Private Client Services Update – LLCs – Why Don’t You Have One?
By William L. Holt, Estate, Trust & Wealth Transfer
Limited liability companies (LLCs) clearly have become the most popular choice of entity for small businesses and real estate investors because of their simplicity and flexibility. However, even after years of use, it is still surprising how many people fail to take advantage of the many benefits offered by LLCs, and continue to operate businesses or hold investment properties in their individual names or as sole proprietorships. In this day and age, it is difficult to think of a reason to operate any venture or investment as an individual or sole proprietorship and in most instances, an LLC offers exactly what is needed.
- Liability Protection for Owners. The name “limited liability company” says enough in itself. Plain and simple, operating as a sole proprietorship or as an individual subjects the business owner’s personal assets to the debts and liabilities of the operation. However, the proper formation, use, and maintenance of an LLC will prevent the individual owners’ exposure to liability from customers of a business or tenants of an investment property. Clearly, operating a business or owning investment property carries certain risks that should be separated from personal assets. Umbrella insurance policies can be helpful in these situations, but should not be relied on alone.
- Ownership & Teaming Opportunities. Because ownership and management of an LLC can be separate, LLCs provide flexible opportunities to involve numerous parties in various capacities. For example, one person might want to invest capital and not participate in the day-to-day operations, while another may not be able to invest financially, but would be the ideal manager of the operation. LLCs easily allow for this situation and most any other variation you could dream up. LLCs also can be owned by other entities like corporations, trusts, or other LLCs, which allows for partnering with existing businesses. Also, LLCs can exist with as few as one member (a “single-member LLC”) and many times are the ideal entity choice for real estate investors or small businesses with one owner.
- Flexibility for Tax Purposes. Many people mistakenly think that forming an LLC might unnecessarily complicate their income tax situation. However, this is normally not the case and the IRS affords much flexibility for the taxation of LLCs. For example, in a single-member LLC, the LLC can be taxed as a “disregarded entity”; meaning that for IRS purposes, the LLC does not exist and all income and expenses of the LLC can be reported directly on the individual tax return of the sole member. By avoiding the need for an additional tax return for the LLC, this can be a very attractive option for investors and small businesses with one owner. So long as the single-member LLC is properly formed, operated, and maintained in accordance with organizational formalities, a single-member LLC will prevent the individual owner’s exposure to liability just as any other LLC. If the LLC has more than one owner, the IRS allows taxation as a partnership (“pass-through” taxation) or as a corporation, upon election by the members. In some instances taxation of an LLC as an S-corporation is the best choice because of the potential employment tax savings available based on the specific operations of the LLC. Fortunately, the IRS realizes that not one size fits all in taxation of LLCs, and allows an LLC to be taxed however the owners desire.
- Isolate Operations & Risks. Due to the simple structure of an LLC, we frequently counsel clients to use separate LLCs for each separate operation or property. This approach serves many purposes, but most importantly, it separates the various operations or properties from each other for easier record keeping and isolates the potential risks and liability associated with each individual operation or property from one another.
Members of the Private Client Services group at Kaufman & Canoles routinely work with our clients in structuring their business and investment interests. Helping our clients protect the assets they have worked hard to acquire is a key component to the client’s estate plan. – Will Holt
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.