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Overview of
Limited Liability Corporations (LLCs)
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Business New Haven
2/9/1998
By: Debra A. Drexler
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Since the adoption of Connecticut's Limited Liability Company Act in 1993, the LLC has quickly become the preferred entity for small businesses in Connecticut. The reasons for this are quite simple: No other business entity can match the combined advantages available to LLCs.
For tax purposes, the LLC is treated like a partnership - i.e., not itself subjected to federal or state taxes. Rather, the proportionate share of income assigned to each LLC member is taxed at their own individual rate for those two taxes. Corporate income, on the other hand, may be subject to both taxes twice - once at the corporate and again at the shareholder level. Use of the LLC eliminates the tax at the business entity level.
The second advantage to the LLC is the limited liability feature. LLC members are not liable for the debts or obligations of the LLC. Accordingly, a member's liability with respect to the conduct of the business is protected in a way similar to that of a corporation shareholder. By contrast, partners in a general partnership may be individually or severally liable for the debts of the partnership.
Finally, another advantage to the LLC format is the ease with which it can be organized, and the flexibility in which it can be administered. The LLC can be established by filing articles of organization with the Secretary of the State's office. The filing fee is $60, less than that for corporations. While the articles of organization are required to state the name, address, purpose and statutory agent, they need not identify the names or other information regarding the LLC's owners.
Regarding the administration and operation of the LLC, there are additional advantages as contrasted to the Subchapter S corporation. For example, there is no requirement that the LLC issue only a single class of stock; neither is the LLC required to make distributions on a proportionate basis. Further, under present tax law, neither a partnership nor a corporation may be a shareholder in a Subchapter S corporation. There is no such restriction with respect to LLCs.
When operating the LLC, owners or members should enter into a written operating agreement. Like a partnership agreement, this sets forth the rights and responsibilities of the members with respect to the business, as well as the economic sharing arrangements of the members. In addition, the operating agreement describes the management of the business and identifies which members are entitled to vote on which issues.
Management of the LLC is a significant issue that may be handled in one of two ways. A manager of the LLC (who need not be a member) may be designated as the individual or entity with sole responsibility for managing the business. In this case, management of the LLC is quite similar to a limited partnership, in which the general partner is the managing authority.
As an alternative, the LLC could be managed by its members without the need for designating a manager. In this case, the “member-managed” entity is governed by the members unless specifically stated otherwise. In this case, each member of the LLC can act as its agent and can sign on behalf of the LLC.
In light of the combined advantages as set forth above, LLCs have been the preferred entity of choice in Connecticut since their inception. There is no reason to believe that this trend will not continue. For these reasons, prospective business owners should give serious consideration to the limited liability company form of entity for his or her business. BNH
Louis B. Schatz is a partner in the tax and LLC practice of Shipman & Goodwin, LLC. This full-service firm with offices in Hartford, Stamford and Lakeville services local, regional and national businesses and individuals.
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