How Does LLC Ownership Work?

How Does LLC Ownership Work?

How Does LLC Ownership Work?

The limited liability company (LLC) is a popular business structure for new businesses, but what does it really mean to own an LLC? LLCs provide unique opportunities to customize business ownership to fit the particular needs and circumstances of the owners. Here is what you should know about LLC ownership.

The Basics
The owners of LLCs are often called members. If a single person or a single business entity owns an LLC, it is called a single-member LLC. If multiple people or entities own an LLC, it is called a multimember LLC. LLCs can have an unlimited number of members. When ownership is established, the membership interests are usually expressed in one of two ways:

● by membership units similar to corporate shares
● by percentage

The terminology you choose to use for a membership interest should correspond to your vision for the company. For example, if the business is owned primarily by your family, identifying the membership interests by percentages may keep things clear and straightforward. However, if you intend to seek funding from individuals outside of the family, you may find that labeling the ownership interests as membership units facilitates the easy transfer of ownership rights.

Establishing Ownership Rights
To be an LLC member, some form of contribution is required; however, the contribution need not be cash, which is called a capital contribution. LLC members can also contribute property or services. Additionally, unlike contributions to a corporation, when an LLC member makes a capital contribution, the concomitant ownership rights and distributions can be customized. For example, if one member were to contribute 40 percent of the capital in an LLC, that member and the other LLC members may still choose to split profits fifty-fifty.

Generally, LLC members are entitled to share in the company’s profits and losses, vote regarding key LLC matters, inspect and review the books, and enjoy a host of other rights. These rights stem from default state laws; however, they may be customized through contractual agreements. The contractual agreement that typically governs LLC ownership rights is an operating agreement. Operating agreements may include the following common customizations:

● distributing profits and losses in a way that does not match the members’ capital contributions
● creating different classes of ownership to reflect passive investor rights
● mandating member meetings

Transferring Membership Interests
Death, incapacity, and sale are the primary events that trigger transfers of membership units. However, if you intend to transfer membership units to investors, be sure to evaluate whether your interest is a security under the federal securities law. If you offer your interest to less than thirty-five investors, your interest likely qualifies for an exemption that allows you to bypass the federal disclosure requirements and even some state securities law.

Management
LLC members can choose to be managed either by the LLC members (a member-managed LLC), or by nonowners or certain members designated as managers (a manager-managed LLC). When an LLC is managed, it is vital to identify and articulate the decisions for which the members bear responsibility and the decisions the managers must make. If the decision-making authority is not clear, the resulting uncertainty can hinder effective management of the LLC.

Payment
LLC members can pay themselves in several ways, such as

● receiving income in the form of distributions of profits at the end of the year,
● receiving draws, which are periodic payments based on the estimated profits for the year, or
● receiving periodic payments as employees of the business.

These three methods are not mutually exclusive—a member can take advantage of more than one option. However, members must remember that each option has unique tax consequences. LLC members should account for Social Security and Medicare taxes. When LLC members pay themselves as employees, the LLC is expected to withhold taxes as it would for any other employee. Conversely, when members pay themselves based on their profits, they must pay self-employment taxes. Either way, LLC members must be mindful of the tax consequences of the payment methods they choose.

Next Steps
If you are considering creating an LLC, our team of experienced attorneys can help you develop the right ownership structure for your business. Call our office to schedule a meeting soon.

Preparing Your Business for an Emergency

Preparing Your Business for an Emergency

Preparing Your Business for an Emergency

2020 was a lesson in the need to prepare for the unpredictable. From the pandemic to natural disasters, businesses have faced numerous challenges that could force them to close. The most common emergencies that businesses typically face fall into three categories:

1. Natural disasters such as floods, fires, and earthquakes
2. Medical emergencies such as the current COVID-19 pandemic
3. Human-caused accidents resulting in physical or technological damage

The Small Business Administration estimates that 25 percent of businesses fail to reopen after an emergency or disaster. In light of this uncertain period, it is essential to take proactive steps to prepare your business for an emergency. Here are the things you should keep in mind as you develop your business’s emergency plan.

1. Assess the types of risks your business is most likely to face. Your risk mitigation plans should emphasize the emergencies your business is most prone to encounter. To properly assess those emergencies, consider your business’s location, the industry you operate within, and the typical circumstances in your community or environment. For instance, businesses that operate in California are likely to prepare for earthquakes because of the geographical elements in their location. On the other hand, businesses that deal with dangerous chemicals ought to focus their preparations on the risks those chemicals pose. By analyzing your business’s unique risks, you position your business to make intentional decisions with a greater positive impact.

2. Reevaluate your business insurance. After assessing your business’s various risks, review your business insurance to make sure your coverage appropriately addresses those risks. Also, take this time to evaluate whether you have the right amount of coverage. Obtaining the correct type of coverage in the proper amount allows your business to access much-needed funds if disaster strikes.

3. Craft a communication plan. To effectively implement an emergency plan, you must keep your team abreast of emergency situations that impact your business. One way to keep your employees in the loop is to create a communication plan that outlines how information regarding your business is circulated within your company. This plan should include important contact information and the essential roles to be filled by your employees. Remember to keep your communication and emergency plans in an accessible location that can withstand natural disasters. Due to technological advancements, you can also store your business’s important documents digitally in the cloud.

4. Create a business emergency fund. The inability to quickly access funds is one of the primary reasons that businesses remain closed after a disaster. Even if you have obtained insurance and have a valid claim that your insurers will accept, it will likely take some time before those funds are distributed. As a result, it is critical to have access to cash so that you can meet the business commitments necessary to continue operating. These commitments may include maintaining payroll, ordering supplies, and maintaining your manufacturing systems.

5. Document and practice your emergency plan. If the unthinkable occurs and impacts your clients or staff, it may open the door to litigation. However, a clearly documented emergency system that identifies best practices as part of your plan will serve as evidence of the careful steps you have taken to mitigate the risk of damage or harm. Furthermore, by practicing your plan, particularly in areas prone to natural disasters, you can help your team avoid unnecessary risks.

6. Ensure that your legal documents provide sufficient liability protection. One of the primary reasons people form legal entities such as limited liability companies and corporations is to avoid personal liability for claims against the business. With business entities that provide limited liability, if the business is held responsible for claims stemming from an emergency, the owners and management may be entitled to such protections. Nevertheless, you should review your formation and management documents carefully to confirm that they include the proper designations and provisions regarding liability limitations.

Prepare Today
The saying “luck favors the prepared” is especially true for business owners hoping to survive life’s emergencies. Our team of knowledgeable attorneys is experienced in helping businesses like yours create and execute plans that mitigate risk during uncertain times. To develop a plan that meets your business’s unique needs, call our office to schedule an appointment today.

Asset Protection for Entrepreneurs

Asset Protection for Entrepreneurs

Asset Protection for Entrepreneurs

Going into business for yourself is a risky endeavor. From investing in goods and services and hiring employees to simply carrying out the daily tasks related to your business, each step is fraught with risks. This is especially true given the litigious nature of our society. As a result, many entrepreneurs employ asset protection strategies. Asset protection is a form of strategic planning aimed at minimizing risk and protecting assets from creditors’ claims and litigation.

Careful asset protection can help you retain and sustain the value of the property and accounts you own. As an entrepreneur, here are a few strategies you can use to protect your assets:

1. Separate your personal assets from your business assets by establishing a limited liability business entity. The default structure for an individual starting a business is the sole proprietorship; the default structure for multiple people starting a business together is a partnership. These entities, though simple to create, do not legally protect the business owners’ personal assets. However, business structures like the limited partnership, limited liability company, and the corporation provide limited liability. This means that the owners of the business are not personally liable for the company’s debts or other liabilities—for example, if a judgment is obtained in a lawsuit against the business. A properly established and maintained limited liability business structure restricts liability to assets belonging only to the business. Creating a separate legal entity is one of the first steps every entrepreneur should take to protect personal assets. Subsequent practices like opening a separate business account, complying with legal requirements such as paying state filing fees, and not commingling personal funds with business funds further establish the legal separation between personal assets and business assets.

2. Keep multiple business ventures separate. Many entrepreneurs are serial business owners who wear many different hats and run a variety of businesses. In these cases, another way to protect your business assets is to ensure that you keep the assets of each business separate. This requires setting up different legal entities for each of your businesses, ensuring that they incur separate liabilities and debts. Failure to legally separate your diverse endeavors will expose all of your businesses to each business’s creditors if litigation arises and one of your businesses is found liable. As a result, it is important to separate these business interests as soon as possible and to ensure that the documentation, banking, accounting, and record-keeping for each business reflect the separation.

3. Obtain sufficient business and personal insurance. Problems and accidents are inevitable, and when they occur, having insurance in place helps insulate you and your business from paying for any losses directly. Various types of insurance are available to you as an entrepreneur; the types you should obtain depend on the type of business you conduct and your unique preferences. Once you have obtained insurance, diligently review your insurance policies to ensure that your insurance coverage remains adequate to cover the value of your assets.

4. Avoid personal guarantees. As an entrepreneur, you may encounter vendors who request personal guarantees. A personal guarantee is an agreement that you will be held personally responsible for the debt your business incurs in the event the business is unable to satisfy it. If you are asked to sign a personal guarantee, consider negotiating a higher payment to the vendor to eliminate the need for the personal guarantee. Despite the short-term discomfort that may be involved in such negotiations, they can provide long-term benefits to business owners.

5. Transfer some of your assets to a trust. A trust is a legal tool that allows a third party, the trustee, to hold assets for the benefit of another, the beneficiary. There are various types of trusts available to individuals. For business owners, one of the preferred types is an irrevocable trust because the business owner relinquishes ownership and control of the business assets, and therefore, the assets are not subject to the risks of loss associated with a revocable trust. A revocable living trust, on the other hand, does not provide protection to business owners against personal liability for the business’s debts or lawsuits because the business owner, who is typically also the trustee, can change the terms of the trust at any time before death and is still treated as the owner of the property held in the trust. However, a revocable living trust can protect from creditors assets that pass to your spouse and children after your death. Entrepreneurs interested in asset protection should strongly consider setting up an irrevocable trust early in their business development. If a trust is created after litigation arises, the trust may be viewed with suspicion by a court as a tool of liability avoidance.

We Are Here for You
The protection and preservation of the wealth you create as an entrepreneur does not just happen on its own. It involves strategic planning and intentional execution. Our team of experienced attorneys is available to help you assess how best to reduce your risk and maximize asset protection for yourself and your business. Call our office to schedule an appointment today.

Estate Planning is Like Building a Snowman

Estate Planning is Like Building a Snowman

Estate Planning is Like Building a Snowman

A complete estate plan must include certain essential parts. In fact, it is similar to building a snowman in some respects. The traditional snowman has several critical components: bottom, middle, and top snowballs, as well as “arms” and a “ face.” If any of these are left out, the snowman can look a little odd! The consequences of an incomplete estate plan are much more serious, however. If you leave out important documents when you create your estate plan, it is unlikely to accomplish all of your goals, and the benefits you thought you were gaining could melt away.

Step 1: Shape a strong foundation—the trust
The foundation of a snowman is the large snowball at the bottom that acts as its base. Likewise, a trust is the foundation of your estate plan. It enables you to name a trusted individual as co-trustee or successor trustee to carry out your wishes upon your death and to manage your affairs if you become so ill you cannot do it yourself. Using a trust, you can specify that distributions from the trust be made to your beneficiaries for specific purposes, e.g., college tuition or health care expenses, or at a certain age. Trusts are often used to ensure that your money and property benefit your own family, rather than, e.g., the new family of a spouse who eventually remarries. In addition, trusts provide a means to pass on your money and property to your family and loved ones without the inevitable delays and costs that accompany the probate proceedings required when you use a will. Trusts also provide your family with more privacy than a will—as your will becomes part of a public record once it is admitted to probate and can be viewed by anyone. Certain types of trusts can also be used to protect your money and property not only from being accessible to satisfy the claims of your future creditors (including a divorcing spouse), but also those of your beneficiaries. These are only some of the benefits that a trust can provide as the bedrock of your estate plan.

Step 2: Form a solid core—the medical power of attorney
Additional strength and stability are provided by the snowman’s middle snowball. You can similarly solidify your estate plan by executing a medical power of attorney that names a trusted agent who can make medical decisions on your behalf if you cannot make them for yourself or are unable to communicate them to the relevant health care providers. Your agent is bound, to the greatest extent possible, to make the decisions you would have made if you had been able to make them yourself. By appointing someone you trust to act on your behalf and making sure they have important information, such as your preferred providers, medical conditions, treatment and medical history, medications, allergies, and religious beliefs, you can gain substantial peace of mind. A comprehensive estate plan describes not only what happens to your money and property when you die, but also how your care should be handled during your lifetime.

Step 3: Cap it off—the financial power of attorney
The third step in building a snowman is adding the snowball representing the “head.” Although it is typically smaller than the snowman’s middle and lower sections, it is no less important. In an estate plan, another essential document is a financial power of attorney. It authorizes someone you choose to make financial decisions for you if you are unconscious, too ill to make or communicate them yourself, or otherwise unavailable to do so. If you do not have a financial power of attorney, your family, including your spouse in some instances, will likely have to go to court to be granted the authority to handle your financial affairs. The person the court appoints to this role may not be the person you would have chosen to handle your financial matters. You can do your family and loved ones a huge favor by making sure you have named an agent to step into this role, avoiding unnecessary delays or disputes.

Step 4: Extend a hand—the funeral instructions for your loved ones
Next, branches are inserted to act as the snowman’s “arms.” You can give your family one last hug by making your wishes for your funeral or memorial service known using a remembrance and services memorandum. Most people would rather avoid thinking about their own funeral, but if you don’t make these plans and arrangements in advance, the burden will fall on your grieving family after you pass away. You can use a remembrance and services memorandum to list people who should be notified after you pass away, provide information you would like to be included in your obituary, give instructions for handling your remains, and specify what you would like to be included in your funeral or memorial service—or to indicate that you prefer that no service be held. Don’t just assume your family knows what you want, as there is a good chance they do not. If several family members have conflicting opinions about what you would have wanted, avoidable disputes could arise, causing additional heartache, delay and potential expense. Taking the time to write down your wishes can be one of the most caring things you can do for your loved ones.

Step 5: Add some personality—the ethical will or letter of instruction
No snowman is complete without the coals and carrot used to create its “face” and add a little personality. You can use an ethical will, sometimes called a letter of instruction or legacy letter, to infuse your estate plan with your personality. An ethical will provides a way to communicate important knowledge, experiences, and values you have acquired over the course of your life to your family and loved ones. The contents of the ethical will are likely to vary widely from individual to individual because each of us is unique and has lived a life unlike anyone else, so the wisdom each person finds valuable and wants to pass on to his or her loved ones is different. The ethical will is not a legally binding document, but it may be one of the most precious gifts you can give to those you will eventually leave behind—as well as future generations of your family who otherwise would not have a chance to know you.

Don’t Give Us the Cold Shoulder—Call Us Today
Without a complete estate plan, you are skating on thin ice. Make sure your estate plan has more than a snowball’s chance in the tropics of accomplishing your wishes. As experienced estate planning attorneys, we can help you create a comprehensive plan without being snowed under by all of the details necessary to address your unique circumstances. Don’t wait for a cold day in July—call us today to set up a meeting!

 

Why Title Matters

Why Title Matters

Why Title Matters

Real estate can take on different forms of ownership depending upon the number of parties and the unique circumstances involved. Understanding how your real estate is owned, or “titled,” is necessary because this determines the extent of control you have over your real estate, how susceptible your property is to creditors, and what will happen to it upon your death. Below are some of the common ways in which real estate is owned.

Individually
One of the most common ways people own real estate is individually. As the sole owner, you have full control over the real estate. You can transfer it to anyone and can mortgage it. However, although the bankruptcy code offers some protections for personal residences, should you have creditor issues, the real estate could be vulnerable to being taken to satisfy debts or creditors’ claims. Additionally, at your death, the real estate will be transferred to the individual(s) named in your will (or trust) or according to state law, both of which will require probate court involvement to transfer ownership to your heirs. This can be a time-consuming, public, and expensive process for your loved ones (especially if the real estate is very valuable).

Tenants in Common
When several people own real estate as tenants in common, the entire property is owned by the group, meaning that no one person can claim ownership of a specific portion of it. Yet the ownership does not have to be equal. One person can own a 25% interest (i.e. “share”) while the other has a 75% ownership interest. Each co-owner is free to transfer or mortgage their interest as they wish. However, the more co-owners, the higher the possibility for creditor issues. Although creditors can only collect from the co-owner that owes them money, they may be able to force a sale of the real estate to satisfy their claim. Upon a co-owner’s passing, their ownership interest will transfer to whomever the co-owner has specified in the owner’s will or by state law if no estate plan was prepared. Both options require the real estate to go through the probate process to transfer ownership to the co-owner’s heirs.

Joint Tenancy
For this type of ownership, also known as “joint tenancy with right of survivorship,” two or more individuals own an equal and undivided interest (share) in the real estate. When one of the owners dies, their interest automatically passes to the remaining co-owners, and the survivor(s) continue to own the real estate. Each co-owner is able to transfer their interest to another person, but the new co-owner does not become a joint tenant (with right of survivorship) but rather a tenant in common (whose interest does not automatically transfer to the surviving owners upon their death) with the original co-owners. One downside of joint tenancy is creditor exposure. Because there are multiple co-owners, creditors of any of the co-owners can go after the co-owner’s interest in the real estate to satisfy their debts or claims. The creditor may be able to force a sale of the real estate, even though the other co-owners may be against it. As mentioned before, a benefit of this type of ownership is that ownership is transferred automatically at death, avoiding probate. However, if you become the sole owner, then you will face the issues associated with owning real estate individually.

Tenancy by the Entireties
In some states, real estate received or purchased by spouses can be owned as tenants by the entirety. Although some of the applicable state laws still refer to the parties as husband and wife, with the proper language in a deed, which clearly demonstrates the desire to own the real estate as tenants by the entirety, all individuals who are legally married at the time they receive the real estate are able to own it as tenants by the entirety. This type of ownership can apply to any real estate, not just the primary residence. Because spouses are considered one unit, one spouse cannot transfer or mortgage the real estate without the other spouse’s consent. However, this also means that a creditor of one spouse cannot go after real estate that is owned as tenants by the entirety (with the possible exception of a federal tax lien) to satisfy the creditor’s claims. At a spouse’s death, the surviving spouse will automatically become the sole owner. This keeps the real estate and its value out of the probate proceedings, but as the sole owner, the surviving spouse will face the issues associated with owning the real estate individually.

In a Trust
Another option for real estate ownership is to transfer it to or have it purchased by a trust. As the trustmaker, you can establish rules for the use of the real estate, appoint a person (sometimes yourself) to oversee the maintenance of the real estate while allowing others (sometimes yourself) to enjoy it. However, it is important to note that the control and benefits can vary depending upon what type of trust is being used. If the real estate is in a revocable trust, then you will have the utmost freedom to manage and use the real estate if you appoint yourself as the trustee and name yourself as a beneficiary. But if it is in an irrevocable trust for asset protection purposes, the selection of the trustee and beneficiaries becomes more complicated. While a primary residence can be transferred to a trust with or without a mortgage, other properties with a mortgage might first require bank approval before it can be transferred to a trust. One of the primary benefits of transferring ownership of your real estate to a trust is that at your death, the real estate does not have to go through the probate process. This is because the trust, not you, is the owner, and the trust can never die. In most cases, the trust document will provide instructions about what will happen to the real estate upon your death.

By a Limited Liability Company
Another entity that can own real estate is a limited liability company (LLC). Instead of owning the real estate, you own a part of the LLC (known as a membership interest), and that is what will need to be transferred upon your death according to the terms of an operating agreement or estate planning documents, or based on state law if there is no will or trust. In the LLC operating agreement, you can also include rules instructing how the real estate is to be used and managed, as well as outline the rules pertaining to the membership interests in the LLC. One of the major benefits of using an LLC is that it provides limited liability. If a lawsuit is filed based on a claim arising from the real estate, or if a creditor seeks to satisfy a claim, the only assets available to satisfy any judgments or creditors are those owned by the LLC. In many states, if you have personal creditor issues, the creditors are limited as to what they can reach inside the LLC to satisfy their claims. It is important to note that the asset protection benefits of an LLC can vary depending on state or federal law, or your unique situation. If this is a concern for you, we encourage you to call us as soon as possible.

Give Us A Call Today!

Regardless of how you think you own your real estate, it is important that you review your documents and confirm your understanding with an experienced attorney. The title of your real estate can play a large role in how your estate plan is set up, and if your real estate is not titled properly, it can completely undo your intent for your estate planning. Give us a call today so we can review your deeds and create an estate plan that will protect your property for future generations.