LLC?

[David Jurney]

How do I set up an LLC? Our company is currently a general partnership
in the state of Oklahoma. Any help would be appreciated.

D. Jurney

[Adam Starchild]

In <31B339...@pobox.oc.edu> David Jurney

THE LIMITED LIABILITY COMPANY

by

Adam Starchild

What Is A Limited Liability Company?

The limited liability company (also called the LLC) is a
form of business entity just now becoming popular in the U.S.,
although it's been available in Germany, France, and many other
countries for decades. Until its recent acceptance by a number
of U.S. states, the business executive had three common choices
when forming a business: the sole proprietorship, the
corporation, or the partnership.
The LLC is a hybrid between the partnership and the
corporation. It has all the flexibility of a partnership to
define its own management structure, rules of procedure, voting
rights, distribution of profits and a myriad of other details.
The structure is created by a contract among all the parties. At
the same time, if structured properly all the members and the
management will enjoy limited liability typical of a corporation.
It is generally assumed that the combination of these two
elements will be the reason most LLCs are formed, although there
is a great deal of latitude with regard to the structure.
It offers many advantages over the Subchapter S corporation,
which has been the traditional method of combining corporate
liability protection with partnership-type taxation.

History Of The LLC

The origin of the modern LLC laws allowing limited liability
companies is in the German law of 1892 which created the GmbH
(Gesellschaft mit beschranker Haftung). In the 60 years which
followed, almost 20 countries adopted similar laws. In France,
for example, the same type of company is known as the SARL
(Societes de Responsabilite Limitee). In Central and South
America it is known as the limitada.
In the U.S., the first state to adopt a modern limited
liability company statute was Wyoming, on March 4, 1977. Florida
followed in 1982 by enacting a similar statute. Now, a number of
states have either enacted similar laws or have legislation
pending. It has become the most talked about and most imitated
new business law in America. However, the IRS gave no assurance
that such an entity could qualify to be treated as a partnership
until September 2, 1988, when Revenue Ruling 88-76 was issued.
It was the first Revenue Ruling from the IRS regarding LLCs. In
February, 1993, the IRS issued four Revenue Rulings which
describe the classification standards the IRS will apply to LLCs
who desire partnership tax treatment.
Now that the issue of pass through tax treatment has been
settled, it is time for the business owner to seriously consider
this form of entity when forming new ventures, and to replace the
form he already adopted for existing enterprises. Some lawyers
predict that the LLC will steadily gain popularity as people
become educated about its benefits until it will largely replace
the partnership and the corporation as the preferred entity.

Where?

LLC laws have been enacted in: Arizona (1992), Colorado
(1990), Delaware (1992), Florida (1982), Illinois (1992), Iowa
(1992), Kansas (1990), Louisiana (1992), Maryland (1992),
Minnesota (1992), Nevada (1991), Oklahoma (1992), Rhode Island
(1992), Texas (1991), Utah (1991), Virginia (1991), West Virginia
(1992), Wyoming (1977). (1996 note: many more have been added
since this article was originally published.)
Most of the other states either have laws pending, or a
legislative committee is studying the matter, so you should check
on recent developments in your state.
For investment and holding companies not doing an active
business in a particular state, then you could use another state
to form the LLC.

Delaware?

The Delaware LLC law was passed on October 1, 1992.
Delaware has a long history as the home of the best corporate law
in the U.S. The law is considered to be pro-management and has a
tradition of respecting good faith management decisions. There
exists a strong partnership in Delaware between the corporate
bar, the legislature and the judiciary, which helps to maintain a
legal atmosphere second to none. This tradition of excellence in
corporate law is likely to attract those who want to form LLCs in
the U.S.
The Delaware LLC statute is clearly the most flexible. It
follows a tradition that Delaware lawyers call the "Freedom of
Contract" which allows broad flexibility among members of an LLC
to create the details of the structure of the company in the way
that best suits their needs. More than any other state LLC
statute, the Delaware law allows the parties to draft the LLC
company agreement as they may require and "opt in" the elements
they desire, without a lot of regulations or restrictions.
The Delaware law presumes that the entity will be treated as
a partnership, unless otherwise classified. It allows extensive
protection to members and managers. It does not require that the
duration be stated in the Certificate of Formation, and it limits
the liability of the members to their investment in the company.
The Delaware law also allows for a structure in which the death
of a member will not cause an automatic dissolution. All these
elements together are not included in the Wyoming statute, or in
any of the others. The drafters of the Delaware LLC law sought
deliberately to create it in such a way as to give maximum
flexibility, so that it would allow creativity among the drafters
of the company agreements.
Delaware LLCs pay an annual state fee of $100, the same as
limited partnerships.
Legislation was passed in July, 1993, that now provides for
Delaware corporations to convert their status to LLC by merging
the old corporation into a new LLC. The LLC may take the same
name as the corporation, with proper filing details.
Delaware has again distinguished itself, and it promises to
be one of the leaders in the formation and maintenance of LLCs.

Comparison With Subchapter S Corporation

An LLC provides its members with liability protection and
tax treatment similar to that enjoyed by stockholders of an S
corporation. However, an S corporation also is subject to the
following statutory restrictions:
1) It is limited to one class of ownership interests (i.e.,
one class of stock).
2) It must be a domestic corporation.
3) It may not have more than 35 stockholders
4) Stockholders may not include other corporations,
nonresident aliens, partnerships, certain trusts, pension funds,
or charitable organizations
5) It cannot have subsidiaries.
None of these restrictions applies to the LLC. This
flexibility creates considerable freedom in planning
distributions and special allocations of income and loss.

Comparison With The Limited Partnership

An LLC is taxed in substantially the same manner as a
limited partnership, without the following disadvantages that
limited partnerships have with regard to liability:
1) A limited partnership must have at least one general
partner who is liable for debts of the partnership, while all of
the members of an LLC may be protected from such liability; and
2) The participation of limited partners in the management
of a limited partnership can result in a loss of limited
liability protection, while such participation by members of an
LLC will not have such effect, provided such management does not
violate the applicable LLC statute. Accordingly, a member of an
LLC treated as a limited partnership would be able to "materially
participate: for purposes of Section 469 of the Internal Revenue
Code -- which limits the utilization of passive activity losses
and credits -- while maintaining limited liability protection.

For Which Purposes Are LLCs Being Currently Formed?

* Venture capital, real estate, and other investment firms:
Control, division of profits and losses and many other aspects
may be specified in the agreement, plus pass through tax
treatment when properly structured.
* Family business enterprises: Control can be spelled out
and estate planning considerations can be customized as an
integral part of the agreement. Pass through tax treatment when
properly structured.
* Entrepreneurial start-ups: Pass through tax treatment
like Subchapter S, but without the restrictions on ownership if
properly structured. No limit on the number of investors.
* Professional corporations: Accountants, attorneys,
doctors, psychologists, financial planners and all professionals
now working through partnerships can free themselves of the
liability for their partner's actions, while retaining the same
control structure as their partnership.

The Formation Process

Each party to an LLC must agree to a contract with all the
other members that will become the "constitution" of the company.
This document may be called the "Company Agreement," "The
Articles of Organization," "The Minutes of the First Meeting of
Members", or any other name, unless the particular state has a
required name.
This agreement should set forth the company's policy and
procedure regarding important matters such as voting rights and
restrictions, differences among members, or classes of members,
investment into the company by each member, restrictions on
access to information among members, rights of management,
restrictions on transfer of ownership interests, distribution of
profits, required meetings (if any), notices of meetings, quorum
rules, inclusion of new members, continuation options upon the
death of a member and all other provisions the company wants to
include.
Most states allow the inclusion of provisions and elements
almost without restriction. This gives the drafters of the
agreement the opportunity to be creative. Since this form of
entity is relatively new all the available inclusions will not be
commonly known immediately. This represents a danger to the LLC,
which can only change it's agreement by the unanimous agreement
of the members.
In drafting the agreement, careful consideration must be
given to the IRS position regarding tax classification of the
entity. Although the law allows tremendous flexibility, the IRS
is very specific about the test it will apply when determining
whether to tax the entity as a partnership or as a corporation.
Since pass through tax treatment is expected to be a prime
consideration of most organizers, the drafters must create an
agreement which provides for the IRS Rules. (If your lawyer or
accountant is not familiar with these rules, they are contained
at 28 CFR 301.7701-2, 3 and 4).
Although do-it-yourself incorporation is generally not a
problem, because the limited liability company agreement is as
complex as a partnership, and calls for originality and
creativity, it is probably best to use a lawyer experienced in
such matters. (He does not necessarily have to be a lawyer in
the state where it is formed -- you may find better experience
elsewhere, and that experience will usually translate to the
state that has just enacted a statute more readily than a local
lawyer will absorb the nuances of a strange entity.) The
differences and possibilities are too vast for a simple do-it-
yourself procedure to be wise at this time.

Who Should NOT Form an LLC?

* Companies planning to operate their business in a state
that does not currently recognize LLCs should seriously consider
the consequences of losing their limitation on liability in that
state, before forming an LLC.
* Entrepreneurs who do not want to bear the responsibility,
cost and possible future constraints of a customized company
structure should consider sticking to the time-tested more rigid
structure that a general stock corporation offers.
* Sole owner companies cannot be LLCs. An LLC must have two
members, by definition, or it automatically dissolves. (Of
course, the second owner could be a children's trust or a family
limited partnership holding 1%.)

About the Author

Adam Starchild can occasionally be persuaded to take time
off from his private entrepreneurship activities to write.
During these interludes he has written over a dozen published
books and hundreds of magazine articles, primarily on
international business and finance. His articles have a appeared
in a wide range of publications around the world -- including
Business Opportunities Journal, Euromoney, International Living,
The Futurist, Tax Planning International, Trusts & Estates, and
many more.

More information and sample materials from his books can be
found at Asset Protection & Becoming Judgement Proof on the
Worldwide Web at http://www.catalog.com/corner/taxhaven

[Aaron Hawbaker]

I'd start by calling the Secretary of State for information. Hope that
helps.

[Brett Weiss]

Speak with a local attorney who does such work. Setting up an LLC is not a
do-it-yourself project.
--
Brett
law...@erols.com
http://members.aol.com/interlaw

> David Jurney <david....@pobox.oc.edu> wrote in article
<31B339...@pobox.oc.edu>...

[Philip D. Stern]

I second the suggestion that you see a lawyer. LLCs are still in their
infancy. The laws vary greatly from state-to-state and the tax
implications are significant if it is done wrong. Moreover, there are new
tax regulations which have been proposed by the IRS which are likely to go
into effect before the end of the year. So, a word to the wise: Be VERY
careful.
--
Philip D. Stern, Esq.
225 Millburn Avenue, Suite 208
Millburn, New Jersey 07041
201-912-9393 Fax:201-912-4343
DISCLAIMER:
This is not a legal opinion. I've merely expressed
my personal thoughts on the issues discussed.

| "Brett Weiss" <law...@erols.com> wrote in article
<01bb71f8.7e61fe40$0fbf...@lawyer.erols.com>...