Winter 2005-01 Limited liability companies law became effective on December 22, 2004

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Number 58
Winter 2005

Limited liability companies law became effective on December 22, 2004!

LLCs have attained virtually universal legislative acceptance, having been adopted in all 50 states, the District of Columbia, the U.S. Virgin Islands and several countries in Europe and Latin America. By virtue of Act No. 487 of September 23, 2004, Puerto Rico now recognizes them as well.

What are they?

LLCs constitute a hybrid between a partnership and a corporation. Nonetheless, they offer one main advantage over corporations: they lack the latter's rigidity and formality. Two definitions are helpful to understand better their nature and use.

"Members"

A limited liability company is owned by one or more members. A member may be a natural person, corporation, partnership (general or limited), another LLC, trust, estate, association, etc., in each case acting in its own right or in a representative capacity. Each becomes a member by acquiring an interest in the LLC and signing an operating agreement. Members are not liable for the obligations of the LLC.

"Operating agreement"

The operating agreement is written contract that governs the administration of the LLC and describes the relationship between its members.

Activities

An LLC may carry on any lawful business, purpose or activity, whether or not for profit, except those prohibited by law to any person.

Flexibility

One of the principal characteristics of the LLC is the flexibility and informality in its organization and management. For example, members can decide that management be vested on themselves, or on other persons. Managers, in turn, may delegate management functions. They can provide for different types or groups of managers, each with its own rights and powers, and subject to restrictions and liabilities. Also, LLCs have no obligation to conduct annual or periodic meetings of members or managers.

In sum, members are free to structure what works best for their business, and can address many of the matters that govern management and organization in the operating agreement itself, for example: formation, purpose, capitalization, allocation of profits, losses and distributions, voting rights, liability of managers and members, and rights and limitations of members.

Fiduciary duties

Members and managers of an LLC owe the same fiduciary duties to the entity as shareholders, directors and officers owe to a corporation.

Duration

Regarding the duration of its business, LLCs have perpetual existence, unless provided otherwise in the operating agreement. They may dissolve under the same terms and procedures as Puerto Rico corporations.

Taxes

For tax purposes, a Puerto Rico LLC will be treated as a corporation and, therefore, subject to double income taxation (first to the LLC and then to its members for the dividends received). Nonetheless, an LLC may only be taxed at the member level if it qualifies for exemption as a special partnership or Subchapter N corporation under the Puerto Rico Internal Revenue Code.

Authorization to do business

An LLC organized under a jurisdiction other than Puerto Rico may obtain an authorization to engage in business in Puerto Rico by filing a request with the State Department. The foreign LLC must designate and maintain a registered office and a resident agent in Puerto Rico. ◙


© 2005 Goldman Antonetti