Article

“LLCs DISPLACING PARTNERSHIPS AND CORPORATIONS AS CHOICE OF BUSINESS ENTITY”, By Mason Salisbury - June 18 - July 1, 2001 Charleston Regional Business Journal

"The superior displaces the inferior. Steel replaces wood; cars replace buggies; limited liability companies replace partnerships". When Newsweek and Washington Post writer, editor and columnist Robert Samuelson said this in a recent New Republic article, his focus was not on LLCs - limited liability companies- but it could hardly have been said better.

The LLC is a superior business entity and is displacing partnerships and corporations as the entity of choice. The LLC is made to order for small businesses and the ownership of commercial or investment property. Corporation and partnership statutes came first and served as the basis for the LLC statutes now enacted in all fifty states and in South Carolina since 1994. LLCs combine formerly unique corporate and partnership features with flexibility of organization and operation. Standouts are, flexibility in taxation and strength in asset and liability protection.

First, your tax professional can choose to have the LLC taxed as either a corporation OR a partnership depending only on what he or she believes is best for your purpose (there is a huge difference between corporate and partnership taxation - just ask your tax professional). No other entity offers a choice of tax status. Second, and regardless of how your LLC is taxed, an LLC provides the best of both corporate and partnership asset and liability protection.

The LLC owner is protected from personal liability for LLC debts, LLC liabilities, and the actions of other LLC owners to the same extent a shareholder is protected in a corporation. Partnership partners do not have this protection. An LLC owner's right to management and control of the LLC is protected from his or her personal creditors and the personal creditors of the other owners to the same extent as a partner in a partnership. Corporation shareholders do not have this protection.

An LLC is superior to both corporations and partnerships in protecting present and future value of LLC property if the LLC is organized as a "term" LLC and if the LLC's operating agreement is properly drafted.

When organized to do so, LLCs will provide the major benefit of limited partnerships ("LPs"). LPs were the first entity to blend corporate and partnership features by creating the "limited partner" who basically is treated as a shareholder of a corporation (no day to day management control, no fiduciary duties to the entity or the other owners, and no liability for the debts of the LP or the acts of the other partners). General partners manage limited partnerships but unlike the managing owners of LLCs general partners in an LP are liable for all LP debts and liabilities. An LLC automatically gives all its owners, whether managers or not, the same liability protection as a limited partner. However, an LP, unlike an LLC, cannot choose its tax status. Simply put, an LLC trumps an LP.

Paradoxically, one of the LLC's greatest strengths, its flexibility of organization and operation, is also the source of its greatest failing. Most all statutory rules governing an LLC may be amended to fit the purposes of the individual LLC and the amendments are primarily accomplished in the organizational contract of the LLC, its "operating agreement". However, far too many LLCs do not take full advantage of this flexibility because their operating agreements are pre-drafted "form " documents. The drafters of "form" LLC operating agreements do not recommend their forms be used as fill in the blank documents, but it happens. "Form" operating agreements are meant to be starting points not ending points, they are outlines to which provisions should be added, subtracted, and modified depending upon the needs of the individual LLC.

Believe it or not, you will likely pay as much for an LLC with a pre-drafted "form" operating agreement from an attorney who occasionally organizes LLCs as you will for a customized operating agreement from an attorney that regularly organizes and thinks about LLCs. The latter likely will have already distilled his or her LLC knowledge and experience into numerous customized operating agreements and can do so again for you in less time then you may think, no reinventing the wheel.

To find an attorney with a special interest in LLCs, ask questions. Try letter or e-mail. Ask if LLC formation is a regular part of his or her practice? How many LLCs have they formed? How many legal seminars on LLCs have they attended? How many books on LLCs in their library? Do they draft their own LLC operating agreements? Do they rely on a "form" operating agreement? How much do they charge? You be the judge, it's your business, your investment, your money. Attorney Mason Salisbury practices commercial litigation and business law with Pelzer and Salisbury, LLC in Charleston. He can be reached at msalis1219@aol.com