Limited Liability Companies (LLC) in Asset Protection Planning

Limited liability companies are exceptional asset protection vehicles. As a business entity, the personal assets of the business owners are protected from business liability. Business assets are also protected from the liability of their owners. If the business faces a lawsuit, the LLC defends the owners from liability related to business transactions. Additionally, when owners are personally sued, there are provisions in the law that protect assets within an LLC from being seized to satisfy a judgment. LLCs are very 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 offers its owners several tax options. A single member LLC is treated as a sole proprietorship (excluded entity) for tax 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 the partnership tax classification, the LLC can provide advantages that are not available to corporations, partnerships, or limited partnerships.

LLC Real Estate Protection
The LLC offers asset protection, making it a favorite for real estate investments. The LLC combines liability protection with positive corporate tax treatment. Generally, real estate ownership creates the potential for tenant and guest injury liability, leases, contracts, environmental laws, mortgages, and other laws; however, LLCs are advantageous when used to own assets that generate passive income.

Taxes and LLC
When an LLC is structured correctly, it can be classified as a partnership for federal income tax purposes. You can assign tax items, including income, gains, losses, deductions, and credits to their owners in accordance with your operating agreement.

LLCs that are taxed as a partnership or limited partnerships do not have a tax advantage. The main advantage of the LLC compared to a limited partnership is the limited liability protection that is provided to all owners and managers of the LLC. Limited partnerships are mandated to have one or more general partners, who are personally liable for the debts and obligations of the partnership. However, as described below in Family Limited Partnerships, general partners can be a corporation, LLC, trust, or other business entity that provides protection to older family owners by not having to become general partners. The LLC offers asset protection to its owners regardless of their involvement in the management and control of the business affairs of the company.

LLCs are extremely flexible and can be used in estate planning. Most of an LLC can be owned by children who are not owner-managers, while the parents manage the business. In the operating contract, non-managerial owners become managers in the event of parental disability or death. Without traditionally transferring assets, wealth taxes are eliminated and the duration of LLCs can be perpetual.

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