10 THINGS EVERY BUSINESS EXECUTIVE SHOULD KNOW ABOUT LLCs

October 20, 2011Linowes and Blocher Breakfast Program

John R. Orrick, Jr., Esquire Demetrios M. Datch, Esquire Linowes and Blocher LLP 7200 Wisconsin Avenue, Suite 800 Bethesda, Maryland 20814

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Introduction:

•LLCs are becoming the preferred choice of entity throughout the United States.

•According to a recent survey conducted by the U.S. Government Accountability Office, there are more than one million LLCs formed each year.

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Why are LLCs so Popular?

•Limited Liability

•Flexibility (e.g., classes of membership, control, tax considerations, etc.)

•The “copycat” effect

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10 Things Every Business Executive Should Know About LLCs

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#1 General Rule: Limitation of Personal Liability

•Members and Managers are not liable beyond the extent of their respective capital contributions

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#2 Exception to General Rule: Piercing the Corporate Veil/ Alter Ego Doctrine

•No commingling of assets

•Maintain separate bank accounts

•Obtain separate tax ID numbers

•LLC may not be used to perpetuate a fraud

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#3 Flexibility over Control

•More than one managing member

•Third party manager(s)

•Member-approved decisions

•Voting vs. non-voting members

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# 4 Tax Considerations• Flow through tax treatment

• Different classes of interest Distributions/Allocations

• Carried InterestsProposed legislation would

eliminate capital gains treatment

• Tax TreatiesAdverse tax consequences for certain

foreign investors (e.g., Germany)

• Self-Employment TaxLLC vs. S Corp

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#5 Use of “Disregarded” Entities and “Check the Box” Regulations

•Single member entity is, by default, “disregarded” for tax purposes

•“Check the box” regulations provide that LLC with two or more members is a “partnership” by default

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#6 Transfer and Recordation Tax Considerations

•“Controlling Interest” legislation in Maryland and District of Columbia

•Conversions of partnerships into LLCs exempt

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# 7 I may be your partner, but I’m not your guardian

• Principal of Freedom of Contract allows members to modify typical fiduciary duties owed to each other

• Delaware language vs. Maryland language

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# 8 Delaware Law

•More established body of law; Chancery Court

•Maryland LLC Act modeled after the Delaware statute

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#9 Creditors Rights and Charging Orders

•Charging Order gives creditor right to profits interest, not voting rights

•Amendment to MD LLC ACT

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#10 SPEs/Holding Companies/ Series LLCs

•SPE’s – Special purpose entity established for bankruptcy remoteness

•Holding Companies – Structure permits venture to own multiple SPEs, but each asset is isolated

•Series LLCs – Not recognized in Virginia or Maryland, but permitted in D.C., effective 1/1/2012

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Conclusion

•LLC is the most popular form of entity for real estate transactions and is becoming the preferred choice of entity for all forms of business. Why? Because of its flexibility.

•Please call if you have any questions.