These form limited liability company agreements are designed for use for single-member limited liability companies (“LLCs”). Both forms are designed to comply with the requirements of the Delaware Limited Liability Company Act. If a practitioner desires to use either form to organize an LLC under the laws of another jurisdiction, it will be necessary to consider carefully how any differences between the laws of that jurisdiction and the Delaware LLC Act affect the provisions of the forms.

One form is designed for use where the member is an individual, and the other form is designed for use where the member is an entity. Many of the provisions in the two forms are the same or similar. However, when there are two approaches to a given area, one of which is more complicated or detailed than the other, the more complicated or detailed approach is included in the entity member form and the simpler approach in the individual member form. Thus, for example, the individual member form uses management by the member, which is the simplest and most straightforward management structure in a single-member LLC, while the entity member form employs a manager-managed construct. In addition, the individual member form employs a simpler dissolution structure that tracks the default language of the Delaware LLC Act, permitting the LLC to be continued after dissolution but not requiring it. In contrast, the entity member form requires that, upon dissolution, the LLC will be continued to the extent permitted under the Delaware LLC Act. Similarly, the entity member form provides for officers and specifically describes the functions of the president, secretary, and treasurer, while the individual member form simply provides that the member may appoint officers if desired.

The forms are also designed to avoid certain pitfalls that can frequently occur with single member LLCs. Thus, for example, in connection with a voluntary transfer by the member of its entire LLC interest, both forms provide that the member will cease to be a member, the transferee will automatically and simultaneously be admitted as the successor member, and the LLC will continue without dissolution. This provision is designed to address the situation that arises when the sole member of an LLC transfers the entire interest in the LLC, just as a stockholder would transfer the stock in a wholly owned corporation, without expressly admitting the transferee as the successor member. Failure to do so can result in the inadvertent dissolution of the LLC, and the transfer provisions of the forms are designed to avoid this. It should be noted, however, that the forms are designed only to function for single-member LLCs. Thus, they should not be used for multi-member LLCs and should be amended and restated if they are used for a single-member LLC that subsequently has more than one economic member.

With regard to tax matters, both forms are intended for use only with an LLC formed with one economic member under the laws of one of the states that is not treated as a trust or corporation (including a corporation making an S election) for tax purposes.

Finally, it should be stressed that no form is appropriate for every use, and careful consideration should be given to the specific facts and circumstances in any individual situation before either of the forms is used. In this regard, while one or the other of the forms may be appropriate for a specific situation, in other situations, it may be desirable to combine provisions of the two forms by, for example, using manager management in a form where the member is an individual, or it may be desirable to add provisions that are not in either form if the specific circumstances dictate.

These forms are a project of the Limited Liability Company Subcommittee of the Committee on LLCs, Partnerships and Unincorporated Business Organizations of the ABA Business Law Section. The forms were approved by the Committee in 2013 after many years of work. The project was begun by Marty Lubaroff, one of the seminal figures in the alternative entity area. Over the years, many people contributed to the project. Without meaning to suggest that others have not made significant contributions, the following persons deserve special recognition for their efforts: Committee members Michael A. Bamberger, Carter G. Bishop, J. William Callison, Peter D. Hutcheon, Leon Andrew “Andy” Immerman, Lewis R. Kaster, Warren P. Kean, Daniel S. Kleinberger, Scott E. Ludwig, James J. Wheaton, an editorial board composed of Steven G. Frost, Robert R. Keatinge, Gregory W. Ladner, Ira Meislik, Lauris G.L. Rall, and Thomas E. Rutledge, and co-reporters Eric N. Feldman, Louis G. Hering, and Christina M. Houston. The Committee’s project editors, Paul M. Altman, Allan G. Donn, and Elizabeth S. Miller, also provided valuable input and revisions.

Single-Member LLC Entity Member Form

By LLCs, Partnerships and Unincorporated Entities Committee, ABA Business Law Section*

LIMITED LIABILITY COMPANY AGREEMENT
OF
_____________________, LLC

THIS LIMITED LIABILITY COMPANY AGREEMENT¹ (this “Agreement”) by the undersigned sole member (the “Member”) of ________________________, LLC,² a Delaware limited liability company (the “Company”), is effective as of the date of formation of the Company.

The Member is executing this Agreement for the purpose of forming a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (DEL. CODE ANN. tit. 6, § 18-101 et seq.), as amended from time to time³ (the “Delaware LLC Act”), and hereby agrees as follows⁴:

1. FORMATION

(i)  The Company was formed on ____________ ___, ______⁵ by _________________ (the “Organizer”), acting in the capacity of an “authorized person”⁶ under section 18-201 of the Delaware LLC Act, executing the initial certificate of formation of the Company and filing it with the Secretary of State of the State of Delaware. The Member hereby acknowledges its authorization and approval of the Organizer’s taking, and otherwise ratifies, that action to form the Company under the Delaware LLC Act.⁷

(ii)  Each of the Member, the Manager (as hereinafter defined) and ____________________⁸ is hereby designated as an authorized person, within the meaning of the Delaware LLC Act and otherwise, to execute, deliver and file any amendments and/or restatements to the certificate of formation of the Company and any other certificates (and any amendments and/or restatements thereof ) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business.

2. PURPOSE

The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, to [engage in any lawful act or activity for which a limited liability company may be formed under the Delaware LLC Act] [specify activity, e.g., acquire and develop certain property, conduct specific business, etc.] and to engage in any and all activities necessary or incidental to the foregoing.⁹

3. POWERS OF THE COMPANY¹⁰

(i)  The Company shall have the power and authority to take any and all actions necessary, appropriate, advisable, convenient or incidental to or for the furtherance of the purpose set forth in Section 2, including, but not limited to, the power:

(a)  to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Delaware LLC Act in any state, territory, district or possession of the United States, or in any foreign country that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company;

(b)  to acquire, by purchase, lease, contribution of property or otherwise, and to own, hold, operate, maintain, finance, improve, lease, sell, convey, mortgage, transfer, demolish or dispose of any real or personal property that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company;

(c)  to enter into, perform and carry out contracts of any kind,¹¹ including, without limitation, contracts with the Member or any person or other entity that directly or indirectly controls, is controlled by, or is under common control with the Member (any such person or entity, an “Affiliate”), or any agent of the Company necessary to, in connection with, convenient to, or incidental to, the accomplishment of the purpose of the Company. For purposes of the definition of Affiliate, “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities or otherwise;

(d)  to purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with, shares or other interests in or obligations of domestic or foreign corporations, associations, general or limited partnerships (including, without limitation, the power to be admitted as a partner thereof and to exercise the rights and perform the duties created thereby), trusts, limited liability companies (including, without limitation, the power to be admitted as a member or appointed as a manager thereof and to exercise the rights and perform the duties created thereby), and other entities or individuals, or direct or indirect obligations of the United States or any foreign country or of any government, state, territory, governmental district or municipality or of any instrumentality of any of them;

(e)  to lend money for any proper purpose, to invest and reinvest its funds, and to take and hold real and personal property for the payment of funds so lent or invested;

(f)  to sue and be sued, complain and defend and participate in administrative or other proceedings, in its name;

(g)  to appoint employees and agents of the Company, define their duties and fix their compensation;

(h)  to indemnify any person or entity and to obtain any and all types of insurance;

(i)   to cease its activities and cancel its insurance;

(j)   to negotiate, enter into, renegotiate, extend, renew, terminate, modify, amend, waive, execute, acknowledge or take any other action with respect to any lease, contract or security agreement in respect of any assets of the Company;

(k)  to borrow money and issue evidences of indebtedness, and to secure the debts of the Company by mortgage, pledge or other lien on any or all of the assets of the Company;

(l)   to pay, collect, compromise, litigate, arbitrate or otherwise adjust or settle any and all other claims or demands of or against the Company; and

(m)  to make, execute, acknowledge and file any and all documents or instruments necessary, convenient or incidental to the accomplishment of the purpose of the Company.

(ii)  Upon the approval of the Member and upon such terms as the Member determines, in its sole discretion, and without any approval of, or action by, the Manager, the Company may (a) merge with, or consolidate into, any other entity to the extent permitted by section 18-209 of the Delaware LLC Act, (b) convert to any other entity to the extent permitted by section 18-216 of the Delaware LLC Act or (c) transfer to or domesticate or continue in any other jurisdiction to the extent permitted by section 18-213 of the Delaware LLC Act.

(iii)  All real and personal property of the Company shall be owned by the Company as an entity. The Member shall not have any interest in any specific property of the Company. The interest of the Member in the Company is personal property.¹²

4. MEMBER

The following information with respect to the Member is to be provided on Schedule 1 and will be accurate as of the date hereof (except to the extent updated as provided below):

(i)  the name and address of the Member; and

(ii)  the capital contribution of the Member to the Company.¹³

The Manager or the Member may, but shall not be required to, update the information on Schedule 1 from time to time to reflect any changes in that information.

5. POWERS OF MEMBER

(i)  The Member shall have the power to exercise any and all rights and powers granted to the Member pursuant to the express terms of this Agreement.¹⁴

(ii)  Except as otherwise specifically provided by this Agreement, only the Manager shall have the power to act for and on behalf of, and to bind, the Company, and the Member, as a member of the Company, shall not have the power to act for and on behalf of or to bind the Company.¹⁵

6. MANAGEMENT

6.1 MANAGEMENT OF THE COMPANY¹⁶

(i)  [______________] shall be the manager of the Company (the “Manager”) and, in that capacity, shall manage the Company in accordance with this Agreement. The Manager is an agent of the Company, and the actions of the Manager taken in that capacity and in accordance with this Agreement shall bind the Company. The salary or other compensation, if any, of the Manager shall be fixed from time to time by the Member and the Manager.¹⁷

(ii)  Except to the extent otherwise provided in this Agreement, the Manager shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all actions as he or she deems necessary or appropriate to accomplish the purpose of the Company as set forth herein and shall have all powers and authority necessary or desirable in connection with the foregoing, including the power and authority to execute all documents or instruments, perform all duties and powers and do all things for and on behalf of the Company in all matters necessary, desirable, convenient or incidental to the purpose of the Company.¹⁸ The Manager may delegate to other persons or entities so much of the Manager’s responsibilities hereunder that the Manager determines to be necessary, appropriate or convenient for the efficient administration and management of the Company’s business and affairs.¹⁹ The Manager, however, must retain the power to direct and control any person or entity to whom the Manager delegates any of the Manager’s responsibilities. The Manager shall be a “manager” (within the meaning of the Delaware LLC Act) of the Company.²⁰

(iii)  The Manager may be removed with or without cause by the Member. The Manager shall serve until removed or until the Manager’s earlier death, resignation or incapacity. The Manager may resign at any time upon 30 days’ prior written notice to the Member.²¹ Upon the removal, death, resignation, incapacity or resignation of the Manager, a successor shall be designated by the Member.

(iv)  The Manager may delegate to any officer of the Company, if any, or to any other person or entity the authority to act on behalf of the Company as the Manager may from time to time deem appropriate in his or her sole discretion. The salaries or other compensation, if any, of the officers and agents, if any, of the Company shall be fixed from time to time by the Manager. Except as otherwise provided by the Manager, when the taking of that action has been authorized by the Manager, the Manager or any officer, if any, of the Company, or any other person specifically authorized by the Manager, may execute any contract or other agreement or document on behalf of the Company.

(v)  The Company may have one or more of the following officers as determined by the Manager from time to time²²: President, Secretary, Treasurer, and other officers the Manager may appoint from time to time. Any officers may be appointed and removed at the will of the Manager. If any officers are appointed by the Manager, they shall perform those functions specified by the Manager. If one or more of a President, Secretary or Treasurer is appointed, each shall perform those functions as are herein provided unless otherwise specified by the Manager:

(a)  The President shall be the chief executive officer of the Company and shall, subject to the supervision, direction and control of the Manager, have the general powers and duties of supervision, direction, management and control of the day-to-day business and affairs of the Company and of the other officers of the Company, including the power to sign all instruments, contracts and agreements that have been approved by the Manager and all powers necessary to direct and control the organizational and reporting relationships within the Company, and shall have such other powers and perform such other duties as may be prescribed by the Manager.

(b)  The Secretary shall keep or cause to be kept at the principal place of business of the Company, or other place the Manager may direct, a book of minutes of all formal actions of the Manager and the Member. The Secretary shall keep or cause to be kept at the principal place of business of the Company, a register or a duplicate register showing the name and address of the Member, the number and date of certificates issued in respect of the Member’s interest in the Company, if any, and the number and date of cancellation of every certificate surrendered for cancellation.²³ The Secretary shall have those other powers and perform other duties as may be prescribed by the Manager or the President.

(c)  The Treasurer shall be the chief financial officer and shall keep and maintain or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the Company. The books of account shall at all times be open to inspection by the Member. The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Company with the depositaries designated by the Manager. The Treasurer shall disburse the funds of the Company as may be ordered by the Manager, shall render to the President and the Manager, whenever the Manager requests it, an account of all of his or her transactions as chief financial officer and of the financial condition of the Company and shall have other powers and perform other duties as may be prescribed by the Manager or the President.

(vi)  The Manager may appoint, employ, or otherwise contract with those other persons or entities for the transaction of the business of the Company or the performance of services for or on behalf of the Company as it shall determine in its sole discretion.

(vii) Except as provided in Section 6.1(v), as otherwise expressly delegated by the Manager or to the extent that the Company’s registered agent has the authority to accept legal process or otherwise act on behalf of the Company as provided in the Delaware LLC Act, no person or entity other than the Manager shall be an agent of the Company or have any right, power or authority to transact any business in the name of the Company or to act for or on behalf of or to bind the Company.

(viii) The expression of any power or authority of the Manager in this Agreement shall not in any way limit or exclude any other power or authority of the Manager that is not expressly set forth in this Agreement; except that any power or authority of the Manager shall be subject to any limitations on the power or authority of the Manager expressly set forth in this Agreement and to any rights and powers granted to the Member pursuant to the express terms of this Agreement.²⁴

6.2 RELIANCE BY THIRD PARTIES

The Manager or any officer of the Company may certify and authenticate records of the Company to third parties and any third party dealing with the Company, the Manager, the Member or any officer of the Company may rely upon a certificate signed by the Manager or any officer of the Company as to:

(i)  the identity of the Manager, the Member or any officer of the Company;

(ii)  the existence or non-existence of any fact or facts that constitute a condition precedent to acts by the Manager, the Member or any officer of the Company or are in any other manner germane to the affairs of the Company;

(iii)  the persons who or entities that are authorized to execute and deliver any instrument or document of or on behalf of the Company; or

(iv)  any act or failure to act by the Company or as to any other matter whatsoever involving the Company, the Member, the Manager or any officer of the Company.

6.3 RECORDS AND INFORMATION

The Manager shall maintain, and upon request make available to the Member, all of the books and records of the Company referenced in section 18-305 of the Delaware LLC Act, to the extent applicable to the Company, except to the extent that any books and records are maintained by an officer of the Company in accordance with Section 6.1(v). Notwithstanding anything to the contrary in the Delaware LLC Act, the Manager shall have no authority to keep any books and records of the Company confidential from the Member.²⁵

7. TERM; DISSOLUTION

(i)  The term of the Company shall be perpetual unless the Company is dissolved and terminated in accordance with this Section 7.²⁶

(ii)  The Company shall dissolve, and its affairs shall be wound up, upon the first to occur of the following: (a) the written consent of the Member; or (b) the entry of a decree of judicial dissolution under section 18-802 of the Delaware LLC Act.

(iii)  Upon the occurrence of any event that terminates the continued membership of the Member in the Company, the Company shall not dissolve and the personal representative (as defined in the Delaware LLC Act) of the Member shall agree in writing to continue the Company and to the admission of the personal representative of the Member or its nominee or its designee to the Company as a Member, effective as of the occurrence of the event that terminated the continued membership of the Member in the Company.²⁷

(iv)  Upon the dissolution of the Company, the Manager shall wind up the Company’s affairs as provided in the Delaware LLC Act.²⁸ Upon the winding up of the Company’s affairs, the Manager shall distribute the property of the Company as follows:

(a)  First, to creditors, including the Member if it is a creditor, to the extent permitted by law, in satisfaction of the Company’s liabilities (whether by payment or the making of reasonable provision for payment thereof ); and

(b)  Second, to the Member in cash or property, or partly in cash and partly in property, as determined by the Manager.²⁹

(v)  Upon the completion of the winding up of the Company, the Manager shall file a certificate of cancellation with the Secretary of State of the State of Delaware canceling the Company’s certificate of formation at which time the Company shall terminate.³⁰

8. ADDITIONAL CONTRIBUTIONS; MEMBER LOANS

(i)  The Member may, but is not required to, make additional capital contributions to the Company.³¹

(ii)  The Member may, but is not required to, make loans to the Company. If and to the extent that loans are made by the Member to the Company, those loans shall be on terms determined by the Member and the Manager to be commercially reasonable. In the absence of any separate determination made by the Member and the Manager, all loans made by the Member to the Company shall be payable upon demand and shall bear interest at __% per year.³²

(iii)  To the extent that additional funds are made available by the Member to the Company, those funds shall be treated as loans made by the Member to the Company, and not as additional capital contributions made by the Member to the Company, unless specifically designated as additional capital contributions made by the Member to the Company.³³

9. LIABILITY OF MEMBER

Except to the extent provided in the Delaware LLC Act, the Member shall not have any liability for the obligations or liabilities of the Company.³⁴

10. TAX STATUS

At all times that the Company has only one member (who owns 100% of the limited liability company interests in the Company), it is the intention of the Member that the Company be disregarded as an entity separate from the Member for federal, state, local and foreign income tax purposes and that the Company be treated for those purposes, but not for purposes other than taxation, as a division of the Member.³⁵

11. DISTRIBUTIONS

(i)  Distributions shall be made to the Member at the times and in the amounts determined by the Manager, except that no distribution shall be made in violation of the Delaware LLC Act.³⁶

(ii)  Unless otherwise determined by the Member, no distribution shall be paid to the Member upon its resignation, whether in connection with the voluntary assignment of its entire interest pursuant to Section 13 or otherwise.³⁷

12. ASSIGNMENTS

(i)  The Member may transfer or assign (including as a pledge or other collateral assignment) in whole or in part its limited liability company interest.³⁸

(ii)  In connection with a voluntary transfer or assignment by the Member of its entire limited liability company interest in the Company (not including a pledge or collateral assignment or any transfer as a result thereof ):

(a)  the Member will cease to be a member of the Company;

(b)  the assignee will automatically and simultaneously be admitted as the successor Member without any further action at the time the voluntary transfer or assignment becomes effective under applicable law; and

(c)  the Company shall be continued without dissolution.³⁹

(iii)  In connection with a partial assignment or transfer by the Member of its limited liability company interest (not including a pledge or collateral assignment or any transfer as a result thereof ), unless this Agreement is amended to reflect the fact that the Company will have more than one member, the assignee or transferee shall not be admitted as a member of the Company and shall not have any rights as a member other than the right to receive any distributions that are payable in respect of the interest transferred.⁴⁰

(iv)  Upon any pledge or other collateral assignment by the Member of all or any part of its limited liability company interest,⁴¹ the pledgee or collateral assignee shall have only those rights as are expressly stated in the controlling pledge or assignment agreement (including any right in connection with the foreclosure of the pledge or collateral assignment of the purchaser of the limited liability company interest to become a member of the Company) or are provided by other applicable law. If the pledgee or collateral assignee of all or any part of the Member’s limited liability company interest has the right under the controlling pledge or assignment agreement or under other applicable law to purchase the interest in foreclosure (or to cause or permit another person to purchase the interest in foreclosure), except as expressly stated in the controlling pledge or assignment agreement, the purchaser shall not be admitted as a member of the Company and shall not have any rights as a member other than the right to receive any distributions that are payable in respect of the interest foreclosed upon and purchased.⁴²

13. RESIGNATION

The Member may resign from the Company at such time as it shall determine.⁴³ Neither the filing of a voluntary petition in bankruptcy nor any other event specified in section 18-304 of the Delaware LLC Act will cause the Member to cease to be a member of the Company.⁴⁴

14. ADMISSION OF ADDITIONAL MEMBERS

One or more additional members of the Company may be admitted to the Company with the written consent of the Member.⁴⁵ In connection with the admission of any additional member of the Company (including an admission in connection with a partial assignment or transfer pursuant to Section 12(iii), but excluding an admission provided for in any pledge or collateral assignment agreement pursuant to Section 12(iv)), this Agreement shall be amended by the Member to make those changes it determines to reflect the fact that the Company will have more than one member, but the failure to so amend this Agreement shall not invalidate any otherwise valid assignment or transfer made by the Member.

15. EXCULPATION AND INDEMNIFICATION

15.1 EXCULPATION⁴⁶

(i)  For purposes of this Agreement, “Covered Persons” means the Manager, the Member, any Affiliate of the Manager or Member and any officer, director, shareholder, partner or employee of the Manager or Member and their respective Affiliates, and any officer, employee or expressly authorized agent of the Company or its Affiliates.

(ii)  The Member, whether acting as Member, in its capacity as Manager (if applicable) or in any other capacity, shall not be liable to the Company or to the Manager for any loss, damage or claim incurred by reason of any act or omission (whether or not constituting negligence or gross negligence) performed or omitted by the Member in good faith, and no other Covered Person shall be liable to the Company, the Member or the Manager for any loss, damage or claim incurred by reason of any act or omission (whether or not constituting negligence) performed or omitted by the Covered Person in good faith and in a manner reasonably believed to be within the scope of authority conferred on the Covered Person by this Agreement, except that a Covered Person (other than the Member, irrespective of the capacity in which it acts) shall be liable for any loss, damage or claim incurred by reason of the Covered Person’s gross negligence and a Covered Person (including the Member) shall be liable for any loss, damage or claim incurred by reason of the Covered Person’s willful misconduct.

(iii)  A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any person or entity as to matters the Covered Person reasonably believes are within the professional or expert competence of that person or entity, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid.⁴⁷ The foregoing provision shall in no way be deemed to reduce the limitation on liability of the Member provided in Clause (ii) of this Section 15.1.

15.2 DUTIES AND LIABILITIES OF COVERED PERSONS

(i)  To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company, the Member or the Manager, a Covered Person acting under this Agreement shall not be liable to the Company, the Member or the Manager for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict or eliminate the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Member to replace any other duties and liabilities of the Covered Person.⁴⁸

(ii)  All provisions of this Section 15 shall apply to any former Member or Manager of the Company for all actions or omissions taken while that person was the Member or the Manager, as applicable, of the Company to the same extent as if that person were still the Member or the Manager, as applicable, of the Company.

15.3 INDEMNIFICATION

To the fullest extent permitted by applicable law, the Member (irrespective of the capacity in which it acts) shall be entitled to indemnification from the Company for any loss, damage or claim incurred by the Member by reason of any act or omission (whether or not constituting negligence or gross negligence)⁴⁹ performed or omitted and any other Covered Person shall be entitled to indemnification from the Company for any loss, damage or claim incurred by that Covered Person by reason of any act or omission (whether or not constituting negligence) performed or omitted by that Covered Person in good faith and in a manner reasonably believed to be within the scope of authority conferred on that Covered Person by this Agreement, except that no Covered Person (other than the Member, irrespective of the capacity in which it acts) shall be entitled to be indemnified in respect of any loss, damage or claim incurred by that Covered Person by reason of gross negligence and no Covered Person (including the Member) shall be entitled to be indemnified in respect of any loss, damage or claim incurred by that Covered Person by reason of willful misconduct with respect to those acts or omissions; but any indemnity under this Section 15 shall be provided out of and to the extent of Company assets only, and no Covered Person shall have any personal liability on account thereof.

15.4 EXPENSES

To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company before the final disposition of the claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay that amount if it shall be determined that the Covered Person is not entitled to be indemnified under this Section 15.⁵⁰

15.5 INDEMNITY CONTRACTS

The Manager and the Company may enter into indemnity contracts with any Covered Person and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under this Section 15 and containing other procedures regarding indemnification as are appropriate.

15.6 INSURANCE

The Company may purchase and maintain insurance, to the extent and in amounts the Manager shall, in its sole discretion, deem reasonable, on behalf of Covered Persons and other persons or entities as the Manager shall determine, against any liability that may be asserted against or expenses that may be incurred by that person or entity in connection with the activities of the Company, regardless of whether the Company would have the power to indemnify that person or entity against the liability under this Agreement.

16. OUTSIDE BUSINESS

The Member or any Affiliate thereof may engage in or possess an interest in any business venture of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Member shall have no rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. The Member or any Affiliate thereof shall not be obligated to disclose or present any particular opportunity to the Company even if that opportunity is of a character that, if disclosed or presented to the Company, could be taken by the Company, and the Member or Affiliate thereof shall have the right to take for its own account (individually or as a partner, shareholder, fiduciary or otherwise) or to recommend to others any such particular opportunity.⁵¹

17. AMENDMENT

This Agreement may be amended or modified only by a written instrument signed by the Member; but if any amendment would affect the rights, obligations or liabilities of the Manager, that amendment shall not be effective with respect to the Manager unless that amendment is approved in writing by the Manager.⁵²

18. GOVERNING LAW

This Agreement shall be governed by, and construed under, the laws of the State of Delaware, without regard to the rules of conflict of laws thereof or of any other jurisdiction that would call for the application of the substantive laws of a jurisdiction other than the State of Delaware.

19. TERMINATION OF AGREEMENT

This Agreement shall terminate and be of no further force or effect upon the filing of a certificate of cancellation cancelling the Company’s certificate of formation pursuant to Section 7(v) of this Agreement; but Sections 15.1, 15.2, 15.3 and 15.4 shall survive termination.⁵³

20. EFFECTIVE DATE

Pursuant to section 18-201(d) of the Delaware LLC Act, this Agreement shall be effective as of the effective time of the filing of the Company’s certificate of formation [or specify another date subsequent to the effective time of the filing of the Company’s certificate of formation upon which this Agreement will be effective].⁵⁴

21. NO THIRD-PARTY BENEFICIARIES

Except as contemplated by Section 15, nothing in this Agreement, express or implied, is intended to confer upon any person or entity, other than the parties hereto and their respective successors, any benefits, rights or remedies.

22. MISCELLANEOUS

Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references to “Sections” and “Clauses” shall refer to corresponding provisions of this Agreement. The use of the term “including” or any similar term shall be deemed to mean “including, without limitation.” Any reference in this Agreement to any law, rule or regulation shall be construed as reference to the law, rule or regulation as it may have been, or may from time to time be, amended, revised or reenacted and any successor thereto. The headings of sections in this Agreement are intended for reference purposes only and shall be given no substantive meaning or any interpretive force.

IN WITNESS WHEREOF, the undersigned has duly executed this Limited Liability Company Agreement as of the day and year first aforesaid.

The Manager hereby executes this Agreement for the purposes of becoming a party hereto and agreeing to perform its obligations and duties hereunder and being entitled to enjoy its rights and benefits hereunder.⁵⁵

The Company hereby executes this Agreement for the purposes of becoming a party hereto and agreeing to perform its obligations and duties hereunder and being entitled to enjoy its rights and benefits hereunder.⁵⁶

Schedule 1

* This form limited liability company agreement is one of two prepared by the LLCs, Partnerships and Unincorporated Entities Committee of the ABA Business Law Section. This form is designed for use where the only member is an entity and the other is designed for use where the only member is an individual. As a general rule, when there are two approaches to a given area, one of which is more complicated or detailed than the other, the more complicated or detailed approach is included in this form and the simpler approach in the individual member form. Thus, for example, the individual member form uses management by the member, that being the simplest and most straightforward management structure in a single-member limited liability company (an “LLC”), while the entity member form employs a manager-managed construct. Similarly, the entity member form includes an extensive list of powers of the LLC, while the individual member form simply includes only a general powers clause. This division is largely for organizational and instructive purposes. Generally speaking, these two approaches and the related provisions can be mixed and matched as the drafter deems appropriate for his or her individual situation. Thus, for example, one could have an individual as the member in a manager-managed LLC with no officers. Care should be taken, however, when mixing provisions of the two forms to be sure that any necessary conforming changes are made. Also note that neither form is intended to be used if the parties contemplate the possibility of there being more than one member or there being more than one person or entity having an economic interest in the LLC. In addition, neither form is intended to be used for a special purpose entity borrower in a structured financing transaction because these forms do not include a number of provisions, such as separateness covenants, that would typically be included in the LLC agreement of such an entity.

With regard to tax matters, this form is intended for use only for a domestic LLC (one formed under the laws of one of the states, not the laws of a foreign jurisdiction) that is not treated as a trust or corporation (including a corporation that makes an S election) for tax purposes and that has only a single economic member. Such an LLC should be disregarded for federal income taxes (see infra note 35). Because the LLC will be disregarded for federal tax purposes, contributions by, and distributions and payments (including compensatory payments and payments of interest) to, the member will be a matter of tax indifference, or non-events, to the member and the LLC. If the LLC is treated other than as disregarded for tax purposes, e.g., because it becomes a partnership through the addition of an additional economic member, it would become an entity for tax purposes separate from the member, and tax counsel should consider the economic interaction between the LLC and the member and make appropriate drafting changes.

It should be noted that a single-member LLC will not always be treated in the same way, and accorded the same rights, as a sole proprietorship or an individual, and, therefore, the decision to use a single-member LLC should be made in consideration of any relevant legal considerations. See, e.g., 3519–3513 Realty, LLC v. Law, 967 A.2d 954, 955 (N.J. Super. Ct. 2009) (interpreting a “statute [that] permits a landlord to remove a tenant if ‘[t]he owner of a building of three residential units or less seeks to personally occupy a unit’” and holding the statute inapplicable where a sole proprietor had transferred a building to his single-member LLC); Krueger v. Zeman Constr. Co., 758 N.W.2d 881, 887 (Minn. Ct. App. 2008) (holding that “to have standing to assert a business-discrimination claim under [the Minnesota Human Rights Act] appellant must show both that respondent committed a discriminatory act in the performance of a contract and that [appellant]—not her limited liability company—has a contractual relationship with respondent”), aff ’d, 781 N.W.2d 858 (Minn. 2010). For a general discussion of separate entity effects, see CARTER G. BISHOP & DANIEL S. KLEINBERGER, LIMITED LIABILITY COMPANIES: TAX AND BUSINESS LAW ¶ 5.05[1][e] (1994 & Supp. 2011).

Finally, this form is designed to comply with the requirements of the Delaware Limited Liability Company Act and other applicable Delaware law. If any practitioner intends to utilize this form to organize a limited liability company under the laws of a jurisdiction other than Delaware, the limited liability company act and all other applicable laws of that jurisdiction will need to be carefully reviewed and compared to those of Delaware and, as needed, this form will need to be modified to conform with all applicable legal requirements and to ensure that the intent of the parties is carried out under the laws of the applicable jurisdiction.

1. See DEL. CODE ANN. tit. 6, § 18-101(7) (2013) (defining a “limited liability company agreement” and providing that the agreement of a single-member LLC shall not be unenforceable by reason of there being only one person who is a party thereto).

2. The Delaware LLC Act sets forth requirements for the name of each domestic LLC, including the requirement that the name include “Limited Liability Company,” “L.L.C.,” or “LLC.” Id. § 18-102.

3. The Delaware LLC Act specifically reserves the ability to amend the Act from time to time and to have those amendments binding upon LLCs, their members and managers, and all rights of members and managers are subject to this reservation. Id. § 18-1106.

4. Id. § 18-101(7).

5. Under Delaware law, an LLC is formed at the time of filing of the certificate of formation or such later time and date as provided for therein, in each case assuming there has been substantial compliance with the requirements of section 18-201 of the Delaware LLC Act. Id. § 18-201(b). It should be noted that an LLC agreement is required under the Delaware LLC Act, but can be entered into before, after, or at the time of filing of the certificate of formation and that the LLC agreement can be made effective as of the formation of the LLC or at such other time as provided in or reflected by the LLC agreement. Id. § 18-201(d). If the person or entity intending to become the member of an LLC files the certificate of formation for the LLC and subsequently enters into the LLC agreement, care should be taken to make sure that no business is conducted by or on behalf of the LLC before the single member enters into the LLC agreement unless the LLC agreement is made effective as of the filing of the certificate of formation or as of a date before the commencement of business, in which case the provisions of the LLC agreement relating to the authority of the member or manager will relate back to the filing date or such other date with respect to any actions taken after that date. Cf. RESTATEMENT (THIRD) OF AGENCY § 4.02(1) (2006).

6. Although the Delaware LLC Act uses “authorized person” in a number of sections, see, e.g., id. §§ 18-201, 18-204, 18-208, the term is not defined. Consequently, it is prudent to provide either in the LLC agreement or through proper action by the manager in the case of a manager-managed LLC or the member in the case of a member-managed LLC what person or entity is designated as an “authorized person” for purposes of the Delaware LLC Act.

7. The Delaware LLC Act requires that the certificate of formation state the name of the LLC and the address of the registered office and name and address of the registered agent for the LLC located in the State of Delaware. Id. § 18-201(a). Because these matters are required to be addressed in the certificate of formation, other than the name, they have not been included in this Agreement for the sake of simplicity and to avoid unintentional inconsistency.

8. There exists no requirement that there be, in addition to the manager, another authorized person, and there is similarly no requirement that the manager be an authorized person. The alternative formula herein set forth is for purposes of illustration.

9. The Delaware LLC Act provides that an LLC “may carry on any lawful business, purpose or activity, whether or not for profit, with the exception of the business of banking as defined in § 126 of Title 8.” Id. § 18-106(a). The purpose clause of an LLC agreement is significant because it delimits the activities in which the LLC may engage. The two basic approaches are to utilize a general purpose clause permitting the LLC to engage in any lawful activity or to utilize a specific purpose clause permitting the LLC to engage only in the specific activity for which it was formed and any necessary or incidental activities. The benefit of the former clause is that the LLC has the power and authority to engage in any lawful activity that may present itself whether or not it was initially contemplated. Conversely, the benefit of the latter clause is that it restricts the authorized use of the LLC to previously agreed-upon activities unless the purpose clause is amended. Where the LLC agreement designates a manager whose interest may not be identical to, or closely aligned with that of, the member, use of a narrow purpose clause will restrict the manager’s rightful ability to operate the LLC so that it will be only for the member’s intended purpose in creating the LLC. Similarly, a clear limitation on the power and authority of the LLC to take certain actions in Section 3 would accomplish the same objective. See also infra notes 11 & 18. Use of a narrow purpose clause also can affect the application of the business opportunity doctrine and limit the circumstances where the member or the manager would be deemed to be taking an opportunity. See, e.g., Grove v. Brown, C.A. No. 6793-VCG, 2013 WL 4041495 (Del. Ch. Aug. 8, 2013). See also Section 16, which specifically eliminates the application of the doctrine to the member.

10. The Delaware LLC Act contains a broad recitation of the powers of an LLC, stating that:

A[n] [LLC] shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by its [LLC] agreement, together with any powers incidental thereto, including such powers and privileges as are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the [LLC].

DEL. CODE ANN. tit. 6, § 18-106(b) (2013). This is in contrast with the approach taken in the Delaware General Corporation Law wherein there is both a general (DEL. CODE ANN. tit. 8, § 121) and a specific (DEL. CODE ANN. tit. 8, § 122) listing of powers.

The powers clause of an LLC agreement is significant because, together with the governing statute, it establishes the power and authority of the LLC to act. The powers clause should conform to the purpose clause so that the LLC has the power and authority to accomplish its stated purpose. Thus, a broad powers clause should accompany a general purpose clause. Generally speaking, the powers clause provides that the LLC shall have all the power and authority to pursue its purpose, specifically lists each power and authority that may be necessary or desirable to pursue that purpose, or includes both general language and a specific list of enumerated powers. This latter approach, adopted by this Agreement, is probably most useful when the goal is to ensure that the LLC has the power and authority to take any action relating to any lawful activity. However, where the LLC agreement designates a manager whose interest may not be identical to, or closely aligned with that of, the member, consideration should be given to whether limiting the power and authority of the LLC to take certain actions is advisable in order to, in that manner, restrict the ability of the manager to cause the LLC to take those actions. See infra notes 18 & 19.

11. Notwithstanding the general prohibition against an LLC’s engaging in banking, see DEL. CODE ANN. tit. 6, § 18-106(a) (2013), LLCs are permitted to “make contracts of guaranty and suretyship and enter into interest rate, basis, currency, hedge or other swap agreements or cap, floor, put, call, option, exchange or collar agreements, derivative agreements, or other agreements similar to any of the foregoing.” Id. § 18-106(c).

12. Id. § 18-701.

13. Identifying what assets have been contributed to the LLC, and by negative implication what assets of the member have not been contributed, serves a variety of purposes. Initially, it determines the LLC’s capital base. Second, it defines those assets of the sole member that are not available (absent a successful effort to pierce the veil) to the creditors of the LLC. Third, in the event of a claim against the sole member, identification makes clear what assets are not (absent a successful reverse pierce) available to the creditor as no longer being the member’s property. See infra note 31.

14. As noted in footnote 16, caution should be exercised if choosing a manager whose interests are not identical to, or aligned with those of, the member. If the interests of the member and the manager are not closely aligned, in addition to the methods of limiting the ability of a manager to lead the LLC in directions not contemplated by the member referenced at infra note 16, it is possible to give the member approval rights over certain actions by the manager. Thus, for example, Section 3(ii) provides that the Company may merge or consolidate only with the approval of the member. In addition, if additional limitations on the authority of the manager are desired, the member could have approval rights, for example, over the filing of a voluntary petition in bankruptcy, over all borrowings or those above a certain dollar amount, over the acquisition or disposition of any assets outside the ordinary course or exceeding a set dollar amount, or the member could have an approval right over any action by the manager that relates to any business or purpose other than the limited business or purpose previously agreed by the member. This last type of approval right is similar to a limited purpose clause, but gives somewhat greater flexibility to the member and the manager. See supra note 10.

15. See DEL. CODE ANN. tit. 6, § 18-402 (2013) (“Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the [LLC].”). Be aware that a member has the apparent authority to bind the LLC except as to a third party who is on notice of the contractual limitation on its authority. A member without authority who did act to bind the LLC would likely be in breach of the warranty of authority. See RESTATEMENT (THIRD) OF AGENCY § 6.10 (2006); see also id. § 8.09(1). Conversely, by so acting, the member may have, by conduct, amended the LLC agreement to vest in itself the power to bind the LLC. See infra note 52.

16. The two most common structures for management of a single-member LLC are management by the member (who may be designated a “managing member”) or management by one or more managers. This form addresses management by a manager. As noted at supra note 1, the companion individual member form addresses management by the member, which is the default rule under the Delaware LLC Act. DEL. CODE ANN. tit. 6, § 18-402 (2013). A manager may but need not be a member and can be an individual or an entity. This form contemplates that the manager will be an individual. If the manager is the member or another entity, certain provisions such as Section 6.1(iii) should be revised to address the manager’s dissolution or termination rather than death, resignation, or incapacity. Caution should be exercised if a manager is selected whose interests are not identical to, or closely aligned with those of, the member. If (i) the company’s purpose expressed in Section 2 is not limited to a specific business or project, (ii) the company’s power and authority is not expressly limited in Section 3, (iii) the member is not given approval rights over certain actions by the manager as described at supra note 14, or (iv) the manager’s powers are not expressly limited in Section 6.1, the manager, exercising the broad powers granted to a manager under Section 6.1 or the expansive powers given to the company under Section 3, might have the ability to lead the company in directions not contemplated by the member. See supra notes 10 & 11. If more than one manager is designated, the LLC agreement will need to provide procedures by which the managers act, including specifying what vote is required for action, e.g., majority of the managers or some higher vote. It should also be noted that in the context of a corporate subsidiary, there is sometimes a desire that the management structure of the LLC replicate to the maximum extent possible a corporate structure. Thus, the LLC may have a board of managers that functions like a board of directors and that supervises and in some instances appoints the officers of the LLC, and the LLC may have “bylaws” comparable to corporate bylaws providing for, among other things, action by the board of managers. If a “board” structure is desired, care needs to be taken in defining its structure as a collegial body rather than a mere grouping of individual agents.

It is important to note that any formalities with respect to management that are created in an LLC agreement must be observed in order to limit the risk that a court will pierce the LLC veil if its assets are insufficient to satisfy its liabilities. See, e.g., Irwin & Leighton, Inc. v. W.M. Anderson Co., 532 A.2d 983, 989 (Del. Ch. 1987) (discussing the importance of “appropriate formalities” in a corporate piercing analysis). Thus, if an LLC agreement establishes a manager and provides that the manager shall take all action on behalf of the LLC, then all action should be taken by the manager and the member should not act for the LLC unless it is doing it in its capacity as the manager.

17. To the extent the member is the manager and payments for services pursuant to Section 6.1(i) are deemed to be distributions, those distributions would be subject to section 18-607(a) of the Delaware LLC Act.

18. It is important to note that although the Delaware LLC Act contemplates management by a manager, the default rule is member management. See DEL. CODE ANN. tit. 6, § 18-402 (2013). Thus, although as a default rule a manager has the authority to bind an LLC, id. § 18-402, a right to information, id. § 18-305(b), a right to seek judicial dissolution, id., and a right to wind up a dissolved LLC so long as the manager has not wrongfully dissolved the LLC, id. § 18-803, there is no default rule that gives a manager any general authority to manage an LLC. Consequently, a term in an LLC agreement giving the manager all of the authority provided by the Delaware LLC Act really gives the manager very little. Consistent with the member-management default rule, the default rule for a number of actions under the Delaware LLC Act requires member action. Perhaps the most significant of these relates to approval of a merger or consolidation. Under section 18-209(b) of the Delaware LLC Act, unless otherwise provided in the LLC agreement, a merger or consolidation must be approved by a majority of the members of the LLC, or if there is more than one class or group of members, then by a majority of each class or group of members. Id. § 18-209(b). The default rule for the allocation of voting rights is in proportion to the then current interest in company profits. Thus, even a broadly worded powers clause vesting in the manager all authority to manage and control the business and affairs of the LLC, as is included in this form, is probably not sufficient to displace the default voting rights of members under section 18-209(b) of the Delaware LLC Act or comparable provisions. See, e.g., id. §§ 18-213 (transfers or continuances), 18-216 (conversions). If it is desired that the manager have authority over those sorts of actions, it is necessary either to specifically reference each such action or include a general statement that the manager has the authority to consent to and approve any action that under the Delaware LLC Act the members would otherwise have the right to consent to or approve in each case without any action by the members. Pursuant to Section 3(ii), this form reserves all those approval rights to the member.

19. Id. § 18-407. Notwithstanding the proviso that the authority of each person shall be limited to the written delegation, this proviso relates only to actual authority. See RESTATEMENT (THIRD) OF AGENCY § 2.01 (2006). However, each person with the title of “manager” will in all likelihood be deemed to have apparent authority to bind the LLC. See id. § 2.03.

20. The Delaware LLC Act defines a “manager,” inter alia, as one who is named as a manager of an LLC or who is so designated pursuant to an LLC agreement or a similar instrument. DEL. CODE ANN. tit. 6, § 18-101(10) (2013); see also id. § 18-401.

21. Under section 18-602 of the Delaware LLC Act, notwithstanding that an LLC agreement restricts or eliminates a manager’s right to resign as manager from the LLC, a manager may resign at any time by giving written notice to the members and any other managers. If the manager’s resignation violates the LLC agreement, in addition to any remedies otherwise available under applicable law, the LLC may recover from the resigning manager damages for breach of the LLC agreement and offset the damages against the amount otherwise distributable to the resigning manager.

22. The appointment of “officers” by an LLC is a matter of private ordering. Where the company’s business does not require active day-to-day management, the manager may not want to appoint all three officers, if any at all. Consequently, this form makes the appointment optional. The persons appointed will have the actual agency authority as is defined in this Agreement and the apparent agency authority as a third party would reasonably ascribe to the titles given. See supra note 20; see also RESTATEMENT (THIRD) OF AGENCY § 2.03.

23. References to certificates for limited liability company interests are for purposes of illustration; there is no requirement that physical certificates be issued. See infra note 42.

24. This provision is intended to ensure that the manager has all power and authority necessary to manage the company, whether or not a specific power or authority is expressly referenced in this Agreement, but those powers and authority would be subject to any limitations on the manager’s authority under this Agreement and to any rights and powers granted to the member, such as the requirement for member approval of mergers, conversions, transfers, domestications, and continuances. See supra notes 15 & 19.

25. The Delaware LLC Act provides, as a general matter and subject to certain exceptions, that each member of an LLC has the right to certain specified information. DEL. CODE ANN. tit. 6, § 18-305 (2013). Thus, implicit in this section of the Delaware LLC Act is that the LLC must maintain the required information. However, the Delaware LLC Act does not state who has responsibility to maintain the required information. To avoid any confusion on this point, this form takes the approach that the manager must maintain all required information unless one or more officers are appointed and any such officer or officers maintain some or all of the required information. This form also negates the statutory authority of the manager to keep any information confidential from the member because to do so would likely be inappropriate in the context of a single-member LLC absent very special circumstances.

It is also important to note that all recordkeeping requirements should be observed so as to reduce the risk that a court will pierce the LLC veil if the LLC’s assets are insufficient to satisfy its liabilities. In this regard, diligent recordkeeping will bolster the argument that the company is an entity separate and apart from the member.

26. Under the Delaware LLC Act, except as may be otherwise provided in the LLC agreement, an LLC has perpetual duration. Id. § 18-801(a)(1).

27. The dissolution provisions of Section 7 are designed to ensure the continuation of the company to the maximum extent possible. They do this by including a requirement that the personal representative of the member agree to continue the company upon the occurrence of any event that terminates the continued membership of the member in the company. See id. § 18-801(a)(4) (providing that an LLC agreement may obligate the personal representative of the last remaining member to agree to continue the LLC and to the admission of a new member). “Personal representative” is defined in the Delaware LLC Act to mean, as to an entity, the legal representative or successor thereof. Thus, the intended effect of Section 7 is to avoid any inadvertent dissolution of the company while leaving the member complete flexibility to dissolve the company at any time by written consent. It should also be noted that the Delaware Court of Chancery has held that a member may waive the right to judicial dissolution under section 18-802 of the Delaware LLC Act. See R&R Capital, LLC v. Buck Doe Run Valley Farms, LLC, C.A. No. 3803-CC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008). Thus, waivers of the right to judicial dissolution are now frequently included in multi-member LLC agreements. However, in the context of a single-member LLC, as a practical matter, the remedy of judicial dissolution would be rarely invoked.

To the extent continuation of the LLC to the maximum extent possible is not the desired objective, a typical provision would provide for dissolution upon the written consent of the member, upon the entry of a decree of judicial dissolution under section 18-802 of the Delaware LLC Act, or upon the occurrence of any event that terminates the continued membership of the member in the LLC. See the dissolution section of the individual member form (Section 6 thereof ) for an example of such a provision. Section 18-801 of the Delaware LLC Act provides, as a default rule, that an LLC may, but is not required to, continue without dissolution when there are no members if within ninety days after the occurrence of the event that terminated the continued membership of the last remaining member, the personal representative of the last remaining member agrees in writing to continue the LLC and to the admission of the personal representative of that member or its nominee or designee to the LLC as a member effective as of the occurrence of the event that terminated the continued membership of the last remaining member.

Another alternative to preventing the inadvertent dissolution of an LLC upon the termination of the membership of the last remaining member of the LLC is to utilize a “springing member” provision. A typical springing member provision follows:

   Upon the occurrence of any event that causes the member to cease to be a member of the Company (other than (i) upon an assignment by the member of all of its limited liability company interest in the Company and the admission of the transferee pursuant to Sections 12 and 14, or (ii) the resignation of the member and the admission of an additional member of the Company pursuant to Sections 13 and 14), the Springing Member shall, without any action of any person or entity and simultaneously with the member’s ceasing to be a member of the Company, automatically be admitted to the Company as the Special Member and shall continue the Company without dissolution. The Special Member may not resign from the Company or transfer its rights as Special Member unless a successor Special Member has been admitted to the Company as the Special Member by executing a counterpart to this Agreement; but the Special Member shall automatically cease to be a member of the Company upon the admission to the Company of a substitute member. The Special Member, in its capacity as Special Member, shall be a member of the Company who has no interest in the profits, losses and capital of the Company and has no right to receive any distributions of Company assets. Pursuant to section 18-301 of the Delaware LLC Act, the Special Member shall not be required to make any capital contributions to the Company and shall not receive a limited liability company interest in the Company. The Special Member, in its capacity as Special Member, shall have no authority to bind the Company. Except as required by any mandatory provision of the Delaware LLC Act or this Agreement, the Special Member, in its capacity as Special Member, shall have no right to vote on, approve or otherwise consent to any action by, or matter relating to, the Company, including, without limitation, a merger, consolidation or conversion of the Company. In order to reflect its agreement to be admitted to the Company as the Special Member, the Springing Member shall execute a counterpart to this Agreement. Before its admission to the Company as the Special Member, the Springing Member shall not be a member of the Company.

   If this provision is incorporated, the Springing Member should execute a counterpart signature page to this Agreement and the following definitions should be incorporated herein:

   “Special Member” means, upon that person’s admission to the Company as a member of the Company pursuant to Section [__], the Springing Member, in that person’s capacity as a member of the Company. The Special Member shall have only the rights and duties expressly set forth in this Agreement.

   “Springing Member” means, initially, [_________], and, thereafter, any successor to the Springing Member, which successor shall be designated by the member to replace the Springing Member.

28. The Delaware LLC Act provides for the winding up of an LLC upon its dissolution setting forth, among other things, who conducts the winding up and certain specified powers of the persons conducting that activity. DEL. CODE ANN. tit. 6, § 18-803 (2013). The Delaware LLC Act specifies the priority of the distribution of assets in the winding up of an LLC. Id. § 18-804. Generally, this requires distributions to be made first to creditors, then to members in satisfaction of liabilities for distributions, and thereafter to members first for the return of their contributions and second respecting their limited liability company interests.

29. The Delaware LLC Act provides that a member may not be required to accept an in-kind distribution to the extent that the member’s percentage interest in the asset distributed exceeds the member’s interest in distributions from the LLC. Id. § 18-605. In the case of a single-member LLC, there is no opportunity for disproportionate distributions among the members.

30. Upon the completion of the process of winding up of an LLC (id. § 18-803), a certificate of cancellation of the certificate of formation is to be filed with the Secretary of State of the State of Delaware, whereupon the separate legal existence of the LLC is terminated. Id. 18-203.

31. As noted at supra notes 14, 17, and 26, practitioners preparing single-member LLC agreements and clients using single-member LLCs must take care to avoid veil piercing—a risk to which single-member LLCs may, in some cases, be substantially more susceptible than are multimember LLCs. See 2 LARRY E. RIBSTEIN & ROBERT R. KEATINGE, RIBSTEIN AND KEATINGE ON LIMITED LIABILITY COMPANIES § 19:1, at 407 n.1 (2d ed. 2013) (discussing the risk of informality in the operation of single-member LLCs giving rise to a “greater risk of piercing the entity veil”). Note, however, that it is generally recognized to be more difficult to pierce the corporate veil in Delaware than in many other jurisdictions because fraudulent or other similar wrongful conduct is usually required under Delaware law. See STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL § 2.8 (2013); In re Phillips Petroleum Sec. Litig., 738 F. Supp. 825, 838 (D. Del. 1990). In a veil-piercing claim against the member of a single-member LLC, a plaintiff may claim that because, in practice, the owners of small single-owner businesses (especially those owned by individuals as opposed to entities) often view all of their personal assets as being available to ensure their business success, the court should view all of the assets of the member of a single-member LLC as being at risk in the claim in question. The member of a single-member LLC should carefully segregate its personal assets from those belonging to the LLC. As to the importance of treating the assets of the LLC as distinct from those of the sole member (and vice versa), see Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989) (“A subsidiary corporation may be deemed the alter ego of its corporate parent where there is a lack of attention to corporate formalities, such as where the assets of the two entities are commingled, and their operations intertwined. An alter ego relationship might also lie where a corporate parent exercises complete domination and control over its subsidiary.”). In addition, if the LLC agreement specifically lists the amount of the member’s contributions and provides that no contribution shall be deemed to have been made to the LLC and no asset of the member shall be deemed to be at risk for claims against the LLC unless expressly listed as a contribution in the LLC agreement, that may help to counter the above argument by a creditor.

Delaware courts have applied the same standard for piercing the veil in respect of an LLC as they have in the corporate context. See, e.g., U.S. Bank N.A. v. U.S. Timberlands Klamath Falls, L.L.C., C.A. No. 112-N, 2005 WL 2093694 (Del. Ch. Mar. 30, 2005). To state a claim of veil piercing, a party “must plead facts supporting an inference that [a party] created a sham entity designed to defraud investors and creditors.” Id. at *1 (citing Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003)). The inquiry is fact-intensive, and the court would consider several factors, including: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the [member] siphoned company funds; and (5) whether, in general, the company simply functioned as a façade for the [member].” Id. at *1.

32. The practitioner should consider what interest rate is appropriate for a specific transaction. In this regard, using a market-based rate will lend support to the argument that the loan should be treated as such, and not be recharacterized as equity or be subordinated to debts owed to third-party creditors.

33. This formulation is intended to preserve claims by the member, vis-à-vis other creditors of the company, that additional funds provided by the member to the company were actually loans and thereby give the member equivalent rights and claims with respect to its loan as are enjoyed by the company’s other unsecured creditors. See DEL. CODE ANN. tit. 6, § 18-107 (2013) (providing, inter alia, that a member may lend money to 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). Note, however, that those loans possibly may be subject to equitable subordination as well as to veil-piercing attacks. See supra notes 14, 17, 26 & 32.

34. The rule of limited liability exists regardless of whether it is recited in the LLC agreement. The Delaware LLC Act provides:

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a[n] [LLC], whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the [LLC], and no member or manager of a[n] [LLC] shall be obligated personally for any such debt, obligation or liability of the [LLC] solely by reason of being a member or acting as a manager of the [LLC].

DEL. CODE ANN. tit. 6, § 18-303(a) (2013). A member, as to some or all obligations of the LLC, may agree to be personally obligated. See id. § 18-303(b).

35. On January 1, 1997, the so called “Check-the-Box” classification regulations went into effect. Generally speaking, under those regulations a single-member LLC will be, for purposes of federal income tax classification, a “disregarded entity.” Treas. Reg. § 301.7701-2(c)(2)(i) (as amended in 2014) (“Except as otherwise provided in this paragraph (c), a business entity that has a single owner and is not a corporation under paragraph (b) of this section is disregarded as an entity separate from its owner.”). For federal employment tax purposes (beginning in 2009), and for certain federal excise tax purposes (beginning in 2008), a “disregarded entity” is treated as separate from its owner. Treas. Reg. § 301.7701-2(c)(2)(iv) (as amended in 2014) (employment taxes), -2(c)(2)(v) (as amended in 2014) (excise taxes). Under the original “Check-the-Box” regulations, a disregarded entity was disregarded for federal income, employment, and excise tax purposes. But see Notice 99-6, 1999-1 C.B. 321, obsoleted by T.D. 9356, 2007-39 I.R.B. 675 (elective treatment of disregarded entities for employment tax purposes before 2009). As a disregarded entity (sometimes referred to as a “Tax Nothing”), a single-member LLC so classified will not file an income tax return or itself report income, loss, deduction, or credit. Rather, those tax items will be incorporated into the tax return of and reported by the sole member of the single-member LLC. Treas. Reg. § 301.7701-2(a) (as amended in 2014) (“If the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.”). If that sole member is an individual, those items will be reported on Schedule C (Profit or Loss from Business (Sole Proprietorship)), Schedule C-EZ (Net Profit from Business (Sole Proprietorship)), Schedule E (Supplemental Income and Loss), or Schedule F (Profit or Loss from Farming). A single-member LLC that would otherwise be treated as a disregarded entity may elect to be classified as a corporation. Treas. Reg. § 301.7701-3(a) (as amended in 2006). In most instances that election is made on Form 8832. If the single-member LLC meets the requirements for being taxed as an S corporation it may elect S corporation status on Form 2553. The regulations formerly required the single-member LLC to file both Form 2553 and Form 8832 in order to elect S corporation status, but under the 2005 amendments Form 2553 alone is now required. See Treas. Reg. § 301.7701-3(c)(1)(v)(C) (as amended in 2006). A single-member LLC may not be classified as a partnership. Treas. Reg. § 301.7701-3(a) (as amended in 2006). Note that “Check-the-Box” applies only to “eligible entities” (i.e., business entities that are eligible to select a classification under the regulations). The vast majority of single-member LLCs, but not all, are eligible entities. A “corporation” formed under state or federal law is never an eligible entity. Other ineligible entities include insurance companies, banks, government-owned entities, and certain foreign “per se” corporations. See Treas. Reg. §§ 301.7701-1(a)(3) (as amended in 2011), 301.7701-2(b) (as amended in 2006), 301.7701-3(c)(1)(v) (as amended in 2006). Assuming a single-member LLC formed in the United States is an eligible entity, it has a default classification as a disregarded entity; it is not necessary that it “check a box” or file Form 8832. Protective elections are possible, but are rarely made except for certain foreign entities. For a general review of “Check-the-Box,” see GARY HUFFMAN, WILLIAM MCKEE, WILLIAM NELSON, JAMES WHITMIRE & ROBERT WHITMIRE, FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 3.06 (4th ed. 2007). Note that the number of members under Delaware or other applicable state law is not necessarily the same as the number for federal income tax purposes. For example, the IRS has treated a two-member LLC as a single-member LLC for federal tax purposes. Conversely, the IRS might consider an LLC with only one member, but two or more holders of economic interests, to be a multi-member entity for tax purposes. See I.R.S. Priv. Ltr. Rul. 2002-01-024 (Oct. 5, 2001).

Keep in mind that, while for purposes of federal income tax classification a single-member LLC may be a disregarded entity without its own tax identity or obligations, certain states will impose entity-level taxes on it. States imposing an entity-level tax potentially applicable to single-member LLCs include: Alabama (net worth based “business privilege” tax imposed on LLCs, ALA. CODE § 40-14A-22(a) (LexisNexis 2011)); California (entity-level franchise fee and gross receipts-based fee, CAL. REV. & TAX. CODE §§ 17941, 17942 (West 2004 and Supp. 2014)); Illinois (1.5% personal property replacement tax based on net income, 35 ILL. COMP. STAT. ANN. 5/205(b) (West 2012)); Kentucky (entity-level income tax imposed upon LLCs, LPs, and LLPs; minimum tax of $175 per annum; rates up to 7% of income with alternative minimum tax calculations based upon gross receipts and gross profits also required, KY. REV. STAT. ANN. §§ 141.010(24), 141.040(5) (West 2010 and Supp. 2013)); New Hampshire (LLCs doing business in the state are subject to a 5% tax on dividends and interest, an 8.5% business profits tax, and the 0.75% business enterprise tax, N.H. REV. STAT. ANN. chs. 77, 77-AQ, 77-E-1 (LexisNexis 2009 and Supp. 2013)); Ohio (8.5% entity-level tax imposed except where all owners give written consent to state tax jurisdictions, OHIO REV. CODE ANN. §§ 5733.40, 5733.41 (LexisNexis 2014)); Pennsylvania (LLCs except certain professional LLCs subject to .699% capital stock and franchise taxes), 15 PA. CONS. STAT. ANN. § 8925 (West 2013)); Tennessee (excise tax of 6.5% of net earnings and franchise tax of $0.25 per $100 of net worth applied to LLCs, LLPs, and LPs, TENN. CODE ANN. §§ 67-4-2105(a), 67-4-2106(a) (2013)); Texas (LLCs, as well as LPs, LLPs, and LLLPs, are subject to entity-level franchise tax, TEX. TAX CODE ANN. § 171.0002 (West 2008 and Supp. 2013)); Washington (all entities subject to business and occupations tax, WASH. REV. CODE ANN. §§ 25.05.500–25.05.570, 25.15.005–25.15.902 (West, Westlaw current with 2014 Legislation effective before June 12, 2014)). A state also may treat a single-member LLC as a separate entity for sales and use tax purposes, even if for income tax purposes the state follows the federal classification of the single-member LLC as a disregarded entity. See generally Bruce P. Ely, Christopher R. Grissom & William T. Thistle, State Tax Treatment of LLCs and LLPs—An Update, 56 ST. TAX NOTES 509 (May 17, 2010); see also JAMIE FENWICK, MICHAEL MCLOUGHLIN, SCOTT SALMON, PATRICK SMITH, ARTHUR TILLEY & BRIAN WOOD; STATE TAXATION OF PASS-THROUGH ENTITIES AND THEIR OWNERS app. tbl. 9 (2010) (INCOME AND FRANCHISE TAXES IMPOSED ON SINGLE-MEMBER LLCS).

While a single-member LLC may have employees, for purposes of federal employment taxation the sole member was treated under the original “Check-the-Box” regulations as the employer with responsibility for the collection and remission of those levies. See Med. Practice Solutions, LLC v. CIR, 132 T.C. 125 (2009), aff ’d sub nom. Britton v. Shulman, No. 09-1994, 2010 WL 3565790 (1st Cir. Aug. 24, 2010); Littriello v. United States, 484 F.3d 372 (6th Cir. 2007); McNamee v. United States, 488 F.3d 100 (2d Cir. 2007); Kandi v. United States, No. C05-0840C, 2006 WL 83463 (W.D. Wa. 2006); Notice 99-6, 1991-1 C.B. 321, obsoleted by T.D. 9356, 2007-39 I.R.B. 675 (Aug. 15, 2007); see also Thomas E. Rutledge & Scott E. Ludwig, The Sixth Circuit Affirms Littriello: “Check-the-Box” Classification Regulations Are Upheld, J. TAX’N, June 2007, at 325; Thomas E. Rutledge & Scott E. Ludwig, Second Circuit Affirms McNamee: Validity of Check-the-Box Regulations Again Confirmed, J. TAX’N, July 2007, at 32; Thomas E. Rutledge, The Dispute Over Check-the-Box, SMLLCs and Liability for Employment Taxes, J. PASSTHROUGH ENTITIES, July/Aug. 2007, at 19. However, effective January 1, 2009, the single-member LLC is treated as the “employer,” and the liability of the sole member for any failure to collect and remit employment taxes is determined under Code section 6672. T.D. 9356, 2007-39 I.R.B. 675 (Aug. 15, 2007).

The IRS in Rev. Rul. 1999-5, 1999-1 C.B. 434 held that an LLC which, for federal tax purposes, is disregarded as an entity separate from its owner is converted to a partnership when a second member purchases an interest in that LLC. Cf. Rev. Rul. 1999-6, 1999-1 C.B. 432 (tax consequences when multi-member LLC becomes single-member LLC).

36. DEL. CODE ANN. tit. 6, § 18-601 (2013). Section 18-607(a) of the Delaware LLC Act provides that:

[an LLC] shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the [LLC], other than liabilities to members on account of their limited liability company interests and liabilities for which the recourse of creditors is limited to specified property of the [LLC], exceed the fair value of the assets of the [LLC], except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the [LLC] only to the extent that the fair value of that property exceeds that liability. For purposes of this subsection (a), the term “distribution” shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.

Id. § 18-607(a). Section 18-607 applies to all distributions other than those made upon the winding up of an LLC, which are governed by section 18-804. Note that while Section 11(i) of this Agreement is by its terms limited to the Delaware LLC Act, other limitations of Delaware law, such as the Delaware Fraudulent Transfer Act, and comparable laws of other jurisdictions, may also apply.

37. The default rule under the Delaware LLC Act is that, upon resignation, a resigning member is entitled to any distribution provided under the LLC agreement and, if the LLC agreement does not so provide, then a resigning member is entitled to receive, within a reasonable time after resignation, the fair value of the member’s limited liability company interest as of the date of resignation based upon that member’s right to share in distributions from the LLC. Id. § 18-604. Section 11(ii) of this Agreement negates the effect of section 18-604 of the Delaware LLC Act. It does so in connection with a voluntary assignment because, as noted at supra note 40, it is assumed that consideration will be payable by the assignee to the assignor. In addition, it does so with all other resignations based on the assumption that upon the resignation of the member for any reason other than an assignment it may be in the best interest of the member and the company to preserve the value of the company by keeping all assets within the company and having the member’s personal representative continue the company pursuant to Section 7 of this Agreement. However, in all cases the rule is subject to a contrary determination by the member, thus providing the maximum flexibility.

38. As a general matter, this form takes a permissive approach to transfers and assignments of limited liability company interests by permitting all transfers and assignments. However, because this form is designed to be a single-member form where the company is disregarded for federal income tax purposes and because certain transfers and assignments can result in there being more than one member or one or more members and one or more economic interest holders, there are circumstances relating to certain transfers, as noted in the accompanying text and footnotes, where this agreement should be amended. As also noted, however, it is thought preferable that purported transfers be permitted than that those transfers be rendered void even if conforming amendments are not made. In this regard, it should also be noted that “limited liability company interest” is a defined term in the Delaware LLC Act as “a member’s share of the profits and losses of [an LLC] and a member’s right to receive distributions of the [LLC’s] assets.” Id. § 18-101(8). Thus, as a general matter, a transfer of a limited liability company interest does not necessarily result in the transferee’s being admitted as a member with respect to the interest transferred, and this form takes the position that certain transfers will result in admission of the transferee while others will not. See, e.g., Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800, 804−05 (Del. Ch. 2011) (“[I]t is clear that the default rule under the [Delaware LLC] Act is that an assignment of an LLC interest, by itself, does not entitle the assignee to become a member of the LLC; rather, an assignee only receives the assigning member’s economic interest in the LLC to the extent assigned.”).

39. DEL. CODE ANN. tit. 6, § 18-702(b) (2013). Although LLC agreements will often have a requirement that they be executed by any successor member, that formality, if not complied with upon a full assignment, may give rise to an unintended dissolution of the LLC if the successor is not admitted due to an inadvertent failure to sign the LLC agreement. Section 12 provides that in connection with a voluntary assignment of all of the member’s interest the assignee will automatically be admitted as the successor member. The triggering event is the effectiveness of the assignment under applicable law. Thus, if a purported assignment was not accepted, the assignment would not become effective so the assignee will never become the successor member. Since it is assumed that in connection with a voluntary assignment, any consideration will be payable by the assignee to the assignor, Section 11 of this Agreement provides that, unless otherwise determined by the member, the assignor member will not be entitled to a resigning distribution in connection with a voluntary assignment, which would otherwise be the case under section 18-604 of the Delaware LLC Act as described at supra note 38.

40. Sections 12 and 14 contemplate that in connection with a partial transfer or assignment by the member of its limited liability company interest (other than in connection with a pledge or collateral assignment (see infra note 43)), the transferee or assignee of the interest will not be admitted as a member unless this Agreement is amended to reflect the changes necessary if there is more than one member, including the relative rights and duties of the members and the fact that the company would no longer be disregarded as an entity separate from its owner for federal income tax purposes (see supra note 36). However, it is important to note that this form does not take the approach of voiding any transfer that would cause there to be one or more economic interest holding assignees in addition to the member even though under those circumstances the company would no longer be disregarded as an entity separate from its owner for federal income tax purposes and certain of the provisions, such as the distribution provision, would no longer work as drafted. The distribution provision would presumably be interpreted to provide that distributions would be made to the member and to the economic interest holding assignees in proportion to their relative limited liability company interests. See Achaian, 25 A.3d at 806 (court and parties agreed that LLC agreement that referred to single member needed to be read to apply to multiple members once additional members were admitted even though LLC agreement was not amended). It is, of course, preferable that in connection with any partial transfer, appropriate amendments be made to this Agreement to reflect the new tax treatment of the company, the changes with respect to the payment of distributions, and other matters that will or may be affected by the transfer. Nonetheless, this form takes the approach that it is better to permit those transfers with their attendant consequences than to provide that they are null and void. There may be transactions, however, where an inadvertent or other transfer that causes the company not to be disregarded as an entity separate from its owner for federal income tax purposes are so severe that the practitioner should consider including a provision that any such transfer would be void ab initio, at least if it is not done with the specific intention that the company would have a different tax status for federal income tax purposes. Under Delaware law, a contractual term that prohibits transfers will be enforceable and a prohibited transfer may be invalidated. See In re Conaway, C.A. No. 6056-VCG, 2012 WL 524190 (Del. Ch. Feb. 15, 2012) (finding valid a limited partnership agreement’s restraint on alienation and invalidating a purported transfer in violation of the agreement).

41. In most cases, interests in an LLC are general intangibles and payment intangibles governed by Article 9 of the Uniform Commercial Code (“UCC”). To facilitate a pledge of the interests in an LLC in connection with a financing, it may be desirable to opt into coverage of Revised Article 8 of the UCC. See generally Lynn A. Soukup, LLC and Partnership Interests as Collateral—The Alchemy of “Opting in” to Article 8, in SECURED TRANSACTIONS 2010: WHAT LAWYERS NEED TO KNOW ABOUT UCC ARTICLE 9, at 431 (PLI Com. L. & Practice, Course Handbook Series, 2010), available at 920 PLI/ Comm 431 (Westlaw); see also Robert R. Keatinge, Taking and Enforcing Security Interests in Unincorporated Businesses, in LIMITED LIABILITY ENTITIES IN TIMES OF CHANGE (ALI-ABA Mar. 12, 2002), available at VPC0312 ALI-ABA 245 (Westlaw); Robert R. Keatinge, Interests in Unincorporated Associations as Securities Under Article 8 of the UCC, in LIMITED LIABILITY ENTITIES IN TIMES OF CHANGE (ALI-ABA Mar. 12, 2002), available at WPC0312 ALI-ABA 361 (Westlaw). In that case, the LLC agreement (and the certificate representing the limited liability company interest in the case of a certificated interest) must expressly provide that the interests in the LLC will constitute securities for purposes of Article 8 of the UCC. See DEL. CODE ANN. tit. 6, § 8-103(c) (2013).

42. In connection with the pledge of the interests in an LLC, the practitioner should consider whether a lender foreclosing on the pledge has the right to become a substitute or additional member of the LLC or will simply be an assignee of a limited liability company interest. If the foreclosing lender is only an assignee, it will generally have no right to cause the LLC to make distributions or take other actions that may benefit its position. On the other hand, when a lender forecloses on a limited liability company interest and becomes the member of the LLC, it may assume liability, as the owner and operator of the LLC for the LLC’s activities—past and present. The practitioner should note that Section 12 of this Agreement provides that a pledgee or collateral assignee shall have the rights provided for in the agreement controlling the pledge or collateral assignment (and as provided by other applicable law), so that if pursuant to that agreement the pledgee or collateral assignee has the right to become a member, it will be able to do so under this Agreement, but if under the applicable security agreement, it does not have the right to become a member, Section 12 of this Agreement does not otherwise provide it with that right. It should also be noted that in connection with a pledge or collateral assignment by the member of part of its limited liability company interest, if the applicable security agreement governing the pledge or collateral assignment provides that the pledgee or collateral assignee can become a member, the situation may arise where there are two members of the LLC or one member of the LLC and one economic interest holding assignee under this Agreement. That situation should be addressed in the applicable security agreement, possibly by including a form of amendment to this Agreement that would apply in the event of foreclosure. Even where that is not the case, this Agreement gives effect to the transfer and admission provisions of the applicable security agreement, based on the view that it is better to have the provisions of this Agreement be consistent with the rights accorded by the member to any pledgee or collateral assignee rather than to have them inconsistent. This form assumes that when a security interest is granted in a limited liability company interest under applicable law, including the UCC, the holder of the security interest could cause the foreclosure and sale of the limited liability company interest subject thereto with the result that the purchaser, although not a member and not generally having the rights of a member, would have the right to receive any distributions that are payable in respect of the interest foreclosed upon and purchased. As noted at supra note 40, it is preferable that in connection with any partial transfer that could have this result, appropriate amendments be made to the LLC agreement to reflect the changes that will take effect. However, as with a voluntary transfer under Section 12, it is thought better to permit those transfers than to provide that they are null and void. In the event of a pledge or collateral assignment by the member of its entire LLC interest, the foreclosure on the pledge may result in the member’s ceasing to be a member of the LLC, DEL. CODE ANN. tit. 6, § 18-702(b)(3) (2013), which could have the result of causing the dissolution of the LLC. See supra note 28 and accompanying text.

43. Pursuant to the Delaware LLC Act, a member may resign from an LLC only at the time or upon the happening of the events specified in the LLC agreement, and, unless otherwise provided in the LLC agreement, a member may not resign from an LLC before the dissolution and winding up of the LLC. Id. § 18-603. Thus, Section 13 provides that the member may resign from the LLC at such time as it shall determine.

Also note that Section 11(ii) of this Agreement (together with the text at supra note 38) has been drafted to avoid the distribution requirement of section 18-604 upon the resignation of the member in the event of a voluntary assignment in full of its limited liability company interest.

44. The Delaware LLC Act provides a number of events that will cause a person to cease to be a member of an LLC unless they are modified in the LLC agreement or waived with the consent of all members. Id. § 18-304. Those events are a member’s making an assignment for the benefit of creditors, filing a voluntary petition for bankruptcy, being adjudged bankrupt or insolvent or having entered against that member an order for relief in a bankruptcy or insolvency proceeding, the filing of a petition or answer seeking the reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief for the member or the admission, or failure to contest a petition filed against the member in a proceeding of similar nature. Id. § 18-304(1). The last sentence of Section 13 is included to override the deemed cessation of membership of the member if the member files for bankruptcy or is otherwise involved in a specified bankruptcy event. Id. § 18-304.

45. The Delaware LLC Act, as a default rule, requires the consent of all incumbent members to the admission of a new member as a member. Id. §§ 18-301(b)(1), 18-702(a). This threshold may be modified in the LLC agreement.

46. The exculpation and indemnification provisions in Section 15 provide for broad exculpation and broad mandatory indemnification for the member irrespective of the capacity in which it is acting. These provisions also provide for exculpation and mandatory indemnification of the manager and the other identified “Covered Persons,” though those protections are not as broad as the coverage for the member. The practitioner should carefully consider the standards for exculpation and indemnification for the member as well as for all other “Covered Persons” and whether that indemnification should be mandatory or at the discretion of the member or the manager. In addition, in a single-member LLC that is being used as a subsidiary, the practitioner should consider conforming those provisions to the standard provisions employed by the member of the LLC with respect to its other subsidiaries. Pursuant to section 18-1101(e) of the Delaware LLC Act, liabilities for breach of contract and breach of duties (including fiduciary duties) to an LLC or to another member or manager or to another person that is a party to or is otherwise bound by an LLC agreement may be limited or eliminated, except that the LLC agreement may not limit or eliminate liability for a bad-faith violation of the implied contractual covenant of good faith and fair dealing.

47. The Delaware LLC Act specifically authorizes a member, manager, or liquidating trustee to rely, in good faith, upon certain records and information including for purposes of making distributions to members and creditors. See id. § 18-406.

48. See id. § 18-1101(c) (duties (including fiduciary duties) to an LLC or to another member or manager or to another person that is a party to or is otherwise bound by an LLC agreement may be expanded, restricted, or eliminated by that LLC agreement, except that the LLC agreement may not eliminate the implied contractual covenant of good faith and fair dealing); see also id. § 18-1104 (“In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”). If an LLC agreement is completely silent regarding fiduciary duties, the Delaware LLC Act expressly incorporates Delaware’s rules of law and equity relating to default fiduciary duties of loyalty and care. See id. § 18-1104.

49. The Delaware LLC Act specifically authorizes an LLC to indemnify and hold harmless any member, manager, or any person from any claim or demand. Id. § 18-108. To indemnify a person for his or her own negligence, Delaware case law in the corporate context requires that intention to be specifically stated, and indemnification for willful misconduct is prohibited. See Warburton v. Phoenix Steel Corp., 321 A.2d 345, 346–47 (Del. Super. Ct. 1974); State v. Interstate Amiesite Corp., 297 A.2d 41, 44 (Del. Super. Ct. 1972); James v. Getty Oil Co. (E. Operations), Inc., 472 A.2d 33, 38 (Del. Super. Ct. 1983).

50. This form provides for mandatory advancement. The drafter should consider whether mandatory advancement with respect to the member or other “Covered Persons” is appropriate in particular circumstances, keeping in mind that if advancement is discretionary, a decision to advance expenses could be viewed as an interested transaction that could be subject to higher judicial scrutiny. The drafter also should note that the treatment may differ between the member and other “Covered Persons.”

51. Note that this provision, which permits competition between the member and the LLC, constitutes a modification of default fiduciary duties under Delaware law. See Kahn v. Icahn, C.A. No. 15916, 1998 WL 832629 (Del. Ch. Nov. 12, 1998). Also note that the manager and officers were not included in this section. Adding the manager and/or the officers to this provision may be appropriate under particular circumstances.

52. Although under Delaware law written agreements may be amended or modified by a course of dealing notwithstanding a provision that authorizes amendment only by written instrument, see, e.g., Council of Unitholders of Breakwater House Condo. v. Simpler, Civ. A. No. 89C-09-007, 1993 WL 81285, at *7 (Del. Super. Ct. 1993); Pepsi-Cola Bottling Co. of Asbury Park v. Pepsico, Inc., 297 A.2d 28, 33 (Del. 1972), the better practice is to provide for written amendments so that the exact terms of the current LLC agreement are always readily accessible to the member, the manager, and to any third parties to whom it has been provided.

53. An LLC agreement as a contract of the member or members of the LLC does not necessarily terminate upon the termination of the LLC. Thus, termination of the LLC agreement is a topic that should be specifically addressed in the LLC agreement and this should include specifying when the LLC agreement terminates and what, if any, provisions survive the general termination, e.g., indemnity provisions.

54. See supra note 6.

55. Although section 18-101(7) of the Delaware LLC Act provides that a manager is bound by the LLC agreement whether or not the manager executes the LLC agreement, in order to put a manager on notice that he or she is in fact bound by the terms of the LLC agreement, some practitioners include a joinder clause whereby the manager executes the LLC agreement, as provided above.

56. Because an LLC may have obligations to perform under its LLC agreement, some practitioners will make the LLC a party to its LLC agreement or will provide for a form of joinder, as provided above. The Delaware Supreme Court, in Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999), held that even though an LLC had not executed its LLC agreement, the LLC was nevertheless bound by an arbitration and forum selection clause in the LLC agreement. The court recognized that the LLC had not signed the LLC agreement. However, it stated that the members were the real parties in interest and that the LLC was simply their joint business vehicle and, therefore, it would enforce the clause against the LLC. In 2002, the Delaware LLC Act was amended to make express that the LLC is bound by the LLC agreement. See DEL. CODE ANN. tit. 6, § 18-101(7) (2013). It should be noted that other jurisdictions have reached a contrary result in cases that also considered the enforceability of an arbitration clause against an LLC that was not a party to its LLC agreement. See, e.g., Mission Residential, LLC v. Triple Net Props., LLC, 564 S.E.2d 888 (Va. 2008) (applying Virginia law; note, however, that this decision was overturned by an amendment to the Virginia Limited Liability Company Act); Trover v. 419 OCR, Inc., 921 N.E.2d 1249 (Ill. App. Ct. 2010) (relying on separate legal existence of LLC under Illinois law and distinguishing Elf Atochem in holding that LLCs were not bound by arbitration clauses in operating agreements that did not specify LLCs were parties and did not include LLCs as signatories); In re Am. Media Distribs., LLC, 216 B.R. 486, 487 (Bankr. S.D.N.Y. 1998) (LLC is not a party and therefore cannot assume operating agreement); Bubbles & Bleach, LLC v. Becker, No. 97C 1320, 1997 WL 285938 (N.D. Ill. 1997) (applying Wisconsin law).

LIMITED LIABILITY COMPANY AGREEMENT
OF
_____________________, LLC

THIS LIMITED LIABILITY COMPANY AGREEMENT¹ (this “Agreement”) by the undersigned sole member (the “Member”) of ________________________, LLC,² a Delaware limited liability company (the “Company”), is effective as of the date of formation of the Company.

The Member is executing this Agreement for the purpose of forming a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (DEL. CODE ANN. tit. 6, § 18-101 et seq.), as amended from time to time³ (the “Delaware LLC Act”), and hereby agrees as follows⁴:

1. FORMATION

(i)  The Company was formed on ____________ ___, ______⁵ by _________________ (the “Organizer”), acting in the capacity of an “authorized person”⁶ under section 18-201 of the Delaware LLC Act, executing the initial certificate of formation of the Company and filing it with the Secretary of State of the State of Delaware. The Member hereby acknowledges his or her authorization and approval of the Organizer’s taking, and otherwise ratifies, that action to form the Company under the Delaware LLC Act. ⁷

(ii)  Each of the Member and ____________________⁸ is hereby designated as an authorized person, within the meaning of the Delaware LLC Act and otherwise, to execute, deliver and file any amendments and/or restatements to the certificate of formation of the Company and any other certificates (and any amendments and/or restatements thereof ) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business.

2. PURPOSE

The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, to engage in any lawful act or activity for which a limited liability company may be formed under the Delaware LLC Act.⁹

3. POWERS OF THE COMPANY¹⁰

(i)  The Company shall have the power and authority to take any and all actions necessary, appropriate, advisable, convenient or incidental to or for the furtherance of the purpose set forth in Section 2.

(ii)  All real and personal property of the Company shall be owned by the Company as an entity. The Member shall not have any interest in any specific property of the Company. The interest of the Member in the Company is personal property.¹¹

4. MEMBER

The following information with respect to the Member is to be provided on Schedule 1 and will be accurate as of the date hereof (except to the extent updated as provided below):

(i)  the name and address of the Member; and

(ii)  the capital contribution of the Member to the Company.¹²

The Member may, but shall not be required to, update the information on Schedule 1 from time to time to reflect any changes in that information.

5. MANAGEMENT

5.1 MANAGEMENT OF THE COMPANY¹³

(i)  The Member shall manage the Company in accordance with this Agreement. The Member is an agent of the Company, and the actions of the Member taken in that capacity and in accordance with this Agreement shall bind the Company.

(ii)  The Member shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all actions as he or she deems necessary or appropriate to accomplish the purpose of the Company as set forth herein and shall have all powers and authority necessary or desirable in connection with the foregoing, including the power and authority to execute all documents or instruments, perform all duties and powers and do all things for and on behalf of the Company in all matters necessary, desirable, convenient or incidental to the purpose of the Company.¹⁴

(iii)  The Member may delegate to other persons or entities, including to officers of the Company appointed by the Member, so much of the Member’s responsibilities hereunder and authority to act on behalf of the Company as the Member determines in his or her sole discretion to be necessary, appropriate or convenient for the efficient administration and management of the Company’s business and affairs. Any person or entity may have titles the Member may elect, including the titles of President, Vice President, Treasurer, Secretary and Assistant Secretary, and the power and authority to act on behalf of the Company as the Member may delegate in writing to any such person or entity.¹⁵ The salaries or other compensation, if any, of the officers and agents, if any, of the Company shall be fixed from time to time by the Member. Except as otherwise provided by the Member, when the taking of action has been authorized by the Member, the Member or any officer, if any, of the Company, or any other person specifically authorized by the Member, may execute any contract or other agreement or document on behalf of the Company.

(iv)  The Member may appoint, employ, or otherwise contract with other persons or entities for the transaction of the business of the Company or the performance of services for or on behalf of the Company as he or she shall determine in his or her sole discretion.

(v)  Except as otherwise expressly delegated by the Member or to the extent that the Company’s registered agent has the authority to accept legal process or otherwise act on behalf of the Company as provided in the Delaware LLC Act, no person or entity other than the Member shall be an agent of the Company or have any right, power or authority to transact any business in the name of the Company or to act for or on behalf of or to bind the Company.

(vi)  The expression of any power or authority of the Member in this Agreement shall not in any way limit or exclude any other power or authority of the Member that is not expressly set forth in this Agreement.¹⁶

(vii) The Member shall not be required to perform services for the Company solely by virtue of being a member of the Company. However, in consideration of the Member’s managing the affairs of the Company, the Company shall pay to the Member a salary in the amount of _________ per year payable in equal monthly installments. The Company may modify this Section 5.1(vii) to change amounts to be paid to the Member; however, no modification shall be made retroactively. Payments made pursuant to this Section 5.1(vii) shall not constitute distributions to the Member for purposes of the Delaware LLC Act.¹⁷

5.2 RELIANCE BY THIRD PARTIES

The Member or any officer of the Company may certify and authenticate records of the Company to third parties and any third party dealing with the Company, the Member or any officer of the Company may rely upon a certificate signed by the Member or any officer of the Company as to:

(i)  the identity of the Member or any officer of the Company;

(ii)  the existence or non-existence of any fact or facts that constitute a condition precedent to acts by the Member or any officer of the Company or are in any other manner germane to the affairs of the Company;

(iii)  the persons who or entities that are authorized to execute and deliver any instrument or document of or on behalf of the Company; or

(iv)  any act or failure to act by the Company or as to any other matter whatsoever involving the Company, the Member or any officer of the Company.

5.3 RECORDS AND INFORMATION

The Member shall maintain all of the books and records of the Company referenced in section 18-305 of the Delaware LLC Act, to the extent applicable to the Company, except to the extent that any books and records are maintained by an officer of the Company in accordance with Section 5.1(iii).¹⁸

6. TERM; DISSOLUTION

(i)  The term of the Company shall be perpetual unless the Company is dissolved and terminated in accordance with this Section 6.¹⁹

(ii)  The Company shall dissolve, and its affairs shall be wound up, upon the first to occur of the following: (a) the written consent of the Member; (b) the occurrence of any event that terminates the continued membership of the Member in the Company unless the Company is continued without dissolution in accordance with Section 6(iii) below; or (c) the entry of a decree of judicial dissolution under section 18-802 of the Delaware LLC Act.

(iii)  Upon the occurrence of any event that terminates the continued membership of the Member in the Company, the Company shall not dissolve if the personal representative (as defined in the Delaware LLC Act) of the Member agrees in writing within [90] days following the occurrence of the event that terminated the continued membership of the Member in the Company to continue the Company and to the admission of the personal representative of the Member or his or her nominee or his or her designee to the Company as a Member, effective as of the occurrence of the event that terminated the continued membership of the Member in the Company.²⁰

(iv)  Upon the dissolution of the Company, the Member shall wind up the Company’s affairs as provided in the Delaware LLC Act.²¹ Upon the winding up of the Company’s affairs, the Member shall distribute the property of the Company as follows:

(a)  First, to creditors, including the Member if he or she is a creditor, to the extent permitted by law, in satisfaction of the Company’s liabilities (whether by payment or the making of reasonable provision for payment thereof ); and

(b)  Second, to the Member in cash or property, or partly in cash and partly in property, as determined by the Member.²²

(v)  Upon the completion of the winding up of the Company, the Member shall file a certificate of cancellation with the Secretary of State of the State of Delaware canceling the Company’s certificate of formation at which time the Company shall terminate.²³

7. ADDITIONAL CONTRIBUTIONS; MEMBER LOANS

(i)  The Member may, but is not required to, make additional capital contributions to the Company.²⁴

(ii)  The Member may, but is not required to, make loans to the Company. If and to the extent that loans are made by the Member to the Company, those loans shall be on terms determined by the Member to be commercially reasonable. In the absence of any separate determination made by the Member, all loans made by the Member to the Company shall be payable upon demand and shall bear interest at __% per year.²⁵

(iii)  To the extent that additional funds are made available by the Member to the Company, those funds shall be treated as loans made by the Member to the Company, and not as additional capital contributions made by the Member to the Company, unless specifically designated as additional capital contributions made by the Member to the Company.²⁶

8. LIABILITY OF MEMBER

The Member shall not have any liability for the obligations or liabilities of the Company except to the extent provided in the Delaware LLC Act.²⁷

9. TAX STATUS

At all times that the Company has only one member (who owns 100% of the limited liability company interests in the Company), it is the intention of the Member that the Company be disregarded as an entity separate and apart from the Member for federal, and, to the extent applicable, state, local and foreign income tax purposes and be treated as a sole proprietorship of the Member.²⁸

10. DISTRIBUTIONS

(i)  Distributions shall be made to the Member at the times and in the amounts determined by the Member, except that no distribution shall be made in violation of the Delaware LLC Act.²⁹

(ii)  Unless otherwise determined by the Member, no distribution shall be paid to the Member upon his or her resignation in connection with the voluntary assignment of his or her entire interest pursuant to Section 11. Unless otherwise determined by the Member, no distribution will be paid to the Member upon the occurrence of an event that causes the Member to cease to be a member of the Company if the Company is continued without dissolution in accordance with Section 6.³⁰

11. ASSIGNMENTS

(i)  The Member may transfer or assign (including as a pledge or other collateral assignment) in whole or in part his or her limited liability company interest.³¹

(ii)  In connection with a voluntary transfer or assignment by the Member of his or her entire limited liability company interest in the Company (not including a pledge or collateral assignment or any transfer as a result thereof ):

(a)  the Member will cease to be a member of the Company;

(b)  the assignee will automatically and simultaneously be admitted as the successor Member without any further action at the time the voluntary transfer or assignment becomes effective under applicable law; and

(c)  the Company shall be continued without dissolution.³²

(iii)  In connection with a partial assignment or transfer by the Member of his or her limited liability company interest (not including a pledge or collateral assignment or any transfer as a result thereof ), unless this Agreement is amended to reflect the fact that the Company will have more than one member, the assignee or transferee shall not be admitted as a member of the Company and shall not have any rights as a member other than the right to receive any distributions that are payable in respect of the interest transferred. ³³

(iv)  Upon any pledge or other collateral assignment by the Member of all or any part of his or her limited liability company interest,³⁴ the pledgee or collateral assignee shall have only those rights expressly stated in the controlling pledge or assignment agreement (including any right in connection with the foreclosure of the pledge or collateral assignment of the purchaser of the limited liability company interest to become a member of the Company) or are provided by other applicable law. If the pledgee or collateral assignee of all or any part of the Member’s limited liability company interest has the right under the controlling pledge or assignment agreement or under other applicable law to purchase the interest in foreclosure (or to cause or permit another person to purchase the interest in foreclosure), except as expressly stated in the controlling pledge or assignment agreement, the purchaser shall not be admitted as a member of the Company and shall not have any rights as a member other than the right to receive any distributions that are payable in respect of the interest foreclosed upon and purchased. ³⁵

12. RESIGNATION

The Member may resign from the Company at such time as he or she shall determine.³⁶ Neither the filing of a voluntary petition in bankruptcy nor any other event specified in section 18-304 of the Delaware LLC Act will cause the Member to cease to be a member of the Company.³⁷

13. ADMISSION OF ADDITIONAL MEMBERS

One or more additional members of the Company may be admitted to the Company with the written consent of the Member.³⁸ In connection with the admission of any additional member of the Company (including an admission in connection with a partial assignment or transfer pursuant to Section 11(iii), but excluding an admission provided for in any pledge or collateral assignment agreement pursuant to Section 11(iv)), this Agreement shall be amended by the Member to make those changes he or she determines to reflect the fact that the Company will have more than one member, but the failure to so amend this Agreement shall not invalidate any otherwise valid assignment or transfer made by the Member.

14. EXCULPATION AND INDEMNIFICATION

14.1 EXCULPATION³⁹

(i)  For purposes of this Agreement, “Covered Persons” means the Member, any Affiliate of the Member and any officer, director, shareholder, partner or employee of the Affiliates of the Member, and any officer, employee or expressly authorized agent of the Company or its Affiliates.

(ii)  The Member, whether acting in his or her capacity as Member, or in any other capacity, shall not be liable to the Company for any loss, damage or claim incurred by reason of any act or omission (whether or not constituting negligence or gross negligence) performed or omitted by the Member in good faith, and no other Covered Person shall be liable to the Company or the Member for any loss, damage or claim incurred by reason of any act or omission (whether or not constituting negligence) performed or omitted by the Covered Person in good faith and in a manner reasonably believed to be within the scope of authority conferred on the Covered Person by this Agreement, except that a Covered Person (other than the Member, irrespective of the capacity in which he or she acts) shall be liable for any loss, damage or claim incurred by reason of the Covered Person’s gross negligence and a Covered Person (including the Member) shall be liable for any loss, damage or claim incurred by reason of the Covered Person’s willful misconduct.

(iii)  A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon the information, opinions, reports or statements presented to the Company by any person or entity as to matters the Covered Person reasonably believes are within the professional or expert competence of that person or entity, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid.⁴⁰ The foregoing provision shall in no way be deemed to reduce the limitation on liability of the Member provided in Clause (ii) of this Section 14.1.

14.2 DUTIES AND LIABILITIES OF COVERED PERSONS

(i)  To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to the Member, a Covered Person acting under this Agreement shall not be liable to the Company or to the Member for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict or eliminate the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Member to replace any other duties and liabilities of the Covered Person.⁴¹

(ii)  All provisions of this Section 14 shall apply to any former Member of the Company for all actions or omissions taken while that person was the Member of the Company to the same extent as if that person were still the Member of the Company.

14.3 INDEMNIFICATION

To the fullest extent permitted by applicable law, the Member (irrespective of the capacity in which he or she acts) shall be entitled to indemnification from the Company for any loss, damage or claim incurred by the Member by reason of any act or omission (whether or not constituting negligence or gross negligence)⁴² performed or omitted, and any other Covered Person shall be entitled to indemnification from the Company for any loss, damage or claim incurred by that Covered Person by reason of any act or omission (whether or not constituting negligence) performed or omitted by that Covered Person in good faith and in a manner reasonably believed to be within the scope of authority conferred on that Covered Person by this Agreement, except that no Covered Person (other than the Member, irrespective of the capacity in which he or she acts) shall be entitled to be indemnified in respect of any loss, damage or claim incurred by that Covered Person by reason of gross negligence and no Covered Person (including the Member) shall be entitled to be indemnified in respect of any loss, damage or claims incurred by that Covered Person by reason of willful misconduct with respect to those acts or omissions; provided, however, that any indemnity under this Section 14 shall be provided out of and to the extent of Company assets only, and no Covered Person shall have any personal liability on account thereof.

14.4 EXPENSES

To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company before the final disposition of the claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay that amount if it shall be determined that the Covered Person is not entitled to be indemnified under this Section 14.⁴³

14.5 INDEMNITY CONTRACTS

The Member and the Company may enter into indemnity contracts with any Covered Person and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under this Section 14 and containing other procedures regarding indemnification as are appropriate.

14.6 INSURANCE

The Company may purchase and maintain insurance, to the extent and in amounts the Member shall, in his or her sole discretion, deem reasonable, on behalf of Covered Persons and other persons or entities as the Member shall determine, against any liability that may be asserted against or expenses that may be incurred by that person or entity in connection with the activities of the Company, regardless of whether the Company would have the power to indemnify that person or entity against that liability under this Agreement.

15. OUTSIDE BUSINESS

The Member or any Affiliate thereof may engage in or possess an interest in any business venture of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Member shall have no rights by virtue of this Agreement in and to independent ventures or the income or profits derived therefrom, and the pursuit of any venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. The Member or any Affiliate thereof shall not be obligated to disclose or present any particular opportunity to the Company even if that opportunity is of a character that, if disclosed or presented to the Company, could be taken by the Company, and the Member or Affiliate thereof shall have the right to take for its own account (individually or as a partner, shareholder, fiduciary or otherwise) or to recommend to others any particular opportunity.⁴⁴

16. AMENDMENT

This Agreement may be amended or modified only by a written instrument signed by the Member.⁴⁵

17. GOVERNING LAW

This Agreement shall be governed by, and construed under, the laws of the State of Delaware, without regard to the rules of conflict of laws thereof or of any other jurisdiction that would call for the application of the substantive laws of a jurisdiction other than the State of Delaware.

18. TERMINATION OF AGREEMENT

This Agreement shall terminate and be of no further force or effect upon the filing of a certificate of cancellation cancelling the Company’s certificate of formation pursuant to Section 6(v) of this Agreement; but Sections 14.1, 14.2, 14.3 and 14.4 shall survive termination.⁴⁶

19. EFFECTIVE DATE

Pursuant to section 18-201(d) of the Delaware LLC Act, this Agreement shall be effective as of the effective time of the filing of the Company’s certificate of formation [or specify another date subsequent to the effective time of the filing of the Company’s certificate of formation upon which this Agreement will be effective].⁴⁷

20. NO THIRD-PARTY BENEFICIARIES

Except as contemplated by Section 14, nothing in this Agreement, express or implied, is intended to confer upon any person or entity, other than the parties hereto and their respective successors, any benefits, rights or remedies.

21. MISCELLANEOUS

Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references to “Sections” and “Clauses” shall refer to corresponding provisions of this Agreement. The use of the term “including” or any similar term shall be deemed to mean “including, without limitation.” Any reference in this Agreement to any law, rule or regulation shall be construed as reference to the law, rule or regulation as it may have been, or may from time to time be, amended, revised or reenacted and any successor thereto. The headings of sections in this Agreement are intended for reference purposes only and shall be given no substantive meaning or any interpretive force.

IN WITNESS WHEREOF, the undersigned has duly executed this Limited Liability Company Agreement as of the day and year first aforesaid.

The Company hereby executes this Agreement for the purposes of becoming a party hereto and agreeing to perform its obligations and duties hereunder and being entitled to enjoy its rights and benefits hereunder.⁴⁸

Schedule 1

* This form limited liability company agreement is one of two prepared by the LLCs, Partnerships and Unincorporated Entities Committee of the ABA Business Law Section. This form is designed for use where the only member is an individual and the other is designed for use where the only member is an entity. As a general rule, when there are two approaches to a given area, one of which is more complicated or detailed than the other, the more complicated or detailed approach is included in the entity member form and the simpler approach in this form. Thus, for example, the individual member form uses management by the member, that being the simplest and most straightforward management structure in a single-member limited liability company (an “LLC”), while the entity member form employs a manager-managed construct. Similarly, the entity member form includes an extensive list of powers of the LLC, while the individual member form simply includes only a general powers clause. This division is largely for organizational and instructive purposes. Generally speaking, these two approaches and the related provisions can be mixed and matched as the drafter deems appropriate for his or her individual situation. Thus, for example, one could have an individual as the member in a manager-managed form with no officers. Care should be taken, however, when mixing provisions of the two forms to be sure that any necessary conforming changes are made. Also note that neither form is intended to be used if the parties contemplate the possibility of there being more than one member or there being more than one person or entity having an economic interest in the LLC. In addition, neither form is intended to be used for a special purpose entity borrower in a structured financing transaction because these forms do not include a number of provisions, such as separateness covenants, that would typically be included in the LLC agreement of such an entity.

With regard to tax matters, this form is intended for use only for a domestic LLC (one formed under the laws of one of the states, not the laws of a foreign jurisdiction) that is not treated as a trust or corporation (including a corporation that makes an S election) for tax purposes and that has only a single economic member. Such an LLC should be disregarded for federal income taxes (see infra note 28). Because the LLC will be disregarded for federal tax purposes, contributions by, and distributions and payments (including compensatory payments and payments of interest) to, the member will be a matter of tax indifference, or non-events, to the member and the LLC. If the LLC is treated other than as disregarded for tax purposes, e.g., because it becomes a partnership through the addition of an additional economic member, it would become an entity for tax purposes separate from the member, and tax counsel should consider the economic interaction between the LLC and the member and make appropriate drafting changes.

It should be noted that a single-member LLC will not always be treated in the same way, and accorded the same rights, as a sole proprietorship or an individual, and, therefore, the decision to use a single-member LLC should be made in consideration of any relevant legal considerations. See, e.g., 3519–3513 Realty, LLC v. Law, 967 A.2d 954, 955 (N.J. Super. Ct. 2009) (interpreting a “statute [that] permits a landlord to remove a tenant if ‘[t]he owner of a building of three residential units or less seeks to personally occupy a unit’” and holding the statute inapplicable where a sole proprietor had transferred a building to his single-member LLC); Krueger v. Zeman Constr. Co., 758 N.W.2d 881, 887 (Minn. Ct. App. 2008) (holding that “to have standing to assert a business-discrimination claim under [the Minnesota Human Rights Act] appellant must show both that respondent committed a discriminatory act in the performance of a contract and that [appellant]—not her limited liability company—has a contractual relationship with respondent”), aff ’d, 781 N.W.2d 858 (Minn. 2010). For a general discussion of separate entity effects, see CARTER G. BISHOP & DANIEL S. KLEINBERGER, LIMITED LIABILITY COMPANIES: TAX AND BUSINESS LAW ¶ 5.05[1][e] (1994 & Supp. 2011).

Finally, this form is designed to comply with the requirements of the Delaware Limited Liability Company Act and other applicable Delaware law. If any practitioner intends to utilize this form to organize a limited liability company under the laws of a jurisdiction other than Delaware, the limited liability company act and all other applicable laws of that jurisdiction will need to be carefully reviewed and compared to those of Delaware and, as needed, this form will need to be modified to conform with all applicable legal requirements and to ensure that the intent of the parties is carried out under the laws of the applicable jurisdiction.

1. See DEL. CODE ANN. tit. 6, § 18-101(7) (2013) (defining a “limited liability company agreement” and providing that the agreement of a single-member LLC shall not be unenforceable by reason of there being only one person who is a party thereto).

2. The Delaware LLC Act sets forth requirements for the name of each domestic LLC, including the requirement that the name include “Limited Liability Company,” “L.L.C.,” or “LLC.” Id. § 18-102.

3. The Delaware LLC Act specifically reserves the ability to amend the Act from time to time and to have those amendments binding upon LLCs and their members, and all rights of members are subject to this reservation. Id. § 18-1106.

4. Id. § 18-101(7).

5. Under Delaware law, an LLC is formed at the time of filing of the certificate of formation or such later time and date as provided for therein, in each case assuming there has been substantial compliance with the requirements of section 18-201 of the Delaware LLC Act. Id. § 18-201(b). It should be noted that an LLC agreement is required under the Delaware LLC Act, but can be entered into before, after, or at the time of filing of the certificate of formation and that the LLC agreement can be made effective as of the formation of the LLC or at such other time as provided in or reflected by the LLC agreement. Id. § 18-201(d). If the person or entity intending to become the member of an LLC files the certificate of formation for the LLC and subsequently enters into the LLC agreement, care should be taken to make sure that no business is conducted by or on behalf of the LLC before the single member enters into the LLC agreement unless the LLC agreement is made effective as of the filing of the certificate of formation or as of a date before the commencement of business, in which case the provisions of the LLC agreement relating to the authority of the member will relate back to the filing date or such other date with respect to any actions taken after that date. Cf. RESTATEMENT (THIRD) OF AGENCY § 4.02(1) (2006).

6. Although the Delaware LLC Act uses “authorized person” in a number of sections, see, e.g., id. §§ 18-201, 18-204, 18-208, the term is not defined. Consequently, it is prudent to provide either in the LLC agreement or through proper action by the member in the case of a member-managed LLC what person or entity is designated as an “authorized person” for purposes of the Delaware LLC Act.

7. The Delaware LLC Act requires that the certificate of formation state the name of the LLC and the address of the registered office and name and address of the registered agent for the LLC located in the State of Delaware. Id. § 18-201(a). Because these matters are required to be addressed in the certificate of formation, other than the name, they have not been included in this Agreement for the sake of simplicity and to avoid unintentional inconsistency.

8. There exists no requirement that there be, in addition to the member, another authorized person, and there is similarly no requirement that the member be an authorized person. The alternative formula herein set forth is for purposes of illustration.

9. The Delaware LLC Act provides that an LLC “may carry on any lawful business, purpose or activity, whether or not for profit, with the exception of the business of banking as defined in § 126 of Title 8.” Id. § 18-106(a). The purpose clause of an LLC agreement is significant because it delimits the activities in which the LLC may engage. The two basic approaches are to utilize a general purpose clause permitting the LLC to engage in any lawful activity (as is an optional approach set forth in this Agreement) or to utilize a specific purpose clause permitting the LLC to engage only in the specific activity for which it was formed and any necessary or incidental activities (as is an optional approach set forth in the entity member form). The benefit of the former clause is that the LLC has the power and authority to engage in any lawful activity that may present itself whether or not it was initially contemplated. Conversely, the benefit of the latter clause is that it restricts the authorized use of the LLC to previously agreed upon activities unless the purpose clause is amended. Since this form is designed for use as a single-member, member-managed LLC, there is little concern about restricting the LLC’s purpose. Therefore, this form adopts the broad purpose clause approach. Use of a narrow purpose clause also can affect the application of the business opportunity doctrine and limit the circumstances where the member or the manager would be deemed to be taking an opportunity. See also infra Section 15, which specifically eliminates the application of the doctrine to the member.

10. The Delaware LLC Act contains a broad recitation of the powers of an LLC, stating that:

A[n] [LLC] shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by its [LLC] agreement, together with any powers incidental thereto, including such powers and privileges as are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the [LLC].

DEL. CODE ANN. tit. 6, § 18-106(b) (2013). This is in contrast with the approach taken in the Delaware General Corporation Law, wherein there is both a general and a specific listing of powers.

The powers clause of an LLC agreement is significant because, together with the governing statute, it establishes the power and authority of the LLC to act. The powers clause should conform to the purpose clause so that the LLC has the power and authority to accomplish its stated purpose. Thus, a broad powers clause should accompany a general purpose clause. Generally speaking, the powers clause provides that the LLC shall have all the power and authority to pursue its purpose, specifically lists each power and authority that may be necessary or desirable to pursue that purpose, or includes both general language and a specific list of enumerated powers. This Agreement adopts the simple approach of including only a broad powers clause. An example of the combined approach can be found in the entity member form.

11. Id. § 18-701.

12. Identifying what assets have been contributed to the LLC, and by negative implication what assets of the member have not been contributed, serves a variety of purposes. Initially, it determines the LLC’s capital base. Second, it defines those assets of the sole member that are not available (absent a successful effort to pierce the veil) to the creditors of the LLC. Third, in the event of a claim against the sole member, clear identification makes clear what assets are not (absent a successful reverse pierce) available to the creditor as no longer being the member’s property. See also infra note 24.

13. The two most common structures for management of a single-member LLC are management by the member (who may be designated a “managing member”) or management by one or more managers. This form addresses management by the member. As noted at supra note *, the companion entity member form provides for management by a manager.

14. Care should be taken in the execution of documents to respect the management structure of the LLC. Documents may be executed by the member, or, to the extent that the member delegates that authority pursuant to Section 5.1(iii), the delegatee. Since this form does not have a “manager” within the meaning of section 18-101(10) of the Delaware LLC Act, confusion could arise as to proper execution of documents on behalf of the LLC in the event a document is executed by a person or entity purporting to act as a “manager.”

15. The appointment of “officers” by an LLC is a matter of private ordering. Where the LLC’s business does not require active day-to-day management, the Member may not want to appoint any officers or other agents. Consequently, this form makes appointment optional. Notwithstanding the proviso that the authority of each person shall be limited to the written delegation, this proviso relates only to actual authority. See RESTATEMENT (THIRD) OF AGENCY § 2.01 (2006). However, while appointed persons or entities will only have the actual agency authority set forth in this Agreement, they may nevertheless have apparent agency authority, including perhaps apparent authority to bind the LLC as a third party would reasonably ascribe to the titles given. See id. § 2.03.

16. This provision is intended to grant the member all of the power and authority necessary to manage the LLC, whether or not a specific power or authority is expressly set forth in this Agreement.

17. To the extent payments for services pursuant to Section 5.1(vii) were deemed to be distributions, those distributions would be subject to section 18-607(a) of the Delaware LLC Act. See infra note 29.

18. The single member should be cautioned that it is essential to observe all recordkeeping requirements and to keep the LLC’s funds entirely separate from those of the member to reduce the risk that a court will pierce the LLC veil if the LLC’s assets are insufficient to satisfy its liabilities. Although income tax law may treat a single-member LLC as a disregarded entity, its member should never disregard the LLC’s status as a stand-alone entity and should respect the LLC’s legal ownership of its own assets separate and apart from the individual’s own assets.

19. Under the Delaware LLC Act, except as may be otherwise provided in the LLC agreement, an LLC has perpetual duration. DEL. CODE ANN. tit. 6, § 18-801(a)(1) (2013).

20. The dissolution provisions of Sections 6(ii)(b) and (iii) are designed to permit, but not require, the continuation of the LLC if an event occurs that causes the member to cease to be a member of the LLC under the Delaware LLC Act (e.g., by death), and the event would otherwise cause the LLC’s dissolution under the Delaware LLC Act. In this form, this is done by tracking the default language of the Delaware LLC Act to allow the member’s personal representative to agree to continue the LLC upon the occurrence of any event that terminates the continued membership of the member in the LLC. See id. § 18-801(a)(4) (providing that, unless an LLC agreement otherwise provides, the personal representative of the last remaining member may agree to continue the LLC and to the admission of a new member). “Personal representative” is defined in the Delaware LLC Act to mean, as to a natural person: the executor, administrator, guardian, conservator or other legal representative thereof. Thus, the intended effect of Section 6 is to permit the avoidance of any inadvertent dissolution of the LLC while leaving the member complete flexibility to dissolve the LLC at any time by written consent. It should also be noted that the Delaware Court of Chancery has held that a member may waive the right to judicial dissolution under section 18-802 of the Delaware LLC Act. See R&R Capital, LLC v. Buck Doe Run Valley Farms, LLC, C.A. No. 3803-CC, 2008 WL 3846138 (Del. Ch. Aug. 19, 2008). Thus, waivers of the right to judicial dissolution are now frequently included in multi-member LLC agreements. However, in the context of a single-member LLC, as a practical matter, the remedy of judicial dissolution would be rarely invoked.

To the extent the member’s objective is to continue the LLC’s existence to the maximum extent possible, it would be typical to include a provision that provides for dissolution upon the written consent of the member, upon the entry of a decree of judicial dissolution under section 18-802 of the Delaware LLC Act, or upon the occurrence of any event that terminates the continued membership of the member in the LLC, but also provides that the personal representative be required to continue the LLC without dissolution upon the occurrence of an event to cause the member to cease to be a member of the LLC. See the dissolution section of the entity member form for an example of such a provision. In addition, the provision in this form that allows the personal representative to continue the LLC’s existence can be expressly overridden. If this is what the member desires, then the form must expressly negate that authority. Otherwise, the default rule set forth in section 18-801 of the Delaware LLC Act would govern. That section of the Delaware LLC Act provides that an LLC may (but is not required to) continue without dissolution when there are no members if, within ninety days after the occurrence of the event that terminated the continued membership of the last remaining member, the personal representative of the last remaining member agrees in writing to continue the LLC and to the admission of the personal representative of that member or his or her nominee or designee to the LLC as a member effective as of the occurrence of the event that terminated the continued membership of the last remaining member.

21. The Delaware LLC Act provides for the winding up of an LLC upon its dissolution setting forth, among other things, who conducts the winding up and certain specified powers of the persons conducting that activity. DEL. CODE ANN. tit. 6, § 18-803 (2013). The Delaware LLC Act specifies the priority of the distribution of assets in the winding up of an LLC. Id. § 18-804. Generally, that requires distributions to be made first to creditors, then to members in satisfaction of liabilities for distributions, and thereafter to members first for the return of their contributions and second respecting their limited liability company interests.

22. The Delaware LLC Act provides that a member may not be required to accept an in-kind distribution to the extent that the member’s percentage interest in the asset distributed exceeds the member’s interest in distributions from the LLC. Id. § 18-605. In the case of a single-member LLC, there is no opportunity for disproportionate distributions among the members.

23. Upon the completion of the process of winding up of an LLC (id. § 18-803), a certificate of cancellation of the certificate of formation is to be filed with the Secretary of State of the State of Delaware, whereupon the separate legal existence of the LLC is terminated. Id. §§ 18-201(b), 18-203.

24. As noted at supra note 12, practitioners preparing single-member LLC agreements and clients using single-member LLCs must take care to avoid veil piercing—a risk to which single-member LLCs may, in some cases, be substantially more susceptible than are multi-member LLCs. See also 2 LARRY E. RIBSTEIN & ROBERT R. KEATINGE, RIBSTEIN AND KEATINGE ON LIMITED LIABILITY COMPANIES § 19:1, at 407 n.1 (2d ed. 2013) (discussing the risk of informality in the operation of single-member LLCs giving rise to a “greater risk of piercing the entity veil”) Note, however, that it is generally recognized to be more difficult to pierce the corporate veil in Delaware than in many other jurisdictions because fraudulent or other similar wrongful conduct is usually required under Delaware law. See STEPHEN B. PRESSER, PIERCING THE CORPORATE VEIL § 2.8 (2013); In re Phillips Petroleum Sec. Litig., 738 F. Supp. 825, 838 (D. Del. 1990). In a veil-piercing claim against the member of a single-member LLC, a plaintiff may claim that because, in practice, the owners of small single-owner businesses (especially those owned by individuals as opposed to entities) often view all of their personal assets as being available to ensure their business success, the court should view all of the assets of the member of a single-member LLC as being at risk in the claim in question. The member of a single-member LLC should carefully segregate his or her personal assets from those belonging to the LLC. As to the importance of treating the assets of the LLC as distinct from those of the sole member (and vice versa), see Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989) (“A subsidiary corporation may be deemed the alter ego of its corporate parent where there is a lack of attention to corporate formalities, such as where the assets of the two entities are commingled, and their operations intertwined. An alter ego relationship might also lie where a corporate parent exercises complete domination and control over its subsidiary.”). In addition, if the LLC agreement specifically lists the amount of the member’s contributions and provides that no contribution shall be deemed to have been made to the LLC and no asset of the member shall be deemed to be at risk for claims against the LLC unless expressly listed as a contribution in the LLC agreement, that may help to counter the above argument by a creditor.

Delaware courts have applied the same standard for piercing the veil in respect of an LLC as they have in the corporate context. See, e.g., U.S. Bank N.A. v. U.S. Timberlands Klamath Falls, L.L.C., C.A. No. 112-N, 2005 WL 2093694 (Del. Ch. Mar. 30, 2005). To state a claim of veil piercing, a party “must plead facts supporting an inference that [a party] created a sham entity designed to defraud investors and creditors.” Id. at *1 (citing Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003)). The inquiry is fact-intensive, and the court would consider several factors, including: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the [member] siphoned company funds; and (5) whether, in general, the company simply functioned as a façade for the [member].” Id. at *1.

25. The practitioner should consider what interest rate is appropriate for a specific transaction. In this regard, using a market based rate will lend support to the argument that the loan should be treated as such, and not be recharacterized as equity or be subordinated to debts owed to third-party creditors.

26. This formulation is intended to preserve claims by the member, vis-à-vis other creditors of the LLC, that additional funds provided by the member to the LLC were actually loans and, thereby, give the member equivalent rights and claims with respect its loan as are enjoyed by the LLC’s other unsecured creditors. See DEL. CODE ANN. tit. 6, § 18-107 (2013) (providing, inter alia, that a member may lend money to an LLC and, subject to other applicable law, have the same rights and obligations with respect to any such matter as a person who is not a member). Note, however, that those loans possibly may be subject to equitable subordination as well as to veil-piercing attacks. See also supra notes 12 & 24.

27. The rule of limited liability exists regardless of whether it is recited in the LLC agreement. The Delaware LLC Act provides:

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a[n] [LLC], whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the [LLC], and no member or manager of an [LLC] shall be obligated personally for any such debt, obligation or liability of the [LLC] solely by reason of being a member or acting as a manager of the [LLC].

DEL. CODE ANN. tit. 6, § 18-303(a) (2013). A member, as to some or all obligations of the LLC, may agree to be personally obligated. See id. § 18-303(b).

28. On January 1, 1997, the so called “Check-the-Box” classification regulations went into effect. Generally speaking, under those regulations, a single-member LLC will be, for purposes of federal income tax classification, a “disregarded entity.” Treas. Reg. § 301.7701-2(c)(2)(i) (as amended in 2014) (“Except as otherwise provided in this paragraph (c), a business entity that has a single owner and is not a corporation under paragraph (b) of this section is disregarded as an entity separate from its owner.”). For federal employment tax purposes (beginning in 2009), and for certain federal excise tax purposes (beginning in 2008), a “disregarded entity” is treated as separate from its owner. Treas. Reg. § 301.7701-2(c)(2)(iv) (as amended in 2014) (employment taxes), -2(c)(2)(v) (as amended in 2014) (excise taxes). Under the original “Check-the-Box” regulations, a disregarded entity was disregarded for federal income, employment, and excise tax purposes. But see I.R.S. Notice 99-6, 1999-1 C.B. 321, obsoleted by T.D. 9356, 2007-39 I.R.B. 675 (Aug. 15, 2007) (elective treatment of disregarded entities for employment tax purposes before 2009). As a disregarded entity (sometimes referred to as a “Tax Nothing”), a single-member LLC so classified will not file an income tax return or itself report income, loss, deduction, or credit. Rather, those tax items will be incorporated into the tax return of and reported by the sole member of the single-member LLC. Treas. Reg. § 301.7701-2(a) (as amended in 2006) (“If the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.”). If that sole member is an individual, those items will be reported on Schedule C (Profit or Loss from Business (Sole Proprietorship)), Schedule C-EZ (Net Profit from Business (Sole Proprietorship)), Schedule E (Supplemental Income and Loss), or Schedule F (Profit or Loss from Farming). A single-member LLC that would otherwise be treated as a disregarded entity may elect to be classified as a corporation. Treas. Reg. § 301.7701-3(a) (as amended in 2014). In most instances, that election is made on Form 8832. If the single-member LLC meets the requirements for being taxed as an S corporation, it may elect S corporation status on Form 2553. The regulations formerly required the single-member LLC to file both Form 2553 and Form 8832 in order to elect S corporation status, but under the 2005 amendments Form 2553 alone is now required. See Treas. Reg. § 301.7701-3(c)(1)(v)(C) (as amended in 2006). A single-member LLC may not be classified as a partnership. Treas. Reg. § 301.7701-3(a) (as amended in 2006). Note that “Check-the-Box” applies only to “eligible entities” (i.e., business entities that are eligible to select a classification under the regulations). The vast majority of single-member LLCs, but not all, are eligible entities. A “corporation” formed under state or federal law is never an eligible entity. Other ineligible entities include insurance companies, banks, governmentowned entities, and certain foreign “per se” corporations. See Treas. Reg. §§ 301.7701-1(a)(3) (as amended in 2011), 301.7701-2(b) (as amended in 2006), 301.7701-3(c)(1)(v) (as amended in 2006). Assuming a single-member LLC formed in the United States is an eligible entity, it has a default classification as a disregarded entity; it is not necessary that it “check a box” or file Form 8832. Protective elections are possible, but are rarely made except for certain foreign entities. For a general review of “Check-the-Box,” see GARY HUFFMAN, WILLIAM MCKEE, WILLIAM NELSON, JAMES WHITMIRE & ROBERT WHITMIRE, FEDERAL TAXATION OF PARTNERSHIPS AND PARTNERS ¶ 3.06 (4th ed. 2007). Note that the number of members under Delaware or other applicable state law is not necessarily the same as the number for federal income tax purposes. For example, the IRS has treated a two-member LLC as a single-member LLC for federal tax purposes. See I.R.S. Priv. Ltr. Rul. 2002-01-024 (Oct. 5, 2001). Conversely, the IRS might consider an LLC with only one member, but two or more holders of economic interests, to be a multi-member entity for tax purposes.

Keep in mind that, while for purposes of federal income tax classification a single-member LLC may be a disregarded entity without its own tax identity or obligations, certain states will impose entity-level taxes on it. States imposing an entity-level tax potentially applicable to single-member LLCs include: Alabama (net worth based “business privilege” tax imposed on LLCs, ALA. CODE § 40-14A-22(a) (LexisNexis 2011)); California (entity-level franchise fee and gross receipts-based fee, CAL. REV. & TAX CODE §§ 17941, 17942 (West 2004 and Supp. 2014)); Illinois (1.5% personal property replacement tax based on net income, 35 ILL. COMP. STAT. ANN. 5/205(b) (West 2012)); Kentucky (entity-level income tax imposed upon LLCs, LPs, and LLPs; minimum tax of $175 per annum; rates up to 7% of income with alternative minimum tax calculations based upon gross receipts and gross profits also required, KY. REV. STAT. ANN. §§ 141.010(24), 141.040(5) (West 2010 and Supp. 2013)); New Hampshire (LLCs doing business in the state are subject to a 5% tax on dividends and interest, an 8.5% business profits tax, and the 0.75% business enterprise tax, N.H. REV. STAT. ANN. chs. 77, 77-AQ, 77-E-1 (LexisNexis 2009 and Supp. 2013)); Ohio (8.5% entity level tax imposed except where all owners give written consent to state tax jurisdictions, OHIO REV. CODE ANN. §§ 5733.40, 5733.41 (LexisNexis 2014)); Pennsylvania (LLCs except certain professional LLCs subject to .699% capital stock and franchise taxes, 15 PA. CONS. STAT. ANN. § 8925 (West 2013)); Tennessee (excise tax of 6.5% of net earnings and franchise tax of $0.25 per $100 of net worth applied to LLCs, LLPs, and LPs, TENN. CODE ANN. §§ 67-4-2105(a), 67-4-2106(a) (2013)); Texas (LLCs, as well as LPs, LLPs, and LLLPs, are subject to entity-level franchise tax, TEX. TAX CODE ANN. § 171.0002 (West 2008 and Supp. 2013)); Washington (all entities subject to business and occupations tax, WASH. REV. CODE ANN. §§ 25.05.500–25.05.570, 25.15.005–25.15.902 (West, Westlaw current with 2014 Legislation effective before June 12, 2014)). A state also may treat a single-member LLC as a separate entity for sales and use tax purposes, even if for income tax purposes the state follows the federal classification of the single-member LLC as a disregarded entity. See generally Bruce P. Ely, Christopher R. Grissom & William T. Thistle, State Tax Treatment of LLCs and LLPs—An Update, 56 ST. TAX NOTES 509 (May 17, 2010); see also JAMIE FENWICK, MICHAEL MCLOUGHLIN, SCOTT SALMON, PATRICK SMITH, ARTHUR TILLEY & BRIAN WOOD, STATE TAXATION OF PASS-THROUGH ENTITIES AND THEIR OWNERS app. tbl. 9 (2010) (Income and Franchise Taxes Imposed on Single-Member LLCs).

While a single-member LLC may have employees, for purposes of federal employment taxation the sole member was treated under the original Check-the-Box regulations as the employer with responsibility for the collection and remission of those levies. See Med. Practice Solutions, LLC v. CIR, 132 T.C. 125 (2009), aff ’d sub nom. Britton v. Shulman, No. 09-1994, 2010 WL 3565790 (1st Cir. Aug. 24, 2010); Littriello v. United States, 484 F.3d 372 (6th Cir. 2007); McNamee v. United States, 488 F.3d 100 (2d Cir. 2007); Kandi v. United States, No. C05-0840C, 2006 WL 83463 (W.D. Wa. 2006); Notice 99-6, 1991-1 C.B. 321, obsoleted by T.D. 9356, 2007-39 I.R.B. 675 (Aug. 15, 2007); see also Thomas E. Rutledge & Scott E. Ludwig, The Sixth Circuit Affirms Littriello: “Check-the-Box” Classification Regulations Are Upheld, J. TAX’N, June 2007, at 325; Thomas E. Rutledge & Scott E. Ludwig, Second Circuit Affirms McNamee: Validity of Check-the-Box Regulations Again Confirmed, J. TAX’N, July 2007, at 32; Thomas E. Rutledge, The Dispute Over Check-the-Box, SMLLCs and Liability for Employment Taxes, J. PASSTHROUGH ENTITIES, July/Aug. 2007, at 19. However, effective January 1, 2009, the single-member LLC is treated as the “employer,” and the liability of the sole member for any failure to collect and remit employment taxes is determined under Code section 6672. T.D. 9356, 2007-39 I.R.B. 675 (Aug. 15, 2007).

The IRS found in Rev. Rul. 1999-5, 1999-1 C.B. 434 that an LLC which, for federal tax purposes, is disregarded as an entity separate from its owner is converted to a partnership when a second member purchases an interest in that LLC. Cf. Rev. Rul. 1999-6, 1999-1 C.B. 432 (tax consequences when multi-member LLC becomes single-member LLC).

29. DEL. CODE ANN. tit. 6, § 18-601 (2013). Section 18-607(a) of the Delaware LLC Act provides that “[an LLC] shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the [LLC], other than liabilities to members on account of their limited liability company interests and liabilities for which the recourse of creditors is limited to specified property of the [LLC], exceed the fair value of the assets of the [LLC], except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the [LLC] only to the extent that the fair value of that property exceeds that liability. For purposes of this subsection (a), the term ‘distribution’ shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.” Id. § 18-607(a); see also Section 5.1(vii) of this Agreement. Section 18-607 applies to all distributions other than those made upon the winding up of an LLC, which are governed by Section 18-804. Note that while Section 10(i) of this Agreement is by its terms limited to the Delaware LLC Act, other limitations of Delaware law, such as the Delaware Fraudulent Transfer Act, and comparable laws of other jurisdictions, may also apply.

30. The default rule under the Delaware LLC Act is that, upon resignation, a resigning member is entitled to any distribution provided under the LLC agreement and if the LLC agreement does not so provide otherwise, a resigning member is entitled to receive, within a reasonable time after resignation, the fair value of the member’s limited liability company interest as of the date of resignation based upon that member’s right to share in distributions from the LLC. DEL. CODE ANN. tit. 6, § 18-604 (2013). The first sentence of Section 10(ii) of this Agreement negates the effect of section 18-604 of the Delaware LLC Act in connection with a voluntary assignment because, as noted at infra note 32, it is assumed that consideration will be payable by the assignee to the assignor. Similarly, the effect of section 18-604 of the Delaware LLC Act is negated by the second sentence of Section 10(ii) of this Agreement in connection with an event that might be considered a deemed resignation of the member under the Delaware LLC Act, such as if he or she is adjudicated incompetent. This provision is included in this form based on the assumption that it would be in the best interest of the member and the LLC to preserve the value of the LLC by retaining all assets within the LLC and allowing the member’s personal representative to continue the LLC’s existence through application of Section 6 of this Agreement. However, as is the case with many of this Agreement’s provisions, the member is given the flexibility to make a different choice.

31. As a general matter, this form takes a permissive approach to transfers and assignments of limited liability company interests by permitting all transfers and assignments. However, because this form is designed to be a single-member form where the LLC is disregarded for federal income tax purposes and because certain transfers and assignments can result in there being more than one member or one or more members and one or more economic interest holders, there are circumstances relating to certain transfers, as noted in the accompanying text and footnotes, where this Agreement should be amended. As also noted, however, it is thought preferable that purported transfers be permitted than that those transfers be rendered void even if conforming amendments are not made. In this regard, it should also be noted that “limited liability company interest” is a defined term in the Delaware LLC Act as “a member’s share of the profits and losses of [an LLC] and a member’s right to receive distributions of the [LLC’s] assets.” Id. § 18-101(8). Thus, as a general matter, a transfer of a limited liability company interest does not necessarily result in the transferee’s being admitted as a member with respect to the interest transferred, and this form takes the position that certain transfers will result in admission of the transferee while others will not. See, e.g., Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800, 804−05 (Del. Ch. 2011) (“[I]t is clear that the default rule under the [Delaware LLC] Act is that an assignment of an LLC interest, by itself, does not entitle the assignee to become a member of the LLC; rather, an assignee only receives the assigning member’s economic interest in the LLC to the extent assigned.”).

32. DEL. CODE ANN. tit. 6, § 18-702(b) (2013). Although LLC agreements will often have a requirement that they be executed by any successor member, that formality, if not complied with upon a full assignment, may give rise to an unintended dissolution of the LLC if the successor is not admitted due to an inadvertent failure to sign the LLC agreement. Section 11 provides that in connection with a voluntary assignment of all of the member’s interest the assignee will automatically be admitted as the successor member. The triggering event is the effectiveness of the assignment under applicable law. Thus, if a purported assignment was not accepted, the assignment would not become effective so the assignee will never become the successor member. Since it is assumed that in connection with a voluntary assignment, any consideration will be payable by the assignee to the assignor, Section 10 of this Agreement provides that, unless otherwise determined by the member, the assignor member will not be entitled to a resigning distribution in connection with a voluntary assignment, which would otherwise be the case under section 18-604 of the Delaware LLC Act as described at supra note 30.

33. Sections 11 and 13 contemplate that in connection with a partial transfer or assignment by the member of his or her limited liability company interest (other than in connection with a pledge or collateral assignment (see infra note 35)), the transferee or assignee of the interest will not be admitted as a member unless this Agreement is amended to reflect the changes necessary if there is more than one member, including the relative rights and duties of the members and the fact that the LLC would no longer be disregarded as an entity separate from its owner for federal income tax purposes (see supra note 28). However, it is important to note that this form does not take the approach of voiding any transfer that would cause there to be one or more economic interest holding assignees in addition to the member even though under those circumstances the LLC would no longer be disregarded as an entity separate from its owner for federal income tax purposes and certain of the provisions, such as the distribution provision, would no longer work as drafted. The distribution provision would presumably be interpreted to provide that distributions would be made to the member and to the economic interest holding assignees in proportion to their relative limited liability company interests. See Achaian, 25 A.3d at 806 (court and parties agreed that LLC agreement that referred to single member needed to be read to apply to multiple members once additional members were admitted even though LLC agreement was not amended). It is, of course, preferable that in connection with any partial transfer, appropriate amendments be made to this Agreement to reflect the new tax treatment of the LLC, the changes with respect to distributions, and other matters that will or may be affected by the transfer. Nonetheless, this form takes the approach that it is better to permit those transfers with their attendant consequences than to provide that they are null and void. There may be transactions, however, where an inadvertent or other transfer causes the LLC not to be disregarded as an entity separate from its owner for federal income tax purposes that the practitioner should consider including a provision that any such transfer would be void ab initio, at least if it is not done with the specific intention that the LLC would have a different tax status for federal income tax purposes. Under Delaware law, a contractual term that prohibits transfers will be enforceable, and a prohibited transfer may be invalidated. In re Conaway, C.A. No. 6056-VCG, 2012 WL 524190 (Del. Ch. Feb. 15, 2012) (finding valid a limited partnership agreement’s restraint on alienation and invalidating a purported transfer in violation of the agreement).

34. In most cases, interests in an LLC are general intangibles and payment intangibles governed by Article 9 of the Uniform Commercial Code. To facilitate a pledge of the interests in an LLC in connection with a financing, it may be desirable to opt into coverage of Revised Article 8 of the Uniform Commercial Code. See generally Lynn A. Soukup, LLC and Partnership Interests as Collateral—The Alchemy of “Opting In” to Article 8, in SECURED TRANSACTIONS 2010: WHAT LAWYERS NEED TO KNOW ABOUT UCC ARTICLE 9, at 431 (PLI Com. L. & Prac., Course Handbook Series, 2010), available at 920 PLI/Comm 431 (Westlaw); see also Robert R. Keatinge, Taking and Enforcing Security Interests in Unincorporated Businesses, in LIMITED LIABILITY ENTITIES IN TIME OF CHANGE (ALI-ABA Mar. 12, 2002), available at VPC0312 ALI-ABA 245 (Westlaw); Robert R. Keatinge, Interests in Unincorporated Associations as Securities Under Article 8 of the UCC, in LIMITED LIABILITY ENTITIES IN TIMES OF CHANGE (ALI-ABA Mar. 12, 2002), available at WPC0312 ALI-ABA 361 (Westlaw). In that case, the LLC agreement (and the certificate representing the limited liability company interest in the case of a certificated interest) must expressly provide that the interests in the LLC will constitute securities for purposes of Article 8 of the UCC. DEL. CODE ANN. tit. 6, § 8-103(c) (2013).

35. In connection with the pledge of the interests in an LLC, the practitioner should consider whether a lender foreclosing on the pledge has the right to become a substitute or additional member of the LLC or will simply be an assignee of a limited liability company interest. If the foreclosing lender is only an assignee, it will generally have no right to cause the LLC to make distributions or take other actions that may benefit its position. On the other hand, when a lender forecloses on a limited liability company interest and becomes the member of the LLC, it may assume liability, as the owner and operator of the LLC, for the LLC’s activities—past and present. The practitioner should note that Section 11 of this Agreement provides that a pledgee or collateral assignee shall have the rights provided for in the agreement controlling the pledge or collateral assignment (and as provided by other applicable law), so that if pursuant to that agreement the pledgee or collateral assignee has the right to become a member, it will be able to do so under this Agreement, but if under the applicable security agreement, it does not have the right to become a member, Section 11 of this Agreement does not otherwise provide it with that right. It should also be noted that in connection with a pledge or collateral assignment by the member of part of its limited liability company interest, if the applicable security agreement governing the pledge or collateral assignment provides that the pledgee or collateral assignee can become a member, the situation may arise where there are two members of the LLC or one member of the LLC and one economic interest holding assignee under this Agreement. That situation should be addressed in the applicable security agreement, possibly by including a form of amendment to this Agreement that would apply in the event of foreclosure. Even where that is not the case, this Agreement gives effect to the transfer and admission provisions of the applicable security agreement, based on the view that it is better to have the provisions of this Agreement be consistent with the rights accorded by the member to any pledgee or collateral assignee rather than to have them inconsistent. This form assumes that when a security interest is granted in a limited liability company interest under applicable law, including the Uniform Commercial Code, the holder of the security interest could cause the foreclosure and sale of the limited liability company interest subject thereto with the result that the purchaser, although not a member and not generally having the rights of a member, would have the right to receive any distributions that are payable in respect of the interest foreclosed upon and purchased. As noted at supra note 31, it is preferable that in connection with any partial transfer that could have this result, appropriate amendments be made to the LLC agreement to reflect the changes that will take effect. However, as with a voluntary transfer under Section 11, it is thought better to permit those transfers than to provide that they are null and void. In the event of the pledge or collateral assignment by the member of its entire LLC interest, the foreclosure on the pledge may result in the member’s ceasing to be a member of the LLC, DEL. CODE ANN. tit. 6, § 18-702(b)(3) (2013), which could have the result of causing the dissolution of the LLC. See supra note 20 and accompanying text.

36. Pursuant to the Delaware LLC Act, a member may resign from an LLC only at the time or upon the happening of the events specified in the LLC agreement, and, unless otherwise provided in the LLC agreement, a member may not resign from an LLC before the dissolution and winding up of the LLC. DEL. CODE ANN. tit. 6, § 18-603 (2013). Thus, Section 12 provides that the member may resign from the LLC at the time he or she determines.

Also note Section 10(ii) of this Agreement (together with footnote 31) has been drafted to avoid the distribution requirement of section 18-604 upon the resignation of the member in the event of a voluntary assignment in full of his or her limited liability company interest.

37. The Delaware LLC Act provides a number of events that will cause a person to cease to be a member of an LLC unless they are modified in the LLC agreement or waived with the consent of all members. Id. § 18-304. Those events are a member’s making an assignment for the benefit of creditors, filing a voluntary petition for bankruptcy, being adjudged bankrupt or insolvent or having entered against that member an order for relief in a bankruptcy or insolvency proceeding, the filing of a petition or answer seeking the reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for the member or the admission or failure to contest a petition filed against the member in a proceeding of similar nature. Id. § 18-304(1). The last sentence of Section 12 is included to override the deemed cessation of membership of the member if the member files for bankruptcy or is otherwise involved in a specified bankruptcy event. Id. § 18-304.

38. The Delaware LLC Act, as a default rule, requires the consent of all incumbent members to the admission of a new member as a member. Id. §§ 18-301(b)(1), 18-702(a). This threshold may be modified in the LLC agreement.

39. The exculpation and indemnification provisions in Section 14 provide for broad exculpation and broad mandatory indemnification for the member irrespective of the capacity in which he or she is acting. These provisions also provide for exculpation and mandatory indemnification of the other identified “Covered Persons,” though those protections are not as broad as the coverage for the member. The practitioner should carefully consider the standards for exculpation and indemnification for the member as well as for all other “Covered Persons” and whether that indemnification should be mandatory or at the discretion of the member. Pursuant to section 18-1101(e) of the Delaware LLC Act, liabilities for breach of contract and breach of duties (including fiduciary duties) to an LLC or to another member or manager or to another person that is a party to or is otherwise bound by an LLC agreement may be limited or eliminated, except that the LLC agreement may not limit or eliminate liability for a bad-faith violation of the implied contractual covenant of good faith and fair dealing.

40. The Delaware LLC Act specifically authorizes a member, manager, or liquidating trustee to rely, in good faith, upon certain records and information, including for purposes of making distributions to members and creditors. See id. § 18-406.

41. See id. § 18-1101(c) (duties (including fiduciary duties) to an LLC or to another member or manager or to another person that is a party to or is otherwise bound by an LLC agreement may be expanded, restricted, or eliminated by that LLC agreement, except that LLC agreement may not eliminate the implied contractual covenant of good faith and fair dealing); see also id. § 18-1104 (“In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”). If an LLC agreement is completely silent regarding fiduciary duties, the Delaware LLC Act expressly incorporates Delaware’s rules of law and equity relating to default fiduciary duties of loyalty and care. See id. § 18-1104.

42. The Delaware LLC Act specifically authorizes an LLC to indemnify and hold harmless any member, manager, or any person from any claim or demand. Id. § 18-108. To indemnify a person for his or her own negligence, Delaware case law in the corporate context requires that intention to be specifically stated, and indemnification for willful misconduct is prohibited. See State v. Interstate Amiesite Corp., 297 A.2d 41, 44 (Del. 1972); James v. Getty Oil Co. (E. Operations), Inc., 472 A.2d 33, 38 (Del. Super. Ct. 1983); Warburton v. Phoenix Steel Corp., 321 A.2d 345, 346–47 (Del. Super. Ct. 1974).

43. This form provides for mandatory advancement. The drafter should consider whether mandatory advancement with respect to the member or other “Covered Persons” is appropriate in particular circumstances, keeping in mind that if advancement is discretionary, a decision to advance expenses could be viewed as an interested transaction that could be subject to higher judicial scrutiny. The drafter also should note that the treatment may differ between the member and other “Covered Persons.”

44. Note that this provision, which permits competition between the member and the LLC, constitutes a modification of default fiduciary duties under Delaware law. See Kahn v. Icahn, C.A. No. 15916, 1998 WL 832629 (Del. Ch. Nov. 12, 1998). Also note that no officers were included in this section. Adding the officers (if any) to this provision may be appropriate under particular circumstances.

45. Although under Delaware law written agreements may be amended or modified by a course of dealing notwithstanding a provision that authorizes amendment only by written instrument (see, e.g., Council of Unitholders of Breakwater House Condo. v. Simpler, Civ. A. No. 89C-09-007, 1993 WL 81285, at *7 (Del. Super. Ct. 1993); Pepsi-Cola Bottling Co. of Asbury Park v. Pepsico, Inc., 297 A.2d 28, 33 (Del. 1972)), the better practice is to provide for written amendments so that the exact terms of the current LLC Agreement are always readily accessible to the member and to any third parties to whom it has been provided.

46. An LLC agreement as a contract of the member or members of the LLC does not necessarily terminate upon the termination of the LLC. Thus, termination of the LLC agreement is a topic that should be specifically addressed in the LLC agreement and this should include specifying when the LLC agreement terminates and what, if any, provisions survive the general termination, e.g., indemnity provisions.

47. See supra note 5.

48. Because an LLC may have obligations to perform under its LLC agreement, some practitioners will make the LLC a party to its LLC agreement or will provide for a form of joinder, as provided above. The Delaware Supreme Court, in Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999), held that even though an LLC had not executed its LLC agreement, the LLC was nevertheless bound by an arbitration and forum selection clause in the LLC agreement. The court recognized that the LLC had not signed the LLC agreement. However, it stated that the members were the real parties in interest and that the LLC was simply their joint business vehicle and, therefore, it would enforce the clause against the LLC. In 2002, the Delaware LLC Act was amended to make express that the LLC is bound by the LLC agreement. See DEL. CODE ANN. tit. 6, § 18-101(7) (2013). It should be noted that other jurisdictions have reached a contrary result in cases that also considered the enforceability of an arbitration clause against an LLC that was not a party to its LLC agreement. See, e.g., Mission Residential, LLC v. Triple Net Props., LLC, 564 S.E.2d 888 (Va. 2008) (applying Virginia law; note, however, that this decision was overturned by an amendment to the Virginia Limited Liability Company Act); Trover v. 419 OCR, Inc., 921 N.E.2d 1249 (Ill. App. Ct. 2010) (relying on separate legal existence of LLC under Illinois law and distinguishing Elf Atochem in holding that LLCs were not bound by arbitration clauses in operating agreements that did not specify LLCs were parties and did not include LLCs as signatories); In re Am. Media Distribs., LLC, 216 B.R. 486, 487 (Bankr. S.D.N.Y. 1998) (LLC is not a party and therefore cannot assume LLC agreement); Bubbles & Bleach, LLC v. Becker, No. 97C 1320, 1997 WL 285938 (N.D. Ill. 1997) (applying Wisconsin law).