Tag Archives: LLC

Corporate Considerations: Duties of LLC Members

By on November 10, 2017

            One of the first considerations to make when starting a business is whether to create a formal corporate entity.  The creation of a formal entity and compliance with state prescribed formalities can offer business owners and members substantial protections from individual liability for business debts when acting by and through an entity.  One particularly popular corporate form is the Limited Liability Company (LLC).  LLCs are governed by state law and, if established and maintained properly, LLCs can offer a flexible and relatively uncomplicated business form.

            While LLCs protect members from individual liability related to the claims of outside actors as against the LLC, members do owe certain duties in exchange for such protection.  In Massachusetts, as in other jurisdictions, members of corporate entities owe implicit duties of loyalty and care to the entity.  Unlike other jurisdictions, however, in Massachusetts heightened protection is given to shareholders in what are referred to as “close” corporations, or corporations where, there exists “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”  Donahue v. Rodd Electrotype Co. of New Eng., Inc., 328 N.E.2d 505, 511 (Mass. 1975).  Massachusetts views such entities as little more than incorporated partnerships, and thus, insists that shareholders in close corporations, “owe one another substantially the same fiduciary duty [loyalty and care] in the operation of the enterprise that partners owe to one another.” Brodie v. Jordan, 857 N.E.2d 1076, 1080 (Mass. 2006).

            Majority shareholders have been found to have violated their fiduciary duties toward minority shareholders in instances where, the “majority frustrates the minority’s reasonable expectations of benefit from their ownership of shares.” Id. Massachusetts refers to this tactic by a  majority as a “freeze out,” as it creates a dynamic where a disadvantaged minority party can be compelled  to come to inequitable terms with the majority party in order to leave the entity.  Thus, Massachussets provides additional protections to close corporations in an attempt to dissuade “freeze outs.” 

            While this heightened duty is explicitly applied to shareholders of close corporations, it is very likely that courts in Massachussets could apply the same to members of LLCs, where the definition of “close” corporation is easily applicable by analogy. Thus, members of LLCs need to be aware that they not only owe duties of loyalty and care to the entity itself, but may also owe the same to their contemporaries as well.  If you have questions with regard to business formation and/or operations you should consult with a knowledgeable attorney to determine your best options.

Money Matters: Making the Most of Investment Property in Massachusetts

By on February 1, 2016

It is no secret that investing in real estate is often a shrewd financial move, especially given the current Boston rental market. Whether you already own investment properties or you are thinking about purchasing your first, there are important considerations to make to ensure that you are maximizing your returns and making your money work for you in the most effective and efficient manner. While investing is easy, investing wisely is imperative.

One simple way to invest wisely is to consider transferring ownership of any investment property from the actual individual who purchased the property to a Limited Liability Company (LLC) created for the express purpose of holding real estate.  This maneuver, in many circumstances, is a simple way to protect yourself, your assets, and your investments.

There are three basic steps required to create a LLC for the purpose of holding investment properties. The first is to create and register the LLC with the state.  In Massachusetts, this requires the filing of Certificate of Organization with the Massachusetts Secretary of State.  Additionally, although not technically required, it is a best practice to simultaneously create an Operating Agreement for the new LLC dictating how the LLC will operate, who owns the LLC, and other important powers and restrictions. The second step is to apply to the IRS for an Employer Identification Number (EIN), which is necessary for tax and banking purposes. Finally, the third step is to formally transfer the deed from the individual who purchased the investment property to the LLC.  Massachusetts, unlike most other states, tracks its real estate titles in two separate systems:  recorded land and registered land. This duel title system can complicate the proper completion of step three. Therefore, it is important to understand how your particular property was originally recorded/registered in order to ensure that it is successfully deeded into the LLC.  Once these three steps are completed, the LLC owns the property.

This transfer of ownership has the potential to insulate the individual owner from personal liability stemming from legal claims relating to the property as well as to allow the individual owner to keep the investment property separate from other personal assets. However, every individual owner, investment property, and real estate deal is different and circumstance often dictates what constitutes a wise investment move on a case-by-case basis.  Moreover, incorrectly establishing a LLC, failing to follow the formalities of owning and operating a LLC, or failing to properly transfer the property into the newly-formed LLC may have unintended and unfortunate consequences. 

Transferring ownership from an individual to a LLC is just one option, among many, to ensure that you are making the most of your real estate investments.  Building and structuring an investment property portfolio can seem daunting but with proper guidance it can be a rewarding and profitable venture. Thus, the wisest move any investor can make is to seek the counsel of a Massachusetts lawyer who specializes in real estate transactions to ensure that all options are properly considered and all investments and maneuvers are above-board and executed correctly.

By Andrea Jacobs, Esq.