Considerations in Forming a Limited Liability Company

Limited Liability Company

A Limited Liability Company generally offers liability protection similar to that of a corporation but is taxed similar to a partnership. Limited Liability Companies may be managed by one or more managers or one or more members. An operating agreement governing its members and operation of the Limited Liability Company is an essential element of a viable and stable limited liability company.

A limited liability company ("LLC) is a fairly new form of business entity that combines the operational flexibility and tax status of a general partnership with the limited liability protection traditionally associated with limited partnerships and corporations. An LLC has far greater operational flexibility than either the Subchapter C Corporation, a Subchapter S Corporation or a Limited Partnership.

The Principal Characteristics of Limited Liability Companies

1) The LLC is not required to hold annual meetings or to comply with the many operational restrictions imposed upon corporations.

2) The restrictions on the number and types of shareholders applicable to a subchapter S corporation do not apply to the owners of an LLC (the "members"). The members of an LLC may also participate in management to a greater extent than limited partners.

3) An LLC differs from a general partnership inasmuch as its members are not personally liable for the obligations of the LLC. It also differs from a limited partnership in that no member is jointly and severally liable for obligations of the LLC, unlike the general partner in a limited partnership. An LLC is subject, however, to disclosure, record keeping and reporting requirements that do not apply to a general partnership.

4) An LLC is a business entity consisting of one or more "persons" (meaning an individual, general partnership, limited partnership, association, trust, estate or corporation,) conducting business for any lawful purpose. An LLC may be an incorporator, general partner, limited partner, applicant of a DBA, or a manager of any corporation, partnership, limited partnership or limited liability company.

5) LLC's consist of members, managers, and employees. Management of the company is reserved to the members or managers as specified in the Articles of Organization. Generally, neither members, managers, nor employees are personally liable for any debt or obligation of the company.

6) LLC's are creatures of statute and become effective once having filed approved Articles with the Division. Like most business types filed with the Division, LLC's are formed by filing Articles (called Articles of Organization.) Foreign LLC's may transact business in the state once having completed an Application for Registration. LLC's may amend their articles, file Articles of dissolution, and must file an Annual Report.

Creating a Limited Liability Company or LLC'S

LLC's are "organized" by filing with New York State Department of State http://www.dos.state.ny.us

Historical Review of Limited Liability Company's

The first limited liability company legislation was enacted in Wyoming in 1977. Florida enacted similar legislation in 1982. Neither act was widely used prior to 1988, however, because of uncertainty regarding the federal tax treatment of LLC's. From 1977 to 1987, the IRS refused to issue letter rulings on LLC's. This meant that during this period no LLC could be certain whether it would be treated as a corporation or as a partnership for federal income tax purposes. The LLC was introduced to NY State in 1994.

The corporate attributes the IRS looked for, were: centralized management; limited liability; free transferability of interest; and continuity of existence. The IRS determined that the Wyoming LLC has the first two corporate attributes, but lacked the latter two. This ruling affirmed the IRS' long-standing position that an entity having two or less of the four specified corporate attributes will be treated as a partnership for federal income tax purposes.

Partnership tax treatment is advantageous because the earnings of a partnership are treated as the earnings of its partners. No separate tax is imposed on the partnership entity. In contrast, the earnings of a corporation are taxed at the entity level; any dividends which are distributed to the shareholders are also taxable to the shareholders. Thus, the distributed earnings of a corporation are taxed twice, while the earnings of a partnership are only taxed once. Like a partnership the earnings of the LLC are taxed only once.

Contact us for help.

^ top ^