Limited Liability Corporations

Limited Liability Corporations (LLC)

A Limited Liability Company has the advantage of being a hybrid between a partnership and a Corporation. The advantage of a Limited Liability Company is that most states require fewer formalities be observed in an LLC in comparison to a corporation.This type of corporation blends the tax advantages of a partnership and the limited liability advantages of a corporation. Owners of an LLC are referred to as “members.” As you might expect, it also has some limitations but is definitely worth considering.

Advantages of LLCs

Limited personal liability for the owners (like a corporation and unlike a partnership).
No Federal taxes (like a partnership).
No limit on the number of stockholders (unlike an S-corporation).
More than one class of stock is permitted (unlike an S-corporation).
Business losses may be deducted on your personal tax return (like a S-corporation).

Disadvantages of LLCs

Legal assistance is required to set up. The paperwork is complex.
No “continuity of life” as in a regular corporation. The LLC dissolves if one of the owners dies or otherwise leaves. However, other formal agreements between the owners can overcome this.
Some states require than an LLC have more than one member.

LLC Meetings While many states do not require that your Limited Liability Company hold meetings on a regularly scheduled basis, it’s always wise to conduct meetings with your members to ensure the LLC is in agreement in all its endeavors.

Opening a Bank Account Most banks require only a copy of your Articles of Organization and your federal Employer ID Number to open a bank account. Some, however, may also require a resolution passed by the Limited Liability Company’s members and a copy of the LLC Operating Agreement before opening an account. To better determine your bank’s requirements, you should contact the branch manager and ask about their requirements for New Accounts.

Advantage One LLC Member Required. Historically, most states require that a Limited Liability Company be comprised of at least two LLC members. Today most states and the IRS recognize the single-member LLC as a legitimate business structure.

Separate Legal Entity Like limited partnerships and corporations, the Limited Liability Company shares a similar advantage — it is recognized as a separate legal entity from its “members.”

LLC Management and Control Management and control of an LLC is vested with its members unless the Limited Liability Company’s articles of organization provide otherwise.

Voting Interest Ordinarily, voting interest in an LLC directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise

Transferability No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.

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Limited Liability Ordinarily, only the LLC is responsible for the company’s debts thus shielding the members from individual liability. However, there are some exceptions where individual members may be held liable:

Guarantor Liability Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.

Alter Ego Liability Very similar to the judicial doctrine applied to corporations where a court may hold the individual shareholders liable where the business entity is merely the “Alter Ego” of its shareholders, a member of an LLC may also be held liable for the LLCs debts if the court imposes its “alter ego liability” doctrine.

Please note, however, that although a corporation’s failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in California. An LLC’s failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLCs Articles of Organization or Operating Agreement do not expressly require such meetings.

Duration An LLC does not have a reliable continuity of existence. The articles of organization must specify the date on which the Limited Liability Company’s existence will terminate. Unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC)Advantage Formalities. The existence of an LLC begins upon the filing of the Articles of Organization with the Secretary of State. The articles must be on the form prescribed by the Secretary of State. Among the required information on the form is the latest date at which the LLC is to dissolve and a statement as to whether the LLC will be managed by one manager, more than one manager, or the members.

To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.