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LLCs- Limited Liability CompanyBenefits of Creating a Limited Liability Company
There are many reasons to create an LLC. Here are some common reasons. (a) Provide Asset Protection and Protect Against Future Creditors of MembersA Limited Liability Company provides considerable asset protection to members carrying on a business. The LLC limits the personal liability of limited members to the Company’s creditors as pointed out above since limited members risk only their investment to the creditors of the company. An LLC also provides some protection from the judgment creditors of the individual limited members if a judgment is entered against the member after the creation of the company. LLCs protect family assets from claims of future creditors of members as a result of basic equitable principles. For example, if future creditors of a particular member were able to acquire assets, all the members would suffer as a result of the actions, or inactions, of a single member. Basic equitable concepts do not support punishment of an innocent group of members for the actions of another member. The LLC provides asset protection by dictating the rights of a member’s creditor. Creditors of a member generally have no right to become a member, to demand company assets, or to compel distributions. Generally, the law of most states provides that a judgment creditor may only levy on assets that are distributed out of the company to the member. For many professionals, and for people with wealth, the asset protection features of the LLC are often the most substantial business purpose for creation of the entity. (b) Avoid Living and Death Probate and Maintain PrivacyCreation and funding of an LLC can assist in preventing assets from going through probate upon the disability or death of a member. Alternatively, owning LLC interests or shares can simplify a guardianship or conservatorship proceeding, and also death probate. It is usually in the best interest of the LLC and the members to simplify such proceedings. The details of investment activities and the nature of LLC assets themselves are part of the public record. The Certificate of Formation (may be called Articles of Organization or a similar name depending on your state) of the Limited Liability Company is filed with the state to form the entity and it generally contains only basic information required by the state. An LLC can be a cleaner planning tool to use in controlling property compared to forms of title such as joint tenancy with right of survivorship (JTWROS.) JTWROS is commonly used on bank accounts and brokerage accounts as a way to avoid, or at least postpone, the death probate process. Joint tenancy is not the optimal way to hold title to many assets for a variety of tax and estate planning reasons. Doing so can completely frustrate the distribution of an estate. LLC ownership can effectively thwart the unintended use of joint tenancy. (c) Restrict the Right of Non-Members to Acquire InterestsThe LLC restricts the right of non-members to acquire interests in LLC assets. The LLC also may prevent the transfer of a member’s interest in the LLC as a result of a failed marriage. No matter how careful other planning may be, unexpected divorces, successful creditor claims, and even adverse court rulings can frustrate both business and family intent and force unwanted communications and relations between ex-family members. Proper planning using an LLC can streamline and facilitate the settlement process between them. (d) Prevent Commingling of the Assets of Gift RecipientsThe LLC creates a simple way to prevent gifts made to family members from being commingled in that family member’s marriage. Limited Liability Company shares or units (LLC units) can be transferred directly in the name of the recipient family member, or in a separate property trust created for him or her. This establishes the property as separate property, and using a trust to own that property tends to make it impossible to commingle with other marital assets. Keeping separate assets separate allows tracking and maintenance of separate property in case of marital dissolution. (e) Allow for More Flexible Business PlanningThe Limited Liability Company is more flexible than most other available business planning tools such as a general partnership, limited partnership, or corporation. Owners of interests in LLCs are not required to recognize gain or loss in connection with liquidation except to the extent that any cash received or deemed received exceeds the adjusted basis of a member’s interest in the LLC immediately before the distribution. (f) Centralized Management of InvestmentsThe LLC can hold investment assets and be structured to provide for centralized management. An older generation of family members such as parents or grandparents that create an LLC may retain fiduciary control of the enterprise and even introduce descendants to the management process over a period of time. Business succession planning encourages the founders or older generation of a family to train successors or descendants and appoint someone to manage business wealth and monitor decisions. It is important to understand the interplay between retaining control and making certain that any member also acting as a manager, whether directly or indirectly through a management trust or entity, acts as a fiduciary. Recent court rulings and IRS interest makes clear that failure to do so can result in potentially adverse tax consequences. Pooling of assets often reduces management costs and may also achieve better rates of return. It is easier to manage one portfolio than several scattered portfolios. Furthermore, the use of the LLC as a holding company may result in lower asset management fees and easier diversification of assets. (g) Easier to Make Loans or Purchase SharesThe LLC may make loans permitted by the LLC agreement. When a member needs funds for specific personal needs, for example an education expense, and the member’s capital account is not sufficient, a loan may be made which could be repaid from subsequent company distributions, or LLC units may be repurchased for fair market value. Loans or purchases must be properly documented in order to minimize the risk that the IRS will later deem these transactions as gifts or to support an argument that the company is not a business and should be disregarded. (h) Valuation Adjustments on Company InterestsIf a member transfers an LLC unit by gift or sale or if a member of the LLC dies, a valuation usually must be made to determine what the transferred interest is worth. Fair market value of Limited Liability Company units (LLCUs) is lower on a “going concern” basis (asset value adjusted for lack of marketability of the LLC units representing ownership in the LLC) than on a “liquidation” basis (value of the underlying assets.) The reasons for this anomaly are based in equitable and business principles. Inherent restrictions on the rights of members under Limited Liability Company law and the specific limitations imposed on LLC units under the Limited Liability Company agreement generally result in LLC units having a fair market value that is substantially less than the value of the underlying assets of the LLC. This is termed a “discount” or valuation adjustment. An outside buyer of LLC units faces the reality that although the buyer might gain a good investment in exchange for a purchase price, he or she could exercise little control over benefits received or the actual assets the interest represents during the term of the LLC. Similarly, gifting of LLC units during the donor’s lifetime may result in gift tax savings. Gift tax savings exist because the gift of a fractional or non-controlling LLC interest can often be valued at far less than the interest’s fractional share of the LLC as a whole. For example, if a parent gives a child a 5% interest in the LLC, the value of the interest will be reduced by adjustments made for lack of marketability and also for lack of control. If the asset share value is discounted by fifty percent, for example, the annual gift tax exclusion or the applicable exclusion amount used to cover the gift is effectively doubled. (i) Reduce State TaxesA Limited Liability Company may not be subject to corporate income tax or franchise tax in certain jurisdictions while other forms of business might be. [In some jurisdictions, however, the LLC is subject to taxes which are not applied to other kinds of business entities.] (j) Reduce Income TaxesIncome distributed to minority owner members or members who do not participate in management may not be subject to self-employment tax that reduces overall income tax. Spreading income among lower income tax bracket family members may also reduce income taxes. Younger family members participate in the growth of all assets in the LLC at income tax rates that may be lower than the creators of the LLC. This can be done through the use of profit distributions to members, or through the use of management fees paid to a manager (which are generally subject to self-employment taxes). Dissolving a Limited Liability Company taxable as a disregarded entity or partnership has less onerous tax consequences than dissolving a corporation. Since a Limited Liability Company taxable other than as a C corporation is a conduit for federal income tax purposes, the tax consequences upon dissolution may be far less significant than upon the dissolution of a C corporation. (k) Facilitate Annual GiftingOne of the primary benefits of the LLC is its ability to maximize annual tax-free gifts to family members. Under current federal law, estates greater than $2,000,000 (in 2007) are taxed at rates from 37% to 48% (47% in 2005, 46% in 2006, 45% in 2007 – 2009, 0% in 2010, and 55% in 2011 and thereafter). State laws may differ. At present, each person may transfer $13,000 gift tax-free per person each year, or $26,000 each year for married couples, without triggering gift tax. (Rules for gifts to a trust may differ.) Some people don’t want to give up management of assets while they are alive, or don’t have sufficient disposable cash on hand to give it away. Yet they desire to make gifts to others to reduce their taxable estate, or for other reasons, and might be willing to make gifts of partial interests of property. The LLC facilitates annual gifts through gifts of LLC units either made directly to beneficiaries or to trusts for their benefit. LLC units are gifted, not the assets held by the LLC. For the donee this is similar to receiving shares of stock in a corporation. The donor owns a percentage of the entire LLC. It is important that the value of the gift be substantiated by appraisal of the underlying assets followed by valuation of the LLC units and the donor should consider filing a Federal Gift Tax Return to start the statute of limitations running for the gift. LLC management may be structured to allow younger family members, key employees, or others an increasing investment and business decision-making role over time. In the family setting, family members may begin to accumulate an equity interest within the LLC that can be used for education or other needs. Those who manage the LLC have considerable discretion to retain and reinvest income from LLC operations or to distribute it. Most LLCs make distributions and are managed to distribute annually at least enough income to pay income tax attributable to each member’s share of the distributable profit of the LLC or more. It is important to provide some benefits to members to avoid the IRS contention that gifts of LLC units are future gifts, without a current measurable benefit, usually a bad tax outcome. The LLC avoids fractionalizing family assets to make annual or other gifts. This simplifies the process of gifting and property management. Since LLC units are not liquid assets, and are not freely assignable, the donor of the LLC units retains a degree of control over the gift if in a position to participate in management of the LLC. Furthermore, in a non-family business setting, management of the LLC can be performed by non-family members while the family member gift recipient receives something that provides real present value that is not easily lost or misspent. |
 BUY SELL AGREEMENT
Why enter into a Buy-Sell Agreement? 1. Create a market for the owner's business interest 2. Provide for mutually agreeable price and terms 3. Facilitate smooth transition of management and control of the business interest 4. Assure owner that future of surviving family members is not dependent upon the business 5. Provide liquidity to pay taxes and settlement costs 6. Often can help establish the value of the business interest for estate tax purposes 7. Reduce potential for discord and litigation |
