In recent years, the Limited Liability Company ("LLC") has gained prominence as an effective business entity and estate planning tool. The LLC, which is now recognized in all 50 states, provides most, if not all, of the benefits of a corporation, yet is usually taxed as a partnership, thus avoiding the tax problems sometimes associated with the corporate business form. Through an LLC, you can also achieve your gifting objectives, minimize any estate taxes due upon your death and protect your assets (personal and business) from the claims of creditors.
The LLC is a relatively new type of business entity. The attorneys at JEFFREY BURR have more than 35 years of experience, not only protecting families and their assets, but protecting businesses and their assets, as well. The LLC is governed by an "Operating Agreement," which is similar to a partnership agreement of the 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.
The LLC has two features which help to distinguish it from other types of business entities. First, an LLC possesses the corporate characteristic of limited liability for all of its members. 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. Thus, unlike other types of business entities, the LLC avoids the infamous double taxation problems associated with the traditional "C" corporation.
In Nevada, any one or more persons may form an LLC for any lawful purpose except banking or insurance. If there are two people involved, the LLC is normally taxed as partnership; however, if one person owns the LLC, the entity is taxed as a sole proprietorship. Moreover, with some exceptions, the law generally allows you to convert an existing limited or general partnership into an LLC without adverse tax consequences. In the case of converting from a "C" or an "S" corporation to an LLC, however, the conversion would be treated as a liquidation of the corporation, a fully 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 the advice of a competent tax attorney if you are considering such a conversion.
Using the LLC business form gives you several advantages over the "S" and "C" type corporations. In addition to avoiding the double taxation problems of "C" corporations, the law in most states does not require an LLC to hold annual meetings or to comply with other operational restrictions imposed on both "C" and "S" corporations such as keeping annual minutes, giving notices to shareholders, voting, etc. Moreover, the law does not restrict the LLC as to the type or number of members it may be comprised of – a unique characteristic, which does not exist for "S" corporations.
The LLC also gives you several advantages over the limited partnership business form. One of the functions of an LLC is to provide limited liability protection to all of its members. With the limited partnership, however, limited liability extends only to the limited partners, not the general partners. Furthermore, an LLC's Operating Agreement may provide that all of the LLC's members have the right to participate in the management of the business, while only the general partners in a limited partnership may do so.
Many types of businesses are particularly well suited to the LLC form of doing business. Limited or general partnerships that want to limit the personal liability of their general partners, and limited partnerships seeking greater participation from their limited partners in the management of the partnership's business, should consider the LLC business form. Also, corporations seeking fewer reporting requirements and formalities, or enhanced flexibility in the number and types of shareholders, will find the LLC form advantageous. If you find that your business fits into one of these categories, you should consider establishing an LLC.
When using the LLC from an estate planning perspective, an LLC can provide you with three extremely valuable asset protection and tax savings strategies as are more fully discussed below.
An LLC can serve as a useful vehicle in implementing your lifetime gifting objectives. By transferring your family business or income-producing property into an LLC in return for membership interests in the LLC, you can gift membership interests in the LLC to your family and friends. Additionally, through careful drafting of your LLC's organizational documents, you can place certain restrictions on your gifted LLC interests so that those interests may qualify for substantial valuation discounts. Thus, for gift tax purposes, you can reduce the value of your gifted LLC interest while actually transferring the true underlying value of those interests, which is significantly higher.
If you are structuring your estate to limit the potential impact of a lawsuit or other attacks on your financial security, you can implement your LLC in conjunction with a Family Limited Partnership ("FLP"). To protect those assets you place into your FLP from the reach of creditors, you can create an LLC and designate the LLC as the general partner of your FLP, with full powers of management and control over the FLP and its assets. Then, by designating yourself as the manager of your LLC-general partner, you retain for yourself effective control over the FLP and its assets. Therefore, as the general partner of your FLP, your LLC benefits from the same kind of protection against creditors, as do the limited members of the FLP.
With your LLC as the general partner of your FLP, the liability of the LLC/general partner is limited to the assets in your LLC. Thus, if you capitalize your LLC only minimally, your potential creditors are severely limited in what assets they can reach. Moreover, if at some future time you are sued, a properly designed LLC Operating Agreement can also prevent creditors from taking control of your FLP from your LLC/general partner and then liquidating the FLP to gain access to its assets.
Life insurance policies usually make up a large portion of an individual's estate. Often, people leave these assets in their estate, which unnecessarily increases their estate tax liability at death. A properly structured LLC can provide a flexible approach to removing all but a nominal percentage of the value of your life insurance policy from your estate, while allowing retained control over the policy for investment and distribution purposes.
The LLC is an extremely versatile tool from both the estate and business planning perspectives. The LLC represents the best of what other business entities offer while providing you with valuable estate planning options to achieve your gifting goals, reduce your estate tax liability, and enhance your protection against potential creditors. All fifty states now recognize LLCs as valid business forms. If you own a business, or if you feel your partnership or corporation needs to change the way it does its business, you should consider meeting with an attorney to see how an LLC can help you.
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