Limited Liability Corporations

You have seen that many businesses list LLC following their name. Previously these companies listed Inc. or Corp. following their name. A Limited Liability company is the type of business of choice if the business fits under the rules of the California Corporation Code.

1. Limited Liability companies provide more flexibility under the tax codes than corporations.
2. LLC's provide stronger asset protection than corporations.

Because most owners of businesses incorporate for protection of their personal assets, the LLC has become popular in California and even more so in other states. California does not permit businesses which require California State Licenses under the Business and Professions code to form LLCs. That Limitation prevents many businesses such as Real Estate Brokers, Contractors, Attorneys, and CPAs to form LLCs. Active legislation is being introduced to eliminate that problem.

General structure of an LLC consists of a managing member (or members) and members who hold an economic interest in the LLC. Ownership is represented by Certificates of Membership. Certificates of Membership are similar in nature to Shares in a corporation. The managing members manage the day to day operations of the LLC. The capacity of a managing member is similar in nature to the Board of Directors of a corporation.

The assets of the LLC are completely protected by the LLC from creditors. The personal assets of the owners of the LLC are protected by the LLC from creditors. Until there is a change in the law, the LLC provides an almost ironclad asset protection tool.

There is a judicial doctrine of piercing the corporate veil which can he ised to reach the assets of a corporation and the personal assets of the owners of a corporation. There is no such doctrine for LLCs. In more than 30 years of practice the doctrine of piercing the corporate veil has not been used successfully against any corporation that I have formed and counseled.

The LLC consists of owners, managers, and employees. Since the year 2000, California permits a one person LLC. Therefore the owner, manager and employee may be the same person.

The LLC consists of the articles, certificates of ownership and an operating agreement. The operating agreement will have many standard provisions to meet the Corporations Code requirements for an LLC. The operating agreement is quite flexible in providing powers of the owners and managers. The owners receive certificates of ownership and have the powers granted inder the operating agreement. While the Corporations Code does not require an annual meeting, an annual meeting is recommended to insure the managers and owners are complying with both the operating agreement and any requirements that might new imposed by the Corporations code.

Estate Planning Tool

The LLC is extremely helpful in substantial estates for estate planning purposes. The LLC can take a discount up to 25% of the value of the assets held by the LLC for estate tax purposes. Real estate valued at $1,000,000.00 could be valued as low as $750,000.00 for estate tax purposes. An estate with assets totaling $5,000,000.00 would pay an estate tax of $1,500,000.00 without estate tax planning. With an AB trust the tax would be reduced to approximately $500,000.00. By incorporating the assets into an LLC, the state would be valued at $4,000,000.00. With AB trust and the LLC, the estate tax would be zero, a saving of $1,500,000.

Primary Characteristics of LLCs:

1. The asset management and control is held by the managing member;
2. The LLC can hold specific types of investments. The LLC Act limits the types of investments to those more conservative in nature, however, the LLC can opt out of the act and engage in any other lawful investment as long as the Business Judgement Rule is followed or any other standard specified in the operating agreement;
3. Disproportionate Distributions are allowed;
4. The right of a creditor to compel distributions of principal and income is limited by the terms of the operating agreement. The agreement may specify that the distributions are mandatory or discretionary.
5. The managing member is not liable for the debts of the business, unless the managing member commits a tort (auto accident).
6. The non-managing members may not reach and withdraw the assets of the LLC;
7. Membership interests are subject to reasonable valuation discounts for the purposes of estate planning;
8. Contributions of membership interests to heirs or others will qualify for the annual exclusion for gift tax purposes;
9. Most important aspect and distinguishing characteristic of the LLC is that at formation, the decision can be made to either be taxed as a corporation or to be taxed as a partnership, thereby allowing the flow of income and losses directly to the members in proportion to their ownership interest;

FEES FOR FORMING AN L.L.C.