FAQs

1. Do all States Recognize The LLC?
2. What Happens If An LLC Conducts Business In A State That Does Not Recognize Foreign LLCs, Or If The State Questions A Specific Attribute Or Does Not Allow An LLC To Conduct The Specific Business Of The Foreign LLC?
3. Can any person or entity own an interest in an LLC?
4. How many owners (members) are needed to form an LLC?
5. What type of property can be contributed to an LLC in exchange for a membership interest in an LLC?

1. Do all States Recognize The LLC?

All 50 states and the District of Columbia have authorized the organization of LLCs in their jurisdiction. (See Appendix A for a list.) Vermont, Massachusetts and Hawaii were the last states to enact LLC acts.

2. What Happens If An LLC Conducts Business In A State That Does Not Recognize Foreign LLCs, Or If The State Questions A Specific Attribute Or Does Not Allow An LLC To Conduct The Specific Business Of The Foreign LLC?

No direct legal precedents answer this question. The concern is demonstrated by Thompson V. Schimitt [274 SW 554, 560, 561 (Tex 1925)], an old case, which addresses the conduct of business by a Massachusetts business trust in Texas. At that time, Texas did not statutorily recognize the business trust entity. The result of that case was disastrous for the owners of the trust. The Texas Supreme Court held that, because the Texas legislature had not authorized the use of a Massachusetts business trust as a legal form of business organization, the trust's beneficial holders were not shielded from personal liability for the trust's liabilities due to public policy.

Before the New York LLC Act was adopted, a federal district court in New York "suggested" that the law of the place of origin of an LLC would apply if the LLC was properly organized. This court was analyzing a Lebanese LLC doing business in New York. [Abu-Nasser v Elders Futures, Inc, No 88 Civ 7906, 1991 US Dist LEXIS 3794 (SDNY Mar 28, 1991)] The court thus implied that the foreign LLC would be respected as an LLC in New York; however, the court did not have to reach this conclusion.

Many recent LLC statues provide that their law should be respected by the courts in other states, but that technically has limited effect. [Merrill, "Treatment of Oregon Limited Liability Companies in States Without Limited Liability Company Statutes," 73 Ore L Rev 43 (1994)]

It is also necessary to review the LLC acts in states where the LLC's business will be conducted to ensure that those states recognize foreign LLCs, that is, those formed in other states, especially if the LLC is conducting a professional practice, insurance business, or other highly regulated business that may not be authorized in a state that otherwise allows other foreign LLCs to do business.

3. Can any person or entity own an interest in an LLC?

Yes. Generally, any legally recognized "person" may own an interest in all LLC except a professional LLC in which the ownership rules are more restrictive due to state law, licensing authority rules, or other regulations; however, the relevant LLC act should be consulted. For example, the Missouri statue provides that any person may own an interest in an LLC and defines "person" to include individuals, partnerships, domestic or foreign limited partnerships, domestic or foreign LLCs, domestic or foreign corporations, trusts, business trustee, real estate investment trusts, estates, and other associations or business entities. [Mo Rev Stat §347.015(15)] Uniform Act Sections 201 and 101(18) expand this definition by adding "government, government subdivision agency or instrumentality, or any other legal or commercial entity."

4. How many owners (members) are needed to form an LLC?

Some states authorize one-member LLCs. The IRS in 1997 implemented "check-the-box" regulations, which allow single-member LLCs to be treated as sole proprietorships for taxation purposes. Such entities will thus be subject to pass-through taxation, as would a sole proprietorship. [Treas Reg §301.7701-1(a)(4)]

It is also possible to have two members, even though they are related. Trusts or corporation can be a member as well as individuals. Thus, it is possible to have an LLC between an individual and a corporation in which that individual owns, stock, or between an individual and a trust that benefits the individual. The "check-the-box" regulations allow substantial leeway in choosing the method by which the LLC will be taxed. [Treas Reg §301.7701-3]

5. What type of property can be contributed to an LLC in exchange for a membership interest in an LLC?

The LLC acts are not uniform in this respect. Many LLC acts allow members to contribute almost anything of value in exchange for an interest, including cash, property, the right to use property, services performed or an agreement to perform services in the future, or a promissory note or other obligation to contribute capital in the future. However, some states limit capital contributions to cash or property [Fla Stat Ann § 608.4211; Wyo Stat §17-15-115]; other states specifically prohibit the issuance of an interest in exchange for a promissory note or services to be rendered at a later date [SD Codified Laws Ann §47-34-19]; and still others do not permit services to be contributed in exchange for an interest in an LLC. [Neb Stat § 21-2614]

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