Publication

Guidelines for Operating Your Family LLC to Avoid IRS Scrutiny

by: Christianna Niepraschk

  1. Ensure that limited liability company formalities are respected at all times and that the Members strictly follow the terms of the Operating Agreement.
  2. Do not commingle any of the Members’ personal assets with LLC assets.
  3. Avoid paying any Member’s personal expenses from the LLC assets.
  4. Maintain books for the LLC and comply with state and local filings, such as qualifying the LLC to transact business in any jurisdiction where it is doing business and be sure to file all required state and federal tax returns.  The Members should also keep detailed records of decisions made on behalf of the LLC and activities of the LLC.
  5. Set up a bank account in the name of the LLC (using the LLC’s employer identification number (“EIN”)).  The account must be accessible only by the Members and the name of the LLC should be imprinted on the checks.
  6. When transferring assets to the LLC, prepare and execute the necessary paperwork such as assignments for such transfer and consult with a tax advisor beforehand regarding any tax implications.
  7. Only transfer to the LLC those assets that have a business or investment reason for being in the LLC.
  8. Try to limit personal use of the LLC property.  If there is a transfer of a residence, make sure that the Member’s lease of the property for personal use is in writing, for fair market value, and that rent is actually paid.
  9. Make sure all agreements between the LLC and its Members are in writing.  Do not leave it open to a determination by the IRS that there is an implied agreement for the Members to personally use the assets transferred to the LLC.
  10. When distributions from the LLC to the Members are made, make sure they are pro rata based on ownership percentages.
  11. The LLC should avoid making loans to a Member who donated assets to the LLC.
  12. If in doubt regarding the legality, tax consequences, or permissibility under the terms of the Operating Agreement of any action the Members wish to take with regard to the LLC, be sure to consult an attorney before taking such action.
  13. Always remember that the LLC must have a legitimate, non-tax business purpose to avoid IRS scrutiny (the purposes should be stated in the LLC’s Operating Agreement) and operate the LLC with those purposes in mind.

Christianna L. Niepraschk is an attorney in Offit Kurman’s Virginia office.  Ms. Niepraschk focuses her practice in the areas of estate planning and estate/trust administration.  She can be reached at 703.745.1803 or cniepraschk@offitkurman.com.