What are the Advantages
of
a Limited Liability Company?
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
(800) 351-5111. As with the corporation, an LLC should only
be formed for business reasons!
