Use of a Single-Member LLC
A single-member LLC’s provides considerable flexibility for its owner. Individuals forming a new business may choose to forego the liability of operating the business as a sole proprietorship, or the forming a corporation to own the business, by creating a single-member LLC which would own and operate the business and assets. The single-member LLC provides advantages over partnerships with a single equity source because a single-member LLC eliminates the need to have two or more owners and this may result in fewer costs by avoiding the need for creation of more than one legal entity to act as “partners.” Additionally, single-member LLC’s may be used to own multiple divisions of a business or multiple real properties with ownership is vested in a single-entity.
A disadvantage of a single member LLC is that such an entity files a schedule C, when owned by an individual or otherwise disregarded entities for income tax purposes. For individual reporting schedule C taxpayers have a higher audit incidence than non-schedule C taxpayers.
To Hold Real Estate
Owning, developing and operating commercial real estate may be a liability-prone business. The owners of real estate can limit their liability with a LLC. However, LLC owners may not be fully exculpated from real estate liabilities using an LLC. In many instances, lenders may require LLC members to personally guarantee loans.
LLC’s may own, operate, and lease as a landlord, real estate. 805 ILCS 180/1-30(3) and (4). The LLC is not required to disclose its member’s identity unless they are also the LLC organizers or managers. 805 ILCS 180/5-5(a)(4), (5) and (7).
Management of Real Estate: Investors in real estate joint ventures may seek to obtain limited liability by becoming a limited partner. However, limited partners risk losing their protection against liability if they participate in control and management of a limited partnership. See 805 ILCS 210/303. Alternatively, an LLC will give the same investor the benefit of limited liability and the ability to manage the business. For example, a firm owning several real estate projects may form a LLC to own each project separate and apart from ownership of the other projects.ii This structure may have the effect of isolating liabilities to a given project or property.
LLC’s also may be used in connection with like-kind exchanges intended to qualify under I.R.C. §1031. The general rule requires that the party who transferred the exchange property must receive replacement property received in an exchange. This requirement may create issues in that the transferor of the exchange property may wish to insulate itself from personal liabilities in connection with the exchange property, perhaps because of the different nature of the replacement property or because for historical reasons the exchange property had been vested in the transferee rather than in a single-purpose limited liability entity such as a corporation, limited partnership, or LLC.
A LLC will be disregarded as a separate entity for income tax purposes, and the replacement property may be received by an LLC whose single member is the transferor of the exchange property, thereby permitting both completion of a like-kind exchange under I.R.C. § 1031 and limited liability for the transferor as a member in the LLC that receives the replacement property. Additionally, under very limited circumstances, the IRS has permitted the use of a two-member LLC to be treated as a disregarded entity and thereby complete an exchange when the second member does not have an interest in profits or losses of the LLC but instead has been inserted into the LLC’s organizational structure for control purposes. See, e.g., PLR 199911033.
To Hold Tangible Personal Property or Intangible Assets
Intangibles: Where a corporation has many businesses and one of its businesses is a high-risk business, the corporation’s shareholders could establish an LLC to carry on the high-risk business that would otherwise have been carried on by the corporation. The corporation leases the use of its fixed assets and licenses its intangibles to the LLC at fair market value rentals and payment of license fees. In addition to the LLC receiving the rentals and license fees, the corporation could use existing contracts, inventory and outstanding accounts receivable to capitalize the LLC. The LLC thereafter generates all future income of the high-risk business that would have otherwise gone to the corporation. This structure may isolate corporate assets from potential LLC future creditors.
- CAVEAT: Be sure to have counsel review fraudulent conveyance and fraudulent transfer statutes prior to any such transfer.
Richard M. Colombik, JD, CPA, is an award-winning attorney and CPA with a doctorate in jurisprudence with distinction and was formerly on the tax staff of one of the world’s wealthiest families.
Mr. Colombik has also been a tax manager at a Big Four accounting firm, the State Bar’s liaison to the Internal Revenue Service (IRS), vice president of the American Association of Attorney-CPAs, and vice chairman of the American Bar Association’s Tax Section of the General Practice Council, as well as the past chair of the Illinois State Bar Association’s Federal Tax Committee. Mr. Colombik has also served on the liaison committee to the Washington, DC, National Office of the IRS. Mr. Colombik is also a member of the Asset Protection Committee, American Bar Association, and a member of its captive insurance subcommittee.
Mr. Colombik has appeared on numerous television shows, hosted a weekly radio show on tax and business planning, and authored more than 100 articles on income taxation, asset protection planning, IRS defense, and estate planning. He has also instructed more than 100 seminars to professional groups, business groups, bar associations, CPA societies, and insurance groups. This is in addition to authoring a published work on business entity structures offered by the Illinois Institute of Continuing Legal Education, as well as writing a chapter for The Estate Planning Short Course and Asset Protection Planning.