Forming an LLC in Hawaii can provide a number of legal benefits.
Freedom of Contract
The Hawaii LLC Act gives members contractual freedom. An LLC agreement may not only govern the allocation of profits and losses, but may also govern the voting relationship among members. Members can use this flexibility to tailor their income streams and risks of loss and facilitate everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.
Privacy for Owners
A “person” may organize an LLC by filing its articles of organization with the Hawaii Director of Commerce and Consumer Affairs. The definition of “person” is not just a natural person, but includes almost any kind of business or legal entity. An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization.
Perpetual Duration
The Act provides for an LLC’s unlimited life. Section 428-203 states that every limited liability company has an at-will duration unless its articles of organization provide for a limited term. An LLC’s existence can therefore outlive its members’ lifetimes.
Benefits for Business Partners
The Hawaii LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 428-409 has a default rule that members in member-managed LLCs and managers in manager-managed LLCs owe limited fiduciary duties of loyalty and care. It limits the duty of loyalty to not competing with the LLC or taking a business opportunity away from the LLC, not dealing with the LLC in a manner adverse to it or on behalf of parties who have an interest that is adverse to it, and acting as a trustee of the LLC’s property. It limits the duty of care to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”
The Act gives members and managers contractual freedom to “opt out” of most of the default rules, however, by including provisions in an LLC agreement that modify the duties. Members and managers cannot completely eliminate the duty of loyalty or unreasonably reduce the duty of care, but they may (1) “[i]dentify specific types or categories of activities that do not violate the duty of loyalty,” and (2) “[s]pecify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.” This second element is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.
Protections Against Unwanted Parties
The Hawaii LLC Act allows members to protect their control of an LLC. An LLC agreement may prohibit members from transferring their distributional interests. But if an LLC agreement does not prohibit it, a transfer does not dissolve the LLC or entitle the transferee to participate in management or to become a member. Instead, the transferee may receive only the distributions to which the transferor would have been entitled.
Creditors Only Get Passive Rights, Not Control Rights
Section 428-504 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, it “constitutes a lien on the judgment debtor’s distributional interest.” That is, a charging order requires the LLC to pay the judgment creditor any distribution that would otherwise be paid to the judgment debtor. But the judgment creditor does not have a right to participate in management.
A court may foreclose on the lien and order the distributional interest to be sold. A purchaser at the foreclosure sale obtains only the rights of a transferee. Obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies
The Hawaii LLC Act has an unusual provision related to what are called “events of dissociation.” Section 428-502 provides that a person ceases to be a member of an LLC when the person transfers all of his or her distributional interest. In addition, section 428-601 provides a person ceases to be a member when the person makes a transfer for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator of the person or of all or substantially all of the person’s property.
When a member becomes dissociated from an LLC, section 428-701 requires the LLC to purchase the former member’s distributional interest. The LLC must pay the “fair value” of the distributional interest as of the date of dissociation. The LLC must deliver a purchase offer to the former member within thirty days. Although this provision of the Hawaii LLC Act is unusual because most states do not have a similar requirement, the provision enhances members’ ability to protect their control of an LLC.
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