A Massachusetts limited liability company (“LLC”) is a form of business more or less intended to shield persons participating in business from liabilities incurred in operating the business. In most instances it is preferable for person(s) engaged in business to operate as some form of entity, rather than in his or her name personally, though frequently the “shield” provided by an entity form of business is incomplete (though nevertheless worthy). One seeking to form a limited liability entity, including an LLC, should understand fully the consequence and limitations of the entity form of business. This article is intended to address a limited aspect of operating as an LLC and is not intended to address all, or even many, of the relevant considerations. (In particular, one anticipating some form of liability protection nevertheless should not forgo liability insurance. It it also appropriate to consult an accountant to address tax and financial matters.)
A Massachusetts limited liability company is a limited liability entity managed by entity managers and carried out by entity members, though members may be managers of an LLC. Those engaged or intending to engage in business may choose to form an LLC and then decide who among them will act as managers and who as members. Frequently, the role of each participant (manager, member, or member-manager) will be influenced by the contribution of the participant.
The Massachusetts Limited Liability Company Act, M.G.L. c. 156C (“the Act”) requires few formalities in establishing an LLC. Other than a Certificate of Organization that contains very basic information, the Act does not require that LLC participants prepare a document outlining rights and duties of the participants. Instead, the Act contains “default provisions” that define certain rights and duties should the participants fail to do so. Further, the Act requires that certain arrangements among participants, to be enforceable, must be in writing. The terms of the default provisions and the requirement of a writing to accomplish other terms may be inconsistent with the expectations and understandings of the participants (managers and members).
Forming a Limited Liability Company: A Massachusetts limited liability is established when a “Certificate of Organization” is signed and filed in the Office of the Secretary of the Commonwealth. Find the form Certificate of Organization here. The certificate of organization must be filed with a filing fee of $500.
The information required in a certificate of organization is very limited:
• the federal employer identification number for the LLC, if available;
• the name of the LLC;
• the street address of the office of the LLC in the Commonwealth where its records are maintained;
• the business of the LLC;
• the date of dissolution of the LLC;
• the name and business address of the LLC’s agent for service of process;
• the name and business address of the managers (if any) of the LLC;
• the name and business address of those persons authorized to execute, deliver, and file on behalf of the LLC instruments with the secretary of the Commonwealth; and
if desired, the name and business address of those persons authorized to execute, deliver, and file on behalf of the LLC instruments affecting the LLC’s real estate interests.
A certificate of organization may contain any additional information as the organizers deem appropriate, but in most cases that is undesirable.
The following outline the “default provisions” of the Act. Persons forming an LLC without creating a writing (referred to as an “operating agreement”) defining the rights and responsibilities of the participants should be aware of the default provisions. Following the default provisions, terms that must be in writing are identified. Participants without an operating agreement should be aware of these provisions too. Note finally that participants content to operate under the default provisions should recognize that the default provisions may be changed as a result of changes in the law. Suffice it so say, operating under the default provisions carries some level of uncertainty.
Default provisions:
6. Except as otherwise expressly set forth in a written operating agreement, an LLC shall have the power to make guarantees of the obligations of another person or entity.
7. Except as provided in a written operating agreement, a member or manager may lend money to, borrow money from, act as a surety, guarantor or endorser for, guarantee or assume one or more specific obligations of, provide collateral for, and transact other business with an LLC, and, subject to other applicable law, has the same rights and obligations with respect to any such matter as a person who is not a member or manager.
8(b). The certificate of organization or a written operating agreement may eliminate or limit the personal liability of a member or manager for breach of any duty to the LLC.
12(b). An LLC is formed at the time of filing of the initial certificate of organization, or at any later date specified in the certificate of organization.
13(e). A certificate of amendment to a certificate of organization of an LLC shall be effective upon filing thereof, or at such later date as may be specified in the amendment (which must be a date certain).
14. A certificate of cancellation shall be effective upon filing with the Secretary of State, or at such later date as may be specified in the certificate (which must be a date certain).
15. Unless otherwise provided in the operating agreement, any person may sign any certificate or amendment thereto, or enter into the operating agreement or amendment thereto by an agent, including an attorney in fact.
19(c). A restated (or amended and restated) certificate of organization of an LLC shall be effective upon filing thereof, or at such future effective date as may be specified therein (which must be a date certain).
20. In connection with the formation of an LLC, a person is admitted as a member of the LLC at the later to occur of (1) the date of formation of the LLC or (2) the time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, when the person’s admission is reflected in the records of the LLC. Thereafter, a person is admitted as a member of the LLC at the time provided in and upon compliance with the operating agreement, or, if the operating agreement does not so provide, upon the consent of all members.
21(d). If an operating agreement does not provide for the voting rights of members, the decision of members who own more than 50 percent of the unreturned contributions to the LLC shall be controlling.
24. Unless otherwise provided in the operating agreement, the management of the LLC shall be vested in its members. If an LLC has at least one manager, then unless otherwise provided in the operating agreement, the manager shall manage and control the LLC and no member shall manage or control the LLC. If an LLC has no manager then, unless otherwise provided in the operating agreement, the members shall manage and control the LLC. If an LLC has at least one manager then, unless otherwise provided in the operating agreement, each manager may execute documents and act for the LLC and no member shall execute documents or act for the LLC. If an LLC has no manager then, unless otherwise provided in the operating agreement, each member may execute documents and act for the LLC. Unless otherwise provided in the operating agreement, a member or manager of an LLC may delegate some or all of such member’s or manager’s rights and powers to execute documents and act for and manage and control the business and affairs of the LLC, including delegating to agents and employees of a member or manager of the LLC, and delegating by a management agreement or another agreement with, or otherwise to, other persons. Unless otherwise provided in the operating agreement, such delegation by a member or manager of an LLC shall not cause the member or manager to cease to be a member or manager, as the case may be, of the LLC.
26(d). If an operating agreement does not provide for the voting rights of managers, the decision of a majority in number of the managers shall be controlling.
28(a). Except as provided in a written operating agreement, a member is obligated to an LLC to perform any promise to contribute cash or property or to perform services, even if the member is unable to perform because of death, disability or any other reason.
28(b). Unless otherwise provided in a written operating agreement, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of the Act may be compromised only by consent of all members.
29. If the operating agreement does not provide for allocations of profits and losses, profits and losses shall be allocated on the basis of the agreed value of the contributions of each member, as stated in the records of the LLC, to the extent they have been received by the LLC and have not been returned.
30. If the operating agreement does not provide for distributions of cash or other assets, distributions shall be made on the basis of the agreed value of the contributions of each member, as stated in the records of the LLC, to the extent they have been received by the LLC and have not been returned.
31. If an operating agreement does not specify the times at which distributions are to be made, the members or managers, acting pursuant to Sections 21 or 26 of the Act, may determine when the members are entitled to distributions.
32. If not otherwise provided in a written operating agreement, a resigning member is entitled to receive, within a reasonable time after resignation, the fair value of his or her LLC interest as of the date of resignation, based on his or her right to share in distributions from the LLC.
33. Except as provided in a written operating agreement, a member, regardless of the nature of his or her contribution, has no right to demand and receive any distribution from an LLC in any form other than cash. Except as provided in a written operating agreement, a member may not be compelled to accept a distribution of any asset in kind from an LLC to the extent that the percentage of the asset distributed to him exceeds a percentage of the asset that is equal to the percentage in which he shares in distributions from the LLC.
34. Except as provided in the operating agreement, at the time a member becomes entitled to receive a distribution, he has the status of, and is entitled to all remedies available to, a creditor of the LLC with respect to the distribution.
36. A member may resign as a member of an LLC at the time or upon the occurrence of events specified in the operating agreement and in accordance with the operating agreement. An operating agreement may provide that a member does not have the right to resign, however, regardless of whether it so provides, a member may resign as a member upon not less than six months’ prior written notice to the LLC at its office in the Commonwealth (as set forth in the certificate), and to each other member and each manager at their respective addresses (as set forth on the records of the LLC).
37. A manager may resign as a manager of an LLC at the time or upon the occurrence of events specified in the operating agreement and in accordance with the operating agreement. An operating agreement may provide that a manager shall not have the right to resign, however, regardless of whether it so provides, a manager may resign as a manager upon prior written notice to the LLC at its office in the Commonwealth (as set forth in the certificate) and to each member and each other manager at their respective addresses (as set forth on the records of the LLC).
39(a). An LLC interest is assignable in whole or in part except as provided in the operating agreement. An assignee shall have no right to participate in the management of the business and affairs of the LLC, except upon compliance with any procedure provided for in a written operating agreement or upon the approval of all members other than the assigning member.
39(b). Unless otherwise provided in the operating agreement, (1) an assignment entitles the assignee to share in such profits and losses; to receive such distributions; and to receive allocations of income, gain, loss, deduction or credit or similar items to which the assignor was entitled, to the extent assigned; and (2) a member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of his or her LLC interest. Unless otherwise provided in the operating agreement, the pledge of, or granting of, a security interest, lien, etc., in or against any or all of the LLC interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member.
39(d). Unless otherwise provided in the operating agreement, and except to the extent assumed by agreement, until an assignee of an LLC interest becomes a member, the assignee shall have no liability as a member solely as the result of the assignment.
41(a). An assignee may become a member upon the approval of all members (other than the assignor) or upon compliance with any procedure provided for in a written operating agreement.
41(b). Unless otherwise provided in the operating agreement, an assignee who becomes a member is liable for the obligations of his or her assignor to make contributions as provided in Section 28 of the Act (obligation to make ordinary contributions), but shall not be liable for the obligations of his or her assignor under Section 35 of the Act (obligation to return wrongful distributions). However, the assignee is not obligated for liabilities, including the obligations of his or her assignor to make contributions as provided in Section 28 of the Act, that were unknown to the assignee at the time he or she became a member, and that could not be ascertained from the operating agreement.
42. Unless otherwise provided in the operating agreement, if a member who is an individual dies or a court adjudges him or her to be incompetent to manage his or her person or his or her property, the member’s executor, administrator, guardian, conservator or other legal representative may exercise all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member. Unless otherwise provided in the operating agreement, if a member is a corporation, trust or other entity, and is dissolved or terminated, the powers of that member may be exercised by its legal representative or successor.
43. With respect to an LLC formed prior to January 1, 1997, except as provided in a written operating agreement, the death, insanity, retirement, resignation, expulsion, bankruptcy or dissolution of a member, or the occurrence of any other event that terminates the membership of a member in the LLC, dissolves the LLC, unless the LLC is continued either by the consent of all the remaining members within 90 days following the occurrence of such event, or pursuant to the right to continue stated in a written operating agreement.
45. Unless otherwise provided in an operating agreement, a manager who has not wrongfully dissolved an LLC (or, if none, the members or a person approved by the members pursuant to the operating agreement) (or if there is no operating agreement, pursuant to Section 21) may wind up the LLC’s affairs.
46. Upon winding up the LLC, the assets will be distributed first to its creditors (regardless of whether the operating agreement provides otherwise); and then, except as otherwise provided in the operating agreement, to members and former members to satisfy liabilities for distributions payable during the term of the LLC and upon resignation of members; and then, unless otherwise provided in the operating agreement, to members, first for the return of their capital contributions, and second, in respect of their LLC interests.
56. Except as otherwise provided in a written operating agreement, suit on behalf of the LLC may be brought in the name of the LLC by (1) any member or members (even in an LLC with managers) with the consent of members owning more than 50 percent of the unreturned capital contributions to the LLC (exclusive of the interest of any member who has an interest in the outcome of the suit that is adverse to the interest of the LLC); or (2) any manager or managers of the LLC (if the operating agreement vests management of the LLC in one or more managers who are authorized to sue) by the vote of a majority in number of the managers (similarly excluding an interested manager).
60. Unless otherwise provided in a written operating agreement, a consolidation or merger must be approved by each Massachusetts LLC to consolidate or merge by its members; or, if there is more than one class or group of members, by each class or group of members. In either case, the consolidation or merger must be approved by members who own more than 50 percent of the unreturned contributions to the LLC, determined in accordance with Section 29, and owned by all members or by the members in each class or group, as appropriate.
61(b). Unless a future effective date or time is provided in the certificate of consolidation or merger, the consolidation or merger shall be effective upon filing the certificate or consolidation or merger with the Secretary of the Commonwealth.
Provisions required to be in writing:
9. Each LLC shall keep at the office it is required to maintain in Section 5 of the Act the following records: (1) a current list of the full name and last known address of each member and manager; (2) a copy of the certificate of organization and all certificates of amendment thereof, together with executed copies of any powers of attorney pursuant to which any certificate has been executed; (3) copies of the LLC's federal, state and local income tax returns and reports, if any, for the three most recent years; (4) copies of any then effective written operating agreements and of any financial statements of the LLC for the three most recent years; and (5) unless contained in a written operating agreement, a writing setting out the following: (i) the capital contributions made and required to be made by each member, (ii) the times at which additional contributions are to be made, (iii) any right of a member to receive or a manager to make distributions to a member and (iv) any events that dissolve the LLC.
