If you read the back of the newspaper, I’m sure you have seen legal notices for the formation of limited liability companies. In fact, some of those notifications may be for your neighbors. So, what in the world is a limited liability company, or LLC?
The name alone, limited liability company, gives us some clues. In an LLC, a person or persons contributes capital or assets to the company. In return, the person or persons is not personally liable for the debts and liabilities of the LLC. In other words, the extent of a person’s contribution to the LLC is the extent of the payment of debts and liabilities the LLC may incur. This is the basis of ‘limited liability’. This is the same limited liability a corporation has.
Unlike a corporation, however, an LLC has pass through taxation, or check-the-box taxation. This is the same type of taxation a partnership has. This means that any income of the LLC is treated as the income of the members of the LLC. If the LLC is has only one member, the income or loss of the LLC is reported on the individual tax return of the member. If the LLC has multiple members, each member receives a K-1 Form reporting the income distribution to the member. This is the same form as a partnership.
An LLC may elect to be treated as a corporation for taxation purposes. If that election is made, the LLC must choose between a traditional corporation (C-corp) or an S-corporation. The details of that election is outside the scope of this blog post, but keep an eye out for future discussion.
An LLC has wide flexibility in determining how it operates. While an LLC in Nebraska is not required to have a written operating agreement, it is highly recommended. The operating agreement defines how the LLC is managed on a day-to-day and long-term basis, voting rights, who can bind the LLC to contracts, admission of new members, withdrawal/dissociation, distributions, amendment of the operating agreement, dissolution, transfer of LLC interests, and fiduciary duties. Other issues can also be drafted into an operating agreement but the above are the big issues. The operating agreement is private between the members of the LLC and is not required to be filed with a state agency when forming the LLC.
If you are considering an LLC as you begin your farming operation or as a mechanism in estate or business planning, feel free to contact us. We’re happy to discuss the issues with you!