I get this question all the time. What are the benefits of an LLC, and what are its limits?
Not many know the limits. An LLC is an abbreviation for a “Limited” Liability Company. It is basically an upgraded C-Corporation, and the baby brother to the S-Corp. Before an LLC small businesses, were subject to double taxation, and both the C and S corp forms had no real protection because shares of corporations can easily be seized.
The advantage of the LLC is that it created ownership of classes of “members” instead of shareholders. This means no shares of stock to be seized. This makes it more difficult for a creditor to reach the assets of the LLC interest held by a member. And some states have strong charging order protection limiting the remedy of a judgment against a member of an LLC just to the charging order. This helped by stopping the creditor at the door and changing the leverage of the debtor. The LLC also has pass-through taxation. Another benefit is the single member LLC. It allows for limited protection and pass through taxation.
The LLC also has its limitations. It says it in its name, “Limited.” They are not hiding that fact. They say it point blank in its name. A very big limitation is that States have begun differentiating themselves on how serious they take limited liability in favor of piercing the corporate veil. We see more and more State Courts disregard the “charging order only” remedy and directly reach LLC assets to satisfy a creditor. You also cannot transfer state laws. The U.S. Constitutions “Full Faith and Credit Clause” limits how much protection an LLC can give you with judgments from other states. We are see that single member LLCs are becoming worthless and the “Single Member LLC Exception” has become a major concern and in many states there is significant discomfort by planners to even use the Single Member LLC as courts are simply disregarding them. Especially in states like California which has shown a strong and consistent propensity to disregard the asset protection features of all types of legal entities.
There is a very real concern that a judge will use his power and simply disregard the LLC altogether and determine that it was the “alter-ego” of the member and hence bypass the LLC statutes.
These concerns give rise to a more serious look at the various jurisdictions. Used properly, LLCs are fantastic foundations to protect assets when combined with a LP and a powerful Bridge Trust. Enjoy this recent podcast where we break all these concepts down in detail. https://lnkd.in/e8r6HDc
By: Brian T. Bradley, Esq.
Senior Managing Partner
Bradley Legal Corp.
Asset Protection Law Firm