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The Twisted Veil of Texas LLCs
The Texas law of veil-piercing for limited liability companies is incoherent. It should be fixed. Section I tells what is wrong with the law. Section II proposes a fix.
Model Company Agreements for Closely Held LLCs
It is often stated that one of the benefits of organizing an entity as a limited liability company is that this form of entity offers the owners and governing authority of the entity the flexibility to agree to provisions for the economic terms and governance that are more flexible than available with respect to a corporation. This is true, and indeed limited liability companies are sometimes used to create highly complex structures with multiple classes of ownership interests and highly customized provisions regarding management and governance of the entity, including complicated provisions for voting and management succession. However, given the large number of entities now being created as limited liability companies in Texas and other states, it is likely that many of these new entities are not entities with complex structures with multiple classes of ownership and complex bureaucracies for governance. Statistics compiled by the Internal Revenue Service show that for the tax year 2020 (the most recent year for which statistics are currently available), approximately 67% of the S corporation returns are for single-shareholder S corporations and approximately 24% have only two shareholders. The Internal Revenue Service does not publish similar statistics for limited liability companies, and single-member limited liability companies are typically disregarded entities that do not file tax returns. But if one assumes that most limited liability companies are closely held entities, then by analogy, it is likely that a large portion of limited liability companies have one or two owners. Therefore, it is much more likely that practitioners will find themselves needing to draft simple limited liability company agreements suitable for entities with one or two or a very few owners, rather than more complex documents.The purpose of this paper is to present and discuss models for governing agreements for limited liability companies when a simple structure is needed.
Appendix A of 2024 Model Company Agreements for Closely Held LLCs
Model Company Agreement for Manager-Managed, Multi-Member Limited Liability Company. This Model Agreement is Appendix A to an article by Cliff Ernst and Elizabeth S. Miller entitled Model Company Agreements for Closely Held LLCs (the “Accompanying Article”). This Model Agreement should not be considered a form to be completed by filling in the blanks. Drafters should be certain that any agreement used by them is appropriate for the particular transaction. This Model Agreement should be read together with the Accompanying Article, including the various references to the Accompanying Article throughout this Model Agreement.
Appendix C of 2024 Model Company Agreements for Closely Held LLCs
Model Company Agreement for Single Member Limited Liability Company. This Model Agreement is Appendix C to an article by Cliff Ernst and Elizabeth S. Miller entitled Model Company Agreements for Closely Held LLCs (the “Accompanying Article”). This Model Agreement should not be considered a form to be completed by filling in the blanks. Drafters should be certain that any agreement used by them is appropriate for the particular transaction. This Model Agreement should be read together with the Accompanying Article, including the various references to the Accompanying Article throughout this Model Agreement.
Common Pitfalls in Drafting LLC and LP Agreements
Given their structural flexibility and tax advantages, it is little wonder that limited liability companies (“LLCs”) and limited partnerships (“LPs”) have eclipsed the corporation as the primary entities of choice for new businesses in Texas. LLCs and LPs offer a myriad of almost limitless options on ownership structure, company governance and almost all other aspects related to the operation of the entity. However, as it is often said, with much freedom comes much responsibility. A practitioner who puts together a limited liability company (“LLC agreement”) or an agreement of limited partnership (“LP agreement”) for a client should be well versed in the overall structure of these entities and the variables that should be considered in drafting the operative agreement. Both LLCs and LPs are so-called “creatures of contract” in that the Texas Business Organizations Code (“TBOC”) chapters on LLCs and LPs give great deference to the LLC agreement or LP agreement to define the rights and obligations of the members and partners, respectively, of these entities. This paper analyzes select provisions of the LLC agreements and LP agreements that practitioners are likely to have to address in drafting an agreement for a client.
Series Limited Liability Companies: Formation, Operation and Practical Considerations
This paper and presentation are intended to address the statutory authority for a “Series LLC” (hereinafter referred to as a “Series”), selected statutory provisions relating Limited Liability Companies (“LLCs”), a limited examination of how Series LLCs are taxed, how they are treated under the Uniform Commercial Code (“UCC”), under the United States Bankruptcy Code, and various practical considerations related to Series LLCs. Limited Liability Companies will be referred to as LLC, Company or Mothership in this paper.
Equity Incentive Compensation in Limited Liability Companies
Management Responsibilities of Governing Persons of Corporations and Limited Liability Companies
Although this paper will focus primarily on LLCs, it is worthwhile to consider the duties typically imposed on corporate directors, as the same duties show up in cases involving LLCs. Directors have a duty to discharge their responsibilities in accordance with the duty of care, the duty of loyalty, and the duty of obedience. The duty of care mandates that a director discharge his or her responsibilities with the care that an ordinarily prudent person would exercise in similar circumstances. Corporate statutes based on the Model Business Corporation Act use the phrase “an ordinarily prudent person in a like position would exercise under similar circumstances.”1 This statutory language allows a court to look to a particular organization rather than a hypothetical entity. Applying this standard, a court may consider the background, qualifications, and experience of a director and the role the director plays in the corporation when measuring the director’s conduct. The ordinarily prudent person standard is associated with tort-law and simple negligence, but in the corporate world, it has been incorporated into the duty of care and case law applies a gross negligence standard. Directors also usually enjoy the benefits of the business judgment rule. The duty of loyalty requires a director to act in good faith in what the director reasonably believes to be the best interests of the corporation and to not derive a personal profit or advantage at the expense of the corporation. The duty of loyalty comes into play if a director or officer wants to compete with the corporation or take an opportunity of the corporation for the director’s own benefit. The duty of obedience dictates that a director obey the law and the corporation’s organizational documents. Corporate statutes commonly provide a procedure for approval of a director’s conflicting interest transaction. Most corporate statutes now permit the corporation’s formation document to relieve directors from monetary liability for breaches of the duty of care. The provisions of the TBOC governing for-profit corporations (like the predecessor Texas Business Corporation Act) do not explicitly set forth or define the fiduciary duties of corporate directors; however, case law generally recognizes that directors owe a duty of obedience, a duty of care, and a duty of loyalty.
Model Company Agreements for Closely Held LLCs
Records maintained by the Texas Secretary of State indicate that the limited liability company has become the entity of choice among Texas organizations. The office of the Texas Secretary of State reports that of the 374,301 certificates of formation filed for domestic for-profit entities in 2024, 348,753 (or approximately 93%) were limited liability companies, and of the 391,934 certificates of formation filed for domestic for-profit entities in 2023, 365,417 (or approximately 93%) were limited liability companies. It is often stated that one of the benefits of organizing an entity as a limited liability company is that this form of entity offers the owners and governing authority of the entity the flexibility to agree to provisions for the economic terms and governance that are more flexible than available with respect to a corporation. This is true, and indeed limited liability companies are sometimes used to create highly complex structures with multiple classes of ownership interests and highly customized provisions regarding management and governance of the entity, including complicated provisions for voting and management succession. However, given the large number of entities now being created as limited liability companies in Texas and other states, it is likely that many of these new entities are not entities with complex structures with multiple classes of ownership and complex bureaucracies for governance. Statistics compiled by the Internal Revenue Service show that for the tax year 2021 (the most recent year for which statistics are currently available), approximately 68% of the S corporation returns are for single-shareholder S corporations and approximately 24% have only two shareholders. The Internal Revenue Service does not publish similar statistics for limited liability companies, and single-member limited liability companies are typically disregarded entities that do not file tax returns. But if one assumes that most limited liability companies are closely held entities, then by analogy, it is likely that a large portion of limited liability companies have one or two owners. Therefore, it is much more likely that practitioners will find themselves needing to draft simple limited liability company agreements suitable for entities with one or two or a very few owners, rather than more complex documents. The purpose of this paper is to present and discuss models for governing agreements for limited liability companies when a simple structure is needed.
Fall, 2015
Includes articles the 84th Session of the Texas Legislature, specifically: "2015 Texas Legislative Update on Entity Law" by Daryl Robertson; "A Series LLC Is Now Included Under The Texas UCC’s Definition Of Person, Removing Uncertainty For Secured Lending Transactions" by James Leeland; "Power of Attorney Bill (HB 3095)" by Jacqueline Akins. There were two non-legislative articles as well, including: "Confidentiality of Email – The Changing Consensus" by Ronald Chichester; and "Texas Crowdfunding Portals Provide Texas Businesses New Access to Investment Dollars" by R. Jason Pierce.
Section Newsletter Summer 2015
This issue includes articles on "Trap for Nonprofit Corporations: Using Single Member LLCs" by Darren Moore and Frank Sommerville; "Form of Nonprofit Corporation Governing Documents Available to Members" by Elizabeth Miller and Frank Sommerville; "Delaware Judge Fines Dole Food Executives $148 Million for Merger Fraud" by Byron Egan; and "Common Qualifications to a Remedies Opinion in U.S. Commercial Loan Transactions" by Gail Merel and Steve Tarry.
Fall, 2015
Includes articles the 84th Session of the Texas Legislature, specifically: "2015 Texas Legislative Update on Entity Law" by Daryl Robertson; "A Series LLC Is Now Included Under The Texas UCC’s Definition Of Person, Removing Uncertainty For Secured Lending Transactions" by James Leeland; "Power of Attorney Bill (HB 3095)" by Jacqueline Akins. There were two non-legislative articles as well, including: "Confidentiality of Email – The Changing Consensus" by Ronald Chichester; and "Texas Crowdfunding Portals Provide Texas Businesses New Access to Investment Dollars" by R. Jason Pierce.
Section Newsletter Summer 2015
This issue includes articles on "Trap for Nonprofit Corporations: Using Single Member LLCs" by Darren Moore and Frank Sommerville; "Form of Nonprofit Corporation Governing Documents Available to Members" by Elizabeth Miller and Frank Sommerville; "Delaware Judge Fines Dole Food Executives $148 Million for Merger Fraud" by Byron Egan; and "Common Qualifications to a Remedies Opinion in U.S. Commercial Loan Transactions" by Gail Merel and Steve Tarry.