This is my fourth post in a series examining some of the advantages and disadvantages of different Illinois business structures. Thus far, I’ve discussed sole proprietorships, general partnerships, limited partnerships, and limited liability partnerships. In this post, I discuss one of the most popular business organizations among small-business owners, the limited liability company (LLC).
LLCs were designed as a hybrid of a general partnership and a corporation. LLCs offer liability protection like a corporation, but are subject to fewer formalities, like a partnership. LLCs can be managed by managers, like the board of directors in a corporation, or by the owners (called members), like the partners in a partnership. And, as I discussed in a post last month, LLCs can be taxed like a sole proprietorship (if there’s only one member), a partnership (if there’s more than one member), or a corporation (regardless of the number of members).
Formation: An LLC is formed when an organizer—who doesn’t have to be one of the members—files articles of organization with the Illinois secretary of state. The articles of organization must be accompanied by a $500 filing fee. The articles list basic information about the LLC, such as its name, purpose, and the name and business address of any manager (if the LLC will have managers) or managing members. They may also include additional provisions about the LLC, some of which must be included in the articles to be effective at all.
Liability Protection: The members and managers of an LLC are generally not liable for the LLC’s obligations. In addition, control of the LLC is protected against the members’ personal creditors. The significance of this point will be clearer after I discuss corporations in my next post. For now, it’s enough to note that the only part of a member’s interest in an LLC that creditors can seize is the member’s right to distributions from the LLC.
Formalities: In general, the formalities that apply to an LLC are like those in a limited partnership. The members should have an attorney draft a written operating agreement to govern their relationships with each other and with the LLC. The LLC must maintain an agent for service of process in Illinois. It must also keep certain business records and make them available to the members. And the LLC must file an annual report (along with a $250 filing fee) within the 60 days preceding the anniversary month of the LLC’s formation. Additional formalities apply to a series LLC, which I discuss below.
Limited Liability Company Variations
Series LLCs: Series LLCs are a relatively new form of LLC. They have only been available in Illinois since 2005. In a series LLC, the members form a single LLC (sometimes called the “master” LLC) that can establish multiple “series” within itself. When properly structured, the ownership, management, assets, and liabilities of each series are separate from those of any other series or the master LLC. This internal liability protection requires the LLC to satisfy certain additional formalities, such as separate bookkeeping for each series.
Low-Profit LLCs (L3Cs): Another new form of LLC is the low-profit LLC, abbreviated as L3C. L3Cs are for-profit companies that significantly further one or more charitable or educational purposes and do not have as a significant purpose producing income or appreciating property.
As you can see, limited liability companies are a flexible type of business organization. However, with that flexibility comes some risk. The laws governing LLCs—especially the variations like series LLCs and L3Cs—are still in a process of development. In fact, just last year the Illinois Legislature significantly amended the Illinois Limited Liability Company Act, and those changes become effective this July.
If you’re interested in learning more about LLCs or other business formation topics, please contact us today.