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In previous newsletters, discussed that it may be a better choice for you to invest within a company structure rather than investing alone. Investing within a company is known as “passive investing.” It is not for everyone, but it offers several benefits, including not having to be involved in every aspect of managing the investment.. This allows for a much calmer lifestyle.

Most companies use the Limited Liability Company (LLC) structure, which is a relatively new way of doing business in the United States (in 1988 all states enacted LLC laws). The best way to describe an LLC is to explain what it is not. An LLC is not a corporation, a partnership or a sole proprietorship.

The LLC is a hybrid that combines the characteristics of a corporation structure and a partnership. It is a separate legal entity like a corporation, but it has the entitlement to be treated as a partnership for tax purposes. Therefore, an LLC, carries certain tax benefits for investors.

The investors, which are called Members, become owners of the LLC. Investors can be individuals, corporations, trusts, other LLCs, pension plans, etc. Unlike a corporation where stocks are issued, a Members’ capital is invested by purchasing Membership Units. The Members, who hold the majority of the voting class membership units, maintain the controlling management of the LLC.

The LLC is controlled by an Operating Agreement, in which the operations of the company are defined. This document allows the LLC to be managed by a third party rather than requiring the Members to be involved in the LLC’s day-to-day functions. This is normally the way most Funds are created – – where a Manager handles all of the management aspects for the Members, and they become passive investors.

The primary advantage of an LLC is limiting the liability of its Members. Unless personally guaranteed, Members are not personally liable for the debts and obligations of the LLC. At Liberty Creek, we do not allow any personal guarantees in our Fund structures. Any debts and obligations are only of the LLC. Taxation is generally a “pass through” structure, meaning that the earnings of the LLC are not subject to double taxation, unlike that of a “standard” corporation. However, they are treated like the earnings from partnerships, sole proprietorships and S corporations with the added benefit for all of its Members.

There is greater flexibility in structuring the LLC than is ordinarily the case with a corporation, including the ability to divide ownership and voting rights in unconventional ways while still enjoying the benefits of pass-through taxation. The most notable of these options is appointing an independent Manager for the LLC, which allows for the benefit of a total passive investment.

Next Week, we’ll discuss how LLCs are used in the Fund structure.

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