Limited Liability Companies (LLC) in Asset Protection Planning

Limited Liability Companies are outstanding asset protection vehicles. As a business entity the company owners’ personal assets are sheltered from the liability of the business. The business assets are also protected from liability from its owners. If the business faces a lawsuit, the LLC defends the owners from the liability related to business transactions. In addition, when owners are sued personally, there are provisions in the law that protects the assets inside of an LLC from being seized to satisfy a judgment. LLC’s are remarkably beneficial when used to preserve real estate.

A limited liability company (“LLC”) is a non-corporate business, and depending on how it is structured, all owners can have limited liability protection, and all owners can contribute to management and control. In the US, an LLC provides its owners with several taxation options. A single member LLC is treated as a sole proprietorship (disregarded entity) for taxation purposes. With two or more owners, an LLC is 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 merging 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 which makes it the favorite for real estate investments. The LLC blends liability protection with positive partnership tax treatment. Generally, real estate ownership creates the potential for liability with tenant and guest injuries, leases, contracts, environmental laws, mortgages and other laws, nevertheless LLCs are advantageous when used to own assets that create passive income.

Taxes and LLCs

When an LLC is properly structured, it can be classified as a partnership for federal income tax purposes. It can allocate tax items including income, gains, losses, deductions, and credits to its owners in accordance with its operating agreement.

LLC’s that are taxed as a partnership or limited partnerships have no tax advantage. The chief advantage of the LLC as compared to a limited partnership is the limited liability protection afforded to all LLC owners and managers. Limited Partnerships are mandated to have one or more general partners, who are personally liable for partnership debts and obligations. However, as discussed below under Family Limited Partnerships, the general partners can be a corporation, LLC, Trust or other business entity which provides protection to senior family owners by not having to become a general partner. The LLC affords asset protection to its owners regardless of their involvement in management and control of the company’s business affairs.

LLCs are extremely flexible and can be used in estate planning. The majority of an LLC can be owned by children who are non-managing owners, while the parents manage the company. In the operating agreement, non managing owners become managers in the event of the incapacitation or death of the parents. Without transferring assets traditionally, estate taxes are eliminated and the LLCs duration can be perpetual.