Articles

Series LLCs: Where Angels Fear to Tread: by Garrett Sutton

There's a lot of talk about Series LLCs. More and more people are wondering if they're a smart idea. The short answer is that they aren't - they haven't been tested, giving them limited applications if they have any at all. First, some background. LLCs alone are an excellent structure for many different uses. For instance, they work well as a method of holding high dollar assets like real estate. If you own commercial or rental property, it's important that you hold title to that property in an entity. If this entity (most likely an LLC) is run and managed properly, it can protect you from any personal liability.

Many people own a number of different investment properties. They want to protect both their investments and themselves by placing them into one or more LLCs. The task then is scenario, every investment is held under a different LLC. That's not a popular answer for people who have lots of investments, but it's built on sound reasoning. Think of LLCs as giant shoeboxes. As many investment items as you like can be placed inside, but they're all at risk if something happens to the box. If a lawsuit happens, every investment you've placed into that LLC will be in danger.

The solution is to separate your investments. Ideally, you should use a separate LLC for each one. If you can't, be sure to examine the equity you have at stake in every investment along with its liability potential. Then group them in LLCs accordingly. As an example, it's not a good idea to include a single family beach front rental in Maui in the same LLC as a duplex on the wrong side of town. You may have several thousand dollars of equity stored in the house on Maui, which is placed at risk by including it in the same LLC as the rough edged duplex. Keep them separate. However, if you own three single family homes in Idaho, each within about twenty thousand dollars of equity, you might feel that placing them together is an acceptable risk. But that segregation strategy can get expensive. If you have ten properties, using ten different LLCs might seem confusing and costly. Series LLCs seem to provide a solution as statutes in certain states allow you to create separate series within a single LLC, the debts and liabilities of which are only enforceable against that series. These laws allow LLCs to establish separate series of interests, members and managers, giving them separate duties, powers and rights. Those include the rights to profits and losses with respect to specific property and obligations. In states that have this kind of enabling legislation, each series within the LLC works as a separate entity under state law. This is why many people are attracted to series LLCs - they theoretically have the ability to shield property in different series from liabilities incurred in or against one another without paying state fees for multiple entities. This means that an LLC containing two properties can choose to place each into a separate series, so that liabilities from one can't cause problems with the assets of the other. (Remember the same effect can be created using two different LLCs to hold these two properties.) Many people prefer series LLCs because at first glance they appear to be cheaper to set up. However, this assumption is false. It's actually more complicated to set up a series LLC, making it more expensive than the basic type. In California you might find a series LLC appealing because the Franchise Tax Board charges an annual fee of eight hundred dollars for each entity. Many people think that setting up a single series LLC means paying only one fee in California. However, the Franchise Tax Board takes the position that each series counts as its own LLC for fee purposes, meaning you'll have to pay the same whether you set assets up in series or in their own separate LLCs.

The biggest problem with series LLCs is that many states (including California) don't have series legislation and may choose to ignore the laws of the state where the series was created. That's because you're subject to their rules when doing business in their state. The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since series LLCs are so new they've never been tested by courts, even in the states that permit them. That means there's no guarantee that limited liability protection will be extended to each series until every state rules on the subject. It's hard to see how a court would choose to grant this kind of protection inside one entity, and only time will tell if courts will do this. But do you want this type of uncertainty when you are trying to protect your assets?

Again, one should be concerned about how series LLCs will be treated by the states that don't have laws permitting them. If you set up a series LLC in Nevada then register it as a foreign entity conducting business in the state of Massachusetts, each series in the LLC own a separate piece of property. If there's a lawsuit in regards to one of these properties you can't be sure that the Massachusetts court will honor the series structure of the LLC, applying Nevada's law to the real estate and activities that are located in Massachusetts. If they do, the claimant can collect only against the property in that series. If they don't, the claimant can collect against the properties in other series as well. States are expected to give full faith and credit to legislation of other states, but the answer is uncertain. Exceptions do happen. It is also important to note that the American Bar Association did a review of series LLCs and declined to endorse them. You can be certain that future court cases will take note of this development.

Since the laws about creating series LLCs are different in every state that permits them, it might take a long time before enough case law is accumulated to give us any level of comfort about using them. If you want to make sure your assets have good, solid protection, it's a much better idea to avoid corporate structures that don't provide reliable protection. Avoid series LLCs as a form of protection until a definitive case law is established and rely instead on known, tested entities such as individual LLCs.

Protect Yourself from Your Assets: by Garrett Sutton

How can you best protect your personal assets? Here are some things to consider.

• Keep Your Personal and Business Assets Separate If you don't insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.

As an example, if you're a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.

Or perhaps you've formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend's errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner's signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.

To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You'll need to keep your company's registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.

• Protect Your Business Assets You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business's assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.

A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker's Compensation insurance. The insurance should also have "increased cost of construction" additions if your building should become damaged or require reconstruction. That means you'll be covered at today's construction prices instead of those of previous years. If you are a landlord, "loss of rents" riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it's being rebuilt to offset right losses. A final consideration is a "higher limits" rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.

But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.

Keys for Using an S-Corporation: by Garrett Sutton

If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation's profits are taxed once as the corporation's income and again when the profits are distributed as dividends, a limited liability company or limited partnership's profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation.

Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business. While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders. Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:

• Incorporate the Business - As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.

• File an S-Corporation Election Form - To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.

• Notice and Obey S-Corporation Limitations - Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants' estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.

Every business is unique. Your business's form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations' tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability.

By considering your business's options and choosing the best available business form, you will ensure that you take advantage of available opportunities.

C Corporation Considerations by Garrett Sutton

A C Corp has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits. This is not the case in a flow-through entity, such as an S Corp, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is important to you, a C Corp may be your entity choice.

C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don't work well with businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets.

The most often-cited disadvantage of using a C Corp is the "double-taxation" issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.

There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over -- use all of the write-offs and deductions allowed by the IRS to reduce the C Corp's net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side.

The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA.

Some quick things to note on C Corps:

· They can have an unlimited amount of shareholders, from anywhere in the world.

· For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world.

· They can have several different classes of shares.

· They are the most widely recognized business entity in the world, and are the premier entity for going public. In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized, adding extra levels of privacy.

While we like and often use S Corporations, we keenly appreciate that C Corporations have their merit and place in your entity structure strategy.

Thoughts on Asset Protection: by Garrett Sutton

It is no secret that the United States is the most litigious society in the world. That said, it is important to acknowledge that many of these lawsuits are a necessary component of our legal system, and possibly the only means to right many of the wrongs that occur in our society. However, the other side of this is that a certain portion of these lawsuits are based on nothing more than an attempt by one party to generate a financial windfall from a targeted defendant. To help combat such legally permitted takings was born the concept of Asset Protection, the legal techniques of protecting one's assets from judgment.

Asset protection is based on the principle that since assets held in your name (minus a few exceptions) can be seized by a judgment creditor, assets not held in your name (and subject to charging order protections) are better protected. Unfortunately, many "experts" who provide asset protection strategies offer services that range from unethical to illegal. Beware of advisors touting Nevada corporations as a way to "hide" from the Internal Revenue Service (IRS) and thus avoid paying taxes. Take for example the recent case against a very high profile asset protection firm located in Las Vegas, Nevada. At first glance, this company appeared to be a legitimate organization providing advice regarding how to protect yourself and your assets from seizure. They had expensive promotional videos and a nice professional looking office. They even had a well known celebrity endorsing their services in a commercial. However, according to a recent court complaint filed by the Federal Trade Commission, if you cracked the shiny outer coating you found that this group was run by two men, one with a suspended law license and the other a convicted felon.

Among the many services that this group provided was the option of having their company listed as the sole signatory on their clients' corporate bank accounts in an attempt to hide corporate owners from the tax liability of the company. This, according to the group's marketing materials, helped shield their clients from "capricious federal judges and any government agency". Improperly hiding your assets from the government is not a sound asset protection strategy for several reasons. First, if you owe money to the IRS you owe it. Evading the obligation is a crime.

You certainly can use a corporation to minimize taxes and should always do so. But to hide assets and evade taxes leads to big trouble. Second, if you are brought to a debtor's exam, you will be forced to disclose what assets you have under penalty of perjury. A properly designed asset protection plan allows a debtor to disclose what assets they control, without sacrificing the protection of a proper structure. But anyone who advises you to set up a corporation to hide your assets and avoid paying taxes is going to get you into trouble. Also be wary of anyone who is advising you to shield yourself through the use of "bearer shares". Bearer shares are corporation stock certificates which are owned by the person who holds them, the "Bearer", and are not recorded under the owner's name. Some unethical asset protection advisors tout bearer shares as a means to shield the corporation.

The IRS has been aware of the practice for a long time and if they catch you using bearer shares to avoid paying taxes, be prepared to take an extended vacation in a federally funded resort with no pool and plenty of concrete. Any ethical asset protection advisor will tell you that the use of the bearer share is a bad idea and is now illegal even in Nevada and Wyoming. If an expert is telling you otherwise, politely excuse yourself and run away - quickly. Further, be aware of advisors telling you it is possible to absolutely bulletproof your corporation from liability. No one can make that claim. There is no magic cloak of protection from liability. That being said, a sound asset protection plan is essential. Although you cannot completely bulletproof yourself due to charging laws and new court decisions, you most certainly can and should protect yourself to the best extent possible. With proper planning and advice, you should be able to adequately limit your personal liability and protect yourself from illegitimate claims and unscrupulous individuals.

Improper Accounting: by Garrett Sutton

Many new business owners make the mistake of not properly accounting for it all. Please know that companies live and die by numbers. They are defined by numbers. They grow with numbers. They bleed with numbers. Numbers define the health of your business at any given time and over time. To be successful you must have a system to record, classify, report, and analyze your company's numbers. And you must use this system every day (or pay someone who will).

Too many new businesses let the numbers slide. They never establish a system for their accounting, they don't write down all the incoming and outgoing money, they forget and/or guess at some transactions, they forget to file necessary paperwork. The main reasons for this are: 1) most of us hate dealing with numbers and 2) time taken on accounting is time taken away from business. The first reason for avoiding accounting (your dislike of numbers) comes under the heading of "too bad." Numbers are a fact of business life. If you don't want to keep track of your accounts, that's fine, but find someone who will. Don't let your aversion suck the lifeblood out of your company. The second reason for avoiding accounting (time taken away from your business) is just, to be blunt, ignorant. Whether you sell a product or a service, sales are what makes the time you spend a business rather than a hobby. And sales are defined by numbers.

You need to know what you are bringing in and what you are sending out so that you can set appropriate prices, manage your overhead, market, and make a profit. Without a knowledge of income and expenses, you are leaving profit up to chance. The best way to keep up on your accounting is to have a system - a method or plan - that becomes second-nature with repetition. This won't happen overnight. After all, it takes 90 days to form a habit. And it may take a while for you to find a system, that suits your temperament and your business needs. But once the habit is in place, you no longer have to think about it every day. Regardless of the system you use - computer program, ledger, accountant, book keeper - your system will fall into one of two categories: cash-based method (you count income when it comes in and expenses when they go out) or accrual-based method (you count income when you invoice and expenses when you commit to pay).

The difference is timing and can be important if you regularly have inventory or if credit is a part of your business. The accrual method is better under some circumstances, but the cash method is simpler. However, if you make more than $5 million you may have no choice but to use the accrual system, since the IRS may require it. Accounting can be complicated, but it is also predictable. Here is a very basic outline of what you can expect: Every day you need to record the day's transactions. On a regular basis (dependent upon your personality, your business, and your revenue and expense levels), you will want to post all your sales and expenses to a general ledger. Just as regularly, it's a good idea to adjust the ledger so that you don't lose sight of anything that doesn't get recorded on the day of the transaction.

At the end of your accounting cycle (usually monthly), when the ledger is complete, balanced, and up to date, post the profits to the owner's equity account. This balances revenue and expense accounts back to zero, preparing you for the next cycle. The cycles add up to an accounting period. At the end of that period, you will compile your financial reports to give a picture of all financial activity during that period. While there is much financial data you will want to keep in-house (and there are regulations stating how long you need to keep different records), much of it is also dependent on filing. If it isn't filed, it doesn't exist. Keep on top of those numbers.

Lack of Substantiating Paperwork: by Garrett Sutton

All corporations have paperwork that must be completed and kept on file to prove the business and its owners are acting as a corporation rather than an individual. C Corporations, S Corporations, Limited Liability Companies and Limited Partnerships all must have paperwork substantiating their existence as limited liability entities. No matter which entity you choose, you will need, at a minimum, articles of incorporation or organization. But you may also need meeting minutes, a resident agent, a Federal Identification Number, and initial organization filings. In order for a corporation to remain legally and financially separate from its owner (which is the most likely reason you incorporated to begin with), you must have the paperwork that makes your corporation real and proves its existence. And you must file the appropriate paperwork with the appropriate parties (such as government agencies and regulators). However, no matter how carefully you set up your initial corporate documents, no matter how perfect and thorough they are, you aren’t done. There are a variety of filings, records and documents due every year. Forget to file the right papers with the right people at the right time and your company is no longer independent. Paper is all that protects you and your assets from lawsuits. But that paper, done right and right on time, can be like corporate Kevlar.

What is the best entity? Using the right entity is an important decision, so we've put together this report to help you make the correct choice. Click here to read more.

Nevada Asset Protection Trusts: Are you interested in outstanding asset protection but uncomfortable with the costs and red flags of using offshore trusts? Then read on about Nevada’s new onshore asset protection trust. Click here to read more.

Three reasons to use a Limited Liability Company or Limited Partnership for real estate investments: After searching the market for the perfect piece of real estate, you have found property that will satisfy your needs and give you future opportunities. Now is the time to be concerned about protecting yourself from the risks involved in property ownership. Click here to read more.

Taxes and kids: It comes as a surprise to some parents that their children may have to file a tax return. Although [most] minor children are dependents of their parents, they are subject to taxes if they receive income. Click here to read more.

Sophisticated Asset Protection Techniques: Click here to read more.

Dynasty Trusts: Click here to read more.

Trademarks:  What is the difference between Patents, Trademarks, Servicemarks, and Copyrights? It is common for people to confuse patents, copyrights, and trademarks. Although there may be some similarities among these kinds of intellectual property protection, they are different and serve different purposes. Click here to read more.

Franchise:  Many people are interested in franchises, read our FREE e-book Winning With Franchises or call 1-800-700-1430 to arrange an attorney consultation.