The Truth About Limited Liability Companies in Utah

The following information reflects Utah law. It has been provided for informational purposes only, and is not intended to render legal advice. It is not intended to apply to any specific situation. Legal principles discussed can differ in individual situations. Before applying any of this information to your personal use, you should consult with your lawyer.

LLCs

Limited liability companies — LLCs — have become commonplace in recent years. In fact, the concept has swept across the entire country. Now, all states have enacted laws which allow LLCs to be formed.

Limited Liability

In any partnership, general or limited, at least some of the equity owners are liable for the partnership’s debts. Thus, if necessary, a creditor of a partnership could attach the personal assets of the general partners to satisfy a partnership debt. Now, an LLC, like a corporation, provides protection for all owners from personal liability for the LLC’s debts.

Income Tax Savings

Generally, corporations are taxed at the entity level. Shareholders are then taxed again when distributions are received from the corporation. This results in double taxation of a corporation’s income.

  • If a corporation elects Subchapter S treatment, the corporation’s net profits are taxed to the shareholders and not to the corporation. This allows only one level of income taxation.
  • Similarly, a partnership pays no income tax. Instead, the net profits of a partnership are taxed as if they were the profits of the partners themselves, thus avoiding a separate level of taxation. This advantage attracts many businesses to organize as partnerships—to ensure only one level of taxes.
  • Like a partnership and a Sub-S corporation, an LLC provides this “flow through” taxation, i.e., no income tax at the entity level, to avoid double taxation of income.

DEFINITIONS

Articles of Organization: The LLC’s charter document that is filed with the Division to form the LLC.

Division: The Utah Division of Corporations and Commercial Code, a part of the Utah Department of Commerce.

Interest: A member’s share of the profits and losses of an LLC and the right to receive distributions from the LLC. A member’s interest is usually expressed as a percentage.

Manager: The person who manages or governs an LLC and has power to bind the LLC in a transaction.

Member: A person who owns an interest in an LLC.

Operating Agreement: The internal governing document of an LLC. Similar to a partnership agreement or corporate bylaws.

QUESTIONS AND ANSWERS

Q: What entity choices are available in Utah?

For business or investment activities, entity choices include a general partnership, a limited partnership, a corporation and an LLC. For non-profit activities, the choices include a non-profit corporation and an LLC. Recognized professions also have the choice of organizing as a limited liability partnership (LLP) or an LLC, which protect a partner or member from liability for the acts or omissions of other partners or members.

Q: Does an LLC protect its members from all debts and liabilities?

No. Generally, an LLC protects its members from personal liability for the LLC’s debts and obligations. However, there are several exceptions. An LLC may not protect a member from liability for his own improper actions where another person is injured in some way. Nor does an LLC protect a member who personally dumped or spilled toxic or hazardous waste. Also, a member who receives money or property from an LLC before the LLC’s creditors are paid may be liable to such creditors to that degree.

Q: What management structures are available to an LLC?

An LLC may opt to be managed either by its members or by designated managers. Thus, an LLC is either member-managed or manager-managed. The LLC’s Articles of Organization must specify which structure is selected. In a member-managed LLC, each member has power to bind the LLC in any transaction. In a manager-managed LLC, only the managers have such authority.

Q: Does a Utah LLC dissolve on the death of a member?

No, unless the LLC’s Articles or Operating Agreement require dissolution in such event. Under prior Utah law, the answer was “yes.”

Q: May an LLC member withdraw from the LLC and demand a distribution of property or money?

No, unless the LLC’s Articles or Operating Agreement allow for such distributions or unless the LLC dissolves or its period of duration expires.

Q: What would cause an LLC to dissolve?
A Utah LLC dissolves when:

  • The LLC’s period of duration expires.
  • The LLC fails to have at least 1 member.
  • Members holding a majority of the profits interests in the LLC determine to dissolve the LLC (unless otherwise provided in the LLC’s Operating Agreement).
  • An event occurs that is specified in the LLC’s Articles or Operating Agreement.
  •  The LLC is not the successor LLC in the merger or consolidation of two or more LLCs.
  • The LLC fails to file its annual report on time. But the LLC may be reinstated within 2 years.

Q: May an LLC interest be owned by trusts, partnerships, corporations and even other LLCs?

Yes. There is no restriction on the types of entities or persons who can own LLC interests.

Q: How do I know if an LLC is right for me?

Although LLCs are flexible and adaptable to almost any situation, expert advice from a competent lawyer is needed. LLCs have numerous design characteristics available. Thus, before knowing if an LLC will “fit the bill” for a particular situation, careful analysis is needed of all available options and characteristics that may impact the LLC and its operations. Only with competent legal advice can you determine for sure if the LLC is a proper fit.

Q: What is required to set up an LLC?

In Utah, an LLC is formed when “Articles of Organization” for the LLC are filed with the Division. The Articles are usually a short, “bare bones” document which covers only the minimum requirements of state law. Another essential LLC formation document is an Operating Agreement. The Operating Agreement is like a partnership agreement, is more detailed and governs the operations of the LLC. Operating Agreements are not filed with the Division.

Q: Are there standard forms for LLCs?

No. However, Utah law specifies the minimum provisions required for Articles of Organization. Utah law also sets forth numerous optional provisions for inclusion in either the Articles of Organization or the Operating Agreement. Competent legal advice is needed to determine which options should be included in a particular LLC and which ones should be avoided.

Q: How many owners are required to form an LLC?

Only 1 owner is required. Although 1-owner LLCs can still be separate, viable entities under state LLC law, they are usually “disregarded” for tax purposes — meaning they are treated as being invisible or transparent for tax purposes.

Q: Should I use a lawyer to set up an LLC?

Yes. To do it right and to minimize problems down the road, it is always best to use an experienced lawyer to set up and help maintain your LLC. It is even better to use a lawyer knowledgeable in tax matters, since LLCs could involve intricate tax issues.

Q: Must a Utah LLC maintain a registered agent?

Yes. The name and street address of the initial registered agent in Utah must be included in the Articles of Organization. Also, any change of registered agent must also be shown on the LLC’s annual report filed with the Division. And, the Division must be named as the “back up” registered agent in case the registered agent resigns or cannot be found.

Q: Must LLCs file annual reports?

Yes. Each LLC must file an annual report with the Division. Failure to file the annual report timely can result in involuntary dissolution of the LLC.

Q: Must LLCs file income tax returns?

Yes, if there are two or more members and the LLC has any net profits. If there is only one member, the LLC files no income tax returns and all taxable income, gains and expenses of the LLC must be reported on the member’s income tax return.

Q: Can partnerships be converted to LLCs?

Yes. Partnerships can be converted to LLCs to reduce owner exposure to lawsuits and liabilities. It is advisable to have a knowledgeable lawyer help with the conversion.

Q: What maintenance is needed for an LLC?

Annual reports must be filed with the Division and tax returns may be required. Although there are no requirements for regular or annual meetings of members, record keeping is still needed for assets, income, liabilities, and distributions. Also, transfers of LLC interests, admissions of new members and amendments to the LLC’s Articles of Organization and Operating Agreement should be documented properly.

COMPARISON OF ENTITY CHOICES

This table highlights a few key differences among the entity choices:

  LLCs C Corp S Corp General Partnership Limited Partnership
Limited Liability for
all owners
yes yes yes no no
Flow-through entity for
income taxes
yes no yes yes yes
Restrictions on number
or types of owners
no no yes no no
Restrictions on transfer
of ownership
yes no yes yes yes
Dissolves on
owner’s death   
no no no yes yes*
Strict name formalities
required
yes yes yes no yes
Registered agent, record
keeping, annual reports required
yes yes yes yes yes
Multi-state entity
possible
yes yes yes yes yes

*for death of a general partner