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Limited Liability Companies are a relatively new type of entity in the United States. Properly structured, LLC members will have the liability protection afforded shareholders of a corporation, but have the tax planning flexibility only available to a partnership.
The basic favorable tax planning characteristics of an LLC include:
* The LLC is taxed only at the member level (except for certain large, publicly traded entities, which would be taxed as corporations) with income and losses passed through to the members.
* The LLC confers limited liability on all members.
* Centralized management may be elected, thus giving the older generation the ability to continue to control the enterprise while permitting the younger generation to participate in future growth.
* Unlike S Corporations, an LLC may have an unlimited number of members, and, there are no restrictions on who may be members.
* Again, unlike S Corporations multiple classes of interests (including special allocation of losses) are permitted. For example, some family members might be given preferred interests while others might receive common interests.
Uses in Estate Planning
Limited Liability Companies have a role in estate planning and family wealth preservation, particularly as more and more states enact LLC statutes. Their likely uses include:
* As an alternative to using a family limited partnership both where the goal is to establish a gift program, and where the goal is primarily succession planning. LLCs have particular advantages as entities to hold family vacation homes.
* As a general partner in a family limited partnership.
* As an entity in which to conduct a family-controlled business (where a family limited partnership might not be appropriate).
* As a mechanism to implement estate freeze techniques.
* As an alternative to using a trust.
Why Use An LLC
This article will focus on using the LLC itself as the entity to hold assets, rather than using an LLC only as a general partner in a family limited partnership. Placing family assets in an LLC can have several advantages.
Management: The older generation can maintain control while still permitting members of the younger generation to share in profits.
Succession Planning: Use of an entity may facilitate succession planning. For example, a parent may desire that child I succeeds to management; and that other children have a financial stake in a family-owned business, but not have management roles.
Estate Freezes: Subject to the limitations of Chapter 14 of the Internal Revenue Code, an LLC can be structured (by using different classes of interests) to allow future growth to be shifted to a younger generation.
Valuation: Using an LLC may facilitate obtaining discounts for minority interests, thereby minimizing transfer taxes. The IRS has now acknowledged that minority discounts will be allowed with respect to family held entities. However, Section 2704 will still apply to affect valuation.
Creditor Protection: Use of a LLC provides protection against creditors to the same extent as limited partnership interests in limited partnerships. The …