Considerations in Forming a Limited Liability Company
A limited liability company ("LLC") is a new form of business entity that combines the operational flexibility and tax status of a general partnership with the limited liability protection traditionally associated with limited partnerships and corporations. A LLC has far greater operational flexibility than either a Subchapter C Corporation, a Subchapter S Corporation or a Limited Partnership.
The Principal Characteristics of Limited Liability Companies
- The LLC is not required to hold annual meetings or to comply with the many operational restrictions imposed upon corporations.
- The restrictions on the number and types of shareholders applicable to a subchapter S corporation do not apply to the owners of a LLC (the "members"). The members of a LLC may also participate in management to a greater extent than limited partners.
- A LLC differs from a general partnership inasmuch as its members are not personally liable for the obligations of the LLC. It also differs from a limited partnership in that no member is jointly and severally liable for obligations of the LLC, unlike the general partner in a limited partnership. A LLC is subject, however, to disclosure, record keeping and reporting requirements that do not apply to a general partnership.
- A LLC is a business entity consisting of one or more "persons" (meaning an individual, general partnership, limited partnership, association, trust, estate or corporation,) conducting business for any lawful purpose. A LLC may be an incorporator, general partner, limited partner, applicant of a DBA, or a manager of any corporation, partnership, limited partnership or limited liability company.
- LLCs consist of members, managers, and employees. Management of the company is reserved to the members or managers as specified in the Certificate of Organization. Generally, neither members, managers, nor employees are personally liable for any debt or obligation of the company.
- LLCs are creatures of statute and become effective once having filed an approved Certificate with the Division. Like most business types filed with the Division, LLC's are formed by filing a Certificate (called Certificate of Organization). Foreign LLCs may transact business in the state once having completed an Application for Registration. LLCs may amend their Certificate, file Certificate of Dissolution, and must file an Annual Report.
Creating a Limited Liability Company or LLC
LLCs are "organized" by filing with the state a Certificate of Organization setting forth (U.C.A. Section 48-3a-201 ):
- The name of the Limited Liability Company (must contain the words "Limited Liability Company," "Limited Company," "L.C.," or "L.L.C.").
- Principal office address (street & mailing): The primary physical address at which the company will be located.
- Registered Agent: The Registered Agent is a business or individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons. The Division also sends all correspondence to the Registered Agent. A Utah street address is required.
- The signature of Organizer is required (48-3a-203 ).
- The name and address of Members and/or Managers (optional): Provide the name and street address of each of the Limited Liability Company’s Managers and/or Members. While not required when filing the Certificate of Organization, at least one Manager, Member or other Governing Person will need to be provided in the annual report delivered to the Division (48-3a-212 ).
- The duration of the business entity (optional).
- The purpose of the business entity (optional).
Additional filing requirements
- One (1) original or true copy of the Certificate of Organization. If the filer requests a copy of the Certificate of Organization an additional exact copy of the filed document along with a return-addressed envelope with adequate first-class postage must also be submitted.
- The processing fee of $54.00 payable to the State of Utah.
- You may file in person, by mail, or fax. Means of payment are; cash, check, money order, or credit card made payable to the "State of Utah."
- You may file online and pay securely by credit card on the OneStop Business Registration site .
Historical Review of Limited Liability Companies
The first limited liability company legislation was enacted in Wyoming in 1977. Florida enacted similar legislation in 1982. Neither act was widely used prior to 1988, however, because of uncertainty regarding the federal tax treatment of LLCs. From 1977 to 1987, the IRS refused to issue letter rulings on LLCs. This meant that during this period no LLC could be certain whether it would be treated as a corporation or as a partnership for federal income tax purposes.
In 1988, the IRS indicated that it would issue rulings on the tax treatment of LLCs. In Revenue Ruling 88-76, 1988-2 C.B. 360, the IRS ruled that a Wyoming LLC would be treated as a partnership for federal tax purposes. The 1988 ruling was based on a finding that a Wyoming LLC did not have a majority of four specified corporate attributes.
These corporate attributes, as set forth in Treas.Reg.301 7701-2(1983), are as follows: centralized management; limited liability; free transferability of interest; and continuity of existence. The IRS determined that the Wyoming LLC has the first two corporate attributes, but lacks the latter two. This ruling affirmed the IRS' long-standing position that an entity having two or less of the four specified corporate attributes will be treated as a partnership for federal income tax purposes. In February of 1992, the AIRS issued a favorable ruling regarding the tax treatment of Utah Limited Liability Companies. Utah LLCs will be treated as partnerships for tax purposes.
Partnership tax treatment is advantageous because the earnings of a partnership are treated as the earnings of its partners. No separate tax is imposed on the partnership entity. In contrast, the earnings of a corporation are taxed at the entity level; any dividends which are distributed to the shareholders are also taxable to the shareholders. Thus, the distributed earnings of a corporation are taxed twice, while the earnings of a partnership are only taxed once. Like a partnership the earnings of the LLC are taxed only once.