Partnership vs Limited Liability Company
Limited liability companies have similar characteristics to that of an Illinois partnership and have often been compared to general partnerships due to the flexibility it may have in its operational structure. Specifically, both the LLC and partnership are contractual in nature. In other words, the LLC and partnership operate pursuant to the agreement (partnership agreement for a partnership or operating agreement for an LLC) executed between the business owners and the business entity. Although both LLC’s and partnership operate and function pursuant to an agreement (as noted above), they are different in the way they are formed and terminated, and the responsibility the owners have with respect to the company’s liabilities. LLC’s and partnerships may also be different in the way they are operated and treated for federal and state income tax purposes. For example, a partnership may only elect a partnership tax treatment, as opposed to an LLC which may elect to be treated for tax purposes as a sole proprietorship, partnership, S-Corp or C-Corp.
The first significant different between LLC’s and partnerships is how the businesses are formed. A general partnership, like a sole proprietorship, does not require any formal legal agreement or business registration with the Illinois Secretary of State to be created. An LLC can only be formed by registering the LLC with the Secretary of State and establishing the appropriate legal documents, such as the operating agreement.
The second significant different between an LLC and a partnership is the business owner’s personal liability for the company’s debts and obligations. In a partnership, all partners are jointly and severally liable for partnership debts and obligations. Also, all partners have the duty to provide full disclosure and duty to act as a fiduciary to the other partners. Generally, a partnership is operated and managed equally by its partners. In an LLC, the business owners, or members, may elect an operating structure that is not equal among the members and management may be allocated to certain members while other members may remain passive.
Limited Liability Company vs Corporation
Illinois Limited liability companies have similar characteristics to that of a Illinois corporation, especially Illinois close corporations with less than 50 shareholders, that restrict the transfer of stock, and lack corporate formalities such as a board of directors, corporate bylaws, etc. Corporations and LLC’s may be operated and managed in an identical manner. Corporations generally have a centralized management structure in the form of a board of directors and corporate offices. LLC’s may choose to be operated and managed by a centralized management structure like a corporation. Conversely, corporations may be managed and operated directly by the business owners by electing to be a close corporation. LLC’s may also elect to be operated and managed directly by the business owners. The most significant similarity, however, is that corporations and LLC’s offer business owners limited liability if the business is properly structured. Both business entities provide protection from personal liability to the business owners against third parties for corporate or LLC debts and obligations.
The most significant difference the LLC possesses is its flexible business structure, especially with respect to its management and control of the LLC, and greater flexibility in its capital structure, distributions, transfer of ownership interests, tax, and termination procedures.
LLC Operating Agreements
The limited liability company operating agreement is the principal governing document of an LLC. Although the filing of the articles of organization with the Illinois Secretary of State legally creates an LLC, the articles of organization generally do not contain the critical provisions of how the business will be operated. The agreement of the business owners (and managers, offices of the LLC, if any) relating to the internal governance of the LLC, along with the agreement among the business owners regarding the business relationship, is provisioned in the operating agreement. The operating agreement is a private agreement of the company and is not filed with the Illinois Secretary of State.
The Illinois Limited Liability Company Act states as follows:
All members of a limited liability company may enter into an operating agreement to regulate the affairs of the company and the conduct of its business and to govern relations among the members, managers, and company. To the extent the operating agreement does not otherwise provide, this Act governs relations among the members, managers, and company. Except as provided in subsection (b) of this Section, an operating agreement may modify any provision or provisions of this Act governing relations among the members, managers, and company.
LLC Operating Agreement Mandatory Provisions
The operating agreement may not:
unreasonably restrict a right to information or access to records under Section 10-15;
vary the right to expel a member in an event specified in subdivision (6) of Section 35-45;
vary the requirement to wind up the limited liability company’s business in a case specified in subdivisions (3) or (4) of Section 35-1;
restrict the rights of a person, other than a manager, member, or transferee of a member’s distributional interest, under this Act;
restrict the power of a member to dissociate under Section 35-50, although an operating agreement may determine whether a dissociation is wrongful under Section 35-50, and it may eliminate or vary the obligation of the limited liability company to purchase the dissociated member’s distributional interest under Section 35-60;
under certain circumstances, may not eliminate or reduce a member’s fiduciary duties; and
eliminate or reduce the obligation of good faith and fair dealing under subsection (d) of Section 15-3, but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable.
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