CHAPTER 5
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LIMITED LIABILITY CORPORATIONS (LLCs) A Limited Liability Corporation is a mixture between a partnership and a corporation. One of the complaints about a corporation is its’ rigid corporate structure. In contrast, a partnership has no limited liability protection, but has a lot of flexibility where the business owners may adopt a flexible operating structure. 1. Limited Liability Similar to an S corporation and a C corporation, an LLC has limited liability protection separate and distinct from its owners. The Limited Liability Company Act, 820 ILCS 180/, governs the creation and operation of LLCs in the state of Illinois. Owners of an LLC are called “members” and there are two (2) types of management structures of LLCS in Illinois. These two (2) structures are “member-managed” and “manager-managed” LLCs. A membermanaged LLC is run by the owners of the LLC. In contrast, a manager-managed LLC is similar to a Corporation because the member(s) elect officers to conduct the day to day affairs of the LLC. 2. Flexibility LLCs are a great business entity because they allow owners to customize their business operations according to their goals and objectives. For example, a law firm can have one (1) managing partner and two (2) junior partners and allow the managing partner and junior partners to form an LLC together. The managing partner likely wants to maintain all or most of the voting control of the LLC while giving the junior partners an incentive to work hard. With an LLC, the managing partner could be the only voting member where as the junior partners could be non-voting members. The benefit of this flexible
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structure is several purposes. The first purpose is to allow the managing partner to run the day to day affairs of the LLC where he or she has significant experience. In contrast, the non-voting members generally have greater liability protection because they are like shareholders in a public owned company. Essentially, the junior partners are investors with limited voting rights and lessened liability concerns. Non-voting members may not run the day to day affairs of a business but generally are employees that want to be incentivized to contribute to the law firm. Furthermore, this structure would also enable the managing partner to set up an easy transition system in case one partner wants to leave the law firm’s business. Generally, a non-voting member may participate in the profits of an LLC. If one junior partner left at the end of the first quarter, their wages and profits are limited to their salary and percentage of profits for the first quarter. There is no buy-out of the junior partner’s interests. Another example of this flexibility would be a law partner that has worked hard to establish the law firm for five years and wants to add his new associ-
ate(s) as partners in the near future. The new associates/partners understand that the managing partner should benefit for his or her hard work, but the business reality is that to keep the new associates/partners they may have to get a greater percentage of the law firm business. For instance, Sue, John, and Becky enter into a law firm business together as an LLC and Sue is the managing partner while John and Becky are the new associates that will be elected to junior partners. To reward Sue for her hard work with the law firm, Sue gets seventy-five (75) percent of the profits of the law firm for the first three years and, after this, Sue’s share of the profits drops to fifty-one (51) percent. With an LLC, its’ flexibility can account for the business realities that business and partners face. 3. Taxation An LLC is a disregarded entity for federal tax purposes, which means that one acts like the LLC did not exists. Thus, members pay federal and state taxes as though they were not incorporated and acted as a sole proprietorship or partnership. An LLC is considered a STARTING AND GROWING YOUR BUSINESS