The Smallbiz Entity Trap
When researching what type of business entity to select, entrepreneurs often seek the most popular option – a Limited Liability Company (LLC). LLCs are popular because they don\’t require the administration that S-Corporations (S-Corps) require – filing quarterly tax returns, holding annual meetings, paying employee wages. Additionally, LLC participants, aka “members,” don\’t own the LLC property, which provides members with some liability protection. (Hence, Limited Liability Company.) LLCs can have one or more members, single-member LLCs (SMLLCs) or multiple-member LLCs, respectively. Furthermore, unless an LLC selects to be treated as an S-Corp, LLCs are treated as partnerships, where the loss or gain of profits flow through to the members. However, when approached about entity selection, while administration and tax issues are important, for start-ups, it\’s critical that liability protection is thoroughly considered. If a judgment is placed against an LLC, the judgment creditors can generally only place liens on the distributions or the LLC property. So, if an LLC member of a multiple-member LLC is sued, the judgment is placed solely against that member’s distribution, whereby the other members can receive their distributions. But, if the LLC is an SMLLC, treated as a partnership, and a judgment is entered against the distribution, then that member won\’t be able to receive their distribution (share of the profit) until they settle the judgmentd. What’s a partnership of one? A sole proprietorship. Who gets sued in sole proprietorships? The proprietor. Whose assets are subject to judgments in sole proprietorships? The proprietor\’s. Ergo, depending on the jurisdiction, S-Corps are sometimes more suitable; they provide an extra layer of liability protection. Because an S-Corp owner/employee would be treated as an employee for the S-Corp, if the S-Corp was sued, the S-Corp owner/employee, unlike an LLC manager/employee, would still be able to receive wages and, thus receive part of the profits. (Ownership shares of an S-Corp are not wages.) As mentioned above, an LLC can seek to be treated as an S-Corp, whereby the owner is also paid as an employee. But, that means that the administrative burdens that accompany S-Corp status are now also a part of the LLC. And that defeats the simplicity purpose of establishing an LLC. THE TAKEAWAY…Potential smallbiz owners should consider liability as an important factor when selecting a legal structure: Choosing the wrong entity can mean the difference between a great launch or great flop .
Infants, Stairwells & Burning a Million Dollars
Wealth preservation aka “asset protection” is slowly rising to the top of the mainstream American lexicon, much like estate planning did a couple of decades ago. However, though related, the 2 activities are quite different. A solid estate plan’s end goal is to ensure that your intended beneficiaries obtain what you intend for them in the most efficient and least adverse manner possible. Retirement and tax planning are a substantial part of the estate planning process but the primary beneficiary at the end of the game is someone else, not you. Conversely, a solid wealth preservation plan will ensure that you don’t go broke before, during, or after retirement and fulfill your intentions toward your beneficiaries, tying it into estate planning. But the primary beneficiary of wealth preservation is not someone else; the primary beneficiary is you. Estate planning and wealth preservation are technically linked because the core documents and the fiduciary roles are primarily the same. Both include trusts and, consequently, trustees. Both might even include a LLC. The fundamental distinction is jurisdictional, i.e., what law governs the trust. Typically the laws in states that have asset protection statutes and are referred to as Domestic Asset Protection Trusts (DAPTs) govern wealth preservation instruments whose jurisdiction is in the U.S. Instruments whose jurisdiction is outside the U.S. are governed by the laws, or lack thereof, in those particular countries and are known as “offshore” trusts. Now before you start getting all antsy with thoughts of tax evasion, let me squash that thought like a bug. The only way to ensure that one doesn’t incur Uncle Sam’s penalties is by being completely compliant with the U.S. tax code. Now before going too far into the different schools of thought surrounding DAPTs and offshore trusts, you may be thinking, “I don’t have a gazillion dollars, so this doesn’t apply to me.” But before I lose you to Facebook or an incoming text message – wait. If you live in America, you live in one of the most lawsuit crazed countries in the world. So while you may not have a gazillion dollars, consider the following stats: 99% of doctors in high risk specialties will be sued; 75% of doctors in low-risk practice areas will be sued; Every 6 minutes a child under the age of 5 is treated for an injury sustained on a residential stairwell; In 2012, a woman was awarded about $833,000 for an injury sustained on her landlord\’s property ; Over a 10-year period, 15-21 lawsuits were filed per 100 architect firms; I won’t mention lawyers, it’s a given, people hate us, think we have deep pockets, so they sue us. So if you know your liability insurance won’t cover a potential lawsuit or the cost of litigation in successfully defending an unscrupulous claimant, how comfortable are you holding a “fire sale”? If you’re not thrilled about selling your home and liquidating all of your assets, including your retirement portfolio, to settle a claim, then wealth preservation may be needed sooner rather than later. Then again, maybe you have a million dollars to burn…
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.
Christmas in August & Legacy Planning for Families
My mom is one of the amazing sort who finishes holiday shopping in August. It always fascinated me, so of course I tried emulating her. The closest I got was finishing in October. So what does this have to do with wills, trusts, and estate planning? Well, 2 parallels exist between holiday shopping in August and legacy planning. The first is obvious – planning ahead for yourself and your family is fiscally prudent. The second parallel is a little less obvious because it’s less about shopping and more about August, the summer vacation season, and family harmony in particular. Many families go on holiday in the summer and while doing so often select a favorite family get-away spot. This spot ultimately becomes either a retirement or vacation property loved by all. As such, parents decide to keep the cherished corner of the universe in the family for the benefit of future generations. Typically, if there is more than one child, parents will leave the property to siblings to “share and share alike.” But what if the siblings can’t share alike? What if they are geographically spread out over the 4 corners and the property is closer to one than the others? What if they don’t want to share and share alike, i.e., they don’t want to perform the same responsibilities, such as property maintenance and financial maintenance? One answer would be to place the property in trust and draft terms delegating certain duties to the respective siblings. However, times change and people change, so what we might think our sons and daughters are good at today may not be what they become expert in tomorrow. Consequently, it might be more harmonious and advantageous if parents let their children decide how to manage the property and place the property in an entity with a structured agreement that supplements the trust. Instead of supplementing a trust, parents may also create a trust that owns such an entity, such as a Limited Liability Company (LLC), which in turn would own the property. As their lives and circumstances dictate, various family members could hold and move into member positions of the LLC, performing the duties directed by the LLC’s operating agreement, which is similar to a corporation’s by-laws. Forming an LLC and placing it inside of a trust requires legal assistance. Additionally, estate and income tax considerations should be addressed. However, by placing the property in an entity similar to an LLC, generations can continue to enjoy the favorite family getaway without the fear of an ensuing feud. Well…there may be a feud brewing, but at least it won\’t be about the one family member who always has to clean the pool, shovel the snow, or rake the leaves. Plan ahead and consider the abilities and desires unique to each kid – it\’s a great way to shop and a great way to create a legacy. *Author’s note: Yes, I know “plan ahead” is redundant, but it just sounds so darn good!