A limited liability company (LLC) is a relatively new legal invention. It is often chosen by entrepreneurs and businesses over a corporate entity, particularly when there are a small number of investors. LLCs offer more flexibility in how the burdens and benefits are shared by members.  Occasionally, LLCs are adapted to overcome solve lesser problems. Here are three examples:

Sporting Event Entity.  My wife and I are Angels baseball fans and have had season tickets since the first World Series win of the club. As with most sports teams, the longer you hold the seats, the better your seat choices will be the following year. However, baseball clubs usually do not allow ticket holders to assign or transfer their season ticket rights to another person.  You have to continue to buy the tickets each season to preserve your right to the same seats. If you don’t buy the tickets your priority is lost. However, consider the season ticket holder that is a business – say an LLC. An LLC is a separate, fictitious, legal entity. However, unlike a natural person, an LLC has owners. So, if an LLC was formed by faithful sports fans that purchased tickets for prime location seats, a later change in the ownership of the LLC would not change the owner of the tickets. A premium seat could be effectively transferred from one group of avid sports fans to another – or rather, a membership in an entity that has a premium seat. 

Virtual Sale of Low Assessed Property.  The same principle applies to residential and commercial property owned by LLCs. A sale of real estate usually triggers a reassessment of the value of the property for property tax purposes. However, if a membership in an LLC is sold, the real estate owned by the LLC is not reassessed. The sale of an interest in an LLC that owns real estate could be worth more than the sale of the real estate! The new LLC owner could occupy the house or commercial property and have all the benefits of a property owner. 

Avoiding Sales Tax.  Selling a large ticket item such as an airplane, a yacht, an executive motor home, or a classic car usually triggers a sales or use tax. The tax could be significant. However, if an LLC is the owner of the personal property, a sale of an LLC membership does not trigger sales tax. This is particularly helpful where there are several members that have partnered to make the original purchase. When one of the original group wants to sell his interest, the sale would be of his LLC interest, not the interest in the specific property that would require the payment of sales tax.    

Cautions: None of these scenarios works if you already own the sports tickets or the real estate or the “big ticket item” personally. A transfer of real estate from an individual or individuals to an LLC would be an actual sale of real estate and would trigger the tax reassessment. The sale to the LLC from the individuals of a “big ticket item” would generally require the payment of sales tax. If you recently purchased the property, or if the reassessment of the property would be a positive event (i.e., the value has subsided significantly), then you may have an opportunity. Similarly, an attempted sale of the right to season tickets to another would just put you back in the sun of the stadium’s center field.  It takes some advance planning to have these kinds of structures in place when the original purchase is made.

You should consider the minimum cost and tax to have an LLC in the first place. So a benefit analysis has to be made with something of sufficient value. Other income tax consequences should also be explored.  However, setting up structures like these could be translated to other situations, where transferability is otherwise restricted. An attorney should be consulted who will read the “small print” and give you an opinion before committing in this way.  If done properly, entrepreneurial planning and sophistication could result in tax savings or allow you to have a different view – one behind Home Plate with a transferable value.

Do you think that the use of an LLC in this way is irresponsible or just savvy?  Let us know what you think with a comment on this blog.

 Warning: This article is intended to discuss general concepts and ideas and should not be viewed as legal advice for your specific situation. Always consult and rely upon your attorney and your tax advisors before implementing a strategy for your personal or business situation. 

Are you subject to the Disposal Rule?  We have a rule in our home that artichoke leaves do not  go into the garbage disposal – a rule born out of my efforts to unclog a drain one too many times. However, this Disposal Rule deals with how sensitive consumer information is destroyed.    

● What Is The Disposal Rule?

This Rule mandates what common sense requires.  In simple terms, it says, “If you use consumer reports, don’t allow the very personal information in them to be accessible to anyone else.”  The Rule requires disposal practices that are reasonable and appropriate to prevent the unauthorized access to – or use of – information in a consumer report.

● Does The Rule Apply To You? 

If you use or consult consumer reports, this Rule applies to you.  Large or small organizations are included.  Some examples would include consumer reporting companies; lenders; insurers; employers; landlords; government agencies; mortgage brokers, car dealers; attorneys; private investigators; debt collectors.  As an individual, if you pull a consumer report on prospective home employees (nannies, housekeepers or contractors) you are also subject to this Rule.

If you don’t refer to or use information from consumer reports, you are not subject to this law.  However, it is common sense that sensitive, financial or personal information should be destroyed when you are finished with the information.    

● What is a Consumer Report?

The Fair Credit Reporting Act defines a “consumer report” as information obtained from a consumer reporting company that is used – or expected to be used – in establishing a consumer’s eligibility for credit, employment, or insurance, among other purposes. Therefore, credit reports, credit scores, reports businesses or individuals receive with information relating to employment background, check writing history, insurance claims, residential or tenant history, or medical history are all “consumer reports.”

● What Should You Do? 

Adopt a complying policy and make sure you and your employees follow it. Your plan could include burning, pulverizing or shredding hard copies of the information and/or destruction of electronic files or other media so the information cannot be retrieved or reconstructed.  If your business delegates the destruction task to a document destruction firm, check the company out and make sure you understand their procedures and policies and try to find out if they are certified by a trade organization.   

Consult your attorney for more information or to make sure your policies comply with the law. Also, the Disposal Rule was published by the Federal Trade Commission and is available at www.ftc.gov/os/2004/11/041118disposalfrn.pdf.  The Federal Trade Commission has also issued a new publication, “New Rule Seeks to Protect Privacy by Requiring Proper Disposal of Sensitive Consumer Information,” that can be found at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt152.shtm.  

That’s the new Disposal Rule – it’s not just for artichokes any more.

If you have turned your primary residence into a rental, a second home or a vacation home and are planning to sell it, you should be aware of a new law that changes how capital gains are calculated beginning January 1, 2009.   

The Current Law.  Currently, the law excludes up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a primary residence. The sale of a home qualifies for this exclusion if the home was the primary residence of the tax payer for at least two of the five years ending on the date of sale or exchange. The exclusion applies even if the home was originally purchased as a second home.   

The New Law.  Rethink your strategy because on January 1, 2009, the rules will change.  President Bush signed The Housing and Economic Recovery Act of 2008 (H.R. 3221) on July 30, 2008. The tax law name of this same law is The Housing Assistance Tax Act of 2008.  This law will generate tax revenue by reducing the home sale exclusion, but also has a generous transition component.   The law does not allow a taxpayer to claim exclusion for any period of time after December 31, 2008, in which the home is not the main home of the taxpayer. The available exclusion is apportioned in the ratio that the period the home was the primary residence (qualifying use) bears to the period of ownership after December 31, 2008.  Any nonqualifying use that occurred prior to January 1, 2009 is ignored. The maximum excludable amount remains at $250,000 or $500,000, depending on your marital status.   

An Example.  If a homeowner purchased a house in 2009 for their main home, turned it into a rental property in 2012 and sold it 2014, the property would not have been used as a primary residence for 2 years of the five years it was owned (or 40% unqualified use). Under these circumstances, 40% of the gain realized from the sale would be subject to capital gains tax. The remaining 60% of the gain would be excluded up to the maximum amount allowed.  

Temporary Absences.  Being absent from the property for temporary periods of time that are not greater than two years will not threaten the status of a home as a primary residence. A home can still be the primary residence of the taxpayer when he/she is absent because of a change in employment, health conditions or other unforeseeable circumstances. 

Time Remains To Do Tax Planning.  Because the new law uses a test period of January 1, 2009 to the date of sale, the highest tax advantage is gained by using the home entirely as a primary residence during this period of time. Taxpayers who are planning to sell a vacation home, a second home or a rental home, may want to discuss with their tax advisors whether to move into the home on or before January 1, 2009, to accumulate as much qualifying use as possible before the home is sold. There is still time to do some planning to gain a tax benefit from this change. 

This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance.  Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

Ironically, change is constant in so many aspects of life.  The economy is frenetically unpredictable. The political power and policy of the USA is shifting and morphing.  Entire industries are being redefined, retooled or relocated within the territory of the globe.  For some, it is an unsettling and disturbing situation.  However, for the entrepreneur, it is a perfect wave of opportunity.  Change is the sinew of entrepreneurial muscle.  The litmus test for being an entrepreneur is being able to identify change and exploit it, regardless of the direction or nature of the change.   

With this many opportunities awaiting your business, it is a great time to take inventory of your resources and make a plan.  Have you noticed that it is November?  Creating a strategic plan now for 2009 would just be smart.  Last January I wrote a blog post entitled Planning Your Success In 2008 in which I discussed the traditional “SMART” formula of annual goal setting used so widely.  However, a strategic plan is different.  It is more than goal setting.  Carter McNamara, MBA, Ph.D, of Authenticity Consulting, LLC, explains that “. . . strategic planning determines where an organization is going over the next year or more, how it’s going to get there and how it’ll know if it got there or not. The focus of a strategic plan is usually on the entire organization, while the focus of a business plan is usually on a particular product, service or program.”  Dr. Carter McNamara defines and explains how to strategically plan consistent with the personality of your business and management team.  He describes five different approaches to strategic planning (goal-based, issue-based, organic, scenario and “appreciative inquiry”).  His guidebook and articles can be found on the website of the Free Management Library, This resource is a real find for the entrepreneur or manager wanting to avoid just giving lip service to planning for this next year.