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Feb 01 2017
Limited Liability Companies; The Best of Both Worlds
Kyle Mead, CBA, Sunroc Corporation

Limited Liability Companies (LLC) have become an increasingly more widespread form of business organization over the last several years. The State of Utah passed LLC legislation in 1991, since then entrepreneurs have taken advantage of the benefits that an LLC can provide. The most dominant benefit for an LLC is receiving the personal protections of a Corporation while enjoying the single taxation of Sole Proprietors or Partnerships. LLCs are also not required to hold annual meetings or comply with many of the other operational restrictions that corporations are required by law to maintain. Subchapter S Corporations have restrictions for the number and type of shareholders that can be involved. Limited Partners have restrictions on how involved they are with business operations. LLCs are not restricted by the regulations enforced on Partnerships and Corporations. Another benefit for LLCs that attracts entrepreneurs is that it is easy to create an LLC. To organize an LLC an Operating Agreement is developed which describes all the operational procedures, the Members and their roles within the company. Then, a Certificate of Organization must be filed with the state.

Limited Liability Companies are the best of both Corporations and Partnerships. The members, like in a Corporation, are only held liable for what they have invested in the company and are not held liable personally. Additionally, like a Partnership, they are only taxed once on the income of the company. However, there are some disadvantages to an LLC. First, an LLC must have the words "Limited Liability Company" or "LLC" in the business name. The name requirement may seem like a minor detail, but corporations have been around for much longer. Potential customers may still be conditioned to think that corporations are the more established company. An LLC does not have quite the same ring to a name as Corporation does to those types of customers. For the entrepreneurs that are egocentric and want to have the flashy title, the leaders of LLC's are called Members or Managers and don't get to call themselves the "CEO" or "President." These disadvantages may seem silly, but there are some operational drawbacks as well. Corporations can raise capital by selling stock in the company. LLCs cannot offer investors stock without making them managers in the company. LLC's must rely on business loans and other types of funding. For a startup or a small business, funding can be the key factor in the success or failure of the company.

As a Credit Manager, knowing the basics of why an LLC is created will help the understanding of the risk involved with granting an open credit account and the things that can be done for protection. Know that within normal circumstances, the Members are not held personally liable for debts owed by the LLC. To protect against potential fraud situations, the Operating Agreement can be requested during the application process. The Operating Agreement will provide the names of the members and state their authority related to signing the credit application and contract for the company. From my experience, many LLCs are created for one single job or project and then dissolved once it is done. This situation can make it difficult to find any credit history for the LLC, making it a more difficult and risky credit decision. Although the member of the LLC may disagree, it is not unreasonable to ask for the member to stand behind their own company and sign a personal guarantee. Whether the reply is positive or negative, the response to the personal guarantee will help understand the character of the debtor. Then, the ultimate choice can be made. Is the risk worth the reward?