LLCs in IowaAugust 17, 2010

Des Moines, Iowa

ByJason M. Stone, J.D., LL.M.

JasonStone@DavisBrownLaw.com

Background

History of LLCs• Originated outside the US• First US LLC act passed in 1977 (Wyoming)• First Iowa LLC act passed in 1992• Check-the-box Regulations adopted in 1997• 8,443 LLCs were formed in 2009 while only 2,577

corporations and only 418 limited liability partnerships were formed in 2009

New Act

Generally• Passed: 2008• Effective: January 1, 2009 for LLCs formed on or after

that date; January 1, 2011 for all others• Source: Based upon the Revised Uniform Limited

Liability Company Act• Codified: Chapter 489 of the Iowa Code

New Act

Structure• Unlike prior acts, which drew from corporation law for

guidance, the new act draws heavily from partnership law

• It’s a default statute and can, except in limited circumstances, be varied by contract

New Act

Material Changes• Change in terms (e.g. Certificate of Organization vs.

Articles of Organization)• Shelf LLCs• Change in the way votes are cast (per capita vs. per

capital)• Change in the way distributions are made (per capita

vs. per capital)

New Act

Material Changes• Elimination of statutory apparent authority for members

in member-managed LLCs (Statements of Authority)• Clarification of fiduciary duties• Modifications to information provisions• Changes to transfer provisions

New Act

Material Changes• Changes to dispute resolution provisions• Changes to dissolution provisions

What does it all mean?

• If you have a written operating agreement – not much.• If you don’t have a written operating agreement – you

are in for big and potentially unwanted changes.

What do I do?

• Adopt an operating agreement if you don’t already have one.

• If you already have one, review it.

What to consider in when adopting or revising an operating agreement

• Contribution provisions – particularly additional capital contribution provisions

• Management structure• Information and reporting provisions

What to consider in when adopting or revising an operating agreement

• Duties and obligations (competition and confidentiality)• Distribution provisions• Tax provisions• Dispute resolution provisions• Transfer provisions• Merger and Integration Clause• Amendment provisions

Tax Aspects of LLC’s

Dave WatsonAugust 17, 2010

Tax Aspects of LLC’s

Flow-through taxation

- Compare to C-Corporations

▪ Income taxed at C-corp level

▪ Taxed again when distributed from corp

i.e. dividends

▪ Losses trapped in C-corp

▪ Only offset by future income, if any

Dice Holdings, Inc. Sarbanes-Oxley Project2008

2

Tax Aspects of LLC’s

Flow-through taxation, cont’d.

- One level of taxation for LLC’s

▪ Income not taxed twice

▪ Losses useable by members to offset other taxable income

- Exception for passive members

Dice Holdings, Inc. Sarbanes-Oxley Project2008

3

Tax Aspects of LLC’s

Flow-through taxation, cont’d.

- Compare to S-Corporations

▪ S-corps also have flow-through taxation

▪ Per/share, Per/day allocation

- Special allocations of profits/losses available for

LLC’s

▪ Possible shield from Self Employment

tax

Dice Holdings, Inc. Sarbanes-Oxley Project2008

4

Tax Aspects of LLC’s

Debt used as basis

- Allows members to take losses > capital contribution

- At risk limitation

- Passive activity limitation

Dice Holdings, Inc. Sarbanes-Oxley Project2008

5

Tax Aspects of LLC’s

Ownership Issues

- Limit on types of S-corp owners

▪ No limit on types of LLC owners

- Must have ≤ 75 S-corp shareholders

▪ No limit on number of LLC owners

Dice Holdings, Inc. Sarbanes-Oxley Project2008

6

Tax Aspects of LLC’s

Traps

- Prior losses taken with help of debt may create

phantom income later

- All profits from trade or business may be subject to self employment tax

- Corporate merger candidates could create taxable event

Dice Holdings, Inc. Sarbanes-Oxley Project2008

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