What You Should Know About Family Limited Liability Companies

Law Offices of Stephen F. Banta, P.L.L.C. 
What You Should Know About Family Limited Liability Companies
by Tom Bouman

1.         What is a Family Limited Liability Company?
The family limited liability company (“family LLC”) is a form of business or investment entity ownership, which seeks to provide its owners with enhanced protection from creditors and, in some cases, substantial estate and gift tax savings.  Its characteristics usually include multiple owners who are related to each other (“family LLC”) and a restrictive operating agreement.

This planning technique is traditionally referred to as a family limited partnership, although the limited liability company (“LLC”) has become the favored entity in Arizona.

The general intent behind the LLC is to encourage business development and investment by offering enhanced creditor protection to its members.  However, an active business is not required; rather any person may transfer personal assets to a LLC and may qualify to receive the same benefits as a business owner.

A family LLC may own almost anything.  The most common assets held by a family LLC are investments such as business property, brokerage accounts and rental properties.

2.         How does a Family Limited Liability Company work?

The owners of the family LLC are referred to as members.  Members are entitled to their respective share of distributions, but they have no control over company operations.  The original owner can maintain day-to-day management control over the assets, if desired; sometimes through a separate management entity.  Thus, a parent can maintain control over the entity, even if children own most or all of the membership interests.

In general, the initial member will be the original owner’s living trust.  Then in future years, the original owner will gift or sell membership interests to children or to trusts for their benefit.

A family LLC is governed by a restrictive operating agreement that defines the terms upon which the company will do business.  For example, the agreement should carefully restrict the rights of a member to withdraw or dissolve the company.  It should similarly restrict the rights of a creditor seeking to enforce a judgment against a member.  As a general rule, a more restrictive operating agreement provides more protection from creditors and higher discounts for tax purposes.

3.         How does a Family LLC protect assets from seizure by a creditor?

A family LLC offers the same benefits as any LLC.  For example, the members can isolate company liability from personal liability.  But when structured properly, a family LLC will provide enhanced protection from seizure of assets by a creditor.  First, the family LLC should be registered in a state with protective laws.  The most protective state laws (including Arizona) provide that a charging order is the only remedy a court can use to seize assets from a LLC.  This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor, but a judge cannot order a distribution of assets.  Second, the family LLC should have more than one member, if possible, because a multi-member LLC provides stronger asset protection than a single member LLC.  Therefore, gifts from the original owner to other family members may be appropriate.  Third, the family LLC should be governed by a comprehensive operating agreement that carefully limits the rights of members and creditors regarding withdrawal, distributions, dissolution, and management of the company.

4.         What are the tax consequences of establishing a Family LLC?

A family LLC may qualify for substantial discounts for estate and gift tax purposes.  The term “discount” means that a membership interest will be valued less for tax purposes than the actual value of the underlying assets.  A qualified appraisal is needed to substantiate the discount, which is usually for lack of control and lack of marketability.  The size of the discount depends on many factors, but may range as high as about 50%.

A family LLC is usually treated as a partnership with flow-through taxation, so income and losses inside the entity are passed through pro rata to the members.

The contribution of business or investment assets to the family LLC is not a taxable event.

5.         How much does a Family LLC cost?

Establishing a family LLC or family limited partnership (either is commonly referred to as an FLP) requires a substantial amount of legal and tax counsel.  The process is much more complicated than establishing a single member LLC to isolate business and personal liability (aka “naked LLC”) and nothing more.  The lawyer who prepares the operating agreement must be familiar with the latest case laws affecting family business entities.  The legal fee may be $5,000 to $10,000 or more.  Ongoing expenses include annual meetings and accounting costs.  Generally, a family LLC is not appropriate unless funded with at least $300,000.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

---

                                                                                                            

Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Does Your Bio Impress Others?

If you are a professional, you've likely got a bio page on your company's website.  I'm going to bet that you'd have a hard time topping this one:

Best Lawyer Ever?

What to Do When Your Company Receives A Demand Letter

How to React to a Demand Letter

By Brian P. Sanford (First published on Texas Lawyer)

July 2, 2012

When a demand letter from a plaintiffs employment attorney arrives on an inside counsel's desk, an in-house attorney will want to provide the company with sound legal advice and good business judgment. Exercising both requires carefully examining a demand letter, gathering facts from the plaintiffs attorney at the earliest possible opportunity and exhausting any possibility for immediate resolution.

The best opportunity for in-house counsel to achieve a reasonable settlement is after receiving a demand letter. To provide the best chance for an early resolution, here are a few fundamentals to keep in mind.

1. Don't assume the claim is frivolous. Representing an employee against an employer is daunting. A successful plaintiffs lawyer will not take a marginal case because even good cases are difficult to win.
Statistics on the Equal Employment Opportunity Commission's website show that in fiscal year 2011 the EEOC received almost 100,000 charges of discrimination in the private sector alone.

Around 20,000 suits based on EEOC claims are filed each year in federal court, of which the employee wins about 11 percent of the time, noted Kevin M. Clermont and Stewart J. Schwab in a 2009 article in the Harvard Law & Policy Review, "Employment Discrimination Plaintiffs in Federal Court: From Bad to Worse?" Of course, employees file other suits alleging mistreatment by an employer that do not relate to an EEOC claim, such as worker's compensation retaliation, failure to pay overtime and whistleblower retaliation.

Employment cases are often as difficult as complex commercial cases, involving numerous key witnesses, thousands of documents, events spanning years and many difficult legal issues. If this was not discouraging enough for employees and their lawyers, most damages are capped.
An attorney who represents employees generally receives inquiries daily from potential clients and can only represent a small fraction of those who request services. The attorney must decide whether to invest resources in a possible long-term commitment of professional guidance and representation that may require litigating for years toward trial and appeal.

The first prerequisite for a plaintiffs attorney to consider taking a case is evidence of a good employee and a bad manager. The second is protection in the law. The law does not prohibit many unfair and immoral actions in the workplace, and redress often is not practical to pursue. Examples of such actions include preying on employees as an equal-opportunity harasser, firing an employee in her first year of employment for attending to her child's hospitalization, and terminating an employee based upon a false accusation of sexual harassment.

Plaintiffs lawyers generally send a demand letter believing they can win the claims at trial, after spending hours interviewing the employee, reviewing documents and talking with other witnesses.

2. Don't assume the manager's reasons are credible. Many employment cases involve proof of intentional violation of the law. Because people rarely verbally disclose their illegal motives and because implicit bias may be partly subconscious, most cases turn on circumstantial evidence.

An in-house lawyer reviewing a demand letter should not discount circumstantial evidence. Quoting Abraham Lincoln in its 1992 decision in Hopkins v. Andaya, the 10th U.S. Circuit Court of Appeals acknowledged: "We better know there is a fire whence we see much smoke rising than we could know it by one or two witnesses swearing to it. The witnesses may commit perjury, but the smoke cannot."

A plaintiff provides circumstantial evidence of discrimination or retaliation by showing disparate treatment excused by reasons that lack credence.

Because an attack against a manager is an attack against the company, many businesses will defend a bad manager against a good employee, sometimes to the detriment of the company's operational success because of the fear of liability and the spread of claims. This fear, combined with a company's bureaucratic decision-making process, often makes it difficult to resolve matters early.

But it's worth in-house counsel's effort to work through this challenge. The people who will make key decisions concerning a settlement should examine a manager's decisions closely. Do those decisions withstand comparison to other managers' decisions or that manager's treatment of similar employees? Do the decisions reflect the complaining employee's true performance? If the answer is no, the time to find out is now, not later.

3. Don't assume a high demand means a reasonable settlement is out of reach. Valuing a case is always difficult. In a country where so many people identify themselves by what they do, a dismissal from employment can be deeply personal. Former employees may seek recovery of their identity after, for example, coming to the realization that, despite their efforts to prove themselves, their employers ultimately judged them by their skin color, gender or age. Legal remedies never fully compensate for a severe loss, and a settlement provides even less restitution and closure.

Because defendants tend to negotiate in smaller increments than plaintiffs and will not tolerate an increase in a plaintiff's offer, plaintiffs attorneys must make the initial demand high enough to provide sufficient room to negotiate — not only at the beginning of the process but also throughout litigation, mediation, and trial.
A plaintiffs attorney may be able to provide in-house counsel with a lower range of settlement possibilities for informal discussion while keeping the official offer high. An in-house lawyer should not be afraid to discuss with the plaintiffs attorney the possible range of an ultimate settlement.

4. Do not assume the plaintiffs attorney will give up. Compensation for plaintiffs attorneys usually comes at the end of the case — if at all. The more an attorney works on a case, the more he or she is invested. A contingent fee from a settlement often will leave the attorney not fully compensated, compared to how much she would have earned based on a lodestar hourly calculation. An early settlement is much more likely to provide adequate compensation, providing incentive for an attorney to negotiate early.

But it's not all about the money. Many plaintiffs attorneys represent employees not just for the tangible compensation but also for the intangible rewards that come from choosing to help good people during tough times and knowing that efforts to enforce the law ultimately will benefit others.