Forming an LLC in Utah can provide a number of legal benefits.
Freedom of Contract
The Utah LLC Act gives LLC members contractual freedom to customize their contributions 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 Utah 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 48-3-110 provides that an LLC agreement governs the “relations among the members as members and between the members and the limited liability company.” 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
The Act does not require filing of members’ names. A “person” may form an LLC by filing its certificate of organization with the Division of Corporations. 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 organization.
Perpetual Duration
The Act provides for an LLC’s unlimited life. Section 48-3-104 specifically states that an LLC has perpetual duration. An LLC’s existence can therefore outlive its members’ lifetimes.
Benefits for Business Partners
The Utah LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 48-3-409 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 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 conduct, intentional misconduct, or intentional violation of law.
The Act gives members and managers contractual freedom to “opt out” of most of the default rules, however, if they include provisions in an LLC agreement that modify the duties established in section 48-3-409, and the provisions are not unconscionable or against Utah public policy. Under section 48-3-110, an LLC agreement may restrict or eliminate the duty of loyalty. In addition, an LLC agreement may (1) “[i]dentify specific types or categories of activities that do not violate the duty of loyalty,” and (2) “specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts.” 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. Moreover, an LLC agreement may “alter the duty of care, except to authorize intentional misconduct or knowing violation of law.” Alternatively, an LLC agreement may expand a member’s or manager’s duties and liabilities.
Protections of Unwanted Parties
The Utah 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 receive only the distributions to which the assignor would have been entitled, and all the other members must consent to the assignee becoming a member.
Creditors Cannot Obtain Controlling Rights
If a judgment creditor of a member obtains a charging order against the member’s membership interest, it constitutes a lien on the membership interest and a right to receive only the distributions to which the member would have been entitled. A court may foreclose on the lien and order the membership interest to be sold. A purchaser at the foreclosure sale obtains only the transferable interest and cannot become a member unless the non-transferring members consent. Under section 48-3-503, obtaining a charging order is the judgment creditor’s exclusive remedy.
In addition, the Act states that unless an LLC agreement provides otherwise or all members give consent, 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.” These events are considered “events causing dissociation.”
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