Letter Re: Protecting Your Assets With an LLC

One of your SurvivalBlog Glossary entries deserves some comment. A Limited Liability Company (LLC) gives you as much or more protection from liability as a corporation, but passes profit through to your personal taxes like a 1099 independent or a subchapter S corp.  However, unlike a corporation, once you file your ‘Articles of Organization,’  in most states your LLC has no more paperwork requirements some states require an annual status report, but it is solely for informational purposes and has nothing to do with the IRS or other government agencies except to notify the IRS how you choose to allocate profit and loss among the members) one of the most attractive difference between an LLC and a C Corporation or S Corporation.  Your Articles of Organization (AoO) basically allow you (not the state or Feds) to create the rules under which your LLC will be run – such as which members manage it, how it is to be managed, how profits are distributed among members, and which of a number of options you want to elect to be taxed under.  For your own records, you create an Operating Agreement (OA) identifying each member, what percentage of the total ‘membership interests’ (sort of like corporate ‘shares’ but not subject to the laws dealing with shares and percentage of equity ownership or distributions of profits).

Basically there are ‘manager managed’ LLCs, where one or more members (or even an outsider) are specified in your AoO as having management responsibilities and other members have no say in the decision making (a two-class organization), and ‘member managed,’ where each member is included in the same class and shares management duties.   Each member is issued a number of “membership interests,”  Note that you don’t have to allocate distributions according to the percentage of membership interest each member has, nor does the number of interests each member holds reflect what the member’s contribution is.  Your AoO and OA can specify any division of responsibilities and profits that all members are willing to agree to.  For example, to avoid estate taxes on large estates, you can put your assets into an LLC, where you are the manager and sole recipient of earnings from the assets, and make your heirs members and do not share in the profits while you are alive.  In effect, you are gifting them with membership interests well before you die.  When you die, your heirs, as the surviving members, can designate a new manager and grant themselves equal or proportional revenues – all without any estate tax.

The main value of an LLC is that you can move assets into it, or acquire them through it, and if you are successfully sued, the LLC assets can not be taken, and any successful suit against the LLC can only take the LLC-owned resources and not your personal ones.  In fact, if you create multiple LLCs, say, a separate one for each piece of real estate you own, than a suit against one LLC only endangers that property, while the other properties are immune.  You can put just about any type of asset, like a business, a home, a car, investments, intellectual property – virtually any appreciating asset.

They also allow you to avoid the double taxation of corporations, where corporate profits are taxed and then investors have to pay their own taxes on the distributions.

You can create as many LLCs as you want, and locate them in any state you want, based on the state’s laws. New Mexico, Utah, and Nevada are very LLC-friendly.  You just have to pay a nominal amount to a ‘registered agent,’ a person or company located in the state your LLC is created in that is guaranteed to be available to accept formal legal documents during business hours and also act as a general mail forwarding service for all general mail sent to the LLC.  This service is usually very inexpensive, as you do not need, nor would you want to pay the rates of, an attorney.

Only a few things to watch out for:

A single-member  LLC is legal in some states, but not in others.  Also, the IRS treats a single-member LLC like a sole proprietorship, which complicates your interactions with them (such as the aggravation of having to file quarterly estimated taxes). While a single-member LLC will protect your personal assets if the LLC is sued, it is not guaranteed to protect the assets in the LLC against lawsuits filed against you personally.  Always have two or more members.

LLCs are still very new and there is nowhere near the case law and formal precedents that exist for corporations, so that you can’t be totally sure that future legal decisions won’t change the rules of the game after you are already on the field.

You can’t move personal assets into an LLC once a suit is filed against you to try to shelter them.  Nor can an LLC transfer assets to its members or another LLC once a suit is filed against it, so it is wise to set up at least one LLC now even if the assets it is intended to protect will be accumulated directly by the LLC in the future.  That way, your LLC will predate and be immune from any future suits against you personally.

There is much more about LLCs and it is a good idea to find several books on it and discuss how to best structure it with an accountant, You might possibly consult a lawyer in the state in which you wish to create your LLC to be absolutely sure of the particular state’s laws and restrictions, if any, on LLCs based in that state (but don’t pay the lawyer’s rates to actually do the filings and such – either do it yourself, or find a registered agent who includes the filing services in his package.

Sorry to go so long about a single entry, but, TEOTWAWKI or not, it is an option any sane and knowledgeable person with assets should be doing yesterday.  It is the single most powerful legal way to take control of your taxes, avoid all of the severe government restrictions and legal filing requirements on corporations, general and limited partnerships, and sole proprietorships –  and to protect all, or at least, most of your personal appreciating assets from being seized in a lawsuit.

It is not really relevant to surviving a natural or man-made breakdown of the underpinnings of society, but until such happens, it is the best way to legally avoid government interference and regulation of you affairs today. Best Regards, – John S.