Originally Posted by JimM68
I was going to just stay out of this after yesterday, but in the interest of communicating and learning.... well why not.
Why are LLC's used so much for "shielding" assets if they actually offer no protection?
Would it make more sense for the entity to be an S Corp?
If so, what would it take to convert an LLC to an S Corp?
Just filing the required state paperwork and a fed form 8832?
What if the Montana LLC after a while, transfered title to the members actual home state?
Since a sale didn't take place, no tax would be due, correct?
You've stated your client has a problem because he cannot prove that the asset was not kept in the home state for longer than specified by law?
So if he camped one weekend a month and bought fuel and rented a campsite out of state, he has no problem?
Oh, and thanks from me as well for your restraint in responding to "certain members" comments. I appreciate it, and will try hard to do the same.
Jim, first off there was no offense taken on my part as the concepts are pretty obtuse sometimes. Let me see if I can answer your questions.
LLC's are used mostly to shield the owners rather than the assets themselves. If you are a sole proprietorship without the LLC shield you have unlimited personal liability. So if one of your employees has an accident with a Company vehicle, you are personally liable for the total amount of the suit. If you have the LLC protection, only the assets of the LLC itself are subject to the suit.
There are reasons to be an LLC as there are reasons to be an S corporation. For example, an LLC owner who has children under the age of 18 can employ those children and pay no social security tax on his children's wages until they reach age 18. Once the child reaches age 18 then the child is subjected to social security taxes. Downside to the LLC is the total income is subject to social security taxes. At 15.3% that can be a tough cookie to chew on. As an S corp I have to pay social security taxes on my kids and I can't employ them until they are at least 14. The upside is that not all of my own income is subject to social security taxes as I can take part of my income as dividends. This is a very brief description of the two entities, but I think you get the point of some of the pluses and minuses of both.
To convert an LLC to an S corp is a two step process. First you would file the 8832 (by the way, I'm impressed that you know about that form) and elect to have the LLC treated as a corporation. Then you would file the 2553 to elect to be treated as an S corp. That conversion is actually pretty simple.
If a Montana LLC met all the requirements of being a separate entity for sales tax purposes, it could then transfer title to the owner of the LLC. Depending on the state this may or may not escape sales tax. If it was taxable it would probably be taxed on its fair market value rather than new cost.
The way my client got into hot water was exactly what you mentioned. He didn't document that he had left the state and as such it will probably cost him some serious cash.
Sorry for the wordy explanations, but that is a real brief summary of the LLC's and S corps and other issues.