Attention California business owners: A Restricted LLC (limited liability company) and a Restricted LP (limited partnership) are special entities that will be allowed under Nevada law starting October 1, 2009. Nevada is the first and only state to allow these types of entities.
With a restricted LLC, 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 ten 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 set up an LLC which by its charter may not make any distributions to members for up to ten 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.