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OWM Newsletter
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Most businesses should be operated by entities which protect the owners from personal liability for the debts of that business. In years past, the entity of choice to achieve that limitation of liability was the corporation. Today, the entity of choice for most new businesses is the limited liability company, or LLC. A limited liability company is a distinct legal entity that offers an alternative to partnerships and corporations by combining the corporate advantage of limited liability with the partnership advantage of pass-through taxation. A limited liability company is formed in Pennsylvania by the filing of a Certificate of Organization and Docketing Statement with the Pennsylvania Secretary of State. No advertising is required in connection with the formation of an LLC. The Certificate of Organization may provide for perpetual existence. An LLC is owned by its members. An LLC may have an unlimited number of members or as few as one member. The members’ ownership of an LLC is represented by their “interests.” Ownership interests may be evidenced by certificates; these are similar to stock certificates. Management of the LLC may be by the members themselves or by a selected manager, who may be one of the members. However, the members may select an outsider to act as manager. As with limited partnerships, the relationship among members and the management structure is typically set forth in a written Operating Agreement. That Agreement is not filed with the Secretary of State. One of the primary benefits of the LLC is the flexibility of its internal governance. Governance Issues are not mandated by state law but are left to the members of the LLC. The Operating Agreement has almost total flexibility in terms of its provisions and its effect upon the running of the LLC and the relationship between the members. In forming an LLC, one of the first decisions to be made is whether the LLC will be member-managed or manager-managed. A member-managed LLC is similar to a general partnership and the law on general partnerships applies generally to these LLC’s. However, this is a presumption and is subject to the express desires of the members as set forth in the Operating Agreement. While members have a legal position similar to general partners, they do not have the liability of general partners. A manager-managed LLC is similar to a limited partnership and, unless specifically provided otherwise in the Operating Agreement, the Pennsylvania law of limited partnerships will apply to these entities. In this structure, the managers are in the role of general partners and the members are in the role of limited partners. A third alternative is to have a member-managed LLC which operates similar to a corporation with corporate rules of governance. Limited liability companies offer substantial flexibility in ownership and ease of operation. They also afford similar flexibility in income tax treatment. Depending upon the circumstances of each entity, an LLC may elect to be taxed as a sole proprietorship, partnership, S corporation or C corporation. Due to the complexities of such tax treatment, a tax advisor should always be consulting prior to making that election.
Read Legal Ease every other Sunday in the Pottstown Mercury. Watch Legal Talk, brought to you by OWM, on PCTV, Tuesdays at 8:30 on Channel 28, and Thursdays at 9:30 p.m. on Channel 98, or on our website at www.owmlaw.com/legal_talk/legal_talk.php. David A. Megay, Esq. and James C. Kovaleski, Esq., speaking at SCORE business planning seminars on 11/7/11 (contact SCORE at 610-327-2673). |
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O'Donnell,Weiss & Mattei, P.C.
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