Nevada Corporate Services

For liability protection, I would be better off with an LLC, right?

LLCs have been heavily advertised over the last few years, "The new, best, structure to protect you, your business, and your assets," promoting the golden triad of: liability protection, tax savings, and privacy. What is the truth about LLCs? When would it be appropriate in your business plan? And, Why are they being so heavily "sold?"

Limited Liability Companies have joined the ranks of chartered business organizations, such as the venerable C-Corporation, the once popular Limited Partnership, and the waning Sub-S corporation. Also in our list of contestants is the ever popular sole proprietorship, and the always-dangerous Partnership or General Partnership. The LLC is the proverbial "New Kid". Let's make an in depth review of the relative strengths and weaknesses of an LLC.

Tax benefits: The LLC provides no tax benefit. It is a pass-through entity.

Liability Protection: The LLC was intended to provide the pass-through tax treatment of a partnership while still allowing the liability protection of a corporation. While this idea of choosing options from a Chinese Menu for your business structure sounds appealing, it defies what we know to be true about the judicial process. This country's entire infrastructure is predicated on the idea that an independent third party shall define the terms of existence for you and your business.

Each lawsuit has a loser. Every court case denies someone of something that they claimed to be rightfully theirs. Merely claiming the right to a tax benefit and denying the responsibility for liability does not make it so. The courts use "precedence" to determine the viability of claims. Regarding Limited Liability Companies, there really is no substantial precedence. Thirty, forty, fifty years from now we may know how the courts will treat LLCs, but right now, we can only consider related rulings. Therefore, let us, as the courts do, draw upon rulings from related areas, and consider some potential arguments. The IRS has made a ruling: "The Limited Liability Company will initially be taxed as a partnership." Now listen to the voice of the opposing attorney. "Your Honor, the defendant intentionally organized his business, not as a Corporation which has a long history, and much precedence, regarding protection from liability, but as an LLC." "Your honor, the IRS says that for their purposes, the LLC is synonymous with the General Partnership." "If the IRS classifies the LLC as a partnership, without any precedence to the contrary, then we must also." "Therefore, since this is a Partnership, all liability for all debt, rests on all of the members." Not a very comforting thought if you have a lot at stake. You may be able to argue the other way, and win, but it would probably be better to avoid the argument altogether, and let someone else test the waters.

Since limited liability companies have only recently become popular, there are a number of unanswered questions. First, it is unclear whether states that do not recognize limited liability company status for their own businesses would nevertheless honor that status for companies organized under the limited liability company law of another state. Second, it is unclear whether membership interests are "securities" for purposes of the federal securities laws.

Some other consideration about Liability Protection:

• Like a shareholder, a member is personally liable to the company for failing to make an agreed contribution. Though unlike a shareholder, a member may be personally liable for his or her contribution to creditors of the company who acted in reliance on the member's commitment.
• A limited liability company may be subject to a veil piercing theory.
• Even after an assignment of membership, the assignor is not released from the statutory liability to make a promised contribution or from liability arising from a wrongful distribution.
• It is unclear the extent to which states that do not provide for limited liability companies will recognize the limited liability status of the members of out-of-state limited liability companies.

Regardless all of the above, One of the first things that we learned on the playground of school: If you want to keep something all to yourself; Do not tell everyone. Privacy is the first shelter from the storm of liability.

Privacy: Of the three reasons that we are discussing here, Privacy, is the claim that has absolutely no basis in truth. The Articles of Organization that are filed with the State, set forth the names, address and percentage ownership of all of the members. Also in many States even the tax returns for as many as 3 previous years have to be available to the public.

All of the contributions of individual members are noted in the company's articles of organization or other record available for public inspection. In some states, the articles of organization, (or an attached affidavit) must set forth the total amount of cash, value of property initially contributed, as well as the total additional contributions to be made by all members. Some States require the articles of association to be signed by all members named in the articles.

We have discussed three of the most common reasons that people sight as the reason to form an LLC. When comparing the effectiveness of the LLC and C-Corp for these reasons, it appears that the Corporation wins hands down. Can we safely say that all LLC's are bad and all Corporations are good? No. Many corporations will not provide these benefits for their owners (Much to their surprise). We can say that for; Tax savings, Asset Protection, and Privacy an LLC has no advantage, and that a properly organized Corporation can provide significant benefits.

So when would a Limited Liability Company be a benefit? Due to its youth, the LLC has not been closely scrutinized by the Securities and Exchange Commission (SEC). The SEC has not yet placed some restriction on the LLC as it has on the Sub-S corporation. A Sub-S Corporation is limited to no more than 35 stockholders, not so the LLC. Stockholders in a Sub-S Corporation must be US citizen, and must be actual persons, not other corporations. Again, as yet the LLC does not carry these restrictions. So, if you have no concerns about Taxes, Liability Protection, or Privacy, and your have either, more than 35 holders, non-US holders, or non-real persons as holders, then an LLC may be a better choice.

Why are they so heavily sold? The marketers of LLC's, whether they admit to the title or not, are fanning the flames. At this point the conversations are self-perpetuating. People are asking about it because they here about it. This frenzy is not necessarily bad. The more, LLCs, the more test cases. The more test cases, the sooner you and I can make an educated consideration of LLCs and their true value.