Does an LLC that has elected to be taxed as a corporation need articles and bylaws?

This is kind of trick question, because LLCs don’t have articles of incorporation or bylaws, they have limited liability agreements, sometimes called operating agreements.  An LLC that has elected to be taxed as a corporation is a weird animal.  It’s a corporation for federal tax purposes but an LLC under state entity organization law.  Even though it is taxed as a corporation, its governing documents must comply with the LLC statute.  That means all of the rules that govern organization, issuance of units, relationship of owners, duties of management, requirements for distributions, dissolution and liquidation — they are still found in the LLC act, not the corporation act.  For Washington that would be RCW 25.15, rather than RCW 23B.  One of the most material differences is that the fiduciary duty of loyalty can be waived with LLCs, something that is sometimes desirable for real estate management firms but would generally not be recommended for a tech startup.

An LLC that has elected to be taxed as a corporation needs a limited liability company agreement designed for its situation.    If the company has made an S corp election, it is very important that the LLC agreement have  protective language in the document providing, among other things, that investors may not join who would blow the S-election because of their status (e.g., an entity or a foreign citizen).  Disclosure and communication to members is critical with this kind of entity, because the distinctions are not widely understood, and investors/members may have incorrect assumptions.

The take away for a startup company is that if you are an LLC and you are being advised to make an S election, or even a C corp election, understand that you will become kind of a hybrid entity that isn’t always well understood.  Also, once a corporate election is made, that is what you are in the eyes of the IRS.  You can’t switch back to being taxed as a partnership without consequences – you will be treated as liquidating the corporation for tax purposes and may have tax liability as a result.  

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