Protect Your
Identity:
Protect Your Assets:
Safety
In the
last
article we discussed how to acquire and own assets while
preserving our privacy through the use of the “nominee trust”.
In this article we learn how to acquire and hold an asset in a way
that does not expose our other assets to the potential liabilities of
our new asset. An example will help. We consider buying a
large sailing yacht, and better yet, putting it out to charter, so
that hopefully we earn income therefrom. However, we don’t
want an uninsured or underinsured yachting accident wiping out all of
our other assets, such as our businesses, homes, stocks and bonds.
Enter, the
concept of limited liability. We know something about
limited liability, since we know that corporations limit the liability
of their shareholders to the amount of their investment and no more.
A shareholder limits his or her liability to the amount that he or she
has invested in the corporation. We might not want to run out
and form a corporation every time we purchase a boat or other asset,
since there are substantial tax, recordkeeping, and other
ramifications of corporations. On the other hand a new business
entity may fit the bill nicely.
Beginning
January 1, 2000, California authorized the use of a
“single-member” “limited liability company” or “LLC”.
A LLC is a business organization that provides its “members” with
the same limited liability as corporations do. From an income
tax perspective, however, the single-member LLC is disregarded as a
separate entity and therefore does not have the double taxation and
other tax drawbacks of corporations. In addition, LLCs do not
have the significant corporate recordkeeping requirements, such as
annual meetings of shareholders and directors. As a result,
sophisticated real estate and other investors now transfer each of
their major properties to separate single-member LLCs to insulate each
of their properties from the liabilities of each of their other
properties.
What are the
drawbacks you ask? California charges an annual $800 minimum
franchise tax on each LLC. In addition, there is a gross
receipts tax based upon a sliding scale from $865 for receipts in
excess of $250,000 up to a maximum of $7,785 for receipts in excess of
$5,000.000. Is this a reasonable “insurance” cost? The
decision is yours, but the cost of the yacht slip for one month will
equal the annual $800 franchise tax, and if your receipts are
$5,000,000, you probably won’t mind the $7,785 tax in any event.
The peace of mind in limiting the yacht liabilities to the
yacht, and not the rest of your assets, may very well tip the balance
in favor of LLCs.
Is the
limited liability unlimited? As with corporations, the
single-member LLC must be careful to maintain the integrity of the LLC
by maintaining separate LLC bank accounts, accounting records, and
liability insurance, so that creditors cannot “pierce the liability
veil” by claiming that the entity was really just the owner’s
“alter ego”. Of course, any entity used to perpetrate fraud
on others will be disregarded by the law.
As always,
consult your trusted accountant and attorney with respect to your
individual circumstances, as this article has been prepared for
informational purposes only, does not constitute legal advice, and is
not guaranteed to be correct, complete or up-to-date.
In the
next
article, we learn to put the last two article’s lessons together
to increase both the privacy and safety of our assets.
Disclaimer:
The purpose of this article is to provide information, rather than
advice or opinion. It is accurate to the best of my knowledge as of
the date of the article. I have no duty to update this article. The
information, examples and suggestions presented in this article have
been developed from sources believed to be reliable. This article
should not be viewed as a substitute for the guidance and
recommendations of a retained professional and should not be construed
as legal or other professional advice. In addition, I do not endorse
any actions addressed herein, unless they are produced or created by
me. I recommend consultation with me or other competent legal
counsel and/or other professional advisors before applying this
material to any particular factual situations.
