C corporation, if it receives a management fee from the LLC/LP, will need a bank account to receive and disburse the income it receives.
What is a “Partnership in Commendam”?
In Louisiana, a Limited Partnership is known as a “partnership in commendam.”
How many pieces of income-producing property should be held in one LP or LLC?
Again, there is no correct answer here. The overall strategy is to segregate assets. You don’t want a judgment creditor (one with a court-approved claim against you) to be able to reach ten properties in one entity. But does that mean that each entity holds one asset or four assets? That is a judgment call for you to decide. I have some clients who are not troubled by the annual fees and put only one asset into one entity in order to completely segregate assets. I have others who feel that three assets per entity is the right number. You must arrive at your own decision.
How many general partners and limited partners may an LP have?
There are no limits. Of course, you must follow the securities laws when bringing in large numbers of investors.
How many managers and members may an LLC have?
Again, there are no limits subject to application of the securities laws.
Would you suggest an LLC or an LP to hold a large securities portfolio?
I would suggest one or the other depending upon your circumstances. For estate planning and control purposes some planners would more often use an LP. In a situation where several persons were owners and all wanted a say in management, a member-managed LLC may be appropriate.
Can my wife and I own 100 percent of a corporate general partner that owns 2 percent of an LP and also individually own the remaining 98 percent of the LP as limited partners?
Yes. This scenario is frequently used in Limited Partnerships and is not considered to be too closely held.
Can the same 2 percent general partner corporation also own the 98 percent Limited Partnership interests?
No. In that case, there are not two partners as required for an LP.
What is a Family Limited Partnership?
It is important to know that there is no such thing as a family limited partnership or “FLP”. While there are promoters selling an expensive package of asset protection strategies known as the family limited partnership, there is no such entity authorized under any state law as the family limited partnership. Yes, there are limited partnerships which can hold family assets. But beware of promoters selling you expensive forms for illusory entities which do not exist.
What is a Family Limited Liability Company?
Once again, there is no such thing as a family limited liability company or “FLLC”. Yes, LLCs can hold family assets but beware of promoters trying to sell you an FLLC as something better or more protective than a regular LLC.
Case Numbers 1 & 2 – John and Liz; Mary and Gary
John and Liz are ready to form J & L Consulting, LLC. Mary and Gary are likewise ready to form M & G Holdings, LP. How do they proceed?
Limited Liability Company
With an LLC, Articles of Organization are filed with the secretary of state’s office of the state in which you wish to operate. Before the Articles are filed the organizers must determine if they are to be member-managed or manager-managed and who the managers will be. A resident agent (an individual or corporate entity that will agree to accept service of legal documents on your behalf) must be identified and accept the appointment. In some states a resident agent is known as a registered agent. An Operating Agreement is then prepared which further details the rights and responsibilities of the managers and members and outlines the operating procedures for the entity.
Limited Partnership
With a Limited Partnership, a Certificate of Limited Partnership (LP-1) is filed with the secretary of state. Likewise, before the LP-1 is filed the partners must determine who is going to serve as the general partner and a resident agent must be identified.
A Limited Partnership Agreement is then drafted which, as in the LLC Operating Agreement, details important entity issues. It should be noted here that a discussion of how to draft Operating and Partnership Agreements far exceeds the scope of this book, and is indeed a book unto itself. For now, we shall discuss what points and strategies should be contained in these agreements so that you and your professional advisor can come up with the document that is right for you.
Which State to Use?
A common formation issue for LLCs and LPs is which state to utilize for filing. To answer this question the following must be considered:
1. In what state – or states – will the company operate?
2. Is the company willing to pay extra to file in a more favorable state?
Case Number 1 – John and Liz
John and Liz know that J & L Consulting, LLC will operate in a number of states right away. They already have clients lined up in California, Nevada, Texas and Florida. They have been advised by their accountant that by going into Florida, for example, they will need to have their company qualified to do business in Florida. This entails filing as a foreign (or out of state) LLC with the Florida secretary of state’s office.
The decision then for John and Liz is which state to use for the original formation. While Wyoming offers excellent protections at a lower cost, the two have clients in Nevada, which means they will have to register in Nevada anyway. With their professional advisor they review the LLC statutes for the states in question. They decide on Nevada because it offers the advantage of greater protections for managers. After filing originally in Nevada they then go ahead and qualify as a foreign LLC doing business in California, Texas and Florida (already being aware of the special state tax issues associated with California LLCs, as addressed in one of the last questions in Chapter Four). They realize that they will have to pay annual fees in each state as well as, where applicable, file an annual tax return to each state. However, John and Liz know that these are the costs of doing business and they sleep better at night knowing they are following the rules. In addition, they know that if they have not registered they could be prohibited from bringing a lawsuit or transacting any future business in the state(s) in question.
Case Number 2 – Mary and Gary
Mary and Gary live in California and the first asset they seek to protect is a four-plex apartment building they are purchasing in California. Mary and Gary have learned that LPs (and LLCs) are effective asset protection entities, in part because of the charging order procedure. (Refer to Chapter Seven for details on what a charging order is and how it works). However, they have also learned that in California the charging order is not always enforced. In two cases California courts have ignored the charging order procedure and allowed partnership interests to be reached by a creditor. We shall further discuss California issues ahead.
This disturbs Mary and Gary. They want to protect their
