Joseph Colvin: Hello and welcome to today’s installment of the Video Educational Series of VLF. My name is Joseph Colvin.
Diren Singhe: I’m Diren Singhe.
Joseph: Today we’re going to talk about creating a limited liability company or an LLC.
Diren: Joseph limited liability companies are one of the four types of companies we’ve seen our clients form. Probably the most common that you see before they come to us is the sole proprietorship. We’ve also seen general partnerships, of course, corporations, and as you mentioned, LLC is a limited liability companies. Why do you think we’ve seen so many of our clients favor the LLC form?
Joseph: Well, I think the primary advantage was down to flexibility. That comes in two forms. Both flexibility in tax treatment, either tax as a partnership or tax as a corporation and also flexibility in governance.
Diren: Once you have that flexibility, that’s not enough. What is it that these people are discussing amongst themselves before they come to us so that we can set it up for them?
Joseph: Well usually, unfortunately, we only talk about that once they meet with us. But these are what we call the five D’s. It’s what are you going to do if one of the partner dies? Death. What are you going to do if one of the partners gets a divorce? Because Texas is a community property state. What are you going to do when one of the partners wants to sell? It’s a disposition. What are you going to do if one of the partners who’s active and is also an employee becomes disabled? Finally, what happens if one of the partners become subject to a judgement or false bankruptcy? That’s called divestiture.
Diren: Interesting. I guess I would add to that, perhaps the fifth D, which is distribution, that’s a related question of what is the company going to do with the money as it comes in and it meets it expenses and it starts turning up profit. One of the things I like about an LLC is it lets the members set up what we call waterfall provisions. That’s a way in which the profits can call roll down in a schedule way. Perhaps the person who puts the money in gets repaid first. The person who puts the sweat equity in can start to get a profit interest based on the growth of the company. It allows for a return of the capital investment of the person who actually put the money out front. Those kinds of waterfall provisions are often negotiated very closely and it makes a big difference when the people meet with us and find a way to structure these things upfront as opposed to later.
Joseph: That’s exactly right. These are questions and concerns that we deal with everyday at Vethan Law firm. If you’re interested, you can find more information at www.vethanlaw.com.