Overview

The Limited Liability Company (LLC) has become a powerful tool for accomplishing many asset protection goals. The LLC is the most versatile and convenient strategy for owning rental property, insulating Dangerous Assets, operating a business, and achieving an excellent level of financial privacy.

The LLC is a relatively new legal entity created by statute and recognized in all fifty states. The adoption of the LLC format began in Wyoming and Florida in the 1970s with approval in most other states only within the last ten years. The purpose of the legislation is to allow individuals to create a legal entity that avoids many of the tax and business problems inherent in the corporate and partnership structure. The intent of the law is to allow individuals to conduct their financial and business affairs in an efficient and convenient manner without the restrictions, formalities, and liabilities associated with those other entities.

More particularly, the LLC provides the protection from liability of a corporation without the formalities of corporate minutes, bylaws, directors, and shareholders. In contrast to corporate law, which allows shareholders and officers to be individually sued if the corporate formalities are not followed, the LLC law specifically bars a lawsuit against a member for the liabilities of the LLC. That is an important distinction which you should understand. The principle shareholders and officers of a corporation are routinely named as defendants in a lawsuit against the company-forcing them to incur attorney's fees to defend themselves and rendering the corporate shield meaningless from a practical standpoint.

A primary goal of the LLC legislation was to change this result by clearly stating that the members and managers of the LLC could not be named in a lawsuit against the company. The new law was drawn specifically to provide a vehicle which would protect the owners from liability associated with the business-what the corporation was intended for but no longer accomplished.

The LLC is also convenient to maintain. The owners are permitted to adopt flexible rules regarding the administration and operation of the business. For tax purposes, it is treated like a partnership. That means the LLC itself pays no income tax. All of the income and deductions flow through directly to the members and is reported on their personal tax returns.

The LLC is formed by filing Articles of Organization with the Secretary of State's office. Unlike the FLP, which requires the names of the general partners, the disclosure of the names of the principals can be avoided. The name of either the member or the manager must be provided in the articles. Also, many states, including Nevada and Delaware, permit a single member LLC to be formed. We will see that these provisions open the door for a variety of financial privacy strategies. Anonymous ownership of financial accounts, business interests, and real estate can be achieved with an LLC as an important component of the plan.

The bad news, for physicians and some other professionals, is that state law generally does not allow these practices to be operated as an LLC. The liability shield available to business owners has not been extended to doctors-due to opposition primarily from the trial lawyers. Although the LLC may be useful in protecting accumulated assets from lawsuits, it will not insulate the individual from the liability associated with a medical practice.