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The LLC: Is it a hit, run or error for baseball?
Jim Juliano - Spring 2006

The LLC—or Limited Liability Company—has been growing in popularity, including among professional baseball owners. The LLC is a business entity that has the limited liability attributes of a corporation, while maintaining the pass-through taxation of a partnership.

The National Association of Professional Baseball Leagues Inc. (NAPBL) allows LLCs to have an ownership interest in minor league baseball franchises. To form an LLC, one or more persons or entities would file articles of organization, a certificate of organization or a certificate of formation—the exact title depends on the state—with the secretary of state where the team is organized.

Equity owners of an LLC are called members, and they typically receive membership units or a membership interest in the LLC. Unlike a limited partnership, where only the limited partners have limited liability, all LLC members have limited liability. Although not required by federal or state law, most LLCs are governed by an operating agreement that is executed by the LLC’s members. In the absence of an operating agreement, state statutes usually govern the operation of an LLC.

The NAPBL’s Control Interest Transfer Application requires an LLC to provide a certified copy of its articles of organization and any operating agreement, along with a list of the LLC’s members and managers.

A significant advantage of an LLC is that if the LLC is properly organized and elects to have the Internal Revenue Service tax it as a partnership, the IRS will recognize the LLC as a pass-through entity. Members of an LLC report distributions of profits from the LLC on their personal income tax returns. In general, pass-through taxation eliminates taxation at the LLC level and eliminates double taxation.

The same type of pass-through taxation can occur by forming a Subchapter S corporation. However, the IRS places various restrictions on S corporations that are not applicable to LLCs. For example, unlike an S corporation, there are no restrictions on the number and types of members. An LLC can have more than one class of membership units, such as voting and non-voting membership units. Also, unlike shareholders of an S corporation, LLC members can use their proportionate share of LLC debt to increase their basis for deducting pass-through losses, subject to the same limitations as partnerships.

An additional advantage of an LLC is that it provides its members with flexibility in how the LLC is managed. Only the general partner manages a limited partnership, but in an LLC, the operating agreement can provide that the LLC will be governed by its members, officers, a board of managers, a manager or a managing member. Further, a manager or managing member does not have to have an equity interest in the LLC, and, unlike a corporation where annual shareholders and directors meetings are required, an LLC is not required to have annual meetings.

The main disadvantage of an LLC is that statutes are not uniform state-to-state. Additionally, because state laws creating LLCs are relatively new, there is a limited body of case law to determine how courts would decide issues of governance.

Based upon the favorable tax treatment for the LLC and the flexibility in how it is managed, franchise owners and potential franchise owners should consider utilizing the LLC as their ownership entity.

An owner might consider converting a different form of business entity into an LLC. The business, tax and legal considerations of a conversion are beyond the scope of this article. We recommend consultation regarding specific situations with legal and tax advisors.

This article was contributed by James P. Bauer, an associate attorney with Nicola, Gudbranson & Cooper LLC.

 

 

 

 
 
 
 
 

This website contains general information that should not be considered legal advice or legal opinion concerning individual situations. Legal counsel should be consulted for specific advice.

Copyright 2006 by L. James Juliano Jr.
Legally Speaking® is a registered trademark of the law practice of L. James Juliano Jr.