10 things every BUSINESS EXECUTIVE should know about llc s

1. 10 things every BUSINESS EXECUTIVE should know about llcs October 20, 2011 Linowes and Blocher Breakfast Program John R. Orrick, Jr., Esquire Demetrios M. Datch, Esquire Linowes and Blocher LLP 7200 Wisconsin Avenue, Suite 800 Bethesda, Maryland 20814

2. Introduction: • LLCs are becoming the preferred choice of entity throughout the United States. • According to a recent survey conducted by the U.S. Government Accountability Office, there are more than one million LLCs formed each year. 1592021v1

3. Why are LLCs so Popular? • Limited Liability • Flexibility (e.g., classes of membership, control, tax considerations, etc.) • The “copycat” effect 1592021v1

4. 10 Things Every Business Executive Should Know About LLCs 1592021v1

5. #1 General Rule: Limitation of Personal Liability • Members and Managers are not liable beyond the extent of their respective capital contributions 1592021v1

6. #2 Exception to General Rule: Piercing the Corporate Veil/ Alter Ego Doctrine • No commingling of assets • Maintain separate bank accounts • Obtain separate tax ID numbers • LLC may not be used to perpetuate a fraud 1592021v1

7. #3 Flexibility over Control • More than one managing member • Third party manager(s) • Member-approved decisions • Voting vs. non-voting members 1592021v1

8. # 4 Tax Considerations • Flow through tax treatment • Different classes of interest • Distributions/Allocations • Carried Interests • Proposed legislation would eliminate capital gains treatment • Tax Treaties • Adverse tax consequences for certain foreign investors (e.g., Germany) • Self-Employment Tax • LLC vs. S Corp 1592021 v1

9. #5 Use of “Disregarded” Entities and “Check the Box” Regulations • Single member entity is, by default, “disregarded” for tax purposes • “Check the box” regulations provide that LLC with two or more members is a “partnership” by default 1592021v1

10. #6 Transfer and Recordation Tax Considerations • “Controlling Interest” legislation in Maryland and District of Columbia • Conversions of partnerships into LLCs exempt 1592021v1

11. # 7 I may be your partner, but I’m not your guardian • Principal of Freedom of Contract allows members to modify typical fiduciary duties owed to each other • Delaware language vs. Maryland language 1592021v1

12. # 8 Delaware Law • More established body of law; Chancery Court • Maryland LLC Act modeled after the Delaware statute 1592021v1

13. #9 Creditors Rights and Charging Orders • Charging Order gives creditor right to profits interest, not voting rights • Amendment to MD LLC ACT 1592021v1

14. #10 SPEs/Holding Companies/ Series LLCs • SPE’s – Special purpose entity established for bankruptcy remoteness • Holding Companies – Structure permits venture to own multiple SPEs, but each asset is isolated • Series LLCs – Not recognized in Virginia or Maryland, but permitted in D.C., effective 1/1/2012 1592021v1

15. Conclusion • LLC is the most popular form of entity for real estate transactions and is becoming the preferred choice of entity for all forms of business. Why? Because of its flexibility. • Please call if you have any questions. 1592021v1