Limited Liability Company
Limited Liability Companies are outstanding asset protection vehicles. As a business entity the company member’s (owners) personal assets are protected from the liability of the business. The business assets are also protected from liability from it’s members. If the business is sued the LLC shields the members from the liability related to business transactions. In addition, when members are sued personally, there are provisions in the law that protect the assets inside of an LLC from being seized to satisfy a judgment. LLC’s are exceptionally beneficial when used to safeguard real estate.
A limited liability company (“LLC”) is a non-corporate business entity, in which, depending on how it is structured, all members can have limited liability protection, and all members can participate in management and control. In the United States, the LLC gives its members several taxation options. By default, a single member LLC is treated as a sole proprietorship (disregarded entity) for taxation purposes. With two or more members, an LLC taxed as a partnership rather than a corporation for federal income tax purposes. LLCs can be taxed as a corporation or even an S corporation. By combining limited personal liability with partnership tax classification, the LLC can provide advantages that are unavailable to corporations, partnerships or limited partnerships.
LLC Protecting Real Estate
The LLC offers asset protection benefits making it the preferred vehicle for real estate investments. This is because it combines liability protection with favorable partnership tax treatment. Although real estate ownership crates potential liability with tenant and guest injuries, leases, contracts, environmental laws, mortgages and other laws, real estate investors prefer LLCs because they are advantageous when used to own assets that create passive income.
Taxes and LLCs
Accordingly, an LLC, if appropriately structured, can be classified as a partnership for federal income tax purposes. Therefore, it will be permitted to allocate tax items including income, gains, losses, deductions, and credits among its members in accordance with its operating agreement.
There are no major differences in the federal income tax treatment of LLC’s that are taxed as a partnership or limited partnerships themselves. The principal advantage of the LLC over the limited partnership is the limited liability protection afforded to all LLC members and managers whereas Limited Partnerships are required to have one or more general partners, who are personally liable for partnership debts and obligations. The LLC affords asset protection to its members regardless of the extent to which they participate in management and control of the company’s business affairs.
LLCs are so flexible, they can be used for estate planning purposes. The majority of an LLC can be owned by children non managing members, and the parents manage the company. In the operating agreement, non managing members become managers upon the incapacitation or death of the parents, in this case. Without transferring assets traditionally, death taxes are eliminated and the LLCs duration can be perpetual.
A very effective asset protection service plan would use an LLC, depending on the client’s needs. The specific arrangement would depend on a individual’s particular circumstances, business activity, and the type of assets owned.