comm law 2- business entities- limited liability company

history of LLC

LLC wasn’t used because IRS didn’t say how it would be used, in 1994 IRS said LLC can choose to be taxed as GP or Corp (pass thru or double taxation)

double taxation

shareholders get dividends and pay personal taxes on it and tax on entity/corporation itself

LLC definition

an LLC is a non-corporate business that provides limited liability to all of its owners/members and it permits all of its members to participate in management

ease of creation/maintenance

need to file an article of organization or certificate of formation (depending on state), requires substantial compliance with state LLC statutes

some states…

require an operating agreement also be filed and some require that the name includes “LLC” or “Limited Liability Company”

ownership

by all the members (can be 1 member), could be equally or other (will say in operating agreement)

control and management

all members or operating agreement can select a manager (doesn’t have to be a member)

taxation

decide each year pass thru or double

liability

all protected (no personal liability), only LLC assets

outside investors

not attractive to investment but possibly to membership

termination

stated in operating agreement, if not then statute can terminate

advantages

control and manage with protection, flexibility with taxes, no limit to number of members, controlled by statute, easy to run, can convert to corporation with 1 form to IRS and SCC

disadvanatges

not able to use international business because not every country recognizes LLCs, varying state laws

what is an operating agreement

basic contract among the members, it governs the affairs of the LLC and includes the rights/duties of members/manager

operating agreement is…

subordinate to federal and state law

profit and loss sharing is….

addressed in the operating agreement

operating agreement specifies…

the type of management (member or not)

decisions all members have to vote on

1. amending articles of organization/certificate of formation

2. amending operating agreement

3. admitting new members

4. consenting to dissolve the LLC

5. consenting to merge with another LLC

6. selling or leasing or disposing in any way of all of the substantial assets of the LLC

rights of the members

1. right to the financial interest (what you transfer when you transfer rights)

2. management interest

3. right to withdraw and demand payment interest

4. assignment right