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LLC Changes?

Limited Liability Companies (“LLCs”) were first introduced in the United States in 1977 by the great state of Wyoming. Since then, the LLC has exploded in popularity and been recognized in all 50 States and the District of Columbia. The Missouri LLC Act became effective on December 1, 1993.

Forming a LLC is not all that difficult, but it’s important to have legal counsel to avoid misteps. In MO, the LLC is generally governed by the articles of organization, which are filed with the MO Secretary of State. The actual operation of the LLC is governed by an operating agreement, which can be either oral or written (it is infinitely better to have a written LLC should a dispute arise; moreover, many banks and financial institutions require a copy of a written operating agreement before opening up an account). In MO, the LLC Act embraces the full principle of freedom of contract; accordingly, business owners are afforded leeway in making their business structure as simple or as complex as they desire.

LLCs have members, who are the owners or investors of the LLC and have an “interest” in the LLC, which is defined in the operating agreement. More often than not, a member’s interest is simply in profits and losses.As for management, the LLC can either be “member-managed” or “manager-managed.”It’s important to speak with an attorney and consult with business partners (if any), before making this decision.

Now the two biggest perks of the LLC: limited liability and tax treatment. The limited liability of the LLC very generally means that its members or managers will not experience personal liability should a lawsuit or other liability befall the business. In other words, if a company should become liable, the business entity itself is sued, not the individual investors or members/managers. However, there are a few exceptions to this rule (e.g., things like corporate piercing); it’s not categorical, so, again, you should consult with an attorney.

With tax treatment, a LLC can be treated as either a partnership, a corporation or a sole proprietorship (if it’s a single member LLC — “SMLLC”).The goal for every business is to minimize tax exposure; as such, depending on the type of business and its structure, one of these options will provide the optimal tax treatment at the state and federal levels.

Now Wyoming appears to be on the cutting edge of business law again. This past July Wyoming ratified a law which provides strengthened creditor protection for SMLLCs. Specifically, the new law limits creditors rights to a simple “charging order,” wherein a successful creditor will generally only have rights to distributions made from the SMLLC. Other remedies, including foreclosure, aren’t available and may not be ordered by a court.

Given the success of the original Wyoming LLC, I wonder how long it will take for States to begin enacting similar layers of protection for businesses.


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