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Asset Protection: Limited Liability Companies
Limited Liability Companies or LLCs are a fairly new business form. Even though all fifty States have adopted laws authorizing the use of a LLC as a business entity, these laws range widely from state to state. LLCs combine the advantageous limited liability that is typically associated with corporations, and the tax reporting that is associated with partnerships. From a liability standpoint, LLCs insulate the member’s personal assets from creditors and legal judgments, similar to the way a corporation protects its shareholders.
There are many reasons why people choose to create a LLC over other forms of businesses. The major “perk” of utilizing a LLC in the estate planning sense, is that upon the death of a member of the LLC, the LLC may elect to adjust the basis of its assets. Basically what this means is that LLCs, as with Family Limited Partnerships discussed above, are sometimes used to compress the value of the assets owned by the entity.
Valuation discounts are available because restrictions are placed within the operating agreements on the members of the LLC. The restrictions create minority interests, which in turn, affect the liquidity of the interest, effectively compressing the value of the entity.
People who own investment properties sometimes utilize a LLC to insulate themselves personally from the liabilities associated with owning rental properties. In certain situations it may be advisable to have a Limited Liability Company own the properties. LLCs can also be helpful if you own several properties in several different States. If they are held by a LLC, they will pass outside of probate, and could be distributed to your heirs in days instead of months or years. If you own investment properties and are worried about personal liability, you should consult competent counsel to advise you about using a LLC as an asset protection vehicle.
Because each state has different LLC laws, it is important to choose the right state in which to set up your LLC. For various reasons the State of Wyoming is known as particularly friendly to Limited Liability Companies. Wyoming has no income tax, inheritance tax, gift tax, franchise tax, excise tax, or business tax. Hence Wyoming is a preferred jurisdiction in which to set up business entities like LLCs. The major benefit to setting up a LLC under the laws of Wyoming is the fact that the only remedy Wyoming affords creditors of a LLC, which would include people who have a judgment against the LLC, is a charging order. Therefore there is no way to pierce through the Limited Liability Company and obtain the individual member’s assets. A LLC can get sued and even lose the lawsuit with little consequence to the members of the LLC personally.
A LLC is formed by filing articles of organization with the appropriate State official, typically the Secretary of State. The articles of organization must set forth the name and location of the LLC, and the name and address of each organizer of the LLC; as well as the name and address of an agent for service, one who is available to receive service of process in legal matters concerning the LLC. The name of the business must have Limited Liability Company or LLC in its title to properly advise the general public of its business status.
After the LLC is formed members may enter into an operating agreement, which among other things regulates the affairs of the business, and relations among members and the company. LLCs may put certain limitations in the operating agreement to create situations where valuation discounts can be taken on the gift of minority interests in the LLC.
A LLC can be as effective in compressing the values of minority interest holders as in the case of a FLP. The major advantage of a LLC over a FLP, especially a LLC established under the laws of Wyoming, is that it is a more streamlined entity. FLPs require a general partner and limited partners which each must set up tax identification numbers and bank accounts. A LLC needs just one identification number and one bank account, in essence, cutting the FLP in half. Furthermore, by taking advantage of Wyoming’s laws, you can further insulate yourself from personal liability.
LLCs can be much more than just business entities. They can be used to pass property outside of probate. They can also be used to compress the value of your estate and limit the amount of estate tax exposure. Care should be used when using these business entities in planning your estate.
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