Using LLCs For Estate Planning

By: Tamara Pow

Although I do not practice estate planning law, as a limited liability company lawyer (“LLC lawyer”) in San Jose, I have worked with estate planning attorneys to form many LLCs for families that want to include them in their estate plan. Traditionally, the entity of choice for estate planning was the Family Limited Partnership (“FLP”). Once LLCs were introduced in California, attorneys began using an LLC to be the general partner in the Family Limited Partnership. The parents would contribute assets (often income producing real estate) to a Family Limited Partnership in exchange for limited partnership interests which would be gifted to the next generation, and a general partner interest which would be retained by the parents in their wholly owned LLC. This maintained control with the parents, but unlike holding the general partnership interest in their individual names, it provided them with a layer of liability protection as well.

Gifting of limited partnership interests is more attractive than outright gifting of the underlying asset for two reasons: First, the donor can retain control in the form of the general partnership interest. Second, the gifted limited partnership interest can get a valuation discount for terms in the partnership agreement such as lack of control and lack of marketability of the interest. In other words, a parent can gift her child 50% of a property worth $1,000,000, making the gift worth $500,000; or a parent can gift her child a 50% limited partnership interest in a partnership that owns the $1,000,000 property, making the gift worth approximately $350,000 because the partnership interest is not a controlling interest and cannot be easily transferred. LLCs are entitled to this same valuation discount so long as the transferee has limited rights.

Over time, estate planning attorneys have become more comfortable with using Family Limited Liability Companies in place of Family Limited Partnerships, rather than just as their general partners. Using one entity instead of two can sometimes reduce the amount of California franchise taxes paid by the family to maintain the entities and can simplify the annual reporting requirements for the family. Also, the transfer of assets to a Family LLC can avoid the potential of a gift occurring when parents transfer assets to an FLP and take limited partnership interests but give the next generation the general partnership interest (the IRS sees this as a transfer of control resulting in a gift without valuation discounts). This same argument against valuation discounts does not apply to LLCs because the transfer of assets to an LLC with one class of members does not involve the same disproportionate transfer of control.

There are many more business and real estate considerations to an operating LLC than just the estate planning considerations. A good LLC attorney is critical to drafting an operating agreement for the LLC that will both satisfy the family’s estate planning intentions and satisfy its business protection needs, management needs and other tax requirements. A trust and estates attorney can set up trusts for the members to hold the LLC interests and work with the LLC attorney to make sure the ownership and control succession plan dictated by the operating agreement is in line with the succession plan for the family.

As an LLC attorney with an MBA, a California real estate broker’s license and experience in public accounting, I cannot overemphasize the importance good planning plays in choosing an LLC, LP or corporation as the proper form of entity for business and real estate investments, including those involved in family estate planning.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

The LLC – The Right Choice For Your Business?

By: Serge Filatov

I’ve written previously about sole proprietorships and general partnerships as forms of businesses for the small business owner here in San Jose and Silicon Valley. However, as mentioned before, those forms of businesses are not ideal because they expose the business owner to unnecessary liability. Instead, a small business owner should consider starting a limited liability company.

LLC’ s are often a great choice for a business owner because they can be structured almost any way you want yet they still provide liability protection. Do you want to have one person control all of the power of the company? No problem. Do you want to have the company controlled by a board of directors? Great. How about every owner voting having an equal say in the management of the company? Ok (though I wouldn’t recommend it in many circumstances). Unlike a general partnership or a sole proprietorship, the LLC is a separate entity from its owners and, under most circumstances, will shield its owners from liability for business debts.

If you choose to create an LLC, the first major issue you will have to deal with is determining the management structure of the LLC. Will it be member (i.e. owner) managed or manager-managed? A member-managed LLC is where all of the members of the LLC participate in the management of the LLC. A manager-managed LLC, on the other hand, is a situation where the members turn over the right to manage the company to one or more managers which they appoint. The manager(s) is then provided full power to run the company while the members are merely passive investors (similar to shareholders of a corporation).

A common question asked by first time clients is whether they should choose a member or manager-managed LLC. The answer to this depends heavily on the situation of the client. As a general guideline, however, one should consider a manager-managed LLC if you answer yes to any of the following questions:

Investors and Passive Owners. Will the entity have any owners who you do not want to manage the company? Will it have investors?

Size. Will the entity be too large, diverse, or complex to efficiently be able to run the business with every member having management rights?

Structure. Do you want the entity to look and feel more like a corporation or more like a general partnership or limited partnership?

On the other hand, if the LLC is only going to have a couple of members who are capable of management, then you may want to consider having a member-managed LLC. A member-managed LLC is simpler to document because, in general, you do not have to deal with determining all of the management rights and duties of the managers.

In any event, the operating agreement for an LLC, which is the operating document for the entity, needs to clearly set out the structure of the entity and how it will operate. A seasoned attorney can help you create the operating agreement and make sure that it is properly tailored for your situation.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

The Steps of Hiring an Attorney

For a business owner, the time to hire a corporate attorney is not after running into legal problems; it’s before they occur. By working with a corporate lawyer on an ongoing basis, you can ensure that your business is properly formed, that it is in full compliance with all applicable regulations, and that you are achieving favorable contracts and transactions. When searching for corporate legal services in San Jose, there are a number of factors you should consider. These include the attorney’s areas of specialization, credentials, track record, and approachability.

The Steps of Hiring an Attorney

Consider Practice Areas

The legal field is very broad, with numerous areas of specialization. Some lawyers work exclusively on personal injury law and medical malpractice, for example, while others only handle divorce and child custody cases. Since it doesn’t make sense to hire a divorce lawyer to handle your business affairs, the first step in hiring an attorney is to develop a short list of lawyers in your area who have specialized in corporate law. Check the websites of a few attorneys in your area and look for a section labeled something like “practice areas.” If it is a corporate law firm, the website will likely list specialties such as employment, business transactions, partnerships, and tax planning.

Evaluate Credentials and Experience

Once you have a list of corporate attorneys in your area, narrow the list down further by considering the attorneys’ credentials and experience. Lawyers often list their education and experience on their websites. Select an attorney who is a member of the bar association in good standing and who holds other professional memberships. You may also wish to select a corporate attorney who is dedicated to ongoing professional development , as evidenced by authoring various publications, or serving as a panelist or guest speaker.

Assess Approachability

During your consultation with the corporate attorney, consider his or her approachability. It’s important to hire a lawyer who will take the time to answer your questions to your satisfaction and who is committed to furthering your own knowledge of legal matters for companies.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Spotlight on Business and Entity Formations

To form a business, you need a lot more than just a good idea and a marketing strategy. You need the expertise of a corporate attorney . A corporate attorney near San Jose can help you make the right choices for your business today that can led to success in the future. For example, your lawyer can help you understand the various types of business and entity structures you can choose from. He or she can explain the benefits and drawbacks of these structures, which include general partnerships, C-corporations, S-corporations, and limited liability companies.

Your corporate lawyer can do much more for you than simply filing the appropriate paperwork to form your business. Your corporate attorney can help you set the stage for reaching your short-term and long-term objectives, which in turn facilitates your personal wealth goals. Your lawyer can employ strategies for tax minimization, growth, and investments to help your company thrive. Spotlight on Business and Entity Formations

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

The New California LLC Act – Part I, Forming the LLC

As of January 1, 2014, the California Revised Uniform Limited Liability Company Act (“RULLCA”), California’s new limited liability company act went into effect. The previous LLC act had been in place for almost 20 years, with relatively few changes. The RULLCA is a complete re-write of the law. It applies to all existing California LLCs as well as all LLCs from other states that are registered in California. If you have an LLC, you should know that you cannot opt out of the new law. It automatically applies to your LLC, without any requirement for you to sign or file anything.

Although much of the new LLC act is similar to the old LLC act, the RULLCA is much more thorough. It includes more default rules that will apply in the event your LLC operating agreement is silent on an issue. It also includes some substantive changes. This series of blogs will review some of those changes in an effort to inform existing LLC managers and members of the changes being imposed upon them and their entities.

Forming the LLC

Under both the old and the new law, an LLC is formed by filing Articles of Organization with the California Secretary of State. The required contents of the Articles of Organization remain the same under the old and new laws. Under the old law, an LLC must have an operating agreement to be fully formed. As a result, individuals that may have formed their own LLC, or used an on-line service to do so, often did not have the true protection of the LLC because they had not signed an operating agreement, and therefore the LLC was not correctly formed. Under RULLCA it will now be possible to form an LLC without an operating agreement. However, the operating agreement is the foundational contract that governs the relationship between the members and should not be overlooked as one of the most important parts of forming an LLC. This is even more important under the new law because of the number of default provisions that you may not like or even be aware of, but will apply to you if you don’t have a thorough LLC operating agreement that contradicts those default provisions. For those members and managers of existing LLCs, this is a good time to revisit their operating agreements to see if some of the new detailed provisions of the RULLCA may override the terms previously agreed to by the members.

Under the old LLC law, if any provision of the Articles of Organization conflicted with the operating agreement, the Articles of Organization controlled. However, under RULLCA, the operating agreement provisions will prevail with respect to members, dissociated members, transferees, and managers. This is another reason to look very carefully at your operating agreement to see if you need to, or want to, make any changes. Even without the change in the LLC law, it is a good idea to take a look at your documents once a year to see if they still reflect the current agreement between you and your partners.

Stay tuned for additional blogs on the new LLC law, including information on naming your LLC under the new rules.

The information appearing in this article does not constitute legal advice or opinion and should not be construed as such. If you have specific questions regarding this article, please contact the author.