Traditional LLC vs. Close LLC

A Close LLC and a traditional LLC are essentially the same regarding how they’re formed, the personal liability protection they provide to business owners, and the tax flexibility they provide.

A traditional LLC and a Close LLC have the following similarities:

• Both Close LLCs and LLCs are created by filing a formation document called articles of organization (or certificate of organization) with the state.
• Both Close LLCs and LLCs limit the LLC members’ personal legal responsibility for the liabilities of their business.
• Both Close LLCs and LLCs may choose one of the following tax treatment options:
  • Default taxation (Sole Proprietorship if a Single-Member LLC or a Partnership if a Multi-Member LLC)
  • S Corporation tax election (if the LLC and its members meet the IRS’s eligibility requirements)
  • C Corporation tax election

A traditional LLC and a Close LLC differ in that:

• Very few states offer a Close LLC option, whereas all states allow LLC formation.
• Close LLCs may have stricter rules for withdrawal of members, transfer of ownership interests, dissolution, profits and losses, and return of capital.
• Some Close LLC statutes may require that if a member wishes to sell their ownership interest in the business, they must allow the other members first right of refusal before selling to outsiders.

Generally, the members of a Close LLC must abide by the provisions in their operating agreement in all matters governing the business entity.

While a Close LLC does have some advantages, it’s best to consult an attorney and tax advisor before choosing your business structure because your decision will have legal and financial ramifications.

Potential advantages of a Close LLC:

• A Close LLC helps smaller companies keep tighter control over matters involving the transfer of members’ ownership interests, members’ withdrawal from the company, return of capital distributions, and dissolution.
• A Close LLC may have fewer ongoing compliance tasks than a regular LLC (depending on the operating agreement’s terms and conditions and the state’s laws).
• Forming a Close LLC involves the same general steps as forming an LLC, with the exception of having some specific language added to the Articles of Organization and LLC operating agreement.
• A Close LLC offers the same degree of personal liability protection as an LLC.
• A Close LLC offers the same tax flexibility as an LLC.

An Example of How a Close LLC Works in Wyoming

Wyoming is one state that allows entrepreneurs to form a Close LLC (per the Wyoming Secretary of State’s “Wyoming Close Limited Liability Company Supplement”).

Below are some of the key details that the supplement addresses:

• A Close LLC is an LLC whose articles of organization contain a statement that the company is a Close LLC.
• An LLC may convert to a Close LLC by amending its articles of organization to include a statement that the company is a Close LLC.
• The LLC’s operating agreement and certificates of ownership must conspicuously contain a statement similar to this:
  NOTICE OF RESTRICTIONS ON TRANSFERS AND WITHDRAWALS – The rights of members in a close limited liability company may differ materially from the rights of members in other limited liability companies. The Close Limited Liability Company Supplement, articles of organization, and operating agreement of a close limited liability company may restrict transfer of ownership interests, withdrawal or resignation from the company, return of capital contributions and dissolution of the company.”
• A Close LLC’s members shall manage the company and management control shall be in proportion to the division of profits and losses among the members—unless otherwise stated in the LLC operating agreement.
• Any member who wishes to withdraw from the Close LLC must do so under the terms and conditions of the company’s LLC operating agreement. If no terms or conditions exist, a member may only withdraw with the consent of all other LLC members.
• A member who withdraws from a Close LLC may not receive their capital contribution unless the company’s liabilities have been paid or the company has sufficient funds to pay them and all members consent to the return of contributions (per the articles of organization or operating agreement, or if the LLC dissolves).
• A Close LLC may be dissolved by unanimous written agreement by all members, when the fixed period for the duration of the LLC expires, or if any specific events calling for dissolution in the operating agreement occur.
• A Close LLC may divide its profits and losses among its members and transferees of the company according to the rules in its operating agreement. If the operating agreement does not address that, the Close LLC must allocate profits and losses based on the value of each member’s contributions to the company.
• A Close LLC’s interests (including transferable interests) shall only be transferred according to the operating agreement’s terms and conditions. If not addressed in the operating agreement, no interest may be transferred without the consent of all members of the Close LLC.

To form a Close LLC in Wyoming, the business owners must check box #2, which reads, “This entity elects to be a close limited liability company” on the Limited Liability Company Articles of Organization form.

Unless an annual meeting requirement is in the operating agreement (or a meeting is requested by a member), a Close LLC in Wyoming does not have to hold an annual meeting. However, a Wyoming Close LLC must file an annual report per the state’s rules.

Things to Keep In Mind

Because your choice of business structure affects your company legally and financially, consider talking with your attorney and accountant when exploring your options. As I mentioned, Wyoming is one of only a few states that offers this niche LLC option. If you’re unsure whether the Close LLC entity type is available where you want to form your Limited Liability Company, contact your state’s secretary of state office.