Limited Liability Companies as a wealth management tool (Colorado)Colorado, Limited Liability Company, LLC, estate planning, wealth management, and US tax policy manipulation
The life breathed into business entities, through the constitutional protections afforded with Citizens United, show that this trend will not change anytime soon. Most voters have a hard enough time determining fact from opinion to understand the implications of any of these policies or the consequences of who they vote for; don’t expect a law to get passed to fix this anytime soon.
Enough motivation, let us create a new pseudo-citizen.
Creating a new legal entity
This article focuses on the Limited Liability Company, specifically the Single Member LLC, which is the easiest to do the paperwork for and usually the best option for taking advantage of the 20% Qualified Business Income deduction:
- Creation is easy:
- $50 in Colorado to create
- $150-300 for an hour or two of a lawyer’s time to review an example Colorado single member Operating Agreement
- $25 to get your operating agreement notarized
- (Optional) $10-12 per month for a mailbox to shield your home address
- You can do all the taxes with your standard income taxes:
If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return.
- Upkeep isn’t terrible:
- File a $10 annual report
- Apply for an EIN and maintain a bank account separate from your personal finances. I really like TD Ameritrade for their cash services, unfortunately they (and American Express) crack down on physical addresses provided by a Commercial Mail Receiving Agent … while other banks will let you use a virtual mail provider for your physical address … more on why that is important later. Be sure to check if your address will be flagged as a Commercial Mail Receiving Agent if using a bank that cares.
- Setup quarterly electronic estimated tax payments for the US National Goverment and your incorporation state if you have no other way to do income tax withholding (like through a W-2 employer).
If your taxable income is less than $157,500 for a single filer or less than $315,000 married filing jointly, and if this new business’s purposes is Investing and Lending, which this is, then the interest income coming through this LLC is Qualified Business Income; that is the interest income is properly allocable to a trade or business.
Physical address matters
The address you use for banking and business letterhead may mean the difference between paying 10% of your Qualified Business Income (QBI) or paying no tax; California vs Nevada or Oregon vs Washington.
As an Investing and Lending business with no employees, no sales, no services, and no tangible property it makes sense to use an address which means low or no income taxes; occupation, sales, and use taxes do not matter here. While everyone talks about creating Delaware (zero sales tax) business entities, Nevada (zero income tax) makes much more sense in this instance; additionally, Nevada does not charge taxes on services.
While it is true Nevada charges no income taxes, Nevada does charge significantly more for business filing fees than Colorado does for business filing fees, which at lower income levels cost as much as the 4.6% Colorado income tax rate.
Additionally, the cryptocurrency regulatory regime in Colorado is much more progressive, which is necessary for my LLC investments.
Saving on taxes now and in the future
To save on taxes, you will need to transfer ownership of accounts and assets to the LLC, known as a capital contribution. Fiduciaries generally want to see:
- Articles of organization and/or Certificate of Good Standing from the secretary of state in the incorporation location
- Operating agreement (including beneficial owners) … remember getting that notarized?
- Government ID for all beneficial owners with more than 25% in the company
- Bank statement in the company’s name (with your business address)
- In-depth description of the business activity (anti-money laundering reasons)
Given my tax jurisdiction and wealth, all of my startup fees were covered by the tax savings in the first month.
Now given that there is no public market for these LLC assets, gifting membership interests to your heirs while you still are the LLC manager means hefty asset write-downs.