LLC – Limited Liability Companies

LLC – Limited Liability Companies

LLC’s are similar to LLP’s and LP’s in that they must file Articles of Organization with the Secretary of a state to form this entity. There is a fee usually associated with the formation of the LLC, the size of which varies depending on the state and some states charge an excessive fee for no apparent reason. The main advantages to an LLC are the protection the LLC owners receive from business creditors and the fact that, unlike a limited partnership, the owners can still participate in the management of the business.

After the parties submit the articles of organization, the owners of the LLC (called “members”) should enter into an operating agreement, which provides provisions to how the company shall operate day to day. If there is no operating agreement, then the LLC statutes of the state where the articles of incorporation are filed control the organization. Generally speaking, it is better to have an operating agreement than it is to rely on the default rules, if only because it forces the members to think about many practical aspects of running a business at the outset and then agree about such matters before real money is at stake.

Agreements (Buy-Sell) should also be created between all members of the LLC to restrict or set forth guidelines as to how interest in the company may or may not be sold or purchased. All members of the LLC have no liability for the debts of the company.

Although not require, an LLC can opt for a management structure that allows certain people called “managers” to control the LLC. These managers usually possess the same scope of powers as a general partner would have in a standard general partnership: they can sign contracts, sell assets, and make other important business decisions for the business. The actual powers are spelled out in the state statute or, more often, in the LLC operating agreement.

Since managers are not required for an LLC, the members may simply retain all managerial authority for themselves. Or they can grant partial or limited powers to certain members and/or managers. In fact, almost any practical division of power among members and/or managers is possible with an LLC. You can even create different classes of members. This flexibility of control by the owners is one of the very best features of the LLC.

In general, LLC’s combine the most favorable features of partnerships and corporations:

  • Complete pass-through tax advantages and the operational flexibility of a partnership.
  • Corporation-style limited liability under state law.
  • Management participation by all members if desired.
  • Ability to be taxed as an S-Corporation

The LLC enjoys the same “flow-through” tax treatment that partnerships and S-Corporations do. The rules concerning capital accounts, contributions and other basic partnership taxation principles apply to LLCs as well. Care must be made to make the correct taxing election, however, or you could end up with as high a tax consequence as sole proprieterships or general partnerships.

You should also be aware that some states impose a tax on LLC income tax (for no clear reason other than a simple money grab). So you should check with the state tax authority of each state in which your LLC will earn income to make sure that you are not going to have to pay an additional amount of money in LLC income taxes.

Under the right circumstances and in the right state, this is a highly recommended structure. As ever, we would be happy to guide you to local competent counsel in your area who could help you.

Have questions? Contact us.