PRACTICE TIP CONCERNING THE USE OF “EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT”

By , February 24, 2017 3:41 pm

I’m often asked by clients to review operating agreements drafted by other lawyers for LLCs that my clients may want to join.  A phrase I often see in one or more of the provisions of many of these agreements is the phrase “except as otherwise provided in this Agreement.”

I beg you to never use the above phrase in operating agreements that you draft.  The phrase forces readers, in the case of each such provision, to comb through the entire agreement to find “other provisions.”  Instead, just cite those other provisions.

WHAT TAX RECORDS SHOULD LLCS AND THEIR MEMBERS MAINTAIN, AND FOR HOW LONG?

By , February 23, 2017 6:03 pm

The IRS issued new guidelines about the tax records that taxpayers should keep, and for how long.  These rules apply, of course, to LLCs and their members, and the members should structure their LLC record keeping accordingly.

See IR-2016-162 (Dec. 7, 2016).  The link is https://www.irs.gov/uac/tax-preparedness-series-tax-records-what-to-keep

THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

By , February 22, 2017 5:38 pm

The implied contractual covenant of good faith and fair dealing applies powerfully to the interpretation and implementation of the operating agreement of every multi-member LLC.  So LLC lawyers have to have a deep understanding of implied covenant doctrine.  The new article cited below is an excellent introduction to this doctrine under Delaware law, and the doctrine as addressed in the article undoubtedly applies also in most or all other states.

Also set forth below is an abstract of the article.

57 B.C. L. Rev. E-Supplement 212
Boston College Law Review E-Supplement
2016
LEAP OF FAITH: DETERMINING THE STANDARD OF FAITH NEEDED TO VIOLATE THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING FOR DELAWARE LIMITED LIABILITY COMPANIES
Pat Andriola
Copyright © 2016 Pat Andriola. All rights reserved.

Abstract: Delaware courts have long respected the right to contract in Delaware, and possibly no entity is afforded more privileges to set the boundaries of its corporate form than the Delaware Limited Liability Company. Unlike nearly every other state, Delaware permits LLCs to abolish the duties of care and loyalty in their operating agreements, but forbids companies to eliminate liability for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.” The problem with the phrase “bad faith violation” is that, when referencing a breach of the implied covenant of good faith and fair dealing, it implies that there exists a non-bad faith violation of the covenant. In determining whether or not “neutral faith” or “non-bad faith” violations of the implied covenant are permissible under Delaware LLC law, this essay argues that Delaware courts should look to the relatively short history of the covenant, the contractarian spirit of Delaware laws and courts, and section 18-1101 of the Delaware Limited Liability Company Act to hold that the implied covenant can only be violated in bad faith.

EXPELLING LLC MEMBERS

By , February 21, 2017 5:40 pm

The article cited below will be of particular interest to Florida LLC lawyers, members and managers, but its subject matter is important under all U.S. LLC acts.

91-JAN Fla. B.J. 8
Florida Bar Journal
January, 2017
Feature
INVOLUNTARY EXPULSION OF TROUBLESOME MEMBERS UNDER FLORIDA’S REVISED LLC ACT
Dennis A. Nowak and Caitlin M. Trowbridge
Copyright © 2017 by The Florida Bar; Dennis A. Nowak, Caitlin M. Trowbridge

EMPLOYMENT TAXES OF LLC MEMBERS

By , February 20, 2017 4:30 pm

Employment taxes on their shares of LLC income are a key consideration for many LLC members.  Even LLC lawyers who know very little about taxes should have at least a basic understanding of about these taxes and either handle or get help in identifying and handling issues for LLC clients that involve employment taxes.  The new post by Lou Vlahos under the following link provides a brief but very clear introduction to federal employment taxation of LLC members and an excellent discussion of a recent IRS ruling very relevant to LLC members and their lawyers.

Here’s the link:  http://www.taxlawforchb.com/2016/11/bifurcating-a-partner-for-self-employment-taxes-nothing-doing/#

ARTICLE ABOUT STATUTES FOR CLOSELY HELD BUSINESSES

By , February 17, 2017 4:11 pm

If you are interested in LLC statutory law, you may be interested in the article cited below and the paragraph summarizing the article.

46 Sw. L. Rev. 63
Southwestern Law Review
2016
Article
TOO MANY COOKS SPOIL THE CAKE, AND TOO MANY STATUTES SPOIL THE LLC: A PLEA FOR UNIFORMITY
Carol Goforth
Copyright © 2016 by Southwestern Law School; Carol Goforth

There is widespread agreement that closely held enterprises play a critical role in this country. Even if some economists are questioning whether all closely-held businesses offer the same long term benefits for the economy in terms of job-production or innovation, the reality that so many American businesses are in fact closely held means that such enterprises are significant to a very large number of individuals. In the past thirty years, we have seen dramatic and unparalleled growth in the range of operational structures available to such businesses. Regrettably, in the rush to try and offer entrepreneurs “new” and “better” statutory options, we have lost the benefits of uniform, predictable and well-understood operational structures. We continue to modify, adapt, and innovate so rapidly that the ideal business form is a constantly shifting and moving target, which serves no one well. This article suggests that it is time to stop offering “new” alternatives and “new” rules, and to attempt to find common ground and move towards a more uniform understanding of how LLCs, in particular, should be structured and operated to maximize efficiency for the closely held, multi-owner business. The current ULLCA, promulgated by the Uniform Law Commission, seems the most likely alternative to achieve this result.

 

ADVANCEMENT AND INDEMNIFICATION PROVISIONS IN LLC OPERATING AGREEMENTS

By , February 16, 2017 4:30 pm

In the operating agreements of larger and more sophisticated LLCs—and sometimes the operating agreements of smaller LLCs—advancement and indemnification provisions can be critically important.  The new post under the link below provides a brief but excellent discussion of the Delaware LLC law relevant in drafting these provisions.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=a234e902-0fd0-4369-94ca-242ecc7c028c&l=7T7DJ8A

LOANS AMONG RELATED ENTITIES

By , February 15, 2017 3:52 pm

Whenever you create a holding company/operating company for your LLC formation clients, you need to provide for itcas among them for tax purposes and anti-veil piercing purposes.  The new post under the following link discusses intercompany loan agreements:

http://www.taxlawforchb.com/2017/01/loans-between-related-entities/

LLCS AND FREEZE-OUT MERGERS

By , February 14, 2017 2:50 pm

Under the link below is another excellent new post about a recent New York case involving an LLC merger freezing out a minority member.  The decision in the case was based on the plain language of the governing operating agreement, and, in particular, on the fact that the operating agreement permitted a majority of the members to approve transfers of membership interests but without any requirement that the consenting members be disinterested.  The lesson of the case for LLC lawyers in drafting operating agreements is always to consider whether member consent requirements should make clear that consenting members must be disinterested.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=b8e8e170-0340-4cdd-a124-b54ae930b1ca&l=7T95V6U

BUSINESS JUDGMENT RULE

By , February 13, 2017 3:41 pm

The post under the link below discusses a very recent Delaware Court of Chancery decision about the business judgment rule.  LLC lawyers need to have a detailed understanding of this rule because, among other things, it should often be included with the duty of care provisions in operating agreements for multi-member LLCs.

Here’s the link:

https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/business-judgment-rule-applied-when-disinterested-majority-approved-merger-in-fully-informed-and-uncoerced-vote/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=c105709976-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c105709976-70733165