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Related Articles: Business Law/Commercial Landlord
This article
is intended to provide general information on Virginia law, and is not intended
to be relied upon as a substitute for legal advice for specific situations. The
contents of the article may be out-of-date, since it was produced at a specific
time and may not have been updated.
Limited Liability Company: Its Time Has Almost Arrived
Why are so many businesses ready to form a Limited Liability
Company (LLC) over the general partnership, the limited partnership,
the S Corporation and the closely held corporation? Why not,
if you can achieve the advantages of flow-through tax treatment
and limited liability for owners with simplicity of structure.
Although LLCs created and used by the Germans since 1892,
the first state to enact a true LLC statute was Wyoming in
1977. Virginia and Maryland both recently enacted LLC statutes
as have the majority of states. However, not all such statutes
are the same, leaving concerns about whether certain states
will respect the tax pass-through and limited liability of
LLCs from other states. Nevertheless, a Uniform LLC Act will
be formulated in the near future which will resolve many of
these problems.
The IRS Says "Yes"
Until 1988 when the IRS finally upheld the Wyoming statute,
it was uncertain whether the LLC would be classified as a
partnership for federal tax purposes. The IRS now permits
partnership tax treatment of an LLC if it lacks two of four
corporate characteristics, which it defines as:
- continuity of life
- centralization
of management
- limited liability
- free transferability of interest
The IRS ruling encourages members of the LLC to manage the
business themselves. However, a 1994 IRS regulation has caused
renewed concerns for LLCs set up only for tax avoidance.
The LLC resolves the restraints of S Corporation elections,
and still permits direct management which is a handicap of
the Limited Partnership entity. The LLC has the flexibility
of a partnership in structuring the allocation of profits,
losses and distributions in differing ratios. Thus, tax benefits
are achieved while the general partner is shielded from personal
liability.
Formation of LLC
At its inception the LLC in Virginia files simple Articles
of Organization with the State Corporation Commission. A Registered
Agent is required. Existing general and limited partnerships
can convert to an LLC. The Operating Agreement defines the
members agreements on capitalization, voting, management,
distributions, allocations and addition of new members.
Members and managers (who need not be members) are subject
to statutory standards of conduct in order to be protected
from liability. However, creditors can "enforce a member's
right against or liability to" the LLC.
Popular Uses
Real estate investing is moving toward LLCs. In addition to
the other benefits, they provide simplification of estate
and multi-state problems because of the LLC's ability to hold
and pass title after death or incompetency
The flexibility of forming a management and ownership structure
designed for particular needs will entice many new businesses,
venture capital and corporate joint ventures. Family businesses
can avoid S Corporation difficulties, maintain control, yet
still permit the involvement of multiple individuals.
Professionals can avoid losing their personal assets because
of the negligent acts of a partner or employee. Non-American
businesses have used this business form for a long period
of time and in many cases would prefer it when investing in
the U.S.
Conclusion
Some concerns remain, such as how to freely transfer membership
interests, forced dissolution upon death or termination of
a member, and recognition of the LLC by other states. Nevertheless,
the LLC can be used now for activities within a single jurisdiction,
especially for certain joint ventures or for real estate investing.
Once lingering problems are resolved, it should replace general
and limited partnerships, as well as S Corporations.
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