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Utah's limited liability company.


If you're interested in starting up your own business or just thinking about changing your current form of business, there is a new development in Utah that may interest you. Utah became the fifth state in the nation to authorize the creation of a new form of business entity, a "limited liability company," effective July 1, 1991.

The limited liability company (LLC) concept was first created in 1977 by Wyoming, followed by Florida in 1982, and Kansas and Colorado in 1990. The LLC may be the missing link between a partnership and a corporation. A partnership is often desired because of the flow-through tax treatment it receives, while the shareholders of a corporation enjoy limited liability from legal claims. Both of these forms have their benefits and detriments.

Two additional types of organizations exist which begin to span the differences between corporations and partnerships. The limited partnership and the S corporation allow investors and business owners to receive the benefits of flow-through taxation of income and losses, yet partially avoid liability exposure beyond their investment in the business. A few of the legal and tax comparisons of all of these different entities are listed in the accompanying chart.

Neither the limited partnership nor the S corporation, however, completely bridge the gap between the standard partnership and corporation. Ideally, the LLC should combine the best attributes of both entities. The LLC enjoys the limited liability of a corporation for all shareholders, and all partners benefit from the flow-through tax treatment of a partnership. Unlike an S corporation, there is no restriction on the number or type of shareholders, and an LLC is not required to hold annual shareholder meetings or keep corporate minutes. Also, the owners are able to participate in every aspect of the company without fear of losing their limited liability status, unlike limited partners in a partnership.

The Internal Revenue Service has yet to rule on the tax status of the Utah LLC. The IRS reviewed the Wyoming act that created that state's LLC in a 1988 Revenue Ruling, and agreed to classify the Wyoming LLC as a partnership for federal income-tax purposes. The IRS ruled that the Wyoming LLC be treated like a partnership because it lacks continuity of life and free transferability of ownership, both of which are common features of corporations.

The law firm of Holme, Roberts, and Owen has filed for a ruling from the Internal Revenue Service that will classify the Utah LLC as a partnership for federal income-tax purposes. A favorable ruling is expected since the law is modeled after Wyoming's.

A word of caution with regard to the LLC is that, while the shareholders of an LLC should not be liable for claims against the company in Utah, this may not be the case in other states. The courts in states which do not recognize the existence of an LLC may yet seek to satisfy the liabilities of the company with the assets of the owners. A Utah LLC may not enjoy the benefits of limited liability in California, for example, because California does not have any provisions for an LLC in its law.

But for those interested in the operational flexibility and income-tax treatment of a partnership and the liability protections traditionally associated with corporations, the limited liability company may be the answer. There is wisdom in waiting until some of the technicalities are worked out, however, and we suggest seeking professional advice before proceeding.

Glossary of Business Types

Corporation - An independent taxable entity, separate and apart from its shareholders, that includes associations, joint-stock companies, and insurance companies.

S Corporation - A corporation which elects to become an S corporation because it meets certain requirements, including being a domestic, small business corporation with 35 or fewer shareholders and only one class of stock.

General Partnership - Any syndicate, group, pool, joint venture, or other unincorporated organization with two or more partners, through which any business is operated, and which is not a corporation, estate, or trust.

Limited Partnership - A partnership in which at least one person is a general partner and at least one is a limited partner, the latter restricted from certain activities but having limited liability.

Utah Limited Liability Company - Similar to a limited partnership, but without a general partner, in which all partners benefit from limited liability without being restricted from participation in the business. [Tabular Data Omitted]

Gregory G. Prawitt, CPA, is senior manager of tax services for Deloitte & Touche in Salt Lake City. Linda C. Vosburgh is a tax consultant for the same company.
COPYRIGHT 1991 Olympus Publishing Co.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:state recognizes new form of business entity
Author:Prawitt, Gregory G.; Vosburgh, Linda C.
Publication:Utah Business
Date:Jun 1, 1991
Next Article:KUTV: a strong believer in employee wellness.

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