Limited-liability format for companies proposed

February 27, 1991|By David Conn | David Conn,Annapolis Bureau of The Sun

ANNAPOLIS -- Want a company that gives you all the healthy tax benefits and liability protections you need, but with none of the bitter Internal Revenue Service rules and regulations?

Step right up to the limited-liability company, a little-known and even less understood creature that House Bill 491 and its companion Senate measure, SB 345, would introduce to Maryland.

Its proponents told the House Judiciary Committee yesterday that this format for companies would provide Maryland with an economic-development tool that few other states have.

"This little bill creates a new corporate animal in Maryland," said Delegate Robert L. Ehrlich Jr., R-Baltimore County, one of the bill's co-sponsors.

Actually, not so little. The 82-page bill would allow for the creation of a hybrid business entity combining some of the benefits of corporations and partnerships but without the disadvantages of either.

Whereas the owners of a corporation -- its stockholders -- are protected from lawsuits against the company, the downside is that they are taxed twice: once when the company reports its profits and the second time when the shareholders pay income taxes on the dividends they receive.

Members of a partnership, by contrast, do not suffer from this "double taxation," but in many instances they could be held liable individually for the actions of a partner.

The S-corporation was a Solomonic attempt by the IRS to split the baby down the middle: limited liability and no double taxation. But there are so many legal hoops to jump through with an S-corporation that the form is impractical for many businesses, according to Daryl Sidle, an attorney who testified yesterday as a member of the Maryland State Bar Association committee that drafted the bill.

As a result, in 1988, the IRS was presented with the Limited Liability Company, and the federal agency ruled that it was legal and would solve most of the tax, liability and legal complexity problems that plague small businesses looking for a corporate format.

It would be attractive primarily to small companies that do not have a large class of stockholders.

There are only four states that allow a limited-liability company, said Stuart Levine, the chairman of the bar association committee, but Maryland is among six others whose legislatures are considering the change this year, including Virginia.

"This bill is going to assist this state economically," Mr. Levine said. "There are a lot of entities that are going to come into the state and use this bill."

The state Department of Fiscal Services determined that the law would not cost the state any tax revenues and, after some initial start-up costs, could bring in money from the fees of companies that take advantage of it.

One thing the limited-liability company would allow small companies to do is raise money more easily from foreign investors, who are barred from participating in running or even from financing some types of companies in the United States.

That aspect especially will help small high-technology companies, according to Selig Solomon, director of the Office of Technology Development in the Department of Economic and Employment Development.

"High-tech companies need this vehicle so they can go from [the start-up] stage to [the production] stage without going through all these wild gyrations" of corporate law, he said.

Along with the array of programs aimed at helping high-tech companies, Mr. Solomon said, the limited-liability company would give Maryland's development efforts one more boost.

"This is another piece, if you will, in that mosaic," he said.

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