          
          
          
                       THE LIMITED LIABILITY COMPANY
          
          
                   What Is A Limited Liability Company?
          
               The limited liability company (also called the
          LLC) is a form of business entity just now becoming
          popular in the U.S., although it's been available in
          Germany, France, and many other countries for decades. 
          Until its recent acceptance by a number of U.S. states,
          the business executive had three common choices when
          forming a business: the sole proprietorship, the
          corporation, or the partnership.
               The LLC is a hybrid between the partnership and
          the corporation.  It has all the flexibility of a
          partnership to define its own management structure,
          rules of procedure, voting rights, distribution of
          profits and a myriad of other details.  The structure
          is created by a contract among all the parties.  At the
          same time, if structured properly all the members and
          the management will enjoy limited liability typical of
          a corporation.
               It is generally assumed that the combination of
          these two elements will be the reason most LLCs are
          formed, although there is a great deal of latitude with
          regard to the structure.
               It offers many advantages over the Subchapter S
          corporation, which has been the traditional method of
          combining corporate liability protection with
          partnership-type taxation.
          
          
          
                            History Of The LLC
          
               The origin of the modern LLC laws allowing limited
          liability companies is in the German law of 1892 which
          created the GmbH (Gesellschaft mit beschranker
          Haftung).  In the 60 years which followed, almost 20
          countries adopted similar laws.  In France, for
          example, the same type of company is known as the SARL
          (Societes de Responsabilite Limitee).  In Central and
          South America it is known as the limitada.
               In the U.S., the first state to adopt a modern
          limited liability company statute was Wyoming, on March
          4, 1977.  Florida followed in 1982 by enacting a
          similar statute.  Now, a number of states have either
          enacted similar laws or have legislation pending.  It
          has become the most talked about and most imitated new
          business law in America.  However, the IRS gave no
          assurance that such an entity could qualify to be
          treated as a partnership until September 2, 1988, when
          Revenue Ruling 88-76 was issued.  It was the first
          Revenue Ruling from the IRS regarding LLCs.  In
          February, 1993, the IRS issued four Revenue Rulings
          which describe the classification standards the IRS
          will apply to LLCs who desire partnership tax
          treatment.
               Now that the issue of pass through tax treatment
          has been settled, it is time for the business owner to
          seriously consider this form of entity when forming new
          ventures, and to replace the form he already adopted
          for existing enterprises.  Some lawyers predict that
          the LLC will steadily gain popularity as people become
          educated about its benefits until it will largely
          replace the partnership and the corporation as the
          preferred entity.  
          
                                  Where?
          
               LLC laws have been enacted in: Arizona (1992),
          Colorado (1990), Delaware (1992), Florida (1982),
          Illinois (1992), Iowa (1992), Kansas (1990), Louisiana
          (1992), Maryland (1992), Minnesota (1992), Nevada
          (1991), Oklahoma (1992), Rhode Island (1992), Texas
          (1991), Utah (1991), Virginia (1991), West Virginia
          (1992), Wyoming (1977).  
               Most of the other states either have laws pending,
          or a legislative committee is studying the matter, so
          you should check on recent developments in your state.
               For investment and holding companies not doing an
          active business in a particular state, then you could
          use another state to form the LLC.
          
          
                                 Delaware?
          
               The Delaware LLC law was passed on October 1,
          1992.  Delaware has a long history as the home of the
          best corporate law in the U.S.  The law is considered
          to be pro-management and has a tradition of respecting
          good faith management decisions.  There exists a strong
          partnership in Delaware between the corporate bar, the
          legislature and the judiciary, which helps to maintain
          a legal atmosphere second to none.  This tradition of
          excellence in corporate law is likely to attract those
          who want to form LLCs in the U.S.
               The Delaware LLC statute is clearly the most
          flexible.  It follows a tradition that Delaware lawyers
          call the "Freedom of Contract" which allows broad
          flexibility among members of an LLC to create the
          details of the structure of the company in the way that
          best suits their needs.  More than any other state LLC
          statute, the Delaware law allows the parties to draft
          the LLC company agreement as they may require and "opt
          in" the elements they desire, without a lot of
          regulations or restrictions.
               The Delaware law presumes that the entity will be
          treated as a partnership, unless otherwise classified. 
          It allows extensive protection to members and managers. 
          It does not require that the duration be stated in the
          Certificate of Formation, and it limits the liability
          of the members to their investment in the company.  The
          Delaware law also allows for a structure in which the
          death of a member will not cause an automatic
          dissolution.  All these elements together are not
          included in the Wyoming statute, or in any of the
          others.  The drafters of the Delaware LLC law sought
          deliberately to create it in such a way as to give
          maximum flexibility, so that it would allow creativity
          among the drafters of the company agreements.
               Delaware LLCs pay an annual state fee of $100, the
          same as limited partnerships.
               Legislation was passed in July, 1993, that now
          provides for Delaware corporations to convert their
          status to LLC by merging the old corporation into a new
          LLC.  The LLC may take the same name as the
          corporation, with proper filing details.
               Delaware has again distinguished itself, and it
          promises to be one of the leaders in the formation and
          maintenance of LLCs.
          
          
                 Comparison With Subchapter S Corporation
          
               An LLC provides its members with liability
          protection and tax treatment similar to that enjoyed by
          stockholders of an S corporation.  However, an S
          corporation also is subject to the following statutory
          restrictions:
               1) It is limited to one class of ownership
          interests (i.e., one class of stock).
               2) It must be a domestic corporation.
               3) It may not have more than 35 stockholders
               4) Stockholders may not include other
          corporations, nonresident aliens, partnerships, certain
          trusts, pension funds, or charitable organizations
               5) It cannot have subsidiaries.
               None of these restrictions applies to the LLC. 
          This flexibility creates considerable freedom in
          planning distributions and special allocations of
          income and loss.
          
          
                  Comparison With The Limited Partnership
          
               An LLC is taxed in substantially the same manner
          as a limited partnership, without the following
          disadvantages that limited partnerships have with
          regard to liability:
               1) A limited partnership must have at least one
          general partner who is liable for debts of the
          partnership, while all of the members of an LLC may be
          protected from such liability; and
               2) The participation of limited partners in the
          management of a limited partnership can result in a
          loss of limited liability protection, while such
          participation by members of an LLC will not have such
          effect, provided such management does not violate the
          applicable LLC statute.  Accordingly, a member of an
          LLC treated as a limited partnership would be able to
          "materially participate: for purposes of Section 469 of
          the Internal Revenue Code -- which limits the
          utilization of passive activity losses and credits --
          while maintaining limited liability protection.
          
          
            For Which Purposes Are LLCs Being Currently Formed?
          
               * Venture capital, real estate, and other
          investment firms:  Control, division of profits and
          losses and many other aspects may be specified in the
          agreement, plus pass through tax treatment when
          properly structured.
               * Family business enterprises:  Control can be
          spelled out and estate planning considerations can be
          customized as an integral part of the agreement.  Pass
          through tax treatment when properly structured.
               * Entrepreneurial start-ups:  Pass through tax
          treatment like Subchapter S, but without the
          restrictions on ownership if properly structured.  No
          limit on the number of investors.
               * Professional corporations:  Accountants,
          attorneys, doctors, psychologists, financial planners
          and all professionals now working through partnerships
          can free themselves of the liability for their
          partner's actions, while retaining the same control
          structure as their partnership.
          
          
                           The Formation Process
          
               Each party to an LLC must agree to a contract with
          all the other members that will become the
          "constitution" of the company.  This document may be
          called the "Company Agreement," "The Articles of
          Organization," "The Minutes of the First Meeting of
          Members", or any other name, unless the particular
          state has a required name. 
               This agreement should set forth the company's
          policy and procedure regarding important matters such
          as voting rights and restrictions, differences among
          members, or classes of members, investment into the
          company by each member, restrictions on access to
          information among members, rights of management,
          restrictions on transfer of ownership interests,
          distribution of profits, required meetings (if any),
          notices of meetings, quorum rules, inclusion of new
          members, continuation options upon the death of a
          member and all other provisions the company wants to
          include.
               Most states allow the inclusion of provisions and
          elements almost without restriction.  This gives the
          drafters of the agreement the opportunity to be
          creative.  Since this form of entity is relatively new
          all the available inclusions will not be commonly known
          immediately.  This represents a danger to the LLC,
          which can only change it's agreement by the unanimous
          agreement of the members.
               In drafting the agreement, careful consideration
          must be given to the IRS position regarding tax
          classification of the entity.  Although the law allows
          tremendous flexibility, the IRS is very specific about
          the test it will apply when determining whether to tax
          the entity as a partnership or as a corporation.  Since
          pass through tax treatment is expected to be a prime
          consideration of most organizers, the drafters must
          create an agreement which provides for the IRS Rules. 
          (If your lawyer or accountant is not familiar with
          these rules, they are contained at 28 CFR 301.7701-2, 3
          and 4).
               Although do-it-yourself incorporation is generally
          not a problem, because the limited liability company
          agreement is as complex as a partnership, and calls for
          originality and creativity, it is probably best to use
          a lawyer experienced in such matters.  (He does not
          necessarily have to be a lawyer in the state where it
          is formed -- you may find better experience elsewhere,
          and that experience will usually translate to the state
          that has just enacted a statute more readily than a
          local lawyer will absorb the nuances of a strange
          entity.)  The differences and possibilities are too
          vast for a simple do-it-yourself procedure to be wise
          at this time.
          
          
                        Who Should NOT Form an LLC?
          
               * Companies planning to operate their business in
          a state that does not currently recognize LLCs should
          seriously consider the consequences of losing their
          limitation on liability in that state, before forming
          an LLC.
               * Entrepreneurs who do not want to bear the
          responsibility, cost and possible future constraints of
          a customized company structure should consider sticking
          to the time-tested more rigid structure that a general
          stock corporation offers.
               * Sole owner companies cannot be LLCs.  An LLC
          must have two members, by definition, or it
          automatically dissolves.  (Of course, the second owner
          could be a children's trust or a family limited
          partnership holding 1%.)
          
          
               For help with forming a simple Delaware LLC, write
          to Incorporation Information Package, 818 Washington
          Street, Wilmington DE 19801 and specify that you want
          LLC information.
               If you need help with a more complex LLC
          structure, you should contact Asset Protection
          Corporation, Suite 201A, 14418 Old Mill Road, Upper
          Marlboro MD 20772.
          
          
          
          
