I am frequently asked by small business owners if they should have a separate LLC or multiple LLCs for their assets. The answer is “it depends” on what your objective is for considering this. In a short column like this, I will only be able to highlight the strategies of why you would consider this and not the details of how.
If the concern is legal liability, then this is a discussion to be had with their legal counsel and not their CPA/financial planner. The fundamental question to be raised with their attorney is if you have the assets in another LLC will it limit any of your liability exposures.
Other reasons a business owner might consider this are: 1) raising additional capital with a sale-leaseback, 2) transferring by gift to family members, 3) sharing the ownership with employees, or 4) they have heard this is the thing to do.
The fundamental issue up front is, as far as tax considerations are concerned, there should be a legitimate business purpose. Further, all elements of the transaction should meet an arms length standard and be at fair market value.
For a sale-leaseback, the business owner will set up a new LLC and then under an arms length transaction, sell the asset to the LLC and immediately enter into a lease for this property from the LLC. If the primary purpose of this strategy is to raise more capital, then it is necessary to find the investor who will be putting the cash into the LLC. The primary disadvantage in considering this strategy is the small business owner is giving up some of the profits in the business via the lease payments.
The primary caution in considering this strategy is you must understand the transaction must be an “arms-length” transaction for both the sale to the LLC and the leaseback of the asset from the LLC. A secondary issue is whether the lease qualifies as an operating lease or a capital lease. The third issue, which may be the most critical to many small businesses, is have you given up your primary asset that may be critical for your use as collateral for your overall debt structure?
The CPA/financial planner should also determine the tax ramifications of the sale-leaseback. Most likely, the business owner will have to pay taxes at the time of the sale.
If the motivation is to transfer ownership in assets to other family members or employees, this transaction may be structured more along the lines of a gift-leaseback. In order to determine the value of the gift into the LLC, you must obtain an appraisal of the fair market value of the equipment. This strategy would normally only be considered by a business that would conclude that it is “asset rich.” As with the sale-leaseback, it is important that the lease be at fair market value.
This strategy could afford the business owner to 1) potentially reduce the size of their taxable estate and 2) potentially shift some income and cash flow to either family members or key employees.
For any gifting, you must discuss with your CPA/financial planner the gift tax and estate tax implications. A major factor in evaluating this strategy is whether the assets transferred will be appreciating in value. Another factor as discussed above, is whether the business owner will need the assets for collateral in the future. And, the business owner needs to make a long-term estimate of the cash flow impact on the business.
The CPA/financial planner should assist the business owner in determining if a gift tax return must be filed or in the case of employees, if the transfer constitutes taxable compensation.
The CPA/financial planner also needs to carefully research the issue related to the new LLC’s ability to take depreciation on the assets.
If the business owner has decided they want to go forward with setting up a separate entity for any of these reasons or other purposes, they should retain a competent and experienced attorney to draft the documents for the transaction(s) to transfer the assets to the entity and for the terms and conditions of the lease.
If one of the motivations of the business owner is protecting assets from creditors or for other reasons, the attorney needs to be the one leading the discussion and advising the business owner.
The final aspect of considering this topic is control. In these transactions, the business owner may be giving up control over assets that are key to the business. An extension of this question is to consider if future asset purchases will be made by the newly created LLC or inside the business.
Jerry Love, CPA, is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at
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