“The 10 Overlooked LLC
Issues People Screw UP!”
Issue #5
How to Get Property and
Stuff Into Your LLC
I hope you saw in Issue #4 why the IRS choices you make for your LLC are so important. The choices you make can mean an extra 10 – 20% boost in your annual take home.
Your LLC needs to be more than a piece of paper your attorney or LegalDoom files with the state for you. (By the way, you can do it faster if you just send it in yourself.)
Your LLC is a shield you can hold out in front of you to protect your personal assets from business disasters. It’s also a vault you can put assets in to protect them from lots of different types of attackers. It’s also a tax shelter.
If it’s going to be a vault to protect assets or if you’re going to use it to conduct business, your LLC has got to be the “owner” of property.
There can be real property, tools, cars, and all kinds of assets “inside” of your LLC. How do you get the assets physically into the LLC? You can do it right or you can do it wrong.
If you’ve already done it, have you done it right? You may not know for years, until you get the tax audit, you sell the asset or your LLC, or you die. (If you die, technically you’ll never know, but your family will.)
This all leads into “The 10 Overlooked LLC Issues People Screw UP!” Series #5: How to Get Property and Stuff Into Your LLC.
Let’s follow two scenarios. #1. You are going to try and protect a piece of real estate from lawsuits by putting it into the LLC. #2. You are running a business as a corporation or an LLC, and want to put your equipment into a second LLC so that it will be protected and you can “shift income” to your family and reduce your estate tax liabilities.
The order of the steps that you take to put stuff (property or equipment) into an LLC is critical. (If you are the only member of the LLC and you own the property before it goes into the LLC, there are fewer issues, but the steps are still important.)
Here’s the order
- Form the LLC and make sure you have an operating agreement and all of the resolutions.
- Make a resolution saying that the LLC will accept your property (real estate or equipment) in exchange for membership interests.
- Transfer the property. Use a statement of transfer for the equipment or a deed for real estate.
- Issue membership interests to equal the value of the property you transfer to the LLC.
- If it is a bigger piece of property (real estate vs. a hammer), then file a 351 report (there is no such thing as a 351 IRS form) with the IRS informing them of the value and the membership exchange.
- After you get the membership interests, you can give away your membership interests in the LLC, if you want family members to participate for income tax or estate tax purposes.
If you screw up the order the IRS is going to come after you.
Almost nobody files a 351 report, because there is no set form or format. It is basically a letter where you declare the value of the property to establish the transfer value of the asset at the time it is transferred.
This is basically the order IBM follows when you give them a $1,000 in exchange for stock in their company. There is no tax consequence to IBM or you when you get IBM stock back in exchange for your $1,000.
It’s an exchange of equal value. This is an important asset protection concept. Make sure you get the How to Double Your Asset Protection eBook to learn more about this.
And, make sure you actually issue the stock certificate like IBM does. (It’s actually a membership certificate for an LLC.)
Ideally, when you transfer equipment into the LLC, it will be fully depreciated (you get the depreciation), and you will transfer it at a low price, because you don’t want to “recapture” the benefits you got from depreciating the piece of equipment.
Why would you want to transfer equipment into an LLC? To name a few reasons, Asset Protection, Estate Taxes, and Income Taxes. Plus other reasons like the double asset protection.
Whenever you transfer a piece of real property there are issues like the due on sale clause in the mortgage, transfer taxes, and increases in property taxes. This is all covered in a long discussion in the LLC Wizard Course.
An LLC is a tool. You can get exquisite tax benefits, asset protection, estate planning, and lots of other advantages out of it, or you can use it as a fake front to do business, which is exactly what 99% of the LLCs are.
Tomorrow: LLC Credit and Credit Cards
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Tomorrow : LLC Overlooked Issue No. 6, “LLC Credit and Credit Cards”
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