Ten Tips In Forming Limited Liability Companies

Jun.22.2011

COPYRIGHT AND DISCLAIMER

The following article and all information contained on this website are for informational purposes only and do not constitute legal advice. This information is not intended to create an attorney-client relationship, and the receipt or viewing of it does not create or constitute an attorney-client relationship. You should not act upon any information contained on this website without consulting an attorney for individual advice regarding your own situation.
© 2012 Buckley Law All rights reserved.

Share:           

  1. LLCs are usually used for real estate holdings but more and more LLCs are used for operating businesses.
  2. For a client who has a lot of rental properties, I create a master LLC and a separate subsidiary LLCs for each property.
  3. Default Rules: A single member LLC owned by an individual is treated as a sole proprietor for tax purposes. A single member LLC owned by a corporation is treated as a division of the corporation. Multiple member LLCs are treated as partnerships for tax purposes.  LLCs can elect different tax treatment i.e. Sub S corporation by filing Form 8832.
  4. Clients should be aware that active members of the LLCs will pay self-employment tax on their earnings.  Passive members (like limited partners) will not pay self-employment tax on their earnings.
  5. Client must choose between a manager-managed LLC or a member-managed LLC.  Even member-managed LLCs often choose a managing member to act for the LLC. Managers do not have to be members of the LLC although they often are.
  6. LLCs that are taxed as partnerships must maintain capital accounts and follow the capital account accounting requirements.  This can become an issue when there are distributions disproportionate to the ownership percentages or units.
  7. LLCs should have clearly drafted distribution provisions especially in a business LLC.  The LLC should provide for sufficient distributions to pay taxes on the profits of the LLC so called “phantom income”.
  8. Some LLCs provide for “guaranteed payments” similar to a draw or salary that are distributed before profits are distributed by units or ownership percentages.  This is particular true in a business LLC.
  9. LLCs should have buy-sell and valuation provisions in the event of withdrawal, death, disability, insolvency or expulsion of a member.  LLCs usually require approval of the remaining members to admit a new member.  Absent the approval of the remaining members, the new prospective members are assignees who have only an economic interest and no voting rights.
  10. LLCs provide asset protection for two or more members because normally a court cannot compel distributions to the members except in accordance with the operating agreement.

Share: