Operations Manual

LIMITED LIABILITY COMPANY

Operations Manual
 Operations Manual

Table of Contents

Article One Preliminary Matters 1-1

Section 1.01 What is a Limited Liability Company? 1-1
Section 1.02 Benefits of Creating a Limited Liability Company 1-1

Article Two The Tax Implications of LLC Planning 2-6

Section 2.01 Fair Market Value and Limited Liability Company Units 2-6
Section 2.02 Potential Transfer Tax Reduction 2-6
Section 2.03 Intergenerational Wealth Planning and Transfers 2-6
Section 2.04 Maintaining Control Over LLC Activities 2-8
Section 2.05 Income Tax Attributes of Using an LLC 2-8
Section 2.06 Income Tax Savings Using an LLC 2-8
Section 2.07 Franchise Tax Savings Using an LLC 2-8

Article Three Asset Protection and LLC Planning 3-9

Section 3.01 Ownership and Title to Property 3-9
Section 3.02 How Does an LLC Provide Personal Asset Protection? 3-9
Section 3.03 What About Fraudulent Transfers? 3-10
Section 3.04 Avoiding Fraudulent Transfer Problems 3-10
Section 3.05 What if a Creditor Sues the LLC Itself? 3-10
Section 3.06 What Options Does a Creditor Have When Suing a Member? 3-11
Section 3.07 Maintaining Proper Insurance Coverage 3-12
Section 3.08 Additional Protection Using LLCs 3-12

Article Four LLC Operational Issues 4-13

Section 4.01 Asset Appraisals of LLC Assets 4-13
Section 4.02 Valuation of the LLC 4-13
Section 4.03 Periodically Review Operations 4-13
Section 4.04 Managing LLC Investments 4-15
Section 4.05 Transfer of Specific Assets to the LLC 4-16
Section 4.06 Assets That Should Not Be Transferred to the LLC 4-16
Section 4.07 Obtaining Distributions from the LLC 4-17

General Questions and Answers 5-18

Section 5.01 Observe the Formalities to Assure LLC Status as a Separate Legal
Entity 5-18
Section 5.02 Dealing with Valuation Disputes 5-19
Section 5.03 Federal and State Securities Laws 5-20
Section 5.04 Filing of Income Tax Returns 5-21
Section 5.05 The Role of the LLC Accountant 5-21
Section 5.06 Deductibility of Fees Paid for Business and Estate Planning 5-21
Section 5.07 Multiple Entity and Holding Company Planning 5-21

Article Six Funding the LLC 6-26

Section 6.01 Introduction to Funding 6-26
Section 6.02 Why Fund the LLC? 6-27
Section 6.03 If You Require Assistance in Funding the LLC 6-27
Section 6.04 How is an LLC Funded? 6-27
Section 6.05 How Should the LLC Hold Title to Assets? 6-27
Section 6.06 How Should Specific Assets Be Funded? 6-28

Article Seven Miscellaneous Issues Regarding Your LLC 7-33

Section 7.01 How Does the LLC Identify Itself? 7-33
Section 7.02 How Does the LLC Conduct Business? 7-33
Section 7.03 What About LLC Bank Accounts? 7-33
Section 7.04 What About Property Transferred to the LLC? 7-33
Section 7.05 Does Transferring an Asset Into the LLC Create Tax Liability?7-34
Section 7.06 How Does the LLC Transact Business? 7-34
Section 7.07 Should Members Have Meetings? 7-34
Section 7.08 What About Taxes on Wages and Salaries? 7-34
Section 7.09 Estate Planning and the LLC 7-35
Section 7.10 Amending Your LLC 7-35
Section 7.11 Annual Gifts 7-35
Section 7.12 Periodic Valuations and Appraisals 7-35
Section 7.13 Maintain Contact with Key Advisors 7-35
Section 7.14 Conclusion 7-35
 Article 1
Preliminary Matters

The purpose of this Limited Liability Company Operations Manual is to illustrate key concepts
and benefits of using a Limited Liability Company (LLC.) Basic information concerning the
appropriate steps in creating, maintaining, and updating the LLC is included to guide you in
working with your professional advisor team to realize those benefits.
There are numerous reasons why clients undertake LLC planning. Most commonly is the desire
to segregate business assets or an active business for the purpose of asset protection. Clients
may desire to structure their investments to provide for retirement income, acquire assistance in
managing assets, or engage in effective planning to minimize the costs associated with
transferring assets during their lifetime or at death. They may desire to lower income taxes by
spreading income among family members in lower tax brackets. Some clients want to involve
family in the management of family assets or to structure a way for family members to become
involved in the family business to a greater degree without surrendering total control. LLC
planning can accomplish all of these objectives and more.
There are two main forms of Limited Liability Companies: member-managed and
manager-managed. In member-managed, members of the company choose to manage the entity
by membership voting; in manager-managed, members appoint one or more managers to conduct
business for the entity as authorized by the members.
A Manager need not be a Member of the LLC but can be. Even in a member-managed LLC, a
“day to day” manager is sometimes appointed to conduct daily business operations without
decision making management authority. Finally, an LLC has great flexibility in selecting how it
is taxed. Depending on the number of members, it may be a disregarded entity or may be taxed
as a partnership or corporation. This design flexibility is a major reason an LLC is so attractive.

Section 1.01 What is a Limited Liability Company?

Limited Liability Company -- A Limited Liability Company, or LLC, is an entity created under
state law by the filing of Articles of Organization with the Secretary of State. An LLC has
certain features that affect both member liability and creditor rights involving the company. An
LLC may be taxed as a “disregarded entity” (like a sole proprietorship) if it has one member, as
an S or C corporation, or as a partnership if it has two or more members. Members of the
company do not have personal liability for the enterprise. Instead, liability for company
activities is limited to the assets of the company, i.e., a member’s investment. Likewise, a
member would not ordinarily have personal liability for company obligations absent a personal
guaranty.

Section 1.02 Benefits of Creating a Limited Liability Company

There are many reasons to create an LLC. Below are some of the most common ones.

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(a) Provide Asset Protection and Protect Against Future Creditors of
Members
A Limited Liability Company provides considerable asset protection to members
carrying on a business. The LLC limits the personal liability of members to the
Company’s creditors since members risk only their investment to the creditors of
the company. An LLC also provides some protection from the judgment creditors
of the individual members if a judgment is entered against the member after the
creation of the company.
LLCs protect family assets from claims of future creditors of members as a result
of basic equitable principles. For example, if future creditors of a particular
member were able to acquire assets, all the members would suffer as a result of
the actions, or inactions, of a single member. Basic equitable concepts do not
support punishment of an innocent group of members for the actions of another
member.
The LLC provides asset protection by dictating the rights of a member’s creditor.
Creditors of a member generally have no right to become a member, to demand
company assets, or to compel distributions. Generally, the law of most states
provides that a judgment creditor may only levy on assets that are distributed out
of the company to the member. For many professionals, and for people with
wealth, the asset protection features of the LLC are often the most substantial
business purpose for creation of the entity.
(b) Avoid Living and Death Probate and Maintain Privacy
Creation and funding of an LLC can assist in preventing assets from going
through probate upon the disability or death of a member. Owning LLC interests
or shares can also simplify a guardianship, conservatorship, and probate
proceedings. It is usually in the best interest of the LLC and the members to
simplify such proceedings.
The details of investment activities and the nature of LLC assets themselves are
not part of the public record. The Articles of Organization of the Limited
Liability Company are filed with the state to form the entity, but they generally
contain only basic information required by the state.
An LLC can be a cleaner planning tool to use in controlling property compared to
forms of title such as joint tenancy with right of survivorship (JTWROS.)
JTWROS is commonly used on bank accounts and brokerage accounts as a way
to avoid, or at least postpone, the death probate process. Joint tenancy is not the
optimal way to hold title to many assets for a variety of tax and estate planning
reasons. Doing so can completely frustrate the distribution of an estate. LLC
ownership can effectively thwart the unintended use of joint tenancy.
(c) Restrict the Right of Non-Members to Acquire Interests
The LLC restricts the right of non-members to acquire interests in LLC assets.
The LLC also may prevent the transfer of a member’s interest in the LLC as a
result of a failed marriage. No matter how careful other planning may be,
unexpected divorces, successful creditor claims, and even adverse court rulings

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can frustrate both business and family intent and force unwanted communications
and relations between ex-family members. Proper planning using an LLC can
streamline and facilitate the settlement process between them.
(d) Prevent Commingling of the Assets of Gift Recipients
The LLC creates a simple way to prevent gifts made to family members from
being commingled in that family member’s marriage. Limited Liability Company
shares or units (LLC units) can be transferred directly in the name of the recipient
family member, or in a separate property trust created for him or her. This
establishes the property as separate property and using a trust to own that property
tends to make it impossible to commingle with other marital assets. Keeping
separate assets separate allows tracking and maintenance of separate property in
case of marital dissolution.
(e) Allow for More Flexible Business Planning
The Limited Liability Company is more flexible than most other available
business planning tools such as a general partnership, limited partnership, or
corporation. Owners of interests in LLCs are not required to recognize gain or
loss in connection with liquidation except to the extent that any cash received or
deemed received exceeds the adjusted basis of a member’s interest in the LLC
immediately before the distribution.
(f) Centralized Management of Investments
The LLC can hold investment assets and be structured to provide for centralized
management. An older generation of family members such as parents or
grandparents that create an LLC may retain fiduciary control of the enterprise and
even introduce descendants to the management process over a period of time.
Business succession planning encourages the founders or older generation of a
family to train successors or descendants and appoint someone to manage
business wealth and monitor decisions. It is important to understand the interplay
between retaining control and making certain that any member also acting as a
manager, whether directly or indirectly through a management trust or entity, acts
as a fiduciary. Recent court rulings and IRS interest makes clear that failure to do
so can result in potentially adverse tax consequences.
Pooling of assets often reduces management costs and may also achieve better
rates of return. It is easier to manage one portfolio than several scattered
portfolios. Furthermore, the use of the LLC as a holding company may result in
lower asset management fees and easier diversification of assets.
(g) Easier to Make Loans or Purchase Shares
The LLC may make loans permitted by the LLC agreement. When a member
needs funds for specific personal needs, for example an education expense, and
the member’s capital account is not sufficient, a loan may be made which could
be repaid from subsequent company distributions, or LLC units may be
repurchased for fair market value (FMV). Loans or purchases must be properly
documented in order to minimize the risk that the IRS will later deem these

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transactions as gifts or to support an argument that the company is not a business
and should be disregarded.
(h) Valuation Adjustments on Company Interests
If a member transfers an LLC unit by gift or sale or if a member of the LLC dies,
a valuation usually must be made to determine what the transferred interest is
worth. Fair market value of Limited Liability Company units (LLCUs) is lower
on a “going concern” basis (asset value adjusted for lack of marketability of the
LLC units representing ownership in the LLC) than on a “liquidation” basis
(value of the underlying assets.) The reasons for this anomaly are based in
equitable and business principles.
Inherent restrictions on the rights of members under Limited Liability Company
law and the specific limitations imposed on LLC units under the Limited Liability
Company agreement generally result in LLC units having a fair market value that
is substantially less than the value of the underlying assets of the LLC. This is
termed a “discount” or valuation adjustment. An outside buyer of LLC units
faces the reality that although the buyer might gain a good investment in
exchange for a purchase price, he or she could exercise little control over benefits
received or the actual assets the interest represents during the term of the LLC.
Similarly, gifting of LLC units during the donor’s lifetime may result in gift tax
savings. Gift tax savings exist because the gift of a fractional or non-controlling
LLC interest can often be valued at far less than the interest’s fractional share of
the LLC as a whole. For example, if a parent gives a child a 5% interest in the
LLC, the value of the interest will be reduced by adjustments made for lack of
marketability and also for lack of control. If the asset share value is discounted by
fifty percent, for example, the annual gift tax exclusion or the applicable
exclusion amount used to cover the gift is effectively doubled.
(i) Reduce State Taxes
A Limited Liability Company may not be subjected to corporate income tax or
franchise tax in certain jurisdictions while other forms of business might be. (In
some jurisdictions, however, the LLC is subject to taxes which are not applied to
other kinds of business entities.)
(j) Reduce Income Taxes
Income distributed to minority owner members or members who do not
participate in management may not be subject to self-employment tax, which
reduces overall income tax. Spreading income among lower income tax bracket
family members may also reduce income taxes. Younger family members
participate in the growth of all assets in the LLC at income tax rates that may be
lower than the creators of the LLC. This can be done through the use of profit
distributions to members, or through the use of management fees paid to a
manager (which are generally subject to self-employment taxes).
Dissolving a Limited Liability Company taxable as a disregarded entity or
partnership has less onerous tax consequences than dissolving a corporation.
Since a Limited Liability Company taxable other than as a C corporation is a

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 conduit for federal income tax purposes, the tax consequences upon dissolution
may be far less significant than upon the dissolution of a C corporation.
(k) Facilitate Annual Gifting
One of the primary benefits of the LLC is its ability to maximize annual tax-free
gifts to family members. Some people do not want to give up management of
assets while they are alive or do not have sufficient disposable cash on hand to
give it away, but they desire to make gifts to others to reduce their taxable estate,
or for other reasons, and might be willing to make gifts of partial interests of
property.
The LLC facilitates annual gifts through gifts of LLC units either made directly to
beneficiaries or to trusts for their benefit. LLC units are gifted, not the assets held
by the LLC. For the donee, this is similar to receiving shares of stock in a
corporation. The donor owns a percentage of the entire LLC. It is important that
the value of the gift be substantiated by appraisal of the underlying assets
followed by valuation of the LLC units and the donor should consider filing a
Federal Gift Tax Return to start the statute of limitations running for the gift.
LLC management may be structured to allow younger family members, key
employees, or others an increasing investment and business decision-making role
over time. In the family setting, family members may begin to accumulate an
equity interest within the LLC that can be used for education or other needs.
Those who manage the LLC have considerable discretion to retain and reinvest
income from operations or to distribute. Most LLCs make distributions and are
managed to distribute annually at least enough income to pay income tax
attributable to each member’s share of distributable profit or more. It is important
to provide benefits to members to avoid the IRS contention that gifts of LLC units
are future gifts, without a current measurable benefit, usually a bad tax outcome.
The LLC avoids fractionalizing family assets to make annual or other gifts. This simplifies the
process of gifting and property management. Since LLC units are not liquid assets, and are not
freely assignable, the donor of the LLC units retains a degree of control over the gift if in a
position to participate in management of the LLC. Furthermore, in a non-family business
setting, management of the LLC can be performed by non-family members while the family
member gift recipient receives something that provides real present value that is not easily lost or
misspent.

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 Article 2
The Tax Implications of LLC Planning

Section 2.01 Fair Market Value and Limited Liability Company Units
To understand the tax consequences of using an LLC, it is important to define “fair market
value” and its relationship to the LLC. Fair Market Value “FMV” is defined in Treas. Reg.
20.2036-1(b) as:
What a willing buyer would pay a willing seller, when neither is compelled to act
and both understand all of the relevant facts.
The LLC agreement itself limits the economic value of an LLC unit by restricting the rights of
members. For example, the agreement may state that a Member has no right to demand a
distribution, order dissolution of the LLC, participate in the management of the LLC, withdraw
from the LLC, or sell his or her LLC units to anyone without a 100% vote of all members. Thus,
the Member’s interest is not as valuable as the representative share of underlying assets since he
or she lacks the rights of a full owner.
Full value is represented by the actual asset, or fraction thereof, that the member would own if
there were no LLC. Since this is not what the member has, LLC units are “discounted” to a
reasonable fair market value at death to reflect marketplace reality, i.e., that they are not “worth”
full value on an ongoing basis. An informed buyer would not ordinarily be willing to pay as
much for LLC units as for a comparable asset without restrictions on enjoyment of benefits.

Section 2.02 Potential Transfer Tax Reduction

When LLC units are given as gifts, they are valued for gift tax purposes at their fair market
value. If the fair market value of the LLC units has been determined by a competent appraiser to
be less than the fair market value of the underlying assets due to LLC agreement restrictions, the
donor of the gift may actually transfer more value using LLC units. For example, if the LLC
units are discounted by 1/3, a gift of $10,000 of LLC units is equivalent to the gift of $15,000 in
underlying assets. ($15,000 x 2/3 = $10,000)

Section 2.03 Intergenerational Wealth Planning and Transfers

The LLC is a business entity that can carry on any permitted business activity. This makes it a
flexible tool for planning. An LLC structure can facilitate wealth planning in several ways.
(a) Family as a Wealth Collaborative
Many American families keep their financial affairs totally secret, yet expect
other family members to manage them should they become disabled or die. This
is especially problematic given the great number of businesses that are family
owned, of which 40% are in transition at any time with little or no planning.
Also, one of the common issues in American families is the fear that as children
mature, they will drift away or move away from the family. Senior family

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members are rightfully concerned about the availability of credit and the
temptation to create a lifestyle using it. LLCs are investment tools.
A powerful nontax reason for creating a family business enterprise is that it can be
used to train and prepare family members for success in their investment lives.
Many of our clients use an LLC as a “kitchen table” mechanism to retain control
while providing a forum for family financial and investment planning. This
“glue” can help keep the family together. Information critical to the well-being of
family members can be shared. Using a business structure in the form of an LLC
as a means of creating effective communication and financial goal setting for the
family is one of the primary benefits of this form of planning.
(b) Ease of Gifting
Gifting fractional interests in certain investment assets can be difficult and
problematic. For example, a farm, real estate, or business is hard to split into
fractional interests. To complicate matters, some asset values change on a daily
basis. The LLC allows for gifts of fractional interests of the LLC itself, since
LLC units are similar to shares of stock. The LLC owns the underlying asset
while members own LLC units or a percentage of the entity. A person assigns a
share or part of a share in order to transfer units.
(c) Gift Tax Savings
The law allows annual gifts to be made without paying gift taxes. The limit on
such gifts is $16,000 per gift recipient, per year as of 2022. (Check with your
attorney or tax accountant as this exclusion may change in future years.) If one
spouse makes a gift and the other spouse joins in the gift, the annual gift tax
exclusion increases to $32,000 per year per gift recipient. Thus, a couple with
four children may give away up to $128,000 per year in cash or in kind without
using any portion of their lifetime exemption from estate and gift taxes.
Valuation discounts generally apply to fractional interests in any business,
including a family business, and whether active or passive. For example, if a
valuation discount of 50% applies to LLC units, then a single person making gifts
of LLC units could effectively remove $32,000 in comparable asset value from
his or her taxable estate each year per gift recipient. With that type of discount, a
couple with four children could conceivably gift the equivalent of $256,000 each
year in related underlying assets, by gifting $128,000 of LLC units.
(d) Death Tax Savings
Valuation adjustments may also apply to the remaining LLC units of any deceased
member: % of ownership x FMV x (1 - discount) = Estate Tax Value
(e) Protection of Gifted Interests
Outright gifts of cash or other property can be problematic. The assets or cash
gifted may be wasted, lost to creditors, or lost in divorces. It is difficult to give a
fractional interest in property other than cash. Accordingly, ownership of LLC
units with transfer restrictions can protect the integrity of the LLC structure and
its underlying assets from being lost or wasted by the gift recipients. LLC units

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 cannot be spent, wasted, or obtained by creditors. Restrictions in the LLC
agreement can prevent the transfer of LLC units to those outside the LLC without
the agreement of all members.
(f) Alternative Income Options vs. LLC Distributions
Managing Members are entitled to income in the form of management fees as
compensation for managing the LLC. LLCs can be structured with a “preferred
equity interest” that pays a set percentage of income to holders of that interest.
These potential income sources can provide security to certain members even
though they may have given away a substantial percentage of LLC units.

Section 2.04 Maintaining Control Over LLC Activities

Clients may serve as managing members or simply members of the LLC. Sometimes an entity
manager is advisable for continuity of management, since entities do not become disabled or die.
A management trust, LLC, or corporation could be considered, and even a third-party manager
under contract. Should a manager-based LLC be created, the control of a manager could include
full control over investment decisions, including decisions about how much LLC income to
distribute or to reinvest inside the LLC entity, or far less than that degree of control. Generally,
however, a manager answers to the members. Note, however, that a member-manager must act
in a fiduciary capacity in exercising management authority.

Section 2.05 Income Tax Attributes of Using an LLC

An LLC with two or more members by default is taxable as a partnership, i.e., a flow-through
entity for income tax purposes. This means that members receive their portion of income tax
attributes of the LLC. The LLC will file an IRS form 1065 income tax return but does not pay
income taxes. However, it may also elect taxation as a C or S corporation. Similarly, a sole
member LLC may be taxable as a disregarded entity or as a C or S corporation but not as a
partnership.
Transfers of property to an LLC are normally not taxable events. Typically, the transfer of
property into an LLC by an individual is a capital contribution, and the person making the
transfer of assets into it receives LLC units (a percentage of ownership) in exchange for the
contribution. Finally, upon dissolution of an LLC, the distribution of assets to members would in
most cases not trigger an income taxable event since it would usually be a return of capital.
There are some exceptions to these general rules on dissolution of the LLC and those exceptions
are largely dependent on entity tax status, so the situation should be reviewed at that time. Even
if there is no tax on dissolution, there could be capital gains tax consequences when distributed
assets are later sold.

Section 2.06 Income Tax Savings Using an LLC

LLCs are generally pass-through entities that do not offer the members tax savings. The income
of the LLC will generally either be taxed based on the source of the income or the location of the
member. The use of the LLC may result in income tax savings through the use of income shifting
to members in lower income tax brackets.

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Section 2.07 Franchise Tax Savings Using an LLC
In some jurisdictions there are franchise tax savings associated with LLCs that are not available
to other business entities.  However, in some states, LLCs are taxed more heavily than other
forms of ownership.  State income tax and franchise tax laws must always be considered.
Depending on the type of income and where it is generated, the LLC may owe franchise taxes in
more than one state and in a state other than the state in which it was formed.

Article 3
Asset Protection and LLC Planning

Section 3.01 Ownership and Title to Property

When a person owns an asset in his or her name it is typically available to a creditor in a lawsuit
unless the asset enjoys an exemption from creditors under state law. A person identified as
owning valuable real property or investments may be viewed as a “deep pocket” target for
litigation. Proper planning results in the individual owning relatively little in his or her name (or
in his or her revocable living trust) in order to be a less inviting target.
Form of title, and state law, are critical factors in determining creditor or debtor rights. In some
states, marital rights in property may affect the rights of some creditors to claim it, for example.
Assets protected by bankruptcy laws are exempt from creditor claims. Even when bankruptcy is
not filed, certain types of assets are protected under bankruptcy laws and exemptions. Each state
has its own rules about what assets are exempt under the bankruptcy laws.
All other assets are non-exempt assets. Non-exempt assets are the only assets a creditor can
attach in a lawsuit. Non-exempt assets are the usual type of assets transferred into an LLC to
accomplish an asset protection goal.
If an individual owns real estate and someone is injured on that real estate, the injured party can
make a claim or sue the owner of the real estate. If the value of available liability insurance,
coupled with the value of the real estate, is not enough to satisfy the claim, the injured creditor
can obtain any other non-exempt assets owned by the real estate owner. This is called an
“inside” liability.
Savvy real estate owners protect themselves by creating a business entity to own the real estate.
Should a third-party injury occur, it is the entity that will be liable to the injured party because
the entity is the owner of the property. The creditor can execute their judgment against the assets
owned by the responsible LLC. A member of the entity is insulated from further claims since
there is no personal liability, only entity liability. A member would only be personally liable if
the “LLC veil” is pierced (i.e., the entity disregarded as a sham) or if the member entered into a
personal guarantee against the risk.
Suppose the real estate owner creates a business entity and contributes real estate to it. Then the
owner is involved in a car accident, and an injured third party sues the owner. Let us assume
further that the auto insurance coverage is not enough to satisfy the claim. The creditor can then
look to other assets owned by the owner of the car to satisfy the claim. However, since the real
estate is owned by the LLC, the creditor has no ability to levy against it.

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Section 3.02 How Does an LLC Provide Personal Asset Protection?
An LLC can protect assets from personal lawsuit creditors. When a judgment is entered against
a member individually, that individual member’s personal creditor generally cannot seize any
assets of the LLC. Creditors of an individual member usually only have some rights to
distributions from the LLC should any occur. Rights would not typically include any right to
manage the LLC or to demand that distributions be made from it or to vote the LLC interest.
LLC law generally provides a creditor with only one way to collect a judgment; this is what is
referred to as a “charging order.”
A charging order allows the creditor to seize LLC distributions actually made. But there is no
way for the creditor to force a distribution. The creditor would be forced to wait until a
distribution was actually made to the debtor-member.
An LLC agreement generally allows withholding of LLC distributions to members in order to
accumulate revenue for the reasonable needs of the LLC. This would increase the members’
capital accounts. Moreover, under IRS rules, even if a creditor did not receive distributions, the
creditor may be required to pay the income tax associated with the LLC interest that is subject to
the charging order. This leaves the creditor in the unenviable position of paying taxes on money
not received.

Section 3.03 What About Fraudulent Transfers?

Fraudulent transfers (also called fraudulent conveyances or voidable transfers) are an issue in
asset protection planning because creditors often claim that the property was transferred after the
claim arose. The definition of a fraudulent transfer is fairly broad. A fraudulent transfer is
usually a transfer that is made before or after the claim arose with the intent to defraud, hinder, or
delay a known or likely creditor. Intent is generally presumed, leaving the defendant with the
burden of proof that there was no fraudulent intent, and it is extremely difficult to prove a
negative such as this. Courts look at “badges of fraud” including the transfer of non-exempt
assets, a transfer for less than full and fair consideration, with insolvency as a consequence of the
transfer. If the court determines that there was a fraudulent transfer within the applicable statute
of limitations it can set aside the transfer.

Section 3.04 Avoiding Fraudulent Transfer Problems

The key to avoiding fraudulent transfer problems is the timing of transfers to an LLC or other
asset protection entity such as a domestic or offshore asset protection trust. An asset protection
system must be in place before a claim arises in order to get the best possible result. This is not
to say that estate and asset protection planning cannot be done under threat of a claim. However,
if a claim has arisen additional design and planning issues will need to be considered.

Section 3.05 What if a Creditor Sues the LLC Itself?

If a creditor has a legitimate complaint against the LLC itself, the LLC is the party sued. The
creditor may satisfy its judgment with LLC assets and/or insurance. Remember this rule: A
creditor can always get to the owner of an asset, and the creditor can also generally get to other
assets owned by the owner. If the LLC owns real estate, a judgment creditor of the LLC can levy
on the real estate. If that is all the LLC owns, then there are no other assets for the creditor to
get, but if the LLC owns many assets, they would all be at risk.

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To avoid the danger of “all eggs in one basket” an LLC may be structured with subordinate
entities to own “risky” assets, i.e., those that create liability. The preferred solution is for the
LLC to own one or more subordinate limited liability companies. An asset protection design can
involve wholly owned subordinate LLCs (taxable as disregarded entities) to hold risky assets.
The subordinate LLC contains the risk. The subordinate LLC is the property owner, so only the
assets of that LLC would be at risk. This arrangement will not work in all jurisdictions, so LLC
members should consult with counsel to obtain more information before implementing an
arrangement of this nature.

Section 3.06 What Options Does a Creditor Have When Suing a Member?
A creditor has three potential outcomes from a successful claim. The creditor could hope to
receive LLC units, could wait until the LLC is liquidated to collect the liquidation value
available, or could obtain a charging order.
(a) Can the Creditor Obtain a Member’s LLC units?
LLC units are personal non-exempt property and as such would appear to be
collectible. Can the creditor really get the LLC units? Since status as a member
depends on the terms of the agreement, a debtor-member would first have to get
permission from the other members before making the transfer to a creditor, an
unlikely result. A creditor might be an assignee, but that is merely a right to
receive distributions, not a right to exercise LLC rights such as voting.
(b) Can the Creditor Obtain LLC Assets from a Member?
Since a member has no right to take assets from the LLC, the creditor does not
have the right to take assets from the LLC either. The creditor could sue the
member, get a judgment, and wait until the LLC is liquidated to collect it as that
member collects his or her share of the liquidated assets. If the LLC is set up to
last for 50 years with a 50-year option, the creditor might not collect for almost
100 years. That is a long time to wait. Will the creditor be willing to wait years,
even decades, to be able to collect? For most people, waiting until liquidation to
collect is not a viable option.
(c) Can the Creditor Obtain a Charging Order?
Most state laws make a charging order the “sole” remedy for a creditor of a
member. Some states have provided that the charging order is the “exclusive”
remedy. The judgment creditor could collect the debtor’s share of any income
distributed by the LLC.
A charging order entitles the creditor to distributions (not management fees,
loans, or sale proceeds) made to the debtor Member. For this purpose, the
creditor is given a status that is the equivalent of an assignee of the debtor’s
member’s interest. The IRS (Rev. Ruling 77-137) is read by many commentators
to suggest that the assignee should receive a K-1 statement showing the assignee’s
share of LLC income, even if no distributions of cash are made from the LLC.
Since the LLC is a pass-through entity for income tax purposes, the debtor’s share
of undistributed income may be taxed to the judgment creditor even though the

11
 debtor did not receive the LLC income. This type of income is sometimes
referred to as “phantom income.”
The possibility of “phantom income” can provide a strong disincentive for
someone who sues a person owning interests in an LLC or a strong incentive to
settle early. If the creditor’s share of phantom income is a significant amount, it
may throw the creditor into a higher tax bracket and could even force the creditor
to pay more in income tax in a year than he actually received in income.
Some creditors will not be deterred by a charging order. Some creditors have
significant loss carry-forwards that they will never be able to use. These potential
creditors are rare. A creditor with a tort judgment is the more common creditor of
a member. When we consider who the most likely creditors might be and their
commitment to forcing settlement or receiving an award, the typical creditor will
usually be deterred by the tax consequences of a charging order.
(d) So, What Do Creditors Do?
Many creditors prefer to settle the lawsuit rather than dealing with a charging
order and facing the risk of phantom income. The LLC helps to level the
litigation playing field by forcing a creditor to spend at least the same amount of
money pursuing the claim as the debtor will spend defending it.

Section 3.07 Maintaining Proper Insurance Coverage

Adequate liability insurance coverage for the LLC is critical. First, insurance coverage means
that defense counsel will be provided. Second, insurance is the carrot that will make some
creditors settle their claims in short order. Insurance proceeds provide an easy alternative to
costly litigation with uncertain results.
It is critically important for the insurance policy to include the correct “Named Insured” and
“Additional Named Insureds.” The Named Insured shoulders certain obligations under the policy,
such as paying the premium and deductibles, receiving notices, requesting cancellations, and
wields other decision-making powers. Additional Named Insureds may include people like
member who are primary owners of the Named Insured entity; managers; employees;
subsidiaries; and perhaps affiliated entities in which the Named Insured owns 50 percent or more
of the affiliate.
In either case, the liability that results will be covered by the insurance policy.
When an asset, like real estate, that was in the name of an individua is contributed to an LLC, the
insurance must be updated to reflect the new ownership. Failing to do so could result in a denial
of an insurance claim because the Named Insured technically no longer owns the real estate.
Speak to your insurance company to ensure you are properly covered.

Section 3.08 Additional Asset Protection Using LLCs

Creation of subordinate limited liability companies (LLCs) to own risky property can be an
effective tool to contain the damages resulting from a lawsuit involving the property that created
the liability. Using LLCs to insulate risky assets from safe assets will make a lot of sense for
individuals who have personal risk, or who serve as General Partners of limited partnerships.

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Risky assets held in a separate or subordinate LLC do not contaminate the safe assets held in the
LLC itself, or in other LLCs, so long as the entities are operated properly.
Similarly, use of an appropriate entity Manager is an added level of protection for persons
serving in that capacity. The use of an asset protection entity makes certain that no individual is
exposed to personal liability. Protecting a Manager and protecting the assets of the LLC from
any potential joint liability goes hand in hand.

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 Article 4
LLC Operational Issues

Section 4.01 Asset Appraisals of LLC Assets

If you are seeking to obtain valuation discounts for assets contributed to an LLC, the value of all
assets transferred to the LLC must be determined at the time of contribution to the LLC. Assets
that do not have a readily ascertainable value, such as real estate, notes receivable, business
interests in closely held companies or LLCs, may need to be appraised by a qualified appraiser.

Section 4.02 Valuation of the LLC

In addition to the appraisal of the underlying assets contributed to the LLC, a qualified business
appraiser or evaluator must also value the LLC units when the units are gifted or sold and also in
the event of the death of the owner of the units. The valuation, or business appraisal, is needed
to justify any valuation discounts claimed in connection with gifting, in order to substantiate the
positions taken on Federal Gift Tax Returns. A comprehensive appraisal is appropriate in the
event of a challenge by tax authorities or in the event of litigation. You should use a competent,
well-qualified appraiser or evaluator who will produce a thoughtful, comprehensive, and
intelligible appraisal or valuation report. An inexpensive appraisal may ultimately cost you far
more than an appraisal report produced by a reputable business appraiser. You should plan to
pay for the expertise needed for a competent appraisal.
We use the following criteria in recommending appraisers:
The appraiser must have a good reputation for quality work in the field of
appraisals. We depend on other law firms to tell us about their experience with
appraisers. We must have favorable reports about the appraiser’s work from other
trusted professionals.
It may be appropriate to have the appraiser hired by the attorney to maintain
the attorney-client privilege on communications between the appraisers, your
legal advisors, and you. Since the communications between the law firm and the
appraiser could affect the valuation adjustments determined by the appraiser, we
often suggest that the information communicated be protected by attorney-client
privilege. Therefore, the law firm often retains the appraisers on behalf of the
client.
We prefer to recommend appraisers with specific experience in family entities,
with a successful track record for audits, and even those who have been hired
by the IRS. There are many business appraisers who prepare valuation reports,
but some have not valued family entities or been through an audit on the valuation
issue.

Section 4.03 Periodically Review LLC Operations

We strongly recommend that you meet with your advisors periodically to review the operation of
the LLC and to thoroughly document annual or more frequent meetings of the members. Your

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financial advisors should monitor the performance of investment assets held by the LLC. You
must keep in mind that the LLC is a business entity, created for a business purpose, and must be
operated as a business.
(a) Need to Keep Your LLC Current
The tax laws concerning LLCs changes on a regular basis. New opportunities are
regularly created, and some opportunities may be lost. Therefore, do not look at
your LLC plan as something you do and then forget. It is a business. Like any
other business, it requires regular attention.
We suggest that you contact us to calendar annual LLC meetings.
(b) Important Issues to Consider in Operating the LCC
The IRS has enjoyed considerable success in recent years by attacking
partnerships and LLCs that were not properly operated. The following is a
checklist of the items or issues that should be considered to ensure that your LLC
is not one of those:
● Do not transfer all of the senior generation’s assets to the LLC
leaving no assets outside the LLC to provide income to maintain
the senior member’s lifestyle.
● Title to real property or securities intended to be owned by the
LLC should be formally transferred to the partnership.
● A separate set of accounting books and records must be
maintained for the LLC.
● The LLC must have its own separate bank account, and income
generated by the LLC must be deposited into that account.
● Distributions from the LLC to members must be based on pro-rata
membership interests. The following distributions have been
found to be fatal in some recent court cases:
● distributions to pay for personal living expenses of
an LLC member, particularly a senior generation
LLC member
● distributions to pay for special medical needs,
including nursing home expenses.
● distributions to make annual gifts to family
members or to make loans to family members
● indirect distributions in the form of rent-free use of
residential property owned by the LLC.
● Lack of regular meetings of LLC members and recordation
through minutes of discussions of decisions made.
● Failure to compensate managing member for services provided

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 ● Failure to properly reflect LLC income on K-1’s to proper LLC
member

Section 4.04 Managing LLC Investments

Most states have used a standard for trust investments which has been called the “Prudent Person
Rule” and which will apply except as may otherwise be directed by the trust instrument. Since
this rule is the heart of all investment judgments, it is quoted here at length from a typical statute.
The Prudent Person Rule: In acquiring, investing, reinvesting, exchanging,
retaining, selling, and managing property for the benefit of others fiduciaries shall
be required to have in mind the responsibilities which are attached to such offices,
the size, nature, and needs of the estates entrusted to their care, and shall exercise
the judgment and care under the circumstances then prevailing, which men of
prudence, discretion and intelligence exercise in the management of their own
affairs, not in regard to speculation but in regard to permanent disposition of their
funds, considering the probable income as well as the probable safety of their
funds, considering the probable income as well as the probable safety of their
capital. Within the limits of the foregoing standard, fiduciaries are authorized to
acquire and retain every kind of property, real, personal, and mixed, and every
kind of investment, specifically including, but not by way of limitation, bonds,
debentures and other corporate obligations, stocks, preferred or common,
securities of any open-end or closed-end management type investment company
or investment trust, and participation in common trust funds, that men of
prudence, discretion, and intelligence would acquire or retain for their own
account.
What does this mean for you? Clearly this rule gives the Managing Member the power to invest
LLC assets in the kinds of property in which investors of prudence and caution would invest
their own money. It imposes on the Managing Member the standards of investment that a
prudent investor would follow considering all the circumstances involved.
The Managing Member should:
● Consider diversifying the assets of the LLC among many types of
investments such as stocks, bonds, mortgages, etc.
● Consider diversifying among various industries with LLC stock holdings.
● Consider current income as well as long-term capital appreciation and
balance the interests of the beneficiaries of LLC interests.
● Seek professional guidance both for initial investment and for continuing
review of investments held if the Managing Member needs such
assistance.
The Managing Member should not:
● Speculate with LLC assets.
● Lend LLC assets without adequate security or engage in other forms of
self-dealing.

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 ● Continue to hold an investment that no longer meets the “prudent man”
standards.
● Continue to hold assets transferred to the LLC without an independent
investigation of their quality as LLC investments.
● Delegate investment decisions to others. The LLC agreement instrument
may enlarge or limit investment powers, but you should always keep in
mind the Prudent Person Rule quoted above.
Important Note about Prudent Person Rule: In many states, the Prudent Person Rule applies
to the entire investment portfolio. This may or may not be the same as the business judgment
rule that is generally applied to decision-makers in business entities. When juries make
decisions on these cases, they may consider the entire investment portfolio performance, but if
they find one investment that does not meet the Prudent Person Rule, the jury may find the
Trustee liable. Generally, there is a higher standard for Trustees than for other fiduciaries such as
agents, business managers, general members, etc.

Section 4.05 Transfer of Specific Assets to the LLC

Investment assets should go into the LLC. These assets include:
● Investment real estate;
● Stocks, bonds, mutual funds, money market accounts, and CDs;
● Business interests like shares of a closely held corporation (but not shares
of an S corporation), partnership interests, and Limited Liability Company
membership interests (be sure to check partnership, LLC, shareholder, and
other agreements that might restrict the transferability of closely held
business interests);
● Notes receivable, and mortgages and trust deeds given as security for
notes; and
● Life insurance not owned by irrevocable gifting trusts or irrevocable life
insurance trusts.

Section 4.06 Assets That Should Not Be Transferred to the LLC

A primary residence should normally be kept out of the LLC because of the tax advantages
available to owners of a residence. Also, in many states, there are homestead exemptions that
protect part or all of a personal residence from creditor claims. These exemptions may be large
or relatively inconsequential, depending on state law. If the residence is transferred into the
LLC, fair market rent must be paid to the LLC.
There are some situations where you might want the residence to go into the LLC. If the home
value is high, the loss of the homestead and capital gains exemption might cost considerably less
in the long run when compared to any estate tax savings. Also, if the creators of the LLC do not
mind paying rent (which could further reduce their taxable estate), then putting the residence in
the LLC could work. Generally, however, it is best to leave the residence out of the LLC.

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Non-business tangible personal use property, like furniture, jewelry, collectibles, and the like
should be kept out of the LLC. Since most clients prefer to continue to use their personal
property, they should keep it out of the LLC in order to avoid having to rent it from the LLC.
Cars and other motor vehicles that are used for personal use should also be kept out of the LLC.
A motor vehicle can produce tremendous personal liability for the owner of the vehicle if an auto
accident happens. By keeping vehicles out of an LLC, our clients avoid having to rent the
vehicles from the LLC, and also protect the LLC itself from incurring liabilities that can exist for
owners of motor vehicles.
Annuities, IRAs, and other qualified retirement plan funds should be kept out of the LLC since
these items must be personally owned for certain tax purposes. Transfer of these assets to an
LLC would result in adverse immediate income taxes.

Section 4.07 Obtaining Distributions from the LLC

There are four ways to obtain cash from an LLC.
● First, the managers can be paid management fees for managing the LLC.
If the manager is an entity, the entity can use the management fee to pay
salaries to its managers.
● Second, distributions (of income) may be declared. When distributions
are declared, all members receive a pro rata share of the distributions.
● Third, the LLC can make loans, at market interest rates, to the members.
The note signed upon the creation of a loan, and any unpaid interest, is a
legitimate debt for the taxable estate of the borrower if the loan is not paid
back prior to death. Such outstanding loans can reduce the estate tax of
the borrower.
● Fourth, when distributions are paid, members could use the distributions to
purchase more LLC units from the founders of the LLC if they desire to
sell some of their LLC units. Since these sales are at the fair market value
(FMV) of the LLC units, this sale will get more LLC units out of the
founders’ taxable estate and provide a source of cash to the founders.

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 General Questions and Answers

In order to preserve the advantages of doing business as a Limited Liability Company and to
comply with the applicable laws in the course of conducting the LLC’s business, there are certain
fundamental policies and procedures that must be established and followed. Members must read
and observe these policies and procedures to protect the benefits of LLC planning.

Section 5.01 Observe the Formalities to Assure LLC Status as a Separate Legal
Entity
The Limited Liability Company (LLC) is a legal entity or “person,” separate from its members,
managers, any officers, and employees. One advantage of doing business in the LLC entity form
is to prevent LLC obligations from becoming the obligations of its limited members, managers,
officers, and employees. To accomplish this goal, it is essential that the separate existence of the
LLC be recognized and respected.
Any business done by the LLC should be conducted in the LLCs name to preserve its status as a
legal person. Business should not be conducted by the individuals involved in their individual
capacity, but only in their business capacity, such as “Member” or “Manager.”
It is important that receipts and disbursements flow through the correct entities. For example, if
rent is received by the LLC from a property owned by the LLC, the rent should be deposited in
the LLC’s account. Business transactions must always be done through business, not personal,
accounts.
If management fees are payable to a Manager or Member, the LLC should write a check from the
LLC account to that party. That party should deposit the check into its bank account, and then if
it is an entity, write checks to the managers, officers, or Trustees for management fees.
Distribution checks should be written to the members (whether trusts, entities, or individuals) as
distributions are made. Creating this “paper trail” makes it difficult for anyone to argue that
there was no business purpose when in fact the LLC was managed like a business. On the other
hand, if this is not done, it can be argued that there was no business purpose, and that the LLC
should be disregarded as a separate legal entity.
State law decrees that certain written records must be kept and maintained at the principal or
registered office of the LLC. Any member or assignee may make a request of LLC information
at any reasonable time and make copies free of charge.
The records must be in written form or able to be reduced to written form. The laws of each
state vary as to what records are required, but the required records generally include:
(a) Current Lists Which:
States the name of and current address of each Member; and
States the percentage owned by each member; and
States the names of the members of each class or group when two
or more types of LLC interest are created.

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 (b) Copies of Tax Returns
Copies of the Limited Liability Company’s federal, state, and local tax returns for
the most recent six tax years must be kept.
(c) Copies of Specific Documents
Copies of the LLC agreement, Articles of Organization, all amendments,
restatements, copies of any powers of attorney, and any documents that create
classes or groups of members must be kept.
(d) Written Statements
A written statement of the following must be kept:
Cash contributions and agreed value of any other property
contributed and that the members have agreed to make in the
future; and
The time additional contributions are to be made or events
requiring additional contributions; and
Events requiring the LLC to be dissolved and its affairs wound up;
and
The date each member became a member; and
The books and records of the accounts of the LLC.
Another issue to consider is meticulous maintenance of any Member entity’s records. If an entity
is a manager, for example, it is important that books and records be kept up to date, tax returns
be properly filed on time, and all state reports filed timely. Since a Manager (if used) is critical
to the success of the LLC, it is important that it be properly maintained if it is an entity as well.
Even if certain records are not required under state law, the entity’s records should be maintained
with as much detail as possible because failing to do so could make it easier for someone suing
the LLC to pierce the veil and hold the Members liable for the LLC’s debts.

Section 5.02 Dealing with Valuation Disputes

Success on audit, or in any LLC dispute, is largely a function of records quality and the facts. It
is appropriate to operate the LLC as though it will be subject to audit at any time.
If tax authorities challenge valuation adjustments used in LLC planning, several
different factors become significant. These factors include the following:
Business-like management of LLC – The LLC must be managed
as a business entity in order for it to be respected as a separate
legal entity. It should have a business plan for conduct of
operations, an investment plan if it is to invest, and some level of
reporting to Members. Members and/or Managers should review
operations with advisors on a regular basis and should make
certain to document business decisions and activities concerning
the LLC.

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 Appraisal report prepared by competent business appraiser - This
is another critical factor. This should be done prior to initial
gifting of LLC interests, and it should be updated in future years.
Making gifts based on the underlying asset value sets a precedent
with the IRS that there should be no discount. Gifts made using
the fair market value (FMV) of the underlying assets assist the IRS
argument that the FMV of the underlying assets is the value to use
upon death.
Document business purpose and maintain documentation
supporting any valuation adjustment or discount – Business
purpose is a nontax reason for planning. Appropriate business
purposes are often cited in the LLC agreement. Members should
review these purposes during annual tax preparation, or more often
as appropriate, and make notations in the business records.
Document drafting – Legal documentation pertaining to the LLC
should be reviewed each year or so by your attorney and CPA for
changes in the tax law, the LLC situation, and relevant individual
member issues.
Facts of the case – The facts surrounding creation and operation of
an LLC are germane to the benefits the members receive. Since
members cannot change the facts of the case, it is important to
consider how they affect tax and nontax outcomes. Bad facts can
often be overcome or dealt with through plan design.
Asset mixture – Some assets work better than other assets for LLC
planning. When investment assets are exclusively used to fund the
LLC, consideration must be given to the “anti-diversification
rules” in order to avoid applicability of certain potentially
unfavorable income tax rules on contribution of those assets to the
LLC. Assets that create liability might be better held in a separate
entity, either separate from or subordinate to the LLC.

Section 5.03 Federal and State Securities Laws

The LLC could be subject to federal and state securities laws. It is important for your attorney
and CPA to decide whether or not they apply. If they do, it is essential that all sales and offers to
sell any LLC units are made in compliance with both the federal and state securities laws.
Failure to comply can result in serious consequences.
Is it a Security Offering? The Howey Test refers to the U.S. Supreme Court case which
established a rule that is used to determine whether a transaction qualifies as an "investment
contract," and therefore would be considered a security and subject to disclosure and registration
requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under
the Howey Test, an investment contract exists if there is an "investment of money in a common
enterprise with a reasonable expectation of profits to be derived from the efforts of others."

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Because of the complexity of the legal requirements relating to disclosure and registration of
offering securities, it is most important that legal advice be obtained when any financing plan is
developed and prior to any contract with any person concerning the possible sale of any LLC
interests. If matters are not properly managed from the outset, opportunities for financing may
be legally foreclosed.

Section 5.04 Filing of Income Tax Returns

If the LLC has more than one Member, the LLC must file an annual federal income tax return on
IRS Form 1065, unless the LLC has made an election to be treated as an S-Corp or C-Corp, in
which case it would file an IRS Form 1120-S or 1120. Many states also require annual state
income tax returns for entities. If the LLC has only one Member or was formed by spouses in a
community property state, it does not need to file any form with the IRS and all information is
included on a schedule of the Members IRS Form 1040. Tax accounting is very complex; and
the services of a good tax CPA should be seriously considered to prepare the LLC tax returns.
When taxable as a partnership, or as a disregarded entity, income, losses, and other tax attributes
from the LLC will flow through to the members on a pro rata basis, absent special planning
provisions usually referred to as “special allocations.” Different rules may apply if the LLC is
taxable as an S-Corp or C-Corp.

Section 5.05 The Role of the LLC Accountant

Ideally, a CPA should be involved prior to or immediately following the decision to consider
entity planning. The CPA is sensitive to income tax planning and compliance issues, valuation
issues, and integration of the entity design into the comprehensive wealth and estate plan.

Section 5.06 Deductibility of Fees Paid for Business and Estate Planning
Legal and tax advice fees for business planning is usually deductible in the year that the fees are
paid. Estate planning fees for certain services may be tax deductible. Depending on the amount
spent on the organization of the LLC, the amount spent may be deducted in the first year or
amortized over a period of 60 months from the date the LLC is organized. An election under
section 709 of the Internal Revenue Code will need to be made on the first federal income tax
return of the LLC. These possible deductions should be reviewed with your income tax return
preparer.

Section 5.07 Multiple Entity and Holding Company Planning

It may be preferable to create multiple LLCs or other entities with a holding company structure
to fulfill your objectives. There are three significant issues to consider – risk class of assets,
basis of assets, and the diversification rules. Many people who create an LLC actually need
more than one entity to accomplish all their goals.
(a) Risk Class of Assets
Each asset has its own risk class. For example, marketable securities have almost
no risk from a lawsuit standpoint. Marketable securities pose no real risk by just
owning them. Real estate on the other hand poses a great risk. People can get
physically injured when visiting or using real estate. When someone is hurt on
real estate, the owner of the real estate receives a claim or lawsuit for damages. It

22
is easy to see that real estate poses more lawsuit risk to the owner than marketable
securities. It is important to try to classify risk classes and to limit liability in any
situation to the least amount of assets possible. Different types of real estate pose
different levels of risk. How much more risk depends on the real estate, where is
it located, and the circumstances of its use. For example, farmland poses a
different risk level than an apartment building.
General Rule: Segregate different asset risk classes by using multiple entities.
[Note, however, that some state laws do not offer charging order protection to
single member LLCs.]
(b) Basis of Assets
The basis of an asset is the amount paid for that asset or its cost. When you
purchase an asset for $100, your cost basis is $100. When you sell that asset, the
basis is subtracted from the sale price to determine the capital gain. You then pay
taxes on the capital gain. There are factors that can cause the basis to increase
(making capital improvements to an asset) or to decrease such as depreciation
taken on an asset. When the basis of an asset is adjusted for various increases or
decreases, we refer to the basis as an adjusted basis.
When a gift of an asset is made to another person your basis, for determining gain
on the sale of the asset, will transfer to that person. Thus, when they sell it at a
gain, they will calculate their capital gains tax by using your basis. But if the
person sells the asset at a loss, they will use the lesser of your basis or the fair
market value of the asset at the time of the gift, to determine their capital loss.
But if a person inherits an asset, they will receive a step up (or down) in basis,
equal to fair market value of that asset on the date of death or six months after the
date of death in some cases. This means that when inherited property is sold in
the future, gain or loss will be calculated by using this new fair market value
basis.
When you contribute assets to an LLC, those assets have a basis. If members
contribute many different assets in the LLC, each with a different basis, it can
become an expensive administrative nightmare for the CPA. The LLCU you
receive for contribution of the asset also has a basis of its own. Gifted LLC units
transfer the LLCU basis to the gift recipient.
Remember that sales may not occur for years and may include multiple
generations of family members. Some assets will receive a step up or down in
basis following a member’s death. Some assets will retain the original basis. In
some cases, an asset will be mixed with some of the asset receiving the step up in
basis and some receiving a step down in basis. This can create complications
such as additional accounting expense or increasing the chances of IRS attack.
General Rule: Be careful in mixing assets in an LLC or allowing future
contributions of additional assets. Consider use of a different LLC for each basis
class. It costs more money initially and a little more administratively to run each
year but can significantly reduce overall cost and complexity.

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(c) Diversification and Tax-Free Formation
Transferring assets into an LLC is not usually a taxable event. However, some
transfers do trigger an immediate tax. Current law recognizes a taxable event
when certain “diversification” occurs with securities, for example. The
diversification rules are a trap for the unwary.
(1) The 80% Rule
The first rule is sometimes called the 80% rule. If marketable
securities that are contributed to the LLC make up more than 80%
of its asset value, diversification could be a problem.
Diversification does not occur if 20% or more of the value of the
LLC is made up of real estate. When considering the value, keep
in mind that any other discounts or valuation adjustments applying
to assets must be considered before trying to satisfy this rule.
If more than 80% of the LLCs assets are stocks and securities, the
LLC could be classified as an “investment company”. Transfers to
an investment company can result in immediate recognition of gain
on the transfer of appreciated securities if the transfer is to:
A regulated investment company; or
A real estate investment trust; or
A corporation, partnership, or LLC if more than
80% of the value of its assets are held for
investment and are cash, stocks, or securities.
Under TRA ‘97, the definition of cash, stocks, and
securities was greatly expanded. Stocks and
securities include:
Marketable stocks and securities;
Cash;
All corporate interests;
Evidence of indebtedness;
Options
Forward or futures contracts;
Foreign currency;
Precious metals; or
Interests in any entity if 90% or more of its
assets consist of any of the types of interests
described above.
(2) The Non-identical Assets Rule
Transfers of non-identical assets can cause diversification, unless
the assets are already diversified. This rule is easy to trigger

24
 because if one person contributes stock A and another person
contributes stock B, these are not identical assets. Thus, gain must
be recognized on the transfer. There are some exceptions. For
example, by definition, mutual funds are diversified already and
therefore the contribution of mutual funds should not cause
diversification. The transfer of identical assets, however, does not
cause diversification. Therefore, if one or more persons transfer
the identical security the anti-diversification rule is not violated.
(3) The De Minimis Exception
The de minimis exception avoids application of the rule when an
insignificant contribution is made that would technically trigger the
rule. The IRS has accepted a 1% contribution as an insignificant
amount but has rejected an11% contribution as being insignificant.
The area between 1% and 11% is a no-man’s land.
(4) The 25% Test and the 50% Test
Diversification does not occur if the transferors transfer a
diversified portfolio of stocks and securities to the LLC, provided
the 25% and 50% tests are met.
A portfolio of assets is treated as diversified if not more
than 25% of value of total assets is invested in the stock
and securities of any one issuer; and
A portfolio of assets is treated as diversified if not more
than 50% of value of total assets is invested in the stock
and securities of five or fewer issuers.
The diversification rules are one more factor to help determine
how many LLCs or other entities to use in a given case. As a
practical matter, careful consideration of the assets being
contributed avoids this problem. Trying to do too much with one
LLC can create a lot of diversification problems.
(d) Examples of Diversification (a summary of the above)
Will the contribution diversify the contributing person’s assets? If the
contribution does not diversify the contributors’ assets, the investment company
taxation rules do not apply.
Diversification results if two or more persons contribute non-identical assets to
the LLC.
The same diversification rule may apply to contributions from spouses in
non-community property states. In non-community property states,
diversification does not result if spouses contribute assets jointly owned in the
same proportion as their interests in the LLC. Therefore, spouses should transfer
title to joint tenancy or tenants in common before transferring the assets to the
LLC.

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In community property states, spouses may contribute different community
property assets as the sole LLC assets. Diversification does not result when
spouses contribute community property assets, even if those assets are the sole
assets used to fund the entity. Thus, when spouses contribute community property
assets to fund an LLC, taxation of appreciated assets is rarely an issue.
If one party contributes almost all of the assets to form an LLC other than de
minimis contributions by other members, there is no diversification. If an
individual contributes assets worth less than 1% of the LLC, the de minimis
exception applies. De minimis contributions are not considered for purposes of
determining diversification.
If several individuals contribute identical assets to form an LLC, diversification
does not occur.
Contributing an already “diversified” portfolio of stocks and securities does not
cause diversification. A portfolio is diversified if not more that 25% of the value
of the contributed securities is from one issuer; and not more than 50% of the
value of the assets are the securities of five or fewer issuers.
Mutual funds are diversified by definition. Thus, contributing mutual fund shares
to an LLC should not cause diversification.
If the contribution is “stocks and securities” (see below), which are not identical
in both type and ratio to the assets already in the LLC, and “marketable
securities” comprise over 80% of the value of the LLC, investment company
taxation rules will apply. An entity not diversified at its formation can become
diversified by later contributions, retroactively creating a taxable event. With
other than husbands and wives contributing community property, the contributors
should own the assets to be contributed as joint tenants or tenants in common in
proportion to their ownership interest in the entity before transferring the assets to
the entity.
If the contribution causes diversification, are more than 80% of the assets “stocks
and securities?” If so, the entity will be treated as an investment company.
Analyze the assets to be contributed to an LLC. Are they “stocks and securities”
as defined by IRC 351(e), which includes:
__ cash;
__ stock or securities of any private or public corporation;
__ options;
__ forward or future contracts;
__ precious metals;
__ foreign currency;
__ interests in publicly traded partnerships or LLCs;
__ any interest in a real estate investment trust (REIT), registered investment
company, or common trust fund;
__ bonds and personal notes; and
__ interests in any entity if 90% or more of its assets consist of any of the
types of interests described above.

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 If more than 20% of the total value in an LLC is investment real property or other
assets that are not classified as “stocks and securities,” the entity will not be
treated as an investment company. If possible, contribute at least 20% investment
real property to prevent the LLC from being considered an investment company.
Exercise extreme caution when contributing assets to an already funded LLC.

Article 6
Funding the LLC

Specific funding of assets must be approached on a case-by-case basis. The information in this
section of the manual is general in nature. If you have a revocable living trust and have received
an Operations Manual or Funding Memorandum for that trust, you will notice that much of the
funding information in this document may differ from the information in that manual. To that
extent, these instructions override the funding instructions contained in the manual that came
with your revocable living trust.
It is important that the LLC be funded in order to obtain the benefits of the LLC structure.

Section 6.01 Introduction to Funding

Funding is transferring ownership of assets to the LLC. Funding is an essential part of planning
since only those assets that have been transferred into the LLC will realize the intended benefits.
Financial Assets. It is not unusual for insurance companies, some banks, and other institutions
to require you to complete one or more of their own in-house forms in addition to the form that
your attorney might provide. It is recommended to take any bank transfer forms directly to the
bank, savings and loan, credit union, or other financial institution so that you can sign the new
signature cards and complete any in-house forms required. In the case of insurance companies, it
is better to complete the forms and then forward them directly to the home office of the insurance
company. You will find the name and address of the insurance company somewhere on your
insurance policy or on a premium notice. If you have an established relationship with a life
insurance agent, request him or her to assist you.
Securities. Changing title to publicly traded securities is not necessarily easy. A signature
guarantee from a bank officer or broker-dealer may be required; otherwise, these forms will not
be accepted by the securities transfer agent. Therefore, do not sign stock certificates until you
are in the presence of one of these advisors. If you have a stockbroker, financial planner, or other
investment advisor, he or she should be able to handle all transfers of securities for you. Most
securities transfer agents today require a “Medallion Guarantee.” A Medallion Guarantee is a
guarantee that is given by a financial institution that has a proven level of financial stability.
Real Estate. Contribution of real estate or contracts can be complex. Real estate transferred
without lender consent can cause acceleration of mortgage debt. Contribution of leases or other
contracts can void or change the terms between the parties. Contribution of tax deferred
installment notes can result in the acceleration of the recognition of the deferred taxable gain.

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If you do not want to be burdened with handling all the paperwork involved in getting these
transfers made, your attorney can prepare documents for you and take care of getting the
transfers made. If you prefer, your other advisors including your life insurance professional,
financial planner, or CPA may assist you with transfer of certain types of assets.
(a) Taxpayer ID Number
The LLC must submit form SS-4, titled “Application for Employer’s
Identification Number” to the Internal Revenue Service to obtain a taxpayer
identification number. Each LLC and each other business entity and some trusts,
owning an interest in the LLC, must have its own Taxpayer Identification number.
(b) Tax Returns
By default, an LLC is taxable as a partnership. In this case, a Form 1065 U. S.
Partnership Tax Return must be filed by April 15 of each year and the Tax Matters
Member must issue each member a Form 1065 Schedule K-1. Each member must
use the information from the Form 1065 Schedule K-1 to report LLC tax
information on their annual IRS Form 1040, 1041, 1120, or 1065 Tax Return as
the case may be. Remember to file the appropriate tax return if your LLC is
taxable as something other than a partnership, i.e., a disregarded entity or
corporation.
(c) Future Acquisitions or Sales of LLC Assets
When the LLC acquires a new item of property or opens a new account, be sure to
acquire it in the name of the LLC. The sale of an LLC asset will require that the
entity pass good title to the sold asset. Remember to review such transactions
with your attorney or CPA prior to executing them if you do not know or are
uncertain about legal or tax ramifications.

Section 6.02 Why Fund the LLC?

An unfunded LLC is unable to provide you with the benefits available through the use of the
LLC. Creation of the LLC is the first step to success, while funding is the second step. Also,
LLC ownership interests should be properly documented once asset contributions have been
made to the LLC and accepted by LLC. Proper funding of the LLC is a client responsibility.

Section 6.03 If You Require Assistance in Funding the LLC

Your attorney can help you fund your LLC in several ways:
● Your attorney understands how to fund assets into the LLC.
● Your attorney has access to forms for LLC funding.
● To avoid any chance that investment assets you want in the LLC might
remain outside of your LLC, it is essential that you make specific transfers
of title. We can assist you by drafting deeds, assignments, and other
instruments.
Finally, when everything is transferred into the name of the LLC, we will provide the paperwork
necessary to transfer the LLC units to the appropriate recipients.

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Section 6.04 How is an LLC Funded?
In general, an LLC is funded by taking title to assets in its name. Transfers are generally
accomplished in the same manner by which title was originally obtained. For example, when
you acquire land, you receive a deed. Similarly, the LLC would receive a deed from the
contributing real property owner.

Section 6.05 How Should the LLC Hold Title to Assets?

Normally, the LLC should hold title to assets in its name.
However, when titling real estate, a real estate attorney in the state where the real
property is located should be consulted to determine the preferred titling method.

Section 6.06 How Should Specific Assets Be Funded?

The following discussion will cover many types of assets an LLC may own or acquire. Refer to
the type of asset involved for funding instructions for that asset.
(a) Untitled Tangible Business Property
Untitled tangible business property owned by the LLC includes things such as
business equipment, inventory, farm equipment, livestock, and crops on hand
since such property is usually held without any recognized document of title.
Transfer of this type of property is best accomplished with either a Bill of Sale or
an Assignment transferring the items into the LLC. Do not transfer personal use
property such as home furniture, household goods, or other items you personally
use into an LLC.
(b) Titled Tangible Business Property
Titled tangible business property includes things like cars, boats and boat trailers,
motorcycles, motor homes, and airplanes. These assets have a certificate of title
or other document of title showing who owns the asset.
When you transfer a motor vehicle to any other party or entity, contact your
insurance agent and ask the agent to make sure the new owner is shown as the
insured on the vehicle insurance policy. It may be that transferring automobiles to
an entity will cause your insurance rate to change. Therefore, check on this prior
to transferring automobiles. You could also incur transfer taxes if this is not
properly done. We recommend that the title to any potential liability producing
assets be transferred to a separate entity which may be entirely separate or
subordinate to your LLC.
(c) Real Estate
Real estate must be conveyed by a deed. Only investment real estate is normally
transferred to an LLC. Your residence is normally titled in your revocable living
trust or in your own name.
It is critical that any property conveyance be properly drawn, and that it correctly
designates the grantor and the grantee. Rules of conveyance can be a pitfall for
“do-it-yourself” advocates, so be very careful in transferring real estate without
the assistance of an attorney licensed in the state where the real estate is located.

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When you transfer real estate to any other party or entity, contact your insurance
agent. Ask the agent to make sure the new owner is included as an “insured” or
as an “additional insured” on the insurance policy for each piece of property
transferred.
Warranty deeds, transfers of lien, mineral deeds, and transfers of oil and gas
leases necessary to transfer your real property and related holdings into your LLC
are normally documents that an attorney must prepare and that must be recorded.
If in the future, you should sell any real estate that is in the LLC, or desire to
purchase in-state real estate in the name of the LLC, contact your attorney for
assistance. A lawyer licensed in the appropriate state must prepare out-of-state
real estate deeds.
CAVEAT: Mortgaged Real Estate. If you have a mortgage on your real
property, it is advisable to seek prior approval from your lender prior to recording
the warranty deed. It is essential that you bring your deed of trust or mortgage to
your attorney for review to make certain there is no prohibition against
transferring the real property into the LLC. Violation may result in acceleration
of the mortgage or trust deed through “due on sale” clauses in mortgages or trust
deeds that encumber the property. Approval is almost always granted because the
conveyance does not release existing liability on the debt secured by the
encumbrance.
Every lending institution has different rules and regulations. If you are unsure
about any mortgage, it is better to seek permission from the lender prior to
recording the deed to the LLC. If the lender will not consent to the transfer to the
LLC, then do not record the deed! Simply keep the deed with your LLC papers
and attach a signed and dated memo to it indicating that the deed was
intentionally not recorded.
Under the laws of many states, it is not necessary to record the deed for the
transfer of real estate to your LLC to be effective for transfer purposes. It is,
however, necessary to record deeds for creditor protection purposes and to avoid
title problems. Holding unfiled deeds can be a risky action to take.
(d) Stocks and Bonds
Stocks and bonds and other securities are often transferred to an LLC. Your
stockbroker, the issuing company, or a designated transfer agent will need to
register these assets in the name of the LLC. If you have a stockbroker, the stocks
may be held in a “street name account,” a brokerage account in the LLC name
with the actual stocks held in the brokerage company’s name. This is the safest
way for you to own stock, and there should be little or no cost to you to have the
title changed to the LLC.
(1) Government Bonds
Government bonds may be re-titled in the name of the LLC by
completing an application form that may be obtained from:
Bureau of Public Debt
200 3rd Street

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 Parkersburg, West Virginia 26101
Attention: Transactions and Rulings.
Alternatively, you may be able to find a bank that will manage
such transfer for you. US Government Bonds should normally be
transferred to your LLC formally, rather than retained in the name
of a Member as nominee, unless the total value of such bonds is
very minimal.
(2) Unregistered Bonds
Unregistered bonds (such as municipal bonds and unregistered
treasury bonds) may be assigned to the LLC through use of a
separate piece of paper signed by you and attached to the bond. It
can be typed or handwritten.
(e) Business Assets
Business assets may be transferred as follows:
(1) Sole Proprietorships
Business assets such as a sole proprietorship for which you use a
trade name can be transferred to your LLC as follows:
“I hereby sell, transfer, assign and convey all of my
right, title, and interest in and to [NAME OF LLC],
LLC, a Limited Liability Company.”
Signed,
Your Name Here
After assignment of such assets, you should file a new trade name
affidavit or form with the State and/or any other assumed or
fictitious name filing governmental unit, to reflect that your LLC is
now the owner of such business.
(2) Entity Interests
You can also transfer other LLC, corporate, or partnership interests
to your LLC by an assignment of such interests.
Be sure that a review of other entity agreements is done to
determine what type of consents to such assignments may be
required so that the necessary consent documents are properly
prepared and signed by all of the required parties.
(3) Shareholder Agreements
With any stock that is subject to a buy-sell agreement, or subject to
a shareholder agreement, a proper type of assignment of such stock
will be necessary. Make sure that a stock power is signed and an
amendment is made to the agreement that recognizes the LLC as
the new shareholder.

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 (4) Small Corporation Stock and Professional Corporation
Stock
Do not transfer S Corporation stock or IRC Section 1244 stock
to an LLC without consulting your tax advisor. S corporation
stock should generally be transferred to an intentional grantor
trust such as your revocable living trust.
Professional Corporation stock cannot be transferred to an
LLC.
Other small corporation stock can be transferred to an LLC. Use a
stock power or assignment like that mentioned above for other
corporate stocks.
(f) Savings Accounts and Certificates of Deposit
Savings accounts can be titled in an LLC by executing a new signature card with
the financial institution in which the funds are kept. The ownership of a checking
or savings account is determined by what appears on the signature card on record
at the bank. While it is not important that the LLC name appear on your checks,
it is important that the LLC name appear on you monthly account statements.
A certificate of deposit can sometimes be assigned to the LLC without penalty.
To be sure there is no penalty, check with the financial institution before making
the transfer. Otherwise, to avoid a penalty wait until the certificate matures and
then take out a new CD titled in the name of the LLC.
An assignment of the CD to the LLC can document the intended transfer in the
interim. The assignment may then be attached to the Certificate of Deposit with a
paper clip and retained with the Certificate. When the new CD is formally
reissued in the name of the LLC throw away the assignment.
(g) Notes, Mortgages, and Trust Deeds
Notes and security instruments such as mortgages and trust deeds can be
transferred to an LLC. Notes are assigned subject to their terms or any
restrictions.
A formal assignment should be used to transfer a mortgage or trust deed to the
LLC. It may or may not be necessary to record such an assignment, but the
original should be placed with the original note and security instrument to form a
complete chain of title when it comes time to cancel or release the indebtedness
and encumbrance.
(h) Life Insurance
Life insurance policies have both an owner and at least one beneficiary. Policies
may be assigned to the LLC. Your life insurance agent would provide necessary
forms to make the LLC the owner and the beneficiary of the policy. You will
need both a Change of Beneficiary form and a Change of Ownership form.

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(i) Annuities
Do not transfer annuities into your LLC without tax or legal advice about the
consequences. There are special rules that apply to annuities, and you may lose
the tax benefit of deferral of income taxes on earnings within the annuity if you
transfer it to your LLC.
(j) IRA’s and Retirement Benefits
Do not transfer any IRAs or retirement plan assets into your LLC without
tax or legal advice. There can be significant adverse income tax effects if you
transfer such assets. There are potentially some strategies that use these assets
with an LLC, but the facts must be carefully considered prior to making such
transfers.
(k) Digital Assets
Digital Assets like cryptocurrency, bitcoin, Ethereum, NFTs, and other digital
assets may either be held as untitled intangible business property, when owned in
a hardware wallet or cold storage, or in an account on an exchange. If they are
held as untitled intangible business property, transfer of these digital assets is best
accomplished with either a Bill of Sale or an Assignment transferring the items
into the LLC. If the digital assets are held in an account on an exchange, then you
should open a new account on the exchange in the name of the LLC and transfers
those assets to the LLC account in accordance with the exchange rules.

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 Article 7
Miscellaneous Issues Regarding Your LLC

Section 7.01 How Does the LLC Identify Itself?

The LLC must hold itself out to the public at all times as a Limited Liability Company. All
letterheads, billheads, advertising, business cards, and telephone listings should use the LLC’s
registered name, followed by the words, “a Limited Liability Company,” “Ltd.,” or “LLC” to
indicate its status.

Section 7.02 How Does the LLC Conduct Business?

A Limited Liability Company acts through its Members, Manager if any, or through agents
properly appointed. When action is taken to sign a letter, contract, or check for the LLC, or
when the name of any person is printed on a business card, you should make certain that the
capacity of the individual signing or named, is clearly indicated. In virtually every, case that
person must be either be a Manager, all the Members or as otherwise agreed, or an authorized
business agent. Agreements and other documents for the LLC should be signed in such a way as
to identify the LLC, the signor, and their authority to sign for the entity. Do not sign in your
individual capacity or you might acquire personal liability!

Section 7.03 What About LLC Bank Accounts?

Establish a checking account for the LLC. That account, and any other accounts of the LLC,
should be established in the LLC’s name. The appropriate responsible LLC officials in their
official capacities and on behalf of the LLC should execute signature cards for the accounts.
Always observe the distinction between Member, Manager, or individual signatures, even in
cases where the individual involved is required to be a signatory (for example, where an
individual will be a guarantor of the LLC’s obligations and will sign in his or her individual
capacity).

Section 7.04 What About Property Transferred to the LLC?

It is extremely important that LLC property is clearly understood to be that of the LLC and not
that of any individual member, manager, or officer. The LLC is not simply a separate pocket of
its members. It is a distinct legal entity. The failure of the members, managers, and officers of a
Limited Liability Company to recognize that their LLC’s cash or other assets are not theirs could
cause significant and unpleasant encounters with the IRS and could invalidate asset protection
features of the LLC.
Any assets transferred to the LLC become the property of the LLC and must be treated as LLC
property. Insurance policies for fidelity bonds, liability insurance coverage, and property
coverage should be obtained in the name of the LLC. If there will be liability coverage for
individuals as well as for the LLC, the individuals should be added as additional insureds.
For instance, if the LLC distributes money or assets, this must be done:
As wages or salary (for management fees); or

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 A distribution of profits taxable to the member; or
As a loan (loans from an LLC to its members are extremely suspect to the IRS,
and unless completely documented have a questionable chance of surviving an
IRS audit). Likewise, cash or property made available to the LLC by its members
will either be considered a contribution to capital or a loan, and all loans should
be properly documented. Properly documented, this also means that the note
should be signed and should bear a market interest rate.

Section 7.05 Does Transferring an Asset Into the LLC Create Tax Liability?
There is normally no tax owed when property is contributed to the LLC in return for an LLC
interest. The transfer of assets to an LLC in exchange for an LLC interest is called a capital
contribution. If someone sells property to the LLC, however, the seller must pay any taxes (such
as capital gains tax) resulting from such sale. It is important that you review several of the prior
articles of this manual for the exceptions to this tax-free transfer rule!

Section 7.06 How Does the LLC Transact Business?

All important transactions of the LLC, such as major business agreements, loans, employment
agreements, leases, and buy-sell agreements, must be considered and approved by formal action
of the Members unless authorized by a Manager. If there is a pattern of individual action without
the necessary formalities, the members involved risk a legal determination that they were acting
and are liable as individuals, despite their use of the LLC name. The end result could be a loss of
tax benefits and asset protection.

Section 7.07 Should Members Have Meetings?

Since the LLC is a business, members should know the business plan and general activities of
the business. In a Limited Liability Company the Members, or Managers if any, transact all
business, so there may not be a requirement for approval of day-to-day decisions and affairs. An
annual business meeting is a good idea in order to keep everyone informed of the business plan,
investment plan, and to gain member input. LLC meetings are usually not necessary to take any
action that is required by or consistent with the Limited Liability Company agreement.

Section 7.08 What About Taxes on Wages and Salaries?

The LLC and its managers, officers, and members are responsible for payment of salaries,
wages, and payroll taxes. They must ensure that salaries and wages as well as payroll taxes are
properly paid. They may incur personal liability if the LLC fails to make proper withholdings
and tax payments.
(a) Must the LLC Withhold Taxes on Wages or Compensation Paid to
Employees?
Employers, who pay taxable wages to employees or who have employees who
report tips, must withhold income tax and Social Security (FICA) taxes. Each
employee should fill out a Form W-4, withholding allowance certificate, or form
W-4E, exemption from withholding. Every employer must file all necessary
Form 941 quarterly employment tax reports by the last day of the month

35
 following the end of each calendar and an annual unemployment tax return, Form
940, on or before January 31st of each year.
(b) Is the LLC Required to Withhold State Income Taxes?
The Limited Liability Company must normally comply with any state withholding
requirements in all states in which it does business.

Section 7.09 Estate Planning and the LLC

Your LLC is a valuable component of an overall estate plan. State and federal gift and estate tax
exemptions are changing. To keep your plan current an annual estate plan review is advisable.

Section 7.10 Amending Your LLC

Periodic review of your LLC is essential to address changes in the law and changes in the
situation in which the LLC was originally envisioned. We recommend that you contact us
annually or biannually for a “business and estate planning review.”
We strongly advise clients not to amend technical legal documents without competent
attorney assistance! Such an action risks frustration of all or part of your plan.

Section 7.11 Annual Gifts

Your LLC contemplates gifts of LLC units to other family members or to trusts that have been
established for their benefit. Make sure you contact your attorney and/or CPA to assist you in
accomplishing and properly documenting annual gifts.

Section 7.12 Periodic Valuations and Appraisals

If you are using your LLC as a means of making annual gifts, periodically an appraisal of the
assets in your LLC and valuation of the LLC itself is necessary. For gifts to be properly
documented, appraisals of assets and valuations of LLC interests must be done at the time gifts
are made. Updating must also be done in the event of the death of a member.

Section 7.13 Maintain Contact with Key Advisors

An annual maintenance agreement with your attorney and/or CPA is a great way to help
document and maintain your LLC each year. Please call with questions and be sure to always
provide changes in your address or phone number.

Section 7.14 Conclusion

The most important thing you can do after setting up your LLC is to operate it correctly. You
should review this manual at least annually and whenever you have questions. If it does not
contain the answer to your questions, please contact us and/or your CPA for guidance. We will
either have the answers or we will help you find the answers from one of your other advisors.

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