What is an LLC?
A Limited Liability Company (“LLC”) is a type of business organization that is comprised of members (the owners) and the managers. In recent years, the LLC gained prominence as both an effective business entity and an estate planning tool. It is recognized in all 50 states and it provides most, if not all, of the benefits of a corporation, yet is usually taxed as a partnership. This allows an LLC to avoid tax problems sometimes associated with the corporate business form.
The LLC has two features distinguishing it from other types of business entities. First, an LLC possesses the corporate characteristic of limited liability for all its members without the burden of corporate formalities. This characteristic shields the individual LLC members from personal liability beyond their investment or capital commitment to the LLC for the debts and obligations of the LLC. Second, an LLC possesses the income tax flow-through attributes of a partnership. Unlike other types of business entities, the LLC avoids the infamous double taxation problems associated with the traditional C corporation.
Due to the flexible nature of LLCs, these entities are favored as a part of comprehensive estate plans to achieve your gifting objectives, minimize potential estate tax liability upon your death, and protect your personal and business assets from the claims of creditors.
How do LLCs offer asset protection?
An LLC can protect your personal assets from being used to pay creditors of your business. If you structure your estate to limit the potential impact of a malicious lawsuit or other attacks on your financial security, you may want to implement your LLC in conjunction with a Family Limited Partnership (“FLP”).
An FLP is another type of business organization that is comprised of general and limited partners. The general partner is an owner of the FLP, and manages the day to day activities of the FLP. The limited partners are the other owners of the FLP, but do not take part in managing the entity. While limited partners in an FLP are protected from personal liability beyond their investment in the FLP, the general partner is not. To avoid that liability however, you can create an LLC and designate it as the general partner of your FLP to protect assets you place into your FLP from the reach of creditors. As manager of the LLC, you also maintain full powers of management and control over the FLP and its assets. As the General Partner of your FLP, your LLC benefits from the same kind of protection against creditors as do all members of the FLP.
When your LLC is the general partner of your FLP, the liability of the LLC General Partner is limited to the assets you kept in your LLC. Potential creditors are severely limited in assets they can reach if you minimally capitalize your LLC. However, you must keep sufficient assets in your LLC for state law purposes. If you are sued, a properly designed LLC Operating Agreement and adherence to the organizational structure can prevent creditors from taking control of the FLP from your LLC General Partner and liquidating the FLP to gain access to its assets.
How do I create an LLC?
To form an LLC, you must file Articles of Organization with the Secretary of State in the state you intend to form your business. The LLC is governed by an Operating Agreement which is like a partnership agreement or bylaws of a corporation. Individuals or other entities who invest in the LLC are referred to as members and are the equivalent of corporate shareholders.
To create an LLC in Nevada, the law requires you to do so with at least one person or one business entity. Some states require two people or business entities. If there are two people involved, the LLC is normally taxed as a partnership. However, if one person owns the LLC the entity is taxed as a sole proprietorship. In Nevada, any one or more persons may form an LLC for any lawful purpose except insurance. A corporation, general partnership, S corporation, limited partnership, or trust all qualify to be members of an LLC. With some exceptions, the law generally allows you to convert an existing limited or general partnership into an LLC without adverse tax consequences. The conversion would be treated as a liquidation of the corporation when converting from a C or an S corporation to an LLC. This conversion is a taxable event likely resulting in the recognition of taxable gain equal to the difference between the fair market value and the adjusted basis of the corporate assets transferred to the LLC. You should seek advice from a competent tax attorney if you consider such a conversion.
Our attorneys are well versed in LLC and FLP creation and utilization. To discuss how you might use an LLC or FLP (or combination of the two) as a part of your estate plan to achieve your family’s unique goals, contact us today to set up an appointment at (702) 433-4455.