Limited Liability Protections

In today's environment of rampant litigation and frivolous lawsuits, it is extremely important for one protect himself against such claims and potential liabilities.  It is important for Doctors, Dentist Business Owners, Property Owners, and any one of Substantial Wealth to protect themselves from frivolous lawsuits and claims.  Businesses and individuals should consider should consider any and all tools available to minimize one's liability exposure. Traditionally, business owners have utilized the Corporation as the legal tool to protect one's personal assets from the liabilities associated with the business. In other words, the liabilities related to the business cannot attach themselves to the personal assets of the owner or shareholder.

In the early 1990s, the Ohio legislature passes the Limited Liability Company Act. This Act created new kind of entity called the "Limited Liability Company" or LLC. This entity if property utilized can provide business and real estate owners and individuals significant liability protections.
An LLC can have one owner or several owners. The owner or owners are called Member(s).

Organization

An LLC is formed by filing a simple charter document, and appointing a statutory agent with the Secretary of State. The principal document that defines the rights and duties of members  is the operating agreement in the context of a multiple member Limited Liability Company. However, in a single member LLC, a self declaration defines the rights of the sole owner.

Single Member LLC

A single Member Limited Liability Company (SMLLC) is an entity owned by one person. There are several benefits to a SMLLC. First, the entity provides liability protections to the owner. This has already been explained. Second, if the proper election is made, the SMLLC is a non-entity for tax purposes. In other words, for tax purposes the asset or business is owned by the owner. Therefore, all income and losses are shown on the IRS Form 1040. Therefore, if one owns a business, the income is listed on Schedule C. If real estate, Schedule E and so on. No entity tax return is required.

Rental Real Estate Example

For example, lets assume one owns three separate pieces of rental property. Each property has 10 separate units. The owners could create 3 separate SMLLCs with each property owned by a different SMLLC. Lets assume the entities are called Smith Properties I, LLC, Smith Properties II, LLC, and Smith Properties III, limited liability company. All contacts are between the Limited Liability Company and the tenant.  What does this do? First, any liabilities from the properties cannot attach themselves the personal assets of the owner. Therefore, a tenant can only pursue a lawsuit against the SMLLC rather than the owner. A lawsuit naming the owner should be summarily dismissed. In addition, the liabilities from each property cannot attached themselves to the property in the other two SMLLCs. In others words, a judgment against Smith Properties I in an amount of one million dollars is only good against that Limited Liability Company. The other properties are protected. Finally, for tax purposes, all the properties are owned by the owner and are listed on his IRS Form 1040.

Small Business Example

Many individuals are owners of small business. As previously noted, if ownership is in the name of the owner, there is no liability protection. Thus, any judgment against the business attaches itself to the personal assets of the owner. There is no reason to assume such a risk. A sole proprietor  can organize the business in the name of the Limited Liability Company. For tax purposes it is a non entity or sole proprietorship. But for liability protection purposes, creditors can reach and attach the personal assets of the owner. The owner shields his personal assets from the debts, obligations and liabilities of the company.

Management

Management is defined in the operating agreement and  the variety is infinite, limited only by creativity of the parties and the drafting of the contract. Management can be on a general partnership model, with all members actively involved in the business and with each of them having the authority to bind the entity in the ordinary course of its business. On the other hand, management can be specifically limited to a hired or appointed manager. Somewhere in the middle would be an LLC with one or a small group of members actively conducting and managing the business.

Who can benefit from an Limited Liability Company?

1. New start-up business. A new start-up business should consider utilizing an Limited Liability Company. An LLC can be formed at nominal cost and provide the owners with flexibility to suit the particular needs of the new business.

2. Real Property Owners and Landlords. Real Property owners and landlords should consider the benefits of an LLC. An LLC protects the owner or landlord from the liabilities and risks associated with owning property. A negligence suit brought by a tenant would have to name the LLC as defendant, not the owner. Again, the LLC provides limited liability. Owners of multiple properties should consider placing each property into its own LLC, thereby shielding each property from the liabilities of the other.

3. Construction and Development & Joint Ventures. When investors and developers come together on a construction and development project, they need a mechanism to govern the rights and interests of the parties. An limited liability company can be the mechanism used to govern the rights and interests of the parties.