Restricted LLCs
Author: Jacob Stein • Tags: limited partnership, llc, nevada • Posted on: Jun 05, 2009

On May 29 the Governor of Nevada approved Nevada Senate Bill 350 which creates a new type of limited liability companies and limited partnerships. For simplicity, we will focus on the LLCs only.

These new LLCs are called "restricted" and the enabling legislation can be found in the newly enacted NRS 86.161. The legislation goes into effect October 1, 2009. A restricted LLC is an ordinary Nevada LLC that elects to be "restricted" by checking off the appropriate box in its articles of organization.

Once the restricted LLC checks the box, the new statute imposes restrictions and limitations on the LLC's ability to make distributions. The statute provides, in part, that unless otherwise provided in the articles of organization, a restricted LLC shall not make any distributions to its members with respect to their membership interests until 10 years after the date of formation of the LLC (or amendment of the articles of an existing LLC to become a restricted LLC), so long as the LLC has remained a restricted LLC.

Why would one want to set up an LLC which by its charter may not make any distributions to members for a period of 10 years? The reason is Internal Revenue Code Section 2704(b), which provides that when valuing an interest in an entity for gift tax purposes, the liquidation restrictions contained within the LLC operating agreement have to be disregarded by the appraiser if the LLC is owned by family members both before and after the transfer. Code Section 2704(b)(3)(B) provides however that a restriction that is imposed by state law cannot be ignored.

Nevada has always been a business friendly state, and it hopes that with these new restricted LLCs, it will attract the business of estate planning attorneys seeking greater valuation discounts for transfers of interests in business entities between family members. Given that the restriction can be lifted fairly simply (by amending the LLC's articles of organization), it is a flexible concept that should grow in popularity.

Latest Video Bob Klueger Estate Tax Law Video Bob Klueger talks about the effects of the new tax law.
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