New Mexico Limited Liability Companies (LLCs)
Combining certain characteristics of both partnerships and corporations, LLCs are privately owned legal entities that can be formed for the purpose of earning profits, pursuing a social mission, or both, although some states require an LLC to be formed only for a “business purpose.” LLCs differ from for-profit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for pass-through income tax treatment. This means that income and expenses are reported as though the members incurred them directly, and profits or losses are taxed at the ownership (member) level, rather than the entity (company) level.
Members of LLCs can be individual investors as well as for-profit corporations and tax-exempt nonprofit corporations. For this reason and also because of pass-through taxation which eliminates “double taxation” (the effect of taxing income at the corporate level and again when it is included in the owner’s income), LLCs are preferred over for-profit corporations as vehicles for social enterprise, especially for joint ventures between a tax-exempt nonprofit with a social change mission and a for-profit business.
LLCs are akin to partnerships because the members have broad discretion to allocate profit and loss and management powers among themselves (via an “operating agreement”). On the other hand, as with the shareholders of corporations, the members of an LLC can be divided into classes, each with its own economic rights, and members have limited personal liability (discussed below).
The Limited Liability Company Act [Chapter 53, Article 19 1978] governs the formation, operation and dissolution of LLCs in New Mexico.
Two states, Tennessee and Kentucky, specifically authorize the formation of nonprofit limited liability companies (nonprofit LLCs). The statutes of numerous states, including California, have language that permits nonprofit LLCs to exist. Assuming state laws permit formation of nonprofit LLCs, the IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be treated as a separate legal entity for tax purposes and its operating agreement includes the language mandated by the organizational test (purposes, distribution of assets upon dissolution, etc.) and it meets numerous requirements largely designed to guard against inurement and private benefit. These conditions will be discussed in the Nonprofit Taxation section.
In New Mexico, limited liability companies may be formed by one or more persons may form a limited liability company by filing articles of organization with the PRC. The person or persons forming the limited liability company need not be members of the limited liability company. One or more persons may own and operate the limited liability company.
The articles of organization must contain: the name for the limited liability company; the street address of the initial registered office and the name of the initial registered agent at that address and the street address of the limited liability company’s current principal place of business, if different from the address of its registered office; the period of duration, if other than perpetual; if management of the limited liability company is vested to any extent in a manager, a statement to that effect; if the limited liability company may carry on its business and affairs as a single member limited liability company, a statement to that effect; and any other provision that the persons signing the articles choose to include in the articles, including provisions for the regulation of the internal affairs of the limited liability company.
A limited liability company formed in New Mexico must have: a registered office that may be the same as the limited liability company’s principal place of business; and a registered agent for service of process on the limited liability company that is either an individual resident of New Mexico, a domestic corporation, limited liability company or partnership having a place of business in New Mexico, or a foreign corporation, limited liability company or partnership authorized to transact business in New Mexico having a place of business that is the same as the registered office.
New Mexico permits a limited liability company to conduct or promote any lawful business or purpose. The duration of existence of a limited liability company may be perpetual or may be limited to a definite term or until completion of a particular undertaking.
For guidance in completing the articles of organization for limited liability company, please visit, http://www.nmprc.state.nm.us/corporations/pdf/charter/dllc.pdf
Management and Control
Typically, an LLC “operating agreement” among the members governs the management of an LLC. The operating agreement—which is like the articles of incorporation, bylaws and a shareholder agreement all in a single document— may contain provisions requiring adherence to a social purpose and such purpose and the values it embodies may be interwoven throughout the operating agreement.
The management of the business and affairs of the limited liability company is done either by the members or by specified manager who may or may not also be members. If the articles of organization vest management in one or more managers, the articles of organization or an operating agreement may prescribe the qualifications and the number of managers, the method in accordance with which managers can be selected and duties and responsibilities of such managers.
Unless otherwise provided by the articles or organization or operating agreement, members who have contributed to the capital of the limited liability company may vote in proportion to the value of their contributions to the capital, adjusted to the time the vote is taken to reflect all contributions made and all withdrawals of capital prior to such vote. Moreover, except as otherwise provided by the articles of organization or operating agreement:
i) the affirmative vote of the members having a majority is required to amend the articles of organization or an operating agreement to approve the sale, mortgage, pledge or other hypothecation or disposition of all of the assets of the limited liability company;
ii) the affirmative vote of all of the other members is required to remove a member from membership;
iii) if the articles of incorporation or operating agreement vest management responsibility in one or more managers, the affirmative vote of a majority of the managers is required to decide any matter connected with carrying on the business and affairs of the limited liability that is within the scope of managers' authority; and
iv) any matter connected with the carrying on of the business and affairs of the limited liability company that is not within the scope of the authority of one or more managers, or in one or more members in whom the articles of organization and operating agreement vest particular management responsibility, must be decided or resolved by the affirmative vote of a majority share of the voting power of all members.
A person may become a member of a limited liability company when a person acquiring a membership interest directly from the limited liability company, upon compliance with the articles of organization or an operating agreement or, if neither the articles nor an operating agreement so provides, upon the written consent of all members; and in the case of an assignee of a member’s interest, as provided in the Limited Liability Company Act. The effective time of admission of a member is the later of the date the limited liability company is formed; or the time provided in the articles of organization or an operating agreement or, if no such time is provided when the person’s admission is reflected in the records of the limited liability company.
Assets must be applied or distributed, and its accounts settled, in the following order of priority:
- To payment or adequate provision for payment to creditors;
- Satisfaction of liabilities; and
- To members at the date of dissolution in the proportions, determined as of that date, of the values of their contributions to the capital adjusted for withdrawals.
Limited Liability of Members and Managers
The debts, obligations and liabilities of a limited liability company are solely the debts, obligations and liabilities of the limited liability company. No member or manager of a limited liability company and no other person with authority pursuant to the Limited Liability Company Act to wind up the business or affairs of the limited liability company following its dissolution, is obligated personally for any debt, obligation or liability of the limited liability company solely by reason of being a member or manager of the limited liability company or having authority. A person may be liable for any act or omission performed in his capacity as a manager of a limited liability company if there is a basis for liability.
A member of a limited liability company is not a proper party to a proceeding by or against the limited liability company solely by reason of being a member of the limited liability company.
Unless otherwise provided by the articles of organization or an operating agreement:
i) a member who is not a manager and is not vested with particular management responsibilities is not liable to the limited liability company or to the other members solely by reason of his act or omission in his capacity as a member;
ii) a member who is vested with particular management responsibilities by the articles of organization may not be liable in damages or otherwise to the limited liability company or to the other members solely by reason of his act or omission on behalf of the limited liability company, unless such act or omission constitutes gross negligence or willful misconduct;
iii) a member or manager may lend money to and transact other business with the limited liability company, and he will have the same rights and obligations with respect to such loan or transaction of business as he would have if he were not a member or manager;
iv) every member who is vested with particular management responsibilities and every manager must account to the limited liability company and hold as trustee for it any profit he derives from: any transaction connected with the conduct or any use by such member or manager of the company’s property, including matters entrusted to him as a result of his status as a member or manager unless:
- the material facts of the relationship of the interested manager or member to the contract, transaction or use were disclosed or known to all of the other managers or members who, in good faith, authorized or approved the contract, transaction or use;
- the contract, transaction or use was fair to the limited liability company when it was authorized or approved.
Merger, Conversion and Dissolution
A limited liability company may be merged with or into one or more limited liability companies, foreign limited liability companies, corporations, foreign corporations, partnerships, foreign partnerships, limited partnerships, foreign limited partnerships or other domestic or foreign entities. For purposes of the Limited Liability Company Act, an entity is domestic if it was formed in New Mexico and an entity is “foreign” if it was formed in a state other than New Mexico. When a merger takes effect, all property owned by the disappearing entity becomes the property of the surviving entity and all debts and obligations of the disappearing entity become the debts of the surviving entity.
A corporation, partnership or limited partnership may be converted to a limited liability company. Furthermore, a limited liability company may be converted to a corporation, partnership or limited partnership. A corporation, partnership, limited partnership or limited liability company that is converted is for all purposes the same entity that existed before the conversion. Thus, for instance, all property owned by the converting entity and all debts and obligations of the converting entity are transferred to the converted entity. Moreover, the owners of the converting entity become owners of the converted entity.
A limited liability company may be dissolved upon the happening of one of three events: upon the happening of an event specified in the articles of organization or the operating agreement; upon the written consent of members having a majority share of the voting power of all members; or upon entry of a decree of judicial dissolution. A decree of judicial dissolution may be entered by a court on application by or for a member if the court determines it is not reasonably practicable for the limited liability company to carry on its business in conformity with its articles of organization or operating agreement.
A limited liability company offers the same flexibility in raising capital as a for-profit corporation.
Recordkeeping and State Reports
A limited liability company must keep at its principal place of business, and notify all of its members of the location of such place, the following: a list with the full name and last known mailing address of all current and former members and managers; a copy of the articles of organization and all amendments or restatements of the articles of organization, together with executed copies of any powers of attorney pursuant to which any articles, amendments or restatements have been executed; copy of each of the limited liability company’s federal, state and local income tax returns and financial statements for the three most recent years; a copy of every current and prior operating agreement, and every amendment to each of those operating agreements. Furthermore, unless the following statements are included in the articles of organization or an operating agreement, a limited liability company must keep at its principal place of business a current statement of the capital contributions; a statement of the cash, property and services that each member has agreed to contribute and of the principal balance and a statement of the times at which, or the events on the happening of which, any additional contributions to or withdrawals from capital to which the members have agreed are to occur. Finally, if the articles or organization or operating agreement provide that other documents shall be made available to the members, such documents or other writing must be kept at the limited liability company’s principal place of business.
A member or a member’s representative may, at the member’s expense, inspect and copy any limited liability company record, wherever such record is located, upon reasonable request during ordinary business hours.
A limited liability company is not required to be a separate taxable entity like a corporation; instead it may be a “pass-through entity” so that the LLC owners report business losses or profits on their personal tax returns, like a partnership.
Unless a limited liability company with a single member elects to be taxed as a corporation, the IRS by default treats the single-member limited liability company as a sole proprietorship for tax purposes. This means the limited liability company itself does not pay taxes and does not have to file a tax return. Unless a limited liability company with more than one member elects to be taxed as a corporation, the IRS by default treats the multi-member limited liability company as a partnership for tax purposes. This means that the limited liability company owners each pay taxes on their lawful share of the profits on their personal income tax returns. The limited liability company tax rate for New Mexico is variable, depending on New Mexico taxable net income.
Generally, limited liability companies must obtain a federal tax identification number (EIN). A EIN is similar to an individual’s social security number. However, a limited liability company with a single member and no employees is not required to obtain an EIN.
Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships (Incisive Media, 2009)
New Mexico Tax Rebate, http://www.tax.state.nm.us.
New Mexico Limited Liability Company Act [Article 53, Chapter 19 NMSA 1978]