I know there is a reason for this...
January 24, 2012 11:48 AM   Subscribe

What is the catch here. Business creating a seperate LLC for company cars.

So I was wondering, what is the point of one business creating a LLC just for car leases? Is it a liability issue? A way to lower tax liability by creating a loss that can later be written off?
posted by handbanana to Work & Money (3 answers total)
Probably hoping to segregate liability. They could use the expense of the leases against business profits without going through all this. IANAL, IANAA
posted by randomkeystrike at 11:57 AM on January 24, 2012

I've seen a number of small businesses do this. Part of it is to, as has been suggested, "segregate liability" by having each car be part of a separate business entity. The theory is that if one car gets in a wreck, the other cars aren't at risk.

But it's also frequently a way for small business owners to hide their assets. A single guy might have dozens of LLCs running around, with the goal of rendering himself functionally judgment proof because he doesn't actually "own" anything, and his assets are scattered throughout the various companies. It's not entirely effective, as a dedicated plaintiff can potentially "pierce" these corporate veils and get at his stuff, but it takes time and effort, and that alone can discourage plaintiffs. This is a scummy way of doing business, but it's not at all uncommon.

It could also have something to do with insurance. Some states have different rules for insurance policies that cover a fleet of vehicles as opposed to a single vehicle. Depending on what the vehicles are being used for, it might be cheaper, premium wise, to do it this way. Or it could be a way of getting a policy that might not otherwise be available. This may involve lying to the insurance company, but that doesn't mean it doesn't happen. The insurer is likely to drop the client like a hot potato if anything does go wrong, but hey, whatever.

Of course, it's also possible that the business owner is just doing cookbook, homebrew legal practice, thinking that creating all of these entities is going to get him something that it won't actually deliver. Which is also entirely possible. I've seen small business owners screw themselves over by getting a little too clever with their corporate shell games, resulting in denials of insurance coverage for some pretty hefty claims. I've also seen the registration and legal fees associated with getting and keeping these entities up and running swamp any potential tax benefit because of the sheer amount of work involved.

All that by way of saying that yes, there could be a reason for doing it this way, but it isn't an obvious reason, and it may well be that the reason is pretty shady. But without more facts than this, it's really hard to give anything more specific. One certainly can't give any kind of opinion as to what's actually going on in this particular case.
posted by valkyryn at 12:13 PM on January 24, 2012 [2 favorites]

Limitation on liability, presumably. Note, however, that jurisdictions may "pierce the corporate veil" (notwithstanding that an LLC is not a corporation, but has similar liability shield) if an entity is undercapitalized vis a vis the risks inherent in its business. So, if an LLC's only asset is a car lease (which, unless it's below market, is likely to have no net positive value at all, given that it includes an obligation to make lease payments), a court could hold the owner of the LLC liable notwithstanding the LLC's liability shield, if it views the LLC as having insufficient assets to cover its risks.

Not likely a tax play at all; single-member LLCs are disregarded under the US tax principles unless the owner elects to treat it as an "association" treated as a corporation for tax purposes. I don't think that's particularly common outside of more sophisticated tax structuring.

I am not your lawyer and this is not legal advice. Consult a lawyer in your own jurisdiction (wherever that may be).
posted by Admiral Haddock at 12:40 PM on January 24, 2012 [1 favorite]

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