In this episode of Anderson Business Advisors, Toby Mathis speaks with attorney Jonathan Evans from Anderson Advisors. You’ll hear Toby and Jonathan discuss all the pros and cons of LLCs – they are expensive in some states, more affordable in places like Wyoming and Delaware, they don’t provide the stock tax breaks that other entities do, and there are some investment restrictions. However, the name itself shows one of their greatest benefits which is “Limited Liability” and separating you personally from your business entity. They are flexible, offer a lot of choice, and in the end, are still a good option for setting up your business.
- Jonathan’s background
- The problems with LLCs – expenses in certain states
- LLCs don’t have stock – but there are huge tax breaks for businesses that DO have stock – the 1244 and the 1202
- Olmstead v. The FTC in Florida’s Supreme Court – opening single -member LLCs to creditors
- Wyoming is a leader for affordable asset protection
- Investment restrictions in LLCs vs. corporations
- LLCs and international investors
- Disregarded entities and active businesses
- Some redeeming qualities of LLCs – “Limited Liability” being number one
- Flexibility and choice in operations with LLCs
- The LLC is still a valuable entity for your business – work with a professional
Full Episode Transcript:
This is the Anderson Business Advisors Podcast, the show for real estate investors, stock traders, and business owners. We help you keep more of what you earned and protect what you’ve built. Let’s get started.... Read Full Transcript
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors Podcast. Today, we have Jonathan Evans, an attorney who’s going to be enlightening us on the burning question of: are LLCs dead or is there a reason to believe that there’s still hope that they might still make it?
Jonathan, welcome, and thanks for joining us.
Jonathan: Thanks for having me, Toby.
Toby: Why don’t you start off just a little bit about yourself, how long you’ve been practicing, what you do, and what’s your area? You don’t have to tell us how long but just give us a little background on who Jonathan is.
Jonathan: I come from a family that is not made up of lawyers. I’m forging that path, I guess you could say. Most of my family is made up of medical professionals, so I’m a little bit of a black sheep in that sense. But I grew up around lawyers. I had a bunch of friends whose dads and moms were lawyers, and I noticed that the ones who seemed the happiest were the ones who were practicing in estate planning, business structuring, and tax planning.
I decided to follow those paths. I went to law school, focused on those types of topics, and found that I really enjoyed it, so I took all of the tax law classes and estate planning classes I could take. Then, after law school, I found that there’s this nice little niche practice area called asset protection that basically weaves them all together, so I found Anderson and I’ve been loving it ever since.
Toby: When you’re at the dinner table with your family and all the medical professionals are there, do they get nervous around you like, you’re not going to go try to represent any of our patients, are you? You’re not going to do that, are you?
Jonathan: Initially, there was a little bit of that, but then when they saw that I was more on the transactional side and that I was actually a useful source of free legal advice to keep them out of trouble, they warmed up a lot more to the idea.
Toby: All of a sudden, they’re like, hey, we got somebody on the inside here. Please don’t represent any of our patients against us, but can you tell us how not to get in trouble to make sure?
Toby: Interesting holidays probably at your house.
Today, we’re going to be talking about LLCs and this idea of whether they’re alive or dead. It seems like everybody and their mother has an opinion on LLCs, and I wanted to get somebody who deals with this stuff day in and day out. I’m interested in your opinion, so let’s break it down. Take off. Are LLCs dead?
Jonathan: My thought was we could look at reasons why they are and why they aren’t, and then let people decide from there. I’ll start off with why they might be dead and the problem areas that I’ll often run into with LLCs so that people will have a perception that maybe they’re not a great path to take.
One of the first ones that pop up is expenses. In particular, there are certain jurisdictions that for whatever reason just really hammer LLCs. A common one that we run into is California. There’s this tax. They call it a tax, but it’s technically more like a business privilege fee for the opportunity to operate in California. It’s called the franchise tax, and it’s a minimum of $800 per year for any entity formed in California.
For our California clients, they’ll get really excited about getting all of their real estate into these separate LLCs thinking about all of the asset protection that they’ll be able to get out of it, and then they’ll learn about this franchise tax. It’s a bit of a panic-inducing situation because suddenly, they’re looking at each one of these LLCs and they’re just seeing that $800 fee each and every year thereafter.
Toby: What other states have big fees if you know off the top of your head?
Jonathan: Massachusetts is another one. It’s not a franchise tax. It’s actually the renewal. It’s pretty expensive. It’s about $500 per year. Massachusetts can be a bit of a sticker shock-inducing state as well.
Toby: They just figured out, hey, these LLCs are popular. People use them for asset protection for real estate. We’re just going to add fees to them ad nauseam so we can see how long until they quit setting them up in our state.
Jonathan: It seems to be because then you’ll look at other states like Utah where the renewal is more like $20. They don’t seem to have any problem cranking them out in a really timely fashion. There seems to be some ulterior motive there for monetizing these things at the state level.
Toby: Do you mean an agency profiteering off its people? That can’t be. In California, the minimum of $800, does it have a cap? Does it go anywhere? What’s the most you could be getting hit with here?
Jonathan: Most real estate investors are going to be hit at that $800 level, but depending on the level of income that an entity in California is generating, I believe it can double up to $1600.
Toby: There’s a surcharge tax on the sales inside of LLCs. I’ve seen it. I think it was $11,000 or $12,000. If you’re a property flipper, you’re going to be mad at somebody if you’re doing it all through an LLC because you might step on it. That’s where you talk to a good accountant.
It might be dead in some jurisdictions. You’re dead to me. You’re costing me too much. Maybe a little bit of that, right?
What else? What other reasons are these LLCs starting to lose a little disfavor to where some people might think it’s time to stick a fork in them?
Jonathan: One issue that we’ll often see comes down to the way that LLCs actually work. They’re owned by members who have membership interests, not by shareholders who have stock.
There are some special tax breaks built into the Internal Revenue Code that can actually reward entities that have stock, things like the 1202 exclusion and the 1244 stock loss rule. If those are applicable or attractive to you and you set up with an LLC, even if you elect to be taxed as a corporation, that doesn’t change the fact that there’s no stock in this LLC, so you won’t be able to take advantage of those.
Toby: 1202 is what, and 1244 is what?
Jonathan: 1202 was the first one to get passed by Congress. It was basically designed to attract investors to domestic startups. The idea is that you can put a bunch of money into this corporation and if the corporation really takes off and now your stock is worth a ton more than you originally paid for it, you actually get to exclude up to $10 million worth of that gain as long as everything was structured properly, to begin with.
That can be huge. It’s basically a $2 million tax break on that $10 million that you get to exclude if you figure in that it will be taxed at capital gains rates otherwise.
Toby: Basically, it’s like, hey, if I set up a qualified small business stock, then I meet the criteria. I don’t have to pay taxes when I sell. If you’re setting up a business that you’re going to sell, maybe this is something you want to pay particular attention to. But it doesn’t work for LLCs though, right?
Jonathan: Exactly. 1244 similarly is just for entities that have stock, so it’s not going to work for an LLC, but it’s like the bookend of 1202. It was passed a little bit later when Congress realized that a lot of these startups are actually going to end up foundering and losing money rather than being those tech unicorns that just take off.
To keep incentivizing people to put money into these startups, they came up with another one that actually—I guess you could say—rewards failure. If you end up with stock in a C-Corp that ends up being worthless because it just never got off the ground, you can get a tax break for that up to $50,000 of an ordinary loss or $100,000 on a joint return, and then you get to claim that against any of your other income. It could be wages, dividends, interests, and even 1099. You don’t have to worry about that $3000 net capital loss limitation that you’d otherwise have to worry about with a capital loss because in this particular case, they wrote it so that it ends up being an ordinary loss instead, which is really attractive.
Toby: Again, this is not available to an LLC even if it’s taxed as a corporation, right?
Jonathan: Right, exactly.
Toby: That could be painful for somebody who doesn’t know any better.
Jonathan: 1244 is fun. Typically, by itself, it’s not a big enough benefit to get you to set up a C-Corp just for that purpose, but if you’re setting one up for another reason like trying to qualify for 1202, you’re typically going to make sure that you also qualify for 1244 just in case.
Toby: What other reasons are there why somebody might say let’s just do away with these LLCs? In my world, you’re dead to me.
Jonathan: The next one actually comes to us from some case law that came out of the Florida Supreme Court back in 2010. It really sent some shockwaves around the country, especially for those of us who practice on asset protection. It’s called the Olmstead case. It’s Olmstead v. The Federal Trade Commission (FTC).
Basically, what it held was that a single-member LLC in Florida does not get the charging order protection that everybody thought it did. Originally, people were setting up Florida LLCs with just a single owner, putting in their properties, and getting them all protected because based on the statutes and everyone’s understanding, they should be protected. Creditors shouldn’t be able to just take the LLC or assets out of the LLC. They should be stopped by that charging order protection.
What happened in Olmstead though is the Florida Supreme Court basically flipped it on its head and said, creditors can get in here. They can seize the membership interest of the LLC itself. It completely opened up single-member LLCs in Florida.
There was even a time where people weren’t sure if this would also apply to multi-member LLCs, but then there was this thing called the Olmstead Patch that came around and basically assured people that multi-member LLCs still get those strong protections. But single-member LLCs are still left out in the cold, you could say.
Toby: I think the reason in the Olmstead case was they said it wasn’t an exclusive remedy to do the charging order. What’s a charging order so people understand what it is?
Jonathan: Charging order, as strange as it sounds, is the one tool that you want your creditor to have compared to anything else. You don’t want a creditor to be able to just come in and take the LLC from you or take assets out of the LLC. You want them to have this charging order which is basically where they get the authority to take distributions that the LLC is making to its members. If they only get that authority and nothing else, the members are still sitting pretty because the creditor doesn’t have the ability to force distributions to happen. The members still have that management control that we would want them to have, so they can just sit tight and play a waiting game with that creditor.
Toby: It’s like a lien against the asset or a lien against the company. I can’t force anything, but if you distribute money, I can receive it.
In the Olmstead case, if I recall correctly, it didn’t say, hey, this is the sole and exclusive remedy. They just said this is a remedy. They maybe even used the word sole, but it didn’t say exclusive. The court said, aha, we’re going to find a way to not uphold this thing.
I think there was fraud involved in that one state. They probably were trying to look for a window to jump through and find the liability. It sent a seismic shock throughout the asset protection industry because everybody was loving these LLCs, but now a corporation doesn’t really provide you any of that protection either.
Jonathan: That’s why this one is technically an issue, but it’s really only a narrow issue in Florida and some other states where you may have a little bit of a weaker set of protections for single-member LLCs.
There’s a way to patch it, of course. You just use a slightly different structure in Florida. You can use something called a land trust. Land trusts do provide some inside liability protection. Their beneficiaries—the owner of the land trust—is protected from any liability that the land trust itself might experience. If it holds a property and someone gets hurt on that property, the beneficiary is protected, and then you can just name another LLC as the beneficiary to give yourself an extra layer there. You could set that up in a more asset protection progressive jurisdiction, you could say, like Wyoming or Delaware.
Toby: What’s your favorite jurisdiction for asset protection? If I’m a real estate investor and all things being equal, do you have a particular jurisdiction you like to use?
Jonathan: Yes, definitely Wyoming. They’re really affordable. It’s a really easy-to-work-with jurisdiction. They’re the first ones that came out with the LLC back in 1977, and they’ve been really hustling to stay on the forefront of that ever since. Delaware is great too, but Wyoming has all the same whistles and bells, generally speaking. It’s just a little cheaper and easier.
Toby: And it’s pretty blank as far as what you’re actually filing. You’re not saying who the members and managers are. There’s really not much to disclose there.
Jonathan: Exactly. The information that you actually put on the Wyoming filing is so little that if you do it right, you’re not going to give away anything about who owns it, who runs it, or what it’s doing.
Toby: What other reasons would lead someone to believe that the LLC should be left out and back in a trash heap? What else is out there that would lead us to believe that LLCs are dead?
Jonathan: One is the idea that transferring your ownership in an LLC is a little bit harder than it is in a corporation. If you think about the big publicly traded corporations out there, there’s that open market. There’s always somebody looking to buy and sell shares in those big corporations.
You don’t really have that with LLCs, generally speaking. That membership interest is typically pretty restricted by the LLC operating agreement as far as when you can sell it, who you can sell it to, and even other transfers like if a member happens to pass away, what happens to it at that point? Because of that, it may not be the best place to park maybe an investment that you’re looking for.
If you’re trying to raise some capital, then the LLC may be a little bit more restricting in that sense. Someone in that position who’s looking for venture capital or a bit more liquidity may shy away from an LLC in favor of a more traditional corporation.
Toby: If you’re going public, chances are you are not an LLC. What else is there that would lead us to believe that perhaps it’s time for the demise of the LLC? What else is out there that would lead us to believe that LLCs are dead?
Jonathan: This next one is another special case. It’s for international investors, generally speaking. LLCs are a bit unique internationally. Germany has one that has a structure that’s fairly similar, but the US LLC isn’t widely recognized outside of the US.
If, for example, you’re a Canadian investor, you decide to start investing in the US, just mimic your US neighbor, and use a bunch of LLCs to hold your rental properties, you’re going to find that Canada doesn’t really look at LLCs the way that you think they’re going to. They’re actually going to treat those as corporations even if they’re disregarded in the US, so you may end up in a really crummy tax situation where you’re basically getting double taxed once as you take the funds out as the member in the US, and then again as basically the Canadian taxing authority says that you’re taking dividends out of a non-domestic corporation.
Toby: That can be a little bit of an ouch. All of a sudden, you realize you had no idea, and the Canadian Revenue Agency says, aha, this is how we’re going to treat this. I don’t care how you did it in the United States.
You could actually be taxed in the US then and taxed twice in Canada. You could get triple treatment. If you want your money to go away, that might be smart. If you want to make sure you don’t have money, do that.
What about self-employment tax and things like that? Is there ever a situation where you say, man, LLCs are dead because of the way practitioners use them or because they perhaps misuse them?
Jonathan: Definitely. The disregarded LLC can be really attractive for a lot of reasons. Basically, what a disregarded LLC means is that it’s got a single owner and it hasn’t chosen to be taxed as either an S-Corp or a C-Corp, so whatever the LLC is bringing in, that’s just income to that single owner. There’s no separate tax return.
That happens to raise a lot of people’s eyebrows because often when they look at setting up a bunch of LLCs, they’re worried about all of this additional tax reporting. If you use disregarded, you can avoid a lot of that. The problem though is that you don’t always want to use a disregarded entity because at the end of the day, disregarded entities are basically sole proprietorships the way the IRS looks at them.
If you’re operating an active business—maybe a brick-and-mortar storefront where you’re selling goods to the public or something like that—and you’re running that all through a disregarded entity, any of the expenses that you’re claiming are going to be showing up on your personal return.
Anytime the IRS sees a bunch of expenses being claimed on your personal 1040, you’re really jacking up your audit risk. Those additional 87,000 auditors, odds are most of those are going to be looking at sole proprietorships because in the IRS’s eyes, that’s where the low-hanging fruit is. People who operate as sole props tend to not be as sophisticated and tend not to have good records. In their experience, these audits are just a really big moneymaker for them, which is the whole point of the IRS.
In that situation where you’ve got an active business, you don’t want to run that through a disregarded LLC. You are probably going to be looking at an S-Corp depending on the circumstances or maybe a C-Corp, but if it’s a business where you’re providing some professional kind of services, moonlighting, locum tenens work if you’re a medical professional, collecting your commissions as a real estate agent, or something like that and you’re basically pulling it all out to live off of it, then you’re going to want to make an election for that LLC to be taxed as an S-Corp.
The reason you want to do that is S-Corps aren’t subject to the corporate tax rate, that 21%, so whatever you take out as distributions of profits, you don’t have to pay your FICA taxes on that. It’s the Old-Age, Survivors, and Disability Insurance and then, of course, Medicare on top of that, so it’s about a 15.3% tax in total that you get to skip.
There’s a bit of a caveat. You do have to take a reasonable salary before you can take distributions. But as long as you’ve done that, everything else gets to avoid that 15.3% tax.
Toby: That can be pretty significant. Let’s just say that you’re average and you’re making $79,000. The difference could be about $8000 a year just in the tax savings from using that S-Corp. Again, so many practitioners are like, hey, it’s so easy. Let’s just ignore this thing. We don’t have to do a tax return.
You do. It’s just as part of the 1040. It’s a separate schedule, but the return itself, the Schedule C on a 1040, looks suspiciously like the corporate return that you would file otherwise. They’re basically the same thing.
Jonathan: Right. Then, the nice little cherry on top of all of that besides the tax savings and efficiency that you’re getting from that S election is S-Corps and LLCs taxed as S-Corps are not subject to audits anywhere near the way that sole proprietors are, so the audit risk is almost gone when you make that election.
Toby: I think it’s 0.1% for corps and we’re still looking over about 1.5% on the sole proprietor, but the crazy thing about sole proprietorships is they lose their audits 95% of the time the last time that the data was published. I think was table 17B of the publication 55 where they put out all the dates every year and would always break down by schedule. They don’t do that anymore, but I think last year was the last year that they did it. It was just brutal.
If you’re a sole prop, there’s a reason it’s easy. It’s because it’s easy to screw it up. It’s easy to do that. Quite literally, I think it was 94% if you were in a correspondence audit and 95% of the time you lost if you were in a field audit. It wasn’t even close. You just got nuked.
Jonathan: That basically has conditioned the IRS to look at sole props as a really, really money-making proposition for them.
Toby: Of course, because it’s so easy. I don’t know what business and personal is. I made it so easy to commingle them. If you don’t know, they don’t know. If they don’t know, it’s not deductible. That’s easy. The answer’s no, nobody knows.
We’ve beat the heck out of LLCs now, so I’m just going to go cry because I have LLCs. Should I do that or is there some redeeming hope out there for LLCs that makes them an attractive vehicle? Or should we just take a hatchet to them all?
Jonathan: There definitely is hope. A lot of these downsides that we’ve been going over are fairly narrow. There are a lot of different fixes for them, but rather than just going through and rehashing them all, let’s look at some that are just absolutely positive absolute reasons why you should continue to look at LLCs as a really viable option for asset protection and business planning.
The first one that I want to highlight is just in the name LLC itself, Limited Liability Company. Those first two words are beautiful in my ears, the idea that you’re limiting your liability. You’re basically distinguishing yourself legally speaking from your business, so you and your business are not one and the same for legal purposes anymore.
While this concept has been around long enough that it’s not quite as exciting as it once was, if you think about the history of business entities and how we got up to this point, it’s still pretty remarkable, the idea that you can create this little compartment, put a business in it, and then that compartment and that business are totally separate from you legally speaking. If you get into some hot water, the business is protected from that. If the business gets into hot water, you personally are protected from that.
This is still huge. It’s absolutely useful for real estate investors and really any other kind of investor that has some assets they’ve amassed and want to keep those out of lawyer’s pockets and away from the plaintiffs out there.
Toby: It gives you lots of limited liability protections both inside and outside. I think you’re making a good case, but in case it wasn’t clear enough, if I have a cup of coffee, I want to protect myself from the coffee. I don’t want it all over me. I don’t want to be holding it in my hand if it’s hot. It’ll burn me. But also, I want to protect this cup of coffee from me. What if I throw things around? What if I get into an accident? What if I do something? I don’t want them to come take my coffee. I don’t want them to get inside this vehicle.
That’s what that liability protection is. It works both ways, inside and outside liability. They’re a fantastic tool.
I guess we’re not going to throw them away just yet. What other reasons do we have for keeping these LLCs around and not just throwing them into the dung heap of history?
Jonathan: If you compare them to the other types of entities out there, LLCs are really flexible. Even in just their day-to-day operations, the LLC can actually be run by its members. With corporations and other older structures, you often have the board of directors who are in charge of the day-to-day operations. The shareholders still have some degree of control. They get to appoint the directors, of course, and make major decisions here and there, but as far as day-to-day operations go, that’s typically your directors in a corporation, so that’s a whole another layer of complexity that you have to navigate if you’re just starting a new business or using it to hold something fairly straightforward like a single rental property.
With an LLC though, the member can do the day-to-day operations. There’s no need for that director level of management. On the flip side though, the LLC can have that same type of director level of management. They’re just noticed managers.
The beautiful thing about the LLC is you get the choice. Depending on your situation, whatever you think is best, going to give you the least headache, get out of your way, and let you operate the business and be successful, you can pick and choose. That’s something that I really like about the LLC.
Toby: A corporation, the easiest way that I’ve always remembered it is you have your shareholders and directors. The directors vote on these officers, and the officers do the day-to-day.
In an LLC, you just have members and managers, and you could actually be member-managed. You could just do away with that whole other level. You have one level to make it super simple, you could have two, and technically, you could even have three. You can say, hey, we’ll create an executive class. We can even call them presidents, secretaries, and treasuries if we feel like it, but I don’t have to.
They’re actually really nice. If you don’t want to be too complex, you can be pretty loose with an LLC. Is that fair?
Jonathan: That’s a great way to put it.
Toby: You say there’s lots of flexibility. I agree 100%. I think that they’re also like a Swiss army knife. You can make them look whatever way they need to look for whatever purpose you have.
Are there any other benefits? Are there any other reasons why there might be a redeeming grace for these LLCs?
Jonathan: This is another version of flexibility, but it’s on the tax side of things. If flexibility in day-to-day operations isn’t quite doing it for you, then flexibility in tax treatment typically gets people’s attention.
We already talked about how LLCs can be disregarded and how that’s a pretty unique situation for business entities out there. That’s default for an LLC with a single member.
They have another default which is partnership tax treatment. It functions just like a limited partnership in that sense. You can have multiple members in there. They split it along those partnership lines as far as ownership, profits, and losses allocations go, but that’s not the only thing the LLC can do.
Either a partnership LLC or a disregarded LLC can actually elect to be a C-Corp or an S-Corp. People call this Check the Box because there’s a form, the 8832, where you can actually tell the IRS, hey, normally, this is a single-member LLC. It would be disregarded, but we’re going to go with S-Corp or C-Corp instead.
The vast majority of the benefits that you get out of being a C-Corp or an S-Corp for tax purposes are also available to LLCs. LLCs can actually swap that treatment as they go along, so even if you pick one upfront, you actually have some degree of flexibility to swap down the road if circumstances change.
Toby: The IRS does this. What are you? You tell me. They just cover their eyes. They don’t know what an LLC is. They’re like, you just tell me what it is. You could say, hey, I’m a corporation. I’m a C-Corp. They’re like, okay, you’re a C-Corp.
I don’t think there’s a single place in the Internal Revenue Code where it says LLC from a tax standpoint. I guess there are code provisions that are relevant to LLCs and they’ll say the name every now and again, but there’s nothing that says LLC taxation. There’s no tax form that’s an LLC tax form. It relies on you to say, I am a…, and if you don’t say anything, then they’re going to say how many owners? When you say single, they’re going to say, then you’re nothing. We’re just going to tax it to the owner. If you say there are two owners, then they’re going to say, well, then you’re a partnership.
It’s funny how that works. It was 1997 when that came out, and it changed the whole world because for a lot of us, there was a requirement that you do certain things before you can qualify for a tax designation. They came up with this form […] and then the 8832 where you just check. What are you going to be taxed as? Check. I’m going to be an S-Corp.
All you got to do is file your S-Corp election and you’re good as gold. You can be an LLC ignored, LLC taxed as a partnership, LLC taxed as a corporation, C-Corp, or S-Corp, LLC that flows into a trust and is taxed as a trust, or LLC that’s taxed as a nonprofit or 501(c)(3) if it’s owned by a 501(c)(3) and disregarded. It’s this crazy world of flexibility like you said. They are so versatile.
What other reasons do we like these LLCs? Should we throw them out with the bathwater? I think that’s the phrase.
Jonathan: The next one is another form of flexibility. This one is being able to create a special allocation of profits and losses. Normally, with most other business entities out there, your ownership percentage is what determines your share of the profits and the losses, so if you’ve got two people in a corporation and they each have 50% of the shares, they’re each getting 50% of the profits and losses. It’s just how it works.
With LLCs, you actually can choose to modify that a little bit. You have to be careful. It does have to be an LLC that’s taxed as a partnership, of course, but if you’ve got one member who contributes a bunch of money in startup, you can actually grant that member a larger share of the profits without having to alter the actual ownership split. It’s still a 50-50 LLC, but you can give that initial contributor 75% of the profits.
It does need to be fairly limited. It does have to have a substantial economic effect the way that the IRS requires it to be. That basically means you can’t just move it around purely for tax purposes like you give all the losses to the partner that has the highest tax bracket or something like that. If it’s purely for playing around with the tax result, then the IRS will get in there and disallow it. But as long as you’ve got some legitimate reason like somebody contributed more in the front and you’re trying to make them whole for that, then you’re good to go and you actually have that flexibility to change how these things are split.
Toby: Again, it sounds like we’re making a case not to kill these things off just yet. That would be a good one. Depending on your situation, maybe I’m going to allocate more of the losses to the guy that needs the loss. Maybe you’re negotiating and saying, hey, I know we’re going to be buying this property. I’m a real estate investor and I need more of that loss, so I want to negotiate a non-pro-rata share of that certain activity to enable us to actually enter into a transaction that works for both parties. That would be pretty cool.
Any other things that we need to consider? Are there any other redeemable qualities of these things called LLCs?
Jonathan: The last one I want to talk about is just the fact that they’re recognized in all 50 states. Wyoming was at the forefront back in 1977, but by 1996 which was a really short period of time for the legal world because the legal world is fairly resistant to change, astonishingly, less than 20 years later, all 50 states have LLC statutes, and then that very next year like you’ve mentioned, Check the Box goes into effect because the IRS saw the writing on the wall and realized that there was this whole new entity out there. It was really catching on. They didn’t want to come up with a whole separate tax regime for it, so they just said, here, tell us what you are, like you said.
The fact that it caught on like wildfire, has stuck around, and is very consistent across all of these different jurisdictions generally speaking means that it is a really good vehicle to be using for your asset protection structuring. There are a few narrow cases where LLCs may not be great in certain places and certain jurisdictions like those single-member LLCs in Florida, but there are still so many other types of LLCs out there that you can leverage like these Wyoming LLCs we’ve been talking about to fill those gaps as they arise.
Toby: And it’s amazing that something that came out of Wyoming could cut like that. No offense to our friends in Wyoming, but of all the places for a great, innovative business tool to come out of, I would just be like, wow, that thing just absolutely went. It makes us rethink of our friends. We have an office in Cheyenne, so we love Wyoming, but it’s still amazing that something came out of there because you’d always think of New York, Delaware, or maybe some innovation from California, but you’d never say if there’s one place where there’s going to be amazing legal innovation that’s going to change the landscape of the United States forever, I don’t think I would have picked Wyoming. But I’m glad they did that.
I guess the guillotine was raised up and we were about to stick the LLCs’ neck on the line, but maybe we’re not going to do it. I don’t think they’re dead. I don’t think we’re ready to stick a fork in them yet.
You certainly helped, sir. Thank you so much, Jonathan, for coming in and dealing with the shenanigans, this idea of are LLCs dead. I would say though from listening to you that if you are an active business, you may want to think long and hard before you go down that path of an LLC because it might be that you’re just infinitely better—depending on your circumstances—being a traditional corporation or probably an S-Corp.
If you are going to be an LLC, maybe a real estate agent, consultant, engineer, attorney, or whatever it might be and you’re making your living off of it, maybe it’s an LLC taxed as an S-Corp. Maybe that’s the appropriate route to go.
Maybe not just do these ignored LLCs and disregarded LLCs if you’re an active business. Maybe think long and hard about that although I’m sure the IRS would absolutely be ecstatic if everybody just said—if they were an active business—go ahead and be a disregarded LLC. It sounds like they’re eating everybody that does that, and they probably would appreciate it if they had some more victims.
Any closing comments, thoughts, or anything else you want to add?
Jonathan: Just like you said, there are some drawbacks here and there. Your mileage may vary depending on what you’re trying to do with this business entity, but overall, the LLC is still the premiere business vehicle for most purposes out there, so it’s certainly worth looking at if you’re looking at getting structured for asset protection or starting up a business. You just want to be careful and work with some professionals who can guide you on the right path so that you don’t make any missteps with them.
Toby: Speaking of professionals that could help them on their path, how does somebody get a hold of you?
Jonathan: You guys can reach out to us through the website, andersonadvisors.com. We’ve got a wealth of information on there, a lot of different ways to get in touch with us, learn more about what we’re talking about here today, and a lot of other similar topics that also apply to different real estate investors, people who invest in the stock market, and people who are looking for more tax savings and more tax planning opportunities. We’ve tried to create a one-stop shop where we’ve got attorneys and CPAs working hand in hand to make sure that our clients are not only protected from lawyers and […] but that they’re also not getting taken advantage of too much by Uncle Sam.
Toby: Yeah. We don’t like that uncle doing bad things to us. We want to keep him at bay. You just stay over there, uncle. Just like you at your Thanksgiving where there are all the medical professionals and your family is like, Jonathan, you could just sit over there on the end or maybe sit at the kiddy table, we can do that to our Uncle Sam and put him in the corner too. That’s just me. I’m sure that they let you sit at the big-boy table too.
This was certainly enlightening and a lot of fun. If somebody wants to get a hold of you personally, I would just say it’s email@example.com. We might put that in the show notes for somebody if they want to touch base because again, everybody is different. If they’re listening to this, they might say, you know what, I really liked the way Jonathan talks. He’s thoughtful, and I really like to reach out to him.
I would invite people to do that because you did a great job today explaining this thing. No, LLCs aren’t dead. We’re not going to throw them out and put them in the dung heap of history. We’re going to continue to use them as appropriate.
As Jonathan said, it’s not always black and white, but there are little nuances. Sometimes, they’re great at things, and sometimes, they’re stuff you want to avoid.
I just want to say thanks again, Jonathan, for enlightening us and bringing your knowledge to the table.
Jonathan: Thanks again for having me, Toby. It was fun.
Toby: You got it. Thank you, sir.