LLC – Limited Liability Corporation

LLC – Limited Liability Corporation

Quick Overview

• For asset protection purposes: A LLC is a private entity established mostly for the purpose of creating a degree of separation between the debts, obligations and liability of the owners and the debts, obligations and liability of the business LLC.
• LLC’s are very flexible and have a vast array of uses.
• They are quite effective for property ownership.
• Relatively easy and inexpensive to set up.
• Creates a corporate veil between owners and company.
• LLC’s have many tax options.
• Has “outside and inside” protection.
• Several drawbacks to consider regarding single member LLC’s as opposed to multiple party LLC’s.

BENEFITS

Limited Liability

• The biggest benefit of an LLC is that all owners of a LLC are protected by corporate veil from being personally liable for the debts, and lawsuits of the LLC.
• Any LLC is its own separate entity. This means that any LLC is basically a legal person separate and apart from its owners. This is also important to note from a business continuity perspective. If a member, manager or a key employee dies or leaves the business, the business still continues.

Management Structuring

• A LLC creates flexibility when deciding how a business will be managed. The members of a limited liability company can choose between two simple management structures: management by members or management by designated manager.
• This benefit of an LLC allows members great elasticity in deciding the rules and bylaws with regards to the LLC management and governance.
• LLC laws intentionally impose very few formalities when it comes to limited liability company decision-making among members and managers.  This provides great benefits of an LLC because the owners can concentrate more on operating the business than worrying about formalities or upkeep.  Regardless, some limited liability company maintenance is recommended or required to retain the limited liability benefits of an LLC.
• LLC laws are focused on creating the ability for contractual flexibility.  LLC’s are designed so they allow members themselves to decide on important issues such as: ownership structure, right to profits, voting rights and many other aspects of the member relationships between both each other and with the limited liability company itself.  This allows an LLC to be used for many different types of businesses. LLC’s can be very simple or extremely complex, and cab be tailored to each individual situation.

TAXES

• The tax choices for an LLC are very advantageous. The IRS passed a regulation which cause the limited liability company to become a popular business vehicle for small business. “Check the Box” regulations, allow the members of the LLC to choose how the LLC will be taxed for federal income tax purposes.
• For a single member LLC that is owned by an individual, the limited liability company can have simple sole proprietorship federal income taxation but without the personal liability of sole proprietorships. Sometimes single member LLC’s can be owned by other entities- (If a C-Corp was the only owner of an LLC) in this situation, the tax choices afford the business freedom from complex consolidated return regulations.
• For multi-member LLC’s, laws allow partnership pass-through taxation. This is useful in that the limited liability company doesn’t to comply with many complex rules normally imposed upon a corporation that utilizes pass through taxation. Additionally, both a single member and multi-member LLC can each choose to be taxed as a corporation. The tax benefits of an LLC often provide more choices than other legal entities.

Important to note:

1. Always register your LLC in a state that only allows creditors a charging order as the sole remedy by statute.
2. If it is important, make sure you register in a state that allows anonymous managers, or use a nominee manager.
3. Make sure you have a well formulated and thought-out operating agreement in writing.

Courts have continually ruled that there is a distinction between an LLC and the owner of the LLC – and that the owners are insulated from the debts of the company.

You can register your business in an LLC in any state, and you would be wise to do so in a state that provides you with the most rights. Some of the most popular States for LLC’s are Wyoming, Delaware and Nevada. This is because the case law in these states is well developed.

Weaknesses

Be aware, that courts can pierce the corporate veil of LLC’s when fraud or falsification is involved, or under certain situations where the owner uses the company as an “alter ego.”

SINGLE MEMBER LLC’s – are an interesting topic. Many recent court cases have weakened the effectiveness of single member LLC’s.

LLC charging order protections MAY not apply to a single member LLC. A 2003 Federal bankruptcy court case (in Re Albright – Albright court case) ruled that LLC charging orders don’t apply to single member LLC’s. Furthermore, The Florida Supreme Court has ruled that Florida’s LLC laws do not provide asset protection to a single-member limited liability company.
They held that: ”a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment”

This court case does not apply to every instance of single member LLC’s. There simply is not enough case law at this time. Be aware that other state LLC’s carry considerably better established case law, and that courts have consistently ruled that multiple member LLC’s are protected. Most recently in Dover Phila Heating v. SJS Restaurants 185 Ohio App.3d 107, 2009-Ohio-6187.