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An LLC must contain income-producing or investment property. This might consist of marketable securities, real property, closely-held businesses, investment accounts, etc. Personal use property should not be transferred into an LLC. Assets placed into an LLC for personal use will taint the LLC as viewed by the IRS and the courts (i.e. homes, jewelry, artwork).

If the LLC consistently pays out a management fee to the managing members and does not make distributions to the membership as a whole, there is a possibility that the IRS may not view it as a legitimate business or argue that no transfer of interest was actually made.

There are two schools of thought on the idea of making distribution from the LLC. The first is that a legitimate business takes profits and distributes them to the owners of the business. It may not do this every year or every other year, but on a fairly regular basis when a profit is realized from the business. The second is that pulling money out of the LLC has the effect of decompressing the value of the money, i.e. $100 outside the LLC is worth $100, $100 inside the LLC is only worth $70 and constantly pulling out money for personal costs makes the LLC look less legitimate. If the LLC creators are not in immediate need of a large distribution of money, the former view tends to work better since the IRS may feel that legitimate businesses distribute profits, if there are any. Using this technique, the LLC can make distributions to all members each year to provide them with additional income. In some situations, if the LLC creators are in need of money, the best course might be to take a large distribution out of the LLC in order to replenish their disposable funds (rather than here and there) and then, with a trimmed down LLC, make a significant gift of membership interest to their beneficiaries.

Income, expenses, credits, and deductions are passed along to the members. This allows income shifting from parents to children, as gifted LLC interests carry with them the responsibility for a proportionate share of the LLC income.

Lack of Marketability Discount (approximately 20%-40%) Most LLCs are set up for the purpose of maintaining ownership of assets within a family and are therefore structured so that transfer of LLC interests to persons outside the family is restricted or prohibited. In addition, since membership interests are not readily marketable as are typical corporate stocks, they are not easily converted into cash. When compared with publicly-traded stocks (i.e., IBM) or real estate, which are both easily transferable and marketable, LLC interests are much more complicated to transfer and therefore obtain a discount for their lack of marketability. Minority Interest Discount (approximately 20%-30%) Since most transferred interests do not carry with them the ability to control the assets or manage the LLC or influence LLC decisions, the value of these interests will be reduced for a lack of control.