LLC formation.

• Author: Ellentuck, Albert B.
• Position: Limited liability company

Editor's note: This case study has been adapted from "Guide to Limited Liability Companies," 2nd Edition, by Michael E. Mares, Sara S. McMurrian, Toni D. Heaps, Stephen E. Pascarella II and Gregory Poscaro, published by Practitioners Publishing Company, Fort Worth, Tex. 1996.

Facts: Debra Jones, a valued client, tells her tax adviser that she and her friend, Sandy Smith, are in the midst of forming a limited liability company (LLC) for the purpose of running a restaurant. Debra asks the tax adviser to review the LLC's drafted articles of organization and operating agreement to ensure that the documents meet her and Sandy's goals and desires for the operation of the business. Issue: What information does the tax adviser need to review the LLC's articles of incorporation and operating agreement properly?

Analysis

In reviewing an LLC's articles of organization and operating agreement, certain information must initially be examined. First, the adviser should ensure that he understands the client's goals; this review may differ depending on whether the client is an individual who intends to manage the LLC or be a passive nonmanaging member.

The adviser should also ensure that he understands the specific relationships the members intend the documents to convey. For example, is it important for each member to participate in management? Is the LLC being formed for estate planning purposes? Should a member have the right to withdraw from the LLC at anytime and receive the fair market value of his interest? The interview questionnaire below can be used to make sure the adviser has all the necessary information to ensure that the documents clearly reflect the client's needs and desires.

Interview Questionnaire: Formation Issues

1. Who are members? (Name, Address, Employer Identification Number)

2. What is the purpose of the LLC?

3. Who is the registered agent?

4. Where is the registered office?

5. In which states will the LLC conduct business?

6. How much capital will be contributed?

7. Will the LLC permit capital contributions of noncash property, services or loans and other debt guarantees?

8. If noncash contributions are permitted, will there be any limitations on those contributions?

9. How will noncash contributions be valued?

10. Have the organizers considered whether the LLC interests will be considered securities?

11. If future contributions are contemplated, will the interest vest only on the transfer of the property or performance of the service or guarantee?

12. Will there be a need for future capital calls?

13. Will the calls be mandatory or voluntary?

14. Will there be penalties if a member refuses or fails to meet a future capital call? Will the other members be able to compromise a member's capital account obligation?

15. Will discretionary contributions by members be permitted?

16. How will the members vote (per capita, by capital balance or by contribution)?

17. When will the member's interest be...