Over Twenty years ago Kansas became the 3rd state, behind Wyoming and Florida, to enact legislation introducing the limited liability company (LLC) as an option for Kansas business formation. Since that time the LLC has grown from an obscure and little known entity in Kansas to one of the most commonly used business organizations by today’s entrepreneurs.
The Kansas Limited Liability Company (LLC) is best described as a hybrid between a Kansas partnership and a Kansas corporation. Generally speaking the Kansas LLC is a legal vehicle which provides limited liability to all of its owners (referred to as “members” for Kansas LLC purposes), allows all members to participate in the management of the business, and avoids the tax consequences of doing business as a corporation (i.e., double-taxation). "Limited liability” is emphasized because contrary to popular belief the protection afforded to these entities is not absolute and corporate formalities must be followed to ensure that you are getting the maximum amount of protection from your LLC. When utilized correctly, the Kansas LLC can be extremely adaptable and most of the characteristics described above can be modified to fit the particular needs of the Members through the use of a properly drafted operating agreement.
Types of Kansas LLCs
A LLC can be formed for just about any purpose in Kansas, including not-for-profit, below are the four main characterizations of LLCs that are formed in Kansas:
1. Single Member Kansas LLC: The Single Member LLC is a good business tool for the individual entrepreneur because it is the only unincorporated business organization that affords limited liability protection to its owner. However, the protection afforded is fickle and special safeguards must be followed to ensure that the LLC is viewed as separate and distinct entity from the Member.
2. Multi-Member Kansas LLC: This is just as it sounds in that it allows for multiple owners to participate in the company. The members may choose to be involved in the day-to-day business decisions of the company or alternatively they may designate a manager to perform these functions on their behalf. This is the key distinction between LLCs and Limited Partnerships. LLCs allow every member the opportunity to manage the business while in a Limited Partnership one partner is designated the general partner to perform the day to day business operations of the company and the rest of the partners are designated limited partners with no say in the general management of the partnership.
3. Professional LLC: In Kansas there are roughly twenty-seven different professional services that are certified or licensed by the State of Kansas and thus are eligible to form a professional LLC. The most common use of professional LLCs are by attorneys, dentists, physicians, and real estate brokers.
4. Agricultural LLC: In Kansas, an LLC is restricted from owning or leasing agricultural land unless in qualifies as a limited liability agricultural company (LLAC). The LLAC limits ownership to 10 members and at least one of the members must reside on the farm or be actively involved in the management of the farming operation.
Forming a Kansas LLC is relatively simple. The only two requirements are: 1) filing articles of organization with the Kansas Secretary of State, and 2) Paying the appropriate filing fee ($165.00 or $160.00 if filing online). An LLC is recognized as a separate legal entity as of the date that the articles are filed, unless designated otherwise by the members in the Articles. Once your Kansas LLC is formed you must file a annual report each year with the Kansas Secretary of State’s Office to maintain your limited liability company status.
1. Articles of Organization: The articles of organization put the world on constructive notice that the members of the LLC are generally protected against liabilities of the company and that the members are not proper parties to any proceedings against the LLC entity. The content of the articles is governed by K.S.A. 17-7673 which requires the following mandatory disclosures:
2. Operating Agreement: The operating agreement is generally considered the most important document of the LLC as it governs the affairs of the LLC and the conduct of its business. In Kansas an operating agreement is no longer required for formation but it is strongly recommended that the members adopt one. If the members do not adopt an operating agreement the LLC will be governed by the default rules contained in the Kansas Limited Liability Act.
3. Member Resolutions: Member Resolutions formally document the authorization of the limited liability company to enter into certain transactions. Member resolutions help to establish the separate legal identity of the company.
By default the management of the LLC is vested in the members of the company, however, the members may also choose to designate a manager to run the day-to-day operations of the company.
1. Management by Manager: Through the use of an operating agreement the management of the company may be vested in one or multiple managers. The manager does not have to be a member of the LLC and his or her responsibilities can be as broad or as limited as the members designate in the operating agreement. If management by manager is elected then the operating agreement must also designate the process for electing and removing managers.
2. Management by Members: Unless stated otherwise the management of the LLC is vested with the members. Each member’s right to participate in management is proportionate to that member’s interest in the LLC and majority vote controls. However, these rules may be modified in the operating agreement.
In 1996 the IRS adopted what are called “check-the-box” regulations. These regulations provide that an LLC with at least two members can elect to be classified as either an association taxable as a corporation or as a partnership. Additionally, a single member LLC may elect to be classified as an association taxable as a corporation or as an entity separate from its owner (a disregarded entity). In both cases the multi member LLC will operate as a partnership and the single member LLC will operate as a disregarded entity unless an affirmative election is made to be taxed as a corporation.
Therefore by default the LLC is considered a “pass-through” entity meaning that no tax is paid at the LLC level. All income, gain, loss, deductions, and credits which are earned through LLC operations are simply passed through to the individual members and reported on their personal tax returns. Conversely, if the members choose to have the LLC taxable as a corporation, the LLC will be treated as a separate tax paying entity and is subject to corporate income tax at the company level and again at the individual member level when the members take their respective share of profits from the LLC, hence the term double taxation.
John Thompson is a shareholder with Kennedy Berkley Yarnevich & Williamson, Chartered assisting entrepreneurs, families and farmers in the areas of estate and business planning.