Sidney Goldstein on Forming a LLC: Not So Fast!

Sidney Goldstein on Forming a LLC: Not So Fast!

by Sidney Goldstein

In this EIA we will examine various issues that should be fully explained by the professional advisor to her client, before selecting the limited liability company (LLC) as the form of business entity to be adopted. Since each state has adopted its own version of a Limited Liability Company Act (LLCA), this EIA will focus on the Laws of Delaware and New York, which attract the most new ventures.

Excerpt:

The LLC became a popular form of business in the 1990s and by 1996, each state had adopted a LLCA. Unfortunately, the final versions, which have been substantially amended, are far from uniform. The American Bar Association and the Uniform Law Commission have each been actively engaged in seeking the adoption of a uniform LLCA by the states. When counseling a client, the selection of a particular jurisdiction for the LLC requires the exploration and familiarity with the LLCA of the states being considered. Due to space limitations, we will limit our review to the following (a) the cost of establishing the LLC, (b) restrictions on the ability of a member to assign or transfer her membership interest, (c) the LLC as a possible means of defeating claims of creditors and (d) the fiduciary obligations of the members to the other member and the creditors of the LLC. Before launching the LLC it is essential that the client receive competent tax advice as the tax treatment of a LLC and its members. This is especially true if it is contemplated that a "series LLC" structure is to be adopted. Briefly, a series LLC involves a "parent" LLC which establishes a separate LLC for each segment of its business creating a "fire wall" insulating each LLC from the obligations of the other LLCs. To obtain this protection careful tax planning and record keeping is required. For instance, in Delaware creation of series LLC interests must be provided for in the Operating Agreement.

Formation Costs

Each state has its own statutory organizational cost. It is suggested that a search be made to determine the availability of the proposed name of the LLC. Additional costs may be involved. For instance, New York imposes a publication requirement. The LLC must publish, within 100 days after its formation, a notice in two general circulation newspapers. One of which is published daily and the other weekly and are both located in the county where the LLC was formed. Each notice is required to run once a week for six consecutive weeks. The "Notice of Formation," includes the following:

Name of LLC

Date of Filing with NY Department of State

Designation of NY Secretary of State as

agent for service of process

Person designated to receive notice

of process

Purpose of LLC

The failure to comply with the publication requirement can result in the suspension of the LLC's authority to do business in New York. This suspension can be terminated by compliance with the publication rules.

Although compliance is easily handled, the costs of publication vary widely from county to county, ranging from $300 to over $1,600 in New York County. The cost is dependent on the advertising rates charged by the newspapers designated by each county clerk. As a result, many professionals recommend the formation of an LLC in a jurisdiction, outside of New York. However, if the LLC is formed outside of New York, publication will be required if the LLC must qualify to do business in New York. This is a factual question. Generally, if the LLC maintains an office in New York, qualification and publication, will be required.

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Sidney Goldstein, Special Counsel at McCarter & English in New York City, is the author of Business Law Monographs, Loan Agreements, published by Matthew Bender. Mr. Goldstein specializes in banking, asset-based lending and creditor's rights. He is a graduate of New York University School of Law and was general counsel for a New York City bank and a listed public corporation before entering private practice. Mr. Goldstein previously chaired and participated in numerous programs presented by the American Bar Association (ABA) and the New York State Bar Association (NYSBA) on topics related to financing businesses.

He is a former chairman of the Business Law Committee of the ABA General Practice Section and is currently a member of the Banking Law Committee of the NYSBA. As an active participant in The New York Institute of Credit, he taught the credit law course at the Institute. He played an active role in the drafting of Revised Article 5 of the Uniform Commercial Code, which covers letters of credit. He was appointed to the ABA's Committee to Revise Article 7 of the UCC, which deals with documents of title. Currently, he is a member of an ABA Task Force which is drafting a standard form of a Deposit Account Control Agreement.