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What is a Restricted LLC?

Last updated Friday, February 12, 2021

 

A restricted LLC is an ordinary Nevada LLC that elects to be restricted in its initial articles of organization. The restricted LLC election imposes restrictions and limitations on the LLC's ability to make distributions.  Nevada statute NRS 86.161 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.

 

 

 

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Revised February 12, 2021 8:04 AM

 

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