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.
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.