Great idea, Right? Wrong. Don't get me wrong, I love LLCs. Easy to form, easier to maintain than a corporation, and gives you good asset protection. Done correctly, it will shield your personal assets from business liabilities AND it makes it harder for personal liability creditors to go after your business assets. For example, I want to create a company that manufacturers eye glasses, so I form Eye Glasses LLC, if the glasses end up causing blindness, sure, I may very well lose the company, but I won't lose everything I personally own to all those people that bought my glasses (yes, I know this is an old Steve Martin movie but it is after lunch and the best idea I can come up with). Works great. Note, I said above, if done correctly.
Like a corporation, the LLCs were created as an entity to hold, manage, and operate a business. Let me restate it, a business. Unfortunately, there are entities out there advertising that you can shield your assets from creditors by putting them in an LLC. This includes, they argue, your home, car, bank accounts, etc. We had one such email today from an "asset protection expert" stating this is a good strategy and used an IRS regulation to make his point. A very brief look at this position will reveal that the basic premise fails.
In Arizona, a corporate or LLC entity must have some business purpose if you are going to expect the judge to tell a creditor they cannot go after the assets inside the LLC. An LLC is intended to be a business entity with a business purpose. Managing a home, while it may seem like a business, clearly is not. Some of these entities go even further and tout the tax benefits of depreciating and expensing out these personal assets as though it were a business and thereby "saving on their personal income taxes". I won't even go into why that will fail but will recommend they start putting their affairs in order since they may be going away for awhile.
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That's some very good information. I formed an LLC for my business last year and my financial advisor has suggested preparing annual minutes. Can you provide additional information regarding the necessity of this?
ReplyDeleteAnnual minutes, while not legally necessary for an LLC (like it is for a corporation), is a good way to track company business. It is just good practice to have a record of all business the company engages in. This isn't the details of the underlying business but details about what the company itself has done in the last year, i.e., secured financing, changed officers, salary changes, expansion plans, etc.
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