in Your Future?
An S Corporation Isn't Always Best
Until recently, a business activity could be organized or chartered under one of three forms: a proprietorship, a partnership, or a corporation. Some simple variations in these primary structures have emerged during the past 50 years, e.g., the limited partnership and the S corporation [formerly Subchapter (s) in the Internal Revenue Code]. Unfortunately, the smaller business often found each of these structures to be ill-fitting for its unique needs.
Since the early 1980s, 48 States have now enacted legislation allowing Limited Liability Companies (LLC) and its kinsman, Limited Liability Partnerships (LLP), that are often best-suited to entrepreneurs and professionals. In essence, the LLC strives to combine the best features of corporations and partnerships. The members of an LLC enjoy the limited liability similar to the shareholders of a corporation, but income is taxed as a partnership, i.e., there is no double taxation as is encountered with a C corporation.
While the day-to-day operations of the limited liability company (LLC) are similar to a partnership, it has all of the liability shield benefits of a C corporation. The personal risk faced by the "members" (investors) financing the business is limited to no more than the amount they have invested in the enterprise. Its companion, the LLP, protects members of partnerships -- e.g., accounting, law, engineering and architectural firms -- from placing their personal assets at risk when a fellow partner may be sued.
The principals in an LLC are generally known as "members" and their investments in the entity are generally known as "contributions." The shield against personal liability is typically stated, "... the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company; and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by being a member or a manager of the limited liability company."1
Similar to the shareholders of a corporation, there may be "... classes or groups of members having such relative rights, powers and duties as the operating agreement may provide ..." and this operating agreement "... may grant to all or certain identified members or a specified class or group of the members the right to vote separately or with all or any class or group of the members or managers, on any matter. Voting by members may be on a per capita, number, financial interest, class group or any other basis."2
"The contribution of a member to a limited liability company may be in cash, property, or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services."3 And an LLC "... may consolidate or merge with or into one or more domestic limited liability companies or other business entities formed or organized under the law of the commonwealth or any other State of the United States or any foreign country or other foreign jurisdiction ..."4
The conduct of business for an LLC is governed by an "operating agreement." This entrepreneurial structure is unusually malleable in defining the "rights, powers and duties" of the members and managers as well as "the right to vote" and the forms of "contributions" to equity by the members. In other words, an LLC can be designed to meet almost any objectives envisioned by the founding members and managers, and can be readily redesigned whenever desired by the members and managers. It is not hamstrung by statutory or regulatory proscriptions. Simplicity and great flexibility are the hallmarks of the LLC.
With some variations, the limited liability company (LLC) is a business structure now available in almost every State; it is designed to meet the singular requirements of the smaller business. It is a form of business structure warranting thoughtful consideration by the owner/manager of every smaller business.
1 The General Laws of the Commonwealth of Massachusetts, Chapter 156C,
Section 22 (Limited Liability Company Act).
2 Section 21 (a) and (b).
3 Section 27.
4 Section 59 (b).
Revised: June 11, 2000 TAF
© Copyright 1996, 2000 Thomas A. Faulhaber, All Rights Reserved