Utah's limited liability company.

• Author: Prawitt, Gregory G.
• Position: State recognizes new form of business entity

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...