LLC: Limited Liability Company
- Services offered in connection with forming your LLC
- Potential Creditors
- Veil Piercing
- Protecting assets from creditors
- Family Limited Partnerships
- Comparison Chart Corp v. LLC v. FLP
An Overview of Limited Liability Company (LLC)
A Limited Liability Company, or LLC is a form of doing business, combining limited liability for all owners (called members) with taxation as a partnership. An LLC is formed by filing articles of organization with an appropriate state official, such as the Secretary of State.
Under the typical LLC statute, the members (analogous to shareholders in corporations and partners in partnerships) are all shielded from the company's debts unless they affirmatively undertake responsibility for such debt, such as by a guarantee to a lender. Also, the Internal Revenue Service has ruled repeatedly in precedential rulings that if the LLC is formed in a particular manner the company would be treated as a partnership for tax purposes.
Services offered in connection with forming your LLC
- LLC name availability search.
- LLC name reservation.
- Preparation and Filing of the Articles of Organization.
- Acquisition of a Taxpayer Identification Number.
- Preparation of a Corporate Binder, which includes:
- The LLC Operating Agreement
- Banking Resolution
- Stock Certificates
- Corporate Seal (optional)
- Minutes of the First (organizational) Meeting of Managers and Members.
- Template for the Minutes of the Annual Meeting of Managers and Members.
- Forms and instructions for the filing of all annual fees.
- Publishing of the Articles of Organization and supporting documentation confirming notice of publication (as required for Arizona Formations).
- Statutory agent for service included for the first two years (Arizona LLC only).
- Assist in the transfer of assets into the LLC or the transfer of ownership of the LLC to a Living Trust. AmeriEstate Legal Plan, Inc. is also available to secure or file any subsequent documents necessary, which may include Certificates of Good Standing, Applications for Authority or New Authority, Amendments to the Articles of Organization, Mergers or Annual Reports.
Creditors are usually characterized as Inside Creditors or Outside Creditors
Inside Creditors: These are creditors whose claim is directed against the business operation or real estate directly. Generally the creditor is limited to remedies against the assets within or inside the entity itself.
Example: a person slips and falls or suffers from respiratory illness stemming from harmful mold related to water damage at an apartment house owned by an LLC. Such as person only has the right to assert the claim against the LLC itself. The manager and members of the LLC have no personal liability to the inside creditor.
First line of defense: Most businesses and real estate operations have liability insurance to protect against inside creditors. However, there is always the danger that the claim is outside of the scope of the insurance policy or that it may exceed the policy limits.
Outside Creditors: These are creditors whose claims arise outside of the purview of the business entity or real estate operation and are generally asserted against the business or real estate owner personally.
Often these are claims against individuals such as auto accident claims in excess of policy limits, other tort liability beyond the scope of personal or liability umbrella insurance. Such claims may also stem from contract claims for personal loans, guarantees and other contractual obligations
This term is a metaphor for the liability protection offered by an incorporated business entity, such as a Corporation or Limited Liability Company (LLC).
“Piercing” the corporate veil is an equitable remedy created by the courts and now in some states codified in state statutes, which allows creditors of a liability limiting entity (Corp or LLC) to satisfy their claims against not only the entity’s assets, but also the personal assets of the owner(s) of the entity.
Factors for Piercing:
Commingling of funds
Failure to observe procedures and formalities
Where the member has all or substantially all control over the LLC. Not enough of an issue to allow piercing by itself especially if proscribed procedures and formalities are followed.
Was there enough cash or other assets available to meet the company’s obligations? Did the company consistently operate at a loss (before depreciation or other non cash expenses)? Did the owner contribute personal funds repeatedly without properly documenting them for example as loans with a stated interest rate?
Typical fact pattern is where a debtor makes transfers (either by gift or “excessive” payment to a particular person or favored creditor) of some or all of his/her/its assets, usually to a party related to or controlled by the debtor, leaving themselves with insufficient assets from which to pay the attacking creditor.
Protecting Assets from Creditors
Charging Orders against LLC’s: A charging order is a court order available to a judgment creditor directed to the LLC of which the debtor is a member. This order essentially grants the creditor the right to whatever distribution would otherwise be due to the debtor member. The creditor cannot participate or influence the LLC and the manager may simply elect to NOT make distributions for whatever period of time. The idea is that the creditor should not be able to interfere with the operations or assets of the company, especially as it could affect members who are not a party to the creditor’s claim.
Resulting Tax liability to creditor: If the creditor obtains a charging order, then the creditor may also be saddled with the liability for taxes on the debtors share of LLC profits, even though such profits may not be actually be distributed.
Charging Order as it relates to Inside and Outside Creditors of a Single Member LLC: An LLC is still effective for asset protection and claims stemming from an inside creditor of a single member LLC. However, based on court rulings in certain states, a client interested in protecting against outside creditors should strongly consider having more than one member in the LLC.
Family Limited Partnerships
Partnerships can either be General or Limited Partnerships. In its most basic form, the general partnership, the income and losses of the partnership business flow through directly to the partners and are not subject to tax at the partnership level. However, all the partners are jointly and severally liable for the debts and judgments of the partnership. Of course, limited partnerships are employed by many to retain these tax benefits but reduce the liability of the partners. Yet, as every limited partnership requires at least one general partner, this leaves at least one person with complete exposure for partnership debts and judgments. One common mechanism is to form a special purpose corporation with finite assets to hold a small partnership interest as general partner. While typically more cumbersome to operate than an LLC, a key advantage of a Limited Partnership in an estate planning application may enable a family member to greatly reduce projected estate taxes by using discounting techniques to gift assets to a lower generation, while reserving complete control over such assets during one’s lifetime
Comparison Chart Corp v. LLC v. FLP
|Annual Minimum Tax (Companies doing business in California)||$800||$800||$800||$800|
|Types of Business Purposes||Any||Any||No Business where a professional license issued by the State of California Except Insurance Agents||Generally family owned businesses or Real Estate or Securities holdings|
|Tax Structure||Double taxation||Similar to Partnership- Pass through to individual shareholders||Similar to Partnership- Pass through to individual members||Similar to Partnership- Pass through to individual partners|
|Separate Tax Return||Yes||Yes- Informational||Yes- Informational||Yes-Informational|
|Annual Registration Fee||$25||$25||$20||$25|
|Limited Liability for Officers/General Partners/Managers||Yes||Yes||Yes||No – General Partner remains fully liable for all debts and obligations of the Partnership, therefore usually you also need to form a special purpose corporation to act as General Partner.|
|Limited Liability for Shareholders/ Limited Partners and members||Yes||Yes||Yes||Yes|
|Annual Minutes Required||Yes||Yes||No||No|
|Discounted Gifting Avail.||No||No||Yes||Yes|
|LLC Fee (CA Only)||None||None||Gross Rev Fee:
$250,000 – $499,999
$500,000 – $999,999
$1M – $4,999,999