Limited Liability Company: a business type with several advantages.

June 2015

While our previous article “Most Common Types of entities in the United States” analyzed the various forms of business entities which can be established in the USA,

this article will specifically focus on the Limited Liability Company.

The Limited Liability Company, also known as LLC, is the most popular way to start a business because of the advantages it offers.

It is a relatively new form of entity originally created in 1977 in the State of Wyoming and now recognized in all 50 States and the District of Columbia; and it can be best described as a hybrid between a corporation and a partnership since the LLC provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

Owners of an LCC are called members and may include individuals, corporations and other LLCs (whether domestic or not). Each owner is entitled to a Membership Interest, which represents a member’s collective rights in the LLC, including the member’s share of profits and losses of the LLC,  the  right  to  receive  distributions  of  the  company’s assets and any right to vote or participate in management. Members may personally manage the LLC as well as it may be managed by selected managers. Indeed, there are two different management structures of a LCC:

1)        Member management: assume that members participate equally in the management of the company’s business; each member has an equal say in the decision making process of the company which operates much like a partnership. This is more frequent to find in small LCCs.

2)        Manager management: in which one or more owners (or even an outsider) is designated to take responsibility for managing the LCC. Only the named managers are in charge of the affairs of the company, get to vote on management decisions and act as agents of the LLC, while the non- managing owners simply share in LLC profits and losses and have the right to vote.

There is no maximum number of members, so unlimited number of individuals, corporations and partnerships may participate in a LLC.

Most states also permit “single member” LCCs.

In order to create a LCC, it is necessary to file “Articles of Organization” (in some states called “Certificate of Organization” or “Certificate of Formation”) with the LCC Division of the State government. These are considered public documents meaning   that   they   are   generally accessible by the public. The minimum information required for the articles of organization varies from state to state. Generally, it includes the name of the LLC, the name of the person organizing the LLC, the duration of the LLC and the name of the LLC’s registered agent. Some states require additional information, such as the LLC’s business purpose and details about the LLC’s membership and management structure. In all states an LLC’s name must include words or phrases that identify it as a limited liability company. These may be the specific words Limited Liability Company or one of various abbreviations of those words, such as LLC or Ltd. Liability Co.

The LLCs usually come into existence on the same day the Articles of Organization are filed and a filing fee is paid to the Secretary of State. In addition to the Articles of Organization, the LLC must have an Operating Agreement, which governs the LLC’s finances and organization and sets the rules and regulations for operating the company (i.e., the LLC member’s rights and responsibilities, their percentage interests in the business, their share of the profits and other provisions) and lists the members of the company. The Operating Agreement may be easily modified with the required percentage of votes, as the business grows and changes.

As  mentioned  above,  the  LLC  is  a  hybrid  between  the corporation form of organization and the partnership form. Just like shareholders of a corporation, all LCC members are protected from personal liability for business debts and claims: only LCC assets may be used to pay off business debts, while owners stand to lose only the money invested in the company. However, a LCC doesn’t have the corporate formalities (board meetings, shareholders meeting, minutes, etc.)   or   extra   levels   of   management   (Shareholders, Directors,   Officers),   but   the   easy   management   of   a partnership, with just one level of management.

Another difference from corporations (in particular, “C” corporations) is related to the tax treatment of a LLC. Indeed, in the eyes of the federal government LCCs are considered as pass through entities, meaning that business income and expenses are “passed through” the business to the members, who report their share of profit – or losses – on their personal tax returns, just like the owners of a partnership would (so called, “federal pass-through tax advantage”), which is exactly the same tax advantage of partnerships. Thus, the business itself is not taxed, but business’ taxes are paid through the owners’ personal income tax return. However, if the LLC has only one member, it is treated as a disregarded entity for income tax purposes. Both LLC with two or more members and with only one member may elect to be treated as a corporation.

When the LLC has a single member, it may be useful to know about the Foreign Investment in Real Property Tax Act of 1980 income tax withholding, also known as FIRPTA. FIRPTA is a United States tax law that imposes U.S. income tax on foreign people selling U.S. real estate or, more in general, disposing of United States real property interests. People from all over the world invest in United States real estate, so if you are buying property from a foreign owner, FIRPTA may apply to your purchase. Under this law, people purchasing U.S. real property interests (transferee) from foreign persons (transferor) are required to deduct and withhold a tax equal to 10% of the total amount realized by the transferor on the disposition (which is normally the purchase price). It is important to know about FIRPTA because if the transferor is a foreign person and you fail to withhold, you may be held liable for the tax and penalties do apply.

The 2013 Florida Legislature adopted a new limited liability Company act, which is called the Florida Revised Limited Liability Company Act (the “Act”) and created new Chapter 605 of the Florida Statutes.

The new law became effective January 1, 2014, even though LLCs already in existence before that date were given the possibility to continue to operate under the provisions of the existing law (unless they elected to be governed by the new act) until December 31, 2014. This means that actually January 1, 2015 is the date from which all LCCs formed or registered in Florida are subjected to the new law.

Just like the previous law, the new one remained a “default statute”, which means that, except for the “nonwaivable” provisions expressly listed in the new Chapter 605, the members may override the statutory default rules by their operating agreement.

Among some of the more important changes in the new law are the following:

a)        Adds more “nonwaivable” rules pertaining to operating agreements, meaning that certain rules cannot be overridden by the operating agreement, while others can be modified with certain limitations;

b)        Delineates the liability of members and managers with  respect  inaccurate  records  filed  with  the

Department of State;

c)        Clarifies that there are only two management structures  for  LLCs  (“manager-managed”  and

“member-managed”) and defines very precisely the respective duties of members and managers in each case. Moreover, it eliminates the term “managing member”;

d)        Permits LLCs to file Statements of Authority with the Department of State to delineate the authority

of certain persons or groups of persons (as members, managers and/or officers) associated with the LLC;

e)        Permits interest exchanges and explicitly addresses direct actions by members against the LLCs, as well as actions against other members and managers, to enforce member’s rights and protect their interests.

Also,  for  the  first  time,  companies  based  outside  of  the United States that want to domesticate as Florida LLCs will be allowed to do so while keeping their status of foreign entity.

The new law has represented a substantial evolution in Florida law and was intended to modernize Florida’s LLC law, so to make Florida a more attractive place to organize and operate an LLC.

 

Cav. Piero Salussolia , Esq.

Dott.ssa  Angela  Cappuzzello (not admitted in Florida)

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IUS GENTIUM By: Piero Salussolia P.A.