Articles Tagged with limited liability companies

What happens to an LLC member’s membership interest in the LLC if the member files bankruptcy? How does the member’s (the debtor) bankruptcy filing impact the LLC and its other members? Does the bankruptcy trustee (or the debtor in possession in a chapter 11) step into the debtor’s shoes contrary to an express provision in the LLC’s operating agreement restricting transfers by members and prohibiting a transferee or assignee of a member from becoming an LLC member without the other members’ consent? Is the bankruptcy trustee bound by the terms of the LLC’s operating agreement, or does the trustee acquire the debtor’s membership interest free and clear of any transfer or other restrictions imposed by the LLC’s operating agreement? To answer these questions, the Bankruptcy Court in the debtor’s bankruptcy must first determine whether the LLC’s operating agreement is an “executory” contract under Section 365 of the Bankruptcy Code.

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What is an Executory Contract?


The Bankruptcy Code does not define “executory contract.” However, many circuits, including the Ninth, have adopted the “Countryman Test,” which provides that a contract is executory if ‘the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach and thus excuse the performance of the other.’ Determining whether a contract, including an operating agreement, is executory therefore requires a case-specific examination of the contract in question.

Public policy in California dictates that businesses should be free to compete against each other in the marketplace. Competition among businesses greatly benefits consumers. At the same time, competition engenders higher quality goods and higher service quality at price points advantageous to the consumer. Toward that end, California’s antitrust law, known as the “Cartwright Act,” prohibits a wide variety of conduct designed to restrain competition in the marketplace.

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The San Jose business lawyers at Structure Law Group, LLP dedicate their practice to helping business owners grow their company while insulating them from harm.  Unfair competition has a negative effect on consumers and businesses. Business entities should avoid structuring agreements which arguably cause unfair competition. Failure to do so could subject those businesses to lengthy and costly litigation and expose them to potential damages.

According to California business, trusts are unlawful and against public policy. California law defines a trust as a “combination of capital, skills, or acts by two or more persons” to:

A limited liability company (“LLC”) is one of the most favored forms of business entities because they combine the advantages of a corporation, such as limited liability and protection of their members from investor-level liability, with the advantages of a partnership, such as “pass-through tax treatment.” Additionally, LLCs are characterized by the informality of its organization and internal governance, set forth through an internal contract called the operating agreement.  An LLC member can be an individual, a corporation, a partnership, another limited liability company or any other legal entity.

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An LLC can be structured as a manager-managed or member-managed LLC.  In a manager-managed LLC, the members appoint a manager or managers to run and manage the LLC while the members take on a more passive role.  In a member-managed LLC, all the members share in managing the day-today operations of the LLC.  The managers or managing members who have been charged with the responsibility of running the LLC are obliged to act in the best interest of the LLC. The duties connected to this obligation are  known as fiduciary duties.   The key fiduciary duties are the duty of loyalty and the duty of care.  These duties are specifically defined by California law, as discussed in more detail below.

Requirements of a Fiduciary Duty

Starting a business with a partner can be highly beneficial: collaborations offer many benefits and are particularly popular with startups and firms providing professional services. When you start a business with another person or people, the last thing you expect is to end up in a disagreement about business ownership. Unfortunately, these kinds of disputes arise on a regular basis and can have a significant impact on the success of your business as well as your personal bottom line.

Fotolia_71517132_Subscription_Monthly_M-300x200Business disputes can arise in a variety of contexts – here are some of the most common situations:

  • A party may attempt to assert authority which he or she does not have

A business will select a certain business entity at the time of formation for a variety of different reasons. One of the most important reasons businesses elect a certain type of business entity is to protect owners and investors from personal liability. Business entities such as corporations and limited liability companies (LLCs) remain attractive because they protect owners, investors, members, etc. from personal liability. On the other hand, entities such as a sole proprietorship or partnership leave owners open to personal liability for corporate debts.

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Yet, while limited liability protections exist for corporations and limited liability companies, these protections are not impenetrable. Rather, personal liability may, in some circumstances, run through the company and attach to its owners and investors. This is called “piercing the corporate veil” and it is something of which all businesses, whether starting out or established, should be well aware.

How Can the Corporate Veil be Pierced?

As an innovator or entrepreneur, you may launch a business for a variety of reasons. At first, a primary reason is to develop a profitable product or technology you believe will provide a nice return.  But, creating the next popular app or useable technology could lead to a life-changing acquisition of your business at a premium valuation.  At the same time, if your business is not performing as you had hoped, selling may be the best option for you. These are only a few reasons why you may want to sell your business.

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It is important that businesses considering a sale of their company obtain the guidance of legal counsel. A Silicon Valley business attorney will be able to work with owners to identify and avoid potential legal issues that may arise with the potential sale of the business.  These pitfalls could include, for example, issues with due diligence, fiduciary duty and duty of care, voting requirements, corporate compliance, shareholder approval, intellectual property, and lien holder negotiation.  After all, once a decision is made to sell the business, the goal is not only to get a good offer but to be able to actually get the deal done.

Owners considering a sale of their business should consider the following four tips:

Businesses are not immune to making mistakes, and many businesses will at some point be served with a lawsuit. Being sued is, without a doubt, very stressful. However, if you find yourself in this situation, you should ensure that you act in a manner that preserves your legal rights and positions while allowing for the best possible outcome. Here are some things that you should consider:

Seek Legal Assistance. Do Not Tackle Business Lawsuits Alone.Fotolia_77718062_Subscription_Monthly_M-300x201

Businesses faced with potential lawsuits may not fully consider the potential negative fallout that may occur as a result of the litigation. Some businesses may be very concerned with the expenses that would be required to defend the suit. However, do not make the foolish decision of not obtaining legal counsel.

In a corporate merger or acquisition, it is important to ensure that both companies involved are on the same page early in the process. Mergers and acquisitions can be complicated and can require costly resources, so it is important to know what each party is prepared to offer before moving forward with the transaction. One way to ensure both parties are on the same page is to draft a letter of intent (LOI), which outlines the deal points of the merger or acquisition and serves as a type of “agreement to agree”.

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The LOI should be carefully drafted by the purchasing company and submitted to the selling company and should set out important basic terms of the transaction. This letter is typically not viewed as a binding contract though that does not mean it should not be given careful consideration. When submitting an LOI, the buyer should put forth attractive though realistic terms. If it fails to do so, it could result in a breakdown in negotiations or a later legal dispute if the expectations set out in the LOI were not in good faith. On the other hand, the purchaser should fully realize that an LOI does not represent the final agreement and that the terms of the deal may change after due diligence is conducted. Because of the importance of an LOI to a merger and acquisition, you should always seek assistance from an experienced M&A attorney when drafting, reviewing, or negotiating the letter.

Provisions to Include in a Letter of Intent

Contracts are utilized in every type of business and every business owner should know that written contracts should be carefully drafted, reviewed, and negotiated before signing. However, not every business deal is memorialized in writing and many agreements are based on verbal interactions and a handshake. Just as with written contracts, legal disputes can arise over deals that were verbally made. When a disagreement arises, the first question is naturally: is an oral contract enforceable under the law?

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Whether an oral contract is enforceable depends on several factors. The law requires that certain types of contracts be in writing in order to enforce the terms of the contract. Some contracts that may apply to businesses that must be in writing involve the following:

  • Contracts for the purchase or sale of goods that are worth more than $500;

Whether you are starting a company or already have an established business, you will likely need legal advice on many different issues. From business formation to dissolution, an attorney can assist you regarding contracts, employees, mergers, corporate disputes, and much more. Because you want to hire the right attorney for your legal case, the following are five questions you should consider.

What is the lawyer’s business law experience?Fotolia_93396178_Subscription_Monthly_M-300x200

Laws regarding businesses can be extremely complicated and difficult to decipher. Just because an attorney handles cases in court involving individuals does not mean they can skillfully interpret business law and apply the laws to your case. You should ensure that the attorneys at the law firm you hire have extensive experience specifically in business law.