Forming an LLC in Kentucky can provide a number of legal benefits.
Freedom of Contract
When drafting the LLC agreement (a.k.a. operating agreement) for your Kentucky LLC, take comfort in knowing that section 275.003 of the Kentucky LLC Act expressly states its purpose is “to give maximum effect to the principles of freedom of contract and the enforceability of operating agreements.” The Act gives LLC members contractual freedom to customize their contributions, rights, duties, and distributions of profits and losses. In addition, it allows members to protect their control of an LLC.
The Kentucky LLC Act gives members contractual freedom to create voting and non-voting classes of membership and customize their capital contributions and shares of profits and losses. Section 275.205 provides that the “[p]rofits and losses of a limited liability company shall be allocated among the members and among classes of members in the manner provided in the operating agreement.” This means 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.
Perpetual Duration
The Act provides for an LLC’s unlimited life. Section 275.025 states that every limited liability company has perpetual duration unless its articles of organization provide otherwise. An LLC’s existence can therefore outlive its members’ lifetimes.
Privacy for Owners
A “person” may organize an LLC by filing its articles of organization with the Kentucky Secretary of State. The definition of “person” is not just a natural person, but includes almost any kind of business or legal entity. Likewise, section 275.020 states organizers do not need to be members of an LLC. An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization.
Benefits for Business Partners
The Kentucky LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 275.170 has a default rule that members and managers owe limited fiduciary duties of loyalty and care. It limits the duty of loyalty to acting as a trustee of the LLC’s property, which includes not deriving a personal profit or benefit that should have belonged to the LLC without obtaining consent from a majority of the disinterested members or managers. It limits the duty of care to refraining from “wanton or reckless misconduct.”
The Act gives members and managers contractual freedom to “opt out” of most of the default rules, however, by including provisions in a written LLC agreement that modify the duties. Section 275.180 provides that a written operating agreement may “[e]liminate or limit the personal liability of a member or manager for monetary damages for breach of any duty provided for in [section] 275.170.”
Protections Against Unwanted Parties
The Kentucky 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 participate in management or to become a member. Instead, the assignee may receive only the distributions to which the assignor would have been entitled, and a majority of the non-assigning members must consent to the assignee becoming a member.
Section 275.260 provides that if a judgment creditor of a member obtains a charging order against the member’s membership interest, it “constitutes a lien on and the right to receive distributions made with respect to the judgment debtor’s limited liability company interest,” but it “does not of itself constitute an assignment of the limited liability company 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.
Creditors Only Get Passive Rights, Not Control Rights
A court may foreclose on the lien and order the membership interest to be sold. A purchaser at the foreclosure sale obtains only the rights of an assignee and cannot become a member unless a majority of the non-assigning members consent. Obtaining a charging order and a foreclosure sale are the judgment creditor’s exclusive remedies. This restriction helps to protect your business from being taken over by unwanted creditors.
In addition, section 275.280 provides that a person ceases to be a member of an LLC when the person makes an assignment 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. This also keeps other members’ creditors from taking over your business.
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