GLOSSARY OF TERMS

1. Centralized Management

One of the four corporate characteristics. Denotes management of the LLC by managers, similar to the officers and directors of a corporation.

2. Check the Box

New term describing a new IRS ruling that permits LLC organizers to just select how they want the entity tax i.e. as a partnership or a corporation so that organizers and the IRS will be able to dispense with the drafting technicalities involved.

3. Continuity of Life

One of the four corporate characteristics. A corporation has perpetual life. LLC's are usually set up to dissolve in 30 years because this is a corporate characteristic that is not essential and can be circumvented by a vote of the members to continue the LLC for an additional time period. LLC's, to be treated by the state as partnerships, can only have two of the four corporate characteristics. The two that are usually kept are limited liability and centralized management.

4. Corporation

A separate legal entity apart from its incorporaters, officers, directors, stockholders, or employees. It is strictly governed by state statute.

5. Flexible

Most state statutes are flexible meaning  that if there is no operating agreement or if the operating agreement is silent on a particular issue, the default rule will apply.

7. Free Transferability of Interests

One of four corporate characteristics. Interests in the entity can be sold by the owner to anyone, without the consent of the other owners. This characteristic is usually limited in an LLC because of the closer relationship of the owners and because this is one that can be eliminated and still keep the characteristics of limited liability and centralized management. An LLC can only have two of the four corporate characteristics and retain its partnership status.

8. Limited Liability

One of the four corporate characteristics. The owners are only liable for their capital contributions. None of them are personally liable for the business debts. This is the main corporate characteristic that most business owners are seeking.

9. Operating Agreement

The agreement between the members of a limited liability company that contains all of the operating details and methods for making decisions etc. Tantamount to the bylaws of a corporation. Not all of the states require a written operating agreement but, from a practical and prudent standpoint, there should be one. 

10. Partnership

An association of two or more persons organized to conduct a business for profit. It is not a separate entity apart from its owners or partners. Each partner is liable for all of the business debts, not just his/her proportionate share.

11. Partnership Tax Classification

Partnership taxation is usually desirable because of certain tax benefits available. Some of these benefits are:

• Flow through taxation - no corporation double tax
• Ability to deduct business loss on individual return
• Basis for loss includes owner's share of company debt
• Can increase basis by "step up" election
• Can specially allocate items of income and expense
• Can contribute and distribute appreciated property tax free
  

12. Sole Proprietorship

Oldest, simplest, and least complicated form of doing business. Individual, sole owner makes all the decisions and has absolute power. Personally responsible for performance of all contracts and no protection from lawsuits etc. Personal assets that have no relation to the business are at risk.