Limited liability companies (LLCs) are one of the most common forms of business ownership today. LLCs are really advantageous entities because they shield the individual members from personal liability. This means that if there is a verdict or judgment rendered against the LLC, only the assets in the LLC will be subject to the verdict or judgment, not the assets of the individual members. For example, let's say that a company is sued for personal injury. They have a verdict of $1 million entered against them. The assets of the LLC, and not each members' personal assets, are subject to the verdict. In other words, the members cannot be personally liable for a verdict rendered against a limited liability company (except for in certain circumstances).
LLCs are formed by filing articles of organization with the Secretary of State. The Secretary of State will then issue a certificate of organization recognizing the LLC as a legitimate entity capable of doing business. From there, the member(s) must execute an operating agreement which discusses how the LLC with operate and be managed.
Like partnerships, LLCs are subject to pass-through taxation. That means that taxes are owed at the membership level, not the entity level. The entity pays no taxes; that burden is shifted on the individual members. Such a carveout under the tax code means that the members will not be subject to double-taxation (i.e., once at the entity level and once at the membership level).
There are a few different types of LLCs: single-member, multi-member, and series. Within each of these there are different types of management structures: member-managed or manager-managed. Let's take a closer look at all three.
As the name implies, a single-member LLC is an LLC with only one member. If one person has an idea for a business and plans to operate it on their own, they should consider creating a single-member LLC. Once organized, the single-member must create an operating agreement governing how the LLC will be managed. An operating agreement for a single-member LLC will be relatively simple, and will cover topics such as formation, management, liabilities, indemnification, and dissolution/winding-up of the business.
Single-member LLCs can hire employees and independent contractors, engage in general business with third-parties, and enter into contracts. The individual member is shielded from personal liability (so long as the LLC is not established for the express purpose of avoiding liability) and their personal assets will not be subject to claims against the LLC.
A single-member LLC may be member-managed or manager-managed. A member-managed LLC is one in which the sole member operates and manages the day-to-day of the company. A manager-managed LLC is one in which the member hires a manager to operate the business for them. The manager does not need to be a member of the LLC and can make certain decisions on behalf of the LLC.
A multi-member LLC is one in which there are multiple members. By necessity, the operating agreement of a multi-member LLC will be more complicated than that of a single-member LLC. The complications that arise in forming a multi-member LLC operating agreement are the result of the fact that there are multiple members, each with competing interests. Oftentimes in multi-member LLCs, members are prevented from transferring their membership interests. These restrictions are put in place so that members cannot sell their interests to random third-parties. Instead, the operating agreement will require a right of first refusal so that the company, or the other members, can purchase the transferring member's interest in the LLC before such interest is offered to an outside person. Moreover, when additional people are added to a multi-member LLC, the operating agreement must be amended to provide for the additional member, and the additional member must agree to be subject to the operating agreement.
As with corporations, multi-member LLCs may issue units (the LLC equivalent of stock) to its members. These units may have different powers, privileges, and rights attached to them. For instance, the LLC may have a preferred class of shares specifically for investors. This class may have priority over dividends and liquidation compared to the other classes of units.
Multi-member LLCs may either be member-managed or manager-managed. If the LLC is member-managed, the members themselves oversee the management and day-to-day operations of the company. However, because there are multiple members in a multi-member LLC, it may be wise to appoint a manager to take care of business. This would be akin to hiring a CEO in the corporation context.
Series LLCs are a relatively new phenomenon, at least in Missouri. In essence, series LLCs closely resemble corporations with many different subsidiaries. There is one overarching LLC and then multiple different series of that LLC, each with a different role. Liability rests within the individual series, so each series will be liable for any verdict or judgment against it, not the main LLC or the other series. Here's a useful example to understand what this means.
Anna and Ben own multiple properties under the series LLC entitled AB LLC. Whenever they purchase a new property, they establish a new series of AB LLC. For one property, they created a series called "AB LLC, Series A," and for another they created a series called "AB LLC, Series B." One day, a tenant in AB LLC, Series A falls on some ice and is injured. The tenant sues AB LLC, Series A for personal injury, and a verdict is rendered against AB LLC, Series A for $500,000. When the tenant goes to collect, they can only go after the holdings in AB LLC, Series A, not the holdings and assets of AB LLC and AB LLC, Series B.
Series LLCs can be single-member or multi-member, and even the individual series themselves can have different ownership structures. Although the law around series LLCs is relatively new in Missouri, they have been shown to be effective and useful in other states.
To inquire about LLCs or how to form them, please contact The Taormina Firm. We will be happy to help.