Limited liability companies: best of both worlds.
If appropriately structured, an LLC preserves the limited liability feature for member-investors (typically associated with a corporation), while permitting taxation similar to a partnership. Statutes authorizing the creation of an LLC are separate and distinct from those governing incorporation of corporations.
This structural form of business has existed in many European, South American(2) and African countries but has only recently become popular in the U.S. Wyoming was the first U.S. state to adopt an LLC statute in 1977.(3) Florida saw LLCs as a mechanism for attracting foreign investment and adopted an LLC statute in 1982.(4) However, it is only since the 1988 IRS ruling that recognized partnership-like taxation of a Wyoming LLC(5) that this hybrid form of business organization has become popular in the United States. By the fall of 1994, at least 45 states had adopted statutes authorizing the domestic creation of LLCs,(6) and LLC bills had been introduced in additional states. Most states have statutory provisions recognizing foreign LLCs doing business in their states, even if the state has not authorized the domestic creation of an LLC.(7) Delaware,(8) Colorado and Wyoming have emerged as model states for alternative forms of LLCs.
Taxation of LLCs depends on the combination of structural features of the LLCs. An LLC may be taxed like a corporation or with pass-through taxation similar to that of a partnership. Most businesses electing an LLC form of business do so to take advantage of the partnership-like pass-through taxation of income and losses feature. To attain partnership-like taxation, the LLC structure cannot include more than two of the following key corporate characteristics:
* limited liability;
* continuity of life;
* free transferability of interest; and
* centralization of management.(9)
Assuming the business seeks limited liability for its investors (known as members) and flexibility in management structure, the parameters for restricting continuity of life and transferability of interest must be observed.
Who Should Invest in an LLC?
LLCs are well-suited for start-up businesses (as they are not affected by the tax implications that result from conversion from other forms of business to LLCs). Other small closely held businesses can often benefit from the ability to retain both a voice in management and limited liability for investors. Small retail establishments and some service businesses(10) (such as construction firms and home repair businesses) may find this a convenient combination.
LLCs pose a popular alternative for venture capital firms, oil and gas ventures and ESOPs (employee share ownership plans). Joint venture investors can achieve limited liability for all investors, without having to designate a general partner in the traditional limited partner arrangement. In addition, flow-through taxation treatment in an LLC eliminates the 80% control requirement needed for consolidated corporate returns.(11)
LLCs are particularly appropriate for real estate investments. If a corporation owns real estate that appreciates in value and later decides to divest itself of that real estate, a section 311 Federal gain tax must be paid. An LLC can own land and lease it to a corporation without such negative tax risks, and depreciation of the asset can flow through to investors. Land already owned by a corporation cannot be transferred to an LLC without tax gain, however.
Where permitted, LLCs may also be used for professional services, insurance and banking (investment banks and savings and loans). Although LLC structures are not sanctioned for banking and insurance industries in several states,(12) some professions are allowed to choose LLC structures. Lawyers and accountants are adopting the LLC form of business for professional services, as statutes and licensing authorities begin to permit this option.(13) For accountants, a limited liability partnership (LLP) is now an additional alternative to an LLC or limited partnership.(14)
Conversion to an LLC
Existing corporations may not find it as advantageous to convert to an LLC. One of the primary restrictions on the conversion of a corporation to an LLC is the double taxation consequence upon the liquidation of the corporation and the Section 311 gain on appreciated property.(15) Even S Corporations may be subject to the gain conversion dilemma.(16) A corporation is not permitted to transfer such property to another entity without incurring tax liability. A gain or loss will be recognized upon conversion, based on the fair market value of the corporate property.(17)
Furthermore, if an investor's basis has increased upon conversion, that, too, may trigger tax liability. Some analysts believe that the tax consequence may be minimized by freezing the value of appreciated corporate assets of a particular investor until that investor becomes deceased, at which time a stepped-up basis in the asset may be acquired. The LLC can more easily avoid triggering a gain when it distributes appreciated property to its members, because of the increased adjusted basis of its members interests. In the interim, the basis of the other investors will absorb profits and appreciation in value of assets.(18)
Generally, partnerships may convert to LLCs as a tax-free conversion from one partnership interest to another (for tax purposes under IRC Sections 721 and 708). This is true provided the partners own at least 50% of the new LLC and the partners share of entity liabilities is not reduced, thereby causing a distribution in excess of its basis for tax purposes.(19) Unlike the corporation, the general partnership will not have to terminate to convert to an LLC. With a limited partnership, the scenario is more complex, since conversion of recourse liabilities into nonrecourse interests may trigger a gain recognition.
Pass-Through Income/Losses Taxation Issues
To fully participate in the pass-through tax loss advantages of a partnership, a partner must be "economically at risk" on partnership "recourse debts." The partner's pro rata share of "recourse" liability and taxable gain form the partner's "basis" from which losses can be deducted. Because limited partners do not have liability beyond investment for most partnership debts,(20) they lack such a basis from which partnership-incurred losses can be deducted. Thus, general partner status may be necessary to take advantage of loss deductions.
In contrast, the basis of an LLC member's interest is increased by the LLC entity's acquisition of debt.(21) Even though a member may not be personally "at risk" beyond investment in the LLC, the member's basis is altered by the LLC's acquisition of debt. This allows the member to use more fully the pass-through losses of the LLC to off-set its share of LLC income for taxation purposes,(22) to the extent it is "at risk" or up to its adjusted basis in the LLC. Thus, an LLC member has greater ability to deduct losses than do investors in limited partnerships or S corporations. Allocation of LLC losses is typically proportional to investment, but some states allow agreements that allocate losses by other criteria.
Although pass-through income and losses to the investors in partnership-like taxation is a basic advantage to an LLC, not all LLC losses can be used to off-set non-LLC income. Under a true "at risk" scenario, losses are deductible only to the extent the investor has personal liability for the debt. However, an LLC member presumably can deduct losses against non-LLC income only to the extent that it is "at risk" or up to its adjusted basis in the LLC, including any personal guarantee of the LLC debt or other recourse debt.(23) A member who does not "materially participate" in the business (in a manager-run LLC) also runs the risk that it may not be able to fully deduct losses generated by "passive activities".(24)
Conventional methods for allocating taxable income in an investment partnership may still pose problems for an LLC, however. When assets are very liquid and are traded frequently, as with marketable financial instruments in an investment firm, adjustment (and readjustment) of the basis of each partner or LLC member is not a simple task. Safe harbor versus PIP methods of allocation of income also will have to be addressed in the context of LLCs.(25)
Whether or not the pass-through taxation factor(26) is an important motivation for adopting an LLC form of business depends in part on the tax bracket of the investors versus the early earnings potential of the business. The maximum marginal rate of taxation for single and married couples earning over $250,000 is 39.6%, as compared to 35% for corporations with taxable income exceeding $18,333,333.(27) On the other extreme, C corporations with income below $50,000 have a tax rate of 15% in nonpersonal service corporations, as do married couples whose taxable income does not exceed $38,000. Personal service corporations, regardless of income level, are taxed at 35%.(28) Thus, for smaller businesses, especially start-up businesses, the outside taxable income of key investors will strongly influence the income tax advantage of an LLC versus a C corporation.
Comparison to Subchapter S Corp
Avoidance of double taxation is often a prime motivation for the creation of both LLCs and S corporations, especially when the corporate tax rate exceeds the tax rate applied to the individual investors. Both LLCs and S corporations provide for some pass-through income to the members for partnership-like Federal taxation, but S Corporations are burdened with more significant restrictions than LLCs.(29) To elect to be treated as an S corporation for Federal taxation purposes, a corporation must satisfy all of the following characteristics.(30)
* Membership is limited to 35 members;(31)
* Limitations on the types of shareholders restrict membership to U.S. citizens and nonresident aliens and their estates(and some designated trusts);
* Only one class of stock is permitted (but voting and nonvoting stock is allowed);(32)
* Numerous limitations on the nature of investments exist (especially on passive investments);(33)
* Income and loss distribution must be proportional to investment.
A business cannot opt in and out of S corporation status on a yearly basis and faces a five-year waiting period when it does elect to give up S status before it can again be eligible for S tax treatment. Because most of these restrictions do not apply to LLCs, an LLC provides a popular alternative to an S corporation.
Membership in an LLC can vary from two to 500 members. Although there is no fixed statutory limit on the size of an LLC, Revenue Rulings in the partnership arena have limited the size of partnerships to 500 investors for tax purposes, so a similar limit might be assumed for LLCs.(34) This provides significantly more room for growth than a sub-chapter S corporation, since the latter is limited to 35 investors.(35) This membership expansion advantage is minimized somewhat by a recent revenue ruling permitting the creation of several small S corporations as members of an umbrella partnership for "administrative simplicity ... of tax affairs."(36) On the other extreme, there is some question as to the tax treatment of one-person LLCs, a possibility allowed in a few states.(37)
Unlike the S corporation, the LLC can also offer more than one class of stock/membership. The LLC is free to issue preferred interests and other forms of participation ownership. An LLC may also accumulate earnings and have subsidiaries without endangering its tax status.(38)
Restrictions do not exist on the type of investor in an LLC. In contrast, only U.S. citizens and resident aliens (or their estates) are allowed to acquire ownership interests in a sub-chapter S corporation. An S corporation cannot have corporations, partnerships, pension plans or nonresident aliens as shareholders.(39) All of these can invest in an LLC. Members of affiliated groups of corporations, foreign corporations or foreign nationals, or REITs (real estate investment trusts) can organize and invest in an LLC, but not in an S corporation.
Comparison to Statutory Closed Corporation
The choice between an LLC and a statutory closed corporation is a closer call. Federal taxation as a partnership may be the main LLC advantage. Even the Model Closed Corporation Act, which provides more managerial flexibility over a traditional general for profit corporation, limits the number of members to 50.(40) If a corporation is able to achieve some flexibility in management through a closed corporation statute, an LLC or a subchapter S status may not significantly improve the financial position of a small business.
Whether or not a tax advantage can be achieved depends on the nature of business and its assets. In closely held corporations, "nonrecourse liabilities added in the general basis calculation (under section 752) must be subtracted to arrive at the at-risk basis."(41) In a service corporation, where most of the earnings go to salaries and little profit remains for distribution as dividends, the threat of double taxation is minimized and the amount of corporate earnings subject to corporate tax rates is reduced.
Under a closed corporation, the articles need to specify whether or not a board of directors will be used or abolished. If specified, certain traditional board duties may be allocated to shareholders. Articles of closed corporations typically restrict the conditions under which shares are transferable. Greater flexibility exists in a closed corporation, however, to decide the extent to which transferability of shares may be limited and the types of dissolution triggering events than with an LLC. A closed corporation may retain perpetual status, free transferability and centralized management, along with limited liability for shareholders if it so desires.
Creation of an LLC
To create an LLC, "Articles of Organization" must be filed centrally with the Secretary of State,(42) as is the case with corporations and limited partnerships. Although the articles should specify the basic type of management structure, the operating agreement (parallel to bylaws in a corporation) should detail the nature of the management and limitations on duration and transferability of interest. The name of the LLC entity must include a designation that it is a "limited liability company," "limited company," "L.L.C." or "L.C."(43) To avoid confusion with other forms of business, the name of an LLC shall not contain the words "association," "Ltd.," "LP," "corporation," "incorporated" or "limited partnership."(44)
Once the business decision has been made to create or convert to an LLC to achieve both limited liability for members and partnership-like pass-through taxation benefits, the business structure must retain two of the following three partnership-like features: management style (decentralized, member-run decision base), limited life and limitations on transfer of ownership interest (approval of transferee by other members). Because limited liability for investors and flexibility in management choices are also often incentives for adopting an LLC form of business, the restrictions on duration and transferability of interest are often pivotal.
To achieve partnership-like treatment of management structure, the LLC must be member-run. If an outside manager is designated, the management structure will be viewed as a corporate characteristic. The delegation of most decisions to member-managers could also have a similar result.(45) Although a few states dictate the management structure of an LLC,(46) many allow the individual LLC to make that selection. The decision to operate with a membership-run LLC must be apparent in both the articles and the operating agreement.
An LLC's statutory duration is generally set at 30 years and dissolution will be triggered sooner(48) by death, retirement, resignation,(49) expulsion or bankruptcy of an LLC member or by judicial decree.(50) Only after the dissolution occurs can surviving members decide whether or not to continue the business. The decision to continue the business should not be agreed to in advance (and certainly not put in the articles or operating agreement). Although unanimity is preferable (and required by some state statues(51)), the business may be continued by majority vote(52) without loss of partnership treatment of the duration variable.
Similarly, if a majority of the remaining members approve the admission of the new member or transfer of interest, that is a sufficient restriction on transferability of interest.(53) States that require unanimity on the duration issue generally require it here as well,(54) while states with an "opt-out" provision on duration also permit majority vote on transferability. Profits can be assigned without the consent of other members,(55) but voice in management cannot, as is the case in partnerships.
Creation of a new LLC must be accompanied by a filing fee, which varies widely from state to state. While the initial fee in most states is comparable to filing fees associated with the formation of corporations, the cost of annual fees for doing business in each state must also be examined. Some states (such as New York) are imposing an annual LLC filing fee (on a per member basis) to offset the expected loss of revenue from corporate franchise taxes.(56) In the majority of states if an LLC qualifies for Federal tax treatment as a partnership, similar tax status applies for state income tax. States still are free to individually make that determination, however. In Florida, for example, a small corporate tax LLCs will be imposed on the state level, regardless of Federal tax status of the LLC.(57)
Conclusion and Cautionary Remarks
Additional risks should be considered before adopting an LLC form of business. Classification for security regulation and bankruptcy treatment are still somewhat uncertain. In all probability, manager-style LLCs may be subject to regulation under security regulations because income is gained "significantly through the efforts of others." Before creating an LLC in a given state, that state's tax treatment and structural restraints should be examined. It is risky to do business in one of the few states that lack a LLC statute recognizing foreign LLCs, since the partnership-like structure for tax purposes could lead to partnership-like treatment for liability purposes. Some states, such as Georgia, adopted statutes recognizing out-of-state (foreign) LLCs doing business in Georgia before permitting the domestic creation of LLCs in its state. Finally, Congressional hearings on LLCs(58) could result in changes in the tax treatment of LLCs, but there will be significant lobbying pressure to make those changes minor.
For the business seeking to combine flow-through partnership-like taxation and limited liability for investors with a choice in managerial structure, the adoption of a limited liability company form of business provides a favorable new entity alternative. Restrictions on duration and transferability of full-membership interests must be observed and may be a substantial disadvantage to larger enterprises. Although the trend in private letter rulings is to permit majority approval for continuation of the business entity or transferability of membership interest in states with "opt-out provisions," unanimous approval may still be required in some states. An LLC may be the preferred organizational entity, especially for the start-up closely held business (which does not have to worry about corporate tax conversion problems) and for certain joint ventures or real estate holding opportunities.
1 See Pace Hamill, The Limited Liability Company: A Possible Choice For Doing Business? 41 Fla. L. Rev. 721,722 n. 9 (1989); Marybeth Bosko, The Best of Both Worlds: The Limited Liability Company, 54 Ohio St. L.J. 175, 177 (1993).
2 A "limitada" form of business association provides for limited liability for its (natural) members, with partnership-like lack of continuity or life, restricted transferability of interest, and restrictions on capital investment; see also Priv. Ltr. Rul. 80-03-072 (Oct. 25, 1979) (treating a Brazilian limitada as a partnership for federal tax purposes).
3 Wyo. Stat. 17-15-101 to -136 (eff. June 30, 1977).
4 Fla. Stat. ch. 608.401 to -.471 (1982).
5 Rev. Rul. 88-76, 1988-2 C.B. 360.
6 1977: Wyo. Stat. 17-15-101 to -143 (eff. June 30, 1977);
1982: Fla. Stat. ch. 608.401 to -.471 (1982);
1990: Colo. Rev. Stat. 7-80-101 to -913 (Supp. 1990, 1994); Kan. Stat. Ann. 17-7601 to -7651 (1990);
1991: Nev. Rev. Stat. Ann. 86.010-.571 (Michie Supp. 1991); Tex. Rev. Civ. Stat. Ann., art. 1528n, 1.01-9.02 (West Supp. 1992), Gen. Laws H.B. 278, 46 (1991); Utah Code Ann. 48-2b-101 to -157 (Supp. 1991, am. 1992); Va. Code Ann. Tit. 13.113.1-1000 to -1123 (Michie Supp. 1992);
1992: Ariz. Rev. Stat. Ann. 29-601 to -857 (approved June 2, 1992); Del. Code Ann. Tit. 6 18-101 to - 1107 (approved July 22, 1992); Ill. Rev. Stat. ch. 805, para. 180, 1-1 to 55-10 (1992); 1992 Ill. P.A. 1062, 1-1-60-1 (approved Sept. 11, 1992, eff. Jan. 1, 1994)); Iowa Code 490A. 100 to -.1601 (approved Apr. 27, 1992); La. Rev. Stat. Ann. 12:1301 to -7651 (approved July 7, 1992); Md. Corps. & Ass'ns. Code Ann. 4A-101 to -1103, (approved May 26, 1992); Minn. Stat. 322B.01 to -.955 and 319A.01 to .22 (1993) (approved Apr. 29, 1992); Okla. Stat. Tit. 18, 2000 to -2060 (approved May 1, 1992); R.I. Gen. Stat. Laws 7-16-1 to -75 (approved July 21, 1992); W. Va. Code 31-1A-1 to -69 (approved Mar. 27, 1992);
1993: S.B. 549, 165th Leg., 1993 Reg. Sess., Ala. Legis. Serv., Ala. Code 10-21-1 to -33 (approved May 20, 1993); Ark. Code Ann. 4-32-102 to -903 (Supp. 1994); H.B. 6974, 1993 Conn. Legis. Serv., 267, 1 to 74 (approved June 23, 1993); H.B. 264, 142d Gen. Ass., 1st Reg. Sess., 1993 Ga. Laws, Ga. Code Ann. 14-11-100 to -604 (approved Apr. 5, 1993); H.B. No. 381, 52d Leg., 1st Reg. Sess., 1993 Idaho Sess. Laws, Idaho Code 53-601 to -672 (approved Mar. 26, 1993); S.B. 485, 108th Leg., 1993 Reg. Sess., 1993 Ind. Legis. Serv., Ind. Code Ann. 23-18-1-1 to 23-18-13-3-1 (approved May 13, 1993); H.B. 1123, 1993 Me. Laws 718 (1993). H.B. 4023, 87th Leg., Reg. Session, 1993 Mich. Legis. Serv., Mich. Stat. Ann. 21.198 (4101) to 21.198 (5200)(approved Apr. 14, 1993); S.B. No. 20 & 66, 87th Leg., 1st Reg. Sess., Mo. Ann. Stat. 359.700 to -.832, -.908 (Vernon Supp. 1994) (approved July 2, 1993, eff. Dec. 1, 1993); S.B. No. 146, 53d Leg., 1993 Mont. Laws, Mont. Code Ann. 35-8-101 to 1307 (approved Mar. 18, 1993); B. 121, 93d Leg., 1st Reg. Sess., 1993 Neb. Laws (approved June 2, 1993); H.B. 690, 153d Leg., 1993 Reg. Sess., 1993 N.H. Laws, N.H. Rev. Stat. Ann. 304-C:1 to 340-D:20 (approved June 23, 1993); N.J. Stat. Ann. 42:2B-1 to -70 (eff. Jan. 26, 1994). H.B. 448, 41st Leg., 1st Reg. Sess., 1993 N.M. Laws, N.M. Stat. Ann. 53-19-1 to-42 (approved Apr. 7, 1993); H.B. 923, HB 624, SB 1141, 1993 N.C. Sess. Laws 354, 398,443, N.C. Gen. Stat. 57C-1-01 to 57C-10-07 (Supp. 1994); S.B. No. 2222, 53d Leg. Ass., 1993 1st Reg. Sess.,
1993: N.D. Laws, N.D. Cent. Code 10-32-01 to-155 (approved Apr. 12, 1993); S.B. 285, 67th Leg. Ass., 1993 Reg. Sess., 1993 Or. Laws, Or. Rev. Stat. 63.001 to .990 (eff. Jan. 1, 1994); S.B. No. 139, 67th Leg. Ass., 1993 Reg. Sess., 1993 S.D. Laws, S.D. Cod. Laws Ann. 47-34-1 to -59 (approved Mar. 22, 1993); WIS. Stat. 183.0102 to .1305 (eft. Jan. 1, 1994);
1994: H.B. 420, 1994 Alaska Session. Laws 99, Alaska Stat. 10.50.010 to -.995 (99 Alaska Laws, eft. July 1, 1994); S.B. 184, 1994 Ky. Acts 389; S.B. 2395, 1994 Miss. Laws 402; SB 7511-A, AB 11317-A, 1994 N Y Laws 516 (eff. Oct. 2-4, 1994); S.B. 74, 1994 Ohio Laws (7-1-1994), permitting professional LLCs; H.B. 4283, 1994 S.C. Acts 448, CodeS. C. 33-41-1220 to 33-43-101 (eff. June 16, 1994); H.B. 952, 1994 Tenn. Pub. Acts 868, Tenn. Code Ann. 48-210-1-1 to 48-248-606 (1994); H.B. 1235, 1994 Wash. Legis. Serv. 210, Rev. Code Wash. Title 25 (eff. Oct. 1, 1994). See, Bosko note 1, generally, for a comparison of specific provisions of state LLC statutes.
7 Georgia, for example, recognized foreign LLCs before permitting domestic LLCs; see note 6; S.B. 74, 1994 Ohio 1 (10); Miss. Code Ann. 79-6-1 (1993).
8 Missouri's LLC statute, which authorized the domestic creation of LLCs beginning in Dec. of 1993, most closely resembles the Delaware model.
9 Treas. Reg. 301.7701-2(a); Morrissey v. Commissioner, 296 U.S. 344 (1935). There were six factors, but the characteristics of "associates" and "objective to carry on a business and divide its gains" are typical of corporations and partnerships.
10 Because service corporations are taxed at a higher rate than nonservice corporation with low taxable income, an LLC may provide a tax advantage. See income tax rate discussion, notes 27 and 28.
11 Limited Liability Companies: The Entity of Choice in Missouri, National Business Institute, Inc.'s audio tape series (Jan. 20-21, 1994).
12 Price, at 49.
13 See Ill. P.A. 1062, 1-25 (1992). Missouri's statute allows professional LLCs as long as the licensing entity of the profession permits it. Accountants and lawyers can form LLCs in Missouri; see Mo. Sup. Ct. Rul. 5.4. In contrast, Rhode Island is in the minority in not allowing professionals to form LLCs.
14 With Hawaii's recent approval an LLP, this form of business is available in at least 18 states. Letter from Charles B. Eldridge, Ernst & Young of July 27, 1994, at 1, adopting LLP.
15 I.R.C. 311 (a) and (b).
16 I.R.C. 1374 (b)(1).
17 I.R.C. 336.
18 See N.B.I. tape, note 11.
19 Horwood, at 355.
20 A limited partner who personally guarantees a partnership loan is "at risk" for basis calculation purposes.
21 I.R.C. 752.
22 See "Limited Liability Company (LLC) Can Be Preferred Choice of Entity," Research Institute of America Inc. (Special Study Aug. 1992) at 7.
23 I.R.C. 465.
24 Horwood, at 356.
25 See J. Craig Gies, Richard A. Helfand and Robert C. Sash, "Managing Investment Partnerships," 132 Trusts & Estates 5 (June 1993).
26 For a discussion of the historical arguments and rulings affecting taxation status of partnerships, S corporations and LLCs, see RL Parker, "Corporate Benefits Without Corporate Taxation: Limited Liability Company and Limited Partnership Solutions to the Choice of Entity Dilemma," 29 San Diego L. Rev. 339 (Sum. 1992).
27 There is a small ban below this taxed at 38%, as well as 28% and 25% bans. A number of health benefits, life insurance and retirement plan payments can be deducted as pre-tax expenses, lowering the net income.
28 I.R.C. 1, 11 (1994).
29 Senator Danforth proposed liberalization of S restrictions in 1993-94, but passage is doubtful.
30 I.R.C. 1361 to-1380.
31 I.R.C. 1361.
32 I.R.C. 1361.
33 For example, an S corporation cannot own more than 80% of the stock of another corporation and cannot be part of an affiliated group.
34 Publicly traded partnership rules limit a partnership to 500 members for partnership taxation status, so a similar limit may be imposed on LLCs (or it could fail to qualify for private placement safe harbor under Section 7704; see Notice 88-75, 1988-2 C.B. 386 and Harris, at 226.
35 In some instances, a husband and wife may qualify as a single investor.
36 Rev. Rul. 94-43, which revokes Rev. Rul. 77-220 to the contrary.
37 Idaho, Montana, Arkansas, North Carolina, Colorado and Texas permit a one person to organize an LLC; see Tex. Rev. Civ. Stat. Ann. art. 3.01 (West Supp. 1992), and Colo. Rev. Stat. Ann. 7-80-203 (West Supp. 1991); it is uncertain whether or not a one-person LLC will qualify as a "partnership" for federal taxation purposes, Dam, at 317.
38 Porter, at 277.
39 I.R.C. 1361.
40 MBCA Closed Corporation model.
41 Charles E. Price, "Tax Aspects of Limited Liability Companies," J. Accountancy 48 at 52 (Sept. 1992).
42 Virtually all states require a filing of the Articles of Organization with the Secretary of State.
43 Mo. Ann. Stat. 359.704(1) (Vernon Supp. 1994).
44 Mo. Ann. Stat. 359.704(2) (Vernon Supp. 1994).
45 See Rev. Rul. 93-5 and 93-6 (1993).
46 Colo. Rev. Stat. 7-80-401(1) requires manager-run LLCs.; see also Minnesota.
47 Del. Code Ann. tit. 6, 18-402 (1992); Mo. Ann. Stat. 359.738.2, 359.745.1 (Vernon Supp. 1994); Kan. Stat. Ann. 17-7612 (1992); Va. Code Ann. 13.11022 (Michie Supp. 1992).
48 Treas. Reg. 301.7701-2(b).
49 In some states, the withdrawing member must give six months notice, similar to an RULPA limited partnership; the withdrawing member should be paid "fair value" for his interest within a reasonable period of time, Mo. Ann. Stat. 359.758.2 (Vernon Supp. 1994).
50 Virginia's dissolution triggering events are typical of most LLCs; Va. Code Ann. 13.1-1-46(3) (Michie Supp. 1992).
51 Va. Code Ann. 13.1-1046(4) (Michie Supp. 1992), Colo. Rev. Stat. 7-80-801 (Supp. 1990), Nev. Rev. Stat. 86.351(1) (Michie Supp. 1991).
52 Del. Code Ann. Tit. 6, 18-704(a) (Supp. 1992); Mo. Ann. Stat. 359.768 (Supp. 1994); Tex. Rev. Civ. Stat. Ann. art. 4.07(A) (West Supp. 1993).
53 See Utah Rev. Rul. 93-91.
54 Earlier rulings had recognized unanimous consent as a sufficient restriction on transferability of interest.
55 Most states permit a member to transfer or assign his right to receive profits without the consent of other members; see Bosko at 186, 187.
56 SB7511-A, AB 11317-A, 1994NY Laws; Tax Notes at 154 (July 11, 1994); Texas also imposes a franchise tax, Dam, at 316 (p. 12).
57 A 5.5% corporate income (not assessed to partnership income) applies to LLCs. Jeffery A. Tannenbaum, "Partnership, Corporation Aren't Only Ways to Start Out," Wall St. J., May 15, 1991, at B2.
58 The House Ways and Means Select Revenues Subcommittee's report of Feb. 2, 1993, indicated plans to hold LLC hearings, Tax Notes, Doc. No. 92-1682.
Carol J. Miller is an attorney and professor of business law at Southwest Missouri State University.
Radie Bunn is a tax professor at Southwest Missouri State University.