A Primer on Limited Liability Companies
Most businesses should be operated by entities which protect the owners from
personal liability for the debts of that business. In years past, the entity of
choice to achieve that limitation of liability was the corporation. Today, the
entity of choice for most new businesses is the limited liability company, or
LLC. A limited liability company is a distinct legal entity that offers an
alternative to partnerships and corporations by combining the corporate
advantage of limited liability with the partnership advantage of pass-through
A limited liability company is formed in Pennsylvania by the filing of a
Certificate of Organization and Docketing Statement with the Pennsylvania
Secretary of State. No advertising is required in connection with the formation
of an LLC. The Certificate of Organization may provide for perpetual
existence. An LLC is owned by its members. An LLC may have an unlimited number
of members or as few as one member. The members’ ownership of an LLC is
represented by their “interests.” Ownership interests may be evidenced by
certificates; these are similar to stock certificates.
Management of the LLC may be by the members themselves or by a selected
manager, who may be one of the members. However, the members may select an
outsider to act as manager. As with limited partnerships, the relationship among
members and the management structure is typically set forth in a written
Operating Agreement. That Agreement is not filed with the Secretary of
One of the primary benefits of the LLC is the flexibility of its internal
governance. Governance Issues are not mandated by state law but are left to the
members of the LLC. The Operating Agreement has almost total flexibility in
terms of its provisions and its effect upon the running of the LLC and the
relationship between the members.
In forming an LLC, one of the first decisions to be made is whether the LLC
will be member-managed or manager-managed. A member-managed LLC is similar to a
general partnership and the law on general partnerships applies generally to
these LLC’s. However, this is a presumption and is subject to the express
desires of the members as set forth in the Operating Agreement. While members
have a legal position similar to general partners, they do not have the
liability of general partners. A manager-managed LLC is similar to a limited
partnership and, unless specifically provided otherwise in the Operating
Agreement, the Pennsylvania law of limited partnerships will apply to these
entities. In this structure, the managers are in the role of general partners
and the members are in the role of limited partners. A third alternative is to
have a member-managed LLC which operates similar to a corporation with corporate
rules of governance.
Limited liability companies offer substantial flexibility in ownership and
ease of operation. They also afford similar flexibility in income tax
treatment. Depending upon the circumstances of each entity, an LLC may elect to
be taxed as a sole proprietorship, partnership, S corporation or C
corporation. Due to the complexities of such tax treatment, a tax advisor should
always be consulting prior to making that election.
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David A. Megay, Esq. and James C. Kovaleski, Esq., speaking at SCORE business planning seminars on 11/7/11 (contact SCORE at 610-327-2673).