WHAT IS A LIMITED LIABILITY COMPANY?
As most folks know, corporations (in all sizes and shapes) have been around for centuries.
The formation of a corporation is determined by the state in which it is to be located and though there are differences from state to state, the formation is a fairly easy process. Further, those in business are familiar with its structure. There are shareholders, directors and officers. Along with limited partners in a limited partnership, shareholders (and the limited partners) are usually shielded from personal liability for a corporate or limited liability partnership debt (called the “corporate veil” or “shield”).
Until 1997, the participants in all other types of business structures, (sole proprietorship’s [who did not elected to be a sub-chapter s corporation], general partnerships, the general partner in a limited liability partnership, joint venture-rs), were all exposed to personal liability for the debts of the business structure.
That changed in 1997 when Wyoming (of all places!) enacted the first limited liability company (LLC) law. This was its reaction to complaints from folks such as general partners and joint venture-rs that it was unfair for a corporate structure to be the only type of business that shielded its equity owners. So limited liability companies are a mere 17 years old! It is not surprising then that most of the country really has no understanding or “feel” for this business entity.
Let our Business Lawyer change that right now!
A LLC is a non-corporate business entity that is a formed under the laws of the state in which it is formed. For the first time, general partners, joint venture-rs and even sole proprietors can be shielded from the debts and obligations of the LLC in the same way that shareholders are shielded from corporate debt. Next it offers its owners (called “members”) the advantage of pass-through taxation in the same way that it is offered to shareholders of a sub-chapter S corporation but without the limitations placed on the formation of a sub-chapter S. To understand this, let’s take a look at what is necessary to form a sub-chapter S:
i. The corporation must be a “domestic” corporation meaning that it has to be incorporated in one of the 50 states;
ii. All shareholders must be human beings and not other business entities (there are some limited exceptions to this that are rarely applicable to small corporations);
iii. There may be no more than 100 shareholders;
iv. All shareholders must be U.S. citizens or resident aliens;
v. There can be only one class of stock (so all shareholders are treated equally); and,
vi. You must apply for sub-chapter S status using IRS form 2553 no later than 2 months and 15 days (and not 75 days) after you have first become a corporation.
Plainly stated, for the most part, a LLC has none of these limitations. So you can a foreign company qualify to become a LLC that has 200 members each of which is another business entity and some of whom are foreign business entities, and each of which has different voting rights and rights to distributions (which is the LLC equivalent to a dividend).
Though the initial creation of the LLC on the state level is fairly easy, the creation and drafting of a proper “Operating Agreement” (which is the road map to the operation of the business) is a complex document that requires your attorney’s input.