The National Trial Lawyers
  • Home
    • Meet Our Team
    • Contact Us
    • Mission & Goals
    • FAQ
  • Webinars
  • News
  • Membership Directory
    • Top 100 Map – Civil Plaintiff
    • Top 100 Map – Criminal Defense
    • Top 40 Under 40 Map – Civil Plaintiff
    • Top 40 Under 40 Map – Criminal Defense
  • Top 100
    • Civil Plaintiff Officers / Executive Committee
    • Criminal Defense Officers / Executive Committee
    • Benefits
    • About
    • Top 100 Presidents Message
    • Diplomat
    • Membership Renewal
    • Member Profile Updates
    • Top 100 Badge
  • Top 40
    • Civil Plaintiff Officers / Executive Committee
    • Criminal Defense Officers / Executive Committee
    • Top 40 Under 40 Trial Academy Bootcamp
    • Benefits
    • About
    • Top 40 Presidents Message
    • Membership Renewal
    • Member Profile Updates
    • Top 40 Badge
  • Specialty Assoc
    • About
    • Shop
    • Officers
    • Membership Renewal
    • Member Profile Updates
  • Nominate
    • Top 100
    • Top 40
    • Specialty Association
    • Trial Lawyer Hall of Fame
    • Trial Lawyer of the Year
    • Trial Team of the Year
    • America’s Most Influential Trial Lawyer
    • America’s Most Influential Law Firm
    • Lifetime Achievement Award
  • Shop
  • Magazine
    • A-List
  • Education and Networking Agenda
    • Trial Lawyers Summit
    • Top 40 Under 40 Trial Academy Boot Camp
    • Mass Torts Made Perfect
    • The Lanier Trial Academy Master Class 6.0
    • The Business Of Law
    • Webinars
  • Hall of Fame
    • Trial Lawyer Hall of Fame

Are These Three Weaknesses Lurking In Your LLC OR FLP?

Posted on February 23, 2016 by Larry Bodine

llc corporationBy David B. Mandell, JD, MBA and Jason M. O’Dell, MS, CWM

Over the past 20 years, tens of thousands of attorneys have established limited liability companies (LLCs) or family limited partnerships (FLPs) as part of an outside business to own real estate, or for estate planning; but most often for wealth protection purposes.

The bad news is simple: most LLCs and FLPs are not as protective as their creators believe them to be because their controlling agreement is missing key provisions, or they have not kept up the entity properly on an annual basis.  Unfortunately, many do not understand a key fact of the law that if the LLC or FLP is not set up or maintained properly, it will not enjoy the protective benefits that it was intended to provide.

There are three common problems we have seen in our clients’ LLCs and FLPs.  In some cases, we have seen one or more of these problems surface.  Even one weakness, though, could be enough to threaten all of the benefits the entity is designed to provide.

1. Not Maintaining All Formalities on an Annual Basis

We mention annual formality compliance first because it is probably where most clients fail with regard to their entities.  Simply put – if you are not having at least an annual review of the following areas (and this is a partial list), then the entity may not get the respect from the law if it is ever challenged.  Such annual compliance should include at least (partial list):

  • Filing of annual state forms & federal/state/local tax forms.
  • Annual meeting and minutes.
  • A review of all relevant insurances, contracts, leases, etc. in the name of the FLP or LLC.
  • Reports to managers or general partners from members/limited partners.
  • Update(s) to LLC or FLP agreement language based on any relevant legislative or case law changes.
  • Gifting program, if applicable, including assignments and gift tax filings.
  • Additional requirements based on specifics to your entity’s circumstances.

2. Language In Operating or Partnership Agreement

Also see: A Common Tax Mistake Could Be Costing You Thousands Annually

An LLC or FLP is only as protective or tax-beneficial as its language dictates – and we have found that most LLCs or FLPs are lacking here as well. Let’s use an analogy of a will.  First you want the will to be valid from a legal perspective – proper signatures, witnesses etc.  This is precisely the weakness of many LLCs and FLPs regarding their ongoing legal requirements.  Even if that is properly managed, then, like a will, the LLC or FLP is only as effective as the language in its operational document. A will might dictate that all assets go to one family member, to all family members or all to charity etc.   Similarly, an LLC or FLP can be written to maximize discounting for gift tax purposes or not. It may be written for solid protection against outside lawsuits…or not. Specifically on the lawsuit protection perspective, there are a number of key provisions that an LLC or FLP should have. We will describe just two of them here.

Language on Distributions

If an attorney wants their LLC or FLP to effectively provide a solid shield for LLC/FLP assets against outside lawsuits, then proper language regarding distributions is critical.  It is especially important that the language not lock in the LLC manager or managing member or FLP general partner to make distributions evenly.  This can be problematic if there is ever a lawsuit or judgment creditor against the LLC or FLP owner(s).  Nonetheless, in the typical LLC and FLP “form” agreements, this problematic language is the standard boilerplate.  This can be a significant weakness and may undermine the entire purpose of the entity for the client and his/her family.

Language on Involuntary Transfers

In our estimation, 80 percent of LLC and FLP agreements do not have adequate provisions regarding involuntary transfers. In other words, what exactly are the rights of a judgment creditor (i.e., successful lawsuit plaintiff) against an LLC or FLP owner’s interests?  Most often, the only LLC or FLP language related to this issue is regarding the ability of the owner to transfer their interests voluntarily – and may be quite permissive.  If this is the only language related to the issue, a judge may very well interpret that permissiveness to the situation to allow a successful plaintiff to become an owner, have voting rights, and even to take control of the LLC or FLP. Even worse, if the LLC or FLP is completely silent on the issue, then the judge has even more leeway.

Ideally, an LLC or FLP defines exactly what occurs in the event of a judgment creditor getting a court order against an owner’s interest, or similar involuntary-type of transfer.  The language should define not only what circumstances give rise to the clause but also restrict the rights of such an involuntary transferee to the greatest extent of the relevant statute. This is crucial to take advantage of the strongest “outside risk” protections that an LLC or FLP can afford.  Without this language, the entity is certainly not ideally protected.

Sub-Optimal Jurisdiction

In the case where the LLC or FLP will own personal property that can be held in any state (i.e., securities portfolio), as opposed to an asset that is fixed in one location (i.e., real estate), one has a choice to create the entity in any of the 50 states.  There are three to four top states from a protection perspective, and state fees and taxes are also a factor. For some clients, estate tax planning may dictate other states as preferable.  Regardless, the important point is that an LLC or FLP does not need to be created in the client’s home state and should be positioned properly depending on the entity’s purpose.

Make Sure Your LLC or FLP is Strong

LLCs and FLPs can be fundamental tools for business planning, asset protection planning, family wealth planning, estate planning and more.  Nonetheless, these tools are only as strong or weak as their operating documents and ongoing compliance management.

SPECIAL OFFERS:  To receive a free hardcopy of Fortune Building for Business Owners and Entrepreneurs, please call 877-656-4362 or visit www.ojmbookstore.com and enter promotional code NTL34 at checkout for a free ebook download of Fortune Building for your Kindle or iPad.


 

David B. Mandell, JD, MBA, is a consultant, attorney and author of over 10 books on legal, tax and financial issues, including Wealth Secrets of the Affluent, published by John Wiley & Sons, Inc., the largest business book publisher in the world. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com along with Jason M. O’Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

Posted in Blog

Comments are closed.

News Categories

Read about other Top Jury Verdicts

The New Mexico Supreme Court Upholds $165 Million Damage Awards in a Deadly FedEx Crash

The New Mexico Supreme Court Upholds $165 Million Damage Awards in a Deadly FedEx Crash

The New Mexico Supreme Court on Thursday upheld $165 million of jury awards against FedEx in a wrongful-death lawsuit stemmin[Read More...]
Noom Reaches a $56 Million Class Action Settlement Over Its Autorenewal and Cancellation Policy

Noom Reaches a $56 Million Class Action Settlement Over Its Autorenewal and Cancellation Policy

Weight-loss program Noom has agreed to a $56 million settlement to resolve class action claims regarding its autorenewal and [Read More...]
Virginians Will Receive $489 Million in a Payday Loan Settlement

Virginians Will Receive $489 Million in a Payday Loan Settlement

Online payday loan companies that charged as much as 919% interest will spend $489 million to reimburse some 555,000 borrower[Read More...]
The State of Minnesota Will Pay $1.5 Million to a Man Who Alleged Excessive Force During an Arrest

The State of Minnesota Will Pay $1.5 Million to a Man Who Alleged Excessive Force During an Arrest

Minneapolis has agreed to pay $1.5 million to a man who said police used excessive force when he was arrested during the prot[Read More...]
A $230 Million Settlement Is Reached Over a 2015 Southern California Oil Spill

A $230 Million Settlement Is Reached Over a 2015 Southern California Oil Spill

The owner of an oil pipeline that spewed thousands of barrels of crude oil onto Southern California beaches in 2015 has agree[Read More...]

#LegalNews

@@TheNTLtop100

Contact Us | Terms of Use | Privacy Policy

Attorney information and content provided on this website is provided for the benefit of members of The National Trial Lawyers and as a public service by Legal Associations Management, Inc. The website and all data are the property of Legal Associations Management, Inc. Data, including without limitation attorney information and content, on the site may not be mined, sold, or used commercially for any purpose without the explicit written consent of Legal Associations Management, Inc. This site may not be accessed by any automated program for extracting data for any use. By accessing and using the site you agree that you will not develop, support or use software, devices, scripts, robots, or any other means or processes (including crawlers, browser plug-ins and add-ons, or any other technology) to scrape data or otherwise copy profiles and other data. Unauthorized use or attempted unauthorized use of this system may subject you to both civil and criminal penalties.