Forming an LLC in Alabama can provide a number of legal benefits.
Freedom of Contract
The Alabama LLC Act gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses. In addition, it gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties, and it allows members to protect their control of an LLC.
The Alabama LLC Act enables members to create classes of membership. The Articles of Organization may establish classes of membership interests with different rights, powers, and duties, including Voting and non-Voting interests. Section 10-12-22 specifically states “[t]he articles of organization of a limited liability company may provide for classes or groups of members or managers having such relative rights, powers, and duties as so provided.”
The Articles of Organization may also provide a method for creating additional classes of membership interests in the future. These provisions 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 LLC Members
The Act does not require filing of members’ names. A “person” may form an LLC by filing its Certificate of Formation with the probate judge of the county in which the initial registered office of the limited liability company is located. 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 Certificate of Formation.
Perpetual Existence
The Act provides for an LLC’s unlimited life. It states that “[u]nless its articles of organization provide otherwise, every limited liability company has perpetual duration.” An LLC’s existence can therefore outlive its members’ lifetimes.
Benefits for Business Partners
The Alabama LLC Act gives members contractual freedom to customize their capital contributions and their shares of profits and losses. It states “[t]he profits and losses, income, deductions, and credits … of the limited liability company shall be allocated among the members in the manner provided in the Operating Agreement.” This gives members contractual flexibility to adapt their income streams and risks of loss to further their broader asset management plans.
The Alabama LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 10-12-21 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 on behalf of parties who have an interest that is adverse to the LLC, 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 the Articles of Organization or an LLC agreement that modify the duties established in section 10-12-21. Members and managers cannot completely eliminate the duty of loyalty or unreasonably reduce the duty of care, but they may (1) “[i]dentify 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. Alternatively, an LLC agreement may expand a member’s or manager’s duties and liabilities.
The result is the Act protects both majority and minority members. It protects minority members because an LLC agreement may not completely eliminate fiduciary duties, even though it may identify activities that do not violate them and prescribe standards for measuring them. These provisions make minority interests safer investments and therefore more valuable.
The Act protects majority members because it provides a “safe harbor” to facilitate contracts and transactions between an LLC and one or more of its managers or members, or an entity in which they own an interest, if the contracts or transactions meet minimum disclosure, approval, or fairness requirements. These rules give majority members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.
Prevent Unwanted Parties
The Alabama LLC Act allows members to protect their control of an LLC. An LLC agreement may prohibit members from assigning their membership interests. But if an LLC agreement does not prohibit it, an assignment does not dissolve the LLC or entitle the assignee to become a member. Instead, the assignee may only receive the financial rights to which the assignor would have been entitled, and all the other members must consent in writing to the assignee becoming a member. If a judgment creditor of a member obtains a charging order against the member’s membership interest, “the judgment creditor has only the rights of an assignee of financial rights.” Under section 10-12-35, obtaining a charging order is the judgment creditor’s “sole and exclusive remedy.”
In addition, the Act states that unless an LLC agreement provides otherwise or all members give written consent, a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, files a voluntary petition in bankruptcy, is adjudicated insolvent or bankrupt, or fails to contest a petition seeking his or her reorganization, liquidation, dissolution, or similar relief.
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