Limited Liability Companies (LLC)

TAX COMPLIANCE AND THE CORPORATE SHIELD

The two main reason for using LLC's are 1. For titling of Real Property (and other assets) (see chart below) or for companies with unmanageable income or income with limited operating cost. A business organized for purposes other than banking or insurance may within the previously defined purposes find it advantageous to establish itself as a Limited Liability Company rather than as a corporation. A Limited Liability Company (LLC) is a hybrid between a corporation and a limited partnership. Members are afforded the limited liability of corporate shareholders and the pass through tax advantages of a partnership without the restrictions imposed on limited partnerships and Subchapter S corporations. Management and ownership may be structured in any fashion as specified in the Operating Agreement, thereby allowing for total flexibility in income distribution. In addition, the Operating Agreement is not required to be publicly filed, maintaining confidentiality of the ownership structure.

The principal issue when forming an LLC will be whether pass-through taxation is desirable; if not, the LLC can be structured to be taxed as a corporation. The LLC can be organized with two or more members. Members may be any person or legal entity, domestic or foreign, who own an interest in the company. Members have no liability of NRS in Nevada, Chapter 86, for the debts, obligations or liabilities of the company to any third parties, whether any such debts, obligations or liabilities arise out of contract, tort or otherwise, solely by reason of being members of an LLC. An LLC requires no general partner, so all of the members have the same limited liability, regardless of ownership interest.

ADVANTAGES OF FORMING AS AN LLC

  • LLCs may operate with a single Manager, Real property recorded in an LLC has tremendous benefits see Chart with explanation.

  • Unlike a Limited Partnership, a Limited Liability Company is not required to declare a general partner. The manager of a Limited Liability Company does not have to maintain a one percent interest in the entity; therefore the personal assets of the manager can not be attached by a creditor seeking payment of a Limited Liability Company debt. Furthermore, no member of a Limited Liability Company may be held fully liable for any debts of the company.

  • LLCs can allocate specifically any distribution of income, gain, deduction, or loss among its members. Stockholders of corporations organized under Subchapter S of the IRS guidelines are limited to distributing interest among its shareholders in proportion to holdings of capital.

  • The entity may have any number of stockholders, unlike a sub S corporation that is restricted to a maximum of 35 investors. In addition, corporations, partnerships, certain kinds of trust, and non-resident alien individuals are restricted from being shareholders of a sub S corporation. LLC's are not subject to these restrictions.

  • LLC operating costs are inherently lower than those of a sub S corporation.

  • Whereas a general partner may not be removed by members of the Limited Partnership, an LLC is not required to declare a general partner. Managers designated by members of an LLC may be subject to removal if desired.

BUSINESSES WHICH BENEFIT MOST FROM BECOMING AN LLC

Companies that are closely held entities not to be traded publicly in the near term may benefit from organizing as an LLC. See Charts Business activities which typically benefit from organizing as an LLC include:

  • Real Estate Developers - Members may contract debt (acquire loans) on behalf of the LLC. Once the property is acquired, any income, gain, deduction, or loss may be specifically allocated among the Members. This combination of provisions essentially allows for the transfer of capital gains from one member to another.

  • Corporate Joint Venture - Rather than using wholly owned subsidiaries to establish a general partnership joint venture, corporations may form an LLC that will provide the same amount of limited liability as well as pass-through taxation.

  • Subsidiaries of Sub S Corporations - A sub S corporation may not own more than 80% of an LLC subsidiary corporation; however, a sub S corporation may form a wholly owned subsidiary LLC. Owning the subsidiary LLC would allow the parent S corporation to expand its resource base.

  • Venture Capital Vehicle - LLCs allow considerable opportunities for investment of company capital into income-generating ventures since the potential number of investors are unlimited. Venture profitability can be enhanced further when members are structured as offshore corporations. This not only allows for reduction in tax exposure, but also a greater level of asset protection and scrutiny. Bahamas Incorporation Services are available through Inc Legal Services Please call for additional information.

  • Small or Family Businesses - LLCs are ideal for small or family-operated businesses. There is total flexibility for structuring management and ownership, and members avoid double taxation.

ORGANIZATIONAL DIFFERENCES AMONG THE STATES

There are four important distinctions among the States:

  • Dissolution Date - California must specify a dissolution date, which may be at any point in time. Neither Nevada nor Delaware may specify a period of duration greater than 30 years. Wyoming has no limit, and may designate "perpetual" as a period of duration if so desired.

  • Cash Contribution Disclosure - Organizing in Wyoming requires disclosure of the total amount of cash contributed to the company as well as the total cash value of property contributed to the company at the time of formation. Nevada and California have no such requirement.

  • Freedom of Contract - Delaware will only provide rules for matters on which the Members of the LLC have failed to agree as per the Operating Agreement. This contractual flexibility as defined by Delaware Corporate Statutory Law is superior to that of any other state.

  • State Taxation - Nevada and Wyoming do not have a State income tax; California levies an annual franchise tax of $800.00; Wyoming levies an annual State tax on LLCs of $100.00; Nevada requires an annual List of Officers or Members filing, fee $100.00; Delaware levies an annual franchise tax of $30.00.

TAX AND OPERATING DIRECTION

Limited Liability Companies are taxed as a "pass-through" entity, unless otherwise structured in the organizational documents. Please see page 2 under the heading "Tax and Operating Direction" for a more detailed explanation.

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