The Low-Profit LLC: A New Entity in Illinois
On January 1, 2010, Illinois will become one of only 5 states to recognize the low-profit limited liability company (“L3C”). The L3C is a variation of the familiar limited liability company (“LLC”), and is only available to for-profit entities whose primary goal is to achieve a socially beneficial objective. Put differently, profits must be a secondary goal of the entity. This entity form aims to make it easier for social enterprises to attract capital. Currently, an L3C can only be formed in the states of Michigan, Vermont, Wyoming, and Utah.
The L3C shares many characteristics with a typical LLC – it is a for-profit entity; offers a flexible ownership structure; is treated like an LLC for tax purposes, rather than a not-for-profit entity; and its members enjoy limited liability. Unlike an LLC, however, the primary purpose of the L3C must be to achieve a socially beneficial objective. In order for an entity to qualify as a L3C, it must (i) significantly further the accomplishment of one or more charitable or educational purposes, and would not have been formed but for its relationship to the accomplishment of such purpose(s); (ii) not have as a significant purpose the production of income or the appreciation of property (though the company is permitted to earn a profit); and (iii) must not be organized to accomplish any political or legislative purposes.
One of the advantages of the L3C is that it embodies the operating efficiencies of a for-profit entity, while remaining unburdened by the many not-for-profit entity regulations. This structure also provides the entity with a better chance at recovering its principal investment and potentially realizing a capital gain which, in turn, can be plowed back into the entities’ charitable or educational endeavors.
If you have any questions regarding the Illinois low-profit limited liability company, please call one of our experienced attorneys at Acumen Law Group.
Authored by Dominika Szreder Fard, Esq. and Shoko Asaka
The Series LLC: Sure Bet or Risky Business?
Common legal sense dictates that business owners operating multiple businesses, or holding multiple assets, organize each business or asset as a separate entity. The reason for this is simple: in the event that one of your businesses is sued, you don’t want the other businesses to be exposed to liability (especially if those other businesses have significant amounts of assets). Before the advent of the series LLC, business owners would have to pay a separate filing fee for each legal entity to the Illinois Secretary of State. Currently, the filing fee for a single LLC in Illinois is $500, and the required annual filing fee is $250. For the owner of a fleet of 20 taxicabs, these filing fees can be burdensome ($10,000 in initial filing fees and $5,000 in annual filing fees). Enter the series LLC, a means of lifting (some of) that costly burden.
Like the name suggests, a series LLC is a single limited liability company with multiple series. Each series within the company is separate and legally distinct from the remaining series. In other words, each series is insulated from the risks and liabilities of the other series under the same company. One can organize the different series with separate managers, members, even operating agreements. Despite the separateness of each series, the Illinois Secretary of State treats the entire series LLC as one entity. One entity = one filing fee and one annual report. For our friend with a fleet of 20 taxicabs, this means that although each cab within the fleet can be designated as its own series, the fleet as a whole is only responsible for paying a single series LLC filing fee (currently $750 plus $50 for each series). To illustrate the significant cost savings, the taxicab company with 20 series would pay $1,750 in initial filing fees, as compared to $10,000 in initial filings for 20 separate LLCs.
To create a series LLC, one must designate the series in the master operating agreement for the company and file a Certificate of Designation with the Secretary of State. The operating agreement must explicitly provide for the limitation of liability. This limitation of liability should be upheld by courts if the following conditions are met: (1) each series maintains its own records; (2) each series holds its assets separate and apart from the assets of other series; (3) the operating agreement provides for separate accounting of assets and liabilities; and (4) the company provides notice of the liability limitation in its Articles of Organization. Failure to fulfill these conditions can produce severe results. For example, a court may completely disregard the separate status of each series and apply all of the assets of the series LLC to satisfy any creditor’s claim. It cannot be stressed enough that business owners must observe all the formalities and operate each series separately.
Although the series LLC has been around in Illinois since late 2005, there is little precedent interpreting the provisions of the Illinois LLC Act authorizing series LLCs. While the Illinois LLC statute specifically states that each series is treated as a separate entity in all respects, the application of the statute has not been fully tested by the courts. Adding to the uncertainly, only seven states currently have series LLC statutes, so an Illinois series LLC cannot be certain that another state without a series LLC statute will honor the separateness of each series in the LLC. Additionally, the IRS has not yet provided any guidance on how the series LLC should be taxed, and there is little case law addressing series LLCs in bankruptcy. For these reasons, prudent business owners (and their attorneys) would be be well advised to ensure that the series LLC complies with all the strictures of the Illinois LLC Act and that the conditions discussed in this article are met.
There are a number of other relevant issues and concerns regarding the series LLC in Illinois. Depending on the nature of your business, the series LLC may or may not be a wise vehicle. If you are interested in learning more about the series LLC please feel free to contact us to speak with one of our attorneys at Acumen Law Group.
Authored by Dominika Szreder Fard, Esq.