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Limited Liability Companies - LLC
A limited liability company ("LLC") is a legal entity which was known
popularly since its enactment in Wyoming in 1977, and which is neither a
partnership, nor a corporation, nor a sole proprietorship. It combines the
corporate advantages of limited liability with the partnership advantage of
pass-through with respect to taxation. Owners of an LLC are referred to as
"members", rather than shareholders, an usually own units or percentages of the
LLC, as opposed to shares. An LLC is managed by a "Manager(s)", rather
than a director or board of directors.
The common characteristics of an LLC are the following:
 | Limited liability - Ordinarily, only
the LLC is responsible for the company's debts, thus shielding the members
from individual liability. However, there are exceptions where
individual members may be held liable:
 | Grantor Liability:
Where an LLC member has personally guaranteed the obligations of the LLC, he
or she will be liable. |
| Alter-ego Liability: Very
similar to the judicial doctrine applied to corporations where a court may
hold the individual shareholders liable where the business entity is merely
the "Alter-Ego" of its shareholders, a member of an LLC may also be held
liable for the LLC's debts if the court imposes its "alter-ego liability"
doctrine. Note, however, that although a corporation's failure to hold shareholder or
director meetings may subject the corporation to alter-ego liability, this
is not the case usually for LLCs. An LLC's failure to hold meetings of
members or managers is not usually considered grounds for imposing the alter
ego doctrine where the LLC's Articles of Organization or Operating Agreement
do not expressly require such meetings. |
|
| Separate legal entity - an LLC is recognised to be a separate legal entity
from its members |
| Management and control - management and control is usually vested with the
members (members-managed), although the members may appoint managers to
directly manage the business of the LLC for them (manager-managed).
The members may also apportion duties amongst
themselves as they see fit, and may even appoint one of their members as
President, or Vice President, or Secretary, or Treasurer, with the appointed
member to have the duties normally associated with such title or titles. |
| Voting interests - usually, the voting interest corresponds directly to
the interest in profits, unless the Articles of Organisation or the Operating
Agreement provide otherwise. One of the benefits of the LLC structure is
the ability to divide ownership and voting rights in unconventional ways,
while maintaining the pass-through nature with respect to the profits. |
| Transferability - Unless the Articles
of Organisation provide otherwise, the consent of the members having a
majority in interest (excluding the person acquiring the membership interest)
is required in order for a person to become a member of an LLC (either
by transfer of an existing membership or the issuance of a new one).
|
| Duration - Although many
jurisdictions allow an LLC to have a perpetual existence, traditionally
the Articles of Organisation were required to specify the date on which the LLC's existence will terminate.
Unless otherwise provided in the Articles of Organisation or the Operating Agreement, an LLC is dissolved at the death, withdrawal,
resignation, expulsion, or bankruptcy of a member (unless within 90 days a
majority in both the profits and capital interests vote to continue the LLC). |
In order to form an LLC, it is necessary to file the Articles of
Organisation, in the form prescribed by the law of the jurisdiction in question.
Among the required information is usually the latest date at which the LLC
is to dissolve (or whether it is perpetual) and a statement as to whether the
LLC will be managed by a
manager(s) or by the members. It is also necessary for
the LLC to adopt the Operating Agreement, which may be oral or in writing (it is
recommended that it be in writing), although many times this is actually agreed
upon before the filing of the Articles of Organisation.
Usually an LLC has at least two members, although in some jurisdictions it is
possible to have single-member LLCs.
Following the favourable IRS (Inland Revenue Service) rulings regarding the
LLC structure, it was legislatively created in many states of the US, including
Delaware and Nevada. The entity has also been created in various offshore
jurisdictions, such as Anguilla and Nevis. However, the LLC in Panama has
existed since 1996, when Panama adopted legislation for the establishment of
limited liability enterprises.
The Limited Liability Company Act
(Anguilla) provides for the operation of a so-called
Limited Liability Company (LLC), also known as a limited duration company.*
The Anguilla legislation is modelled on the Wyoming and Delaware legislation,
and provides for LLCs of limited duration as well as a purpetual life. This
form of business association has some features of a company limited by shares,
including capacity to sue and be sued, separate legal identity, ability to own
and transfer property and limited liability of members. It also has some of the
features of a partnership and, if correctly structured, the tax laws of many
countries treat it as a “pass-through entity”, so that only the members, and not
the entity, are subject to tax (e.g. under the US Internal Revenue Code).
*(The description "Limited Liability Company" is a misnomer, in that IBCs and
ABCs are also limited liability companies in the strict sense. The LLC is a
particular type of company having specific characteristics for the purposes of
US tax treatment.)
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Last
modified
26-Sep-2007 17:37 -0400
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