Forming an LLC in Vermont can provide a number of legal benefits.
Freedom of Contract
The Vermont LLC Act gives members contractual freedom to create voting and non-voting classes of membership and to customize their capital contributions and shares of profits and losses. The ability to create voting and non-voting classes of membership facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests. The ability to specify a method for allocating profits and losses in an LLC agreement that is greater or lesser than a member’s portion of capital contributions gives members contractual flexibility to tailor their income and risks of loss to further their big-picture asset management plans.
Privacy for Owners
The Act does not require filing of members’ names. A “person” may organize an LLC by filing its articles of organization with the Vermont Secretary of State. 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 3023 states an LLC has an “at-will” duration unless otherwise provided in the articles of organization. An LLC’s existence can therefore outlive its members’ lifetimes.
Benefits for Business Partners
The Vermont LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties. Section 3059 has default rules that members and managers owe limited fiduciary duties of care and loyalty. The duty of care requires members and managers to act with “the care an ordinary prudent person in a like position would exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the limited liability company.” The duty of loyalty requires members and managers to not compete with the LLC or take a business opportunity away from the LLC, not deal with the LLC in a manner adverse to it or on behalf of parties who have an interest that is adverse to it, and act as a trustee of the LLC’s property.
But the Act gives members and managers contractual freedom to vary the default rules. Section 3003 provides that an LLC agreement may “identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable.” In addition, it contains a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers. It provides that an LLC agreement may “specify 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 duly of loyalty.”
Protections Against Unwanted Parties
The Vermont 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, and the non-transferring members must unanimously consent to the transferee becoming a member.
Creditors Cannot Obtain Controlling Rights
Section 3074 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, the charging order is only a lien on the interest. The judgment creditor has only the right to receive distributions which would otherwise be paid to the member. The judgment creditor does not have a right to participate in management. A court may foreclose on the lien and order the member’s distributional interest to be sold, but a purchaser at the foreclosure sale obtains only the distributional interest and does not become a member. Section 3074 is the judgment creditor’s exclusive remedy.
Furthermore, section 3081 states that unless an LLC agreement provides otherwise or all members give unanimous 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 over his or her property. These events are considered “events of dissociation.”
Business Compliance