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for a creditor to foreclose on a member’s ownership interest, seek
to dissolve the LLC, and/or to pierce the veil of the LLC and attach
its assets (particularly in SMLLCs where the identity of the owner
and the LLC are indistinguishable).
Second, an owner should consider forming at least a two-mem-ber LLC. The other owner should be someone who has a true
economic interest in the LLC and otherwise qualify as a legitimate
co-owner. Given the flexibility in governance of LLCs generally, much can be done to limit complications of having a second
member. For example, the majority owner can be the “manager,”
so that the other member(s) are not able to manage or otherwise
actively interfere with the business of the LLC.
Third, consider the impact of a potential bankruptcy of the
LLC. Based on case law in several jurisdictions, the trustee of the
bankruptcy estate of a member of an SMLLC who files for federal
bankruptcy protection becomes the owner of the membership
interest and can sell off the business or liquidate the assets to discharge the member’s indebtedness. (How this issue will unfold in
other contexts, such as two or multi-member LLCs, is not yet clear,
but only highlights the need for the type of review suggested in
Fourth, an owner should make sure the LLC operating agreement is legally “up to snuff.” For example, the operating agreement should address transfer restrictions and rights as to membership interests — e.g., providing a procedure for expulsion of a
member who files for bankruptcy protection and/or requirements
and procedures for the purchase of any member’s interest who
becomes subject to a charging order.
Finally, ensure that the LLC’s records are correct and complete.
As has been demonstrated in veil-piercing cases relating to
corporations, an LLC’s ownership, formation, and governance
documents should be maintained for posterity. It is also a good
idea to maintain an LLC “minute book,” as would be the case in
a corporation, which would include all required state filings and
minutes of member or manager meetings.
For those interested in further discussing the issues raised in this
article, feel free to contact Fred at email@example.com
and/or at 312-840-7004.
In spite of a few tactics available to stop a
corporate shareholder’s creditors, creditors can
generally attach the stock of a corporation’s
shareholder and “step into the shoes” of that
LLC: Exploring the Benefits, Risks
According to the U.S. Small Business Administration (SBA.
gov), there are some general pros and cons of an LLC
(limited liability company). According to the organization,
• Limited Liability. Members are protected from personal
liability for business decisions or actions of the LLC. This
means that if the LLC incurs debt or is sued, members’ per-
sonal assets are usually exempt. This is similar to the liability
protections afforded to shareholders of a corporation. Keep
in mind that limited liability means “limited” liability —
members are not necessarily shielded from wrongful acts,
including those of their employees.
• Less Recordkeeping. An LLC’s operational ease is one
of its greatest advantages. Compared to an S-Corporation,
there is less registration paperwork and there are smaller
• Sharing of Profits. There are fewer restrictions on profit
sharing within an LLC, as members distribute profits as they
see fit. Members might contribute different proportions of
capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage
of the profits or losses.
Disadvantages of an LLC include:
• Limited Life. In many states, when a member leaves an
LLC, the business is dissolved and the members must fulfill
all remaining legal and business obligations to close the
business. The remaining members can decide if they want
to start a new LLC or part ways. However, you can include
provisions in your operating agreement to prolong the life
of the LLC if a member decides to leave the business.
• Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax
contributions towards Medicare and Social Security. The
entire net income of the LLC is subject to this tax.
For more information, visit www.sba.gov.