10 things you may not know about your multi-member LLC
Most businesspeople who have formed any of the 80,000 New Hampshire LLCs currently in good standing have done so because LLCs are so easy to form and because they provide their members with liability shields. The same reasons apply for the 18,000 businesspeople who form new LLCs every year in New Hampshire.
My experience as an LLC lawyer is that most LLC founders and members have at least a basic understanding of the value of their LLC liability shields. And these individuals are quite right about the relative simplicity of LLC law as compared with corporate law.
However, there are at least 10 critical questions about LLC law and tax of which, in my experience, most of these individuals are entirely unaware and which they would be entirely unable to answer.
1. What can you do to maximize the strength of your LLC liability shield?
I’ve addressed this question comprehensively in a set of anti-veil-piercing guidelines I provide to my LLC formation clients. If you’d like a copy of these guidelines, send me an e-mail.
2. What should you do to maximize the 20 percent annual federal income tax deduction available to you under IRC section 199a on your LLC income?
You should provide in your operating agreement that the members of your LLC will be paid for their LLC services by distributions of profits, not by guaranteed payments. But you need to balance your section 199A deductions with benefits from federally tax-favored qualified plans such as SEP-IRAs and 401(k) plans.
3. What should you do to reduce your self-employment tax liability on your LLC income?
You need to structure your LLC under a little-known but powerful IRS proposed regulation called Prop. Reg. § 1.1402(a)- Ask your tax adviser how your LLC can take advantage of this regulation. If your tax adviser can’t answer your question, give me a call.
4. Do you need a written operating agreement for your LLC? if so, why?
Yes, you need a written operating agreement, and you should hire a lawyer with an expert knowledge of LLC law and tax to draft this agreement. The key benefits of such an agreement are addressed below.
5. Why must your operating agreement contain detailed fiduciary provisions?
The better the ethical commitments that you and your co-members have toward one another and toward your LLC, the more likely that your LLC will succeed. The fiduciary provisions in your operating agreement are your LLC’s ethical code.
6. When should you take advantage of the contractual freedom available to you under Section 2 of the state’s LLC Act?
You should do so in lots of situations, but the most common situation is when, for good reasons, you or other members of your LLC want to reduce or eliminate your LLC fiduciary duties.
7. Should you provide in your operating agreement for the resolution of member disputes by arbitration or by litigation?
If you want privacy in inter-member disputes, choose arbitration. If you want maximum impartiality and the clearest possible decision-making rules, choose litigation
8. Why should your operating agreement be written in plain English rather than in legalese or taxese?
So that, when problems arise among the members of your LLC, you can resolve them without having to pay a lawyer to interpret your operating agreement.
9. Why shouldn’t you hold your LLC membership in a revocable trust?
New Hampshire estate planners routinely form revocable trusts for their clients, and they routinely recommend that they contribute their LLC memberships to these trusts to protect them from New Hampshire probate. This is usually a bad idea. First, there are better ways for LLC members to protect their memberships from probate. Second, the New Hampshire Uniform Trust Act is not a good statute to govern LLCs. The best possible statute for this purpose is the New Hampshire LLC Act.
10. Why should your operating agreement require a unanimous vote in order to admit a new member to your LLC?
Your operating agreement should require a unanimous vote to admit a new member because a lack of anything less than complete compatibility among your LLC’s members can rapidly lead to its demise.
John Cunningham is an attorney of counsel to the law firm of McLane Middleton whose practice is focused on LLC law and tax. He can be contacted at email@example.com, 603-856-7172 or llc199A.com.