What type of entity should you create?
How should the entity be treated for federal income tax purposes?
The startup and small business marketplace is still a new and fierce frontier that requires legal advice from an attorney who is deeply entrenched in the particularities of how an entity should be structured and taxed. Our firm gives you a holistic approach so your entity may obtain the best competitive advantage in regards to asset protection, organization, management, control, and taxation by the State and IRS. The question of how an entity should be taxed is based on who will be the owners, what are the goals in the ownership of the entity, what is the growth potential, what operations will be conducted inside the entity, and what are the ultimate business succession/estate planning goals of the owners of the entity. The asset protection component of this strategy is based on asset protection planning at the State and Federal level for the following two factors: (1) personal judgment creditor protection for the shareholder/member/partner; and (2) business asset protection for the assets inside the entity. Both strategies must be covered and planned for when an entity is created. For example, a corporation is normally the entity choice everyone thinks of when they decide to form an entity. However, a corporation is limited to being taxed as an S corporation or a C corporation. Also, corporate shares issued to shareholders in most states are not protected from personal judgment creditors of such shareholder. This means a creditor may take the shares owned by the shareholder, vote the interests, replace the board of directors in a corporation (depending on the number of shares obtained by the creditor), replace the officers, then sell the assets in the business and take the money. In contrast, a limited liability company (LLC) may be treated as a disregarded entity (even if such LLC has multiple individuals/trusts/other LLCs as members of such LLC), a partnership, an S corporation, or a C corporation. Also, the membership interests in an LLC which has its ownership interests properly structured should be protected from the personal judgment creditors of a member of such LLC. This means the member will not lose the voting rights to the membership interests. Additionally, limited partnership interests issued in a limited partnership (LP) which has its ownership interests properly structured will also enjoy protections from personal judgment creditors of a limited partner. We can help you understand more fully the choices available when forming a business entity so that you may make an informed decision regarding the same.
There are many types of business entities an individual may choose from when deciding which entity is best for the goal of owning an asset or starting up a business. If an individual owns assets which are not exempt from creditors, then such individual should consider placing such assets in an entity that is protected from creditors. This way if a creditor action does arise, the asset inside the asset protection entity will help protect the asset from being taken by the creditor. If an individual desires to start up a business, then an analysis must be performed to determine what type of entity would be the best form to choose along with how the entity should be treated for federal income tax purposes in order to minimize the tax impact and maximize the profits while at the same time achieving the goals of the client to build the business. All these questions and more may be answered in a free consultation with one of our lawyers. Please feel free to contact our office to schedule an appointment.
corporate FORMALITY REQUIREMENTS
When an entity is taxed as a C corporation and/or an S corporation, such entity should have annual minutes in its corporate minute book which indicate the appointment of members of a board of directors and the appointment of officers for the entity. A lot of clients with corporate entities let these minutes fall by the wayside due to the fact they aren't really important in the day to day business operations of the company. The only time these documents really become important is when names on a bank account need to be changed and/or a retirement plan adopted and/or distributions are to be declared and/or bonuses given to employees and/or a lawsuit occurs against the owner of the entity and/or the entity itself. Minutes in an entity are one type of block in litigation defense to show the formal requisites of the entity are being respected. This is an argument to indicate to a third party the owner of the entity is not treating the entity as his/her own piggy bank. If an entity is treated as a partnership and/or a disregarded entity for federal income tax purposes, then annual minutes are not necessary for such an entity. However, respecting the formality of the entity is still a necessity and a high priority. If a third party is successful in arguing the formalities of an entity are not being respected and the owner is utilizing the entity's cash and assets for personal use, then such third party may be successful in claiming the entity is an alter ego of the owner with the result the limited liability "veil" of the entity is pierced allowing the third party to go after the owner personally in a lawsuit against the entity and/or the asset protection "veil" of the entity is pierced allowing such third party to go after the entity and its assets in a personal lawsuit against the owner. Additionally, how an entity is owned may assist an individual with defending the entity as being separate and apart from the owner. The bankruptcy courts have issued rulings stating if there is no partner to protect in a limited liability company (LLC) then there is nothing to stop a creditor from taking the LLC membership interests. Therefore, it is very important when an entity is created to make sure the formalities of an entity are respected along with making sure the ownership structure is strong and the correct taxation is chosen. Please contact our office for a free consultation if you would like to receive more information pertaining to this topic.