The Limited Liability Company, or LLC, is a hybrid of the corporation and partnership. The LLC is relatively new to the business world, having only come into existence in the late 1970s and a majority of the states not adopting them until the 1990s. Unlike a partnership, which may be formed without any written formalities, an LLC must be registered and is formed by filing articles of organization with the Minnesota Secretary of State. The LLC may then operate as a legal entity for any lawful purpose.
An LLC is a business organization consisting of one or more members. Like shareholders of a corporation, the members have an ownership stake in the LLC (known as a membership unit or interest) and may vote on certain aspects of the company’s business. The members also enjoy limited liability on the company’s affairs. Unlike a corporation, however, which is limited in how it may be taxed, the LLC is more flexible in that it may elect to be taxed like a partnership, a “C” Corporation, or an “S” Corporation. This flexibility affords its members a great advantage in structuring how business profits are earned.
The LLC is also flexible in how it is operated. It may be run similar to a partnership (member-managed), a corporation (board-managed), or somewhere in between (manager-managed). In a member-managed LLC, the members manage the company’s affairs, making all decisions for the LLC by majority or consensus vote. Under a board-managed operation, the LLC functions very similar to a traditional corporation comprised of a board of governors, which may appoint officers (e.g., President, Vice President, Secretary, Treasurer), who will then manage the day-to-day operations of the firm. Finally, an LLC may choose to be managed by one or more managers. The managers may be a member of the LLC or some other non-owner appointee who will control the company’s operations. Most often, a document called an operating agreement will set forth the ground rules of the company and will specify who will govern the company, how it will be managed, and what terms will control in transferring ownership within or outside the company.
In addition, LLCs are flexible when it comes to dissociation or dissolution. Dissociation refers to the act of a member, shareholder, or partner leaving a business entity (e.g., a shareholder sells his or her stock in a corporation). Dissolution, on the other hand, refers to the termination of an entity’s existence (i.e., the legal death of the corporation, LLC, or partnership). In a partnership, dissociation and dissolution are often one in the same, since a partner’s dissociation from the partnership, either through death, bankruptcy, or otherwise, is an event triggering dissolution. By contrast, in a corporation, shareholders selling or transferring their stock does not trigger dissolution. The corporation continues to go on with its affairs following the change in ownership. LLCs, by default, are modeled after the corporation and do not dissolve upon a member’s dissociation. However, members may tailor their operating agreements to provide more restrictions akin to the partnership model, whereby a member’s dissociation may trigger dissolution. But in the absence of such restrictions in an operating agreement, members may leave, die, or declare bankruptcy without causing dissolution.
In sum, since the LLC emerged in the 1970s, LLCs have become commonplace and appeal to many new businesses seeking flexibility. They offer limited liability protection without having to comply with all of the formalities of a corporation. They provide flexibility when it comes to taxation. They provide members with more liquidity in ownership and less risk of forced contributions to meet debt and other company obligations. And finally, LLCs are not required to be operated for a profit, offering individuals added flexibility in gaining taxable advantages. As time progresses, the versatility of the LLC is becoming more widely understood, and, as a result, the LLC is becoming much more widely accepted. LLCs have now become the entity of choice for the real estate holdings, and we are seeing many individuals opting to convert existing partnerships into LLCs.
If you are considering an LLC and would like to learn more about whether it’s the right entity for you, we can help you make those decisions. We are well-versed in LLC formation and operation and can draft the necessary documents to get your new LLC started right away.
For more information on properly maintaining your LLC and ensuring your limited liability protection check out: