12 LLC Strategies to Protect Your Assets and Financial Future

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The proper LLC strategies will help ensure your assets are really protected. Unfortunately, most will file a “simple LLC” online for the least amount of money and are later surprised when they are not protected.

First, let’s look at the history of the LLC. The Limited Liability Company (LLC) is a powerful entity that originally started in Wyoming in 1977 and became more popular in the late 1990s. It is a hybrid between a partnership and a corporation. Most are unaware that an LLC can be taxed in four different ways: disregarded, partnership and S or C corporation.

The IRS established federal default rules to simplify this determination in 1997. A one-member LLC by default will be taxed as a disregarded entity for tax purposes and a two-member LLC will be taxed as a partnership for tax purposes.

Which LLC is Best?

Which LLC is Best?

Now let me share with you 12 LLC secrets that will not only keep you up out of tax trouble but help you better avoid pitfalls down the road.

  1. Can an IRA invest in an LLC? Yes, but…This is a popular strategy when looking for different investment options for retirement funds. Many are looking to take advantage of the real estate market to invest in and find they do not have the money personally to invest, but their IRA does. This strategy involves moving your IRA to a self-directed IRA and the IRA becomes the member of an LLC. In other words, the investment is in the membership interest of the LLC.

    There are a couple of major issues with this strategy that could create problems with the IRS. First, if you are the manager of the LLC and you are on the LLC checking account that has IRA funds, that means you have “checkbook control”. There are prohibited transactions in where you cannot use that money, but more importantly, is that the signer on the account may use the LLC money for personal use which is a big problem and could create serious IRS issues. The second issue centers around who can be the manager of the LLC. Can it be you also? Is that self-dealing?

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Distributions from an LLC

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Knowing how your distributions from an LLC are taxed is critical to your LLC formation strategy. After your LLC is formed, your business is up and running, and revenue is flowing, will you come to that important point where you distribute money to the partners. That may be just you, your spouse, or other outside partners.

Some people just write checks from the LLC to themselves, as the owner, and really don’t consider the tax ramifications of their actions. This is especially important anytime you have a partner, whether that is a spouse, outside partner, or a separate legal entity.

LLC Distributions

LLC Distributions

Let’s address some basic fundamentals first, then get into more details:

The first step is to be aware of how your LLC is taxed. Are you a single member LLC taxed as an S corporation, or disregarded for tax purposes? If you have earned income and a single member LLC that will flow through to schedule C, you are basically operating as a sole proprietorship, but have the liability protection of an LLC).

Test question: Is there any payroll for a single member LLC? The answer: depends. If the LLC is disregarded for tax purposes, there is NO payroll to the owner. Is it possible for a single member LLC to have employees? Yes. If the single member LLC is taxed as an S corporation, the active member (owner) would have payroll and distributions. If you have a single member LLC taxed as an S corporation, of course, the only member is active. If you have a two-member LLC taxed as an S corporation, it is possible that the second member could be passive (this could be a spouse or silent partner). Would the passive member be the manager of an LLC? No. By definition, if passive, they would not be running day-to-day operations. Keep that in mind.

A single member LLC taxed as a C Corporation; there would be, at some point, some type of payroll to the owner of the C Corporation. Is it possible that there was only enough revenue in the LLC taxed as a Corporation to only pay business expenses and not enough profits left over for any type of payroll? That is possible. You may take dividends out of the LLC taxed as a C Corporation, but keep in mind dividends are NOT deductible to the LLC taxed as a C Corporation’s profits.

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Advanced LLC Tax Issues

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An LLC is a hybrid between a corporation and a partnership. An LLC can be taxed as a partnership, S or C corporation or a disregarded entity. The IRS established federal default rules in 1997 to simply how an LLC is taxed. One member is a disregarded entity and two members are tax as a partnership. In either situation, you can file form 8832 to have an LLC taxed as a Corporation or form 2553 to be taxed as an S corporation.

One of the subjects that 90% the people who have an LLC do not properly handle the transfer of an LLC interest to another.

As personal property, an LLC interest may be transferred by a bill of sale, assignment, or comparable document. If the interest are documented certificates, like stock certificates, it should be possible to transfer an interest by endorsing the certificate, by granting the power of attorney to the transferee, or by granting a type of power like a stock power. To be effective the transferee must also cause the transfer of the interest to be reflected on the LLC’s books. The transfer must first be approved under the LLC’s requirements (e.g., approval of at least a majority in interest of members). It is recommended that an LLC record the transfer of membership interests in the same fashion as a corporation uses a stock transfer ledger.

This is a key point…the transfer of an interest to a person does not by itself grant the status of a member in the LLC. Rather, the transferee is merely an assignee of certain economic rights unless the other members by a vote approve the transfer of the interest.

The various state acts generally provide that unless the members have otherwise agreed, a membership interest is assignable in whole or in part. Although some statutes may refer to the free assignability of a membership interest, what is actually meant is the free assignability of the financial rights, not governance rights.

Typically, members will want to impose restrictions on assignability, and the operating agreement would provide this language. An operating agreement also should define if the transfer restrictions did not apply to transfers to members, non-members, or both of the LLC.

This may surprise you, but an LLC member can assign his or her interest without anyone’s consent. Although the transferee will be an assignee and NOT a member. Only members can vote and exercise other rights of members, but not an assignee, like a member, may receive distributions of cash or property.

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