'Legalizing' an LLC

Question: Once I have completed the ORGANIZING AGREEMENT, do I need to send it to the Texas Dept. of State to have it legalized? If so, what is the proceedure for doing this? Jim.

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If I understand your question correctly, I think you have a misconception of the process. The document filed with the Texas Secretary of State's office that legally brings your LLC into being is called Certificate of Formation (in other states, it is called "Articles of Organization"). Here is a link to the Texas form. See the instructions at the front of this form. An LLC operating agreement is an agreement between the LLC members setting forth such matters as how to allocate profits and losses, duties of the members, procedure for withdrawal from the LLC, etc. It is not filed with the state. An LLC operating agreement is not required in Texas. See state survey on issue of whether operating agreement required. Hopefully I have pointed you in the right direction.

Are a Husband and Wife Considered One Member of an LLC?

Question: My wife and I are members in a LLC in New Jersey. We would like to remove her so tax filing will be easier. Is this possible and how would we go about it?

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Answer: I assume you are referring to the fact that a single member LLC can elect to be a disregarded entity for tax purposes and, thus, not file a separate federal tax return. In the case of an LLC that is a disregarded entity for federal income tax purposes, the owner reports the income / loss from this business on his individual income tax return, form 1040, schedule C or perhaps Schedule E if the LLC is solely involved in real estate rental activity. The advantage of the disregarded entity is avoiding the need for a federal tax return (and, also, the state return in most states). First, let's look at the issue of whether you and your wife may qualify as one member for tax purposes in order to take advantage of the disregarded entity rule. In the nine community property states, a husband and wife who own an LLC interest as community property can be treated as one member under Rev. Proc. 2002-69, 2002-2 C.B. 831. Unfortunately, New Jersey is not a community property state, therefore, you are considered two members.

Although it does not apply to your case, the law recently changed allowing a husband and wife who both materially participate in a business not organized as a legal entity under state law to be disregarded for tax purposes (i.e., treated as a sole proprietorship). See Election for Husband and Wife Unincorporated Businesses. It's a nice option where the business circumstances do not make the liability protection offered by incorporating or forming an LLC necessary.

Back to your initial question: how is a member removed from a New Jersey LLC? The first step is to check if the state requires a form to be filed at the time the member withdraws. I did not see a form for this on web site of the NJ Division of Revenue. My assumption is that no form is filed with the state at the time of the withdrawal; however, they are made aware of the change in membership with next annual filing. I invite you to contact the Division of Revenue to confirm my above assumption. If you have a written operating agreement, it may specify the procedure for withdrawal of a member. If not, I recommend that the withdrawing member sign a notice of withdrawal and deliver it to the other members. There is no set form for a notice of withdrawal from an LLC (just a short letter or memo with the withdrawing member's signature should suffice).

Collecting From A Dissolved LLC

Question: An LLC borrowed a sum of money from me for equipment for their new business in 06. The LLC still owes me $15,000 and is going to dissolve without having paid me in full. I do have a written contract. What is my recourse for collection of the funds still due? Anroln, Virginia.

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Two remedies come to mind. First, have an attorney review the contract to see if it forms the basis for a direct collection action against the LLC members as guarantors or cosignors of the debt. I'm not sure if you had an attorney prepare the contract but, when extending credit to new LLCs, the wise course of action is to make the LLC members cosign the loan. Secondly, I would hope you got a security interest in the equipment. This is done by correctly executing and filing a UCC1 form. More info on UCC1. Thus, when the LLC ceases operation, you can at least get the equipment back.

The option of last resort is collection against the LLC. I'm not sure about Virginia but, in most states, the LLC must file a plan of dissolution with the Secretary of State's office. The plan should list you as a creditor of the LLC and state how they plan to pay you, if at all. Check with the Secretary of State's office (called the State Corporation Commission in VA) to see if such plan was filed for this LLC. See contact info for VA State Corporation Commission. If the LLC has assets that are not subject to lien and other remedies are not viable, the best course of action is to institute a collection action ASAP to get your judgment on file before the others that may be coming. Just because an LLC has filed a notice of dissolution does not mean it no longer exists. The voluntary notice of dissolution starts the winding up process. See VA statute on winding up LLC.

Collections are not my specialty so, as always, I encourage you to sit down with a local lawyer to review your options in this matter.

Oral LLC Operating Agreements

They are like putting the condom halfway on. Why in God's name would anyone do this? The reason oral operating agreements make no sense is that when they are violated it's very, very difficult for the wronged party to prevail. Remember that the plaintiff has the burden of proof in American civil cases. So when you sue the other LLC member for breach of an oral operating agreement, it is your word against his. Without some additional evidence such as course of dealing or emails / correspondence from the defendant acknowledging the terms of the oral agreement, the plaintiff loses for failing to carry his burden of proof.

Are oral operating agreements enforceable at all? To my knowledge, other than in the District of Columbia, oral operating agreements are enforceable; however, certain terms such as the agreement to make capital contributions must be in writing depending on the state. See state survey of LLC law.