LLC Perpetual vs. Indefinite

By Elizabeth Rayne

Regulations for limited liability companies (LLCs) are determined by the state in which the company is located. Most states give LLCs the option to create either a perpetual or indefinite company at the time of incorporation. The decision between the two structures will be determined by the type of business and your goals for the LLC.

Perpetual LLC

A perpetual LLC, also known as an at-will company, does not have a specified length of existence. An at-will LLC will exist until one of the members disassociates, or the owners decide to dissolve the company. Unless otherwise specified in the company's organizing documents, an LLC is automatically an at-will company.

Indefinite LLC

An indefinite LLC, or a term company, exists for a particular length of time and then has the option to dissolve. The time of dissolution may refer to a specific date, or the completion of a particular event. For example, a term LLC may decide to dissolve 10 years after filing the organizing documents, or after a particular real estate asset is sold. In some states, the owners of the term LLC have a legal obligation to work for the company until the term is complete. Unlike an at-will LLC, the LLC may continue to operate after an owner leaves if the term is not complete. If a term LLC continues to operate after the expiration of the term, the company is converted into a perpetual LLC.

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Creating a Perpetual or Indefinite LLC

An LLC is usually created by filing the articles of incorporation with the secretary of state in the state where the company is located. The articles will include the name, contact information and information about the nature of the business. In the articles, you will specify if your company is a perpetual or indefinite LLC. Most LLCs also have operating agreements which are not filed with the state. An operating agreement details how the business will be managed, who provides what assets, and how profits will be distributed. The agreement should include whether the company is at-will or term. If it is a term company, the agreement should be as specific as possible about the events that will dissolve the LLC, and if the dissolution will be automatic or if the owners have the option to turn the LLC into an at-will company.

Dissolving an LLC

Whether an LLC is perpetual or indefinite will have an impact on the process for dissolving the company. In a term LLC, the members are responsible for ensuring that the "winding up" of the company's activities are completed in time for the dissolution event. This includes paying debts, distributing profits, and addressing any outstanding taxes for the LLC. In a perpetual LLC, the operating agreement will generally determine how the company may be dissolved, which usually requires a majority vote by the owners. A perpetual LLC must pay debts and distribute profits but generally will have a more relaxed time frame to do so.

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All states have either enacted the Uniform Limited Liability Company Act or a law with similar provisions authorizing the formation of limited liability companies. According to these state laws, an LLC can be established for any lawful business purpose. Because of the flexibility of this type of business structure, an LLC is suitable for virtually any type of business enterprise. An LLC is established through the filing of articles of organization with state government. An LLC provides two significant benefits to the owner. First, an LLC provides the same type of liability protection normally associated with a corporation. An owner is not personally liable for the activities of the business organized as an LLC. Second, unlike a corporation, in which an owner faces the prospect of double taxation, an LLC offers a pass-through tax mechanism. With an LLC, an owner faces only tax liability one time.

What Does an Automatic Dissolution of an LLC Mean?

An LLC, or limited liability company, is a business structure that protects the owners, known as members, from personal liability. In other words, should the company fail to pay its debts, only the assets of the business are subject to collection activities initiated by creditors. However, as the term implies, protection from liability is limited. Certain events can trigger an automatic dissolution of the business entity, possibly placing the personal assets of its owners at risk.

How to Transition an LLC to a Corporation

Electing to convert a business from an LLC to a corporation is subject to the laws of the state where the limited liability company was organized. Some states have enacted a conversion statute that streamlines the process for conversion; other states maintain the traditional procedures for conversion, which requires multiple steps to complete the process.

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