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Limited Liability Companies

Limited liability companies give you the tax advantages of a partnership with the liability protection of a corporation.

A recent Internal Revenue Service regulation change has substantially liberalized the conditions under which limited liability companies may operate. Treasury Decision 8697, effective January 1, 1997, finalized the so-called "check-the-box" regulations proposed earlier in 1996.

Prior to this change, in order for a limited liability company to be taxed as a partnership, it had to be structured to fit within specific, somewhat arbitrary criteria developed by the IRS to determine which types of entities seemed more like partnerships and which types more like corporations. If the IRS determined that a limited liability company had more characteristics of a corporation, the limited liability company would be taxed as a corporation X with company earnings being taxable to the company when earned and with the money left over being taxed again, to the members, when distributed to them. The potential consequences were so severe that we, in advising our clients with respect to limited liability companies, have been very cautious to avoid a mix of corporate characteristics which would push the limited liability company over that line.

The new regulations substantially eliminate the complex criteria, requiring, in most cases, that the limited liability company simply elect, by "checking a box" on its tax return, whether it wishes to be taxed as a partnership or as a corporation.

Important things being eliminated from the IRS requirements are provisions requiring limited liability companies to have at least two members and provisions imposing restrictions on transferability of limited liability company interests.

Because the Connecticut Limited Liability Company Act (adopted in 1993) was intended to conform to the prior IRS rules, it contains a requirement that a limited liability company have more than one member. Liberalizing amendments to the Connecticut law, including a provision for one-person limited liability companies, have been submitted to the Connecticut legislature and are expected to pass this session.

We believe that these changes will make the limited liability company an even more attractive form of legal entity. The substantially-increased flexibility, coupled with the growing acceptance of limited liability companies in the business world, will make limited liability companies a good choice for a broader range of activities, to include operating businesses as well as real estate investment. As a result, we expect that over the next few years the use of corporations as business entities will substantially diminish.

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