WHAT ARE LIMITED LIABILITY COMPANIES AND WHY CREATE ONE?
Our firm routinely encounters an employer that has “LLC” after their name. What is the impact of this designation on our client’s ability to collect their settlement, award or judgment? We generally sue corporations, not individuals, as corporations are the designated employers and have the necessary resources to compensate our clients for wrongful termination. But, what happens when the Corporations are “members” of a “Limited Liability Company”?
A member of a “Limited Liability Company” or “LLC” has limited liability. A corporate member of an LLC has limited liability with respect to the member’s investment contribution to the LLC. This means that if the parent company Inc. is a member of an LLC, the parent company’s exposure to pay the debts and obligations of the LLC is limited to the investment of assets and capital that the parent company has placed in the LLC. An LLC employee cannot recover their wrongful termination damages directly against the parent company.
But perhaps the main reason large corporations use the LLC device is to “roll over” LLC income without federal taxes to the LLC. The LLC’s taxable income or loss passes through the LLC to be reported separately on tax returns by the individual corporate “members.” Of course, distributions from the LLC will depend on member contributions and the LLC’s “Operating Agreement.”
HOW LIMITED LIABILITY COMPANIES ARE CREATED.
Most people are familiar with the idea that corporations are formed by filing “Articles of Incorporation.” However, an LLC is created by filing with the Secretary of State or Department of Corporations in a state a document known as the “articles of organization” or sometimes a “certificate of organization” or “certificate of formation.”
LIMITED LIABILITY COMPANIES ESTABLISHED BY OTHER LIMITED LIABILITY COMPANIES
Most people are also familiar with the idea of a parent-subsidiary relationship. That is, a parent corporation has share ownership and some overlapping controls over a separate subsidiary corporation. An LLC can also establish this “parent-subsidiary” relationship of multiple LLCs involved in a common business. Why do it? The structure still allows for additional layers of liability protection. If one of the LLC members fails or incurs overwhelming debt, the other LLC members are protected from exposure except for what they contributed to the failed LLC member.
IMPLICATIONS FOR CREDITORS AND EMPLOYEES OF LIMITED LIABILITY COMPANIES
An LLC cannot by law issue shares. Its investment capital is derived from its members and any private debt it can muster. But unless the LLC is maintained as a front to defraud creditors, it is often sufficiently funded by its corporate members and other LLC participants to cover our clients’ claims.
An LLC ends when one of the members chooses to leave the LLC. However, the operating agreement may provide for the entire purchase of the outgoing member’s interest and continuation of the LLC. With no such contingency in the Operating Agreement, a new LLC must be formed. The reality is that your target employer-defendant can be dissolved if one of the members of the LLC leaves. Diligent attorneys suing an LLC will obtain a copy of the Operating Agreement to identify all members and ensure continued operations.
