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What is a Limited Liability Company (LLC)?

An LLC is a relatively new type of entity in the U.S. It combines the limited liability of a corporation with the pass-through taxation of a partnership. Owners (or members, as they are called) of an LLC can be individuals or any type of entity, from anywhere in the world, and unlimited in number.

Using a Delaware LLC, non-resident aliens of the U.S. can legally avoid all U.S. federal taxes for their non-U.S. business activities.

American clients use LLCs for the tax benefits also, but the primary reason for using the LLC in the U.S.A. is its heightened protection against judgment creditors. In a General Corporation, formalities must be followed or creditors can destroy the protection from personal liability by “piercing the corporate veil”. These formalities, such as shareholders and directors meetings, minutes, officers and director elections can be eliminated in the LLC, thus making it much more difficult to pierce.

In addition, a judgment creditor of a member of an LLC cannot seize control of the assets of the LLC or the members’ voting rights, as they may be able to do with a corporation.

The LLC is a hybrid business vehicle that combines some of the best features of corporations and partnerships. Like a corporation, an LLC has a legal existence separate and distinct from its owners, and its owners and managers are not personally liable for the company’s debts and obligations. Like a partnership, an LLC can be treated as a pass-through entity for tax purposes. This feature, when combined with non-U.S. source income, means non-resident aliens of the U.S.A. will avoid all U.S. taxation when using an LLC.

The operations and management of the LLC are governed by a written agreement among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations. As a result, an LLC allows secure anonymity and the ability to create a customized management structure, which prescribes the economic relationship among owners. The agreement can be written in any language and is not required to be translated into English.

The Delaware LLC statute allows parties to define their business relationship in a written agreement as they so desire. This is called “freedom of contract”. Delaware law provides rules only for those matters on which the parties have failed to agree. The stated policy of the Delaware LLC law is to give maximum effect to the principle of “freedom of contract” and to the enforceability of LLC agreements. The contractual flexibility offered by the Delaware Act is unmatched by any other LLC statute.

By checking the appropriate box when applying for an Employer Identification Nunber (EIN), a Delaware LLC will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal income tax. For non-resident aliens of the U.S.A., this means Delaware is an attractive jurisdiction for benefits typical of many “offshore jurisdictions”. Combine that with the added strength of the U.S.A.’s fiscal infrastructure, and you have an attractive comparative advantage.

While the Delaware Act permits a Delaware LLC to be managed by its members, it does not require members to be managers. More importantly, it also provides that no member or manager is obligated personally for any debt, obligation or liability of the Delaware LLC solely by reason of being a member or acting as a manager. This limitation on personal liability compares favorably with the limitation on personal liability enjoyed by shareholders of a Delaware corporation.

If properly selected on the SS-4 form, a Delaware LLC will be treated as a partnership for Federal income tax purposes; therefore, it will not be subject to U.S. Federal income tax. This means that a Delaware LLC can offer the same tax advantages as a Subhapter S corporation or a limited partnership, including the ability to provide through a written agreement for allocations of income and/or distributions to members in amounts which differ from the members’ economic interest in the LLC, as well as the ability to provide a basis to members for non-recourse debt. A Delaware LLC will also provide greater tax flexibility in areas of distributions and can be used as a valuable tool for estate planning and wealth transfers.

The limited liability company (aka L.L.C. or LLC) is the strongest asset protection devise for your business replacing the sub chapter “S” corporation. The LLC offers limited liability to the owners of a business and, additionally, the limited liability company is approved in all 50 states.

The LLC is similar to a corporation and sometimes has been mistakenly referred as the limited liability corporation. In the LLC, the individuals are called members and the LLC is most advantageous to smaller companies with a smaller number of members. In cases where the LLC has only one member the LLC may be regarded as a disregarded entity whereby the sole member is viewed as the entity performing the operations of the LLC. This contrasts a corporation owned by a single individual whereby the corporation is viewed as the entity performing the operations.

The limited liability company with multiple members avoids double taxation because the members are partners for taxation purposes. The IRS Form 1065 and Schedule SE (i.e. Self-Employment Tax) are used with the LLC entity. For tax purposes, the LLC in a partnership formation reports its income and deductions via each members’ income tax return.

WHY CHOOSE THE LLC FOR ASSET PROTECTION?

Courts and clever predators with their contingent-fee lawyers have significantly eroded the benefits and protection of corporate entities, allowing for little or no asset protection against employees, shareholders, officers, or directors. The limited liability company has become the “entity of choice” for all new business structures. The sub chapter “S” corporation has now become the white elephant.

LIMITED LIABILITY COMPANY’S FINANCIAL BENEFIT

There is a significant financial benefit to establishing a limited liability company for your business. Your predatory creditor’s sole remedy is the “charging order.” Similar to partnerships, the charging order can only be against LLC member(s) and not the LLC. The charging order is obtained subsequent to your creditor obtaining a judgment against you for monetary damages and other frivolous charges. Your creditor cannot, and is precluded by law, to step into your shoes as an LLC member and take over the financial affairs of your LLC. This is, in and by itself, the limited liability company’s most significant financial benefit.

In all cases, after you plead with your creditor, “Please, please, please, do NOT place a charging order against me because it’ll have the most detrimental affect on how I deal with my existing clients, banks and other businesses,” your creditor will turn around and slap you with a charging order. What you creditor does not realize is that he just gave you a major gift. Thanks in largely due to the drafters of the Uniform Limited Partnership Act.

The charging order means that your creditor has a right to “all your capital distributions.” So when will you have a capital distribution to pay your creditor? The answer is never. You are allowed to take a salary, to joint venture, to borrow money from the limited liability company but you will never take a capital distribution wherein you will pay your creditor. You have just become your creditor’s and their contingent-fee, gold-digging lawyer’s worst nightmare.

LIMITED LIABILITY COMPANY TAX ADVANTAGE

The LLC has a significant tax advantage. Someone must pay the taxes so the IRS declares. According to the IRS, in revenue ruling (77-137) it states that someone must pay the taxes. Since the person holding the charging order will receive the “K-1″, he must pay the taxes on the income generated by the LLC even though your creditor never receives any actual cash from the business.

The creditor saddled by the charging order is treated as a substituted limited partner for tax purposes, thanks to the IRS, and will suffer the tax consequences without capacity to force payment, dissolution or distribution. Do you think that your creditor will want to settle? Please note the “K-1″ is the yearly income tax statement to be included in recipient’s taxable income for the year similar to your mutual fund’s form 1099.

The shocking news is that your creditor will be obligated to pay the taxes for you. Every 6 months, send your creditor a letter on how well your business is doing and that you want to make sure that he prepares himself to pay the taxes. At the end of the taxable year, you send your creditor a copy of an additional letter along with the K-1, addressed to the IRS, requesting an audit of your creditor because you want to be tax compliant and that you want to make sure that all taxes have been timely paid and are up-to-date. Do you still have doubts that your creditor will want to settle?

When you combine the limited liability company’s tax benefit and the protection of the charging order with a surefire asset protection system of an irrevocable trust such as the Ultra Trust you will receive a financial asset protection fortress against your creditors and other contingent-fee based lawyers. So the next time there are any pending frivolous lawsuits you can relax and sleep soundly at night knowing your business assets are well protected.

A Limited Liability Company or LLC is a legal structure of ownership that is similar to corporation. It protects the owners from becoming personally liable to business debts. On the contrary, while operating a partnership or a sole proprietorship, it is your responsibility to deal with all your business debts. However, LLC is much easier to be set up and operate, as compared to a corporation. The three basic steps to form an LLC in New York are:

· Choosing name of your LLC: The business name that you choose cannot be same as name of any other business entity filed with the State Department. You can search the online database to find out whether the name you have chosen has been registered with any other business entity. As far as New York LLC is concerned, the name should contain abbreviations ‘L.L.C.’ or ‘LLC’ or words ‘Limited Liability Company’.
· Filing the formation documents: In New York, a formation documents is known as articles of organization and you need to prepare and file them with the State Department. These documents are required to contain the name of your LLC, its address, its purpose and name and address of the registered agent or agency.

· Publishing notice in the local newspaper: In New York, you are required to publish a notice in the local newspaper which states that you are intending to form a New York LLC. The newspaper will be able to help in filing the document.

Though it is not mandatory, you must create an operating agreement for the LLC, which will guide the owners to operate the business like a corporate bylaw, or partnership agreement. These documents are not needed to be submitted to the State Department. Finally, in order to gain the status of separate entity for your LLC, the members are required to observe some formalities like keeping a detail financial record and recording the minutes of meetings and major decisions.

While selecting the name of your LLC, you must keep the following things in mind:

Must contain the words LLC, L.L.C. or Limited Liability Company in the name Should be different from any other LLC, foreign LLC or authorized name registered with the State Department Must not have any prohibited words, phrases, abbreviations or derivatives Should not contain following phrases such as board of trade, chamber of commerce, state police, state trooper, tenant relocation, community renewal, corporation, urban development, urban relocation, partnership or incorporated Should not contain words such as acceptance, indemnity, guaranty, assurance, annuity, insurance, investment, attorney, bank, benefit, lawyer, mortgage, loan, doctor, trust or finance unless approved by the authorities Should not contain words such as handicapped or blind, unless granted by social services of the state department Should not contain the word ‘exchange’ unless approved

The best thing is to choose at least three names as preferred and conduct a search to see the files.

The articles of organization are required to be signed by 2 persons and delivered to the State Secretary. This information should include the name of the LLC, the duration of the LLC, its principal area of office or business, detail about the registered agent, detail about any LLC debts, liabilities and obligations and any other provisions such as purpose of the LLC and provisions laid in operating agreement.

Other statements required at the time to forming a New York LLC include eligibility requirements, membership procedure, membership resignation, dissolution conditions, taxes such as federal income tax, state income tax and federal tax identification number and fees. The filing has to be made with the Secretary of the State and when appropriate, the check has to be accompanied by a document payable for the state.