Pass The 7 - 2015: A Plain English Explanation To Help You Pass The Series 7 Exam by Robert Walker

Author:Robert Walker [Walker, Robert]
Language: eng
Format: epub
Publisher: Sure Fire Publications, LLC
Published: 2015-03-02T05:00:00+00:00

 LLC (Limited Liability Company)

A limited liability company (LLC) is a type of business ownership in which the owners are called "members" and the ones who also manage the business are called "managing members." In a minute, we will see that the S-corp is limited to 100 shareholders, while the LLC has no limit on the number of members, who can be individuals, corporations, or other LLCs. In fact, Pass the Test, Inc. is an S-corp and also a member of the LLC entitled Pass the Test Management Group, LLC. There's also, of course, this guy known as Robert Walker somewhere behind both the S-corp and the LLC, but the point is, there are three separate entities here. If the S-corp or the LLC get sued, Robert Walker's assets are not at risk.

The owners and any officers and directors of an LLC are personally protected from the debts and lawsuits of/against the company, including being sued for their own negligence in operating the business, which is nice. Looking at our LLC's operating agreement, I see that about the only way the other members could come after me personally is if I caused them damages due to outright fraud/deceit. And I'm basically a very honest and forthright guy. No, seriously. Anyway, advantages of setting up an LLC include:

• Limited liability

• More flexible profit distributions (compared to most partnerships)

• No minutes (meetings not required, as opposed to corporations)

• Avoids double taxation of income (gives owners "flow-through")

The exam could bring up the fact that to be structured as an LLC rather than a corporation, the LLC needs to avoid two of four corporate attributes. Two of four. Remember that. That means that it needs to avoid two of the following characteristics associated with corporations:

• Perpetual life

• Centralized management

• Limited liability

• Freely transferable assets

It's almost impossible to avoid the centralized management, since there have to be managing members of the LLC. It's also tough to avoid limited liability as a limited liability company. Better go with the other two, then. So, how do they avoid the perpetual life and freely transferable assets associated with corporations? Unlike a corporation, an LLC has a limited life. For example, when the LLC is set up, perhaps it has a stated term of 30 years, after which it has to get dismantled. Regarding the assets and their transfer, the members have to agree that they won't sell their interests except according to a certain strict set of rules. For example, if you want to sell your interest to a stranger, the other members might have the right to buy the interest first to prevent that from happening, because who wants to suddenly be in business with a stranger? (Just in case the exam is reaching that day, such an agreement or right might be known as a "right of first refusal.") Without such a rule, if one of the members got himself into debt, the other members might discover they were in business suddenly with the guy's bookie, who wanted to collect the debt through the seized profit interest in his hand.

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