Types of LLCs

A. Single Owner LLCs and Multi Owner LLCs

The term used for an owner of an LLC is "member" and an LLC can have a single member or many members. The difference between the two is fairly obvious, but can be worth addressing. Generally a single member LLC will be managed by that single member, though it is entirely possible that the single member could chose to have a manager run the LLC instead. The single owner LLC generally operates much like a sole proprietorship with the owner exerting full control over the business.

The multi member LLC, on the other hand, has a bit more variety. Multi member LLCs will generally operate either more like a partnership or more like a corporation. The members of the LLC may choose to operate the business directly, making the LLC similar in structure to a partnership, or may choose to instead have a manager run the LLC which will give the LLC a structure similar to that of a corporation with the members of the LLC acting as the stockholders.

B. Member Managed LLCs and Manager Managed LLCs

The LLC has two basic forms that it can take, member managed and manager managed. These two forms are designed to emulate the partnership and the corporation respectively. In the member managed LLC the members act similarly to a partnership. The members of the LLC run the business themselves according to the rules laid out in the operating agreement. On the other hand, the manager run LLC is run more like a corporation. The members of the LLC choose a manager who is responsible for the actual running of the business while the various members of the LLC act more like shareholders in a corporation.

The default for an LLC is member-managed. In order to create a manager-managed LLC the Operating Agreement must explicitly state that the LLC will be manager-managed. Neb. Rev. Stat. §21-136(a). The two forms act largely the same with a few exceptions. In a member-managed LLC the default rules allow the members equal rights to conduct business with the majority prevailing in matters of the ordinary course of business and matters beyond that requiring unanimity. §21-136(b). Manager-managed LLCs operate in a similar manner with managers making the business decisions instead of members. There are some powers reserved for members in a manager-managed LLC, though, and these include the ability to dispose of all or most of the LLCs property, approve of mergers, conversions, and domestications, undertake matters outside of the ordinary course of business and to amend the operating agreement. §21-136.

C. Domestic LLCs and Foreign LLCs

The difference between a domestic LLC and a foreign LLC is simply where the LLC was created. The domestic LLC is created in Nebraska while the foreign LLC is created in another state. There is little difference between how these are treated under Nebraska law and a foreign LLC can file for a certificate of authority with the secretary of state that will eliminate any difference. This is often a good idea because until a certificate of authority for the foreign LLC is on file, that LLC cannot bring an action in Nebraska and it is possible for the Attorney General to seek to enjoin that LLC from operating within Nebraska. §21-162 – 21-163.

D. Professional LLCs

An LLC that is providing professional services governed by a regulating body will have a number of additional requirements which must be met. §§21-185 – 21-191. Most importantly, an LLC which provides a professional services must provide the Secretary of State with a certificate of registration from the regulatory body which provides the name and address of all members, managers, professional employees, and agents who must be licensed and assures that any these people are authorized to provide such services. §21-185(2). A professional LLC also can only provide that one type of service and any services that are ancillary to that primary service. §21-190.

III. The LLC in Nebraska

When forming a limited liability company, the two most important documents are the Certificate of Organization, the term used in Nebraska for what is typically called the Articles of Organization, and the Operating Agreement. Only the Certificate of Organization is actually required in order to create an LLC; however, it is foolhardy to create an LLC without an Operating Agreement because much of the structure of an LLC can be changed to fit with how the members would like to run their business in that document. What cannot be changed in the Operating Agreement under §21-110 are:

(1) the LLC's capacity to sue and to be sued; (2) the applicability of Nebraska law; (3) the power of the court under §21-120; (4) eliminating the duties of loyalty and/or care; (5) eliminating the contractual obligations of good faith and fair dealing; (6) unreasonably limiting the duties and rights of members and managers to information; (7) limiting the power of the courts to dissociate the LLC in the case of illegal activities; (8) vary the requirements of winding up the LLC in case of dissolution; (9) unreasonably restrict the right of a member to maintain an action against the LLC or against other members; (10) restrict the right to approve a merger, conversion, or domestication of a member that will have personal liability with respect to a surviving, converted, or domestic organization; and (11) restrict the rights of a person other than a member or manager.

In order to file a Certificate of Organization it must be signed by at least one organizer and contain the name of the LLC and the street and mailing addresses of the designated office and agent for service of process. §21-118 – 21-119. The final requirement for creating the LLC is that notice must be published in a legal newspaper of general circulation for three consecutive weeks that states the same information that is required to be in the Certificate of Organization. §21-193.

If something in the filings is incorrect or changes over time then it is possible to amend both the Operating Agreement and the Certificate of Organization. There is no need to create another filing with the Secretary of State in order to amend the Operating Agreement because that document deals with how the inner workings of the LLC are to be done. If the Certificate of Organization is being changed, though, then this must be filed with the Secretary of State. If members of a member-managed LLC or managers of a manager-managed LLC are aware of inaccurate or outdated information in the Certificate of Organization then there may be required amendments. Even if not required, though, it is generally a good idea to amend a Certificate of Organization that is not correct because it is possible that if a third party suffers a loss due to inaccurate information in the document then it is possible that the members or managers could be held liable for that loss. §21-123. When amending the Certificate of Organization the filing must contain the name of the company, the date that the Certificate of Organization was filed, the changes that are being made and any former names. Also of note is that the introductory paragraph must contain the company's present name and the date of the filing of the company’s initial Certificate of Organization.

After the creation of the LLC there is also a requirement for a biennial report. This means that every two years, on odd-numbered years, the LLC is required to file a report with the Secretary of State which includes the name of the LLC as well as the street and mailing addresses of the designated offices, any PO Boxes, the agent for service of process and the principal office. §21-125.

IV. The LLC as Compared to Other Entities

A. C Corporation

To create a C corporation the party must file a document called the Articles of Incorporation. While the specific requirements of these can vary between states, in Nebraska the most important requirements of the Articles of Incorporation are the following: (1) the corporation’s name; (2) the number of shares that the corporation may issue as well as the classes and par values of those shares; (3) the address of the registered office and of the registered agent; and (4) the name and address of each incorporator. Neb. Rev. Stat. § 21-2018. Once the Articles are filed there must be a board of directors for the corporation. They can be chosen in the Articles of Incorporation or elected afterwards. All other positions flow from the board of directors. Officers are chosen by the board to perform the day to day running of the corporation, and from there employees are hired. Ultimate ownership of the corporation lies with the various shareholders, who have an indirect claim on the capital of the business.

The disparate structure of the C corporation also leads to the control of the corporation being broken up and divided among the various groups. The shareholders have some statutorily defined rights that give them control over the board of directors. The shareholders have the power to elect who is on the board of directors. Neb. Rev. Stat. § 21-2080(4). The board of directors is ultimately responsible for the decisions of the corporation; however, generally the board is not involved with the daily operations. The officers of the corporation whom the board chooses handle daily operations.

While all of these different groups exert control over the corporation in one form or another, generally none of these parties are personally liable for the obligations of the corporation. The corporation's status as its own legal person means that the shareholders' liability is limited to the amount of their investment and that the board members, officers and employees of the corporation are also, generally, not personally liable.

The profits that a corporation makes are taxed to the corporation as a result of its status as an individual. Whatever profits the corporation makes may be distributed to shareholders as the board of directors determines. If the board does choose to distribute profits to the shareholders then the shareholders will also have to pay income taxes on the distributions received in spite of the fact that the corporation has been taxed once before on the profits earned.

B. S Corporation

The S corporation is very similar to the C corporation, but has a few key differences that arise due to its creation as an entity designed to offer some limited liability to corporations. The laws governing S corporations are not a matter of any state law, but are a creation of the IRS. The IRS will allow a corporation to make the election to be an S corporation if the corporation meets the following requirements: (1) the corporation has no more than 100 shareholders; (2) shareholders must be U.S. citizens or residents and generally must be actual persons (3) the corporation cannot have issued more than one class of stock. 26 U.S.C.A. § 1361.

The S corporation shares the same rules from structure, control and most other issues with the C corporation because the S corporation is really just a C corporation which has filed a special tax election. The big difference between the two forms comes, not surprisingly, in how the corporation is treated for tax purposes. The S corporation is treated like a partnership for tax purposes. This means that the S corporation is given pass-through taxation and that there is no problem with double taxation because the profits flow right through to the shareholders.

The S corporation seems to address the tax-shield conundrum on its own, so why is there a need for the LLC? This is because, while the S corporation can be useful in some situations, the S corporation is far more rigid than the LLC and can be notoriously difficult to use. The purpose of the S corporation was to give the small business the ability to limit its liability while not forcing it into the double taxation that a normal corporation faces. The problem, however, is that the rules surrounding the S corporation can be prohibitively complex. The S corporation must make a tax election with the IRS; however, the formalities to do this can be very complex and require considerable legal help. The high transaction costs are needed, though, because if the formalities are not properly followed then the IRS can require all back taxes to be repaid.

C. General Partnerships

A partnership is simply an agreement between at least two individuals to carry on a business for profit as co-owners. This business entity does not actually require any formalization; however, it is often helpful to file a partnership agreement in order to lay out the structure of the partnership. The Nebraska Uniform Partnership Act of 1998 governs Nebraska's law of partnerships. This act follows the Uniform Partnership Act of 1997, also known as the Revised Uniform Partnership Act, quite closely.

The control of the partnership is shared equally between all partners in the business unless there has been an agreement otherwise. The partners all share in both the profits and losses of the business equally unless there has been an agreement otherwise. Neb. Rev. Stat. § 67-421.

The major advantage to a partnership is the fact that the partnership is given the advantage of flow-through taxation. This means that the profits and losses incurred by the corporation are attributed to the partners in their individual capacity and not attributed to the partnership.

D. Limited Partnerships

The limited partnership, like the general partnership, is an agreement between at least two individuals to carry on a business for profit as co-owners. Where the limited partnership differs, is that in a limited partnership, the partners are not equal in all respects. A limited partnership must have at least one general partner and one limited partner. This form of partnership is also different from a general partnership in that it is generally created by statute.

What does it mean to be a limited partner? One key difference between a limited partner and a general partner is that the limited partner may not participate in controlling the partnership. Neb. Rev. Stat. § 67-251. The operation of the partnership is left in the hands of the general partner or partners while the limited partner or partners are excluded. If a limited partner does, in fact, operate the partnership then he or she becomes a general partner.

The reason one would choose to be a limited partner is because, while one does give up control over the partnership, the limited partner is not liable for the obligations of the partnership. The limited partner is only liable to the extent of his or her investment in the partnership. This provides the limited partner with a barrier against personal liability while still allowing the limited partner to enjoy the benefits of flow through taxation.

The limited partner is able to gain protection from liability while still sharing in profits as other partners do by giving up control. This is both the advantage and the disadvantage of the limited partnership.

E. Sole Proprietorships

Finally, we have the sole proprietorship. This is the most basic form that a business organization can take and, in reality, it is not really a distinct entity at all. The sole proprietorship is owned by an individual and is legally indistinct from that individual. There are no formalizations required of a sole proprietorship. If a business is not one of the other entities listed above or one of their variants, then it will default to this form.

There is no legal separation between the business owner and the business itself. This means that the owner of such a business is fully liable for the obligations incurred on behalf of the business and the business could also be pursued for any liabilities incurred by the owner as an individual. The owner of a sole proprietorship has total control over the business, collects all of the profits and is allowed the benefit of flow through taxation (after all there is no distinct business entity by operation of law here).

This is the most basic form that a business can take, but it is also the most dangerous. The owner of a sole proprietorship opens himself or herself up to unlimited liability arising from the business. This means that a single lawsuit against the business could not only sink the business but carry dire consequences to the owner, and vice versa. If a lawsuit were brought against the owner for, say, an auto accident, then the assets of the business could be levied upon.

V. Who Should Use an LLC?

So when is it best to use an LLC as opposed to the other forms of business entities available? The answer to this question depends heavily on the specific circumstances presented; however, by reviewing what we have covered we can come up with some general conclusions.

The LLC provides the benefits of both flow-through taxation and a liability shield, both of which are highly desirable. This makes the LLC a good choice for the sole owner of a business. If the owner of such a business takes no steps then he opens himself up to the perils that are innate to the sole proprietorship. A member managed LLC with a single member is a better alternative.

The LLC also is useful for small businesses that have multiple owners. The partnership is an option for small businesses, but with it comes the issue of personal liability for the obligations of the business. The limited partnership does address this, but then the new issue arises of controlling the business one is invested in. The LLC can provide the answer to this conundrum by allowing the various owners of the business the ability to run it while also being protected from the liabilities that may be incurred. Another possibility for the small business would be the S Corporation. As stated above, the S Corporation and its tax consequences can be quite complex and go beyond the scope of this article. The LLC is generally a simpler entity to create and can be simpler to administer largely due to the lack of IRS involvement and oversight, meaning that this can be a better choice. Where the S Corporation may outstrip the LLC is when dealing with a business which will be changing owners more often, since stockholders are generally more easily interchanged than members, or when the business owns a great deal of capital assets.

Generally, then, the LLC is a good choice for the single owner business, the family business or nearly any small business that is seeking to have a stable group of owners who want to both own and run their business (though not in the case of a manager-managed LLC) and who want to maintain the benefits of flow through taxation without taking the heavy risk of personal liability that traditionally accompany it.