#3 of 3,987: LLC or S-Corp?
So you’ve decided to start your own small business (\”smallbiz\” or \”SMB\”). Welcome! It’s one of about 3,987 decisions you will have to make. Presuming you’ve already selected a name, for Illinois citizens – at least checked the name with the Illinois Department of Business Services, and then registered your domain name, the next important step is deciding on your business’s legal entity. In most states, including Illinois, business entity choices are; Sole proprietor, Partnership and its various forms, Limited Liability Company (LLC), or Corporation and its various forms, including Subchapter S Corporations (S-Corps). Because individuals tend to believe, however erroneously, that business owners are wealthy, business owners are often litigation targets. Accordingly, it’s unreasonable to operate a business today without some type of legal liability shield in addition to your insurance, which is lacking if you\’re operating as a sole-proprietor or even a partnership. Limited Liability Partnerships (LLPs), while providing limited protection, are not as owner-friendly as LLCs and corporations. Consequently, the use of partnerships has declined substantially. A smallbiz owner is typically advised to choose a LLC or corporation. By doing so, not only can the business take advantage of the legal liability shield, the owner can “pass through” the income profits and losses to his or her individual tax returns. A LLC is treated like a partnership for tax purposes and shareholders of a corporation that selects S-Corporation (S-Corp) treatment can pass through profits or losses. So, unlike C-Corporations, no double-taxation occurs with LLCs and S-Corps. Smallbiz owners tend to prefer LLCs over S-Corps because LLCs, which can also elect S-Corp tax treatment, require fewer formalities. S-Corps require annual shareholder meetings, corporate record-keeping, and quarterly tax filings. Additionally, the Illinois LLC Act allows for either narrow or expansive provisions in a LLC’s Articles of Organization and Operating Agreement. LLCs also offer other advantages, including: an unlimited number of shareholders, no citizenship requirements, few restraints on purpose or asset class, and different stock classes. Still, LLCs that don’t select to be treated as S-Corps, must pay estimated self-employment tax on all income received whereas S-Corps are not required to pay income tax on profits held for reasons other than employee wages. Also, if one depends on profits for your wages, as a single-member LLC (SMLLC), you may lose earnings if your business is sued and no distributions can be made without settling the judgment first. As a smallbiz owner, your entity selection depends on how much flexibility you want and what your current situation dictates, i.e., how much capital you need, how much liability protection you need, and the type of business partners you have. LLCs require less administrative work than S-Corps but capitalization needed for growth is often obtained from institutions that require a record of formalities, which S-Corps also require. Still, an LLC can, through its Articles of Organization and Operating Agreement, require all the formalities of a corporation and more. So… Now, you only have 3,986 decisions to make. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
3 Tips on Succession Planning – Before Needing an Airbag
The previous article discussed succession planning formula for a more successful business today. This week I’ll briefly cover how succession planning helps improve retirement and more importantly, when that succession planning should begin. At its core, succession planning is about tomorrow, our “retirement.” And proper succession planning creates important retirement benefits. As an estate planner with a number of financial planning colleagues, I can attest to the fact that we may have several methods and vehicles to protect and grow your assets and with a proper succession plan, those options may increase dramatically. However, without a proper succession plan, the options could dramatically decrease. Added benefits to retirement include: Being able to withstand harsh bear markets; Having a more secure retirement because your plans are more realistic; Retiring more efficiently and with fewer adverse tax implications; and A Less stressful retirement, even if you experience 1 or 2 bumps in the road. Most importantly, a properly executed succession plan eliminates the need for a “garage sale.” So as I said previously, in addition to making more money, establishing and implementing a succession plan results in an even more successful business today and a relatively stable and peaceful retirement. Now, some of us have a good idea on when we would like to retire but there is an ideal time to start succession planning and that time is before opening your doors for business. If you incorporate succession planning when drafting your business plan, then you will ultimately use and allocate resources more efficiently and plan realistically. Moreover, you\’ll establish processes that are key to a successful business sale or shareholder transfer. You may also realize that the most important factor in executing a successful succession plan is having a well-developed successor. Sometimes, we don’t start actually planning at the beginning. Many of us just do and do and do without stopping and taking the time to think about where all this “doing” is leading. But even if you’re 10 years into your business with about 10-15 years to go, it’s not too late. You probably have some advantages, e.g., a steady clientele or a steady and established referral base; a solid understanding of the rules, regulations, and best practices applicable to your business; “brand equity” among your peers and in your community; staff, if you have them, who are loyal; and if you’re anal, like me, you have helpful processes and spreadsheets in place to get you through the day, week, month, year, and decade. Conversely, 10 years in you may have some disadvantages: too many processes, some of which are inefficient or redundant; and you could be stuck in a time warp working against yourself, treating yourself like an employee and your business like a job, instead of CEO and enterprise. New business owners even with great business plans are also disadvantaged because the business is…new. So mistakes are going to be made and newbiz owners won’t be able to plan for all of them. It is when the business shingle is rusty that folks should proceed quickly but with caution. At age 60-65, triage may be needed, but there\’s still hope. At 66 – 70, like Will Smith said in the movie, Independence Day, “I hope ya gotta an airbag!” And at 70 ½, I think land in Jamaica is reasonable. Knowing why and when to start succession planning, we can move on and discuss the personal and professional practical considerations..Next week! The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
Popping the Question, Prenupts, and Powers of Attorney
Valentine’s Day is quickly approaching and thousands of individuals will be “popping the question” and getting the question popped at them. This is, at least what jewelers around the country have been spending all those advertising dollars on. It’s also what those individuals wanting to be “popped,” so to speak, are also hoping for, and my hopes are with you. In celebration of that bended knee, larger than life smile, and mother’s joyous tears, I offer a few points to ponder after the popping and before the party planning. The points are sobering but will help to provide years of “bubble and squeaky” happiness long after you’ve settled in with each other. If you’re not cohabiting, have “the money talk.” If you are living together and haven’t had the money talk, tsk..tsk… If you are cohabiting and have had it, good for you! and have the money talk again. If there is a large disparity of income or both of you are very affluent, consider a prenuptial agreement. It is commonplace in such scenarios so no one should feel offended if it is mentioned or requested. The basic rule is that both parties should retain their own attorneys to draft and review the document, which should be signed before the formal engagement celebration, if there is one. If you’re cohabiting obtain life insurance and powers of attorney. If you’re not living together but engaged, obtain these items before going on the honeymoon. If you’re on relatively equal financial footing economically and the families are smiling, when you return from the honeymoon, add a will to your estate plan. If even one close family member is frowning, turn that frown upside down by promising to leave him or her something in your will and then add an in terrorem clause. Better yet, have a trust prepared with a pour-over will attached and leave him or her whatever you like with or without the in terrorem clause. Love means planning a relationship founded on pragmatic principles as well as butterflies in the tummy.
3 New Year\’s Resolutions & the Great Cliff Compromise
On December 31, 2012 the United States Senate passed what I like to refer to as the “Great Cliff Compromise” and sent the bill to the House for its blessing. Knowing the House as being one of the most unpredictable entities within the U.S. government, speculation abounded as to whether the blessing would come or whether the bill would be cursed upon and sent back or rewritten in which case the Senate would curse it. However, for reasons that will likely remain with Representative House Leader Boehner and is compatriots, on January 1, 2013, the House voted for the Great Cliff Compromise. Now, many lawmakers, policy wonks, and concerned citizens don’t consider this so “great” or a “compromise.” They aren\’t seeing fireworks of the pretty, sparkly, ooo-ahhh, kind. Instead, they have visions of gray skies and storms in their heads. The disdain lies with the fact that spending cuts were not addressed, and neither was the debt ceiling. And it is the issue of spending cuts that causes as much, if not more, contention between Democrats and Republicans than increased taxes on the affluent. I’d love to see a poll on that one without “both” and “neither” being offered as a choice. Sorry, I digress… So the brow-furrowing continues because over the cliff we went, landed without too many bumps or bruises, but with another nosedive staring America in the face in two months. Still, the Shark Free Zone is most concerned, at least for now, with that part of the parachute involving estate planning. While both Congressional chambers have a lot of work to do to prevent the nosedive, the uncertainty surrounding the federal lifetime estate tax exemption is primarily gone. Some pieces about annual gifting and GSTT indexing must be ironed out but according to esteemed colleagues, they are “being worked on.” Therefore, the lifetime federal estate tax exemption remains at $5 million and indexed for inflation and the marginal rate of the excess of $5 million increased from 35% to 40%. If you were worried because you didn’t have a chance to gift your gazillion dollars away in 2012, you may have time… If you were concerned that you gave a bazillion dollars away but that, upon your death, your loved ones would still have to give more than half to Uncle Sam in taxes, you can relax, probably… BUT, if you’ve not done anything, such as downloaded a power of attorney and had it signed and notarized; confirmed life insurance designations weren’t minor children; or talked with family…even the most harmonious of U.S. Congresses won’t be able to help your loved ones. Not comparing myself to the likes of Biden or McConnell by any stretch of the imagination, may I suggest a few New Year’s Resolutions? Revisit your existing plan; or Create your plan; or Talk to your family about wanting a plan. You have at least 363 days to go…or until the next bipartisan Congressional vote decides to repeal the law and lower the tax rate…
3-Cubed Lessons for Families & Lawyers who Serve Them
As the year draws to a close, reflection is a natural activity. So, below are reflections about relationships that are key to “family work,” whether you’re working on yours or working for someone else’s. Reconnecting. Most of us have various “families,” including the one into which we were borne. High school or college classmates who take the journey with us from late childhood into early adulthood is one example. Coworkers who eventually become close friends is another. Neighbors who share the block on which we raise our children and wave to the mail carrier is yet another. Therefore, staying connected or reconnecting with our several families provides us with multiple layers of protection, comfort, and enjoyment. Relationships – good and bad – take time. Even in a most loving family, a newborn crying, pooping, and sleeping takes adjusting to. We all have unique cycles that require a little getting used to. The question is, however, how soon can we identify relationships that aren’t beneficial so that the extraction is less difficult. Logically, identifying this point sooner rather than later is key or else we may end up paying attorneys a great deal of money to unravel a ball of thorns that could have been prevented. Women matter. We work just as hard as men, if not harder. But we’re paid less and that monetary standard reflects our diminished value in the eyes of our employers. That diminished value is based on the fact that we bring and nurture life – eventually more employees – and must take time off to do so. Continual and de facto ignoring women\’s value will cost employers, advisors, and society dearly. So it behooves all of us to recognize the true worth of our mothers, daughters, wives, partners, and sisters. Team estrogen is moving forward, making powerful decisions about family, community, and nation. Forced networking sucks. Understanding someone’s value system, work ethics, and motivation takes more than the 30-minute coffee klatch. I value my friends, family members, and colleagues so I don’t want to waste their time and the time of others with referrals who are a bad fit. Consequently, even if you’re just a referral source, that doesn’t change the fact that the first rule of networking is grounded in Lesson #2. Generations are unique. Matriarchs, patriarchs, other leaders, and managers should recognize that each generation has its own set of rules. Passing on the family fortune with a heavily detailed blueprint created by Great-Grandfather Algernone will probably not bode well for the fortune or the family. Algernone\’s framework may work with regular retrofitting, but the details must be fleshed out using the world as it exists in the eyes of the current generation and possibly next generation. If not, just leave the family fortune to the family pooch. Reach back. At the first glimpse of success, take the hand of a junior and bring him or her along. Make the time and take the time. Even if you didn’t see it; somebody had a hand in making your bootstraps. Thank you. Sincerely articulated, that 2-word sentence carries more gravitas than Olympic weight-lifters. Causes are everywhere – for a reason. Millions need food, shelter, clothing, books, medicine, water, and peace. Causes are everywhere – for a reason. Marriage doesn’t make the family, authentic relationships do. “She has hers; I have mine; what we build during our relationship will be ours.” This is a favorite mantra among divorce attorneys and it wreaks havoc for estate planners later when intent changes but the walls were never torn down. We must be mindful that where there are people and relationships there is overlap and trying to build one wall may undermine what could have been a solid and lasting foundation.
Einstein\’s Theory the \”Fiscal Cliff-mas\” Ain\’t
It is unlikely that Congress will come to agreement before January 1, 2013. Ergo, the middle class will take a hit – a number of hits. It will be challenging and we will prevail. We will feed, shelter, and educate our children; we will grow our businesses, careers, and gardens; and we will laugh, cry, and argue. There may be a pack of chewing gum in the stocking, but there will be no coal. There may be a used candle lit each day, but a candle will be lit. Prayers will be offered morning, noon, and night. Chanting and asanas will occur. Quantum mechanics, string theory, and Einstein\’s Theory of Special Relativity will continue to be studied and used as a basis to explain existence. Though Einsteinian intellect isn\’t required, Congress doesn\’t get it while dozens of leaders of major corporations do. These leaders, like the middle class, understand and support the need and the plans seeking tax increases on corporations and the very affluent, which I will define here as the top 2% of our country\’s population. And we in the middle class know that spending cuts are also necessary and we\’re willing to decrease funding for valuable programs. We already have and are still willing to go further but not without some give from the other side. Accordingly, we\’ll take care of our families and businesses the best way we can until Congress realizes that political posturing, scare tactics, and continued polarization and gridlock does not work for our country. Furthermore, kudos to the women engaged in this conversation. I\’ve heard repeatedly, from fiscally conservative women and women who are as liberal as liberal can be: \”Me and my family will take the financial hit; we\’ll work with that. Just don\’t diminish our civil rights or the rights of others because those rights are more important than money.\” That may sound \”warm and fuzzy\” to some, but the rights of others include the right to be recognized as a family, the right to determine how your family will grow in number, the right to determine how your child will be educated, and the right to determine how, where, and if you can practice and express your spiritual beliefs. Ergo, \”warm and fuzzy\” and critical are not mutually exclusive terms that can be applied to legal rights. So, despite the posturing and \”warm and fuzziness,\” we know this isn\’t quantum theory and when asked my thoughts, considering the millions of families who will be impacted but are resilient, with great umbrage toward Congress but great pride in the American spirit, I simply repeat the prudent words of a colleague who stated on a list serve during a mucky debate about guns and religion from which he refrained to participate, \”Carry on.\”
Be Sure to Consider the Coin\’s Third Side
I wrote this piece before “the election” after reading an article on the “what if” of an election tie. Each party’s camp, of course, believed their candidate was going to win with a considerable margin. Yet, each party’s camp also had a team of lawyers already prepared for the “what if” of a tie. The article reminded me of a lesson I learned long ago from a very wise woman. And that lesson is that every coin has 3 sides, not 2 but 3. Moreover, irrespective of how unlikely it may be that the coin will land on its third side, that likelihood should never be ignored. The lesson of the third side is one I share with not just clients but everyone I can. However, let’s talk about estate planning for a minute. Of course, there’s no “what if” about death; we’re all going to die one day whether we want to or not, but estate planning is about much more than death. Consider the phrase, “estate planning”: Legally speaking your “estate” is everything you own. “Planning” is self-explanatory. So, estate planning is about planning for what you own. If you have loved ones, this plan naturally includes determining how those assets will be distributed to your loved ones during your lifetime and upon your death. The lesson of the third side is also about the “what ifs” of estate planning: Today, you’re a young couple with an infant and nothing but life insurance and what if…you win the lottery? Your parents left you with a substantial inheritance, which could have adverse tax implications for you, what if…there was a way you could roll it over? Your health is fine, your kids are adults and financially stable, your estate is sufficient to see you through retirement and what if…you don\’t own a home? You want to start taking a lot more time away from your small business, which you’ve successfully established and maintained over the last 15 years, what if…you\’ve been the sole proprietor all those years? This year, you’re taking advantage of the homestead exemption for your residence but you’re approaching retirement , want to give the house to your children, what if…you still need a place to stay? Like millions of others, you’re now behind retirement planning because Enron, the subprime mortgage, and the boyz on Wall Street took a chunk out of your 401(k), and what if…your partner becomes seriously ill? Today the federal estate tax exemption is $5.12 million; if Congress does nothing by December 31, 2012, what if …on November 30, you had sold your business for $8 million? Gran always said the third side is the least best or worst expected outcome. Consider the coin’s third side as you plan and you’ve planned just about as well as you can.
5 Smallbiz Takeaways from Torrents and Blizzards
In the wake of Superstorm Sandy was nearly unfathomable destruction of lives and businesses. However, the American spirit is resilient and, together, we\’re recovering. It is simply taking time. During disasters of that magnitude, we often chide ourselves for not being prepared or as prepared as we could have been because much more needs to be done long before the insurance check arrives. As an attorney and smallbiz owner who assists clients with preparing legacies and for potentially unpleasant events, the need to prepare for disasters isn’t lost on me. Smallbiz owners and their families who depend on the businesses\’ earnings are particularly vulnerable, so it\’s critical that we have a continuity plan for emergencies. Like the preparations outlined in a business plan that consider key operations and resources, so should your continuity plan. Below, are a few questions smalbiz owners should consider when devising a disaster recovery plan. Caveat: This list is by no means exhaustive, comprehensive, or tailored to any particular business. It just serves to help us prepare for the next storm. What would an all out disaster look like for your business? Consider the elements – wind, fire, earth, water – and how extreme amounts of any would impact your business operations, e.g., causing network outages, inventory destruction, and so forth. What are the procedures that would put your business back on track and, specifically, who will be responsible for what and when and how will they perform the necessary tasks?a. Who will lead the team or how will tasks be divided?b. Who will contact clients and vendors, and how? What if cell towers are down?c. Is the disaster just affecting your business or is it also affecting clients?d. What if the disaster occurs “after hours”?e. How will you assess the overall impact to your go forward? Which business resources or operations are likely to suffer more, e.g., are you a restaurant owner with no electricity but with a refrigerator and a freezer full of food? Are your clients local but your employees commute from long distances? Where are your critical client or customer files stored? What if you can’t access the building or your company’s network? Where exactly is your \”cloud?\” Can you temporarily relocate your business, where and do you have sufficient resources to do that? Indeed, this is a “short list” to help small business owners think about a particularly unpleasant topic. Yet, we smallbiz owners know that asking the important “what ifs?” often saves a bundle down the line, despite the torrential downpours, tumult in the streets, blazes, or blizzards. The Law Offices of Max Elliott continues extending its thoughts and prayers to families and businesses who experience disaster as winds of change forever sweep our world.
6 Not-so-Legal Ways to Protect Your Family
It seems there\’s a week, day, or month to celebrate every relationship and, accordingly, the third week in October has been designated \”National Estate Planning Week.\” Why we, estate planners, have a week dedicated to our practice area may, at first glance, seem self-aggrandizing. Yet, estate planning isn’t about lawyers but estate planning is about how individuals can protect their loved ones. Lawyers and other professionals simply guide the way. So instead of calling this week “National Estate Planning Week” maybe we should call it “National Family Fortification Week,” hmmm… Then again, I was going to suggest “National Family Planning Week” but that, too, could have been very misleading. Well, as they say, “a rose by any other name…” Throughout The Lotus Rules (fka the Shark Free Zone) are pieces explaining why estate planning is for everyone and not only the 1 percenters, discussions on basic estate planning documents, analyses on historical and pending cases and legislation involving relationship rights, and scary stories about car crashes and funeral home terrorists. However, I think this is the first post on point for fortifying your family, so welcome. Take simple steps early. If you’re a working young adult with loved ones, then you need a plan to keep potential serious illness or untimely demise from causing your loved ones even more grief. Your plan could be as simple as Powers of Attorney and life, health, and disability insurances. Tell your loved ones that they are indeed loved: “Mom, I won’t let you mortgage the house to pay for my medical bills and, here’s the agent information for all of my insurances.” Tears will probably flow but they\’ll be happy, proud tears. Teach your children the important lessons about life and money early, e.g., age 6, exemplify for them that living a happy and productive life is the goal and money is one tool that can help them reach that goal. Tailor your goals for you and your family; you\’re unique. An estate plan isn’t a goal; it’s another tool. Still, some wrenches are better than others. The same thing applies with respect to estate plans. A good estate plan just doesn’t involve obtaining life insurance, throwing funds in a retirement account, and creating a will. Those are good steps, but before taking those steps consider who will be your trusted advisors. Who\’ll take the time to get to know you and your family, work the plan, helping guide you and your family along over the next few decades? Take your time. OK, so you didn’t start out when you should have and you haven’t taken any steps yet, but holy crap, someone very close to you just passed away and surviving are kids, a dog, a spouse and…you want to do something NOW! Don’t. Well, don’t make any rash decisions, interview a few attorneys, talk to a few friends, chat with a few financial planners, and after the pain of losing a loved one has lessened, then start building your team. It will likely save you tons of resources down the road. Trust your team. Because of the attorney-client privilege issue, loved ones are not typically part of the initial consultation, but sometimes, if they\’re the cornerstone of the family or if a family business is involved, perhaps they should be. Make the initial meeting a \”let\’s get acquainted\” team meeting loved ones and professional advisors can give each other the \”sniff test.\” Discuss the broad strokes: wanting to ensure that the family is protected, that everyone knows who the “team” is, and create a comfortable, collaborative environment. Then later you can meet or speak with the attorney one-on-one regarding specifics. Estate planning is a technical practice with many complex moving parts, but some fundamentals have nothing to do with instruments and everything to do with being a loving family member.
4 Points to Ponder for Your Peace of Mind
The house is quiet. The treat you bought yourself is still in the fridge. You and your spouse have a dinner date in the middle of the week. Your cell phone is no longer a constant reminder of the triple life you lead: companion, professional, and parent. You’re a tad stiff in the morning, but nothing that a few asanas and a hot cup of coffee won’t cure. Plus, there’s nothing wrong with a little stiffness after the decades you’ve spent working out, right? Right. Your mind continually and comfortably drifts off to favorite travel destinations or that mid-week date during meetings you must attend in order to be a “sober second” when asked; and you’re getting asked less and less, thank goodness. Life is . . . pretty good. So, while you have some time on your hands, allow me to provide you with 4 points to ponder related to that pretty good life. Your children are out of the house for good, leading their own lives with their own families. Does this mean you have grandchildren to enjoy and then return to the fray? If so, have you thought about providing or helping to provide for their education? Your career has moved right along or your wok has become more and more tolerable. You’ve gone this far, so you’re in it for the long haul. Have you thought about what to do if, working near the end of the long haul, you are injured for a substantial length of time? Can you afford it? Do you have long term disability insurance or a strategy viable to ensure that you’ll still be able to assist with educating the little brutes or brutesses once they’re about to enter high school or university? The end of the long haul is clearly in sight. Accordingly, the previous point bears revisiting. Also, do you have a strategy for making it through the “Golden Years” comfortably? Do you know how you’re going to draw down your retirement funds so to maximize your money and minimize your taxes? People are living longer now so our resources must keep up. Will you be able to just sit on that old porch swing and smile? Family isn’t charity; it isn\’t a cause. Family is a wonderful responsibility and gift shared amongst its members. However, as those responsibilities, even to ourselves, wane and are fulfilled, how have we shown responsibility toward our community? Is there an organization, a group, a center whose work you admire and would like to try to help ensure the work and programming will continue? You see, estate planning isn’t just about planning for death. These 4 points to ponder prove it. How are you going to (1) help family, (2) help yourself heal peacefully, (3) protecting your porch swing, and (4) helping your community?