Limited liability company

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This article is about a U.S.-specific business entity form. For limited liability companies in the United Kingdom, see Limited company. For a general discussion of entities with limited liabilty, see Corporation
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A limited liability company (abbreviated by L.L.C. or LLC) in the law of the vast majority of the United States is a legal form of business company offering limited liability to its owners. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having characteristics of both a corporation and a partnership. It is often more flexible, the owners have limited liability for the actions and debts of the company, and it is suitable for smaller companies with a single owner. The primary corporate characteristic is limited liability while the primary partnership characteristic is the availability of pass-though income taxation.


Contents

[edit] Terminology

Member: All LLCs must have at least one member. LLC members are the owners of the LLC much as shareholders are the owners of a corporation or the partners of a partnership. Like shareholders, a member's liability to repay the LLC's obligations is limited to his or her capital contribution. Members may be natural persons, corporations, partnerships, or other LLCs.

Membership Interest: A member's ownership interest in the LLC is called a membership interest. Membership interests are often divided into standardized units which, in turn, are often called shares. Unless otherwise provided for in the operating agreement, a member's right to control or manage the LLC is proportionate to her membership interest.

Manager: LLCs are, by default, managed by their members in proportion to their membership interests. Many LLC operating agreements, however, provide for a manager or board of managers to run the day-to-day operations of the LLC. The managers are elected or appointed by members and may also be removed by members. A member may also be a manager, often called the managing member (similar to the managing partner of a partnership).

Articles of Organization: All LLCs must file evidence of their existence with the secretary of state (or some governmental office) of the state where they choose to be organized. The Articles of Organization serve this purpose and are the LLC version of a corporation's articles of incorporation. Although the specific information that must be included in the Articles of Organization varies by state, all LLCs must disclose their company name (which must conform to rules set forth by the state of organization), appoint a statutory agent and disclose their valid business purpose. The fees associated with filing the Articles of Organization also vary by state.

Operating Agreement: The Operating Agreement of an LLC is the document most important to its success because it determines, defines, and apportions the rights of the members. Because the various LLC statutes offer so much flexibility (see discussion below), and the default statutory rules do not fit most LLC's needs, Operating Agreements must be drafted carefully and with much discussion and agreement between the prospective members.

[edit] Flexibility and Default Rules

The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility of the LLC.

In contrast, the phrase "unless otherwise provided for in the bylaws" is also found in all corporation law statutes but usually only refers to relatively minor matters.


[edit] Management

LLCs may be either member-managed or manager-managed. A member-managed LLC may be governed by a single class of members (in which case it approximates a partnership) or multiple classes of members (in which case it approximates a limited partnership). Choosing manager management creates a two-tiered management structure that approximates corporate governance with the managers typically holding powers similar to corporate officers and directors. The LLC's operating agreement (the LLC version of a partnership agreement or a corporation's bylaws) determines how the LLC is managed. Corporations, S-Corporations, Limited Liability Partnerships, Limited Partnerships, Limited Liability Limited Parnerships, and LLCs lie along a spectrum of flexibilty with LLCs being the most flexible, and thus preferrable, for many businesses.

[edit] Income Taxation

LLCs use IRS Form 1065 (if taxed as a partnership) and Schedule SE (Self-Employment Tax). LLCs are organized with a document called the "articles of organization,' or "the rules of organization" specified publicly by the state; additionally, it is common to have an "operating agreement" privately specified by the members. The operating agreement is a contract among the members of an LLC and the LLC governing the membership, management, operation and distribution of income of the company.

Under some circumstances, however, the members (the LLC version of shareholders or partners) may elect for the LLC to be taxed like a corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members).

Operating as an LLC form of partnership does not mean that appropriate US federal partnership tax forms are not necessary, or not complex. As a partnership, the entity's income and deductions attributed to each member are reported on that owner's tax return.

LLCs can lose their tax advantage without the partnership structure. The possible label "disregarded entity" for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner's individual tax return on a Schedule E tax form. And an LLC owned by a corporation--in other words, an LLC with a single corporate member--would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.

[edit] Advantages

  • Much less administrative paperwork and record keeping than a corporation.
  • Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
  • Limited liability, meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity.
  • Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
  • Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility.
  • LLCs in some states can be set up with just one natural person involved.
  • Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (see, for example, the Virginia and Delaware LLC Acts).
  • LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (see recent D.C. decisions).
  • Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members.

[edit] Disadvantages

  • Many states, including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
  • It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
  • The LLC form of organization is relatively new, and as such, some states do not fully treat LLCs in the same manner as corporations for liability purposes, instead treating them more as a disregarded entity, meaning an individual operating a business as an LLC may in such a case be treated as operating it as a sole proprietorship, or a group operating as an LLC may be treated as a general partnership, which defeats the purpose of establishing an LLC in the first place, to have limited liability (a sole proprietor has unlimited liability for the business; in the case of a partnership, the partners have joint and several liability, meaning any and all of the partners can be held liable for the business' debts no matter how small their investment or percentage of ownership is).[citation needed]
  • Although there is no statutory requirement for an operating agreement in most states, members who operate without one may run into problems.
  • Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.
  • The principals of LLCs use many different titles -- e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
  • Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes, for example if a US LLC does business outside the US or a resident of a foreign jurisdiction is a member of a US LLC.
  • Some creditors will require owners of up-and-starting LLCs to cosign for the LLC's loans, thus making the owners equally liable for the debt as the LLC is, and effectively removing the very purpose of forming an LLC: Limited Liability.

[edit] Variations

  • A Professional Limited Liability Company (PLLC or P.L.L.C.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a doctor, chiropractor, lawyer, accountant, architect, or engineer, require the formation of a PLLC. Exact requirements of PLLCs vary from state to state. Typically, a PLLC's members must all be professionals practicing the same profession. In addition, the limitation of personal liability of members does not extend to professional malpractice claims.
  • A Series LLC is a special form of a Limited liability company that allows a single LLC to segregate its assets into separate series. For example, a series LLC that purchases separate pieces of real estate may put each in a separate series so if the lender forecloses on one piece of property, the others are not affected.

[edit] History by country

Companies with limited liability exist in business law world-wide, however the Limited Liability Company is a specific legal structure defined by the laws of states of the United States and with quite distinct characteristics. Several other countries have similar structures.

[edit] United States

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.[1] The LLC is chiefly inspired by the GmbH, a type of business organization in Germany, and by limitadas, a type of business organization available in many Latin American countries.[2]

The first limited liability company act appeared stateside in Wyoming in 1977 as special interest legislation for an oil company.[3] In 1980, the Internal Revenue Service issued a private letter ruling to an LLC formed under Wyoming LLC Act indicating that the IRS would treat the LLC as a partnership for federal tax purposes.[4] However, later that year, the IRS proposed regulations that would deny partnership classification to any business entity in which no member bore personal responsibility for the entity’s liabilities. [5] In 1982, Florida adopted an LLC act modeled on Wyoming’s LLC Act.[6] Due to uncertainty over the tax treatment of LLCs, no other states introduced LLC legislation until after 1988.[7] In 1988, the IRS issued a revenue ruling stating that it would treat a Wyoming-style LLC as a partnership for tax purposes.[8] By 1996, nearly every state had enacted an LLC statute.[9] In 1996, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Limited Liability Company act, and revised it in 2006.

[edit] United Kingdom

The new form of Limited liability partnership (LLP) (created in 2002) is similar to a US LLC as it is tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise all companies, including limited companies and US LLCs, are treated as corporate bodies subject to Corporation Tax if the profits of the entity belong to the entity and not to its members.

[edit] Belgium

In Belgium there are several different forms of corporations which provide limited liability. The "BVBA" (Besloten Venootschap met Beperkte Aansprakelijkheid"), of "SPRL" (Société Privée à Responsabilité Limitée) in French, is the smallest where the startup capital is required to be 18.500 EURO by law. It is mostly used for smaller businessowners who want to protect themselves in case of bankcrupcy.

[edit] Bosnia and Herzegovina

Bosnian and Herzegovinian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Legislation is very similar to Croatian. Companies working under this structure append the abbreviation d.o.o. to their name.

[edit] Brazil

The corporate structure in Brazilian law most similar to the United States LLC is the Sociedade Limitada ("Ltda."), under the new Brazilian Civil Code of 2002. The "sociedade limitada" is the new name of the "sociedade por quotas de responsabilidade limitada", and it can be organized as "empresária" or "simples", under this new code, roughly corresponding to the form types of "comercial" [commercial] and "civil" [non commercial] of the former and now extinct Commercial Code.

[edit] Chile

Chilean legislation contemplates LLCs as Sociedad Comercial de Responsabilidad Limitada (Limited Liability Commercial Association). Companies working under this structure append the abbreviation Ltda. to their name. Therefore, a company which in the United States is called SomeCompany LLC would be called SomeCompany Ltda. in Chile.

[edit] Colombia

Colombian legislation contemplates a very similar structure as mentioned above in the Chilean case. The Ltda. abbreviation is also used in Colombia.

[edit] Croatia

Croatian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name, same as in Serbia.

[edit] Czech republic

Czech legislation contemplates LLCs as společnost s ručením omezeným, abbreviated as s.r.o. or spol. s r.o.. The s.r.o. is not technically comperable to LLC because the profits are still subject to double taxation. The Czech law does not offer a possibility to start up a limited company without the possibility of avoiding the double taxation.

[edit] Denmark

The danish form of the LLC is the anpartsselskab (see ApS). The minimum capital is required by law to be at least DKK 125,000 (approximately US$ 26,000).

[edit] Estonia

In Estonia, a limited liability company is referred to as osaühing (OÜ). The type of entity is also required to be identified in the name. The minimum required starting capital for a limited company in Estonia is currently 40,000 EEK (~2556 EUR).

[edit] Italy

The Italian Civil Code approved in 1942, as amended by the Government Act 6/2003, regulates three forms of limited liability company: Società per azioni or SpA. The minimum required starting capital for a SpA is EUR 120,000. Società a responsabilità limitata or Srl. The minimum required starting capital for a Srl is EUR 10,000. Società in accomandita per azioni or Sapa. The minimum required starting capital for a Sapa is EUR 120,000. Sapa have a mixed liability scheme, where standard partners have limited liability while managing partners have full liability. Companies append the correspondent abbreviation to their names.

[edit] Japan

Japan passed legislation in 2006 creating a new type of business organization, godo kaisha, a close variant of the American LLC.

[edit] Macedonia

Macedonian legislation contemplates LLCs as друштво со ограничена одговорност. Companies working under this structure append the abbreviation д.о.о. to their name. This is the most spread organizational form of Macedonian companies.

[edit] Mexico

Mexican legislation contemplates LLCs as Sociedades de de Responsabilidad Limitada, also known for their abbreviation "S. de R.L.". S. de R.L.'s award limited liability to its members up to their contribution in the company (i.e. contribution of capital) and also act as pass-through or flow-through entities whereby profits are "passed-through" to its members, avoiding double taxation. This type of company is widely used by foreign investors in Mexico because of its "pass-through" modality and it's "check the box" capability under the IRC (Internal Revenue Code of the U.S.).

[edit] Poland

Polish legislation contemplates LLCs as Spółka z ograniczoną odpowiedzialnością. Companies working under this structure append the abbreviation Sp. z o.o. to their name and it is said to be the working congeniality .

[edit] Russia

In Russia and certain other ex-USSR countries, an entity with a somewhat similar structure is known as Общество с ограниченной ответственностью (lit., 'Society with Limited Liability'), usually abbreviated OOO, or in some CIS countries as OsOO.

[edit] Serbia

Serbian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name.

[edit] Slovenia

Slovenian legislation contemplates LLCs as družba z omejeno odgovornostjo. Companies working under this structure append the abbreviation d.o.o. to their name. Due to high cost and complicated bookkeeping of a real Corporation, this is a more widespread form.

[edit] Sweden

The Swedish version of the LLC is the AB (aktiebolag). Swedish law contains two different types of LLCs. One meant for smaller companies (private AB) and one for larger companies (public AB). The law gives different rights and requirements on the two types of LLC. The public AB is an example required to keep a more advanced and detail accounting record and only public ABs are allowed to offer their shares to the public. The minimum capital required by law is depend on the type of AB, Private AB requires at least SEK 100,000 (approximately USD 17,000), Public AB require at least SEK 500,000 (approximately US$ 84,000).

[edit] Romania

This type of entity exists in this country since 1990 (abbreviated in Romanian, it is "SRL" ). The owner is liable only with a value equal with the company's start capital, and because of that each SRL must clearly indicate this amount in the business relations, so that the other party knows how much money cover there is. The minimum start capital is less than $100 US.[citation needed]

[edit] Names and abbreviations

Most states require that the company name contain one of the following terms, with some variation by state:

  • Limited Liability Company, L.L.C., or LLC
  • Limited Company, L.C., or LC
  • Ltd. Co.

Limited liability companies may not use the following terms on their own:

  • Company or Co. — reserved for corporations in most states (the use of the term "company" alone is not valid for a corporation in some states)
  • Limited or Ltd. — reserved for corporations in Texas (except in Nevada, which allows the use of Limited or Ltd.)

[edit] See also

[edit] References

 This article does not cite any references or sources. (October 2007)
Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed.
  1. ^ Limited Liability Company (LLC)
  2. ^ Historical Background of the Limited Liability Company
  3. ^ Keatinge et al.,“The Limited Liability Company: A Study of the Emerging Entity,” 47 Business Lawyer 375, 383-384 (Feb. 1992) (citing Act of March 4, 1977, ch. 155, 1977 Wyo.Sess.Laws 512).
  4. ^ Priv. Ltr. Rul. 81-06-082, 1980 WL 137231 (Nov. 18, 1980)
  5. ^ Prop. Treas. Reg. § 301.7701-2, 45 Fed. Reg. 75,709 (1980)
  6. ^ Fla.Stat.Ann. §§ 608.401-471
  7. ^ Keatinge et al.,“The Limited Liability Company: A Study of the Emerging Entity,” 47 Bus. Law. 375, 383-384 (Feb. 1992)
  8. ^ Rev.Rul. 88-76, 1988-2 C.B. 360.
  9. ^ Larry E. Ribstein, A Critique of the Uniform Limited Liability Company Act, 25 Stetson Law Review 312, 322 (1995).

[edit] External links