Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

What’s an LLC and Why Create One for Your Business?

The Limited Liability Company (LLC) is a popular choice for starting a small business. While it may not be suitable for everyone, there are good reasons for its enduring popularity. An article by NerdWallet discusses the basics of LLCs, why they’re so popular, and the potential drawbacks of this business structure.

What Is an LLC?

An LLC is a business structure combining some of the best features of partnerships and corporations. It provides the flexibility of a partnership while offering the liability protection typically associated with a corporation. This means that if your business encounters financial difficulties or legal issues, your personal assets—like your home or savings—are generally protected.

Who Can Be an LLC Member?

One of the advantages of an LLC is that it can have as many members as you want. These members can be individuals or even other businesses. It’s even possible to form a single-person LLC with just one member. This makes the LLC one of the most flexible business structures, whether you’re a solo entrepreneur or part of a larger group.

How are LLCs Taxed?

LLCs are unique because the federal government doesn’t recognize them as a specific tax entity. Instead, an LLC can choose how it wants to be taxed. By default, a single-member LLC is taxed as a disregarded entity, meaning the profits and losses pass directly to the owner’s personal tax return.

Multi-member LLCs are usually taxed as partnerships, with each member reporting their share of profits and losses. However, an LLC can also choose to be taxed as a corporation, either as a C-corporation or an S-corporation, depending on what makes the most sense for the business.

What are the Benefits of an LLC?

There are several reasons why an LLC might be the right choice for your business:

  • Limited Liability: As mentioned earlier, one of the most significant advantages of an LLC is that it protects your personal assets from business-related debts and liabilities. This means that if your LLC is sued or incurs debt, your personal belongings are typically safe.
  • Pass-Through Taxation: By default, LLCs enjoy pass-through taxation and don’t pay taxes directly. Instead, they use a simplified tax process with profits and losses that pass through to the members’ personal returns.
  • Flexibility in Management: An LLC can be managed by its members, or they can choose to hire an outside manager. This allows members to be as involved in the day-to-day operations of the business as they want to be.
  • Easy to Set Up and Maintain: Setting up an LLC is relatively straightforward and involves less paperwork and regulatory requirements than other business structures like corporations. Ongoing maintenance typically includes an annual report and minor fees.

What are the Potential Drawbacks?

While LLCs offer many benefits, it’s important to be aware of potential drawbacks. The protection of limited liability isn’t absolute; in certain situations, such as mixing personal and business finances or engaging in fraudulent activities, a court may decide to “pierce the corporate veil,” leaving your personal assets vulnerable.

Additionally, if your LLC is taxed as a partnership, you’re considered self-employed and must pay Social Security and Medicare taxes on your share of the profits. Changes in membership can also be complicated. Some states require the LLC to be dissolved and reformed, which leads to additional legal and financial responsibilities.

How Do You Form an LLC?

Forming an LLC involves choosing a name, filing articles of organization with your state, and creating an operating agreement. You’ll also need to select a registered agent to handle official correspondence and obtain an Employer Identification Number (EIN) from the IRS if you plan to hire employees or operate as a partnership or corporation.

Is an LLC Right for Your Business?

Deciding whether an LLC is the best structure for your business involves weighing the pros and cons and considering your specific needs. Whether you’re a solo entrepreneur or part of a larger group, the flexibility, liability protection, and tax benefits of an LLC can make it an attractive option.

Form Your LLC Today

If you’re considering forming an LLC or need help understanding your options, now is the perfect time to consult with an experienced estate planning attorney. A well-crafted business plan can set you on the path to success, protecting both your business and personal assets. Contact our office today to schedule a consultation and take the first step in securing your business’s future.

Key Takeaways

  • Protect Personal Assets: An LLC helps shield your personal belongings, like your home and savings, from business liabilities and debts.
  • Simplify Taxes: LLCs offer pass-through taxation, allowing business profits and losses to be reported on your personal tax return, simplifying the tax process.
  • Flexible Management: LLCs can be managed by the members or an outside manager, giving you control over how involved you want to be in daily operations.
  • Tailor to Your Needs: Whether you’re a solo entrepreneur or part of a team, LLCs offer the flexibility to structure your business according to your specific goals.
  • Seek Legal Support: Consulting with an estate planning attorney can help you navigate the process of forming an LLC and ensure that your business is set up for long-term success.

Reference: NerdWallet (Mar. 11, 2024) “What Is an LLC? Pros and Cons of a Limited Liability Company”

Estate Planning and Tax Planning for Business Owners

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre- and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

Protecting Assets with a Trust vs. Limited Liability Company

While trusts and Limited Liability Companies (LLCs) are very different legal vehicles, they are both used by business owners to protect assets. Understanding their differences, strengths and weaknesses will help determine which is best for your situation, as explained by the article “Trust Vs. LLC 2023: What Is The Difference?” from Business Report.

A trust is a fiduciary agreement placing assets under the control of a third-party trustee to manage assets, so they may be managed and passed to beneficiaries. Trusts are commonly used when transferring family assets to avoid probate.

A family home could be placed in a trust to avoid estate taxes on the owner’s death, if the goal is to pass the home on to the children. The trustee manages the home as an asset until the transfer takes place.

There are several different types of trusts:

A revocable trust is controlled by the grantor, the person setting up the trust, as long as they are mentally competent. This flexibility allows the grantor to hold ownership interest, including real estate, in a separate vehicle without committing to the trust permanently.

The grantor cannot change an irrevocable trust, nor can the grantor be a trustee. Once the assets are placed in the irrevocable trust, the terms of the trust may not be changed, with extremely limited exceptions.

A testamentary trust is created after probate under the provisions of a last will and testament to protect business assets, rental property and other personal and business assets. Nevertheless, it only becomes active when the trust’s creator dies.

There are several roles in trusts. The grantor or settlor is the person who creates the trust. The trustee is the person who manages the assets in the trust and is in charge of any distribution. A successor trustee is a backup to the original trustee who manages assets, if the original trustee dies or becomes incapacitated. Finally, the beneficiaries are the people who receive assets when the terms of the trust are satisfied.

An LLC is a business entity commonly used for personal asset protection and business purposes. A multi-or single-member LLC could be created to own your home or business, to separate your personal property and business property, reduce potential legal liability and achieve a simplified management structure with liability protection.

The most significant advantage of a trust is avoiding the time-consuming process of probate, so beneficiaries may receive their inheritance faster. Assets in a trust may also prevent or reduce estate taxes. Trusts also keep your assets and filing documents private. Unlike a will, which becomes part of the public record and is available for anyone who asks, trust documents remain private.

LLCs and trusts are created on the state level. While LLCs are business entities designed for actively run businesses, trusts are essentially pass-through entities for inheritances and to pass dividends directly to beneficiaries while retaining control.

Your estate planning attorney will be able to judge whether you need a trust or an LLC. If you own a small business, it may already be an LLC. However, there are likely other asset protection vehicles your estate planning attorney can discuss with you.

Reference: Business Report (April 14, 2023) “Trust Vs. LLC 2023: What Is The Difference?”

Can a Vacation Home Be Kept in the Family for Generations?

Many family traditions include gatherings at vacation homes. However, leaving these properties to the next generation is not always in the best interest of the family. Some people try to make a simple solution work for a complex problem, leading to more challenges, as explained in the article “Succession planning for the family lakehouse” from NH Business Review.

Joint ownership among siblings can lead to disputes about how the home is used, operated and maintained. Some children want to continue using the house, while others may see it as an income stream for a rental property. There may be siblings who cannot afford to participate in the house’s upkeep and need the cash more than the tradition. When joint ownership is presented as a surprise in a will, the adult children may find themselves fighting about the vacation home, with no parent around to tell them to knock it off.

Making matters more complicated, if the siblings live in different states and the house is in a neighboring state, ownership of the real estate at death may subject the decedent’s estate to estate taxes where the property is located. As a result, the property may need to go through probate in an additional state. Every state has its own tax rules, so the transfer of joint property will have to be analyzed by an estate planning attorney knowledgeable about the laws in each state involved.

A sensible alternative is creating a Limited Liability Corporation, ideally while the original owners—the parents—are still living. The organizational documents include a certificate of organization to file with the Secretary of State and an operating agreement. The LLC will need its own taxpayer identification number, or EIN.

The operating agreement governs the management of the property and addresses the operating expenses and maintenance of the property. It should also address the process for a child to cash in on their ownership to other children. LLC operating agreements often include these items:

  • Responsibilities for operating expenses
  • Process to transfer member units or interests
  • Duties for regular maintenance, budgeting and approval of property improvements
  • Development of a property use schedule
  • Establishing rules for the home’s use

There are some costs associated with creating an LLC, including annual filing requirements. However, these will be small, when compared to the cost of family fights and untangling joint ownership.

An LLC can also offer personal liability protection from lawsuits brought by renters, creditors, or any litigants. If there is an accident resulting from work being done on the property, the owners may be shielded from the liability because they do not personally own the property, the LLC does.

In the case of divorce, bankruptcy filing, or a large judgement being filed against one of the children, the LLC will protect their interest in the property.

The real estate owned by the LLC is not part of the owner’s probate estate. This avoids the need for a second probate in the state where the property is located. Some states have adopted the Uniform Transfer on Death Security Registration Act, and the LLC membership interest can be assigned along to the terms of the beneficiary designation.

Planning for what will happen to a vacation home after death provides peace of mind for all in the family. Speak with an experienced estate planning attorney to ensure that the property and the family’s peace is preserved.

Reference: NH Business Review (March 23, 2022) “Succession planning for the family lakehouse”

How Do You Pass Down a Vacation Home?

If your family enjoys a treasured vacation home, have you planned for what will happen to the property when you die? There are many different ways to keep a vacation home in the family. However, they all require planning to avoid stressful and expensive issues, says a recent article “Your Vacation Home Needs and Estate Plan!” from Kiplinger.

First, establish how your spouse and family members feel about the property. Do they all want to keep it in the family, or have they been attending family gatherings only to please you? Be realistic about whether the next generation can afford the upkeep, since vacation homes need the same care and maintenance as primary residences. If all agree to keep the home and are committed to doing so, consider these three ways to make it happen.

Leave the vacation home to children outright, pre or post-mortem. The simplest way to transfer any property is transferring via a deed. This can lead to some complications down the road. If all children own the property equally, they all have equal weight in making decisions about the use and management of the property. Do your children usually agree on things, and do they have the ability to work well together? Do their spouses get along? Sometimes the simplest solution at the start becomes complicated as time goes on.

If the property is transferred by deed, the children could have a Use and Maintenance Agreement created to set terms and rules for the home’s use. If everyone agrees, this could work. When the children have their own individual interest in the property, they also have the right to leave their share to their own children—they could even give away or sell their shares while they are living. If one child is enmeshed in an ugly divorce, the ex-spouse could end up owning a share of the house.

Create a Limited Liability Company, or LLC. This is a more formalized agreement used to exert more control over the property. An LLC operating agreement contains detailed rules on the use and management of the vacation home. The owner of the property puts the home in the LLC, then can give away interests in the LLC all at once or over a period of years. Your estate planning attorney may advise using the annual exclusion amount, currently at $16,000 per recipient, to make this an estate tax benefit as well.

Consider who you want to have shares in the home. Depending on the laws of your state, the LLC can be used to restrict ownership by bloodline, that is, letting only descendants be eligible for ownership. This could help keep ex-spouses or non-family members from ownership shares.

An LLC is a good option, if the home may be used as a rental property. Correctly created, the LLC can limit liability. Profits can be used to offset expenses, which would likely help maintain the property over many more years than if the children solely funded it.

What about a trust? The house can be placed into an Irrevocable Trust, with the children as beneficiaries. The terms of the trust would govern the management and use of the home. An irrevocable trust would be helpful in shielding the family from any creditor liens.

A Revocable Trust can be used to give the property to family members at the time of your death. A sub-trust, a section of the trust, is used for specific terms of how the property is to be managed, rules about when to sell the property and who is permitted to make the decision to sell it.

A Qualified Personal Residence Trust allows parents to gift the vacation home at a reduced value, while allowing them to use the property for a set term of years. When the term ends, the vacation home is either left outright to the children or it is held in trust for the next generation.

Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs and Estate Plan!”

Search
Join Our eNewsletter

Recent Posts
Categories