Business Law:
Limited Liability Companies (LLC)

What is a Limited Liability Company?

Beginning July 1, 1993, Indiana began allowing "Limited Liability Companies" as a new form of business in Indiana.  The law permitting the formation of Limited Liability Companies in Indiana is called the Indiana Business Flexibility Act.  A Limited Liability Company ("LLC") is a business entity that combines the limited liability afforded shareholders of a corporation with the ease of management and the favorable tax treatment of partnerships.  The primary advantage of forming an entity as an LLC is that the entity can be classified as a partnership for federal tax purposes.  All income, gain, losses and deductions will be passed directly through to its owners, called "members", and there is no tax at the entity level.  Unlike a partnership, however, an LLC is treated as an entity completely separate and apart from its members (as is a corporation) for liability purposes.  No member of an LLC is personally liable for the entity's debts by reason of holding an ownership interest in the LLC.

Can one person form an LLC?

Yes.  A unique feature of the Indiana Act is that it permits the formation of an LLC with only one member. 

What procedures are required to form an LLC?

An LLC is formed by filing "Articles of Organization" with the Indiana Secretary of State along with payment of a filing fee of $90.00.  The Articles of Organization are similar to the Articles of Incorporation for a corporation.  The person executing the Articles need not be a member of the LLC.  Assuming your application is acceptable, you will receive a Certificate of Organization back from the Indiana Secretary of State in a few weeks.  In the meantime, your lawyer will prepare an "Operating Agreement" which is the agreement setting forth how your LLC will be run.  The Operating Agreement functions much like the By-Laws of a corporation or the Partnership Agreement of a partnership.  The Operating Agreement, among other things, controls the management and operation of the LLC, provides for how members are admitted or withdrawn from the LLC, sets forth any agreement as to capital contributions, provides for the distribution and apportionment of profits and losses among members, voting of members, provides for the transfer and assignment of interests, and provides for the distribution of assets of the LLC upon dissolution.  The Operating Agreement does not get filed with the Indiana Secretary of State and may be amended at any time without further filings with the Secretary of State.

What are the Advantages of an LLC over Other Business Entities?

A. Advantages Over Partnerships:

1. Liability to third parties.  Both general and limited partnerships expose some or all of the partners to unlimited liability.  The general rule is that no LLC member is personally liable for the LLC's debts.  Members are also not personally liable for the acts of other members or employees, although a member remains liable for his own acts.

2. Participation in management.  If limited partners significantly participate in management, they may loose their limited liability.  The LLC form permits investors to participate in the management of the business.

B. Advantages Over "S" Corporations:

1. Eligible owners.  There is no statutory limitation of a member or qualifications of members as there is with regard to shareholders in an "S" Corporation.  The LLC may have more than 75 members and any "person" may be a member: trusts, corporations, non-resident aliens, etc.

2. Election of status.  The LLC need not worry about proper election of status or termination of status after formation.

At Kent A. Jeffirs, Attorney at Law, we offer a FREE half hour consultation to discuss whether forming a Limited Liability Company is right for you. You can call, email or fill out the Request Form for Free Consultation to request this FREE half hour consultation.