LIMITED LIABILITY COMPANY

     Today, many business owners are choosing to operate as a limited liability company (referred to an “LLC”) instead of the traditional corporation or partnership. The LLC is a legal entity created by statute and is available in every state. The purpose of the LLC is to allow individuals to conduct their financial and business affairs efficiently and easily by combining the best features of corporations and partnerships while eliminating many of the problems and complexities associated with them.

     The LLC provides the protection from liability of a corporation without the formalities of corporate minutes, bylaws, directors and shareholders. The LLC is treated like a partnership for tax purposes, meaning that the LLC pays no income tax, and all of the income and deductions flow through directly to the members’ personal tax returns. Further, the owners are can adopt very flexible rules regarding the operation of the business.

Example

     Let’s analyze the benefits of the LLC versus the corporation and partnership.

    Bob and Joan own a commercial rental property in their own names. Holding the property in this manner exposes all of their personal assets to potential liability from anything that might go wrong concerning the building, such as injuries to tenants, problems with lenders, lawsuits from future buyers. A lawsuit or claim against Bob or Joan that is unrelated to the building, exposes the building to that claim. Therefore, owning the building individually is not sound business planning. What else can they do?

Option 1: Corporation

     Bob and Joan could transfer the property to a corporation with each owning stock in the company. The law provides that the shareholders are not responsible for debts of the corporation, so a liability arising out of the property would not subject Bob and Joan's personal assets to danger. However, this protection against liability is not available if all of the corporate formalities are not carefully followed, such as maintaining proper corporate records and documentation. Further, corporations are subject to complex tax rules and the corporation will not offer protection of the property if there is a claim or lawsuit against Bob or Joan that is unrelated to the property. A creditor can simply seize the stock which they own and reach the building by dissolving the company.

Option 2: Partnership

     If Bob and Joan form a limited partnership to hold the property, at least one of them must serve as general partner. Since the general partner has unlimited liability for the debts of the partnership if something happens with the building, the general partner's assets will be exposed to that claim. Although there are no adverse tax consequences and, as previously discussed, an outside creditor of Bob or Joan would not be able to reach the property in the partnership. A creditor suing Bob or Joan for an outside liability would not affect the property in the partnership.

Option 3: Limited Liability Company

     By forming an LLC, Bob and Joan are protected from any claims relating to the building. An LLC is easier to manage because it is not required to keep minutes and extensive documentation and it cannot be pierced and the members cannot be sued for failure to follow formal procedures. Another advantage is that property held in an LLC is protected from potential claims against a member. The creditor is limited to the ineffective charging order remedy.

     Finally, all income of the LLC is passed through directly to the personal returns of the members avoiding the complications and double taxation of corporations.

     The advantages of the LLC may make it the best choice for many business arrangements. The LLC is a flexible and convenient way to protect assets from the threat of lawsuits or claims and can be designed to accomplish many of your personal planning and asset protection objectives.

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