Mike Smith is an Indiana lawyer who is very knowledgeable about LLCs but also about estate planning. He will soon be publishing an article whose text you can access through the link below. The article deals with estate planning issues that arise in the case of single-member LLCs whose members die. If you are an estate planner or an LLC lawyer, but especially if you are both, you should read the article and make sure you implement its teachings with all of your clients who own single-member LLCs.
As I’ve noted in many posts to this group, you have to teach your LLC formation clients how to avoid veil-piercing. Below is a link to a soon-to-be published law journal article on the general subject of veil-piercing. It’s by two distinguished corporate law professors. The title is “Finding Order in the Morass—the Three Real Justifications for Piercing the Corporate Veil.” The ideas in it apply as much to LLCs as to corporations.
One of the key lessons one can derive from the Wyoming case noted in the post below is that when you’re forming LLCs for your clients and they want you to form a single-member LLC, you should tell them that they’ll have a stronger liability shield (and also better pick-your-partner and charging order protections) if they have a two-member LLC. Husband-wife LLCs often work well in this context.
As I’ve already mentioned once or twice in my posts to this listserv, a major resource for LLC lawyers is membership in the Committee on LLCs, Partnerships and Unincorporated Business Entities of the ABA Business Law Section. Click here to view one of the many valuable LLC practice tools available to members of the Business Law Section. The bibliography under the link lists numerous LLC topics, each of which is also a hyperlink through which the bibliography provides articles.
Because of copyright limitations, I could not e-mail you the bibliography with live links. But if you care to skim the bibliography, you’ll at least see the listed topics, and these by themselves will provide you with a decent overview of the world of LLC practice.
And, if you’re not already a member of the ABA Business Law Section, the prospect of obtaining the above bibliography might be a factor in prompting you to join the section.
When you’re forming an LLC for you clients, whether it’s a single-member or a multi-member LLC, you have to teach them about veil-piercing and how to avoid it. A very recent and badly reasoned Wyoming Supreme Court decision pierced the veil of a single-member LLC . Among other things, the court reasoned that the fact that the single-member LLC is a disregarded entity for federal tax purposes is a ground for piercing. This reasoning is insane. The decision also contains dubious reasoning about undercapitalization as a grounds for veil-piercing. But you have to warn your clients about the risks posed by the case and its reasoning.
Here is a link to a short article about the case: http://lawprofessors.typepad.com/business_law/2014/11/wyoming-sc-makes-llc-veil-piercing-easier-says-llcs-can-have-corporate-assets.html. If you click on this link, you will also get a link to a PDF of the case itself.
To be a good LLC lawyer, you have to subscribe to and follow all of the blog websites that, even if only from time to time, publish good posts about LLC practice. A friend of mine kindly told me today about a blog website I hadn’t known about; it’s by a Delaware law firm called Fox Rothschild. Here is link to a recent post in that website about LLC operating agreements. I disagree with some of its contents, but, at the very least, it’s thought-provoking. If you’re an LLC lawyer or planning to become one, take a look at it. I’ve just subscribed to the website. You might want to do the same.
I will be teaching a 1.5-hour seminar on the above subjects on December 11. If these subjects interest you and you want more information about my seminar, click on this link: http://www.nbi-sems.com/Details.aspx/R-68133ER%7C?ctname=SPKEM.
Obviously, LLC operating agreements should be well drafted in plain English that clients can readily understand. The best website I know of on contract drafting is written by a lawyer named Ken Adams. The URL is www.adamsdrafting.com. (If you know of other good websites on contract drafting, please so indicate in a response to this post.) Ken is the author of the ABA handbook on contract drafting, and he teaches contract drafting seminars to law firms worldwide. If contract drafting is a subject that interests you, I suggest you click on the link to his website and then on the navigation button marked blog. This will enable you to subscribe to his website blog posts.
About 70 percent of all LLCs are single-member LLCs owned by individual. About 25 percent are two-member LLCs. Only about 5% of all LLCs have three or more members.
The biggest risk for two-member LLCs are (i) deadlock between the members and (ii) serious misconduct by one of the members. The latter risk is addressed in this terrific recent blog post by Peter Mahler.
When you form two-member LLCs for your clients, you’ve got to address the above two risks forcefully in your clients’ operating agreements. Failure to do so would be a clear violation of the duty of competence under Rule 1.1 of the ABA Model Code of Professional Conduct as in effect in most states, and could lead to a well-deserved malpractice claim.
In case this is useful to those of you who form or are interested in forming series LLCs: My Wolters Kluwer LLC book contains a lengthy chapter on the blessings and curses of series LLCs (with particular focus on Delaware series LLC law), a model Delaware series LLC certificate of formation and a model Delaware series LLC operating agreement with section-by-section comments.