LIMITED LIABILITY COMPANIES
Posted: 8/21/2006 15:38:48

LIMITED LIABILITY COMPANIES


William D. Harazin
William D. Harazin, PLLC
Two Hannover Square, Suite 2404
Raleigh, NC 27601
919-821-370
wharazin@harazinlaw.com

National Business Institute
September 7, 2005




I. WHY LIMITED LIABILITY COMPANIES?


A. Introduction to Limited Liability Companies

The Limited Liability Company (LLC) is a relatively recent creature of statute developed to take advantage of the benefits of several different types of business entities while avoiding their drawbacks. The LLC primarily draws from the Corporation, the Partnership and the Limited Partnership and in many respects it is very similar to an S Corporation. In doing so it provides the protection of limited liability, the tax advantages of a pass through entity and the flexibility to meet the needs of almost any business enterprise.

One of the most the most important bits of information to know about Limited Liability Companies is http://www.secretary.state.nc.us/corporations/. The North Carolina Secretary of State’s website is a user-friendly website, which provides useful information concerning LLCs and other business entities. It also has invaluable downloadable Forms pertaining to the various LLC actions, which a practitioner may encounter.


B. History of the Limited Liability Company

The Limited Liability Company (LLC) is a very recent innovation in comparison with Partnerships and Corporations. The first Limited Liability Company statute was enacted in Wyoming in 1977 followed by Florida in 1982. SEE Wyo. Stat. Sections 17-15-101 to 136 (1977) and Fla. Stat. Ann. 608.401 to 471 (1982). When first enacted the LLC was not the popular entity that it is today and did not really catch on until the 1990s. Though Wyoming’s concept of a flexible “pass-though” entity providing limited liability was enticing it did not operate in a vacuum. It required the cooperation of the Internal Revenue Service to make it a truly viable option as a business entity. Without the IRS’ blessing the entity was rarely used due to the uncertainty of the entity’s federal tax treatment.

From a tax perspective, the purpose of the LLC was to create a “pass-though” entity such that the LLC would be taxed similar to a partnership and avoid the possibility of double taxation. In order for the State statute to accomplish the “pass-though” effect, it required the IRS’ recognition that LLCs could be treated as partnerships for federal income tax purposes. As a new entity such recognition did not occur overnight. In 1988 the IRS recognized that LLCs could be treated as a partnership for federal income tax purposes. This, however, did not alleviate all of the uncertainty and confusion of the LLC’s tax treatment.

Over the next few years the tax treatment of an LLC was determined on the basis of four factors: limited liability; continuity of life; centralized management; and free transferability. To be taxed as a partnership care had to be taken in forming the LLC to ensure that it lacked at least two of the foregoing factors. Without such diligence, the LLC would be treated as a corporation. Nonetheless, the recognition of partnership tax treatment prompted the other states including North Carolina to enact limited liability company statutes, such that now all fifty states have LLC statutes.

As of January 1, 1997 the IRS simplified the method of determining the LLC’s tax treatment by issuing the “Check the Box” regulations and Form 8832, thereby removing the uncertainty over the partnership tax treatment of an LLC. Under these regulations the LLC will be classified as a partnership for federal tax purposes unless it affirmatively elects to be taxed as a corporation by filing Form 8832. Without an election, a two or more person LLC is by default classified as a partnership and a single member LLC is by default classified as a disregarded entity.


C. North Carolina Limited Liability Statute


North Carolina enacted its Limited Liability Company Statute as Chapter 57C of the North Carolina General Statutes, which became effective on October 1, 1993. 57C was drafted by a joint sub-committee on limited liability companies of the Business Law and Tax Law Sections of the North Carolina Bar Association. In drafting the LLC statute, the drafters drew heavily upon The Business Corporation Act of NCGS 55, The Uniform Partnership Act of NCGS 59 and The Revised Uniform Limited Partnership Act of NCGS 59. In doing so, the drafters were cognizant of the great body of judicial opinions interpreting these statutes and intended them to provide guidance in interpreting the new LLC Act.

Since the enactment of the LLC Act it has been amended. Initially, the LLC Act required two or more members to comply with the partnership attributes, but the October 1, 1997 amendment changed the language to one or more members, thereby allowing single-member LLCs. 57C-2-20(a).

Amendments effective January 1, 2002 provided a number of substantive changes and additions to the LLC Act. These Amendments included:

a. The standardization of administrative procedures which provided for filing procedures in a single Chapter 55D;
b. Conversion Rules allowing for the conversion “to and from” an LLC. 57C-9A-11 and 57C-9A-12.
c. Designation of Directors and Executives in the LLC context. An LLC could now appoint Directors and Executives and specify the rights and obligations, which attach to these positions. 57C-2-02(10).
d. Organization and Formation Distinction. An LLC is “formed “ when one or more persons deliver Articles to Secretary of State. 57C-2-20(a), and an LLC “organization” requires one or more initial members along with any further action as may be determined by the initial members. 57C-2-20(c).
e. Membership without economic interest. Allows a person to be a member even without any contribution or without an obligation to make future contributions or without a right to receive any distributions, profits or losses. 57C-3-01(c).
f. Annual Reports. Provides for the uniform date of the filing of Annual Reports as April 15th. 57C-2-23(c).
g. Tax Classifications. If LLC is classified as S or C Corporation it will be taxed as S or C Corporation in North Carolina. 57C-10-06
h. Period of Reinstatement. There is no longer any time limit on reinstatement after Administrative Dissolution and such reinstatement relates back to the date of Administrative Dissolution. 57C-6-03(c).
i. Articles of Organization. The Articles must include the street and mailing address with the county of principal office. 57C-2-21(4a).

The LLC Act makes the Operating Agreement an integral part of the LLC though it does not require one. The Operating Agreement is the structural document of the LLC, which sets forth the rights and duties among the members, managers, directors and executives. It is somewhat a cross between a Partnership Agreement, By-Laws and a Shareholders Agreement. It is broadly defined to include “any agreement, written or oral, of the members with respect to the affairs of a limited liability company and the conduct of its business that is binding on all of its members.” 57C1-03(16). As such, there is no requirement, unless otherwise agreed, that it be in writing 57C-3-05.

Though the LLC Act makes the LLC a creature of contract, it does provide for numerous default provisions in the event the LLC members have failed to address various issues, which might arise pertaining to their respective rights and obligations. Equally important is the concept that the default rules can be over-ridden by explicit agreement of the members. Though the default provisions are not as detailed as in the Business Corporation Act, they generally provide that the partnership characteristics will predominate over the corporate characteristics in the governance and management structure. Though, specific default provisions of note, will be addressed by other writers, a brief outline of the LLC Act is as follows:

Article 1 of the LLC Act provides for the definitions of the major LLC terms and the Secretary of State filing requirements.

Article 2 of the LLC Act deals with the purposes, powers, formation, annual report, name, registered office and agent. The LLC can be formed for the purpose of engaging in any lawful purpose specifically including professional services unless limited by the Articles of Organization. One or more persons can form a LLC by filing the Articles of Organization with the Secretary of State containing the information set forth in 57C2-21.

Article 3 of the LLC Act sets forth the relationship, the powers and the rights and duties among the members and the managers. Generally, the default rules governing the relationship, the powers and the rights and duties can be over-ridden by explicit agreement of the members.

Article 4 of the LLC Act deals with the LLC’s minimum financial requirements. This section governs the members’ contributions, allocations of income, gain, loss, deductions or credits and the distribution.

Article 5 of the LLC Act is the section, which pertains to the assignment of a membership interest and the withdrawal of a member. Ordinarily the membership interest is freely assignable unless otherwise restricted by agreement and the assignee only becomes a member upon unanimous consent of the other members.

Article 6 of the LLC Act sets forth the mechanism for the dissolution of the LLC which may result by the occurrence of an event, 57C-6-01, by judicial dissolution 57C-6-02, or by administrative dissolution, 57C-6-03.

Article 7 of the LLC Act recognizes and permits foreign LLC to transact business in North Carolina provide the Foreign LLC obtains a Certificate of Authority.

Article 8 of the LLC Act grants members the right to bring derivative actions if the member does not have authority to cause the LLC to sue on its own behalf.

Article 9 of the LLC Act has been replaced with Article 9A and sets forth the mechanism to convert to or from an LLC and to merge an LLC with other business entities.

Article 10 of the LLC Act deal with miscellaneous matters.

The LLC has already seen significant amendments and it will continue to develop much like the long-term development of Corporate and Partnership Law through statutory amendments and case law interpretation.



D. Comparison to Other Entities.

As previously indicated the drafters of the LLC Act drew heavily upon The Business Corporation Act, The Uniform Partnership Act and The Revised Uniform Limited Partnership Act. As such, one can find many similarities between the LLC and the entities created by such other Acts. The intention behind the LLC was to take advantage of the beneficial aspects of these other entities while avoiding their drawbacks.

Though tax distinctions and consequences will be treated elsewhere, basic distinctions among the various other entities can be briefly summed up as follows

1. A Sole Proprietorship is the simplest legal form that a business can take. It involves one individual, who owns the entire business to make a profit. It requires few formalities and carries with it the most risk to the individual due to unlimited liability. This form also lacks continuity because it comes to an end upon the death of the owner. Finally, the sole proprietorship will be taxed at the owner’s individual rates.

The Single-Member LLC is similarly taxed as it will be considered a disregarded entity for tax purposes. However, it has the significant advantage of having limited liability protection. The LLC is more flexible with the potential of having unlimited duration. The LLC is not as informal as the Sole Proprietorship in that the LLC requires formal filings with the Secretary of State’s Office.

2. A Limited Partnership is a business form in which one or more of the partners are general partners with unlimited liability and the remaining partners are limited partners with limited liability. The general partners are the managers and the limited partners, in order to maintain their limited liability, must have little authority over the running of the business. The Limited Partnership also requires a higher degree of formality, and provides for taxation similar to that of partnerships.

The LLC is more flexible than the Limited Partnership because it can be structured to mimic the limited partnership while providing all members, even the managing member with limited liability. In doing so it will also provide the favorable partnership tax treatment.

3. A Partnership is a legal entity much like a sole proprietorship in its simplicity and vulnerability except that it involves two or more owners who come together for the purpose of making a profit. The partnership is a pass-through entity in that the income of the partnership is passed on through to the partners who are then taxed on such income at their respective individual rates.

From a tax standpoint the LLC and the Partnership will be similarly taxed. The LLC has the significant advantage of having limited liability protection. The LLC is more flexible with the potential of having unlimited duration. The LLC is not as informal as the Partnership in that the LLC requires formal filings with the Secretary of State’s Office. The LLC also has the advantage of having the ability to divide the ownership into numerous classes.

4. A Corporation is a more formalized legal entity, which is a separate legal entity, separate and apart from the individual owner(s). It offers more protection to the individual owners in the form of limited liability, but requires more formality. In addition, Corporations have different tax rates than individuals. A basic corporate characteristic is “double taxation” in which corporate profits, after being taxed at the corporate level, are then taxed again when such profits are distributed to the individual owners (shareholders) in the form of dividends.

The major difference between the LLC and the Corporation is the taxation wherein the LLC has the benefit of the Partnership tax treatment. The LLC is also more flexible in that it may be structurally organized to mimic a corporation, a partnership or a limited partnership.

5. A Chapter S Corporation is a tax vehicle for small and uncomplicated businesses. From a legal standpoint, other than the tax consequences, it is virtually no different from a regular corporation. The difference is in the taxation. The Chapter S Corporation will generally be taxed like as a “pass through entity”, while retaining its corporate attribute of limited liability. In order to take advantage of the favorable tax treatment, the chapter S corporation can have no more 100 shareholders, have only one class of stock and satisfy certain other requirements reflecting its small business status.

The LLC is very similar to the Chapter S Corporation in that it has limited liability protection with the partnership tax treatment. However, the LLC is not saddled with the strict qualifying limitations of the Chapter S Corporation and thus can accomplish the same goals for businesses unqualified for the “S” status. The lack of qualifying restrictions makes the LLC less likely than a Chapter S Corporation to lose the favorable “pass through” tax treatment. Members of an LLC will be subject to self employment taxes, while shareholders of a Chapter S Corporation may avoid some or all of self employment taxes as owner–employees.




E. Who Should Use LLCs?

The Limited Liability Company is designed to incorporate the best aspects of Partnerships, Limited Partnerships and Corporations. It is a flexible entity that provides for limited liability with partnership taxation. As such it can be a good choice for real estate ventures, family businesses, start-up companies, holding companies, spin-off companies, domestic and foreign joint ventures, private equity and venture funds and professional firms.

The LLC is the alternative for the small business which may not qualify for S Corporation status. In the entrepreneurial setting, an LLC can provide a small number of investors with limited liability while actively participating in its management. An LLC may also be a benefit to family businesses that desire to maintain control within the family by restricting the voting rights outside the family and still have the benefits of limited liability and the tax benefits of a limited partnership. Businesses with appreciating assets may benefit from the favorable LLC tax treatment.

Some of the benefits include;

? Flexibility to organize the LLC in a manner similar to a Partnership, a Corporation or a Limited Partnership.
? Limited Liability to the Members.
? Partnership taxation.
? Losses pass through to the Members.
? Special allocations of income, gain, loss, credit and deductions can be made to the Members.
? No Personal Holding Company tax.
? Members may increase their basis in the membership interest by the amount of LLC debt.
? None of the S Corporation limitations on ownership, members and types of equity interests.

Some of the disadvantages:

? Uncertainty due to the lack of a large body of case law.
? State by State differences.
? As the most recent entity the LLC may have a higher cost.
? The lack of familiarity of the LLC and its operation to businesses, lenders, and investors.
? Some states prohibit single member LLCs
? Many states prohibit or place restrictions on Professional LLCs.
? Venture Capitalists may prefer the familiarity and certainty of control associated with Corporations.

Though the Limited Liability Company may not satisfy the needs of every business in many instances it will be the entity of choice due to its flexibility while providing limited liability with partnership taxation, especially for businesses, which do not qualify for S Corporation status.



LIMITED LIABILITY COMPANIES


William D. Harazin
William D. Harazin, PLLC
Two Hannover Square, Suite 2404
Raleigh, NC 27601
919-821-370
wharazin@harazinlaw.com

National Business Institute
September 7, 2005




III. HOW TO COMPLY UNDER STATE LAW


A. Avoiding Trouble with Concise Articles of Organization


The Limited Liability Company, though flexible, is still a formal entity recognized by North Carolina and therefore must still follow the formalities established by statute. The formalities of an LLC are generally found in Chapter 57C. Other statutes such as Chapter 55D, which standardizes filing procedures, Chapter 55 being the Business Corporation Act, or Chapter 55B pertaining to Professional Corporations may also contain additional formal requirements for the LLC.

The most significant formal requirement of an LLC is the required filing of the Articles of Organization with the Office of Secretary of State, which establishes the LLC as a legal entity. The Articles of Organization are one of the few required and publicly filed written documents since the Operating Agreement may be oral and the “Check the Box” IRS Form 8832 need not be filed if the LLC desires Partnership tax treatment.

57C-1-20(a) requires that any LLC document required or permitted including the Articles of Organization must be filed pursuant to 55D, which is the statute that standardizes the filing procedures for all entities.

In accordance with 57C-2-21(a) the Articles of Organization must include:

? The LLC ‘s name which satisfies the provisions of 55D-20 and 55D-21.
? The date of dissolution, if any.
? The name, address and capacity of each person executing the Articles.
? The name, street and mailing address, and county of the Registered Agent and Registered Office.
? The street and mailing address, and county of the LLC’s Principal Office.
? Election of member-managed or manager-managed LLC.

The name of the LLC must contain, pursuant to 55D-20(a)(2), the words “Limited Liability Company” or its abbreviation, and unless all of the initials are used, the word “liability” cannot be abbreviated. In addition, a Professional LLC must contain the word “Professional” or the abbreviation of P.L.L.C. or PLLC. 57C-2-01(c). Furthermore, the name must be distinguishable from other names on the records of the Secretary of State, which records may be checked on the Secretary of State’s website.

In determining whether the LLC will be a member-managed or manager-managed LLC, 57C-2-21(a)(5) provides that unless all of the members will be managers of the LLC, the Articles must contain a statement that, except as provided in 57C-3-20(a), the members shall not be managers by virtue of their status as members.

Other non-mandatory matters may be included in the Articles pursuant to 57C-2-21(b). However, in doing so the additional information will be disclosed to the public, and may later require an Amendment to the Articles if such additional information changes. Nonetheless, such additional information may include the LLC’s purpose so long as it does not indicate or imply a purpose not permitted by LLC Act, identification of the members and the managers, the initial capitalization, limitations of authority or indemnification.

The Articles need to be signed by the one or more organizers, which is akin to the incorporator of a corporation. The Organizer is person who executes the Articles in the capacity of an Organizer, 57C-1-03(16a), which may be a natural person or other legal entity. 57C-1-03(17).

The North Carolina Secretary of State’s website is a user-friendly website, which can be found at http://www.secretary.state.nc.us/corporations/. It has invaluable downloadable forms pertaining to the various LLC actions, which a practitioner may encounter including an acceptable form of Articles of Organization.


B. Liability Protection and Its Limitations.


A major purpose of the LLC is to provide essentially the same limited liability protection as may be found in a corporation under Business Corporation Act of Chapter 55.

57C-3-30(a) is the provision, which provides the LLC with the statutory authority for limited liability. It provides a member, manager, director, executive or any combination thereof of a LLC is not liable for the obligations of a LLC solely by reason of being a member, manager, director or executive and does not become so by participating, in whatever capacity, in the management or the control of the business. Nonetheless, a member, manager, director or executive will still have personal liability which may created by one’s own conduct. 57C-3-30(a).

In addition to one’s own negligence, the LLC will still not insulate a member, manager, director or executive from their own voluntary affirmative acts which impose individual liability such as a loan guarantee, or individual responsibility for payroll taxes as an IRS defined ”controlling person”, or for exposing themselves to individual liability in the event of an administrative dissolution for failure to file an annual report.

Like shareholders in a corporation, the LLC members will have liability for receiving wrongful distributions. A member will have liability to unpaid creditors of a dissolved LLC up to a pro-rata share of creditors claim not to exceed total amount wrongfully distributed to such member. 57C-6-09(a)(2). A member may also have reimbursement liability to a manager or director held liable for a wrongful distribution of which the member had knowledge up to amount of wrongful distribution received. 57C-4-07(b)(2).

Other possible theories of individual liability for the member based on corporate principles include the members disregard of the corporate entity, the piercing of the corporate veil, and a breach of fiduciary duties.

Nonetheless, the LLC still provides sufficient limited liability protection comparable to that of a corporation to make it worthwhile especially when comparing it to the unlimited liability of Partnerships and Sole Proprietorships.



C. Handling Mergers and Conversions

Initially the LLC Act did not address the issue of conversions and mergers. In later amendments to the LLC Act conversions and mergers were fully embraced in Article 9A. The conversion rules found in 57C-9A-1 through 57C-9A-13 and the merger rules found in 57C-9A-20 and 57C-9A-23 are very similar.

Under the LLC Act an entity may convert to a North Carolina LLC, a North Carolina LLC may convert to another legal entity and a North Carolina LLC may merge with other entities. 57C-9A-1, 57C-9A-10 and 57C-9A-20. The entity or the North Carolina LLC, may do so provided:

a. It is permitted to do so by the laws of the state or country governing the organization and its internal affairs; and

b. Each entity and the North Carolina LLC, comply with the requirements of Article 9A, and to the extent applicable the laws of the state or country governing the organization and its internal affair.

The first step of either a conversion or a merger is to have an approved written Plan of Conversion or a Plan of Merger as the case may be. The Plans require similar information.

A Plan of Conversion to a North Carolina LLC, pursuant to 57C-9A-2(a), requires the following information:

a. name of resulting domestic LLC.
b. name, type and jurisdiction of the converting business entity.
c. terms and conditions of the conversion.
d. the manner and basis for converting the interests of the converting business entity into interests, obligations or securities of the resulting domestic LLC or into cash or other property.

A Plan of Conversion from a North Carolina LLC, pursuant to 57C-9A-11(a), requires the following information:

a. name of the domestic LLC.
b. name, type and jurisdiction of the resulting business entity.
c. terms and conditions of the conversion.
d. the manner and basis for converting the interests of the converting LLC into interests, obligations or securities of the resulting business entity or into cash or other property.

A Plan of Merger with a North Carolina LLC, pursuant to 57C-9A-21(a), requires the following information:

a. for each entity name, type and state or country whose laws governs organization and internal affair.
b. name of surviving business entity.
c. terms and conditions of the merger.
d. the manner and basis for converting the interests of each merging entity into interests, obligations or securities of the surviving business entity or into cash or other property.
e. If a surviving entity is a North Carolina LLC any amendments to its Articles that are to be made in connection with the merger.

As can be seen by the foregoing, the Plan requirements are similar for all three actions. The Plan must be approved in accordance with the laws of the state or country governing the organization and its internal affairs of the participating entities. Prior to the merger or conversion becoming effective the Plan may be amended or withdrawn to the extent permitted by the laws that govern the entities involved.

Once the Plan has been approved the converting entity or the survivor of the merged entities shall file with the Office of the Secretary of State, Articles of Conversion or Articles of Merger as the case may be. Like the Plans, the Articles require similar information.

The Articles of Conversion to a North Carolina LLC, in addition to those required or permitted by 57C-02-21, require, pursuant to 57C-9A-03(a), the following information:

a. LLC is being formed pursuant to conversion.
b. Name of converting business entity, type of business entity, and state or country whose laws govern its organization and its internal affairs.
c. The Plan of Conversion has been approved.
d. Accompanied by a Filing fee of $50.00

The Articles of Conversion from a North Carolina LLC, pursuant to 57C-9A-12(a), require the following information:

a. Name of converting North Carolina LLC.
b. Name of resulting business entity, the type of business entity, and the state or country whose laws govern its organization and its internal affairs. If resulting entity is not authorized to do business in North Carolina a designation of its mailing address with a commitment to provide changes.
c. The Plan of Conversion has been approved.
d. Accompanied by a Filing fee of $50.00

The Articles of Merger with a North Carolina LLC, pursuant to 57C-9A-22(a), require the following information:

a. The Plan of Merger
b. For each entity name, type and state or country whose laws governs organization and internal affair.
c. The name of the surviving business entity. If surviving entity is not authorized to do business in North Carolina a designation of its mailing address with a commitment to provide changes.
d. A statement that the Plan of Merger has been approved by each merging entity in the manner required by law.
e. The effective date and time of the merger if it is not to be effective at the time of filing.
f. Accompanied by a Filing fee of $50.00


The similarities among the conversions and a merger continue with respect to the effects of either type action.

The converting or merging entities cease to exist in their prior form and continue in existence as the converted entity or the surviving entity of the merger. 57C-9A-04, 57C-9A-13 and 57C-9A-23.

Title to real and other property continues vested in the resulting or surviving entity without impairment or reversion. 57C-9A-04, 57C-9A-13 and 57C-9A-23.

All Liabilities continue as liabilities of the resulting or surviving entity and any proceeding by or against entity will continue unaffected by the conversion or merger. 57C-9A-04, 57C-9A-13 and 57C-9A-23.

Interests of the converting entity, which are converted into LLC interests are immediately converted according to the Plan and the former holders of interests in the converting business entity are entitled only to the rights provided in the Plan. 57C-9A-04, Interests of the converting LLC, which are converted into resulting entity interests are immediately converted according to the Plan and the former holders of interests in the converting LLC are entitled only to the rights provided in the Plan. 57C-9A-013. Interests in each of the merging entities, which are merged into a surviving entity or into a right to receive cash or other property are thereupon so converted, and the former holders of interests are entitled only to the rights provided in the Articles of Merger or in the case of former holders of shares of a North Carolina corporation, any rights they may have under Article 13 of Chapter 55. 57C-9A-23(a)(6),



D. Guiding Clients Through Dissolution.


Dissolution is the beginning of the end of the existence of the Limited Liability Company. It is the event in the LLC life cycle which terminates the authority of the members and managers to continue the business as a going concern. The LLC does not come to an end immediately upon dissolution. Rather the LLC goes into the next phase of winding up the affairs of the LLC wherein the members and managers have the limited authority to marshal the assets, liquidate the property, pay-off the debts and distribute the remaining assets.

The dissolution may result by the occurrence of an event, 57C-6-01, by judicial dissolution 57C-6-02, or by administrative dissolution, 57C-6-03. Certain events, some of which are under the control of the members, may trigger the dissolution of the LLC including the following:

a. A time specified in Articles.
b. Happening of event specified in Articles or the Operating agreement.
c. Written consent of all the members.
d. Unless otherwise provided when LLC has no members.
e. Entry of decree of judicial dissolution 57C-6-02 or
f. Filing a certificate of dissolution (Administrative Dissolution) 57C-6-03.

Once there is dissolution other than by judicial dissolution of 57C-6-02, or by administrative dissolution of 57C-6-03, than the manager or if none, than the last remaining member or its representative will wind up the affairs of the LLC and carry on the business only to the extent appropriate to wind up the LLC’s affairs. In doing so such manager or member shall marshal the assets, liquidate the property, pay-off the debts and distribute the remaining assets pursuant to 57C-6-05. In disposing of claims against creditors, the LLC Act provides for notice to known creditors and published notice to unknown creditors, which will then bar actions against the dissolved LLC if the required action in such notice is not taken.

Upon dissolution and winding up, Articles of Dissolution shall be filed in the Office of the Secretary of State which will set forth the LLC name, the filing dates of the Articles of Organization and any amendments thereto, the reason for filing the Articles of Dissolution, the effective date and any other information the managers may determine.

Under Judicial dissolution, in addition to the Attorney General’s right to seek dissolution for obtaining the Articles through fraud or the LLC’s abuse of authority, the other grounds specified in 57C-6-02 are:

a. Deadlock.
b. Necessary for the protection of the rights of the complaining member.
c. Assets are being misapplied or wasted.
d. The Articles or the Operating Agreement entitle the complaining member to dissolution.

Under Judicial Dissolution an action is brought in Superior Court against the LLC in the county of the LLC’s principal office and a Court may issue injunctions, appoint receivers, take action to preserve the assets and carry on the LLC business. Upon determining dissolution is appropriate, the Court will order dissolution unless the LLC elects to purchase the complaining members interest at a fair value as determined by the Court. If the Court enters a decree of dissolution a certified copy of the decree will be filed with the Secretary of State and winding up shall then take place by such member, manager or third party designated by the Court.

There are five separate grounds for the administrative dissolution of the LLC :

a. Failure to pay fees and penalties.
b. Failure to file the Annual Report.
c. Being without a Registered Agent for more than 60 days.
d. Failure to notify the Secretary of State of a change in the Registered Agent or Registered Office.
e. The Articles stated period of duration has expired.

Upon a determination that one or more grounds exist for Administrative dissolution, the Secretary of State shall mail notice of its determination to the LLC, which will then have 60 days to correct such deficiency. If the deficiency is not corrected The Secretary of State shall administratively dissolve the LLC by signing a certificate of dissolution. The LLC may at any time be reinstated upon curing any deficiency and filing an application for reinstatement following the same procedures set forth for corporations in 55-14-22, 55-14-23 and 55-14-24. Such reinstatement shall relate back to the date of dissolution. 57C-6-03(c).


E. Practical Uses for One-Person LLCs.

Initially, the LLC Act required two or more members to comply with the partnership attributes, but the October 1, 1997 amendment changed the language to one or more members, thereby allowing Single-Member LLCs. 57C-2-20(a). Without such change small businesses with only one owner could obtain the limited liability protection while maintaining the favorable tax treatment of a sole proprietorship only through the Chapter S Corporation and only if they met the qualifying requirements.

Now that Single-Member LLCs are permitted, small single owner businesses can take advantage of the benefits of the LLC. The Single-Member LLC will be taxed similar to the sole proprietorship. A Single-Member LLC will be considered a “disregarded entity” for tax purposes. In addition to the favorable tax treatment, the most beneficial aspect of an LLC for a single owner business is the limited liability protection. This comes without the limitations and formalities of the Chapter S Corporation.

Now a single owner business, such as an owner of rental property, can protect itself from liability by placing the rental property in the LLC. The rental property is an appreciating asset, which will have tax advantages in a LLC. Distributions to members of a LLC can be made without recognizing a taxable gain thereby making a LLC a good vehicle to hold appreciating assets.



F. Why Foreign LLCs.

Though all fifty states now recognize Limited Liability Companies and have statutes allowing for their formation, they are not uniform. Each state has recently enacted their own statutes with their own idiosyncrasies. They are similar in the major concepts of flexibility, limited liability and partnership taxation. However, there are differences among the state LLC statutes just as there are among other comparable state statutes even if based on “Uniform Acts”, such as the Uniform Commercial Code.

Though the LLC laws of other jurisdictions is beyond the scope of this discussion, one may find different LLC provisions as well as other laws in the other jurisdiction, which may make such jurisdiction more desirable for a particular business entity. Moreover, North Carolina recognizes foreign LLCs and that the laws of the state or other jurisdiction under which the foreign LLC is formed shall govern its formation, organization and internal affairs and the liability of its managers and members. 57C-7-01.

Forming an LLC in another jurisdiction and then transacting business in North Carolina will, pursuant to 57C-7-02, require the foreign LLC to obtain a Certificate of Authority from the North Carolina Secretary of State, and in doing so, grants the foreign LLC the same rights and privileges as a North Carolina LLC. Without the Certificate of Authority the foreign LLC will not be permitted to maintain any action or proceeding in any North Carolina Court until it obtains such Certificate.


G. Special Rules for Regulated Professionals.

As they can with professional corporations, professionals recognized and regulated by State Law are expressly authorized to carry on their particular profession as a Professional Limited Liability Company (PLLC) pursuant to 57C-2-01(c) and 57C-2-02(16). In doing so they must not only comply with the provisions of the LLC Act but also the Business Corporation Act, the Professional Corporation Act, the specific Licensing Statute and the Rules and Regulations of the specific Licensing Board of that profession.

The formation of a PLLC is done in the same manner as a regular LLC with a few additional requirements. It is generally a three-step process wherein the proposed Articles of Organization are first submitted to the appropriate Licensing Board for approval, who will then issue its approval. The Articles of Organization with the attached Licensing Board approval is then submitted to the Secretary of State for filing. Upon return, the duly filed Articles are then filed with the appropriate Licensing Board which issues its Certificate of Registration.

Generally, the PLLC’s Articles must be executed by a licensee licensed to practice the particular profession in North Carolina and the Articles must specify the type of professional services to be rendered by the PLLC. In addition, pursuant to 57C-2-01(c) the name of the PLLC must comply with 55D-20(a)(2) and shall contain the word “Professional” or the abbreviation “P.L.L.C.” or ”PLLC”.

Once the PLLC has been formed there is no requirement for the PLLC to file an Annual Report as is required of non-professional LLCs. However, akin to the Annual Report is the requirement that the PLLC renew annually its Certificate of Registration with its respective Licensing Board.

Pursuant to 57C-2-01(c) and its corporate counterpart in 55B-9, a member, manager, director or executive of a PLLC is not individually liable for the liabilities of the PLLC that arise from errors or omissions, negligence, malpractice, incompetence or malfeasance committed by another member, manager, director or executive of the PLLC, but will remain liable for his own from errors or omissions, negligence, malpractice, incompetence, or malfeasance. Notwithstanding the foregoing, other liability arising from the LLC relationship will remain.