hold member meetings is evidence of a lack of LLC formality you will want to have a minute book chock full of annual meeting minutes to overcome any such challenge.
By adhering to the formalities that a Corporation is required to follow to avoid piercing the corporate veil, it is anticipated that members of an LLC will avoid having their LLC veil pierced in the future.
The chart on the following pages illustrates some of the differences and similarities between the various entities we have discussed.
With our overview and comparison completed, it is now time to consider the various specific issues associated with using and operating Limited Liability Companies and Limited Partnerships. But first, here are some commonly asked questions and their answers regarding LLCs and LPs.
Frequently Asked Questions
When should I use an LLC over an LP and vice-versa?
Since everyone’s situation is different there is no definitive and correct answer to this question. As a general rule, some planners will more frequently use LPs for estate planning and holding purposes and LLCs for operating businesses and real estate investments. However, there can be valid reasons to use LLCs and LPs for the other activities mentioned. If you have a question in your own mind, you and your professional advisor should arrive at the entity best suited for your specific needs.
Is there a difference in liability protection between an LLC and an LP?
The one major difference is that in an LP the general partner is personally liable for the debts and obligations of the Limited Partnership, which may be minimized by using an LLC or Corporation as the general partner. As well, the limited partners, by acting as generals, may become personally liable. In an LLC, managers and members are not personally exposed. Please note that in an LLC, LP or even a Corporation, individuals may be held personally responsible for fraudulent and willful misconduct as well as for the failure to pay payroll taxes to the IRS. Limited liability protection does not extend to intentional bad acts.
Can non-United States citizens be members of an LLC or partners in an LP?
Yes. While non-resident aliens (foreign individuals living outside the United States) may not be shareholders of S Corporations, they may own interests in and be involved in management of an LLC, LP or C corporation.
Can an LLC or LP own stock in a S corporation?
It depends. A single member LLC taxed as a disregarded entity may hold shares in an S corporation. Otherwise, multi-member LLCs, LPs as well as C corporations, irrevocable trusts or non-resident aliens cannot own stock in an S corporation.
If I use a C corporation as the manager of an LLC or the general partner of an LP, should I open a bank account in the name of the C corporation or the LLC/LP?
You may need to open two bank accounts. The business or holding entity will need a bank account for its purposes. The C corporation, if it receives a management fee from the LLC/LP, will need a bank account to receive and disburse the income it receives.
What is a “Partnership in Commendam”?
In Louisiana, a Limited Partnership is known as a “partnership in commendam.”
How many pieces of income-producing property should be held in one LP or LLC?
Again, there is no correct answer here. The overall strategy is to segregate assets. You don’t want a judgment creditor (one with a court-approved claim against you) to be able to reach ten properties in one entity. But does that mean that each entity holds one asset or four assets? That is a judgment call for you to decide. I have some clients who are not troubled by the annual fees and put only one asset into one entity in order to completely segregate assets. I have others who feel that three assets per entity is the right number. You must arrive at your own decision.
How many general partners and limited partners may an LP have?
There are no limits. Of course, you must follow the securities laws when bringing in large numbers of investors.
How many managers and members may an LLC have?
Again, there are no limits subject to application of the securities laws.
Would you suggest an LLC or an LP to hold a large securities portfolio?
I would suggest one or the other depending upon your circumstances. For estate planning and control purposes some planners would more often use an LP. In a situation where several persons were owners and all wanted a say in management, a member-managed LLC may be appropriate.
Can my wife and I own 100 percent of a corporate general partner that owns 2 percent of an LP and also individually own the remaining 98 percent of the LP as limited partners?
Yes. This scenario is frequently used in Limited Partnerships and is not considered to be too closely held.
Can the same 2 percent general partner corporation also own the 98 percent Limited Partnership interests?
No. In that case, there are not two partners as required for an LP.
What is a Family Limited Partnership?
It is important to know that there is no such thing as a family limited partnership or “FLP”. While there are promoters selling an expensive package of asset protection strategies known as the family limited partnership, there is no such entity authorized under any state law as the family limited partnership. Yes, there are limited partnerships which can hold family assets. But beware of promoters selling you expensive forms for illusory entities which do not exist.
What is a Family Limited Liability Company?
Once again, there is no such thing as a family limited liability company or “FLLC”. Yes, LLCs can hold family assets but beware of promoters trying to sell you an FLLC as something better or more protective than a regular LLC.
Case Numbers 1 & 2 – John and Liz; Mary and Gary
John and Liz are ready to form J & L Consulting, LLC. Mary and Gary are likewise ready to form M & G Holdings, LP. How do they proceed?
Limited Liability Company
With an LLC, Articles of Organization are filed with the secretary of state’s office of the state in which you wish to operate. Before the Articles are filed the organizers must determine if they are to be member-managed or manager-managed and who the managers will be. A resident agent (an individual or corporate entity that will agree to accept service of legal documents on your behalf) must be identified and accept the appointment. In some states a resident agent is known as a registered agent. An Operating Agreement is then prepared which further details the rights and responsibilities of the managers and members and outlines the operating procedures for the entity.
Limited Partnership
With a Limited Partnership, a Certificate of Limited Partnership (LP-1) is filed with the secretary of state. Likewise, before the LP-1 is filed the partners must determine who is going to serve as the general partner and a resident agent must be identified.
A Limited Partnership Agreement is then drafted which, as in the LLC Operating Agreement, details important entity issues. It should be noted here that a discussion of how to draft Operating and Partnership Agreements far exceeds the scope of this book, and is indeed a book unto itself. For now, we shall discuss what points and strategies should be contained in these agreements so that you and your professional advisor can come up with the document that is right for you.
Which State to Use?
A common formation