Limited Liability Companies (LLC) in Asset Protection Planning

Limited Liability Companies are outstanding 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 the assets within an LLC from being seized to satisfy a judgment. LLCs are remarkably 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 may have limited liability protection and all owners may 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 (disregarded 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 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 the positive tax treatment of partnership. In general, real estate ownership creates the possibility of liability with tenant and guest injuries, leases, contracts, environmental laws, mortgages, and other laws; however, LLCs are advantageous when used to own assets that generate passive income.

Taxes and LLCs
When an LLC is properly structured, it can be classified as a partnership for federal income tax purposes. You can allocate tax items including income, gains, losses, deductions and credits to their owners according to your operating agreement.

LLCs that are taxed as a partnership or limited partnerships do not have any tax advantages. The main advantage of the LLC compared to a limited company is the limited liability protection 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 discussed below under Family Limited Partnerships, the general partners can be a corporation, LLC, trust, or other business entity that provides protection for larger family owners by not having to become general partners. The LLC provides 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. The majority of an LLC can be owned by children who are not managing owners, while the parents manage the business. In the exploitation contract, the non-administrator owners become administrators in case of incapacity or death of the parents. Without traditionally transferring assets, estate taxes are eliminated and the duration of LLCs can be perpetual.

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