In order to discuss a Family Limited Liability Company it is first necessary to define a Limited Liability Company

A Limited Liability Company, or LLC, is an entity created under state law by the filing of a Certificate of Formation or Articles of Organization, or some similar name depending on state law) with the secretary of state. Under state law, it has certain features that affect both member liability for the company and creditor rights involving the company or even a separate liability of an individual who happens to be a member. 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 company. 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.

A Family Limited Liability Company (FLLC) is a Limited Liability Company in which family members or family controlled entities own a majority or all of the Limited Liability Company interests. These family members usually include a parent or parents, one or more children, and often include trusts created for children or descendants of children. The phrase “Family Limited Liability Company” or “FLLC” cannot be found in any statute on business entities. It is merely a term of art; an FLLC is merely a Limited Liability Company sanctioned under state law that is treated as a legal person.

Key to any success with this type of planning is the understanding that a Family Limited Liability Company is a business entity and must be run as a business. The business conducted may be passive in nature, such as managing stocks, bonds, and mutual funds or similar assets, or as complex as managing investment real property or an operating business enterprise with employees. Some LLCs are structured to own a mix of different assets that include passive holdings as well as an active business enterprise.

Types of FLLC

There are two main forms of Limited Liability Companies. These are member-managed and manager-managed LLCs. In the first, members of the company choose to manage the entity by membership voting; in the second, members appoint one or more managers to conduct business for the entity as authorized by the members.

A Manager does not need to 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, but 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.

Benefits of Creating a Limited Liability Company

There are many reasons to create an LLC. Here are some common reasons.
(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 limited members to the Company’s creditors as pointed out above since limited members risk only their investment to the creditors of the company. An LLC also provides some protection from the judgment creditors of the individual limited members if a judgment is entered against the member after the creation of the company.

(b) Facilitate Annual Gifting
One of the primary benefits of the LLC is its ability to maximize annual tax-free gifts to family members. At present, each person may transfer $13,000 gift tax-free per person each year, or $26,000 each year for married couples, without triggering gift tax. This annual exclusion can be maximized by claiming discounts on the value of the limited member interest gifted due to a minority interest and/or lack of marketability discounts at the time of gifting. The discounts are permitted due to the lack of control and restrictions of transfer usually associated with limited member interests in the FLLC’s.

For example, if a minority interest and/or lack of marketability discount conducted by a competent appraiser is equal to 50% of the transferred LLC interest, a married couple can gift $52,000 to each child while only utilizing the annual exclusion of $26,000. Meaning $52,000 may be gifted to each child or other person without any tax consequences as opposed to $26,000.

(c) Estate Tax Benefits
A Family Limited Liability Company can be used as an Estate Planning Tool to significantly reduce or eliminate estate taxes. The same discounts used to reduce the value of gifts made during life also apply to reduce the estate tax value of transfers of FLLC interests at death. The estate tax savings for claiming lack of marketability and minority interest discounts can be substantial. The FLLC is able to shift the value of assets out of the gross estate without any loss of control.

Under current federal estate tax law, estates greater than $3,500,000 are taxed at a flat rate of 45%. In 2010, the estate tax is repealed, but only for one year. Unless Congress changes the law, in 2011 and thereafter estates over $1,000,000 will be taxed at rates from 41% to 55% depending on the value of the estate. State death tax laws may differ.

The example discussed in section (b) above may also apply to the remaining LLC interests of any deceased member.

(d) Probate Avoidance 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. Alternatively, owning LLC interests or shares can simplify a guardianship or conservatorship proceeding, and also death probate. It is usually in the best interest of the LLC and the members to simplify such proceedings.

(e) Retaining Control
A typical FLLC is established by an older family member, a parent, who transfers business or investment assets to the partnership and the older family member often serves as a manager. The manager has control over the business activities of the LLC, making investment and management decisions and chooses when distributions should be made to the members. This determination centers upon the manager’s evaluation of the needs of the LLC operations.

(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.

Estate Tax Faces Its Own Life-and-Death Struggle

"Parties are at odds on how to deal with a levy set to disappear entirely in 2010 before being resurrected at full pre-Bush level..."
www.WSJ.com

Commercial Real Estate’s $1 Trillion Time Bomb

"According to analysts at Deutsche Bank AG, as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks' $1 trillion 'core' commercial-mortgage holdings..."
www.WSJ.com

Debate Over Estate Tax Likely to Wait Till 2010

"A split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it expires at the end of the year..."
www.TheHill.com