[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 525
separate rights, powers, or duties with respect to specific property or obligations of the LLC, or with respect to profits and losses associated with specific property or obligations. The debts and other liabilities of a separate series will be enforceable against only that series. Prior to the advent of the series LLC, achieving that same benefit would have required the formation of separate LLCs to hold separate assets or activities. Capitalization : LLCs can raise capital by issuing equity interests to new members or by taking on debt. The LLC agreement offers a great deal of flexibility – members regulate how and when new equity may be issued and can create different classes of membership that offer varying levels of voting rights, powers, distribution rights, and duties. Unless prohibited under the LLC agreement, members can also assign or pledge their equity stake in an LLC to a third party. Depending on the terms of the LLC agreement, this assignment can include both the financial interest and membership rights and powers. Subject to a few restrictions under state and federal tax law, profits and losses may be allocated among the members as provided in the LLC agreement. Personal liability: Similar to a corporation, the debts, obligations, and liabilities of an LLC are solely those of the LLC and no member will be held personally liable for those debts, obligations, and liabilities. This limits the exposure of most LLC members to the amount of their equity contribution and is a significant advantage LLCs have over general partnerships. Most state courts, including Delaware, have applied the same principles for “piercing the veil” to LLCs as they have to corporations. Tax treatment: An LLC with multiple members is treated as a partnership for tax purposes, enjoying pass-through taxation, unless the LLC otherwise elects corporate tax treatment. Please see the discussion of partnership tax
treatment above for important tax information on the taxation of non-United States investors in partnerships. If the LLC meets the necessary requirements, it may opt for S-Corporation tax status, which, although very similar, is slightly different in treatment than partnership taxation and may be more favorable to the members in some circumstances. A single- member LLC is treated as a disregarded entity for income tax purposes unless it elects to be taxed as a C corporation or an S-corporation. Like foreign corporations that invest directly in partnerships, foreign corporations that invest in a single member LLC treated as a disregarded entity may be subject to a 30% branch profits tax on their accumulated earnings and profits effectively connected to a U.S. trade or business carried on through the disregarded entity. The Internal Revenue Service generally treats each series within a series LLC as a separate and distinct entity. 1.6 The Limited Partnership (“LP”) An LP offers many of the advantages of a general partnership, but also allows for a class of “limited partners” who contribute capital to the partnership, but do not face the joint and several liability of general partners. This entity is attractive because of its ability to attract investors who would be unwilling to join as a general partner. Like a general partnership, limited partnership interests are rarely publicly traded. Governance : In an LP, only general partners may manage the partnership. For example, under Delaware law, a limited partner may not participate in the control of the business. They may, however, vote on certain issues that affect the partnership, such as dissolution, admission or removal of partners, or an amendment to the partnership agreement. Like a general partnership and an LLC, the partners in an LP
ILN Corporate Group – Establishing a Business Entity Series
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