Most are unaware that a Limited Liability Company may be taxed in four different ways: disregarded, partnership and S or C corporation.
Let me share with you 10 LLC secrets that will not only keep you out of
tax trouble but help you better avoid pitfalls down the road.
1. Can an IRA invest in a Limited Liability Company? There are a couple
of major issues with this strategy that could create problems with the
IRS. First, if you are the manager of the LLC and you are on the LLC
checking account that has IRA funds, that means you have "check book
control". There are prohibited transactions in where you can not use
that money, but more importantly if the signer on the account uses the
LLC money for personal use that is a big problem and could create
serious IRS issues. The second issue centers around who can be the
manager of the Limited Liability Company. Can it be you? Is that
self-dealing? That means you are running the same entity that is owned
by the IRA and that is an issue with the IRS. It appears that having a
separate self directed IRA only to own the real estate may be a better
approach. You do want to isolate the safe and risk investments.
2. What are the advantages of a Limited Liability Company over an S
corporation? When you capitalize an S corporation, code section 351
allows shareholders to transfer appreciated assets to the corporation
taxfree. But, the shareholder who is transferring the asset MUST own 80%
of the S corporation.
3. When should an entity convert to an LLC? Many times if you formed a
corporation it may be less steps and cheaper to form a new LLC. Many
statutes authorize the merger of an LLC with another entity like a
partnership or corporation. Some state LLC acts provide that an LLC may
NOT merge with another entity unless there is unanimous consent of the
members for such merger.
4. What are the consequences if an LLC is "doing business" in a state
but is not registered as a foreign LLC? Typically, the entity will need
to foreign register where nexus (or a business presence) is located.
Even an internet business can make the argument you can be based from
anywhere, but if you are working in your home office in California with a
Nevada LLC, you have nexus in California. Besides how do you claim a
home office deduction when the LLC is not in your state doing business?
5. When do LLC members have limited liability? No member of the Limited
Liability Company is personally liable for the LLC's debts and
obligations (as opposed to by individual action, such as by personal
guarantee or commission of a tort). A member of the LLC has personal
liability if a creditor of the LLC has the right to require a member to
satisfy a debt of the LLC to the extent that the Limited Liability
Company assets are insufficient to satisfy the LLC's debt to the
6. How will a single member LLC, taxed as a disregarded entity for
federal income tax purposes be treated for state tax purposes? Where
state laws follow federal laws, a single member LLC would be disregarded
for state income tax purposes when disregarded for federal income tax
purposes. At least two states have indicated that a single member
Limited Liability Company would be taxed as a partnership for state tax
purposes, New York and Wisconsin.
7. How much capital must be contributed to an LLC? Except when required
by state law, there is no minimum amount that must be contributed to an
LLC in exchange for an interest in the LLC.
8. What type of reporting is required if real estate is contributed to
an LLC in exchange for a membership interest? According to the Treasury
Regulations Section 1.6045-4(b)(1), a transfer of real estate to a
partnership must be reported, even though it is tax-free under Code
Section 721 (a).
9. When can a Limited Liability Company make distributions to members?
LLCs generally can distribute cash or property, whether income or
capital, to the members as provided in the Operating Agreement, or
otherwise agreed by the members.
10. What is a series Limited Liability Company and what issues does it
bring? The series LLC is similar to a corporate controlled group with
several operating corporations, but there is only one legal entity. The
benefit is that you could put 10 rental properties into one series LLC
and provide protection of each property from the other because each is
owned by one cell.
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