Business Associations
Business Associations on the Kentucky Bar tests entity formation, owner liability, governance, and dissolution under Kentucky statutes: corporations under KRS Chapter 271B, LLCs under KRS Chapter 275, and partnerships under KRS Chapter 362. Expect agency principles and the consequences of ignoring formalities.
Formation and the liability shield
A Kentucky LLC is formed by filing articles of organization with the Secretary of State. The shield comes from the statute, not from capital or ceremony; members and managers are not personally liable for LLC debts merely because of membership. Corporations file articles under KRS 271B and must observe formalities, but de facto incorporation is narrow. Promoters remain personally liable on pre-incorporation contracts unless the corporation adopts the contract or the parties agree to a novation.
Governance and duties
Directors and managers owe loyalty and care. Kentucky's LLC Act lets the operating agreement define duties, but it cannot eliminate the implied covenant of good faith and fair dealing. A member may demand an accounting. A charging order is generally the exclusive remedy of a judgment creditor against a member's distributional interest, so the creditor does not become a member.
Dissolution and winding up
Dissolution triggers winding up: collect assets, pay creditors, then distribute to members under the operating agreement and statute. A distribution made while known liabilities remain can be a wrongful distribution, creating personal liability for the recipient.
Worked example
Member M votes a distribution to himself while the LLC has an unpaid supplier. The supplier sues M. Because the distribution left the LLC unable to pay known debts, M may be liable to the LLC for the amount improperly distributed. The shield does not protect a member who receives an unlawful distribution.
Traps
Confusing de facto corporation doctrine with LLC formation; assuming an operating agreement can waive all fiduciary duties; forgetting promoter liability until novation; treating a charging order as a transfer of the member's entire interest.