LIMITED LIABILITY COMPANY

Overview

• Business is a separate legal entity from its owners.

between them.

• Capital can be raised through the sale of company interest.

• The entity does not pay taxes. The income, deductions, and credits are applied to the members

in portions set forth in an LLC agreement and the members report these on their personal

income tax returns. The members, however, are taxed on allocations, not distributions of the

profits, meaning they owe taxes even if they decided to reinvest the profits rather than take it

for themselves.

• No strict formalities like those of a corporation, though certain procedures should be followed

to ensure optimal results for the LLC and its members. (See below for LLC formalities.)

Cons

followed and adhered to in order to fully enjoy the benefits afforded by the LLC.

• Having a well written Operating Agreement in place, with well-defined roles for members, well

outlined distribution guidelines, and operational and taxation rules.

• Adequate records for all transactions and business engagements, as well as properly written

minutes of meetings (at least one state, Tennessee, requires an annual meeting of the

members). List of members, past and present, articles of organization, tax returns for the past

three years, bank statements, resolutions authorizing activities that, either by law or under the

terms of the operating agreement, require a vote of the members, etc. Are all examples of the

types of records and written agreements that should be properly maintained by the LLC

• Adequate capitalization for the company and maintaining proper operating capital

agreement, and this agreement is taken into consideration by the courts and tax authorities

when a determination is made as to the operation of the LLC.

• Deficient or inadequate capitalization is another important deficiency that a court or tax

regulator will examine when determining the intent of the LLC and its member’s and will usually

factor heavily in their decision to pierce the veil. It is important that an LLC be properly

capitalized and funded, and that the members manage the funds properly in order to run

business properly. Siphoning too many assets or capital and leaving too little in the coffers to

satisfy creditors or company operations may lead to a veil-piercing determination.

funds or accounts will almost certainly lead to an “alter-ego” determination by the courts or a

tax regulatory board and will lead once again to veil piercing--thereby risking personal assets

and stripping members of the liability and asset protection. It is a best-practices act to make

The courts and tax regulatory boards regularly examine the financial dealings and workings of an

LLC to determine whether it is a working business or an independent profit center for its owners

or members. If it is deemed an independent profit center, the veil could be pierced and there

can be tax penalties and liabilities against the owner or members personally.

An LLC should pay and guarantee its own debts, unless specifically outlined in the operating

agreement for specific requirements for such things as the rental or leasing of real property, etc. At

times, if an owner or member regularly guarantees or pays debts, he will have been shown to act as

an alter ego of the LLC and hence will cause that LLC to lose its separate entity status. Owners

should not pay or guarantee the debts of their own LLC unless it is specifically outlined in the

management and restrictive rights of future creditors. Whenever feasible, separate LLCs

should be used with each piece of investment property. This usually insulates assets and

prevents cross-liability, keeping all of the eggs out of one basket.

o It is worth noting that, in order for an LLC to hold a piece of real estate, the LLC must

be listed as the owner on the deed to the property. Often, this means that the

individual must transfer the property to the LLC. The deed of transfer must be

recorded at the applicable registry of deeds. This may cause an issue if a bank has

issued the individual a mortgage in his/her individual name. Often, the lender will not

allow an individual to transfer the property to the LLC without being in default of the

mortgage. It is best to consult an attorney before making the transfer. Ideally, the LLC

suffers damages resulting from food poisoning and wins damages in a lawsuit not covered by

insurance, he becomes a judgment creditor. If separate LLCs are used for the business

operations and the real estate, the judgment creditor may only be entitled to a judgment lien

LLCs are often used in major real estate deals.

• Financing through an LLC. Frequently, real estate investors use a single member single

purpose LLC to hold property. Often securitized loans require specialized LLC operating

agreements for financing at the best rates to allow the loan to be bundled into a fund that is

traded on the stock market.

• Holding tangible personal property. “Hotter” assets, such as boats and planes, are more prone

to accidents and the resulting liability than relatively passive real estate. While this does not

shield the individual operator for liability from his own personal acts/omissions, it does

provide a level of protection stemming from problems with the vessel. In that case, personal

liability will be shielded by the liability of the LLC, the holding entity. For these reasons, it is