Limited Liability Company

The form an oil company asked for

By the early 1970s, Hamilton Brothers Oil Company needed a new way to organize. Since the late 1960s, the independent oil explorer, based in Denver, had run its exploration abroad through business forms created under foreign law, especially the Panamanian limitada. A limitada gave its owners a corporation’s limited liability and still qualified for partnership taxation in the United States. But limits imposed by foreign law had made those forms hard to use, and there was growing concern that American courts might not honor a foreign shield. The company wanted an American form that would do the same job with more certainty. One of its advisers, Frank M. Burke, Jr., drafted a statute to create it. Two attempts to pass it in Alaska failed, in 1975 and 1976. Wyoming enacted it on March 4, 1977, as the first limited liability company statute in the United States.

The new form made two promises at once. Every owner would be shielded from the company’s debts, and the company’s profits would be taxed only once, on the owners’ own returns. Florida followed Wyoming in 1982. Every LLC formed in the state today carries the same two promises, the first under Chapter 605 of the Florida Statutes and the second under federal tax rules. This reading asks what each promise covers and what the statute leaves for the owners to settle among themselves. Those are the questions behind the activity, where you design an LLC, check an AI’s account of Chapter 605, and draft part of the agreement that governs your company.

The tax promise took the longest to keep, as Susan Pace Hamill’s history of the LLC (opens in a new tab) recounts. At the time, the IRS decided whether a business would be taxed as a partnership by counting four corporate traits, and it was slow to accept the new form. In 1980 it proposed taxing every business with limited liability as a corporation, and it dropped the idea only in 1983. In the LLC’s first decade, fewer than a hundred businesses filed as one. The turn came on September 2, 1988, when Revenue Ruling 88-76 said that Wyoming LLCs would be taxed as partnerships. Every state had an LLC statute by the end of 1996. Hamilton Brothers never used one: by 1988, the market for the big independent exploration ventures the form was built for had passed.

In December 1996 the IRS replaced the trait count with the check-the-box rules, which let a business choose its tax treatment. Pass-through taxation is now the default. An LLC with two or more members is taxed as a partnership: the company pays no federal income tax, and each member reports a share of its profit or loss. An LLC with one member is disregarded, so its profit appears on its owner’s return. Either kind can file Form 8832 and elect to be taxed as a corporation, as the IRS explains (opens in a new tab). Your textbook (opens in a new tab) describes the four-trait test, which no longer applies, so read its tax section as history.

The filing that creates the company

An LLC begins with a filing. The articles of organization go to the Division of Corporations, and Florida asks them to say very little (section 605.0201). They must give the company’s name, the street and mailing addresses of its principal office, and its registered agent. The name must contain “limited liability company,” “L.L.C.,” or “LLC,” so that anyone dealing with the company knows it is not a person, a partnership, or a corporation. The registered agent is a Florida resident or an authorized business at a Florida street address. The agent accepts the role in writing and passes along any lawsuit or official notice served on the company. The Division’s filing page (opens in a new tab) lists the current fees.

Everything else in the articles is optional. They may say whether managers will run the company, name its managers or members, or limit a particular person’s authority. If neither the articles nor the operating agreement says the company is manager-managed, it is member-managed (section 605.0407). The LLC exists once the articles take effect, ordinarily the moment the Division accepts them, as long as at least one person is a member at that time.

A member can be an individual, a corporation, or another LLC, and one member is enough. The founders become members by agreeing among themselves. After formation, a newcomer ordinarily joins as the operating agreement provides or with the consent of every member (section 605.0401). The statute even allows a member who contributes nothing.

The choice between the two kinds of management decides who can sign for the company. In a member-managed LLC, every member is the company’s agent. A member who signs an ordinary contract in the company’s name binds it, unless the member lacked authority and the other side knew or had notice of that. In a manager-managed LLC, a member is not an agent merely by being a member, and the managers decide the company’s business (sections 605.0407 and 605.04074).

Staying in business takes a yearly filing. Starting the year after it forms, an LLC must file an annual report with the Division between January 1 and May 1 (section 605.0212). If the report is still missing on the third Friday in September, the Division dissolves the company administratively. A dissolved LLC may do only the work of winding up (section 605.0714).

The deal the statute writes for you

The articles speak to the public. The operating agreement speaks to the members: it governs their relations with one another and with the company, and whatever it leaves out, Chapter 605 decides (section 605.0105 (opens in a new tab)). It can be written, oral, implied from how the members act, or a mix of these. A one-member company can have one too.

Florida’s defaults start with the money. Unless the agreement says otherwise, the company shares profits, losses, and distributions in proportion to what each member contributed. The measure is the agreed value of each contribution, as the company’s records state it (section 605.0404). A partnership splits profits equally by default. An LLC’s default follows the contributions.

Votes follow the same measure. In a member-managed LLC, each member’s vote is proportionate to that member’s share of the profits. A majority-in-interest, meaning members who hold more than half of those shares, decides almost everything, ordinary or not (section 605.04073).

Picture three friends who open a kayak and paddleboard rental on the Halifax River in Daytona Beach. One puts in $60,000, the other two put in $20,000 each, and the company’s records say so. With no agreement on the point, the first friend takes 60 percent of the profits and casts 60 percent of the vote. She can approve a second location or a bank loan on her own, and the other two cannot outvote her on anything. The statute still reserves a few decisions for everyone. Amending the operating agreement or the articles takes every member’s consent, and so does admitting a new member when the agreement is silent.

Promises to contribute get special treatment. If one of the smaller investors promises to add $10,000 next spring, the company can enforce that promise only if the investor signed it in writing (section 605.0403). The operating agreement can also set what happens to a member who fails to pay, such as a smaller share or a forced sale of the member’s interest.

Membership changes are held just as tightly. A member may sell the right to receive the member’s share of distributions, but the buyer gets no vote and no role in management. To become a member, the buyer needs what any newcomer needs: a path in the agreement or the consent of every member (sections 605.0502 and 605.0401). A member also has the power to withdraw at any time. Under the default rules, though, withdrawing before the company winds up is wrongful, and the member is liable for the damage it causes (section 605.0601). The withdrawal alone does not entitle the member to any payment (section 605.0404).

The agreement can rewrite most of these defaults, but section 605.0105 lists what it cannot do. It cannot eliminate the duties of loyalty and care outright, though it may narrow them where that is not manifestly unreasonable. It cannot excuse bad faith, intentional misconduct, or a knowing violation of law. And it cannot unreasonably restrict a member’s right to see the company’s records.

What the shield covers

The shield itself fits in one sentence of section 605.0304 (opens in a new tab). A member is not personally liable for the company’s debts merely because of being, or acting as, a member. That is what limited liability means in practice: a judgment against the company is collected from the company’s assets, and a member’s house and savings stay out of reach.

The shield covers what a member owes because of membership, and nothing more. A member who personally guarantees the company’s lease owes on the guaranty, because the promise is the member’s own. As the textbook notes, a member is also liable for the member’s own torts. And a distribution that leaves the company unable to pay its debts as they come due is improper. A member who takes one knowing it is improper must repay the company the excess (sections 605.0405 and 605.0406).

What the shield does not demand is ceremony. Under section 605.0304, a company’s failure to observe formalities, such as holding meetings or keeping minutes, is not a ground for holding a member liable for its debts. A court can still disregard the company, though, and a Florida case shows how much a creditor must prove first.

In June 2016, Zeev Segal signed a contract for Segal Properties, LLC, the company he alone owned, to buy a house in Coral Gables for $10,000,000. The contract called for a $500,000 deposit within three days. If the deposit never came, the seller, Forastero, Inc., could sue the LLC for that amount. It never came. Forastero won a $500,000 judgment against the LLC, then found that the company had no bank account, no assets, and no income. So it asked the court to make Segal pay. A bank had written that Segal held seven figures in his own accounts, the LLC had nothing when he signed, and it had observed no formalities in two years. The trial court held Segal personally liable.

The Third District Court of Appeal reversed in Segal v. Forastero, Inc., 322 So. 3d 159 (Fla. 3d DCA 2021) (opens in a new tab). Florida’s test for piercing the corporate veil has three parts, which the court took in turn: domination and control, improper purpose, and causation. The owner must have so dominated the company that it had no independent existence, used it fraudulently or for an improper purpose, and caused the creditor’s loss that way. The court held that the record did not establish any of the three as a matter of law.

The LLC had a real past. Segal formed it in 2011, and it had bought and managed a rental property, earned revenue, filed yearly tax returns, and kept a bank account for several years. It had sold the property before Segal signed. Its lack of capital, on that record, did not prove an improper purpose. Segal testified that he would have raised the deposit if the house had passed his inspection, and that he walked away because it was run down. That testimony suggested a business decision. And the seller’s loss may have come simply from the missed deposit, not from any misuse of the company.

The court sent the case back for further proceedings, so the ruling did not clear Segal for good. What it decided was narrower: the record did not prove what Florida requires. Forastero could have asked Segal to guarantee the deal personally, in writing, and it did not. Piercing, the court said, is not “an after-the-fact, judicially imposed personal guaranty.”

Where your draft replaces the statute

Chapter 605 has already written a version of every section your operating agreement will contain. It divides money and votes by contribution, admits no new member without everyone’s consent, gives a buyer distributions but no voice, and treats an early exit as wrongful. In Part 2 of the activity, the Florida Statute Verifier gives the AI a list of sections to explain. Read each one yourself in Chapter 605 (opens in a new tab). Where the AI’s summary and the statute part ways, the statute wins, and the difference belongs in your Part 4 note.

Part 3 asks for two sections. Choose the two where the statute’s answer sits furthest from what your members want, because those clauses change the most. When the Drafting Partner hands you a draft, test it the way an unhappy member would. Try the member who never pays what was promised, the member who wants out, and the loan only the largest investor approved. Revise until the clause answers all three.