Limited Liability Company (LLC)

The Limited Liability Company, or LLC, is like a hybrid of the Corporation and the Partnership. The LLC is relatively new to the business world. The first LLCs were only created in the late 1970s, and a majority of the states did not allow LLCs until the 1990s.

An LLC is a business organization with one or more members that has limited liability for its members and that can elect to be taxed as a Partnership, a C Corporation, or an S Corporation. An LLC can have all of the tax advantages of a Partnership, but also have the liability shield that a Corporation has. Just the same, an LLC can be just like a Corporation should it choose to forgo pass-through taxation.

An LLC comes about after certain documents, called the Articles of Organization, are filed with the Secretary of State. This general requirement of filing is a key distinction between an LLC and a Partnership, as the latter does not require any filings and can be found to exist even where the parties may not have intended to form a Partnership per se.

One of the key features of an LLC is in how it is operated. For example, a Partnership is usually operated and managed by the partners, and, though not always the case, decisions are made equally. In a General Partnership, the general partners make the decisions. In a Corporation, Shareholders put a Board of Directors in place, the Board chooses Officers, and, aside from certain major decisions, the Board and the Officers run the Corporation. In an LLC, the owners, called Members, get to decide how the company is run. Members can run the LLC just like a Partnership, a Corporation, or something in between if they so choose. Most often, all of this would be set out in an Operating Agreement, which details who can do what, when, and how they can do it in regards to the LLC.

Like a Corporation, which issues Stock or Shares to its owners, an LLC issues Membership Interests or Units to its owners. This is another difference between the LLC form and the Partnership form, since the Partnership form does not issue Units to its owners. Instead, partners make contributions to the Partnership.

Another difference between Partnerships and LLCs has to do with dissociation and dissolution. Dissociation refers to the act of a member, shareholder, or partner leaving the business entity that they are involved in, like when a shareholder in a Corporation sells their shares of the Corporation. Dissolution refers to the act of ending the legal existence a business entity, in other words, the legal death of a Corporation, LLC, or Partnership. Traditionally, Partnerships ended and ceased to exist whenever a partner were to die, leave the partnership, or declare bankruptcy. These events are known as events of dissociation, because the partner is leaving the Partnership, and are often referred to as events triggering dissolution. Corporations, on the other hand, do not cease to exist whenever a shareholder dies, sells their shares in the Corporation, or declares bankruptcy. LLCs also allow Members the freedom to dissociate, just like in a Corporation, unless of course the Operating Agreement states otherwise. So, in the absence of contrary language in the Operating Agreement, members of an LLC can leave, die, or declare bankruptcy without causing the LLC itself to cease to exist.

As LLCs have emerged on the scene, they began to fill several voids. First, they offered limited liability to people who did not want to deal with the corporate form or, more importantly double taxation. Second, they provided partners with a liquid ownership and less likelihood of later, forced contributions in order to meet debt and other obligations. Third, LLCs do not need to be operated for a profit, allowing individuals the ability to operate an LLC toward their own taxable advantage.

As time progresses, the versatility of the LLC is becoming more widely understood, and as a result, the LLC is becoming much more widely used. LLCs have begun to dominate the real estate market as holding entities for real estate. Additionally, many individuals involved in Partnerships have converted their Partnership into an LLC for various reasons.

If you are considering the use of an LLC but would like to learn more about whether or not an LLC is the right entity choice for you, the Gabriel Law Office PLLC can help you by explaining how an LLC may work to your benefit or your detriment given your desired use of the entity. If you would like to learn more about the LLC or would like to draft up Articles of Organization and an Operating Agreement, contact the Gabriel Law Office PLLC.

For more information on properly maintaining your LLC and ensuring your limited liability protection check out:

Gabriel Law Office, PLLC

Suite 114
Riverwood Place
880 Sibley Memorial Highway
Mendota Heights, Minnesota 55118-1736

Telephone: (651) 554-9159
Facsimile: (651) 554-0344

Copyright © 2008, Gabriel Law Office, PLLC .
Website By: Minneapolis Web Design | Resources | Minnesota Web Design