Limited Liability Companies, frequently known as LLCs, are a type of business structure allowed under state statute that have both business and estate planning applications, so it’s becoming more and more common to see them referenced in all sorts of transactions.
LLCs were created to be a type of business entity that was not as complex as a corporation, but still gave the liability protection of being an entity rather than a sole proprietorship. In comparison to setting up a corporation, LLCs are easier to establish and have fewer regulatory requirements. They are generally cheaper – in real money and in time – to maintain as opposed to a corporation.
LLCs can have as many owners (called members) as they want, with a minimum of one. Furthermore, members can be individuals, trusts, corporations, etc.
LLCs must have a Registered Agent. This person is the legally designated point of contact for your entity and must be a Maine resident. The Registered Agent receives important legal notices, such as service of process (aka notice of lawsuit), on behalf of your business. The Registered Agent may also serve as a the keeper of your corporate records, making sure documents are filed on time and that Members vote on decisions as required under their LLC Agreement (also known as an Operating Agreement). This role can be held by a member, manager, a separate person, or a professional like an attorney or an accountant.
LLCs can have both owners (members) and managers, if it wants. In a small LLC with only a few members, perhaps all of the members want all of the rights – in which case it would be a member-run entity – but if not, the LLC can vote in a Manager to handle the day-to-day business (making it a manager-run LLC). The LLC Agreement, which is a required document for new LLCs and is strongly recommended for any LLC, outlines what the Managers role is, which decisions require a vote of Members, and how a Manager gets removed / replaced. (The LLC Agreement also defines other important things, like how Membership interests are divided, how distributions or losses are handled, and what happens if the LLC wants or needs to dissolve.)
People frequently wonder if their LLC needs its own EIN (employer identification number). It depends on how it will be taxed – if the LLC is disregarded, it’s taxed to your Social Security Number, so you don’t technically need a separate EIN for it. However, for banking purposes, and other business purposes like contracts, you might want a separate EIN anyway. This is best discussed with your accountant.
For tax purposes, LLCs have a lot of flexibility. They can be treated as a corporation, partnership, or as a disregarded entity (i.e. as part of the LLC’s owner’s personal tax return). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
The most common reason we see LLCs being established is to limit personal liability. If your business is a sole proprietorship, you and your business are legally the same. Your business debts are personal debts. If your business partner or employee is accused of negligence, your personal assets might be at risk. An LLC, however, is legally separate from its owners. LLCs are responsible for their own debts and obligations, and although you can lose the money you have invested in the company, personal assets such as your home and bank account can’t be used to collect on business debts. Your personal assets are best protected if an employee, business partner, or the business itself is sued for negligence.
It’s probably clear that LLCs are a business entity that makes sense if you can check all of the boxes, but how are they used in estate planning?
- We see them used for people who rent property. Say you have a vacation home and you’re putting it up on a rental site. If you create an LLC to own or lease the property, and everything is properly titled, you can limit your personal liability while running your rental “business.”
- LLCs can be used as a way to manage family properties. (This can be done with trusts, as well; a good estate planning attorney will be able to help you figure out which makes more sense for your situation.) In a family property LLC, there can be rules in place on how interests get passed down through the generations, how expenses will be assessed, and how to value interests if someone wants to be bought out.
- An LLC can be a way to gift partial interests in real estate between members without having to file a new deed each time. You would want to be working with an accountant if this is your goal.
One of the challenges of using an entity like an LLC is that it can only protect you if you do everything properly. You must file an annual report with the state, you must have accounts or other assets properly titled, you must be careful not to commingle assets, you must sign checks in your capacity as Member or Manager, you must properly file / pay taxes if applicable, etc. The IRS can claim that your entity is not really separate if you are not adhering to LLC rules; they can claim that it’s your Alter Ego, meaning your personal assets are subject to the same liability as your business assets.
This is a complex area with a lot of possibilities to consider. Researching it on your own to understand the nuances is encouraged, but you should ultimately have a knowledgeable accountant and attorney help you to establish what you need.
The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless agreed to in writing. Please contact us to discuss your particular situation.