A corporation is an institution that is granted a charter recognizing it as a

separate legal entity having its own privileges, and liabilities distinct from
those of its members. There are many different forms of corporations, most
of which are used to conduct business.

Corporations exist as a product of corporate law, and their rules balance the
interests of the management who operate the corporation, creditors who
provide loans, shareholders who invest capital, and employees who
contribute their labor. In modern times, corporations have become an
increasingly dominant part of economic life.

An important feature of corporation is limited liability. If a corporation fails,

shareholders normally only stand to lose their investment, and employees
will lose their jobs, but neither will be further liable for debts that remain
owing to the corporation's creditors.

Despite not being natural persons, corporations are recognized by the law to
have rights and responsibilities like actual people. Corporations can exercise
human rights against real individuals and the state, and they may be
responsible for human rights violations. Just as they are "born" into existence
through its members obtaining a certificate of incorporation, they can "die"
when they lose money into insolvency. Corporations can even be convicted
of criminal offences, such as fraud and manslaughter.

Although corporate law varies in different jurisdictions, there are five core
characteristics of the business corporation:[6]

• Legal personality
• Limited liability
• Transferable shares
• Centralized management under a board structure
• Shared ownership by contributors of capital.
What are the functions of a company as a separate person???

Let us think like this way,

"Some seven men form an Association (If possible, all Peers and Baronets).
The start off with a public declaration to what extent they mean to pay their
debts. That's called their Capital; if they are wary, they will not quote it at a
sum immense. The figure's immaterial--it may vary from fifty million down to
fifty paisa. I should put it rather low; the good sense of doing so will be
evident at once to any debtor. When it's left to you to say what amount you
mean to pay, why, the lower you can put it at, the better.

They then proceed to trade with all who'll trust them, quite irrespective of
their capital (It's shady, but it's sanctified by custom); bank, railway, loan, or
Padma river. You can't embark on trading too tremendous-- It's strictly fair,
and based on common sense-- If you succeed, your profits are stupendous--
and if you fail, pop goes your fifty paisa".

How does the concept of separate legal personality and limited liability give
rise to the circumstances describe upwards? Can we think that the law goes
far enough in disregarding, or avoiding the consequences of, separate legal
personality, when justice requires it to do so? Let us see how it will conduct
that.

An incorporated company, "united or combined into an organized body”, is

recognized by law as a separate legal entity, or 'legal person' distinct from
the separate personalities of the members of the body. The law treats it like
"any other independent person" having rights and liabilities. A company, as a
legal person, may enter into contracts, own property and even commit
crimes. It is this concept of the Company being a fictitious person (then
under the 'Stock Company Act’) 'Utopia' ridicules, where we can follow is that
there could be a convergence of natural persons and legal entities.

Where a private company limited by shares owes money, and becomes

insolvent, the law holds that since its creditors dealt with the Company - not
its individual members - regardless of "the ideas or schemes of those who
brought it into existence”, the extent of financial liability of its members is
limited to the amount the members agree to pay for their shares: their
"public declaration. To what extent they mean to pay their debts". Thus we
can follow our example satirize the consequences of this: if the Company
becomes insolvent, the creditors do not get paid, regardless of the personal
financial situations of its members. This can be contrasted with a partnership
or sole proprietorship, where the owner would be held responsible for all
debts of the corporation.

Conversely, where a company owns assets, those assets belong to the

Company, not its members: in contrast with a partnership or sole
proprietorship, where the owner(s) of the assets are the partners or the
proprietor. Members cannot claim an interest as the assets were purchased
by the Company, as legal owner which, as in Macaura can be to the
detriment of the member.

On occasions, the law is prepared to circumvent the usual consequences of

legal personality by 'lifting' or 'piercing' the veil of incorporation - for
example, where a company's shareholders are using the Company as a
device to avoid their responsibilities. Xmple…search web
This does not mean that the Courts will always lift the corporate veil
wherever justice requires it. The Courts have vigorously fought against any
attempt to allow anyone, let alone themselves, "peer under the skirts of a
company”. In Adams v Cape Industries, a company that marketed asbestos
set up subsidiaries so that if a customer sued for asbestos-related claims,
only the subsidiary would be liable. The bankruptcy of a subsidiary would not
affect Cape. The Court held that Cape were entitled to "organize affairs.. so
that it would have the... benefit of the group's asbestos trade in the USA
without the risks of tortuous liability" .

Similarly, in Ord and another v Belhaven Pubs Limited a defendant company

that was not trading, transferred all of its assets to other companies in its
group, and consequently claimants attempted to sue those other companies
for the debt the defendant owed. The court dismissed the claim, stating that
the transactions were overt and "conducted in accordance with the liberties
conferred upon corporate entities by the Companies Act".

In recent times, the approach would seem to be that the Court will go to any
length to avoid any obvious penetration of the corporate veil. In Allen v
Amalgamated Construction Co Ltd the European Court of Justice examined
the workings of a company to investigate whether transfers between
subsidiaries was capable of being a transfer under the TUPE regulations.
Similarly, in Pirelli Cable Holding NV v IRC the Court, whilst denying that it
was lifting the veil, "availed itself of a jolly good rummage around the
internal workings" in order to examine certain facts.

The Courts have on occasion held directors personally liable for their actions.
In C Evans & Sons Limited v Spritebrand Ltd , the Court held that, in every
case it is necessary to examine with care what part the director played
personally with regards to the act complained of. The Court declined the
opportunity to formulate a comprehensive definition of circumstances that
would always give rise to liability .
More recently, in MCA Records Inc , whilst not setting out general principles,
the Court held that per CBS Songs Ltd and Unilever plc v Gilette (UK) Ltd ,
liability may arise where the individual 'intends and procures and shares a
common design that an infringement takes place'. Consequently, these
cases establish that directors can sometimes be personally liable for torts for
which the company is also liable. Still, the Courts have retained the
principles of separate legal personality and limited liability, and defended the
protection they offer. Whilst permitting some 'rummaging' under the veil to
establish facts, they have severely limited any encroachment on those
principles.

We have seen how the principles of separate legal personality and limited
liability sometimes result in circumstances that may seem favorable to the
Company's shareholders and detrimental to its creditors. On one hand, there
are good reasons for retaining these principles. The Courts feel that to
subject individual shareholders or directors to onerous personal liabilities
would discourage commercial enterprise. Additionally, whilst creditors are
exposed to risk, they are fully aware of this risk: the Company's
Memorandum, a public document, freely states that the company is limited
by shares, the liability of its members is limited, and by how much. So when
the Company "proceed[s] to trade with all who'll trust 'em" , the risk
creditors take is easily calculable.

On the other hand, there are cases where, if it were not for company law,
other principles would require the Courts find individual members liable for
their debts and actions. Cases such as Adams v Cape Industries, where
members have deliberately arranged their affairs to avoid liability if sued,
are difficult to correlate with equitable principles of justice. The law is moving
towards introducing provisions to prevent members abusing the principles to
avoid liability for serious crimes and should go further to introduce provisions
preventing the avoidance of liability for serious losses.
Company Characteristics
Pensler Capital utilizes a variety of measures to evaluate the merits of each
investment opportunity. Although each company and situation is unique,
some of the major parameters we utilize in selecting and operating
companies are:

Top Management -- The opportunity of continued involvement by senior

management is available, although Pensler Capital's broad network is
capable of locating top managers, if necessary.

Middle Management -- We have a preference for strong middle management

Capital Structure -- The firm's existing capital structure is irrelevant and we

will consider restructuring situations.

Profitability -- We require the company to be profitable at the gross margin

level. Operating profits are preferred but not required.

Market Share -- We prefer that a company have a reasonable share in its

particular niche market.
Assets -- We prefer situations in which capital expenditures have not been
deferred and there are substantial assets.

Quality -- We prefer that the company have a reputation for quality within its
industry segment.

Leadership- One of the most important characteristics of a great company is market leadership.
Market leaders can set the agenda for their industry.

However, beware of the complacent giants that grow fat and slow in their leadership roles. They
will eventually go the way of all companies that rest on past accomplishments and disappear into
merger oblivion.

Market leaders set the pace for the industry and use their size to protect their position. They are
able to hire top talent and have the resources to keep pushing their advantage.

Market leaders that pause to catch their breath are often passed and they never regain their
leadership standing again. IBM is a good example of a company that could have owned the
personal computer market, but let it slip away.

Footnote: These are three non-financial characteristics of great companies. The

numbers will usually follow any company that has a durable product or service, a
significant competitive advantage and holds a market leadership position.

http://stocks.about.com/od/evaluatingstocks/a/Great021206.htm

http://www.penslercapital.com/characteristics.htm

Company and Ethics

Change Your Vocabulary

"Ethics" has become too loaded a word to have much practical meaning. When the situation
demands, try substituting "responsibility" or "decency." Instead of "Is it the ethical thing to do?"
ask "Is it the responsible/decent thing to do?" See how you feel when you change that one little
word. Gets to the heart of the matter, doesn't it? And yes, act accordingly.

Take the Values-Statement Challenge

Get comfortable with your company's values statement. It probably includes such words as
"honesty" and "commitment," just as Enron's did. To make the values more concrete, write a
short essay defining each one, giving specific, real-life examples from your company. Next,
identify examples of internal company practices that contradict those values. Do the same for the
values you proclaim publicly.

Be A Know-it-all

What bad news do you keep from yourself? Did that environmental impact statement for the new
facility belong in the fiction section? Are your hiring practices a discrimination lawsuit waiting
to happen? It's time to face the music. Your new mantra: There is nothing I don't want to know.
(Hint: Your public relations director can be a great source of information. Convince her that you
want the truth.)

Hold a Risk Brainstorm

Establish a quarterly process that encourages employees to answer this question: What puts this
company at risk in the next year (or five)? The people below you know what's going on. Listen
to them. Identify risks that get at issues of responsibility and decency. Then take your company's
online ethics course. Does it help you deal with the risks you've identified? If not, start work on
one that's relevant.

Slash Your Pay

Do you earn a rich salary and bonus while your employees take pay cuts or lose their jobs? Meet
with your boss (or the board, if you are the CEO) and negotiate a lower compensation package.
Publicize what you've done. It may sound crazy, but in an environment of mistrust, sacrifices by
top executives go a long way toward creating a culture of trust, mutual respect, and responsible
business practices.

http://www.fastcompany.com/magazine/75/5ways.htm

Footnote: Toffler, along with Fast Company senior writer Jennifer Reingold, is the
coauthor of Final Accounting: Ambition, Greed and the Fall of Arthur Andersen
(Broadway Books, March 2003).
Reference: Payne, J, MA (1998) Lifting the Corporate Veil, Company Law
Gilbert, W S - Utopia, Limited
Halsbury's Laws of England from LexisNexis - Corporations (Volume 9(2) (2006
Reissue)
Halsbury's Laws of England from LexisNexis - Companies (Volume 7(1) (2004
Reissue)
Hill, C, Hubble, P, Longshaw, A, Morgan, T & Roberts, S (2007) W223 Company Law
and Practice, Oxford University Press, Oxford
New Law Journal from LexisNexis - von Wachter, V (13 July 2007) The Corporate
Veil, 157 NLJ 990
New Law Journal from LexisNexis - Pedley, P (6 May 2005) Hints for hungry
litigators, 155 NLJ 702

Understanding Company’s Asset, Liabilities and

Shareholders Equity
what is a company’s asset?

A company’s asset, in this context, is basically what a company uses to operate its business.

In essence, an asset is the summation of liabilities and shareholders equity. i.e.

Asset- Liabilities + Shareholders Equity

This is one formula used in balance sheets calculation.

Company’s Assets

Now, we have two (2) types of assets, which are:

1) Current Assets

2) Non-Current Assets

Current Assets

Current assets are assets that can be converted easily into cash. Their life span is usually a year.

Current assets include accounts receivable, cash equivalents and inventory. The most significant
of the current asset is cash. Cash equivalents are also ok because they could be easily converted
into cash. An inventory in this context refers to work-in progress goods, finished goods and raw
materials

Non Current Assets

What is a non- current asset?

A company’s non current assets refer to assets that could be turned into cash with no stress. They
usually have more than a year life span.

However, two major types of non-current assets are:

a) Tangible assets: In this case, we have example such as building, machinery, land and
computers.

b) Intangible Assets: Examples of intangible assets include copyright, goodwill e.t..c

2) A Company’s Liabilities

In this context, a company’s liabilities refer to all the financial commitments or obligations the
company owes to parties outside. Two types of liabilities includes:

a) Current Liabilities

b) Long term Liabilities

Current Liabilities

What is a company’s current liability? A company’s current liability refers to those liabilities
which must be paid within one year. Under this, we have Short term borrowings and longer term
borrowings. The short term borrowings include account payables e.t.c. Example of the long term
borrowing are interest payment e.g 12 years loan e.t.c.

Long Term Liabilities

They are basically debts with other non debt financial obligations, which becomes due after a
period of a minimum of one year from the recorded date on the balance sheet.

3) A Company’s Shareholders Equity

What is a shareholder’s equity?

Shareholders equity is basically the amount of money (fund) invested in a business. What is a
shareholders account, you may ask? A shareholders equity account is a company’s total net
worth.

advantages of a limited company

Whilst many businesses prefer to trade as a sole trader or a partnership, nearly all significant
businesses operate as an incorporated company. The main advantages of incorporation via a
limited company are summarised below:

Separate Legal Identity

A limited company has a legal existence separate from management and its members (the
shareholders)

Members' liability is limited ("limited liability")

The protection given by limited liability is perhaps the most important advantage of
incorporation. The members' only liability is for the amount unpaid on their shares. Since most
private companies issue shares as "fully paid", if things go wrong, a members' only loss is the
value of the shares and any loans made to the company. Personal assets are not put at risk. The
protection of limited liability does not, however, apply to fraud. Company directors have a legal
duty not to incur liabilities in their companies which they have reason to believe the company
may not be able to pay. If creditors lose money through director fraud, the directors' personal
liability is without limit.

Protection of Company Name

The choice of company names is restricted and, providing a chosen name complies with the
rules, no-one else can use it. The only protection for sole traders and partnerships is trademark
legislation.

Continuity

Once formed, a company has everlasting life. Directors, management and employees act as agent
of the company. If they leave, retire, die - the company remains in existence. A company can
only be terminated by winding up, liquidation or other order of the courts or Registrar of
Companies.

New Shareholders and Investors can be easily introduced

The issue, transfer or sale of shares is a relatively straightforward process - although existing
shareholders are protected via their "preemption" rights and by company legislation that seeks to
protect the interests of minority investors.

The process of lending to a company is also easier than with other business forms. The lending
bank may be able to secure its loan against certain assets of the business (a "floating charge") or
against the business as a whole ("fixed charge".

Better Pension Schemes

Approved company pension schemes usually provide better benefits than those paid under
contracts to self-employed sole trading businesses.

Taxation

Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable
profits. There is a wider range of allowances and tax-deductible costs that can be offset against a
company's profits. In addition, the current level of Corporation Tax is lower than income tax
rates.

Your Company as a Person

Determining your organization’s culture is key to attracting and retaining the type of employee
that will help move the company forward. The fact is that we all prefer to work with people who
work and think like we do. So we have to really be clear on how we work and think before
starting to hire our employees.

To help define your ideal corporate culture, try to imagine your company as if it were a person.
For the most part it is a person anyway, it’s you, but think of how you’d describe it and right this
down on paper. What are the characteristics of this person? Are they innovative and imaginative?
Are they all about providing great customer service? Are they casual, elegant, upscale, rural,
urban? What are their favourite colours? What are their values, opinions and beliefs? Write these
descriptions down because they’re all part of “who” this company is.

Reference: http://thatbookabouthiringpeople.com/2010/04/09/your-company-
as-a-person/

Is a limited liability company bound by its own

operating agreement?
A limited liability company is commonly regulated by an operating agreement. An operating
agreement is an agreement among the members of the limited liability company that governs the
affairs of a limited liability company and the conduct of its business. (Delaware Limited Liability
Company Act Section 18-101 and Illinois Limited Liability Company Act Section 15-5).
Although an operating agreement need not be in writing, most attorneys who assist clients
forming limited liability companies will have a written operating agreement signed by the
members.

But is the limited liability company itself required to sign the operating agreement? If not, is the
limited liability company bound by the operating agreement? Depending on the jurisdiction,
statutes and cases treat this question very differently.

One of the early cases dealing with this issue held that a Wisconsin limited liability company that
did not sign the operating agreement was not bound by it. (Bubbles & Bleach, LLC v. Becker No.
97 C 1320, 1997 WL 285938 (N.D. IL May 23, 1997) In Bubbles & Bleach, the limited liability
company brought suit in Illinois federal court against the managing member for misappropriation
of funds. The managing member moved to dismiss the Illinois federal case. The operating
agreement included an arbitration clause that required arbitration in Wisconsin under Wisconsin
law. The operating agreement was binding on the "parties" to the agreement, but the term
"parties" was not defined. Further, Wisconsin defined an operating agreement as an agreement
among the members. The court found that there was no indication that Wisconsin intended to
bind the limited liability company as an entity distinct from its members. So the limited liability
company was not bound by the arbitration provision in the operating agreement.
Delaware takes a completely opposite approach. In 2002, Delaware amended its limited liability
company law to provide explicitly:

"A limited liability company is not required to execute its limited liability company
agreement. A limited liability company is bound by its limited liability company agreement
whether or not the limited liability company executes the limited liability company
agreement." (Delaware Limited Liability Company Act Section 18-101, as amended by 73
Delaware Laws, c. 295, Sections 1 and 2)

(As an aside, Delaware’s defined term is "limited liability company agreement," but it can be
referred to as an operating agreement, so the references are to the same agreement.)

It might have seemed that Delaware, considered a bellwether in these matters, would have settled
this issue. But, as a recent Illinois case illustrates, the issue is far from settled. (Trover v. 419
OCR, Inc. 921 N.E. 2d 1249, Illinois Appellate Court, Fifth District, January 12, 2010).

Trover was a member of Far Oaks Development Group, LLC (FODG). Trover and the other
members of FODG authorized the managing member, Halloran, to transfer land held by FODG
to 419 OCR, Inc. (419 OCR, Inc. was owned by Halloran and Macaluso who were also members
of FODG.) But Trover alleged that the agreement transferring the land included an oral promise
by Halloran and Mancuso, representing 419 OCR, Inc., to pay FODG, in addition to the
estimated price of the land to be sold, an additional sum of money to be determined as the land
was developed and sold. Although the land was developed and sold at a profit, no additional
funds were paid to FODG. The litigation by Trover was based on a derivative action on behalf of
FODG alleging breach of contract and fraud.

Halloran and Macaluso sought to compel arbitration under the operating agreement of FODG.
The trial court denied the motion to compel arbitration and the defendants appealed.

The court acknowledged that the arbitration provision in the operating agreement was broadly
worded. In this case, some of the claims involved defendants (such as 419 OCR, Inc.) who were
not members of FODG and were not parties to the operating agreement. Clearly, with respect to
these defendants, arbitration could not be compelled. But the more interesting question was
whether the limited liability company itself was considered a party to and bound by the terms of
the operating agreement that created the limited liability company.

The court called this an "issue of first impression in Illinois." The court cited a 1999 Delaware
case (Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999)) which was
Delaware's case of first impression on this issue. In Jaffari, the court concluded that a Delaware
limited liability company was bound by an arbitration clause in its operating agreement, even
though it did not sign the agreement. (Interestingly, the court did not cite or discuss the Delaware
statute noted above that explicitly binds a non-signing limited liability company to its own
operating agreement.)

But the Illinois court found that Illinois law and the facts required a different result. First, under
Illinois law a limited liability company is "a legal entity distinct from its members.” (Illinois
Limited Liability Company Act Section 5-1(c)) A limited liability company has the power to sue
and to be sued. (Id. at 1-30(1)).

The operating agreement of FODG was among the members, none of whom signed in a way that
purported to bind the limited liability company. In addition, the operating agreement provided a
procedure to bind the limited liability company, but none of the members followed the
procedure. Therefore, the limited liability company was not bound by the arbitration provision in
the operating agreement.

At the outset of forming a limited liability company, it is difficult to envision circumstances

where the members want the limited liability company to be governed by different provisions
than those governing the members in the operating agreement (although, as the Trover case
illustrates, facts may develop so that a member may want the limited liability company to avoid
the provisions of the operating agreement.) So, conservatively, it seems a good idea to have the
limited liability company sign the operating agreement so that the limited liability company is
bound by the operating agreement.

This also creates a dilemma. Generally, the members will want an operating agreement in place
before creation of the limited liability company. However, a signature by a limited liability
company yet to be formed might be challenged. Of course, the limited liability company, through
its members or managers, can ratify and sign the operating agreement after the limited liability
company has been formed, so this should not be a major problem.

But, in this area also, Delaware has answered the question by statute:

Footnote: 1. "A limited liability company agreement shall be entered into or otherwise
existing either before, after or at the time of the filing of a certificate of formation and,
whether entered into or otherwise existing before, after or at the time of such filing, may be
made effective as of the formation of the limited liability company or at such other time or
date as provided in or reflected by the limited liability company agreement." (Delaware
Limited Liability Company Act Section 18-202)

So the issue as to whether a limited liability company is bound by its operating agreement
remains and must be considered by persons forming a limited liability company (and their
counsel). But forming a limited liability company under Delaware law should avoid this issue
entirely.
Is a limited liability company bound by its own
operating agreement?
A limited liability company is commonly regulated by an operating agreement. An operating
agreement is an agreement among the members of the limited liability company that governs the
affairs of a limited liability company and the conduct of its business. (Delaware Limited Liability
Company Act Section 18-101 and Illinois Limited Liability Company Act Section 15-5).
Although an operating agreement need not be in writing, most attorneys who assist clients
forming limited liability companies will have a written operating agreement signed by the
members.

But is the limited liability company itself required to sign the operating agreement? If not, is the
limited liability company bound by the operating agreement? Depending on the jurisdiction,
statutes and cases treat this question very differently.

One of the early cases dealing with this issue held that a Wisconsin limited liability company that
did not sign the operating agreement was not bound by it. (Bubbles & Bleach, LLC v. Becker No.
97 C 1320, 1997 WL 285938 (N.D. IL May 23, 1997) In Bubbles & Bleach, the limited liability
company brought suit in Illinois federal court against the managing member for misappropriation
of funds. The managing member moved to dismiss the Illinois federal case. The operating
agreement included an arbitration clause that required arbitration in Wisconsin under Wisconsin
law. The operating agreement was binding on the "parties" to the agreement, but the term
"parties" was not defined. Further, Wisconsin defined an operating agreement as an agreement
among the members. The court found that there was no indication that Wisconsin intended to
bind the limited liability company as an entity distinct from its members. So the limited liability
company was not bound by the arbitration provision in the operating agreement.

Delaware takes a completely opposite approach. In 2002, Delaware amended its limited liability
company law to provide explicitly:

"A limited liability company is not required to execute its limited liability company
agreement. A limited liability company is bound by its limited liability company agreement
whether or not the limited liability company executes the limited liability company
agreement." (Delaware Limited Liability Company Act Section 18-101, as amended by 73
Delaware Laws, c. 295, Sections 1 and 2)

(As an aside, Delaware’s defined term is "limited liability company agreement," but it can be
referred to as an operating agreement, so the references are to the same agreement.)

It might have seemed that Delaware, considered a bellwether in these matters, would have settled
this issue. But, as a recent Illinois case illustrates, the issue is far from settled. (Trover v. 419
OCR, Inc. 921 N.E. 2d 1249, Illinois Appellate Court, Fifth District, January 12, 2010).

Trover was a member of Far Oaks Development Group, LLC (FODG). Trover and the other
members of FODG authorized the managing member, Halloran, to transfer land held by FODG
to 419 OCR, Inc. (419 OCR, Inc. was owned by Halloran and Macaluso who were also members
of FODG.) But Trover alleged that the agreement transferring the land included an oral promise
by Halloran and Mancuso, representing 419 OCR, Inc., to pay FODG, in addition to the
estimated price of the land to be sold, an additional sum of money to be determined as the land
was developed and sold. Although the land was developed and sold at a profit, no additional
funds were paid to FODG. The litigation by Trover was based on a derivative action on behalf of
FODG alleging breach of contract and fraud.

Halloran and Macaluso sought to compel arbitration under the operating agreement of FODG.
The trial court denied the motion to compel arbitration and the defendants appealed.

The court acknowledged that the arbitration provision in the operating agreement was broadly
worded. In this case, some of the claims involved defendants (such as 419 OCR, Inc.) who were
not members of FODG and were not parties to the operating agreement. Clearly, with respect to
these defendants, arbitration could not be compelled. But the more interesting question was
whether the limited liability company itself was considered a party to and bound by the terms of
the operating agreement that created the limited liability company.

The court called this an "issue of first impression in Illinois." The court cited a 1999 Delaware
case (Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999)) which was
Delaware's case of first impression on this issue. In Jaffari, the court concluded that a Delaware
limited liability company was bound by an arbitration clause in its operating agreement, even
though it did not sign the agreement. (Interestingly, the court did not cite or discuss the Delaware
statute noted above that explicitly binds a non-signing limited liability company to its own
operating agreement.)

But the Illinois court found that Illinois law and the facts required a different result. First, under
Illinois law a limited liability company is "a legal entity distinct from its members.” (Illinois
Limited Liability Company Act Section 5-1(c)) A limited liability company has the power to sue
and to be sued. (Id. at 1-30(1)).

The operating agreement of FODG was among the members, none of whom signed in a way that
purported to bind the limited liability company. In addition, the operating agreement provided a
procedure to bind the limited liability company, but none of the members followed the
procedure. Therefore, the limited liability company was not bound by the arbitration provision in
the operating agreement.

At the outset of forming a limited liability company, it is difficult to envision circumstances

where the members want the limited liability company to be governed by different provisions
than those governing the members in the operating agreement (although, as the Trover case
illustrates, facts may develop so that a member may want the limited liability company to avoid
the provisions of the operating agreement.) So, conservatively, it seems a good idea to have the
limited liability company sign the operating agreement so that the limited liability company is
bound by the operating agreement.
This also creates a dilemma. Generally, the members will want an operating agreement in place
before creation of the limited liability company. However, a signature by a limited liability
company yet to be formed might be challenged. Of course, the limited liability company, through
its members or managers, can ratify and sign the operating agreement after the limited liability
company has been formed, so this should not be a major problem.

Footnote:

"A limited liability company agreement shall be entered into or otherwise existing either
before, after or at the time of the filing of a certificate of formation and, whether entered
into or otherwise existing before, after or at the time of such filing, may be made effective
as of the formation of the limited liability company or at such other time or date as
provided in or reflected by the limited liability company agreement." (Delaware Limited
Liability Company Act Section 18-202)

So the issue as to whether a limited liability company is bound by its operating agreement
remains and must be considered by persons forming a limited liability company (and their
counsel). But forming a limited liability company under Delaware law should avoid this issue
entirely.

Ref: http://www.lexology.com/library/detail.aspx?g=099a9839-801e-4d8f-
b73f-6752289ae10f