What Do You Get . . .

. . . when you cross a partnership and a corporation? A hybrid form of business organization called a limited liability company, or LLC.

In recent years, a majority of states have approved LLCs as a new form of business entity. This unique unincorporated business entity combines the most favorable attributes of both partnerships and corporations.

Forming an LLC is very similar to organizing a corporation. Two or more persons may form an LLC for any lawful purpose. To form an LLC, articles of organization must be filed with the appropriate state office. The articles of organization must state the LLCs name, duration, and other information required by the statute or that the organizers deem important to include. The name of the LLC must contain the words Limited Liability Company or the abbreviation L.L.C. or L.C.

LLCs have several unique attributes. Like shareholders of corporations, owners of LLCs, called members, are not personally liable for the obligations of the LLC.

Another major feature of an LLC is the ability to be taxed as a partnership. In order to be taxed as a partnership instead of a corporation, an LLC can possess only four of the following six corporate atttributes:

1. associates,
   
2. an objective to carry on business and divide gains,
3. limited liability,
4. centralized management,
5. continuity of life, and
6. free transferability of interests.

The easiest of these to give up are continuity of life (by choosing a limited duration) and free transferability of interests (by placing restrictions on the transferability of interests). If two of the six corporate attributes are missing, an LLC enjoys the same pass-through tax status of a partnership.

Why should an LLC be used instead of an S corporation or a partnership? Corporations and partnerships are subject to many restrictions and adverse consequences which do not exist with an LLC, including

• S corporations cannot have shareholders other than estates, certain trusts, and individuals (who cannot be nonresident aliens). S corporations can have no more than 35 shareholders, one class of stock, and may not own more than 80 % of another corporation. LLCs have no such restrictions.

• In a general partnership, the partners are personally liable for the obligations of the partnership. Members of LLCs have limited liability.

• Limited partnerships must have at least one general partner who is personally liable for the obligations of the partnerhip (although this can be a corporation). Limited partners are precluded from participating in the management of the business. An LLC provides limited liability to all members even though they participate in management of the business.

LLCs will provide new opportunities and alternatives for doing business, particularly to small and medium-sized businesses and professionals. However, because two or more persons are necessary to form an LLC, sole proprietorships cannot use an LLC as a business entity.