Which Type of LLC Is Best For You?
By Jeff Williams
If you have decided, after considering the various types of entities, that you want to have an LLC, the next decision you need to make is, what kind of LLC do you want to have, and how many owners will be involved? Georgia lawmakers have written the Limited Liability Company statutes in such a way that they are very flexible, and allow many options and variations as to organization and control. With certain exceptions, the Operating Agreement can be drafted to suit your particular needs and goals.
LLC’s may not issue publicly traded “stock” as a Corporation may; instead, an LLC issues Membership Units (or Interests), which are very similar, except that they may not be publically offered for sale; but these Units may be traded or sold between members, or assigned to new members, etc..
Ownership may be divided any way the organizing member(s) wish. For example, one person may well choose to be the sole member, with 100% ownership. Or two people (whether related or not) could each own half; or eight children or grandchildren could each own 5% while you retain 60%; or ten members could each hold 10%; or one member could hold 50% with two other members holding 25% each; or one member could hold 51% with all other members holding a total of 49%; etc..
Note that for tax purposes, the IRS does not regard a single-member LLC as an entity separate from its owner. Hence, if the sole member of an LLC is an individual, the LLC is treated as a sole proprietorship for tax purposes – i.e., it cannot be taxed separately from the owner; its income is taxed at individual rates, reported on a Schedule C attached to the owner’s 1040. If the sole member is a corporation or another LLC, then the LLC is treated as a division or branch of the owning corporation or LLC for tax purposes. However, if an LLC has two or more members, it may choose to be taxed either as a partnership (“flow-through,” each member reporting their respective share of income on their 1040) or as a corporation. Unless the LLC specifically elects to be taxed as a corporation, it will automatically be taxed by the IRS as if it were a sole proprietorship or a partnership. Which choice is best for your situation should be discussed with your CPA, who is familiar with your tax situation and goals.
One of the best advantages of LLC’s over Corporations is the privacy they afford. An LLC Operating Agreement is not a matter of public record, and is not on file anywhere except in the company records, which may be kept at your company’s office, your attorney’s office, or any other location chosen by the owner(s). Further-more, names of Managers, Members, and Officers, and percentages of ownership, ordinarily need not be reported to or kept on record by the government.
An LLC may be either Member-Managed or Manager-Managed. For most situations, we recommend that an LLC be Manager-Managed. See the next page for descriptions of three common variations.
Three of the most common types of LLCs we set up are as follows:
(Members may have the same or differing percentages of ownership)
In this type of LLC, Members may have equal ownership and authority, or may have differing percentages of ownership and authority. But each Member is assumed for legal purposes to be a legal agent of the LLC, with legal authority to bind contracts, etc.. The Members may appoint one or more individuals to be Officers of the LLC. Officers need not be Members, and need not be residents of the State of Georgia.
B. MANAGER-MANAGED, TYPE I
(Members choose one or more Members as Manager)
Under this organizational structure, there are one or more Members, but all functional authority is held by one or more Managers. This is a good choice when one or more people own a company, but wish for one of the Members (owners) to serve as Manager, whether salaried or unsalaried, to operate and control the business from day to day. It is also a good choice when the Members wish to have more than one Manager of equal authority to negotiate and close deals and bind contracts. Managers need not be residents of the State of Georgia, but must be Members of the Company.
C. MANAGER-MANAGED, TYPE II
(All-powerful Manager until death, then replaced by vote)
Under this arrangement, there are one or more owners, but all authority is held by a single “all-powerful” manager who cannot be removed or replaced by the members regardless of their percentages of ownership. This sole Manager serves until death (or other event of dissociation, such as voluntary resignation, or incompetence), at which time the remaining Members must elect one or more successor Managers by majority vote. If the original sole Manager later wishes to share or turn over management responsibilities while he/she is still alive, he/she may also choose, by written consent, to allow one or more other Managers to be elected and serve at any time. Managers need not be residents of the State of Georgia but must be Members of the Company.
If none of these alternatives are exactly what you are looking for, contact us. We can draft a customized Operating Agreement for you to meet your particular needs.
IMPORTANT NOTE: Note that if an LLC is Member-Managed, then each Member is assumed for legal purposes to be a legal agent of the LLC, with legal authority to bind contracts, etc.. In addition, If an LLC is Manager-Managed but this fact is only cited in the Operating Agreement, and not mentioned in the Articles of Organization filed with the State, then each Member is still assumed for legal purposes to be a legal agent of the LLC, with legal authority to bind contracts, etc.. If the fact that the LLC is Manager-Managed is mentioned in the Articles of Organization, then only a designated Manager may be regarded for legal purposes to be a legal agent of the LLC, with legal authority to bind contracts, etc..
NOTICE: This information is of a general nature for informational purposes only, and may be altered or superseded by specific factors, circumstances, or conditions unique to your particular situation. Hence, it is not to be considered as or relied upon as legal advice. We recommend you obtain advice from both your C.P.A. and your attorney before making any decision.