manager-managed company do not ordinarily threaten dissolution of the company unless
either the dissociating member was also a manager or there are no managers who are also
members.
165. ULLCA § 103(b).
166. The concept of "fair value" is used in the ULLCA rather than "fair market value,"
in part, to prevent an unfair use of market depression factors to reduce the purchase price
of a dissociated member's interest. See id. §§ 701, 702 cmts.
167. Id. § 801(b)(3).
168. Id. § 801(b)(3)(i).
169. Id. § 801(b)(3).
170. Id.
Dissolution Avoidance Vote

The dissolution avoidance vote formulas are an expression of two sep-
arate votes capable of reasonably exact calculation.171 The two formulas
seek the vote of those remaining members entitled to a majority of distri-
butions at two separate times in the life of the company. The first formula
requires the vote of those remaining members entitled to receive a majority
of any distributions that would be made if the company were liquidated
at the time of the member dissociation.172 The second formula requires
the vote of those remaining members entitled to receive a majority of any
"future distributions" that would be made if the company did not liqui-
date, but rather continued after the dissociation. 173 For this limited pur-
pose, future distributions are defined as those reasonably estimated to be
made to the remaining members until the projected date of its termina-
tion. 174 This projected element of the future distribution definition inter-
jects some uncertainty into the otherwise precise definition of the required
member vote to avoid dissolution, but the uncertainty is mitigated by the
"reasonably estimated" language. Also, because the default interim and
liquidation distribution rules provide for per capita distributions, the nec-
essary vote will be a simple matter in most cases in the default mode. It
will become more complex as the sophistication of the deal increases, but
presumably the parties will employ counsel and draft for those contingen-
cies.
Accordingly, at least in the default mode, the two part distribution cal-
culation avoids the uncertainty in the IRS safe harbor rules referencing a
"majority-in-interest" vote to avoid dissolution which, in turn, reference
more uncertain calculations of profits and capital. 175 The ULLCA stan-
dard, therefore, creates more certainty and was informally approved by
the IRS.
Dissolution Not Avoided

If dissolution is not avoided, the company must wind up its business 176
and make liquidating distributions to its members. 77 Accordingly, mem-
bers may receive payment for the value of their interest by dissociating if
the dissociation causes the dissolution of the company. 178 If the dissociation
171. Id. § 801 (b)(3)(i)(A)-(B).

172. Id. § 801(b)(3)(i)(A).
173. Id. § 801(b)(3)(i)(B).
174. Id. § 801(a).
175. Rev. Proc. 94-46, 1994 I.R.B. 129.
176. ULLCA § 802(a).
177. Id. § 806.
178. All the members may waive the effects of dissolution but the waiver requires the
consent of the dissociated member. Id. § 802(b). Accordingly, the continuance of the company
by the other members may not block the company's payment of the dissociated member's
liquidating distribution without the consent of that dissociated member.
was wrongful because it was contrary to the provisions of an operating

agreement, 179 the company may offset any resulting damages against the
distribution.180 Also, the dissociated member retains the right to partici-
pate in the winding up process unless the dissociation was wrongful. 181 All
members, including the dissociated member, may agree before liquidation
8 2
is complete to revoke retroactively the company's dissolution.
Dissolution Avoided-Company Purchase Obligation

If dissolution of an at-will company threatened by a member dissocia-
tion is avoided by the required vote of the remaining members, the com-
pany must nevertheless purchase the interest of the dissociated member
at its fair value determined as of the date of the dissociation.18 3 Thus, the
management structure of an at-will company has no effect on a member's
exit rights other than to make a member-managed company inherently
84
more dissolvable. The company must deliver a purchase offer to the
dissociated member not later than thirty days after the dissociation. 18 5
The
purchase offer must be accompanied by financial data on the company
18 6
and a brief explanation of how the purchase price was determined. If
the company does not make an offer to purchase the interest within 120
days after the expiration of the thirty-day period, the dissociated member
may commence a proceeding within another 120 days to enforce the pur-
chase. 8 7 In such a proceeding, the court must determine the fair value of
the dissociated member's interest, the terms of its payment, and enter an
order compelling the purchase on those terms.18 8 The company may offset
against the purchase price any damages for wrongful dissociation and all
179. Id. § 602(b)(1). Any dissociation from an at-will company will be wrongful only where
made specifically wrongful by the operating agreement. Dissociation by withdrawal is wrong-
ful, however, if made before the expiration of the specified term of a term company. Id.
§ 602(b)(2).
180. Specific provision is made for offset in the context of a company payment to a
dissociated member when the company does not dissolve. Id. § 701(). When the company
dissolves, members are entitled to receive only the "surplus" of assets remaining after all
other obligations are discharged. Id. § 806(b). Payment for a claim of wrongful dissociation
could constitute such a claim.
181. Id. § 803(a).
182. Id. § 802(b).
183. Id. § 701(a)(1). Where agreement is reached, the dissociated member would then be
entitled to be bought-out subject to the terms of that agreement. See id. §§ 603(a)(1), 701(a)(l).
184. The price and other terms of the purchase may be determined in an operating
agreement. Id. § 701(c). Although the parties may modify the purchase right, a provision
eliminating it may be unenforceable. Id. § 701 cmt.
185. Id. § 701(b).
186. Id. A simple statement such as "book value" may satisfy the required explanation.
Id. § 701 cmt.
187. Id. § 701(d).
188. Id. § 701(e).
other amounts owing. 1 9 Alternatively, rather than filing an action to com-

pel purchase, the dissociated member may seek dissolution of the company
on the ground that the company failed to deliver a purchase offer. 190 The
dissociated member is entitled to continue to receive an appropriate share
of any authorized distributions made after the dissociation but before the
first payment is made toward the purchase price. 19 1 After that date, the
dissociated member is treated the same as other creditors of the company
except that the member has the right to petition a court for dissolution of
the company if the payments do not comply with the terms of the agree-
92
ment. 1
Term Company
Management Structure
The effects of member dissociation are less pronounced in a term com-
pany than in an at-will company. First, dissociation is less likely to cause
the dissolution of the company. Secondly, where dissolution does not oc-
cur, the company is not required to purchase the member's interest at
dissociation-it is only required to purchase the member's interest at the
end of the specified term.
As with an at-will company, the management structure of a term com-
pany has important effects regarding whether member dissociation threat-
ens dissolution. In a member-managed term company, specified dissoci-
ations of any member threatens dissolution. 19 3 In a manager-managed
term company, however, only the dissociation of a member who is also a
manager threatens dissolution. 194 Where no manager is also a member,
95
the dissociation of any member threatens dissolution. 1
In a member-managed term company, member dissociation prior to
the expiration of the specified term is less likely to cause the company to
dissolve than in a member-managed at-will company. Only specific mem-
189. Id. § 701().

190. Id. § 801 (b)(5)(iv). The remedy of involuntary dissolution, however, should only be
ordered by a court when no other appropriate remedy exists. Accordingly, a court should
not order dissolution when it can enforce a company purchase of the applicant's interest
under Article 7 of the ULLCA. Id. § 801 cmt.
191. Id. §§ 603(b)(1), 702(b).
192. Id. §§ 702(c), 801 (b)(5)(iv). This important provision protects the dissociated member
from relying on non-market terms of an agreement for the purpose of settling disputes, only
to be faced with a later default by the purchaser. In such cases, the dissociated member, in
effect, can elect to proceed to enforce the terms of the agreement or to seek dissolution of
the company and receive a different share of the company on liquidation (less previous
receipts under the agreement). Purchasers seeking the benefit of their agreements must there-
fore abide by the payment terms of those agreements or risk that the dissociated member
will simply seek the fair value of their interest unencumbered by the agreement.
193. Id. § 801(b)(3).
194. Id.
195. Id.
ber dissociations threaten dissolution in a term company, whereas all 196

member dissociations threaten dissolution in such an at-will company.
Generally, a member dissociation by voluntary withdrawal in a term com-
pany will not force a dissolution vote of the remaining members; 19 7 all
198
such dissociations, however, are wrongful.
Company Purchase Obligation

Member dissociation prior to the expiration of the specified term de-
termines the same purchase rights and procedures applicable to an at-will
company, except that company payment and valuation is postponed until
the expiration of the specified term that existed on the date of dissocia-
tion. 199 In a term company, the dissociated member bears the risk of loss
in value during the remainder of the specified term, whereas in an at-will
200
company, the member receives quick payment. From the date of dis-
sociation until the expiration of the specified term, the dissociated member
201
has no right to participate in the management of the company, owes
no further fiduciary duties (except with regard to continuing transactions
that arose prior to dissociation), 20 2 and is entitled to receive the distribu-
tions that the dissociated member would have been entitled to receive
absent the dissociation. 20 3 Therefore, the dissociated member generally20is4
treated as a transferee of a member who is not admitted as a member.
These rules make clear that the designation of a company as a term
company with a specified duration in the articles, rather than adopting
the default at-will duration, has important effects on the consequences of
member dissociation. First, member dissociation in a term company is less
likely to cause the dissolution of the company because the range of dis-
sociation events that force a dissolution vote is more narrow. Second,
member dissociation in a term company does not trigger a company pur-
chase obligation of the dissociated member's interest until the expiration
20 5
of the specified term that existed on the date of dissociation.
196. Id. §§ 801(b)(3), 601(7)-(l 1).

197. Id. Other member dissociations that do not trigger a dissolution vote include (i) events
specified in an operating agreement and (ii) expulsion either under an operating agreement
by the vote of the other members or by judicial determination. See id. § 601(l)-(5).
198. Id. § 602(b)(2).
199. Id. § 701(a)(2).
200. Id. § 701 cmt.
201. Id. § 603(b)(1).
202. Id. § 603(b)(2)-(3).
203. Id. § 503(e)(1).
204. Id. § 603(b)(1).
205. The awkward language is used to make clear the reference to the appropriate spec-
ified term. For example, following a member dissociation, the remaining members of a
company that does not dissolve could amend the articles and extend the term or simply not
dissolve at the end of the specified term. See id. § 411 (term company that continues after the
expiration of its specified term continues as an at-will company). In the former case, the
These effects simply underscore the reason for the double duration par-
adigm-organizers need a simple, but comprehensive, set of default rules
to govern a company that vary rather remarkably depending on the in-
tended duration of the company. A term company is a considerably more
stable business entity than an at-will company. Its members can count on
a secure capital base with which to operate the business, at least until the
expiration of the specified duration.
Dissociation by Death
Death, as a form of member dissociation, 20 6 deserves special mention
simply because it is involuntary20 7 and its effects may be easily remedied
through the use of a buy-sell agreement funded by life insurance. If the
member's death does not result in the dissolution of the company, the
decedent's distributional interest must be immediately purchased by an
at-will company or at the expiration of the then-specified term of a term
company. In a term company, the decedent's estate or heirs may therefore
be forced to hold an interest in the company for a significant period of
time depending on the remaining length of the term. During the holding
period, these persons must accept the risk of market devaluation of the
interest because the purchase price is determined at the expiration of the
term. They have little protection against that risk. The estate or heirs are
regarded as transferees of a member's interest with no management or
other voting rights.2 08 For this special purpose, however, the decedent's
successors in interest are regarded as succeeding to the right of a dissoci-
ated member to seek judicial dissolution of the company during the re-
mainder of the term for the improper conduct of those in control of the
company.2 09 Because of these serious limitations, members of a term com-
company may continue until the expiration of its new specified term but the company must
purchase the dissociated member's interest. In the latter case, the dissociated member could
seek a judicial dissolution of the company. Id. § 801 (b)(6)(i).
206. Id. § 601(8)(i).
207. Although an operating agreement may generally make dissociation wrongful and
thereby subject the wrongful dissociating member to damages, the enforceability of a pro-
vision making death wrongful would be in doubt. Such a provision may be void under
contract law as against public policy and therefore illegal. See id. §§ 602(b)(1), 104(a). Also,
dissociation by death is not wrongful if from a term company. Id. § 602(b)(2).
208. Id. §§ 603(b)(1), 601 cmt.
209. Id. § 801 (b)(5) cmt. Other transferees of a member's interest are relegated to para-
graph (6) in order to seek judicial dissolution. A transferee of an interest in a term company
may not seek dissolution until after the expiration of the term that existed when the transferee
acquired the interest. A transferee of an interest in an at-will company, however, may seek
judicial dissolution at any time. Id. § 801 (b)(6)(i)-(ii). Of course, if a term company otherwise
dissolves prior to the expiration of the remaining term, a transferee would be able to liquidate
the interest in the company. In the meantime, transferees could sell their interests in future
distributions, including the purchase rights and liquidating distribution rights. The sale will
likely produce deep market discounts because of the lack of liquidity and protective voting
rights.
pany may wish to provide for a company purchase of their interests at

210
death funded by company purchased life insurance on the decedent.
DISSOLUTION AND WINDING UP

MEMBER DISSOCIATION AND AVOIDANCE
As explored previously, member dissociation is the event that presents
the greatest risk for dissolution of an LLC. 2 11 In a member-managed com-
pany, the dissociation of (i) any member for any reason in an at-will com-
pany and (ii) for more limited reasons in a term company, causes disso-
lution unless, within ninety days, the remaining members entitled to a
majority of distributions consent to avoid dissolution. 2 12 An operating
agreement may alter these rules by providing alternate means for avoiding
dissolution 2 13 or by simply precluding dissociation.2 14 Also, under the de-
fault rule, the dissociation of the next to last member does not cause the
2 15
company to dissolve because the ULLCA permits one-member LLCs.
These outcomes may create special tax classification issues. Altering the
dissolution default rule may cause the company to take on the corporate
continuity of life characteristic. In addition, a one-member LLC may not
be considered a partnership.
JUDICIAL DISSOLUTION
As with most state LLC laws, the ULLCA provides grounds for judicial
dissolution of a company. First, a company is dissolved and its business
wound up upon the occurrence of an event that makes it unlawful for all,
or at least substantially all, of the business to be continued; however, the
unlawful event may be retroactively cured within ninety days. 2 16 Also, a
company is dissolved upon the application of a member or dissociated
member upon a showing of one of the following five grounds: (i) the eco-
nomic purpose of the company is likely to be frustrated; 217 (ii) another
member has engaged in conduct relating to the company's business that
makes it reasonably impracticable to carry on the company's business with
that member;2 18 (iii) it is not otherwise reasonably practicable to carry on
the company's business in conformity with the articles and the operating
210. Seeid. §601 cmt.

211. See supra notes 144-55 and accompanying text.
212. ULLCA § 801(b)(3).
213. Id. § 801 (B)(3)(ii) (right to continue stated in the operating agreement).
214. Id. § 602(a).
215. Id. § 202(a).
216. Id. § 801(b)(4). Although the section appears to be self-actuating, judicial intervention
may be necessary to determine unlawfulness or actually dissolve the company.
217. Id. § 801 (b)(5)(i).
218. Id. § 801(b)(5)(ii).
agreement; 2 19 (iv) the company failed to execute a required purchase of

the petitioner's distributional interest;220 or (v) the managers or members
in control of the company have acted, are acting or will act in a manner
that is illegal, oppressive, fraudulent, or unfairly prejudicial to the peti-
2
tioner. 21
In addition to these member or dissociated member actions, a transferee
of a member's interest may seek ajudicial determination that it is equitable
to wind up the company's business either because the specified term of
the company that existed when the transferee acquired the interest has
expired 222 or at any time if the company was at-will at the time the trans-
feree acquired the interest. 223 These provisions are designed to afford min-
imal protection to transferees who otherwise have no voting rights. The
grounds for equitable dissolution are intended to include those enumerated
224
for member applications.
DISSOLUTION PROCEDURES
Dissolution is the beginning of the end of an LLC, not the end itself.
Rather, after dissolution, a company continues to operate, but only for the
purpose of winding up its business.2 25 Accordingly, all the members may
waive the right to have the company's business wound up and simply
resume carrying on the company's business. 226 Where the company does
wind up its business, all members who have not wrongfully dissociated
2 27
may participate in the process and judicial supervision may be sought.
Agency power is affected by the dissolution. During the winding up
process, the company is bound by member or manager conduct that is
either appropriate to wind up the business 228 or would have bound the
company before the dissolution if the third party did not have notice of
the dissolution.2 29 Even though the latter conduct will bind the company
to third parties, the member or manager is liable to the company for any
23 0
conduct that is inappropriate to wind up the company's business.
A company may, but is not required to, file articles of termination.23 '
219. Id. § 801(b)(5)(iii).

220. Id. § 801(b)(5)(iv).
221. Id. § 801(b)(5)(v).
222. Id. § 801(b)(6)(i).
223. Id. § 801(b)(6)(ii).
224. Id. § 801 cmt.
225. Id. § 802(a); see also id. § 803(c) (describing the elements of the winding up process).
226. Id. § 802(b). For the most part, the dissolution is treated as having not occurred except
that third party reliance on the dissolution is not affected. Id. § 802(b)(1)-(2).
227. Id. § 803(a).
228. Id. § 804(a)(1).
229. Id. § 804(a)(2).
230. Id. § 804(b).
231. Id. § 805(a).
When filed, the articles terminate the legal existence of the company on
the filing date. 232 The effect of such filing establishes a date certain for the
termination of the liability shield, agency power, and the filing of an annual
233
report.
The ULLCA contains important procedures for the disposition of
known 234 and unknown 235 creditors that permit members to secure some
certainty regarding their liquidating distributions. 236 A known claim will
be barred when the company provides written notice to a claimant that a
claim must be filed with the company no later than 120 days after receipt
237
of the notice and the claimant fails to file the claim. A claim timely
received, but rejected by the company, is also barred unless the claimant
files suit to enforce the claim within ninety days after the receipt of the
notice of rejection. 238 All contingent liabilities or claims based on an event
occurring after the effective date of the dissolution are considered un- 239
known claims and are not governed by these known claim procedures.
Known claims, however, are also governed by the unknown claim rules
when the company fails to follow the precise procedure for disposition of
known claims. As a result, known claims may be barred under both sec-
240
tions.
Unknown claims include all claims not otherwise covered by the known
claim procedures. 241 An unknown claim will be barred 242 when the com-
pany publishes notice, 243 requesting claimants to file claims with the com-
pany, that states that a claim will be barred unless the claimant files suit
to enforce the claim within five years after the date of publication.
232. Id. § 805(b). A later effective date may be stated in the articles.
233. Id. § 805 cmt.
234. Id. § 807(a).
235. Id. § 808.
236. Id. § 806 governs the payment of liquidating distributions to members after payment
to creditors.
237. Id. § 807(b), (c)(1).
238. Id. § 807(c)(2).
239. Id. § 807(d).
240. Id. § 808 cmt.
241. Id. § 808(c)(1)-(3).
242. Id. § 808(c).
243. Id. § 808(b).

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Bluebook 21st ed.

ALWD 7th ed.

APA 7th ed.

Chicago 17th ed.

McGill Guide 9th ed.

AGLC 4th ed.

MLA 9th ed.

OSCOLA 4th ed.

The National Conference of Commissioners on Uniform State Laws

were drafted to comply with the soon to be anachronistic classification

general partnership liability shield).

to accommodate this new flexibility. Given the obvious advantages of uni-

to the critical corporate characteristics of free transferability of interests and continuity of

ORGANIZING A LIMITED LIABILITY COMPANY

pany. 26 A company's management structure has important effects on a

Conflict Between Articles and Operating Agreement

30. ULLCA § 203(b)(1).

Character of the Shield

38. Id. § 202(c).

Piercing the Shield

43. Id. § 403(a). See infra notes 132-35 (indemnification discussion).

OPERATING A LIMITED LIABILITY COMPANY

Profits, Losses & Distributions

71. Id. § 503(a).

Mergers & Foreign Companies

79. Id. § 407(a).

Decision Making Authority

88. Id. §§ 1201-1206.

are decided by a majority vote of the members.97 In a manager-managed

97. Id. § 404(a), (c).

in a manager-managed company."I ' In a member-managed company,

poses even if the company is manager-managed.11 When applicable, this

liability. 125 This provision will encourage companies to impose personal

duties generally terminate upon the member's dissociation except as to

LLC Indemnifcation of Members and Managers

Member Derivative Suits

131. Id. § 603(b).

member may institute a derivative action only where the members or

EFFECTOF MEMBER DISSOCIATION

Member Exit Rights

duration of the company is for a specified term, the company is an at-will

At-Will Company Concept

the dissociation forces an immediate, or merely deferred, purchase of the

dissociation;1 6 1 and (iii) rights to participate in the management and con-

At- Will Company

Dissolution Avoidance Vote

Dissolution Not Avoided

171. Id. § 801 (b)(3)(i)(A)-(B).

was wrongful because it was contrary to the provisions of an operating

Dissolution Avoided-Company Purchase Obligation

other amounts owing. 1 9 Alternatively, rather than filing an action to com-

189. Id. § 701().

ber dissociations threaten dissolution in a term company, whereas all 196

Company Purchase Obligation

196. Id. §§ 801(b)(3), 601(7)-(l 1).