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ElderLaw News

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C., William S. Fralin, Esq., President.

Limited Liability Companies: The Entity of Choice for Estate and Business Planning

The limited liability company ("LLC") is rapidly becoming one of the most popular, as well as useful, tools for estate and business succession planners and their clients.

As the Virginia Limited Liability Company Act celebrates its twentieth anniversary this year, it is a good time to examine why the LLC has become the entity of choice for businesses in Virginia and North Carolina, as well as many other states throughout the country.

As a point of reference, the most common types of business entities are as follows:

-- A sole proprietorship is an unincorporated business that is owned and operated by a single individual. This individual is entitled to all profits, but is also personally liable for all obligations of the sole proprietorship.

-- A general partnership is an association of two or more individuals to carry on, as co-owners, a business for profit. Generally, each partner shares equally in the profits and loses of the partnership, and each is personally liable for all obligations of the partnership.

-- A limited partnership is similar to a general partnership, but must maintain at least one general partner and one limited partner. General partners maintain management and control of the limited partnership, while the limited partners contribute the financial resources for operation of the partnership. In most cases, general partners are personally liable for the obligations of the partnership, while the limited partners are generally liable only to the extent of their investment.

-- A corporation is an entity with distinct management and ownership. Corporations are typically classified as either a stock corporation, a non-stock corporation, or a professional corporation. While the owners are generally shielded from liability, corporations are often complex and cumbersome entities, which must conform to extensive federal and state laws governing their existence and operation.

A limited liability company can be viewed as a hybrid of a partnership and a corporation, extracting the benefits of those entities while avoiding many of their disadvantages. While the owners of sole proprietorships and general partnerships are subject to personal liability, an LLC is a separate legal entity that limits the personal liability of its owners, similar to a corporation. But while corporations are subject to double taxation, an LLC has the option of classifying itself as a partnership for income tax purposes, meaning that it will be taxed only on one level.

What, you might ask, does this have to do with estate and business succession planning? To answer this question, consider an individual who owns real estate that is used as rental property. If the rental property is titled in the owner's individual name and one of the tenants suffers an injury on the property, then the owner may be personally liable for the tenant's damages. This means that any judgment will be satisfied from the owner's personal assets, bank accounts, salary, etc. Conversely, if the house is titled in the name of an LLC created by the property owner, then any judgment would be against the LLC and not against the owner personally.

The other primary advantage of an LLC is the tax benefit. For example, a corporation provides limited liability to its owners (i.e., the shareholders), but is subject to double taxation, meaning that it is taxed at the corporate level (i.e., the corporation gets taxed on its income) as well as the owner level (i.e., the shareholders then pay tax on the income they receive from the corporation). On the other hand, the income received by an LLC (such as rental income) is taxed only at the individual owner level. The owner of the LLC will report any income the owner receives from the LLC on the owner's personal income tax return, but the LLC itself will not incur any tax liability.

Finally, the advantages of an LLC are not limited to limited liability and favorable tax treatment. LLCs also provide:

-- Greater flexibility in structure;

-- Centralized management;

-- Potential continuity of life; and

-- Free transferability of membership interest.

All of this has led to an explosion in the popularity of LLCs. From 2004 to 2007, LLCs were created in greater numbers than were corporations in both Virginia (over 53,000 more LLCs created) and North Carolina (over 34,000 more LLCs created).


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Maryland (301) 214-2229
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The Estate Planning & Elder Law Firm, P.C.

The Estate Planning & Elder Law Firm, P.C. is an elder law firm. We represent older persons, disabled persons, their families, and their advocates. The practice of elder law includes estate planning, estate and trust administration, powers of attorney, advance medical directives, titling of assets and designations of beneficiaries, guardianships, conservatorships, and public entitlements such as Medicaid, Medicare, Social Security, and SSI, disability planning, income tax planning and preparation, care management, and fiduciary services. For more information about The Estate Planning & Elder Law Firm, P.C., please visit our website at http://www.chroniccareadvocacy.com.

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