CHAPTER 38

LLC’s

A new form of business organization (originating in Wyoming in 1977!) is the Limited Liability Corporation, sometimes noted as an LLC, LC or Limited Company.

· The entire idea behind the LLC was and is simple: many corporate rights were being lost due to the corporation owners not following the strict requirements of maintaining corporate records in the appropriate format, as well as a desire for the entity to be treated as a “pass through” entity for tax purposes, to avoid double taxation for federal tax purposes.

· The LLC is a model of making things easy for a small business owner to have the dual advantages from a tax perspective and ease of everyday operations.

LLC Formation

There are several new terms that deal with a LLC:

· Members: these are the owners, and there may be one or more owners, although some states (not Texas) require two or more owners.

· Articles of Organization: very similar to the articles of incorporation of a regular company, which must be filed with the secretary of state, and in Texas, the filing fee is $200, cheaper than the $300 filing fee for a corporation.

· Managers: may be the members (owners), but actually represent the same function as officers of a regular corporation.

· Operating Agreement: similar to the bylaws of a regular corporation.

ADVANTAGES

· Liability is limited to amount of owner’s investment!

· Choice of organizational form for tax purposes (passthrough like a partnership or “captured” in the entity as a corporation)- very powerful and useful for new businesses.

· May be member managed or manager managed entity. In a member management, the owners directly participate in management, while in manager managed, it is similar to the corporate form of governance (similar to board of directors and officers). The preferred method that I have seen is the member managed, which basically allows the member to do many things without the need for corporate resolutions and meetings, and is very powerful for a small organization (less paperwork!)

· As already noted, there is less risk of lack of corporate formalities causing the liability exposure otherwise possible under a poorly maintained corporate entity.

DISADVANTAGES

· Subject to franchise taxes in Texas

· It is a somewhat new entity, some people/organizations are not familiar with it, but this is rapidly a fading problem.

LIMITED LIABILITY PARTNERSHIPS

· Very similar to LLC’s, the LLP is usually designed for professionals, such as doctors, attorneys, CPA’s, who normally transact business in a partnership format.

· TEXAS (yes!) was the first state to enact such legislation.

· Liability exposure is generally limited to the offending partner, but the price, at least in Texas, are higher organizational fees and a mandatory level of malpractice insurance to be carried by the LLP.

Family Limited Liability Partnership

· Usually used for estate planning purposes, to lower estate taxes, to protect the family from outside creditors, and to protect the family from itself! If you are interested in this, take estate planning sometime, you will find it most interesting.

LIMITED PARTNERSHIPS

· This is a partnership designed to protect innocent persons from liability and financial exposure outside of the normal investment. Recall under a typical partnership, the liability to the general partner is unlimited, including personal assets.

· The LP was designed before the LLC came along, and I expect it will be waning in importance over the years, although it is still a very useful device. It is more expensive to set up, usually a minimum charge by the state of $600. But, there are no franchise taxes (yet) to pay.

· In general, we have at least one general partner (usually a company) with numerous limited partners. The general partner has all operating responsibility, and the limited partners are only investors and cannot have any say in the management of the partnership, or they risk losing the shield of being a limited partner.

· There is also a device known as the limited liability limited partnership (LLLP), whereby the general partner is not exposed to any more risk than a limited partner.