LIMITED LIABILITY COMPANY: How to Form and Operate Your Own

Gregory C. Damman, JD

Self-Counsel Press Inc. (a subsidiary of) International Self-Counsel Press Ltd. USA Canada

CONTENTS
1 WHAT IS A LIMITED LIABILITY COMPANY? 1. History 1.1 The Wyoming experience 1.2 The IRS reversal 1.3 The LLC explosion 2. The major benefits of doing business as an LLC 2.1 Limited liability 2.2 Partnership tax status 2.3 LLC flexibility 3. A potpourri of additional LLC benefits 3.1 International participation 3.2 Confidentiality 3.3 Estate planning 4. LLC disadvantages 4.1 Uncertain interstate recognition 4.2 Evolving tax status 5. Filing statistics 5.1 Uniformity 5.2 Professionals 5.3 Sole proprietors IS AN LLC THE PROPER ENTITY FOR YOUR BUSINESS? 1. What to consider when choosing a form of business 1.1 Nature of the business 1.2 Type of owners 1.3 Tax considerations 1.4 Management considerations 1.5 Liability considerations 1.6 Record keeping considerations 2. Entity comparison 2.1 Sole proprietorship versus LLC 2.2 General partnership versus LLC 2.3 S corporation versus LLC 2.4 C corporation versus LLC 2.5 Limited partnership versus LLC 1 2 2 2 2 3 3 3 4 4 4 4 5 5 5 6 6 6 7 7 9 9 9 9 10 10 10 10 10 11 11 11 12 12

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HOW TO FORM AN LLC 1. Filing the necessary documents (ULLCA section 202) 1.1 Articles of Organization 1.2 Drafting the Articles of Organization 1.3 Amendment of the Articles of Organization (ULLCA section 204) 1.4 LLC name and identification (ULLCA sections 105, 106, 107) 2. The filing fees 3. Other potential requirements 4. Choosing the state in which to form an LLC THE OPERATING AGREEMENT 1. Contents of the operating agreement 2. Signature requirements 3. Changing the operating agreement CONVERTING AN EXISTING BUSINESS INTO AN LLC 1. Converting a partnership (ULLCA sections 902, 903) 2. Converting a corporation 2.1 S corporation 2.2 C corporation 2.3 Corporate LLC conversion alternatives THE BASICS OF LLC MEMBERSHIP 1. LLC membership in general 1.1 What do I get? What do I want? 1.2 Who may be an LLC member? 2. The nature of an LLC membership interest (ULLCA section 501) 2.1 Membership contributions (ULLCA sections 401, 402) 2.2 Membership transfers (ULLCA section 502) 3. Leaving an LLC 3.1 Withdrawal or dissociation (ULLCA sections 601, 602(a)) 3.2 Wrongful dissociation (ULLCA section 602) 3.3 What happens when an LLC member dissociates? (ULLCA section 603) LIABILITY OF MEMBERS 1. The nature of an LLCs limited liability (ULLCA sections 302, 303) 2. Piercing the LLC veil 2.1 Inseparability 2.2 Undercapitalization 2.3 Illegal purpose 2.4 Lack of compliance with formalities 2.5 Equity and justice 3. How to avoid having the LLC veil pierced

15 15 15 17 18 19 19 19 20 21 21 22 22 39 39 40 40 40 40 43 43 43 43 44 44 45 46 46 47 47 49 49 50 51 51 51 51 51 52

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THE SOURCES OF MANAGEMENT RESPONSIBILITY (ULLCA SECTION 404) 1. Management provisions in the articles of organization 2. Management provisions in the operating agreement CONDUCTING THE BUSINESS OF AN LLC (ULLCA SECTION 301(a)) 1. General management considerations 1.1 Member agents 1.2 Selecting managers 1.3 Manager agents 2. Special responsibilities of members and managers (ULLCA section 409) 3. Distributions (ULLCA sections 405, 406, 407)

53 53 53 57 57 57 58 59 59 61 65 65 65 65 65 66 69 69 69 69 69 69 70 70 70 70 71 71 71 71 71 71 71 72 72 72

10 CHECK THE BOX TAX STATUS 1. A simplified process 1.1 Firms ineligible for check the box status 2. Making the election 3. Taxation of member contributions 4. Possible taxation at the state level 11 GENERAL LLC TAX CONSIDERATIONS 1. What tax forms must be filed? 1.1 Due date for Form 1065 1.2 Where to file 1.3 Failure to file Form 1065 1.4 Taxable year 1.5 Tax matters member 1.6 Signing the return 1.7 Audits 1.8 Accounting method 2. Details of form 1065 2.1 Cost of goods sold 2.2 Other information 2.3 Partners share of income 2.4 Balance sheets 2.5 Reconciliation of income 2.6 Analysis of partners capital accounts 2.7 Capital gains and losses 3. Self-employment taxes 4. The LLC accountant

Contents

12 WILL MY LLC BE RECOGNIZED IN OTHER STATES? 1. Interstate recognition of LLCs in general 2. How to avoid interstate problems 2.1 Form a manager-managed LLC 2.2 Include a choice of law statement in documents 2.3 Properly identify the LLC 2.4 Educate members and employees 2.5 Form other entities and make them members 2.6 Obtain adequate insurance coverage 2.7 Register in other states 13 IS MY LLC MEMBERSHIP INTEREST A SECURITY? 1. What is a security? 2. LLCs and the federal securities laws 3. Avoiding application of the securities laws 14 WHAT TYPES OF BUSINESSES ARE FORMING AS LLCs? 1. LLCs are suitable for nearly any type of business 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Real estate ventures Natural resource development Accounting firms High technology firms Law firms Medical practices Agricultural holdings Family businesses: Estate planning

79 79 79 79 80 80 80 80 80 80 83 83 83 84 85 85 85 86 87 87 87 87 87 88 90 91 91 91 92 92 92 93 95 95 95 96 96 96 97

2. Some businesses may not operate as LLCs 15 THE LLC LAWYER 1. Is an LLC lawyer necessary? 2. How to select an LLC lawyer 3. Services and fees 3.1 Peace-of-mind service 3.2 Start-up service 3.3 Full service 16 TERMINATING AN LLC 1. The basics of dissolution (ULLCA sections 801, 802) 1.1 Winding up 1.2 Filing matters 1.3 Agency considerations (ULLCA section 804) 1.4 Distributions 2. Creditors rights upon dissolution

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3. Terminating an LLC through merger 17 MISCELLANEOUS ISSUES 1. LLC records 2. Keeping up with LLC changes 3. Annual fees and reports 4. Workers and unemployment compensation 5. Is an LLP more appropriate? 6. A final note APPENDIXES 1. Uniform Limited Liability Company Act 2. State-by-State Directory

97 99 99 100 100 100 101 101

103 137

SAMPLES
1 2 3 4 Operating Agreement Form 8832 Form 1065 Schedule K-1 24 67 73 77

Contents

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1
WHAT IS A LIMITED LIABILITY COMPANY?
Some questions are not easily answered. What color is a chameleon? Does broccoli taste good? Questions of this type do not have clear-cut answers. Instead, the proper response is usually it depends. Is the chameleon on a green leaf or a brown tree trunk? Is the broccoli covered with cheese sauce? Add what is a limited liability company? to the list of questions that may be answered with an it depends response. The answer depends on questions such as: Is the limited liability company managed by all members or is it managed by elected managers? Are corporations included as members of the limited liability company? What are the terms of the limited liability companys Operating Agreement? These questions may seem confusing to you at this point, but, hopefully, by the time youve finished this book, you will understand their significance, and that of many other similar concepts. If you do business as a limited liability company, your friends may consider you to be an expert on the topic. They will ask what a limited liability company is. Unfortunately, they wont be happy with it depends or a lengthy, complicated response based on what you learned from this book. You will need a good cocktail-party answer. Tell your friends that a limited liability company is a flexible form of doing business that provides members with corporate-type limited liability, yet allows them the benefit of partnership tax status. To really become an expert on limited liability companies, you need to understand the concepts discussed in this book. One of the first things you must get a handle on is terminology. Limited liability companies are commonly referred to by the abbreviation LLC. I refer to limited liability companies as LLCs to save space and improve readability. This book has two goals. The first is to explain LLCs in detail so that the reader understands how to form one. The second goal is to provide the reader with the basic legal and practical considerations that accompany doing business as an LLC. You may notice that this book is liberally sprinkled with words and phrases such as most states, typically, usually, a few states, likely, and probably. There is a good reason for this usage. The LLC laws vary in many ways from state to state. It is impossible, at this early point in the development of LLC law, to make more than a few statements about LLCs that are true in every single state. Therefore, you should heed the advice, given numerous times throughout this book, to check your states LLC law on a particular question. For difficult questions, consult with an experienced LLC lawyer. For a copy of a states LLC law, consult the Corporate Division of the secretary of state. This office is typically in charge of filing LLC documents and therefore fields many questions about LLCs. It usually keeps a current copy on hand for the public. Some offices give free copies; others charge a nominal fee. All states have websites containing a wealth of information about LLCs. These websites are typically operated by the secretary of state or the Department of

Commerce in each state. A good starting point for locating your states website for LLC information is www.statelocalgov.net. Another good source of the LLC law is your local public library. Larger public libraries usually have a current copy of its states statutes. Look up limited liability company in the index. The Clerk of the State Legislature may also be a good source for locating current LLC law. Another source is the state law library, which is usually located in the state capitol building. A phone call to the reference desk may be enough to locate a copy. Before getting into the nuts and bolts of forming and operating an LLC, you might be interested in a brief LLC history lesson. If not, skip the next section. 1. HISTORY

Unfortunately, in 1980, the IRS issued proposed regulations that would have prevented members in Wyoming LLCs from qualifying for partnership tax status because no member had personal liability for the LLCs debts. The IRSs position, eliminating partnership tax status for LLCs, effectively did away with the primary advantage of operating a business as an LLC. Therefore, no other states, except Florida, enacted an LLC law throughout the early- and mid-eighties. Florida passed an LLC law simply as an attempt to attract foreign businesses. 1.2 The IRS reversal In 1988, the IRS reconsidered its position on the tax status of LLCs. It decided that limited liability protection for all members should not prevent partnership tax status, as long as the entity met the other requirements for taxation as a partnership. The IRS issued a revenue ruling concluding that a Wyoming LLC could be taxed as a partnership. This ruling opened the floodgates. Every state now has an LLC law.
LLC laws are generally the same from state to state, but there are important differences. First, there are different formation, organizational, and operational rules from state to state, and some states impose a state income tax on LLCs while others dont. Recently, the IRS passed check the box regulations which clarified LLC tax status by allowing an LLC to elect partnership tax status merely by checking a box on the partnership tax form.

In all likelihood, your state enacted its LLC law after 1990. Given this fact, you may think that the LLC is a creature of the 1990s. It is not. In the United States, LLCs emerged in the seventies. Other countries have had similar laws for many years. Brazil and Portugal, for example, have long allowed firms to do business in a similar way as limitadas. Germany has a similar entity called the GmbH (Gesellschaft mit beschraenkter Haftung). The United Kingdom has the Holding Company. Saudi Arabia has limited liability partnerships. Outside of the United States, LLC-type businesses are nothing new. 1.1 The Wyoming experience Despite the foreign acceptance of LLC-type business entities, no form of business similar to these foreign entities existed in the United States until 1977. Wyoming enacted its LLC law that year as special-interest legislation intended to lure Hamilton Brothers Oil Company into Wyoming. Hamilton was involved in international oil and gas exploration and had been using the LLC form in Panama.

1.3 The LLC explosion Now that the LLC wave has swept the country, many people are aware that LLCs are an extremely attractive form of doing business. Given the nationwide scope of the LLC laws and the recent enactment, the current number of LLCs will certainly multiply in just a few years. More and more people want to know whether forming a new business as an LLC, or converting an existing

Limited Liability Company

business into an LLC, would be beneficial. In order to make that decision, a business owner must have a general understanding of the major benefits related to operating a business as an LLC. 2. THE MAJOR BENEFITS OF DOING BUSINESS AS AN LLC

But the liability exposure that remains after an LLC is formed does not prevent LLCs from being an attractive business entity.
LLC members are liable only up to the amount of their capital contributions and the amount they agree to contribute to the firms capital. Of course, limited liability is not granted at the expense of creditors. Many state LLC statutes require disclosure of members agreed-upon contributions, and will limit distributions to members so that they cannot raid the LLC assets and make it unable to pay its debts. Perhaps the best way to think about limited liability is to consider it as corporate-type limited liability. Limited liability is a valuable asset, especially when combined with partnership tax status.

Many experts list two benefits that flow from doing business as an LLC: limited liability and partnership tax status. Actually, there is a third benefit: flexibility. A general look at each of these benefits provides the foundation for a good working knowledge of LLCs. Well start with limited liability. 2.1 Limited liability Perhaps the first thing that jumps out at someone interested in operating an LLC is the name itself. Limited liability company sounds great! What business owner would not want limited liability? We all know about lawsuits, creditors, loans, and all the other liability-creating animals that scare business owners. Imagine the entrepreneurship, creativity, and productivity that could take place if a large portion of a businesss liability concerns could be eliminated. What would happen if these liability concerns could be lessened or eliminated? Presumably, entrepreneurs would be more willing to invest their time, money, and energy into a new business because the potential for personal liability would be lessened. This basic notion is one of the reasons state legislators across the country have looked favorably on LLCs. All members of an LLC should be thoroughly familiar with the nature of limited liability. In short, LLC members are not personally liable for the LLCs debts and obligations. The LLC limited liability umbrella does not, however, protect members from every type of liability that could rain down on them. LLC members may still be personally liable for LLC debts if they personally guarantee those debts. They are also still personally liable for their own negligence.

2.2 Partnership tax status If LLCs provided no benefits other than limited liability, there would be little incentive to form an LLC. There must be more. The more is partnership tax status. This is the cornerstone of the LLC. Once again, a brief terminology lesson is helpful. You might occasionally hear some people refer to the favorable tax status of LLCs as pass-through taxation, rather than partnership tax status. Dont be confused. The two terms mean the same thing. The phrase pass through simply means that members are not taxed twice, as they are in a corporation. In a corporation, both the corporation and the shareholder are separately taxed. In an LLC, income passes through the LLC directly to the member who is then taxed as a partner. The LLC itself is not taxed. There is a form of corporation, called an S corporation, that also provides pass-through taxation, but S corporations are subject to many limitations that are discussed more thoroughly in chapter 2. While partnership tax status and limited liability are important financial LLC benefits, the third benefit flexibility is the feature that makes LLCs extremely useful, innovative, and attractive for a broad

What Is a Limited Liability Company?

range of businesses. In fact, many experts believe that flexibility is the most important feature of LLCs. 2.3 LLC flexibility
LLCs

The business world is becoming increasingly global, and firms that participate in the global economy have an advantage over other, more restricted, business firms. Before the existence of LLCs, foreign investors who were familiar with LLC-type entities in their own country were frustrated by the lack of a similar-type entity in the United States. Now, many foreign investors are impressed by the fact that a US business is operating with the blessing of a state, and they feel more protected in their business affairs. 3.2 Confidentiality Many states have laws that require general partnerships, limited partnerships, and corporations to file annual reports, ownership statements, and other information with the secretary of state. (From now on, when you read the phrase secretary of state, keep in mind that it simply refers to the central filing agency, whether that agency is in fact the secretary of state or not.) Additional filing may also be required if there is a change of ownership within those entities. These filing requirements have the effect of making a substantial amount of business information available to the public. If you want to know whether a person owns shares in a corporation and the number of shares owned, just check the secretary of states records in the state of incorporation. The LLC laws in many states do not impose extensive filing and reporting requirements. Often, the only time an LLC must make information public is when the Articles of Organization are filed. And even then, no financial information need be disclosed. In addition, the LLC may not need to disclose its owners if it is managed by nonowners or some other organization. LLC ownership changes also may not bring about the need to file additional documents. The lack of filing and reporting requirements makes an LLC a confidential

are flexible for many reasons. A prime example of LLC flexibility is that they may be formed with any type of entity as a member, including corporations, partnerships, limited partnerships, individuals, and even other LLCs.

Another feature that makes LLCs flexible is that it is easy for owners to agree about the businesss direction without restrictions. For example, the members may agree that all members have management capability or, in the alternative, that only a small number of members have management power. If the members later want to change the management scheme, they may do so easily.
LLCs are also flexible because there are few state and federal laws or IRS regulations that limit the way LLCs may do business. Yet another source of flexibility is the fact that LLC members may allocate gains, losses, deductions, and credits in virtually any way they see fit. For example, if one member needs to show a greater loss than other members in a certain year, the members may agree to allocate a larger portion of the LLC loss to that member. Perhaps the only limit on LLC flexibility is a lack of imagination.

3.

A POTPOURRI OF ADDITIONAL LLC BENEFITS

Limited liability, partnership tax status, and flexibility are not the only benefits obtained by doing business as an LLC. They are just the primary benefits. There are several other benefits, including international participation, confidentiality, and estate planning. 3.1 International participation
LLCs

are not limited to domestic members, but may take on international members.
Limited Liability Company

entity. Investors or business owners who prefer to keep their interest in the business confidential may do so easily. This confidentiality, however, has received criticism. Some people believe that LLC confidentiality could lead to widespread fraud. If fraud does occur, it is likely that legislation will be passed imposing reporting requirements on LLCs similar to those already in place for other business entities. 3.3 Estate planning Yet another advantage of doing business as an LLC is the ability to structure the LLC so that it is an estate planning device. For example, assume that the owners of a family business want to arrange the business so that it continues in existence after the death of one of the family member owners. In order to do so, the family need only form an LLC and after the family members death, agree to continue the LLC in existence. One of the tax benefits of such an arrangement is that the LLC does not dissolve. If it did, the members would recognize a taxable gain because the LLC assets would be distributed to them. Another way that LLCs could work as an estate planning tool is by reducing inheritance taxes. If your estate is worth more than the federal estate tax unified credit, it could be subject to a large federal estate tax. An experienced estate planning lawyer can help you determine whether your estate is subject to federal estate taxes. Inheritance tax can be avoided by forming an LLC with your children to hold the excess assets. You could retain a small percentage interest in the LLC but retain control over your assets by listing yourself as the manager in the Operating Agreement (see chapter 4 for a detailed discussion of Operating Agreements). This way, you could still direct the LLC to loan you or your children money as needed. Upon your death, inheritance tax would be owed on your percentage interest, but that amount would come to much less than the amount that

would have been paid if the LLC had not been formed. If your children are minors, their interests could be owned by an irrevocable trust. Most states have abolished commonlaw marriages. Research indicates that only 13 states recognize common-law marriages. The IRS may allow spouses to take advantage of estate planning laws used by formally married spouses, but the validity of the marriage can be challenged if it was claimed primarily to gain tax benefits. Naturally, if you are forming an LLC as an estate planning tool, you should consult your lawyer and accountant to make certain that the LLC serves the intended purpose. The tax laws are too complicated to attempt to use an LLC as a tax-saving tool without the advice of a professional. 4. LLC DISADVANTAGES

There are many benefits from doing business as an LLC, but like most things in life, LLCs are not perfect. Fortunately, there are few disadvantages, and those are not substantial. Actually, they are not so much disadvantages as they are question marks. 4.1 Uncertain interstate recognition One disadvantage is that the fast and recent development of LLC laws has created some questions as to how different states may treat LLCs that venture into that state to do business. For example, if a California LLC does business in New York and is sued, will the New York courts recognize the limited liability of California LLC members? This question is especially important if one states LLC law grants stronger liability protection to members than another states LLC law. The courts have not had the opportunity to address the interstate validity of LLCs. In all likelihood, LLCs engaged in interstate commerce will be treated the same as corporations engaged in interstate commerce. That is, LLC members will enjoy limited liability in every state. Until the courts

What Is a Limited Liability Company?

actually embrace this notion, however, interstate LLCs need to be wary. (The question of interstate LLC validity is discussed more thoroughly in chapter 12.) 4.2 Evolving tax status Until the recent creation of the check the box option, it was difficult to predict whether an LLC would enjoy partnership tax status. Now, the primary LLC tax question is whether the states will see an opportunity to generate revenue and impose a tax on LLCs? Many other LLC tax questions need to be answered. In all likelihood, answers will flood in over the next few years; LLC owners must stay in touch with their tax advisers to keep up-to-date on tax issues. 5. FILING STATISTICS

example, in 2001, Florida had 121,063 corporation filings and 25,566 LLC filings. Even so, over the past 10 years, LLC filings in Florida have increased at a much higher rate than corporation filings. 5.1 Uniformity Imagine what would happen if every McDonalds Restaurant had a different name for the Big Mac. You would walk in, order a Big Mac, and the counter worker would say, What? Big Mac? Never heard of it. You would be forced to read the menu to learn what to order. Uniform use of the name Big Mac among all McDonalds Restaurants makes it easier for you to place your order. The same is true with legal matters. Uniform laws from state to state make it much easier for lawyers to apply the law to their clients cases. They arent forced to learn entirely new legal principles just because they happen to be applying the law of a different state. The benefit of legal uniformity has caused groups of legal experts to get together and draft uniform laws such as the Uniform Commercial Code, the Uniform Partnership Act, and the Model Business Corporation Act. Once these uniform laws are drafted, state legislatures review them and decide whether to enact them in their state. Often, uniform laws are enacted with minor changes. As a result, uniform laws are not really entirely uniform, although they are similar enough from state to state to provide the intended familiarity benefit. Given the fondness of lawyers for uniform laws, it is not surprising that a Uniform Limited Liability Company Act was drafted by the National Conference of Commissioners on Uniform State Laws. The Uniform Limited Liability Company Act will be referred to throughout this book as the ULLCA. Sections of the ULLCA will be referred to frequently. Do not rely on these references as the law of any particular state. The ULLCA becomes law in a particular state only if that state enacts the ULLCA, or some

Previous editions of this book contained a prediction that LLCs would become a popular form of doing business. Statistics have proven that prediction to be correct. For example, the Idaho Secretary of State reported that new filings in 2001 for LLCs outnumbered new filings for domestic corporations by a count of 2,628 to 3,509. Their statistics for the nine-year period between 1993 and 2001 showed that an average of approximately 2,600 domestic corporations were filed every year. The numbers were fairly steady, with a high of 2,730 in 1999 and a low of 2,475 in 1998. On the other hand, LLC filings steadily increased during that nine-year period. Only 125 LLCs were formed in 1993. LLC filings increased by several hundred each year thereafter, and first exceeded the number of domestic corporation filings in 1999. Idaho was not alone. For instance, LLC filings surpassed corporation filings in Kentucky for the first time in 2001. In July of 2002, LLC filings in Oregon surpassed corporation filings, and appear to be on track to continue to do so. Some states have seen dramatic growth in LLC filings, but continue to have substantially more filings for corporations. For

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variation of it. Nevertheless, the ULLCA is a good example of the general framework of the typical state LLC law (see Appendix 1). The ULLCA is based on the freedom of contract concept. It is also based on principles contained in the Revised Uniform Limited Partnership Act, the Revised Model Business Corporation Act, and the Revised Uniform Partnership Act. Another source of LLC uniformity is the Prototype Limited Liability Company Act. This act is the product of an American Bar Association committee. It was intended to be a tool for states to use when drafting their own LLC acts. Indeed, the Prototype Limited Liability Company Act formed the basis for the Louisiana, Idaho, Montana, Indiana, and Arkansas LLC acts. Some states have enacted the Uniform Limited Liability Company Act with minor state-specific changes. That is what happened in commercial law with the Uniform Commercial Code. The resulting commercial law uniformity benefited the general business environment by allowing transactions to take place with some certainty about the transactions legal significance. 5.2 Professionals Professionals, such as lawyers and accountants, have embraced LLCs as a form of doing business. This makes sense because, traditionally, professionals have been forced to practice as partnerships. The problem is that partnerships leave partners open to personal liability for partnership debts and obligations. The early LLC statutes did not address whether professionals could practice as LLCs. Later, many states enacted LLC statutes that specifically allowed professional LLCs. Many state legislatures and consumer groups have frowned on professional LLC practice because of a perceived lack of accountability. If you are a professional, you should carefully review your states LLC statute to determine whether you are allowed to practice as an LLC. But even if

your state does not allow professional LLCs, it would be wise to check the status of any attempts to allow professional LLC practice. Several states that initially prohibited professional LLCs later reversed themselves. Your state may be on the brink of such a reversal. Lawyers may practice as LLCs only if the agency regulating the practice of law, such as the state supreme court or state bar association, grants its approval. A lawyer practicing in an LLC will not be insulated from personal liability for his or her negligence. However, the LLC would provide a liability shield if another member/lawyer acted negligently. Another form of doing business, the Registered Limited Liability Partnership (RLLP), exists in numerous states. An RLLP is simply a general partnership that has registered and, as a result, obtained limited liability for the partners. A partner in an RLLP is not personally liable for partnership debts and obligations, but remains personally liable for his or her own negligence. The RLLP may end up being the lawyers LLC in those states that do not allow professional LLCs. Accountants have also embraced the concept. In 1992, the American Institute of Certified Public Accountants approved a change allowing accountancy to be practiced in any form permitted by state law. This change allowed accountants to practice in LLCs. Some state LLC laws specifically allow accountants to practice in LLCs, while other state LLC laws are being revised to include accountants. Indeed, accountants appear to be more interested than any other profession in practicing as LLCs.
LLC

Other professionals, such as doctors, chiropractors, engineers, and architects, are also practicing as LLCs. 5.3 Sole proprietors Massachusetts is the only state that requires an LLC to have at least two members. Therefore, sole proprietors are typically able to do business as an LLC. The IRS has 7

What Is a Limited Liability Company?

tacitly approved one-member LLCs by passing the check the box regulations allowing a business to elect not to be taxed as a corporation.
LLCs

However, some states tax one-member as corporations. Anyone who forms a

one-member LLC should also keep in mind the liability protection may be lessened somewhat. This is because it is sometimes difficult to separate business from personal dealings when a single person operates the business.

Limited Liability Company