LLC Answers

In order to best understand the limited liability company, it is always helpful to know the key terms and concepts.  Here is a list of glossary terms to help:

Articles of Conversion: This is the name of the document required when you want to convert a different kind of legal entity (like a partnership or a corporation) to an LLC.  Not all states have a conversion process

Articles of Organization, Certificate of Formation or Certificate of Organization: These are the different terms used to describe the filing documents required to organize a limited liability company under a state’s LLC laws.  Each state has specific requirements for what needs to be on these documents.  This document is a matter of public record.

Capital Account: This is an accounting concept that is relevant for a multi-member LLC that has chosen to be taxed as a partnership under the IRS rules. It is an account maintained by the limited liability company for each member.  It changes from time to time to reflect contributions made, distributions made, and the member’s share of tax profits and losses.

Certificate of Organization: In most states, this term is used for the actual document issued by the state once a formation filing has been processed and a limited liability company has been formed.

Check the Box Regulations: These are tax regulations issued by the IRS in 1007 that allows for an LLC to choose how it wants to be taxed.

Disregarded Entity: This is a term used for tax purposes only and only applies to a single member LLC.  By default, a single member LLC is considered a “disregarded entity” for tax purposes which means the business is taxed on the individual income tax return of the single owner.

Disassociation: This term describes a situation where a member becomes disassociated with an limited liability company.  While disassociation is handled differently under each state, it generally results in a member no longer having any management or voting rights in the LLC.

Distribution: This describes payments of money or transfer of property to a member or members of a limited liability company that are made in respect of the membership interests held by the members in the LLC.  It does not include any salary payments to a member or the repayment of a loan made by the member.

Dissolution: This term describes the process when a limited liability company ceases to do active business and commences the process of winding down and being canceled. Generally, there are specific events set forth in the laws or the LLC Operating Agreement that trigger dissolution.

Economic Interest in LLC: This describes one aspect of ownership of an LLC and describes the rights a member has to the profits of a limited liability company and the right to a portion of the net assets of the LLC upon dissolution.

Limited Liability: This describes the essential attribute of a limited liability company where a member is not personally liable for the debts, obligations and lawsuits of the LLC merely by being a member.

Limited Liability Company: The term used in the US to describe an unincorporated entity that affords liability protection to its owners.  This entity is a creature of state statute and all 50 states and the District of Columbia have LLC statutes.

Majority in Interest: This means at least 51% of the interests of an LLC

Manager Managed LLC: This is a management structure option for a limited liability company where members  by virtue of being members, have not automatic right to manage and operated the LLC.  A member managed structure requires that managers be elected or appointed and the managers have the management authority.  If there is more than one managers, they collectively make up the Board of Managers.  This structure is similar to a corporation’s management structure.

Member: A member is a person or entity that owns membership units or a membership interest in a limited liability company.  While an LLC can specify or limit what a member is entitled to, a member is generally entitled to an economic interest in the LLC and a right to participate/vote.

Member Managed LLC: This is a management structure option and in most states (not all) is the general default management structure.  Members automatically have management authority and rights to participate in the operations and management of the LLC.

Operating Agreement. This is an internal document which sets out a set of governance rules for the limited liability company and evidences the ownership of the LLC. Aside from the formation documents, this is them most important document for an LLC.  In some state laws, it may be referred to using another term (ex. Member Control Agreement in Minnesota).

Series LLC. A series LLC is a new type of LLC that has series or divisions,  Each division has separate liability protection. The benefit of a series LLC is that the assets of one division are insulated from the liabilities of another division.  There is some hesitation to use these as not all states recognize them and if is not clear how federal laws (like bankruptcy) will treat them.

Single Member LLC. A limited liability company with only one member.