Friday, December 7, 2012

The LLC - The Infinitely Variable Company

Growing up, tractors had gears.  The older the tractor, the fewer the gears.  Throughout my childhood, tractors moved from 4 to 8 to 16 gears.  Now, nearly every manufacturer offers an "infinitely variable" transmission that no longer restricts an operator to using a specific gear.

Corporate law underwent a similar transformation in the early 1990s with the development of the "limited liability company" or "LLC."  Prior to the passage of the Indiana Business Flexibility Act in 1994, the LLC form of legal entity did not exist in Indiana. The same was true elsewhere. In 1989, only two states had enacted LLC statutes.  Businesses that wanted to protect their owners from personal liability had one option--form a corporation.

The LLC revolutionized business law in the United States.  Rather than having to adhere to the rigid corporate structure dictated by the law of corporations--requiring a board of directors, shareholders, annual meetings, etc.--the LLC allows for nearly infinite variability in the company's form.  The LLC can be run by its members collectively, or the members can appoint a single "manager."   The LLC can have one "member" who acts as the sole decision-maker and owner, or an LLC can have multiple members.  Members can create rules that govern management, membership, and profit and loss distribution.  These rules are set out in an "operating agreement," the LLC's version of corporate bylaws.  If an LLC is formed but no operating agreement is drafted and approved by the members, Indiana and other state statutes establish the de facto rules that govern operations.

In  my previous post, I encouraged farmers to incorporate their farms.  Creating an LLC for a farm operation has a similar advantage--it acts as a shield against an owners' personal obligation for debts and liabilities of LLC.  An added advantage is that it provides for "pass through" taxation.  Set up correctly, the LLC does not pay income tax.  Rather, its members are taxed on the income they receive from the LLC at their personal income tax rates.

If your farm is a sole proprietorship, consider making it an LLC.

By Todd Janzen


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