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The Incredible LLC

The Incredible LLC. Limited Liability Company. The Incredible LLC. Review Updates Liquidations Texas, the Series. At the Beginning. The History of the LLC: First LLC in 1892, German Company Established in Germany, spread throughout Europe. Page 5. Portugal 1901 Panama 1917

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The Incredible LLC

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  1. The IncredibleLLC Limited Liability Company

  2. The Incredible LLC • Review • Updates • Liquidations • Texas, the Series

  3. At the Beginning • The History of the LLC: • First LLC in 1892, German Company • Established in Germany, spread throughout Europe Page 5

  4. Portugal 1901 Panama 1917 Brazil 1919 Chile 1923 France 1925 Cuba 1926 Argentina 1932 Uruguay 1933 Mexico 1934 Belgium 1935 Italy 1936 Peru 1936 Switzerland 1936 Columbia 1937 Guatemala 1942 Costa Rica 1942 Honduras 1950 Countries Quickly Adopting LLC Model Page 5

  5. Original 5 Basic Characteristics • 1. Limited Liability • 2. Required use of the word “limited” • 3. Could sue or be sued • 4. Controlled admission to entity • 5. Articles of Organization controlled LLC life Page 6

  6. First State to Create LLC Wyoming in 1977 5 years later, Florida enacted legislation to limit loss on investments. Page 6

  7. History of LLC’s in America • March 4, 1977 First LLC Act –Wyoming • September 2, 1988 “Kintner” Rules • January, 1990 Swift action to create LLC’s by states Page 6

  8. History continued • June 7, 1996 51st LLC Act – Hawaii • January 1, 1997 Check the Box – 8832 • January 13, 1997 Prop. Reg 1.142(a)-2 Page 6

  9. Growth of the LLC • LLC’s first were used primarily for: Real Estate Rental and Development Page 7

  10. Types of Businesses Operating as LLC’s • Engineering and Mgmt Support 26% • Real Estate Services 19% • Construction and Gen. Contracting 12% • Investment Companies 9% • Retailers 8% • Other businesses include: Page 7

  11. And • Leasing Companies 8% • Health Services 7% • Agriculture 7% • Oil and Gas 2% • Restaurants 2% Page 7

  12. Reasons for Popularity • 1. Less paperwork and record keeping • 2. Pass-through taxation • 3. Limited Liability • 4. Check-the-box taxation • 5. Single or multi-member • 6. Assignment of membership interests • And…… Pages 7 & 8

  13. More Popularity Reasons • 7. Treatment as separate from their members • 8. Income retains character to member • 9. Presents an alternative to S corporations • 10.Multi-member LLC’s may avoid Social Security taxes • 11.Single member LLC’s have most simple of business structures Pages 7 & 8

  14. Characteristics of LLC’s • Established under state statutes as legal entities. • LLC’s can have single members or multiple members. • Federal tax classification of LLC is Sole Proprietor, Partnership or Corporation. • LLC’s provide full limited liability to their members. • Substantial asset protection. Page 8

  15. Practitioner’s Alert • Limited Liability Companies do not have limited liability. • LLCs can sue and be sued. • The Members of the LLC have limited liability. Page 8

  16. Limited Liability • To members similar to shareholders • Not liable for tort liabilities, debts and other obligations of the LLC • Agents and managers not responsible Page 8

  17. In Certain States – Members Liable • For debts personally guaranteed • All states allow personal guarantee • Wrongful acts • Amounts promised to be contributed • Wrongful distributions • Sales tax and trust fund portions • Improper personal benefits • Violations of criminal laws • Malpractice claims • Other liabilities in articles of organization Page 9

  18. Personal Liability • Members may be liable if LLC is undercapitalized • Fails to obtain sufficient insurance to cover risks of business • Failure to hold meetings of members or comply with formalities does not Page 9

  19. Practitioner’s Alert • Be careful about piercing of the LLC veil and statutory exceptions to the limited liability rule. • Because a single-member LLC only has one owner, there may be an increased likelihood that a judge would allow a creditor of the SMLLC to pierce the LLC veil. Page 9

  20. Strengthening SMLLC Protection • 1. Maintain formalities of meetings and documents • 2. State document record laws • 3. Maintain adequate capitalization • 4. Do business as the LLC • 5. Letterhead, business cards, etc. in name of LLC • 6. Use bank account of LLC (not personal) NIT

  21. Continued • 9. Get EIN, even if not necessary • 10. Financial Statements should be LLC • 11. Bank loans and forms – LLC • 12. Use LLC name in business dealings • 13. Have SMLLC operating agreement • 14. Follow operating agreement and modify it when needed • 15. Utilize proper terminology – Managing Member NIT

  22. Special LLC Protection • Protection of the asset against creditors • Those who obtain judgments against Members Page 11

  23. The Charging Order • What is a “charging order?” • Who can get a “charging order?” • Charging Order Protected Entity - COPE Pages 11 & 12

  24. Creditors & Entities • C Corporation – corporate veil • S Corporation – involuntary termination • Partnership – states protect partners • Exception to the Partnership Page 12

  25. Charging Order Protection • A creditor must usually follow this path to relief when seeking to obtain assets from a COPE. • Obtain a judgment; • Charge the interest; • Foreclose the charging order; • Appoint a receiver; and • Partition the entity. Page 12

  26. Example • Beanna owns 50% of a trucking company – Beanna’s LLC. • The LLC has $500,000 in assets • Beanna’s involved in a hunting accident • A judgment of $5M is against Beanna • Creditor wants Court order dissolving LLC and the sale of assets to satisfy judgment Page 12

  27. Example Continued • Creditor’s remedies in most states will not allow • Creditor receives “charging order” • Under Corporate Law, creditor would most likely receive stock and force liquidation for receipt of asset value. Page 12

  28. Practitioner’s Alert Charging orders protect entities and are some of the strongest and most acceptable asset protection tools available. These entities afford a significant degree of protection for the partners or members against any creditor. Page 12

  29. All States Allow Charging Orders • Members and debtor retain: Voting rights Power to decide about distributions – when and how much No compelling to make distributions to satisfy debt Page 12

  30. Alert • The only right of the creditor is to receive distributions by the LLC to that particular member. Page 12

  31. But, What About SMLLCs • Creditor may pierce the LLC veil • Must have legal grounds Page 13

  32. Practitioner’s Alert • There is an exception to the rule in some states if the LLC is a single-member LLC, meaning the LLC is treated as a disregarded entity. • The creditor may attach the assets of the single-member LLC in satisfaction of the judgment. Page 13

  33. Practitioner’s Alert Sole proprietorships and corporations do not provide business asset protection. Page 13

  34. Foreclosure on a Member’s Interest • Some states allow foreclosure • At sale, purchaser has rights of transferee • Judgment debtor has no rights after foreclosure Page 13

  35. Foreclosed Interest May be Redeemed • By the judgment debtor • With property other than LLC property by one or more of the other members • With LLC property by one or more members, with consent of all members whose interests are no so charged Page 13

  36. Alabama Alaska Arizona Arkansas Connecticut DC Delaware Florida Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri New Hampshire New Jersey States that Prohibit Foreclosure Page 13- Update

  37. New Mexico New York North Carolina Ohio Oklahoma Oregon Rhode Island Tennessee Texas Vermont As well as… Page 13 Updated

  38. Contractual Flexibility • The Operating Agreement • Governs LLC operation • Can be changed • No bylaws or minutes required Page 13 & 14

  39. Example • J. B. Sims Services, LLC • Single Member LLC’s require operating agreements • Should be reviewed at least annually by tax professional Page 14

  40. Statutory Informality LLC Acts in most states have very few formal requirements on the formation of the LLC. Check state web sites or www.findlaw.com for requirements Page 14

  41. Management of the LLC • 1. Member Managed • 2. Manager Managed • 3. Corporate Management • Default management is by the members. Page 15

  42. Operating Agreement The LLC Operating Agreement determines how the LLC will be managed and by whom. Page 15

  43. Award For Management Flexibility Goes To… Offering the most flexible form of operation is: A. C corporation B. S corporation C. Limited Liability Partnership D. Limited Liability Limited Partnership E. LLC Page 15

  44. Practitioner’s Alert Tax professionals should be aware of potential conflicts of interest in representing both the Managing Member and the LLC before the IRS. If a potential for conflict exists, the tax professional should make every effort to comply with Circular 230 Federal Code of Regulations concerning conflicts of interest. Page 15

  45. Articles of Organization • Required by most states. • State web sites offer sample “Articles.” • Minimum requirements include: • Name and address of entity; • Nature of business; • Name and address of registered agent; and • Names of managers and members. Pages 15 & 16

  46. Sample: Articles of Organization • Note: Not Articles of Incorporation • Sample on Page 16 of text. • Refer to individual state web sites for requirements or to www.findlaw.com Page 16

  47. LLC Tax Classification At formation, the Limited Liability Company is a: “tax nothing!” NIT

  48. Federal Tax Classification • Sole Proprietor • Partnership • Corporation • C corporation • S corporation Page 17

  49. Practitioner’s Alert The instructions for Form 1065 for 2011, page 3, state “A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. Page 17

  50. Entity Classification – Form 8832 • Incorporating vs. LLC formation Incorporation C Corporation S Corporation Page 17

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