Many business owners form several types of business entities to hold their assets and operate different aspects of their businesses. A common strategy is to form limited liability companies to hold real estate. The operating entity, such as a manufacturing entity, pays monthly rent to the real estate LLC and this can work to keep liability of the operating entity separate from the real estate LLC. Some LLCs are formed to hold other assets, such as personal property that is leased to the operating entity. Also, LLCs are commonly used to manage family-owned assets and facilitate transfers among family members. LLCs are not required to have the formalities of meetings, minutes, and notices which are required for corporations. However, for an LLC to maintain its liability protections and protect itself from IRS attacks, it is prudent to exercise some formalities to evidence that the LLC is maintained as a separate entity and is not the alter ego of its owner(s). We advise many of our Cottage Law clients and business owners and families who use LLCs to hold and manage assets that they should treat the LLC as a business by following the pointers below.

• form the entity in strict compliance with the law of the state where it is formed
• apply for and obtain a federal ID number
• fund the LLC with assets immediately upon formation or soon after forming the entity
• the assets transferred to the LLC should be titled in the name of the LLC and ensure that insurance policies reflect the proper ownership
• the LLC should have its own bank accounts that are not used as the members’ (the owners’) personal cash registers
• all LLC related funds should go in and out of LLC accounts; any distributions to the members should be from the funds held in the LLC’s accounts
• the LLC’s assets should not be for the personal use of the members unless the members compensate the LLC for the use of the assets
• personal assets should not be transferred to the LLC unless those assets are for a business purpose and no longer to be used personally
• if the LLC has a manager, the manager should respect the fiduciary duty he or she has to the owners in conducting the affairs of the LLC
• if a member dies, the LLC should continue to operate as usual, as opposed to dissolving, because the IRS could argue the LLC was solely formed for the avoidance of taxes and not legitimate business purposes
• the Operating Agreement should provide a roadmap as to how distributions are to be made and no deviation from this should occur
• the LLCs books and records, corporate and financial, should be attended to on a timely basis and with professional care
• the Operating Agreement should provide for how voting rights are allocated, and while different voting requirements can be established to suit the needs and concerns of the members, the voting requirements should be respected at all times
• the members of the LLC should receive K-1s to attach to their income tax returns
• the members should hold annual meetings and keep minutes of those meetings, filing them in the record book
• the members should hold special meetings for important decisions or provide signed consent resolutions, filing those documents in the record book

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Going, Going, Gone!

Tax-free transfers – gifting – of the family cottage to future generations via a cottage succession plan is a great opportunity for cottage owners to enjoy considerable tax savings while real estate values are suppressed.

U.S. taxpayers are experiencing a “perfect storm” of opportunity to make tax-free transfers (gifts) of assets such as family businesses, real estate and other wealth from one generation to the next. The gift tax was first enacted in 1932 by the federal government. Over the coming months, we all have what may be the best opportunity since 1932 to gift family assets without a gift tax now and to avoid significant estate taxes later.

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They say, “beauty is in the eye of the beholder.” That’s especially true when applied to the family cottage. Whether the family cottage is a small rustic cabin on a pristine lake or stream, a luxurious retirement home on one of the Great Lakes or ocean shore, or a family retreat in some stunning mountain region, it’s not “economic value” that is the most important factor in keeping the family cottage, it’s the “emotional value.”

Some would argue that a place is just a place but the people make it special. When it comes to the family cottage, it can be argued “the place” is special, sometimes almost magical, and can transform those who spend time in that place from stressed out, overworked adults back to their carefree days as a child; skipping rocks on the water, swimming off the dock, nursing a sunburn and eating s’mores by the campfire. For most, the family cottage creates a place for memories and traditions to be formed and a safe haven to retreat to for rest, reflection and reminiscing later in life. The family cottage is a constant in an ever-changing world. It’s where experiences can be shared and passed on to the next generation in their purest form.

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While the changes are mainly technical in nature, some are substantive and worth noting. Changes to the Michigan Limited Liability Company Act (“LLCA”) took effect on December 16, 2010.

The LLCA now: Read the rest of this entry »

Our summertime friends helped us celebrate Casey.

Conor and The Rose Lizard Club sign

Casey named this club the “Rose Lizards.” We made special friends at the family cottage. These friends are people you don’t see on a daily basis and sometimes they may be just summertime friends. I love these friendships, because you pick up where you left off and never skip a beat in conversation or in sharing a story or two.

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Summer began as usual at the family cottage. The dogs, our chocolate labs Jake and Ginger, and our two cats Max and Joey and the three teen boys plus a friend were all settled in for a glorious summer at the cottage.

A few days later we discovered that our pets were not the only critters at the summer cottage. We had a family of skunks living under the shed in the back of the family cottage. There were 5 skunks to be exact. A mother skunk who was not happy we had invaded her space and her 4 babies. I did not want her spraying the dogs. We had that happen before to our very first dog Baily, a yellow lab. It was awful -the smell smarts your eyes. I believe we used tomato juice and hydrogen peroxide to get rid of the smell. I absolutely did not want her spraying the boys.

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Did you know that just watching and listening to a water sprinkler on your lawn provides solace and serenity. Our chocolate Labradors back from their vacation at the lake and family cottage seem eager to chase squirrels and lay in the sun on the moist grass in their own yard. What a beautiful day in July. We finally got a break from the humidity for a few days.

The labs enjoying air conditioning tire from sunning outside and decide to siesta in the family room. Jake, our chocolate lab, probably dreaming about the lake vacation romp at the family cottage, promptly starts snoring. Ahh – the life of a dog. Our backyard has a pond with four fish. The water rushes over rocks giving that soothing sound. The scenery changes at home. There is no big lake or cottage to sit by, but there is peace in the backyard with the birds chirping and butterflies flying on the bushes. Returning from a cottage always amazes me at how much you miss the beauty of the water.

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