Limited Liability Company (LLC) – Part Two
December 15th, 2009
Passive investors of a limited liability company: (LLC)
Passive investors of a limited liability company (LLC) are members who are not managers similar to limited partners of a limited partnership.
Taxation of limited liability company (LLC)
If the limited liability company (LLC) has two or more members, the limited liability company (LLC) is taxed as a partnership. The LLC files a partnership tax return which is the IRS form 1065 and each member of the LLC will receive an IRS form K-1. Members of the limited liability company (LLC) can receive income and tax deductions in proportions that may or may not be equal to their limited liability company (LLC) ownership shares. Therefore, the limited liability company (LLC) is the only business legal entity that offers the flexibility of a partnership with the protection of a corporation. In a way, an LLC is like a marriage between a partnership and a corporation.
One member LLC or single member LLC
An LLC can be formed by one person in most states. An LLC can consist of one member. For a one member LLC or single member LLC, the limited liability company (LLC) is disregarded for federal income tax purposes.
An example of a single member LLC
If a business is run as a sole proprietor and then changed to an LLC, the business owner would have liability protection under state law but would continue to report on IRS tax form schedule C for his or her tax return.
In most states, a member of an LLC ’s interest in an LLC cannot be attached by a creditor. The creditor’s remedy is generally limited to a charging order. This makes an LLC appealing as an asset protection tool but since the LLC as a business entity is now, it has not been heavily tested in court.
Using a Family limited partnership (FLP) and an LLC
If you are using a family limited partnership (FLP) and a limited liability company (LLC) for asset protection and hold your assets, you must have a valid business purpose for the liability protection to be enforceable. That means, a family limited partnership with your personal residence as its sole asset is not a valid business entity unless you pay rent to the family limited partnership.
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