Limited liability company
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A limited liability company (abbreviated L.L.C. or LLC) in the law of the vast majority of United States jurisdictions is a legal form of business company that provides limited liability to its owners. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
[edit] Terminology
- Member
- LLC members are the owners of the LLC much as shareholders are the owners of a corporation or the partners of a partnership. Like shareholders, a member's liability to repay the LLC's obligations is limited to his or her capital contribution. Members may be natural persons, corporations, partnerships, or other LLCs.
- Membership Interest
- A member's ownership interest in an LLC is often called a membership interest. Membership interests are often divided into standardized units which, in turn, are often called shares or units. Unless otherwise provided for in the operating agreement, a member's right to receive distributions or exercise member rights over the LLC is proportionate to their membership interest. Membership interests and member rights are regulated by state law.
- Manager
- LLCs may be managed by their members in proportion to their membership interests. Many LLC operating agreements, however, provide for a manager or board of managers to oversee or run the day-to-day operations of the LLC. The managers are elected or appointed by members and may also be, if so provided in the operating agreement, removed by members. A member may also be a manager, often called the managing member.
- Articles of Organization
- All LLCs must file evidence of their existence with the secretary of state (or some governmental office) of the state where they choose to be organized. The Articles of Organization serve this purpose.
- Operating Agreement
- The Operating Agreement of an LLC is the document most important to its success because it determines, defines, and apportions the rights of the members and the managers if any. The operating agreement generally is not filed with the secretary of state (or other governmental office) .
[edit] Flexibility and default rules
The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility of the LLC.
In contrast, the phrase "unless otherwise provided for in the bylaws" is also found in all corporation law statutes but often refers only to relatively minor matters.
[edit] Management
LLCs may be either member-managed or manager-managed. A member-managed LLC may be governed by a single class of members (in which case it approximates a partnership) or multiple classes of members (in which case it approximates a limited partnership). Choosing manager management creates a two-tiered management structure that approximates corporate governance with the managers typically holding powers similar to corporate officers and directors. The LLC's operating agreement (the LLC version of a partnership agreement or a corporation's bylaws) determines how the LLC is managed. Corporations, S-corporations, Limited Liability Partnerships, Limited Partnerships, Limited Liability Limited Partnerships, and LLCs lie along a spectrum of flexibility with LLCs being the most flexible, and thus preferable, for many businesses.
[edit] Income taxation
For U.S. Federal income tax purposes, LLCs that are treated as partnerships use IRS Form 1065. LLCs are organized with a document called the "articles of organization," or "the rules of organization" specified publicly by the state; additionally, it is common to have an "operating agreement" privately specified by the members. The operating agreement is a contract among the members of an LLC and the LLC governing the membership, management, operation and distribution of income of the company.
Under some circumstances, however, the members (the LLC version of shareholders or partners) may elect for the LLC to be taxed like a corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members).
Operating as an LLC form of partnership does not mean that appropriate US federal partnership tax forms are not necessary, or not complex. As a partnership, the entity's income and deductions attributed to each member are reported on that owner's tax return.
With federal income tax treatment as a partnership, LLCs can lose the tax advantage. The possible label "disregarded entity" for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner's individual tax return on a Schedule E tax form. And an LLC owned by a corporation--in other words, an LLC with a single corporate member--would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.
[edit] Advantages
- Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility.
- Limited liability, meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity[vague].
- Much less administrative paperwork and record keeping than a corporation.
- Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
- Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
- LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate legal standing from their members (see recent D.C. decisions).
- LLCs in some states can be set up with just one natural person involved.
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (see, for example, the Virginia and Delaware LLC Acts).
- Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members
[edit] Disadvantages
- Although there is no statutory requirement for an operating agreement in most states, members who operate without one may run into problems.
- It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
- Many states, including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
- Some creditors will require members of up-and-starting LLCs to personally guarantee the LLC's loans, thus making the members personally liable for the debt of the LLC.
- The management structure of an LLC may be unfamiliar to many. Unlike corporations, they are not required to have a board of directors or officers.
- Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes, for example if a US LLC does business outside the US or a resident of a foreign jurisdiction is a member of a US LLC.
- The LLC form of organization is relatively new, and as such, some states do not fully treat LLCs in the same manner as corporations for liability purposes, instead treating them more as a disregarded entity, meaning an individual operating a business as an LLC may in such a case be treated as operating it as a sole proprietorship, or a group operating as an LLC may be treated as a general partnership, which defeats the purpose of establishing an LLC in the first place, to have limited liability (a sole proprietor has unlimited liability for the business; in the case of a partnership, the partners have joint and several liability, meaning any and all of the partners can be held liable for the business' debts no matter how small their investment or percentage of ownership is).[citation needed]
- The principals of LLCs use many different titles -- e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
[edit] Variations
- A Professional Limited Liability Company (PLLC or P.L.L.C.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a doctor, chiropractor, lawyer, accountant, architect, or engineer, require the formation of a PLLC. Exact requirements of PLLCs vary from state to state. Typically, a PLLC's members must all be professionals practicing the same profession. In addition, the limitation of personal liability of members does not extend to professional malpractice claims.
- A Series LLC is a special form of a Limited liability company that allows a single LLC to segregate its assets into separate series. For example, a series LLC that purchases separate pieces of real estate may put each in a separate series so if the lender forecloses on one piece of property, the others are not affected.
[edit] History by country
Companies with limited liability exist in business law worldwide, however the limited liability company is a specific legal structure defined by the laws of states of the United States and with quite distinct characteristics. Several other countries have similar structures.
[edit] United States
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.[1] The LLC is chiefly inspired by the GmbH, a type of business organization in Germany, and by limitadas, a type of business organization available in many Latin American countries.[2]
The first limited liability company act appeared stateside in Wyoming in 1977 as special interest legislation for an oil company.[3] In 1980, the Internal Revenue Service issued a private letter ruling to an LLC formed under Wyoming LLC Act indicating that the IRS would treat the LLC as a partnership for federal tax purposes.[4] However, later that year, the IRS proposed regulations that would deny partnership classification to any business entity in which no member bore personal responsibility for the entity’s liabilities. [5] In 1982, Florida adopted an LLC act modeled on Wyoming’s LLC Act.[6] Due to uncertainty over the tax treatment of LLCs, no other states introduced LLC legislation until after 1988.[7] In 1988, the IRS issued a revenue ruling stating that it would treat a Wyoming-style LLC as a partnership for tax purposes.[8] By 1996, nearly every state had enacted an LLC statute.[9] The National Conference of Commissioners on Uniform State Laws adopted the Uniform Limited Liability Company act in 1996 and revised it in 2006.
[edit] United Kingdom
The new form of Limited liability partnership (created in 2000) is similar to a U.S. LLC as it is tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise all companies, including limited companies and US LLCs, are treated as corporate bodies subject to Corporation Tax if the profits of the entity belong to the entity and not to its members.
[edit] Belgium
In Belgium there are several different forms of corporations which provide limited liability. The "BVBA" (Besloten Venootschap met Beperkte Aansprakelijkheid"), or "SPRL" (Société Privée à Responsabilité Limitée) in French, is the smallest where the startup capital is required to be 18.500 EURO by law. It is mostly used for smaller businessowners who want to protect themselves in case of bankcrupcy.
[edit] Bosnia and Herzegovina
Bosnian and Herzegovinian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Legislation is very similar to Croatian. Companies working under this structure append the abbreviation d.o.o. to their name.
[edit] Brazil
The corporate structure in Brazilian law most similar to the United States LLC is the Sociedade Limitada ("Ltda."), under the new Brazilian Civil Code of 2002. The "sociedade limitada" is the new name of the "sociedade por quotas de responsabilidade limitada", and it can be organized as "empresária" or "simples", under this new code, roughly corresponding to the form types of "commercial" [commercial] and "civil" [non commercial] of the former and now extinct Commercial Code.
[edit] Chile
Chilean legislation contemplates LLCs as Sociedad Comercial de Responsabilidad Limitada (Limited Liability Commercial Association). Companies working under this structure append the abbreviation Ltda. to their name. Therefore, a company which in the United States is called SomeCompany LLC would be called SomeCompany Ltda. in Chile. However, in the case of an LLC with one individual owner, the equivalent in Chile would be an Empresa Individual de Responsabilidad Limitada which uses the EIRL abbreviation. ====
[edit] Colombia
Colombian legislation contemplates a very similar structure as mentioned above in the Chilean case. The Ltda. abbreviation is also used in Colombia.
[edit] Croatia
Croatian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name, same as in Serbia.
[edit] Czech Republic
Czech legislation contemplates LLCs as společnost s ručením omezeným, abbreviated as s.r.o. or spol. s r.o.. The s.r.o. is not technically comparable to LLC because the profits are still subject to double taxation. The Czech law does not offer a possibility to start up a limited company without the possibility of avoiding the double taxation. The minimum capital is required by law to be at least CZK 200,000 (approximately US$ 9,100).
[edit] Denmark
The Danish form of the LLC is the anpartsselskab (see ApS). The minimum capital is required by law to be at least DKK 125,000 (approximately US$ 26,000).
[edit] Egypt
In Egypt, before 1954, there were restrictions hampering companies taking the form of Joint Stock Company and benefiting from the advantages. Most importantly, restrictions involving identifying the responsibility of each partner owned shares of the capital. Therefore; the Egyptian legislature has introduced - Act No. 26 of 1954 - a kind of companies called limited liability companies, and these companies have been exempted from the restrictions more shareholding companies, while retaining the fundamental advantage, and is to be responsible partners is limited to the amount of shares owned Of the company. And the limited liability companies in accordance with the law 26 of 1954, flanked by two constraints are essential: the first - that may not be less capital thousand pounds and is divided capital shares equal to the value of each of not less than twenty pounds. And the second - that may not increase the number of partners on the fiftieth partner, and at least two, the couple was among the partners must be of at least three partners.
And has been the abolition of Law No. 26 of 1954 under the Act 159 of 1981 which rose to list the minimum operational capital limited liability company of thousand pounds to fifty thousand pounds, then returned to the thousand pounds in the recent amendment, and law 159 For the year 1981 is no longer required that the minimum partners in the limited liability company of three partners in the case of couples.
[edit] Estonia
In Estonia, a limited liability company is referred to as osaühing (OÜ). The type of entity is also required to be identified in the name. The minimum required starting capital for a limited company in Estonia is currently 40,000 EEK (~2556 EUR).
[edit] Germany
Because of its hybrid characteristics it is very difficult to determine the German equivalent. On the one hand it is possible to consider it as a kind of Gesellschaft mit beschränkter Haftung (GmbH) because it has aspects of a corporation; on the other hand it could be considered as a kind of Kommanditgesellschaft (KG), which is the German equivalent of a limited partnership. Based on the literal translation of the word "company" an LLC should be considered as a kind of KG without any liable partner. For the purpose of taxation the Bundesfinanzministerium (German Federal Ministry of Finance) gives detailed guidelines of the circumstances under which a LLC is to be considered as a "corporation" or as a "limited partnership"; see: Steuerliche Einordnung der nach dem Recht der Bundesstaaten der USA gegründeten Limited Liability Company.
[edit] Hungary
Hungarian legislation contemplates LLCs as Korlátolt felelősségű társaság. Companies working under this structure append the abbreviation Kft. to their name.
[edit] Italy
The Italian Civil Code approved in 1942, as amended by the Government Act 6/2003, regulates three forms of limited liability company: Società per azioni or SpA. The minimum required starting capital for a SpA is EUR 120,000. Società a responsabilità limitata or Srl. The minimum required starting capital for a Srl is EUR 10,000. Società in accomandita per azioni or Sapa. The minimum required starting capital for a Sapa is EUR 120,000. Sapa have a mixed liability scheme, where standard partners have limited liability while managing partners have full liability. Companies append the correspondent abbreviation to their names.
[edit] Japan
Japan passed legislation in 2006 creating a new type of business organization, godo kaisha, a close variant of the American LLC.
[edit] Latvia
SIA - Sabiedrība ar Ierobežotu Atbildību
[edit] Lithuania
UAB - Uždaroji Akcinė Bendrovė
[edit] Macedonia
Macedonian legislation contemplates LLCs as друштво со ограничена одговорност. Companies working under this structure append the abbreviation д.о.о. to their name. This is the most spread organizational form of Macedonian companies.
[edit] Mexico
Mexican legislation contemplates LLCs as Sociedades de Responsabilidad Limitada, also known for their abbreviation "S. de R.L.". S. de R.L.'s award limited liability to its members up to their contribution in the company (i.e. contribution of capital) and also act as pass-through or flow-through entities whereby profits are "passed-through" to its members, avoiding double taxation. This type of company is widely used by foreign investors in Mexico because of its "pass-through" modality and its "check the box" capability under the IRC (Internal Revenue Code of the U.S.).
[edit] Moldova
Moldovan legislation contemplates LLCs as Societate cu Răspundere Limitată, abbreviated "S.R.L.", and are regulated member(s)-founder(s), and other non-founder members, minimum one member-founder and maximum total of 50 members, at least one of them must be the founder of the company, but all of the 50 could be also founders.
[edit] Poland
Polish legislation contemplates LLCs as Spółka z ograniczoną odpowiedzialnością. Companies working under this structure append the abbreviation Sp. z o.o. (or Spółka z o.o. ) to their name and it is said to be the working congeniality .
[edit] Romania
This type of entity exists in this country since 1990 (abbreviated in Romanian, it is "SRL"). The owner is liable only with a value equal with the company's start capital, and because of that each SRL must clearly indicate this amount in the business relations, so that the other party knows how much money cover there is. The minimum start capital is less than $100 US.[citation needed]
[edit] Russia
In Russia and certain other former Soviet countries, an entity with a somewhat similar structure is known as Общество с ограниченной ответственностью (lit., 'Society with Limited Liability'), usually abbreviated OOO, or in some CIS countries as OcOO.
[edit] Serbia
Serbian legislation contemplates LLCs as društvo s ograničenom odgovornošću. Companies working under this structure append the abbreviation d.o.o. to their name.
[edit] Slovakia
In Slovakia, the law contemplates spoločnosť s ručením obmedzeným as the rough equivalent of a limited liability company. One to 50 associates can found it through a founding agreement with minimum capital of 5000€, minimum 750€ per person, in money or other property.
[edit] Slovenia
Slovenian legislation contemplates LLCs as družba z omejeno odgovornostjo. Companies working under this structure append the abbreviation d.o.o. to their name. The minimum required starting capital for a d.o.o. is 7.500 EUR. Due to high cost and complicated bookkeeping of a real Corporation, this is a more widespread form.
[edit] Sweden
The Swedish version of the LLC is the AB (aktiebolag). Swedish law contains two different types of LLCs - one meant for smaller companies (private AB) and one for larger companies (public AB). The law gives different rights and requirements for the two types of LLC. The public AB is, for example, required to keep more advanced and detailed accounting records and only public ABs are allowed to offer their shares to the public. The minimum capital required by law is dependent on the type of AB: Private AB requires at least SEK 100,000 (approximately USD 17,000); Public AB requires at least SEK 500,000 (approximately US$ 84,000).
[edit] Switzerland
The Swiss Code of Obligations[10] provides for different kinds of companies with limited liability, the two most commonly used are:
Swiss Limited Liability Company:[11][12] The terms for this kind of company used in the three official languages of the Swiss Confederation are as follows: In German Gesellschaft mit beschränkter Haftung (abbreviation: GmbH), in French Société à responsabilité limitée (abbreviation: S.à r.l. or SARL) and in Italian Società a Rischio Limitato (abbreviation: S.a R.L.). A Swiss LLC is similar to a LLC with respect to various matters, including the following: Members may also be natural persons, corporations, partnerships or other LLCs,[13] the liability of a member of a Swiss LLC to pay for the LLC's obligations is limited to its capital contribution,[14] a Swiss LLC may be either member-managed or manager-managed,[15] and, unless otherwise provided for in the operating agreement, the members’ right to control or manage a Swiss LLC is proportionate to their individual membership interest.[16] The membership interests in a Swiss LLC have to be registered[17] and, thus, they may only be issued in the name of a member but not to the bearer.
Swiss Corporation[18][19] (in English common law context usually translated as company limited by shares): The terms for this kind of company used in the three official languages of the Swiss Confederation are as follows: In German Akiengesellschaft (abbreviation: AG), in French Société Anonyme (abbreviation: SA) and in Italian Società Anonima (abbreviation: SA). A Swiss corporation is with respect to various matters different to a LLC (including a Swiss LLC): Most important is that a Swiss corporation may, neither by default nor by exercising any respective option provided by the Swiss law, be member-managed like a LLC, as the respective mandatory provisions of Swiss law provide that the board of directors has certain non-transferable duties.[20] Furthermore, the shares of a Swiss corporation may also be issued to the bearer (bearer shares)[21] and, thus, not only in the name of a holder (registered shares), which, however, applies to the membership interests in a Swiss LLC, which may only be registered.
[edit] Ukraine
This type of entity exists in this country since 1990-es. In Ukrainian it spells "Товариство з обмеженою відповідальністю" (abbreviated - TОВ, TзОВ), in transliteration "Tovarystvo z Obmezhenoyu Vidpovidalnistyu," that is, "Union of limited liability."
[edit] U.A.E.
This type of entity exists in the U.A.E. states as a widely accepted way to do business and is referred as L.L.C.
[edit] Names and abbreviations
Most states require that the company name contain one of the following terms, with some variation by state:
- Limited Company, L.C., or LC
- Limited Liability Company, L.L.C., or LLC
- Ltd. Co.
Limited liability companies may not use the following terms on their own:
- Company or Co. — reserved for corporations in most states (the use of the term "company" alone is not valid for a corporation in some states)
- Limited or Ltd. — reserved for corporations in Texas (except in Nevada, which allows the use of Limited or Ltd.)
[edit] See also
- GmbH, a European form of the LLC
- Limited liability
- LLP
- Series LLC
- Types of business entity
- Uniform Limited Liability Company Act
[edit] References
- ^ Limited Liability Company (LLC)
- ^ Historical Background of the Limited Liability Company
- ^ Keatinge et al.,“The Limited Liability Company: A Study of the Emerging Entity,” 47 Business Lawyer 375, 383-384 (Feb. 1992) (citing Act of March 4, 1977, ch. 155, 1977 Wyo.Sess.Laws 512).
- ^ Priv. Ltr. Rul. 81-06-082, 1980 WL 137231 (Nov. 18, 1980)
- ^ Prop. Treas. Reg. § 301.7701-2, 45 Fed. Reg. 75,709 (1980)
- ^ Fla.Stat.Ann. §§ 608.401-471
- ^ Keatinge et al.,“The Limited Liability Company: A Study of the Emerging Entity,” 47 Bus. Law. 375, 383-384 (Feb. 1992)
- ^ Rev.Rul. 88-76, 1988-2 C.B. 360.
- ^ Larry E. Ribstein, A Critique of the Uniform Limited Liability Company Act, 25 Stetson Law Review 312, 322 (1995).
- ^ official German text: http://www.admin.ch/ch/d/sr/220/index3.html, official French text: http://www.admin.ch/ch/f/rs/220/index3.html, official Italian text: http://www.admin.ch/ch/i/rs/220/index3.html
- ^ Swiss Code of Obligations, articles 772ss
- ^ Unofficial translation of term pursuant to: Swiss Code of Obligations, Volume II, Company Law, Articles 552 – 964, English Translation of the Official Text, Swiss-American Chamber of Commerce, Zurich 1992
- ^ Swiss Code of Obligations, article 722 paragraph 1
- ^ Swiss Code of Obligations, article 802
- ^ Swiss Code of Obligations, article 811
- ^ Swiss Code of Obligations, article 808 paragraph 4
- ^ Swiss Code of Obligations, article 790
- ^ Swiss Code of Obligations, articles 620ss
- ^ Unofficial translation of term pursuant to: Swiss Code of Obligations, Volume II, Company Law, Articles 552 – 964, English Translation of the Official Text, Swiss-American Chamber of Commerce, Zurich 1992
- ^ Swiss Code of Obligations, article 716a
- ^ Swiss Code of Obligations, article 622 paragraph 1
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