Forming an LLC is not that Simple
Many would have us believe that forming an LLC is as easy as logging onto the Delaware website and a few hundred dollars later it's done.
Unsurprisingly, any professional with tax and legal experience would agree that it's not that simple. If the intent is to use the LLC for serious business purposes, you would probably need professional advice and to spend thousands (rather than hundreds of dollars).
If you do not have a tax or legal background, here's an introduction to US LLCs. It provides proper context and if your business is important to you? It's worth the 10 minutes of reading -
Now that you have that foundation, let's talk about some other considerations -
1. If the intent is to have the LLC form part of an international structure, the arrangement of the entities does matter - https://www.mooresrowland.tax/2014/01/can-uk-taxpayer-claim-double-tax-treaty.html
2. If you're US exposed, remember self employment tax liability -
3. If you're US exposed then perhaps an S Corp is more appropriate -
4. Maybe you're a non US person investing in US assets? Consider using offshore companies as part of the structure -
5. Maybe you want to be an online seller? Then be aware of the potential implications, both in terms of personal liability and "sales and use" taxes
But let's focus on a point raised in the first link above where I touched on asset protection?
If protection of the assets within the LLC is important to you? Read on. If not, you can stop here.
Choosing to use the LLC over
(for example) a corporation may be prudent but raises the question of where to
form the LLC. There are several factors to consider in deciding where to
establish the entity. Picking right LLC jurisdiction may be as important as
decision to use an LLC.
In 2010, the Florida Supreme Court issued a
ruling that eviscerated the effectiveness of the Florida single-member LLC for
asset protection purposes. States such
as Nevada, Alaska, and Wyoming provide express statutory language respecting
the protection of single-member LLCs. Wyoming became a particular favorite
because of its low cost and the fact that LLC members and managers were not
required to be publicly disclosed. A recent decision by the Supreme Court of
Wyoming, however, should give planners cause for concern. In the 2014 case of Greenhunter Energy, Inc. v. Western
Ecosystems Technology, Inc. The Wyoming Supreme Court upheld a ruling that
permitted the creditor of a corporation’s wholly owned subsidiary to “pierce
the corporate veil” of the subsidiary, making the parent company responsible
for the debts of its subsidiary.
Veil piercing is an extraordinary remedy
typically reserved for those cases involving fraudulent conduct. The remedy is
rarely permitted unless a limited liability entity is found to be mere” alter
ego” of its owner such that it would be inequitable not to make the owner
responsible for subsidiary’s debts. In the Greenhunter, the Wyoming Supreme
Court acknowledged that the two companies (parent and subsidiary) maintained
separate bank accounts and business records. The court, however, took the
unprecedented step of considering consolidated tax returns as a factor
favoring the alter ego relationship and permitted the plaintiff to pierce the
subsidiary (to reach the parent’s assets).
The Wyoming Supreme Court’s decision to
confound tax treatment with legal liability is unprecedented and runs counter
to proper application of LLC protections. This is dangerous and surprising
prospect from a state otherwise offering one of the most protective LLC statutes
in the country. The ruling forces us to consider dropping Wyoming as an option
for LLC formation.
Other factors should be considered as well.
1. If stability is a concern, Delaware is a traditional choice and Nevada offers a
sound alternative due to its reliance on Delaware’s long-standing body of
favourable corporate law.
2. If privacy is a concern, Delaware and Alaska are
3. If the entity is to be owned by a single member and charging order
protection is a concern, Nevada and Alaska offer sound legal framework.
maximum asset protection is desired, the best options are often offshore.
finally, one should always consider the types of assets to be owned by the LLC. It makes a little sense, for instance, to
use a Delaware LLC to house Florida real estate for assets protection. The
practical reality is that any litigation involving the property is likely to
occur in Florida, where a Florida court could be expected to apply Florida Law.
Entity selection is a fluid process.
The Supreme Court of a favored state
can quickly throw the state’s law into tailspin.
Professional planning requires