This memorandum highlights some of the key considerations to keep in mind while conducting business as a limited liability company ("LLC"). Observance of these basic considerations, which are not exhaustive, will maximize the likelihood that you will enjoy the benefits that you intended and the purposes for which you formed the LLC.
Standing/Authority to Sue
In order for an LLC to enforce any claims it has in court, it must establish standing/authority to sue.1 To have standing in a particular state, the LLC must be registered to transact business in that state and do such things as are necessary to remain in good standing in that state (e.g., file an annual report and pay taxes).2 In some cases, courts have dismissed lawsuits where a company has failed to file an annual report.3 Additionally, failure to pay taxes will result in the company lacking good standing and therefore lacking capacity to sue.4 Therefore, to ensure that the LLC can enforce any claims it has in court, it should be registered to transact business in all states where it would potentially need to enforce such claims and should comply with all statutory requirements (e.g., filing annual reports and paying taxes).5
Nature of LLC; Mischaracterization of LLC
Sometimes, signatories for limited liability companies mistakenly sign contracts without using the "LLC" designation.6 In such cases, some courts will construe the company as a partnership instead of an LLC. This may result in personal liability for the members of the LLC, which effectively destroys any protection from liability that was intended by formation of the LLC. Therefore, contracts signed by the company should always include "LLC" or "Limited Liability Company" as appropriate.
Limited Liability of Members and Managers; Personal Liability under Agency or Other Law
As mentioned above, an LLC shields its members from liability for the company's obligations.7 However, there are circumstances in which members can be held personally liable for the LLC's obligations. Here are a few examples:
If a member has an oral side agreement to reimburse the LLC for payments made on a note which he signed in his capacity as a member of the LLC, the individual may be held personally liable.8 When signing contracts or other obligations, members should always include their title (e.g., Chief Executive Officer) and the LLC's name. This will ensure that any breach of contract claims against the member individually will be dismissed, especially when there is no evidence that the member intended to be personally liable.9 Any contractual obligations assumed by the LLC belong to the entity, not the individuals signing or the LLC's members.10 Individuals who sign a contract that indicates title but does not name the LLC can bind themselves (instead of the LLC) on the contract by virtue of the individual's failure to respond to a request for admissions.11 If the signature block of the contract states the name of the company without the "LLC" designation, a court might not find the person who signed it personally liable since the variance is slight.12 This finding would be further bolstered if there was no evidence that the other party to the contract was ever misled about the identity of the company and that it is an LLC.13 However, a person who knowingly omits "LLC" in the signature block is liable for any indebtedness, damage, or liability caused by the omission.14 Even when an individual signs a contract as president of the LLC, if the contract includes personal guarantee language, then a court may hold the individual personally liable.15 The bottom line: contracts should never include personal guarantee language and signature blocks should always include 1) the signing person's title and 2) the company's name, including the "LLC" designation. A member of an LLC who personally participates in tortious conduct (bad acts) of the company may be held personally liable for the consequences of their conduct.16 Members or...