Treat Your LLC Like a Business to Protect Your Assets

Many business owners form several types of business entities to hold their assets and operate different aspects of their businesses. A common strategy is to form limited liability companies to hold real estate. The operating entity, such as a manufacturing entity, pays monthly rent to the real estate LLC and this can work to keep liability of the operating entity separate from the real estate LLC. Some LLCs are formed to hold other assets, such as personal property that is leased to the operating entity. Also, LLCs are commonly used to manage family-owned assets and facilitate transfers among family members. LLCs are not required to have the formalities of meetings, minutes, and notices which are required for corporations. However, for an LLC to maintain its liability protections and protect itself from IRS attacks, it is prudent to exercise some formalities to evidence that the LLC is maintained as a separate entity and is not the alter ego of its owner(s). We advise many of our Cottage Law clients and business owners and families who use LLCs to hold and manage assets that they should treat the LLC as a business by following the pointers below.

  • form the entity in strict compliance with the law of the state where it is formed
  • apply for and obtain a federal ID number
  • fund the LLC with assets immediately upon formation or soon after forming the entity
  • the assets transferred to the LLC should be titled in the name of the LLC and ensure that insurance policies reflect the proper ownership
  • the LLC should have its own bank accounts that are not used as the members' (the owners') personal cash registers
  • all LLC related funds should go in and out of LLC accounts; any distributions to the members should be from the funds held in the LLC's accounts
  • the LLC's assets should not be for the personal use of the members unless the members compensate the LLC for the use of the assets
  • personal assets should not be transferred to the LLC unless those assets are for a business purpose and no longer to be used personally
  • if the LLC has a manager, the manager should respect the fiduciary duty he or she has to the owners in conducting the affairs of the LLC
  • if a member dies, the LLC should continue to operate as usual, as opposed to dissolving, because the IRS could argue the LLC was solely formed for the avoidance of taxes and not legitimate business purposes
  • the Operating Agreement should provide a roadmap as to how distributions are to be made and no deviation from this should occur
  • the LLCs books and records, corporate and financial, should be attended to on a timely basis and with professional care
  • the Operating Agreement should provide for how voting rights are allocated, and while different voting requirements can be established to suit the needs and concerns of the members, the voting requirements should be respected at all times
  • the members of the LLC should receive K-1s to attach to their income tax returns
  • the members should hold annual meetings and keep minutes of those meetings, filing them in the record book
  • the members should hold special meetings for important decisions or provide signed consent resolutions, filing those documents in the record book

Limited liability companies provide many opportunities and alternatives for conducting business without all the formalities required of corporations while combining the advantages of limited liability with pass-through tax advantages. The organizational flexibility, such as for voting and distributions, that the LLC affords business owners is the LLC's most popular advantage over many other business associations. With all its flexibility, LLCs must be run and managed responsibly. Business owners and the professionals who assist the business owners must carefully consider how the LLC will be organized and operated and then follow-through and implement those processes and procedures. This will serve to protect the LLC members, and families with an LLC cottage succession plan for the family cottage, from personal liability and from IRS attacks that the LLC was not formed for a legitimate business purpose.