CHAPTER 1

       LLCs and Limited Liability Company Acts

       The limited liability company (LLC) is America’s newest form of business organization. There is little or no historical precedent for LLCs; they are essentially creations of the state legislatures. Some commentators trace the origin of the LLC to a 19th-century form of business organization called the partnership association or limited partnership association. The great bulk of laws authorizing LLCs in the United States were passed in the 1980s and 1990s. Wyoming passed the first law authorizing the LLC in 1977. Florida followed in 1982. The watershed event in the rise of the LLC was a 1988 Internal Revenue Service ruling that recognized partnership tax treatment for LLCs. Within six years, 46 states authorized LLCs as a business form. By 1996, the last state to recognize LLCs, Vermont, had an LLC statute in place.

      The LLC is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. The limited liability company, as the name suggests, offers liability protection to its owners for company debts and liabilities.

SIMPLICITY AND FLEXIBILITY

      While LLCs are essentially creations of state legislatures, corporations are truly ancient—and today’s corporate law still carries some unwanted baggage. The modern American corporation has antecedents that date to Roman times, inherited by us through English law. The basic principles of American corporate law have not changed significantly in centuries. Probably the single greatest disadvantage of the corporate form is the burdensome range of formalities that corporate managers must observe. A modern corporation’s heavy administrative burden is a remnant of the more traditional and formal legal system under which corporate law was cultivated.

       ▼ Expert Tip

      LLCs are the favorite choice for small local business entities with one to three owners who do not plan to grow their business significantly and do not expect to raise significant amounts of capital. As the number of owners grows, the corporation becomes a more attractive choice as a business form.

      The LLC changed all that. The LLC offers the liability protection benefits of the corporation without the corporation’s burdensome formalities. It is this simplicity that has made the LLC an instantly popular business form for smaller companies.

      Another attractive feature of LLCs is their flexibility. An LLC can elect to be taxed either as a partnership or as a corporation. An LLC can be managed like a partnership (a member-managed LLC) or like a corporation (a manager-managed LLC). An LLC can create a board of directors and have a president and officers just like a corporation. An LLC can choose to have periodic meetings of its members or choose to ignore such formalities altogether.

POTENTIAL DISADVANTAGES OF THE LIMITED LIABILITY COMPANY

      The LLC has some disadvantages that will make it an undesirable business form for some purposes. The LLC is a new business form and courts have not yet developed a body of legal precedent governing it. Thus, LLC owners and professionals may face operating questions and issues for which they have little or no legal guidance. That said, this concern lessens as the states develop a reliable body of law concerning LLCs and is of no concern at all for very small companies.

      Furthermore, for business owners who wish to pursue venture capital, accumulate a large number of shareholders, and/or eventually pursue an initial public offering, the LLC is not an appropriate alternative to a corporation. Venture capitalists and angel investors tend to shy away from investing in LLCs. Most large, publicly held companies are corporations, not LLCs.

      What should the owners of an LLC do if their company grows so much that an LLC is no longer the appropriate business form? The answer is simple: it is possible to convert an LLC into a corporation. Thus, some small companies begin life as LLCs and then outgrow the LLC form, so the owners transfer the assets of their LLC to a corporation they form. Thereby, the LLC is converted to a corporation. Furthermore, as one might imagine, it is also possible to convert a corporation into an LLC or to convert nearly any business form into any other. It is also possible to reorganize a business in another state by transferring the assets of a business into a newly chartered entity. Converting business forms requires some sophisticated legal and tax analysis and it should not be attempted without the services of a qualified attorney and accountant

      The cost of setting up an LLC is roughly equivalent to setting up a corporation. The secretary of state’s fees for filing articles of organization and for filing annual reports are often the same for both LLCs and corporations. Organizers who wish to seek help with organizing an LLC through an LLC formation service or through an attorney will find the fees to be roughly the same.

       Advantages and Disadvantages of the Limited Liability Company

       Advantages of the limited liability company: