Archives for "W"

What Is a Statement of Organizer?

A statement of organizer is a document stating the initial members or managers of an LLC. In an LLC, when the company is formed, a Certificate of Formation is filed naming the authorized person. However there is little connection between this individual and the members or managers of the company, other than a cover letter to the company.

What Is the Purpose of a Statement of Organizer?

To provide for more of a “paper trail” and “bridge” from the Authorized Person (also known as an Organizer) to the initial members or managers, the authorized person can sign a Statement of Organizer setting forth the name of the initial members or managers. To make this even more official, if requested by the customer, this document can also be notarized and even certified by the Secretary of State as being an authentic Delaware notary in what is called a “Re-Notary”. If used for international business dealings this “Re-Notary” can even be apostilled or legalized alongside the Certificate of Formation.

When to Create a Statement of Organizer

Generally, initial members or managers will request a Statement of Organizer when they apply to open a business bank account. It is important to do this as soon as possible after formation to make sure you can obtain one.

What is an LLLP (Limited Liability Limited Partnership)?

A Limited Liability Limited Partnership, or “LLLP”,  is a variation of the Limited Partnership. It functions much like a traditional limited partnership (LP), which has two types of ownership:

  • Limited Partners: These are passive investors who don’t have management authority and enjoy limited liability.
  • General Partners: Typically the managers of the partnership.

The key distinction between an LP and an LLLP lies in the liability of the General Partner. Unlike in an LP, where the General Partner has unlimited personal liability, an LLLP offers the General Partner limited liability.

Why Choose an LLLP Over LP in Real Estate?

Real estate investors often utilize LPs for holding property titles. In this setup, they become the limited partners and create an LLC (Limited Liability Company) to serve as the General Partner. This strategy ensures they avoid the unlimited liability that comes with being a general partner.

However, the LLLP provides a streamlined alternative. It naturally limits the liability of the General Partner, eliminating the need for forming a separate LLC. This makes the LLLP an attractive option, even though it’s less common in commercial real estate contexts.

How to Establish an LLLP

Initiating an LLLP requires filing a Certificate of Limited Partnership. Within this process, an election is made to classify the entity as a limited liability limited partnership. Interestingly, after the inception of the LLC Act, many have gravitated towards the straightforward nature of LLCs, preferring them over the slightly more complex and costlier LLLP structure.

LLLP vs. LLC: Breaking Down the Differences

When deciding on the ideal business structure, both LLLP and LLC emerge as viable options, especially in the realm of real estate and other investment sectors. The LLC has become the go-to choice because of its simplicity, flexibility and cost-effectiveness

Here’s a comparison to help you understand the differences between LLLPs and LLCs:

Liability Protection

LLLP: Both General and Limited Partners have limited liability protection. This means that personal assets of partners typically aren’t at risk if the LLLP incurs debt or faces litigation.

LLC: All members of an LLC enjoy limited liability. Their personal assets are generally protected from business-related debts and lawsuits.

Complexity and Setup

LLLP: Establishing an LLLP involves filing a Certificate of Limited Partnership, followed by an election to be recognized as an LLLP. It’s a two-tiered approach that may be more complex than setting up an LLC.

LLC: The setup process is more straightforward, usually requiring only the filing of Articles of Organization or a Certificate of Incorporation with the Secretary of State’s office. This simplicity is one reason LLCs have surged in popularity.

Management Structure

LLLP: Features a bifurcated structure, distinguishing between Limited Partners (who are typically passive investors) and General Partners (who actively manage).

LLC: Can opt for member-managed (all members participate in daily operations) or manager-managed (specific members or external managers handle daily operations) structures.

Pros and Cons of a Delaware LLLP

The Delaware Limited Liability Limited Partnership (LLLP) is similar to a Delaware LLC in that the LLLP owners all have liability protection against the debts of the partnership. The LLLP was designed to patch the problem with the Limited Partnership. In a limited partnership the owners are divided between passive investors known as “limited partners” who enjoy limited liability on the one hand and managers known as “general partners” who are exposed to unlimited liability where the manager is held to account for the debts of the partnership. This liability exposure is a gaping hole in the corporate veil protecting the owners from the partnership liability. This achilles heel is so undesirable that no rational business owner would set-up an LP. However the master limited partnership is a very popular investment vehicle for private equity investing. The solution to fix this exposure is usually to make a separate corporation or LLC the general partner of the LP entity. That way a second shield is created to protect the managers.

The advantage of the LLLP is a cost savings and organizational simplicity “hack” over the LP. Instead of an LP subjecting its general partner to unlimited liability, the law allows the LP to bypass this and provide the general partner with limited liability protection from the partnership liability. The entity only needs to make an election to opt-in to have its general partners enjoy this favorable liability treatment. For most businesses an LLC is simpler and more advisable, unless there are compelling reasons why the LLLP structure is being selected.

When deciding which type of entity is best for your business, it is important to also understand the disadvantages. Unlike LLCs, Corporations, and General Partnerships, not every jurisdiction recognizes LLLP’s as an actual business entity. Being a relatively new structure of business, LLLP’s may not have a vast amount of legal precedents in place, meaning that any legal issues that may arise could have unpredictable results.

What is an Economic Interest?

An economic interest is an ownership share of an LLC that only entitles the holder to receive distributions. This is different than a membership share because an economic interest does not entitle the holder to any control or voting rights.

The benefit (and potential downside) of an economic interest in a company is that you are able to benefit from the company’s profits without having to make the tough decisions that the controlling members make. These people are often called “silent partners” or simply “investors.”

Worker’s Compensation Insurance

Insurance plans that compensate for the death or injury suffered by a worker while on the job.

Working Capital

The amount of capital/current assets that is available for use in company operations. Working Capital is calculated by subtracting current liabilities from current assets.

Winding Up

The process of ending a business. This typically involves selling the business’s assets, paying creditors, distributing the remainder to equity holders, and then dissolving the business.

What is Form SS-4?

The SS-4 is the one-page IRS form which is filed in order to obtain an Employer Identification Number (EIN).  Typically, this will be filled out and submitted to the IRS immediately after incorporation. However, an entity can submit this form later in its life. It is a fairly simple form to complete. It asks for information that is usually readily available, such as the address of the headquarters, the formation date, the type of entity, etc.

You can obtain this form on the IRS website. However, many customers prefer to have IncNow® assist with the process of obtaining an EIN.

MORE: How to Get an EIN