Limited Liability Company Primer

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LLC Primer

Limited Liability Company Primer

Limited Liability Despite Active Management

LLC Members can participate in management and still enjoy limited liability – unless that function is strictly delegated to a management committee.

Limited Partners may not participate in management without jeopardizing their limited liability standing.

DIS:Even if they participate in management of the LLC, Members are never subject to unlimited liability as is the case with Limited Partners who participate in management of the LP.

Transferability of Member Interests

Members of an LLC may not transfer their interests to a 3rd-party without first giving other LLC Members, or the LLC itself, an opportunity to buy those interests.

Limited Partners may freely transfer interests without risking the loss of their limited partner status.

Subchapter S Corporations

Number and Type of Members

LLC’s can have an unlimited number of members including natural persons, corporations, partnerships, other LLC’s, estates, or trusts.

S Corporations are limited to 75 shareholders, all of which must be natural persons, estates, or trusts.

An LLC is not prohibited from owning 80% or more of a corporation or another LLC and filing a single tax return.

S corporations are prohibited from filing consolidated tax returns.

Income Distributions

LLCs may provide for distribution preferences and special allocations of income.

S Corporations may not distinguish between shareholders when it comes to allocation of profits, losses, or distributions: doing so would violate the requirement that they issue only 1 class of stock.

Debt Allocations

LLC members take their pro rata share of debt as their tax basis.

S corporation shareholders will usually not receive a tax basis for their pro rata share of debt.

In short more losses can be deducted by LLC member than by S corporation shareholders.

Treatment of Appreciated Property

Appreciated property may be distributed without triggering gain recognition by a LLC or its members.

S corporations recognize gain on distributions of appreciated property.

Buyers or heirs of LLC interests may cause an increase in basis for LLC’s assets. This increase would be an amount equal to the difference between the adjusted basis of LLC interest in the successor’s proportionate interest of the limited liability company’s inside basis for its assets.

The same is not true for buyers or heirs of S corporation stock.

Close Corporations

Minority Shareholders

LLCs have mandatory determination of profit distributions which favors minority shareholders.

Close corporation methods of distribution profits include (1) majority-controlled board of directors’ decision and (2) shareholders’ agreement to determine ex ante profit distribution.

Liquidity of Interests

LLC shares are protected by a statutory investment and withdrawal process.

The shares of Close Corporation shareholders are illiquid.

LLC Members withdrawing capital remain liable to the LLC for the amount withdrawn to the extent necessary to satisfy pre-withdrawal creditors.

Per statute, the Close Corporation investment withdrawal process requires substantial notice and other limitations, such as valuation of withdrawn interest, net asset restrictions, and continued liability to pre- withdrawal creditors.

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