Are SMLLCs Safe?

Given the legal challenges to SMLLCs, do they still have a place? Are SMLLCs safe to incorporate into your asset planning structure? And what if you’re using your SMLLC to operate a service business or to sell goods through?

We believe the answer is “yes,” in certain circumstances. Your best bet there is to talk with a local attorney, and get his or her take on which way your home state leans.

If you’re concerned in any way though, then we typically suggest abandoning the SMLLC status in favor of a multi-member LLC. That’s enough to offset the IRS argument about debts of the SMLLC being your debts (with the exception of unpaid payroll taxes). Adding someone as a member, even with a small interest (i.e., 2-5%), will usually be enough to offset Albright, as long as the member is in place before any cause of action arises. If you wait until you’re in trouble and then add a minority member, you could be accused of adding that member fraudulently, as a way to beat the claim being made against you. But adding that second member at the time you create the entity can forestall the fraudulent intent argument. On the other hand, if you’ve done something illegal or fraudulent through the LLC, you may not be able to protect your personal assets.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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