TYPES OF LLCs. Jim Francis Fowler Bell PLLC 300 W Vine St, Ste 600 Lexington, KY jfrancis@fowlerlaw.

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1 TYPES OF LLCs Jim Francis Fowler Bell PLLC 300 W Vine St, Ste 600 Lexington, KY jfrancis@fowlerlaw.com

2 I. HISTORY AND TYPES OF LIMITED LIABILITY COMPANIES A. History The modern limited liability company ( LLC ) is a hybrid business entity that combines the liability protection of the corporation with the tax classification of the partnership. Limited liability companies, as we know them today, first arose in 1977 when first the first modern LLC statutes were adopted by Wyoming. The remaining 50 states slowly continued the trend and the LLC is available for use across the country, including Washington D.C. and Puerto Rico. However, the origins of the LLC go back to the late nineteenth century. The first LLC statute in the United States was passed in New York in 1875 under New York Laws c. 611, 34. The statute provided protection for the LLC members from the creditors of the company. B. Types of Limited Liability Companies A limited liability company attains its separate legal status through the filing and approval of its articles or organization by state government. Limited liability companies come in several different varieties but the key concept to all types of limited liability companies is the grant of personal immunity to its members from liability for the acts, inactions, and omissions of the LLC. Member Managed v. Manager Managed Limited liability companies can be managed by either the members or by a manager or managers. In a member managed LLC the acts of any member can bind the LLC as they have apparent authority unless the third party with which they are dealing has actual knowledge of the

3 lack of authority. In a manager managed LLC the members generally have no authority to bind the entity. The consensus is that it is far better to have a manager managed LLC to eliminate the risk associated with unsanctioned actions taken by members and to foreclose actions based upon accusations of apparent authority of members to act and bind the company. Unless otherwise stated in the operating agreement, each manager has equal authority. Professional Limited Liability Company (PLLC) The professional limited liability company is reserved for those business providing professional services, i.e. occupations requiring a professional license which is regulated by a government agency. The PLLC is commonly used for law firms, medical professionals, engineers, architects, and accountants. A PLLC is just like an ordinary LLC except that the members are subject to a regulating board for their profession and other statutes and the operating agreement are subordinate to actions from a regulating board acting within its province. KRS (3). Series Limited Liability Company (SLLC) The series LLC is comprised of a plurality of segregated companies that provide member immunity as well as provide for immunity among the several companies, i.e. the debts, liabilities, and obligations of one company (a single series ) cannot be enforced against another series within the series LLC. Each series may have the same common members or different members and common or different business objectives. The equity interest among the series companies may also vary among common members. Worth noting is that each state has procedural formalities which must be followed to ensure immunity among the several series within the series limited liability company. States that have enacted series LLC statutes are Delaware,

4 District of Columbia, Illinois, Iowa, Kansas, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, and Puerto Rico. The series LLC advantage is that it is more cost effective from the standpoint of only requiring one LLC filing and needing only one registered agent. Each series typically may also make distributions according to its own financial health even if the master LLC is insolvent. Del Code Ann Tit (a). Additionally, an individual series can terminate and have its affairs wound up without affecting the series LLC. However, the IRS treats companies within a series LLCs as separate entities for purposes of taxation. See IRS Private Letter Ruling (Appendix A). The proposed IRS regulations for series LLC would permit each series to elect separate tax classifications according to each series needs. See Internal Revenue Bulletin: (Appendix B). While the Delaware LLC Act serves as the foundation for most states series LLC statutes (Del Code Ann Tit ), there are some differences. For example, Illinois requires that the series LLC operating agreement explicitly state that each series may have unique business interests and objectives. Illinois also gives each series the right to sue or be sued in its own name by statute. 805 ILCS 1880/ Tax treatment of series LLCs is uncertain in most states. Each state is clearly entitled to tax each series as it desires within its jurisdiction. Some states have begun charging a franchise tax for foreign series LLCs, e.g. California charges $800 per series LLC. It is also unclear how a state court in a non-series LLC jurisdiction would interpret the immunities among the companies within a series LLC. Even the Delaware series LLC appears to have been untested in court thus far.

5 Low-Profit Limited Liability Company (L3C) The low-profit limited liability company ( L3C ) is an alternative to the nonprofit corporation entity for social entrepreneurs that intend to either earn limited revenue or need access to capital markets. The L3C provides the legal and tax advantages of the traditional LLC and couples it with the branding and market advantages of a social enterprise. The L3C is a useful entity type to attract private capital to social ventures with modest financial prospects but great potential to bring about social change. The L3C concept is takes advantage of an overlooked part of the Tax Reform Act of While most understand that the law obligates foundations to donate at least 5% of their assets to charity every year, the law also permits them to satisfy the 5% payout through program related investment which can take the form of loans, lines of credit, or equity investment to name a few examples. The L3C provides the same immunity of a traditional LLC, but requires that the articles of organization constrain the company to the standards for program related investing imposed on foundations by the Tax Reform Act of Because the L3C shuns market rate returns on investment it can accommodate higher risks that may be more attractive to venture capital which would not otherwise be invested in social endeavors. The downside to a foundation s forming a L3C is the burden of meeting IRS requirements to verify program related investment. However, since profits and losses flow through the L3C to its members they are taxed according to each investor s particular tax classification, thus making it easier for non-profits and for-profits to partner together.