A limited liability company (LLC) is a common type of business entity. Our office tends to set up LLCs more than any other type of business. But what exactly is an LLC? And why should an attorney set it up?
Washington first authorized LLCs in 1994 through the Washington Limited Liability Company Act. It’s a relatively new entity as opposed to a corporation, which Washington initially authorized back in 1928. Chapter 25.15 of the Revised Code of Washington governs most aspects of an LLC.
Like a corporation, if an LLC is properly formed, properly maintained, and business is clearly being performed under the entity’s umbrella as opposed to the individual who is performing the work, then it can offer individual protection from liability. That’s a lot of if’s. It’s our job, in setting up and maintaining LLCs, to do our best to make the LLC as structurally solid as possible – so it does provide that protection.
But unlike a corporation, an LLC provides flexibility in tax. An LLC can choose to be taxed as a disregarded entity, an S-corporation, or a C-corporation. We require our business clients to work with a certified public accountant, and obtain tax advice to make sure the appropriate tax structure is selected. We want to work with our business clients for a long time! We know that businesses are more likely to grow and thrive if they continually communicate with their accountant to understand the complexities of bookkeeping and filing taxes under their new business structure. And, to make the analysis even more fun, the tax selection for an LLC can even be changed over time! In addition, an LLC tends to allow more flexibility in terms of how it will be set up than a corporation.
- Will there be one person who is the “Manager” and then other silent members who simply receive checks on their investment? Or will all the members participate in the management of the business?
- What will the percentages of ownership interests be?
- What will each member initially contribute into the business?
- What are the rights and responsibilities of members in the business?
- What if an LLC member wants out? Can they just sell their interest on Craig’s List, or do they have to offer it to other members of the business?
- What if an LLC member dies? Will the other members immediately have to pay that member’s estate for his/her share? Or can a structured arrangement be triggered so that the method of valuation is agreed to and the payments occur over a period of years, to make it easier for the business to cope?
- What happens if a member gets divorced, and a judge awards a share of the business to the soon-to-be-ex-spouse?
The LLC Operating Agreement governs the relationship of LLC members, and will likely cover all of these sorts of issues and more.
Also, many people who set up an LLC on their own don’t maintain the business, other than paying the annual fee required by the Washington Secretary of State’s office. An LLC should have documented meetings to ensure that the terms of the Operating Agreement are being followed, all formalities are being met, and key business decisions are being documented – such as the decision to enter into a commercial lease, take on a new member, commit to a business loan, etc.
For a good overview of limited liability companies, please see the U.S. Small Business Administration website. Our firm routinely sets up and maintains LLCs, and we’d be happy to help you tailor this entity to meet the specific needs of your business. The possibilities are endless . . .
Photo credit: Nguyen Hung Vu on Flickr