HOW LLC'S WORK New Mexico and Wyoming offer the best choices for obtaining an LLC. Here are LLC basics:
LLC= Taxation As Partnership + Limited Liability
Partnerships are “pass-through” entities for tax purposes. This means that partnership income, deductions and other items passes through the partnership directly to the partners. Accordingly, each partner takes into account his or her share of partnership income, deductions and other items in determining the partner’s individual tax liability.
| Partnerships have partners. | Limited liability companies (LLC) have members. The ownership in the LLC is called the “member interest.” |
If a judgment is awarded against the LLC itself, it may be levied, and LLC’s property seized or sold in payment. If, however, a judgment is awarded against a member, to the extent that the operating agreement so states, distribution usually cannot be compelled to satisfy a member’s judgment debt. Creditors have to satisfy themselves with a “charging order.” This gives them the rights to any distributions made by the LLC to that particular member, but little else.
LLC’s are taxed as a corporation or as a partnership. Taxation as a partnership is the default.
The Limited Liability Of A Corporation
When a hostile creditor sues the corporation, normally, it can only take the assets of the corporation. The stockholders are generally not liable for the debts, liabilities and acts of the corporation. This is called “limited liability.” This is very different from a partnership, where all partners are liable jointly and severally for everything chargeable to the partnership
| Corporations have stockholders. | Limited liability companies have members. |
The LLC has the limited liability of a corporation.
The Limited Liability Company (LLC) Is A Hybrid Entity
The LLC offers the pass-through taxation of a partnership and the limited liability of a corporation
| CORPORATION | LIMITED LIABILITY COMPANY |
| A Corporation can have one or more Directors and Officers. | An LLC can have one or more Managers. |
| The hostile creditor can take your stock, if he can prove that you own it. | The hostile creditor can ONLY go after a member’s economic interest in the LLC through the courts. This is called obtaining a “charging order.” |
Once the charging order is obtained, the hostile creditor is now first line for any future distributions that are usually paid out to the member(s).
We don’t provide legal advice. If you don’t understand this section, then please ask your attorney.
WYOMING 17-29-503. Charging order.
(g) This section provides the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judgment debtor who may be the sole member, dissociated member or transferee, may, in the capacity of the Judgment creditor, satisfy the judgment from the judgment debtor’s transferable interest or from the assets of the limited liability company.
Other remedies, including foreclosure on the judgment debtor’s limited liability interest and a court order for directions, accounts and inquiries that the judgment debtor might have made are not available to the judgment creditor attempting to satisfy a judgment out of the judgment debtor’s Interest in the limited liability company and may not be ordered by the court.
SOURCE: Wyoming_Limited_Liability_Company_Act_and_Close_LLC_Supplement.pdf
Ask your tax advisor about IRS Revenue Ruling 77-137.
