Considerations when asking: to be or not to be an LLC?

• Author: Weiner, Alan E.
• Position: Limited liability corporation

Even though Wyoming adopted the first limited liability company (LLC) statute in 1977, most of the other 30 states with these provisions have adopted laws within the past five years. As the number of states authorizing LLCs increased, the interest in this type of entity has grown exponentially.

The economic and other

nontax considerations

of the LLC

The LLC will soon be the entity of choice over the S corporation and partnership for start-up companies whose business does not cross state borders. In the future this choice will likely expand to cover new multistate corporations as well. Existing entities have additional liquidation concerns that may restrict their changing to the LLC form.

* Limited liability: For a business that wants personal protection for its owners but does not want the regimentation of a corporation, the LLC is a viable alternative Most statutes will not eliminate the professional malpractice liability for the owner's own negligence or for those who are subordinates of that owner. It will, in most cases, insulate the owner from the malpractice of other owners and noncontrolled subordinates.

* Reduced insurance costs: Malpractice insurance may be reduced because of this insulation. This may not fully insulate professionals when the LLC veil can be pierced and therefore may be of only small value in certain cases. Tort insurance (e.g., auto, product liability, etc.) can also be reduced when the fear of personal liability is removed, but this is a business decision that must include consideration of the business's net worth and its ability to continue operating in the face of a significant lawsuit.

* Stress reduction: With the proliferation of litigation, especially against professionals, an LLC may allow its owner(s) to concentrate more on operating the business and less on taking defensive measures.

* Freedom of movement: For entities that periodically adjust partners' profit participation, the possibility of adverse tax consequences that would arise in a corporate atmosphere is reduced.

* Importance of form: When professional corporations became popular in the late 1960s and early 1970s, these entities were advised to respect the law's formalities to avoid an unnecessary attack on the existence of the entity as a corporation. The same must be said of the new and untried LLC. With that in mind, and given the importance of establishing and maintaining the LLC limited liability protection, the LLC should invest in new...