In
the state of Wyoming, people looked around the world and found that foreign
competition had business forms that were superior to those available in
the United States. In other countries there were business forms that could
provide:
- Limited
Liability (to protect owners from being personally liable for debts
of the business)
- Pass-through
taxation (to avoid the potential of double taxation of C corporations)
- No restrictions
on permitted owners (eliminating the restrictions of S corporations)
- No restrictions
on active participation (to insure, unlike limited partnerships, all
owners could be active in managing the business without jeopardizing
their limited liability protection)
- Operational
flexibility (to let owners structure the management in a way that
satisfies the concerns and requirements for each business)
Then
in 1977, the LLC was created in the state of Wyoming. It has
rapidly grown to where it is accepted in all 50 states. As you can see
it is a powerful entity that is a hybrid between a corporation and
a partnership.
As mentioned
earlier, the corporation is not the place to hold assets. It is
an excellent entity to operate a business and to go public (an LLC can
not go public). An LLC can also be an excellent structure to operate
a business. If your business has equipment or assets it should
be owned by an LLC for business reasons and leased to the corporation. The
following are additional benefits of the LLC:
- When
the founding members liquidate assets from the LLC it is generally
not a taxable event with the LLC. But with the C corporation
it is taxable at the corporate level and shareholder level.
- An LLC
is more desirable and flexible than an S corporation because pass-through
losses under an LLC can be allocated separately to members.
- An S
corporation does not allow for a step-up in tax basis of the S corporation’s
assets on the death of a shareholder and can result in shareholder
tax liability on liquidation. Finally, there are restrictions on shareholders
that exist in an S corporation. This can all be avoided by the
LLC.
- An LLC
has distinct advantages over a Family Limited Partnership (FLP).
The members of an LLC can actively participate in the management of
the LLC without losing the limited liability protection. Not
so with an FLP. In an FLP a general partner is appointed to
handle all management decisions without participation of the limited
partner(s).
- Hence,
the general partner has full and complete personal liability for any
debts or obligations of the partnership itself. In an LLC the
manager is not personally liable for the debts or obligations of the
LLC.
- An interest
in the LLC is personal property and a creditor who seizes an LLC interest
by way of a charging order can not automatically reach the assets
of the LLC.*
- A creditor
who seizes an LLC interest does not automatically become a member
and is therefore not entitled to exercise management powers with respect
to the LLC.
- There
are no corporate formalities.
*To achieve
the charging order protection the LLC must be taxed as a partnership,
not a sole proprietorship or corporation. When the LLC is taxed
as a partnership it falls under the partnership rules. The charging
order applies to limited partnerships and LLCs taxed as partnerships.
In order for an LLC to be taxed as a partnership it must have two members
(the members can be individuals, corporations, other LLCs, partnerships
or trusts).
What Assets
Should Be Placed In an LLC?
- Insurance
policies
- Investments
- Valuable
patents or copyrights
- Property
- Stocks
- Equipment
(especially
the stock of any other corporations you own)
Make sure
to separate safe and risky assets. You do not want to hold
safe assets (stocks) with risky assets (property).
What Are
the Components That Constitute an LLC?
- Articles
of Organization (similar to the Articles of Incorporation)
- Operating
Agreement (similar to the By Laws of a corporation)
- Certificates
(similar to Stock Certificates in a corporation)
The most
critical part of these components is the operating agreement.
NCP’s operating agreement is tailor made and is 23 pages
long! When a creditor goes after the LLC’s assets, all the
protection lies within the operating agreement. Do not rely on a standard
operating agreement offered by many others. A poor operating agreement
may cause a loss of all the LLC’s assets!
The critical
issues to be addressed in the operating agreement include:
- Member
Managed or Manager Managed
- Members’
Rights
- The
LLC’s Capital Structure
- Financing
Mechanisms
- Member’s
Withdrawal Rights
- Duration
of Life
- Rights
to Transfer Membership Interests
In
Nevada, the members are not the proper parties to be named in a lawsuit!
If someone does he or she has broken the law (NRS. 86.381)!
The Limited
Liability Company is a powerful entity to protect assets from the threat
of lawsuits and claims. It would also make sense to separate your
risky assets from your safe assets. For example, hold investments
in one LLC, and heavy equipment and property in another LLC.
In Nevada,
an LLC can hold assets anywhere in the country. In most cases
it is will have to register as a foreign LLC doing business in your
state. An exception to this would be an LLC formed as an investment
company to protect your investments. You can call our offices
for insight to your particular situation (888) 466-7566. As
with the corporation, an LLC should only be formed for business reasons!
You
are welcome to call our office directly for a FREE consultation at (888)
466-7566.
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