D.C. Limited Liability Company Act of 1994
Copyright 1994. All Rights Reserved
By Nicholas G. Karambelas, Esq.
[PUBLISHED IN NOVEMBER/DECEMBER 1994 ISSUE OF WASHINGTON LAWYER MAGAZINE Vol. 9 No. 2]
The limited liability company (referred to as "the LLC") has arrived. The District of Columbia joins 45 states, including Maryland, Virginia and Delaware in enabling the formation of LLCs. The Limited Liability Company Act of 1994 (referred to as the Act). was introduced by in the Council of the District of Columbia by John Ray and passed the Council on May 3, 1994. The Mayor signed the Act on May 18, 1994 and the 30-day Congressional Review Period expired on July 22, 1994. The Act was published in the D.C. Register on May 27, 1994 and took effect on August 5, 1994. (END1) The Act derived from legislation that was developed by the D.C. Corporation Revision Project, chaired by Frank Goldstein of Morgan, Lewis & Bockius, and recommended to the Council.
I. THE IDEA OF THE LLC (END2)
The LLC is a form of business organization that combines into one entity the advantages of a close corporation and the advantages of a partnership. Like a close corporation, an LLC is a legal entity separate from its owners and, like shareholders of a close corporation, all of the owners are accorded limited liability. Like a partnership, an LLC can be created and operated according to an agreement made by or among the owners without adhering to corporate formalities. The LLC can be formed as a pass through entity for tax purposes so that the LLC itself is not a taxable entity but rather, like partners, and all tax effects and consequences are passed through to the members.
While the idea of the LLC may appear somewhat revolutionary to American practitioners, the LLC has been widely used in Europe and Latin America since the 19th century. The German "GmbH", the French "S.A.R.L.", the Greek "E.P.E" and the South American "limitada" are all designations that identify an entity as an LLC.
The LLC effectively eliminates the traditional choice-of-entity choice dilemma that has plagued business planning attorneys and their clients. Because the LLC combines the advantages of the close corporation and the advantages of the partnership, the entrepreneur need not be forced to forego limited liability in favor of partnership method taxation or vice versa. Many commentators expect that LLCs will eventually render partnerships and the statutory close corporations obsolete. The LLC will probably also render the S corporation obsolete. The S corporation offers the same ultimate tax benefit as the LLC, i.e., a pass-through entity for tax purposes with limited liability. However, the S corporation is burdened with many constraints, such being limited to no more than 35 shareholders and to only one class of stock as well as being prohibited from having any other corporations or non-resident aliens as shareholders and from owning more than 80% of the shares of another corporation. Because the LLC has no such constraints, in most circumstances, it would be the clear choice over the S corporation.
Like corporations and partnerships, LLCs have a terminology that is specific to LLCs and will be used in this Article:
- "Member" means a person who owns an interest in the LLC and is the functional equivalent of a "partner" or a "shareholder"
- Articles of organization" is the document that identifies the LLC and is filed with the government authority like articles of incorporation
- "Operating agreement" is the contract made by the members that governs the relationship between the members and the LLC and the relationship among the members. Serving the same purpose as the partnership agreement or the shareholder agreement, the operating agreement orders the affairs of the LLC and the manner in which the business shall be conducted.
II. STATUTORY DEFINITION OF AN LLC AND ORGANIZING PRINCIPLES OF
THE ACT
A. Definition of an LLC
An LLC as an entity that is an unincorporated association that has two or more members and that perpetual duration. While some states such as New York, Montana and Texas enable the formation of single member LLCs, most states require that an LLC have two or more members. Moreover, whether a single member LLC will be classified by the Internal Revenue Service as a partnership for federal tax purposes is an open question. In D.C., one person seeking to do business in any form other than as a sole roprietorship must do business as a corporation. Since 1992, the statutory close corporation has been available in D.C. and the statutory close corporation would most likely be the form of choice for single person business entity. (END3)
An LLC can be formed for any business purpose as long as the purpose is a lawful one. The LLC may offer any professional service including legal services that a corporation organized under the D.C. Professional Corporation Act (D.C. Code §29-601 et seq.) can offer. The members may limit the powers of the LLC or restrict how the powers are exercised as long as the limit or restriction is contained in the articles of organization. If no such limit or restriction is contained in the articles of organization, then the LLC may possess and exercise all powers that are necessary or convenient to carry out the business purpose of the LLC.
The Act expressly confers limited liability on the members of the LLC. A member of an LLC is not a proper party to a cause of action against the LLC except where a member is asserting a right against the LLC or the LLC is asserting a right against a member and where the cause of action is a derivative action. Unlike a partnership, the LLC may acquire and hold property in the name of the LLC rather than in the names of the members.
B. Organizing Principles of the Act
The Act is essentially enabling legislation as opposed to regulatory or administrative legislation. The Act contains mandatory provisions and default provisions. Mandatory provisions contain rules or requirements with which the members must comply in order for the LLC to be a legally created and operated business entity. Mandatory provisions almost always contain the connector "shall" or "must" in the language of the provision. Default provisions contain rules or requirements that will govern the conduct of the members or the affairs of the LLC if the members have not made an agreement with respect to matters covered by the default provisions. Default provisions usually contain the clause "unless otherwise agreed by the members" or "in the absence of agreement by the members". To avoid the legal effect of a default provision and assure a particular agreement by the members shall control on a particular issue, the particular agreement must be in writing and contained in either the articles of organization or operating agreement. An oral agreement on a particular issue shall not be enforced and, regardless of the intent of members, the default provision on that issue will govern. The Act is designed to afford the members as much lexibility and discretion as possible in governing the LLC and managing the business of the LLC. To this end, the Act minimizes the number of mandatory provisions and maximizes the number the default provisions. The substantive legal concepts underlying both the mandatory and default provisions are drawn from the laws governing general partnerships (D.C. Code §41-101 et seq.), the D.C. Uniform Limited Partnership Act of 1987 (D.C. §41-428 et seq.) and the D.C. Business Corporations Act of 1954 (D.C. Code §29-101 et seq.). Therefore, the substantive legal concepts as well as the statutory scheme of the Act will be familiar to practitioners.
III. FORMING THE LLC
A. Preparing and Filing Articles of Organization (D.C. Code 29-1306, 1307 and 1308)
An LLC may be formed by one or more persons but, after formation, the LLC must always have at least two or more members. The formation process begins when articles of organization are prepared. The articles of organization must contain at a minimum (1) the name of the LLC, (2) the latest date on which the LLC is to be dissolved (3) the name, address and consent of the initial registered agent and the signature of the person(s) authorized to sign the articles of organization. Two identical documents containing the articles of organization must be filed with the Mayor, i.e., the Corporations Division of the D.C. Department of Regulatory and Consumer Affairs (DCRA), the signatures need not be manual but may be facsimiles and the filing fee is $100. When the articles of organization are filed, the DCRA shall issue a certificate of organization. The legal existence of the LLC commences as of the later of either (1) the time set in the articles of organization or, if no time is set, (2) the date on which the articles of organization are delivered to the DCRA. If, on the date on which the articles of organization are delivered to the DCRA, they either do not conform to law, then the legal existence of the LLC will still be deemed to have commenced as of the date of delivery as long as non-conforming articles are conformed within 20 days of the date on which the filing party is notified of the non-conformance. If, on the date on which articles of organization are delivered, the DCRA cannot determine whether or not they conform to law, then the legal existence of the LLC shall be deemed to have commenced on the date of delivery if the DCRA subsequently determines that they do conform to law. If the articles of organization do not conform and are not conformed to law within the 20-day period, then the LLC will be deemed never to have been formed.
Articles of organization may be amended at any time at the discretion of the members. They must be amended if the LLC (1) changes its name or (2) changes the latest date on which the LLC is to dissolve. Unless the members have otherwise agreed, at least a majority of the membership interests is required to amend the articles of organization. Articles of organization are amended by filing two identical documents entitled articles of amendment with the DCRA that contains (1) the name of the LLC, (2) the text of each amendment (3) date of adoption of each amendment and (4) a statement that the amendment was adopted by the vote of the members in accordance with the articles of organization or with applicable law. Articles of organization may be restated at the discretion of the members so that the original articles of organization and all subsequent amendments are contained in a single document.
B. Name of the LLC (D.C. Code 29-1304, 1305)
The name of an LLC must contain the words "limited liability company" or the abbreviation"L.L.C." and cannot contain the words or any abbreviation of "corporation", or "limited partnership". An LLC name can be reserved and protected in the same way as can a corporate name. The LLC name cannot be the same as or deceptively similar to the name of any business organization formed under or authorized to do business under the laws of D.C. An LLC may also use a fictitious name to the same extent and under the same conditions as can a corporation.
C. Registered Agent (D.C. Code 29-1309, 1310, 1311 & 1312)
Each LLC is required to appoint and maintain a registered agent and a registered office of the registered agent in D.C. The purpose of the registered agent is to accept service of process on the LLC or of any notice or demand required by law. The registered office may, but need not be the same as the place of business of the LLC. The registered agent may be an individual or a corporation and must affirmatively consent to being appointed as the registered agent of the LLC.
An LLC may change either the registered agent or the registered office or both as long as it files a statement setting forth any such change with the DCRA. A registered agent may resign as registered agent by delivering a notice of resignation to the DCRA and to the LLC at its principal place of business. The resignation takes effect 30 days after the earlier of the date on which the notice is received by the DCRA or the date on which a successor registered agent is appointed.
If an LLC fails to appoint or maintain a registered agent or the registered agent cannot be found with reasonable diligence, then the Mayor (not the DCRA) is deemed the registered agent. Service of process on an LLC will be deemed complete when the process is served on the person in the Mayor's office who the Mayor has designated to receive such service. Process is served by delivering two copies of the process and a fee of $10 to the Mayor's designee. Upon receiving the process and fee, the Mayor shall then forward one copy of the process to the LLC at its principal office or last known address.
D. Partnership Conversion (D.C. Code §29-1313) and Mergers and Consolidations (D.C. Code §29-1340-1342)
A partnership can convert into an LLC. The terms and conditions of the conversion shall be those contained in the applicable partnership agreement. If no such agreement as to conversion exists, the conversion shall occur as a majority in interest of the partners of a general partnership shall agree or, if a limited partnership, as a majority in interest of the limited partnership shall agree. The general partner of a limited partnership does not acquire limited liability, merely because of the conversion to an LLC, for obligations incurred prior to the conversion and remains personally liable for any such obligations. The LLC that results after the conversion is deemed to be the same entity as the partnership from which the LLC was converted.
An LLC can merge into or consolidate with another LLC or any other business entity recognized under D.C. law or, in the case of a foreign business entity, the law under which the entity was organized. The principles of merger and consolidation of business entities and the legal effect of mergers and consolidations recognized under D.C. law generally apply under the Act.
E. Professional Limited Liability Companies (D.C. Code §29-1314)
A professional LLC is an LLC organized solely for the purpose of rendering professional services through its members, managers or employees. A name of a professional LLC must contain the either "professional limited liability company" or the abbreviation "P.L.L.C.".
Despite the limited liability accorded to members of an LLC, a member shall be personally liable for any negligent or wrongful acts or misconduct committed by that member or by an individual acting under the supervision of that member. A member of a professional LLC who does not commit or supervise any of foregoing acts or misconduct shall not be liable merely because that member is a member of the professional LLC.
F. Foreign LLCs (D.C. Code §29-1352-1362)
An LLC formed under any law other than the Act is a foreign LLC. The laws under which the foreign LLC was formed will govern the legal effect of its formation and the internal affairs of the LLC. A foreign LLC that transacts business in D.C. shall register with the DCRA by filing a registration application. If a foreign LLC fails to register, it cannot assert a cause of action in any court and could be subject to penalties for failure to file. However, the failure to file does not impair the validity of any contract of the foreign LLC or any of its acts and does not affect the limited liability of the members.
IV. THE OPERATING AGREEMENT AND MANAGEMENT OF THE LLC
A. The Operating Agreement (D.C. 29-1318)
The operating agreement is the single most important legal document in an LLC. Like the partnership agreement, all rights and obligations of the members, the manner in which the business is to be conducted and the sharing of revenues all derive from the operating agreement. If members fail to deliberate on and affirmatively agree to a carefully drafted operating agreement, they will probably fail to avail themselves of the advantages offered by the LLC as a form of business organization. Recognizing the primary importance of the operating agreement, the Act requires that the operating agreement be in writing to be enforceable.
The operating agreement should generally contain the same types of items that are set forth in partnership agreements. The method of sharing of profits and losses, voting rights of the members, liabilities of members to the LLC, rights upon death or withdrawal of a member, admission of new members and rights upon dissolution of the LLC are the sorts of items that should be affirmatively addressed in the operating agreement. Also, the margin of vote necessary to amend the operating agreement should be specified in either the articles of organization or the operating agreement. If no such margin is so specified, then the Act requires that the a majority of the interests of the LLC will be sufficient to amend the operating agreement.
B. Management of the LLC (D.C. Code 29-1317)
The power to manage the LLC is vested in the members of the LLC. However, by an agreement reflected in the articles of organization, the members can delegate their management power to managers. In so doing, however, the members must be advised that they may cause the LLC to have the corporate attribute of centralization of management. If the LLC already possesses the corporate attributes of continuity of life and free transferability of interests, then the LLC would be taxed as a corporation and not as a partnership.
Managers may, but need not be, members and may be hired and replaced in any manner chosen by the members. If the members choose to delegate management to managers, they may limit, restrict or apportion management power between themselves and the managers or among the managers in any way that the members see fit.
If the members choose not to delegate management power to managers, the members may apportion such power between and among themselves however they see fit. They may create classes of members with unequal rights to manage the LLC. The members may establish any method of voting, such as per capita or by percentage interest, as they may choose. The members may establish formal voting procedures such as notices, quorums or proxies that are familiar in corporations.
C. Information and Records (D.C. Code 29-1322)
Each LLC is required to create and maintain certain basic information and records at is principal office. Each member has the right, upon reasonable request, to inspect the information and copy any records. The required information and records includes the names and identifying information of each member, copies of the articles of organization as they may be amended and the certificate of organization as it may be amended, copies of all local, state and federal tax returns and reports for the 3 most recent years and copies of any operating agreement. If not contained in the operating agreement, the LLC must maintain in writing a description of the contribution of each member, the times if any at which additional contributions must be made, any right of a member to receive or of the LLC to make a return of contribution and any event the occurrence of which will cause the LLC to dissolve and the winding up of the business of the LLC.
The failure of the LLC to create and maintain the required information and records will not, in itself, cause the LLC to lose its status as a limited liability company under the Act. An aggrieved member could seek and most likely obtain injunctive relief against the LLC for failure to maintain the required information and records.
V. FINANCIAL MATTERS
A. Contributions (D.C. Code §29-1323)
A contribution is any thing of value that a person contributes to an LLC that, because of that contribution, makes that person a member in the LLC. A contribution may consist of cash, property, services rendered, a written promissory note or a written binding obligation to contribute cash, property or to perform services.
The Act presumes that a binding promise to make a contribution was intended to be enforceable by the LLC. Unless the members have otherwise agreed, the LLC can enforce any promise to contribute property or services by requiring the member to contribute the cash equivalent of the property or services that the member is obligated to contribute. Also, unless otherwise agreed by the members, where a member cannot contribute services because of death or disability, the estate of the deceased or incompetent member must either contribute the cash equivalent value of the services not performed or forfeit the interest of the member in the LLC.
B. Sharing Profits and Losses (D.C. Code §29-1324) and Distributions (D.C. Code §29-1325-1331)
The members have the discretion to share profits and losses in any manner they so choose by agreement that is reflected in the operating agreement or the articles of organization. If, however, if they do not affirmatively agree, the members shall share profits and losses based on the percentage value that the contribution of each member, actually received by the LLC, bears to the total contributions made to the LLC by all of the members.
A distribution is a transfer of cash or property (including a return of contribution) by the LLC or the creation of a debt by the LLC to a member or for the benefit of a member as an incident to the status of that member as a member. Distributions are shared in the same manner as profits and losses. Unless otherwise agreed by the members, a member has no right to demand a distribution in any form other than in cash.
An LLC cannot make a distribution if, as result a of the distribution, the LLC would be unable to pay its debts as they become due in the usual course of business. Unless otherwise agreed by the members, the LLC is also prohibited from making a dist ribution if that distribution would cause the total assets of the LLC to be less than the sum of its total liabilities plus the amount needed to satisfy any preferential rights that were superior to the distribution rights and that would have to be paid if the LLC were being dissolved.
VI. CLASSIFICATION OF THE LLC FOR TAX PURPOSES
An LLC is not necessarily taxed as a partnership simply because it has been duly formed under the Act. The members must assure that the LLC has not been organized in a manner that will cause it to be classified as corporation for tax purposes under the applicable provisions and regulations of the Internal Revenue Code, (I.R.C). Therefore, a cursory discussion of how business organizations are classified for federal tax purposes is necessary.
A. Tax Classification under the I.R.C.
The issue of corporation verses partnership tax classification arises in connection with any organization that is formed by two or more persons who intend to conduct business and divide the gains. To determine how such an organization will be taxed, the I.R.C. requires that it be classified as either a corporation or as a partnership. That classification depends on whether the organization meets the I.R.C. definition of "corporation" or the I.R.C. definition of a"partnership".
The I.R.C. regulations define a partnership to include any type of unincorporated organization that conducts business but that is not a corporation. (END4) A corporation is defined to include associations, joint stock companies and insurance companies. The I.R.C. does not contain a definition of "association". (END5) While a "partnership" is essentially defined as any organization that is not a corporation it could conceivably be an "association". Decades of litigation and Internal Revenue Service (I.R.S.) rulemaking have been devoted to determining which type of organization is an "association" within the meaning of the definition of "corporation" for tax classification purposes and which type of business organization is not an "association" and, thus, classified as a "partnership" for tax classification purposes.
The term "corporation", on its face, means an organization that incorporates under the corporation laws of a state and such an organization will always be classified as a corporation. (END6) However, since the definition of "corporation" is not limited only to organizations that incorporate under a state law (END7), the term "association" can include organizations that do not incorporate under a state law. The case law that construed the early versions of the I.R.C. developed a functional, rather than a substantive, definition of the term "association". (END8) An association came to be defined as an organization that had associates who were beneficially interested in the organization and who engaged in "some concerted volitional [business] activity" with the objective of dividing the gain from that business and which acted like a corporation in pursuing its business objective. (END9) That the organization was not formally denominated or organized as a corporation under any state law was irrelevant to whether or not it was classified as an association and taxed as a corporation. (END10)
In 1960, the IRS developed regulations that "codified" the case law and set forth those corporate attributes which, if they predominate in the organization, will cause that organization to be an association and classified as a corporation. (END11) Any organization that has more corporate attributes than non-corporate attributes will be classified as a corporation. The regulations specify (1) continuity of life, (2) centralization of management, (3) limited liability for the owners and (4) free transferability of ownership interests as corporate attributes. (END12) If an organization is determined to have three or more of the foregoing corporate attributes, the organization will be classified as a corporation. If the organization is determined to have two or less of the foregoing corporate attributes, the organization will be classified as a partnership.
"Continuity of Life" means that, as a matter of state law or by agreement among the owners, the death, insanity, bankruptcy, retirement, resignation or expulsion of any owner does not cause the organization to dissolve, as dissolution is defined under the applicable state law. (END13) "Centralized Management" means that the exclusive and continuing authority to make business decisions on behalf of the organization is concentrated in persons who may or may not be owners and whose decisions need not be ratified by the owners. (END14) "Limited Liability" means that, as a matter of state law, a creditor of the organization cannot seek personal satisfaction from at least one owner if the assets of the organization are insufficient to satisfy the claim of the creditor. (END15) "Free Transferability of Interests" means that an owner has the unconditional power to confer all of the rights and privileges of ownership in the organization on a person who is not an associate without the consent of the other owners. (END16)
B. Tax Classification of LLCs
The enactment of the first LLC statute by Wyoming in 1977 presented the I.R.S. with an almost unprecedented tax classification issue. The I.R.S. had to consider whether the corporate attribute of limited liability was so fundamental to the concept of "corporateness" that an organization in which all of the owners had limited liability must always be classified as a corporation for tax purposes. The I.R.S. apparently was inclined to view limited liability to be so unique to corporations that any organization that had limited liability must necessarily be taxed as a corporation. Ultimately, however, the I.R.S. determined that no one corporate attribute including limited liability should be accorded any greater weight than the others in classifying an organization for tax purposes. (END17) Therefore, as with any other business organization, an LLC will be taxed as a partnership as long as it has two or less of the four corporate attributes described above.
Unlike the Virginia LLC statute, the Act is not a so-called "bulletproof" statute. A "bulletproof" statute contains such mandatory provisions that the members can never either affirmatively or inadvertently organize the LLC to possess three or more corporate attributes. The Act does, however, contain default provisions which, if the members allow them to govern, will cause the LLC to possess only two or less corporate attributes. Consequently, members who fail to conclude a comprehensive operating agreement or otherwise acquiesce to being governed by the default provisions will not find their LLC taxed as a corporation.
To the extent that the members agree not to be governed by the default provisions and, by agreement, vary the default provisions of the Act, they must assure that they do not cause the LLC to have three or more of the corporate attributes described above if they plan to be taxed as a partnership. By definition, the LLC will always possess the corporate attribute of limited liability. Therefore, the LLC must fail to possess at least one of the three remaining corporate attributes.
1. If the members have organized the LLC to have continuity of life and free transferability of interests and the members desire to delegate management of the LLC to managers or to less than all members, the practitioner must consider whether that delegation will cause the LLC to have centralized management.
2. If the members have organized the LLC to have continuity of life and centralized management and the members desire that an person be able to acquire a membership interest from the LLC after formation upon less than the unanimous consent of the members, the practitioner must consider whether the desired margin of consent will cause the LLC to have free transferability of interests.
3. If the members have organized the LLC to have centralized management and free transferability of interests and the members desire that the LLC continue after an event in dissolution has occurred upon the vote of less than a majority in interest of the members, the practitioner must consider whether the desired margin will cause the LLC to have continuity of life.
C. Classification for D.C. Tax Purposes (D.C. Code §29-1374)
An LLC formed under the Act or a foreign LLC authorized to transact business in D.C. under the Act will be classified as a partnership for D.C. tax purposes. If, however, the LLC is classified as an association (i.e. it has a predominance of corporate attr ibutes) and taxed as a corporation for federal tax purposes, then it will be taxed as a corporation for D.C. tax purposes. A member or an assignee of a member of an LLC formed under the Act or of a foreign LLC authorized to transact business under the Act will be treated as a resident partner or a non-resident partner respectively. If, however, the LLC is classified as an association and taxed as a corporation for federal tax purposes, then the member will be treated as an owner of a corporation is treated for D.C. tax purposes.
VI. FUNDAMENTAL CHANGE TO THE LLC
The issues of assignment of membership interests, admission of new members, dissolution and continuance of the LLC cause the LLC to undergo a fundamental change because they alter the legal relationship between and among the members and the LLC that existed when the LLC was formed. Because these issues are deemed vital to the efficacy and efficiency of the LLC as a form of business organization, the Act is designed to provide the members with maximum flexibility to arrange these issues as they see fit. However, in exercising that flexibility, the members must assure that they do not organize the LLC to possess three or more of the corporate attributes if they seek to have the LLC classified as a partnership for tax purposes.
A. Admission of Members after the LLC is Formed (D.C. Code 29-1332)
After the LLC is formed a person may become a member either by acquiring a membership interest directly from the LLC or as an assignment from a member. If the person acquires the interest from the LLC then all of the members must consent to the transaction unless the members have agreed to a lesser margin of consent. If they have agreed to a lesser margin, however, they risk causing the LLC to have the corporate attribute of free transferability of interests.
If the person acquires the interest through an assignment from a member, then the person becomes a member only if assignment includes both the financial rights as well as the governance rights of the assigning member. If the person is assigned only the financial rights of
the assigning member, the person may receive the profits and distributions of the assigning member but cannot become a member.
B. Assignment of Membership Interest (D.C. Code §29-1335-1337)
A membership interest consists of financial rights and governance rights. Financial rights are the rights of the member to share in the profits and losses of the LLC and in the distributions from the LLC. Governance rights are the rights of the member to vote and participate in the management of the LLC. A member may assign its financial rights in whole or in part and, unless otherwise agreed by the members, need not obtain any consent or approval from the other members. The assignee of financial rights can receive the assignor's share in profits, losses and distributions but cannot participate in management or vote on any matter. Unless otherwise agreed by the members, an assignment of financial rights does not make the assignee a member and does not dissolve the LLC.
A member may assign its membership interest only by assigning its governance rights as well as its financial rights to the same assignee. While a member can assign its governance rights to another member without the consent of the other members, a member can assign its governance rights to a non-member only if at least a majority in interest of the members consent to the assignment. The members may, by agreement, require a more restrictive margin of consent for such assignment.
After the other members have duly consented, the effect of an assignment of governance rights is that the assignee becomes a member and the assignor ceases to be a member. Because the Act requires that at least majority in interest of the members must consent to the assignment, it is unlikely that the LLC will be deemed to have the corporate attribute of free transferability of interests. Unless otherwise agreed by the members, the withdrawal of the assigning member shall not cause a dissolution under the Act.
C. Dissolution (D.C. Code §29-1347)
An LLC must dissolve upon the occurrence of an event specified in the articles of organization or the operating agreement or upon the unanimous consent of the members. The LLC can but need not actually dissolve upon the death, retirement or resignation of a member or any other event that causes a member to cease to be a member. If there are at least 2 members remaining when one of foregoing events occur and the members have not made any prior agreement on dissolution, then the LLC can continue and not actually dissolve as long as the remaining members unanimously agree to continue the LLC within 90 days after the date on which the event that caused a member not to be a member occurred.
If the members have agreed to continue the LLC if a member ceases to be a member, then that agreement shall control whether or not the LLC shall continue. In formulating that agreement the practitioner must take care to avoid inadvertently causing the LLC to possess the corporate attribute of continuity of life. The agreed procedure for continuing the LLC should provide for (I) an affirmative vote to continue by the remaining members and (ii) that the margin of vote necessary to continue the LLC be at least a majority or more in interest of the remaining members. (END18)
Endnotes
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1. 41 D.C. Register 3010 (May 27, 1994); Notice of enactment 41 D.C. Register 5138 (August 5, 1994). D.C. Law 10-138 will appear in the 1995 Supplement to the D.C. Code, that will be available in July or August, 1995. All statute references in this Article are to the new D.C. Code sections as they will appear in the 1995 Supplement rather than to the sections of the Act itself. For the full text of the Act see 41 D.C. Register 3010 (May 27, 1994) or request copies of D.C. Law 10-138 from the Legislative Services Office of the Council of the District of Columbia. 
2. See generally Karambelas Limited Liability Companies: Law & Taxation Vol. 2 (Clark Boardman Callaghan, 1994).
3. D.C. Code §29-399.54 et seq.; see generally "D.C. Corporations Law Retooled for the Nineties", WLM Vol.7 No.1 p.26.
4. IRC §7701(a)(2)
5. IRC §7701(a)(3)
6. Gen Coun Mems 37127 (May 18, 1977), 37953 (May 14, 1979)
7. IRC §7701(a)(3)
8. Burk-Waggoner Oil Association v. Hopkins, 296 US 110 (1925); Hecht v. Malley, 265 US 144 (1924)
9. Morrisey v Commissioner, 296 US 344 (1935)
10. Larson v Commissioner, 66 TC 159 (1976)
11. Reg §301.7701-2(a)(1)
12. Reg §301.7701-2(a)(2)-(3)
13. Reg §301.7701-1(b) as amended by 58 Fed Reg 28501 (No 92)
14. Reg §301.7710-2©)
15 Reg §301.7701-2(d)
16. Reg §301.7701-2(e)
17. Rev. Rul. 88-76
18. Rev. Proc. 94-46
