UBE Limited Liability Companies
Last updated: May 2, 2026
Limited Liability Companies questions are one of the highest-leverage areas to study for the UBE. This guide breaks down the rule, the elements you need to recognize, the named traps that catch most students, and a memory aid that scales to test day. Read it once, then practice the same sub-topic adaptively in the app.
The rule
A limited liability company (LLC) is a hybrid unincorporated entity formed by filing articles of organization (or a certificate of formation) with the state, governed primarily by an operating agreement, with the default rules supplied by the state's LLC act (most jurisdictions follow the Revised Uniform Limited Liability Company Act, RULLCA). Members enjoy limited liability for entity obligations (the corporate-style liability shield) and pass-through tax treatment, while management may be vested in the members (member-managed, the default) or in designated managers (manager-managed). Members and managers owe fiduciary duties of care and loyalty to the LLC and to each other, though the operating agreement may modify (but not eliminate) those duties under RULLCA § 105. The liability shield can be pierced under the same equitable doctrines used for corporations.
Elements breakdown
Formation of an LLC
An LLC is formed when a person files a public organizational document with the secretary of state and the filing becomes effective.
- File articles of organization (or certificate)
- Filing accepted by secretary of state
- At least one member at formation
- Statutory contents satisfied (name, agent, address)
Common examples:
- Filing a certificate of formation under Delaware LLC Act
- Articles naming registered agent and principal office
Operating Agreement
The operating agreement is the private contract among members governing the LLC's internal affairs and may be oral, written, or implied.
- Agreement among members (or sole member)
- Governs internal affairs of the LLC
- Cannot eliminate core fiduciary duties or good faith
- Controls over default statutory rules where consistent with statute
Common examples:
- Allocating profits 60/40 despite equal capital contributions
- Designating manager-managed structure
- Restricting transfers of membership interests
Member-Managed LLC (Default)
Each member has equal rights in management and conduct of the LLC's activities, and any matter is decided by a majority of the members.
- No manager designation in articles or operating agreement
- Each member is an agent for ordinary-course business
- Ordinary matters decided by majority of members
- Extraordinary matters require unanimous consent
Manager-Managed LLC
Management is vested exclusively in one or more managers designated in the articles or operating agreement; non-manager members have no agency authority.
- Operating agreement or articles so provide
- Manager(s) chosen by member majority
- Managers act as agents of the LLC
- Non-manager members lack actual or apparent authority
Limited Liability Shield
A member or manager is not personally liable, solely by reason of being a member or manager, for the debts, obligations, or other liabilities of the LLC.
- Valid LLC formed under state law
- Obligation incurred by the LLC itself
- Member/manager not personally guarantying
- Member/manager not personally tortfeasor
Duty of Loyalty
Members in a member-managed LLC and managers in a manager-managed LLC must account for any benefit, refrain from self-dealing, and refrain from competing with the LLC.
- Account to LLC for any property, profit, or benefit
- Refrain from dealing with LLC as adverse party
- Refrain from competing with LLC's business
- Disclose conflicts; obtain informed authorization
Duty of Care
Members in a member-managed LLC and managers in a manager-managed LLC must act with the care a person in a like position would reasonably exercise, refraining from grossly negligent, reckless, intentional, or knowing legal violations.
- Refrain from grossly negligent conduct
- Refrain from reckless conduct
- Refrain from intentional misconduct
- Refrain from knowing violations of law
Duty of Good Faith and Fair Dealing
Every member and manager must discharge duties and exercise rights consistently with the contractual obligation of good faith and fair dealing; the operating agreement cannot eliminate this duty.
- Honest dealing with co-members
- Faithful performance of operating agreement
- No evasion of spirit of bargain
- Not subject to elimination by agreement
Piercing the LLC Veil
Courts disregard the LLC's separate existence and impose personal liability on members under the same equitable doctrines applied to corporations.
- Unity of interest (alter ego) or domination
- Inadequate capitalization or commingling
- Failure to observe entity formalities (where required)
- Fraud, injustice, or inequitable result if shield honored
Dissociation and Dissolution
A member may dissociate by withdrawal, expulsion, death, or bankruptcy; the LLC dissolves on events specified in the operating agreement, consent of all members, or judicial decree.
- Triggering event under statute or operating agreement
- Wrongful dissociation if breaches operating agreement
- Dissociated member loses management rights
- On dissolution, wind up and distribute assets
Common patterns and traps
The Member-Managed vs. Manager-Managed Trigger
The vignette will tell you (or pointedly omit) whether the LLC is manager-managed. That single fact decides whether a member's signature binds the LLC. In member-managed LLCs the default is that each member is an agent for ordinary-course matters; in manager-managed LLCs non-manager members have no actual or apparent authority, and the third party generally cannot rely on the member's status alone.
A choice that says 'the LLC is bound because Reyes is a member' is a trap when the facts establish a manager-managed structure.
The Personal Tort Exception to the Shield
The LLC shield protects members from entity obligations — it does not protect them from liability for their own torts. A member who personally drives negligently, personally commits fraud, or personally directs a tortious act is liable as the tortfeasor, regardless of acting on LLC business.
A choice saying 'the member is shielded because the act was within the scope of LLC business' fails when the member personally committed the tort.
The Operating-Agreement-Cannot-Eliminate-Duty Cut
Under RULLCA § 105, the operating agreement may modify or restrict but cannot eliminate the duty of loyalty, the duty of care below the gross-negligence floor, or the contractual obligation of good faith and fair dealing. Examiners draft a clause that purports to authorize self-dealing or waive loyalty altogether to test whether you spot the unenforceable carve-out.
A choice that turns on 'the operating agreement waived all fiduciary duties' is wrong because RULLCA forbids that elimination.
The LLC-Opportunity Usurpation Pattern
Like the corporate-opportunity doctrine, a member or manager who personally takes an opportunity in the LLC's line of business that came to them in their LLC capacity breaches the duty of loyalty unless they disclose and obtain informed authorization. The pattern often disguises itself as 'the LLC could not have afforded it' or 'the member found it on her own time.'
A choice excusing the diversion 'because the LLC lacked funds to pursue it' fails — the duty requires offer and informed waiver, not unilateral self-help.
The Veil-Piercing Mirror
Courts pierce the LLC veil under the same factors used for corporations: alter-ego dominance, commingling of personal and entity funds, undercapitalization, and fraud or injustice. Failure to observe formalities is a weaker factor for LLCs because formalities are statutorily lighter, but commingling and inadequate capitalization remain potent.
A choice that pierces 'because the LLC failed to hold annual meetings' is weak; the strong choice cites commingling, undercapitalization, or fraudulent use.
How it works
Start every LLC question by locating the entity in the statutory grid: Was it validly formed? Is it member-managed or manager-managed? What does the operating agreement say, and what does the LLC act supply by default? Picture Reyes and Liu forming Lakeshore Logistics, LLC by filing articles in a RULLCA jurisdiction without designating managers — the LLC is member-managed by default, each owes the other fiduciary duties of care and loyalty, and each can bind the LLC for ordinary-course transactions. If Liu privately diverts a shipping contract that came to Lakeshore to her own side venture, that is a textbook duty-of-loyalty breach (usurpation of an LLC opportunity), and the operating agreement cannot waive it away under RULLCA § 105 — it can only define how conflicts are authorized. Personal liability of members generally requires either a personal guaranty, the member's own tort, or veil piercing on alter-ego/inadequate-capitalization/fraud grounds.
Worked examples
Is Riverbend Cabinetry, LLC bound by the contract Patel signed?
- A Yes, because Patel is a member of the LLC and members have apparent authority to bind the LLC for ordinary business transactions.
- B Yes, because Patel held himself out as an owner and Northbay reasonably relied on that representation.
- C No, because in a manager-managed LLC a non-manager member has no statutory agency authority, and Patel had neither actual nor apparent authority from Riverbend. ✓ Correct
- D No, because contracts entered into by an LLC member must be in writing and signed by all members to be enforceable.
Why C is correct: Under RULLCA, in a manager-managed LLC the management authority is vested exclusively in the designated manager(s); a non-manager member is not, solely by reason of being a member, an agent of the LLC. Patel had no actual authority (Okafor did not authorize the contract) and no apparent authority sourced from the LLC (Northbay's reliance was based on Patel's self-description, not on any manifestation by Riverbend). The Member-Managed vs. Manager-Managed Trigger controls.
Why each wrong choice fails:
- A: This states the rule for member-managed LLCs, not manager-managed LLCs. The default agency rule flips when the operating agreement designates managers, and Riverbend is manager-managed. (The Member-Managed vs. Manager-Managed Trigger)
- B: Apparent authority must be created by manifestations of the principal (the LLC), not by the agent's own statements. Patel's self-description as 'one of the owners' is not a Riverbend manifestation, so no apparent authority arose. (The Member-Managed vs. Manager-Managed Trigger)
- D: There is no statute requiring all LLC members to sign every contract; LLC contracting is governed by ordinary agency principles. The choice invents a formality requirement that does not exist.
What is the most likely outcome?
- A Liu prevails because the operating agreement insulates her from liability absent actual fraud, and she did not commit fraud.
- B Liu prevails because she had a good-faith belief that Greyhill could not afford the acquisition, satisfying the duty of care.
- C Greyhill prevails because Liu breached the duty of loyalty by usurping an LLC opportunity without disclosure or informed authorization, and the operating agreement cannot eliminate that duty. ✓ Correct
- D Greyhill prevails only if it can prove that, but for Liu's conduct, it would have purchased the portfolio itself.
Why C is correct: In a member-managed LLC each member owes a duty of loyalty that includes refraining from usurping LLC opportunities; a member who learns of an opportunity in the LLC's line of business while acting for the LLC must disclose it and obtain informed authorization before taking it personally. Under RULLCA § 105, the operating agreement may identify categories of permitted transactions but cannot eliminate the duty of loyalty wholesale. The 'no liability absent actual fraud' clause is unenforceable to that extent.
Why each wrong choice fails:
- A: This relies on a clause that purports to eliminate the duty of loyalty, which RULLCA § 105 forbids. The operating agreement may modify or specify but cannot eliminate the duty. (The Operating-Agreement-Cannot-Eliminate-Duty Cut)
- B: Good-faith belief about the LLC's appetite for an opportunity is not a defense; the loyalty duty requires disclosure and authorization, not unilateral judgment by the diverting member. The choice misframes a loyalty issue as a care issue. (The LLC-Opportunity Usurpation Pattern)
- D: Usurpation of opportunity does not require but-for causation that the LLC would have taken the opportunity; the breach is the failure to offer it and obtain informed waiver. The remedy commonly disgorges the benefit even if the LLC could not have completed the deal. (The LLC-Opportunity Usurpation Pattern)
Is Mackenzie most likely to be held personally liable?
- A No, because the LLC liability shield protects a sole member from all entity obligations regardless of how the LLC is operated.
- B No, because Mackenzie did not personally drive the truck, and a member cannot be liable for an employee's negligence under any theory.
- C Yes, because Mackenzie is automatically liable for tort obligations of any single-member LLC.
- D Yes, because the facts support piercing the veil based on commingling of funds, gross undercapitalization, and use of the LLC as her alter ego. ✓ Correct
Why D is correct: Courts pierce the LLC veil using the same equitable factors applied to corporations: alter-ego dominance, commingling of personal and entity funds, undercapitalization given the foreseeable risks of the business, and resulting injustice. Mackenzie's facts hit the strongest piercing factors — personal use of LLC funds and assets, customer receipts deposited personally, and capitalization plainly inadequate for a hauling business with substantial tort exposure. The shield yields under the Veil-Piercing Mirror.
Why each wrong choice fails:
- A: The shield is not absolute; equitable veil piercing has long applied to LLCs, particularly where the member treats the entity as her personal pocketbook. The choice overstates the protection. (The Veil-Piercing Mirror)
- B: The question is not direct tort liability but veil piercing; the LLC is liable for the employee's negligence under respondeat superior, and the issue is whether Mackenzie can be reached behind the shield. The choice answers a different question.
- C: There is no rule that single-member LLCs lose the shield automatically; single-member status alone is not piercing. Piercing still requires the equitable factors, which are present here, but the rationale in this choice is wrong. (The Veil-Piercing Mirror)
Memory aid
FORM-MAN-DUTY-SHIELD: File (formation) → Manage (member- or manager-managed) → Duty (loyalty + care + good faith) → Shield (limited liability unless pierced or personal tort/guaranty).
Key distinction
Member-managed vs. manager-managed is the single most outcome-determinative classification: in member-managed LLCs every member is an agent with apparent authority for ordinary business; in manager-managed LLCs non-manager members have no agency power, so a contract they sign generally does not bind the LLC absent actual authority or estoppel.
Summary
An LLC blends the corporate liability shield with partnership-like internal flexibility, governed by the operating agreement on top of the state LLC act, with management default to member-managed, fiduciary duties of loyalty and care that cannot be eliminated, and a shield piercable on alter-ego or fraud grounds.
Practice limited liability companies adaptively
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Start your free 7-day trialFrequently asked questions
What is limited liability companies on the UBE?
A limited liability company (LLC) is a hybrid unincorporated entity formed by filing articles of organization (or a certificate of formation) with the state, governed primarily by an operating agreement, with the default rules supplied by the state's LLC act (most jurisdictions follow the Revised Uniform Limited Liability Company Act, RULLCA). Members enjoy limited liability for entity obligations (the corporate-style liability shield) and pass-through tax treatment, while management may be vested in the members (member-managed, the default) or in designated managers (manager-managed). Members and managers owe fiduciary duties of care and loyalty to the LLC and to each other, though the operating agreement may modify (but not eliminate) those duties under RULLCA § 105. The liability shield can be pierced under the same equitable doctrines used for corporations.
How do I practice limited liability companies questions?
The fastest way to improve on limited liability companies is targeted, adaptive practice — working questions that focus on your specific weak spots within this sub-topic, getting immediate feedback, and revisiting items you missed on a spaced-repetition schedule. Neureto's adaptive engine does this automatically across the UBE; start a free 7-day trial to see your sub-topic mastery climb in real time.
What's the most important distinction to remember for limited liability companies?
Member-managed vs. manager-managed is the single most outcome-determinative classification: in member-managed LLCs every member is an agent with apparent authority for ordinary business; in manager-managed LLCs non-manager members have no agency power, so a contract they sign generally does not bind the LLC absent actual authority or estoppel.
Is there a memory aid for limited liability companies questions?
FORM-MAN-DUTY-SHIELD: File (formation) → Manage (member- or manager-managed) → Duty (loyalty + care + good faith) → Shield (limited liability unless pierced or personal tort/guaranty).
What's a common trap on limited liability companies questions?
Treating an LLC like a partnership for liability purposes
What's a common trap on limited liability companies questions?
Assuming all members can bind a manager-managed LLC
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