LLC'S VS. CORPORATIONS

An LLC, however, works a bit differently. There are no shares. Instead a person buys a percentage interest. Instead of being called a shareholder, the person is called a “member.” Members own an LLC and shareholders own a corporation.

Creating the business entity is another area where terminology is often abused. To create a corporation, one “incorporates” by filing articles of incorporation with the relevant Secretary of State. To create an LLC, one “organizes” it by filing articles of organization with the secretary. It sounds like a simple distinction, but it is important because filing the wrong paperwork can result in the voiding of the business entity, a total disaster.

So, who governs the business entity? In a corporation, the Board of Directors is the governing entity. The number of directors is set out in the bylaws of the corporation and they are elected by the shareholders. They usually serve for a year. An LLC, of course, is completely different. The LLC is governed by the members. If there is more than a couple members, they usually elect a “manager” who is often a member, but doesn’t have to be. This person usually serves for a year as well.

The formalities of the business entity is one area where LLCs and corporations are often distinguished. A corporation is often cracked upon because there are formalities required to keep it functioning. The formalities include proper notice of meetings, holding meetings and formalizing the minutes of same in the corporate book. LLCs do not require such formal function, but that doesn’t mean you shouldn’t do it anyway. If a dispute every arises regarding the running of the LLC [and it will], you want a paper trail regarding how the entity has been run. Without such evidence, any dispute boils down to a liars contest in court, to wit, a flip of the coin. Hold meetings and document them if you have an LLC!

Adam S. Tracy
Attorney at Law
www.tracyfirm.com

SHOULD YOU USE ONLINE LLC FORMATION SERVICES?

Online incorporation services tout easy, fast, and cheap online incorporation and limited liability company (LLC) formation services. Examples include LegalZoom.com, MyCorporation.com, and IncorporateTime.com. Storefront and virtual paralegal services such as We the People and those found in the legal services section of your local craigslist also offer similar services. Their web sites and radio and TV sales pitches indicate that forming a corporation or LLC is as quick, easy, and inexpensive as filling out an online questionnaire and paying a fee of $100-150 for the completion of the paperwork and the filing of the documents with the secretary of state. This article reviews the advantages and disadvantages of these services overall - for specific reviews of a particular provider, you should look elsewhere (and preferably to those with direct experience using the service, as well as at least a year of business operations thereafter).

No legal advice:

In the fine print, many document preparation services state they are not law firms, cannot provide legal advice, and recommend that you consult an attorney for legal advice. Here's a word for word example from one web site: "This site is not a substitute for legal counsel.... You should consult legal counsel to determine applicable law for your situation." And from another: "[Our document preparation service] is not a substitute for an attorney or law firm." Only licensed attorneys can practice law and provide legal advice to clients, so these firms are wisely protecting themselves by making it clear that they are not in the business of providing legal advice; they are in the business of preparing whatever forms or filing you tell them to. Thus, the computer programmer's old adage, Garbage In, Garbage Out, applies. If you tell them to form a Nevada LLC, when you really need a California S corporation, they will in all likelihood produce a technically sufficient LLC, but it won't meet your actual business legal needs. Likewise, if you choose not to elect S-corporation status, and end up paying higher taxes as a C-corporation, this is not their fault; they are counting on you to know what you need, or to have consulted a lawyer and/or tax accountant before coming to them.

Many incorporation services would apparently seem to remedy this situation with lengthy FAQs and learning centers, but, frankly, a few minutes or even a few hours of research is not a substitute for a lawyer's college degree, three years of law school, and additional on-the-job training and annual continuing legal education. Any paralegal or incorporation service whose employees do provide legal advice is engaged in the unethical practice of law without a license, a crime in most jurisdictions, and their legal advice, for more reasons than one, should be taken with a grain of salt. Better yet, terminate your relationship with any such person immediately.

Other Legal Issues:

Attorneys will focus not just on forming an entity you have ordered them to, but in taking a step back, assessing your overall business plan and goals, and making sure the legal structure takes into account your particular circumstances, rather than assuming you and your business are exactly the same as the next guy and his business. They will also at least point out, and suggest options for best addressing, legal issues that arise tangentially to forming a corporation or LLC. Such issues that the average incorporation service customer may be blissfully unaware of include securities laws compliance, promissory notes, trademark and service mark issues, and employee and independent contractor law. (Tax issues are also inherent in incorporating, so working with a CPA or accountant is something I always recommend to clients before and after incorporating.) Agreements typical of new corporations or existing business which are growing and have decided to incorporate include employment agreements, independent contractor agreements, supplier agreements, web site terms of use and privacy policies, and shareholder buy-sell agreements. All of these should be customized to your needs, not fill in the blank forms, just as corporate bylaws and LLC operating agreements should be customized, not one size fits all.

Lack of Follow-Through:

A good business attorney will also assist you in following through in the formation of your corporation or LLC. By this I mean making sure the meeting minutes are appropriately customized to your needs and the corp. or LLC's formation documents are actually completed, signed, shares are actually issued to shareholders, and appropriate federal, state, and local filings are made. After having reviewed numerous incorporation service companies, usually a year or more later after problems have arisen, but also often times in the course of transactions such as sale of the business or part of it to a new shareholder, member, or partner, I have yet to see a company that was correctly set up. I can say the same of do-it-yourself incorporations, where the owner(s) didn't hire anyone and did it themselves. In most cases, the articles of incorporation (for LLCs, the articles of organization) have been completed and filed in an adequate, if not optimal, manner, and the bylaws or operating agreement is likewise present. However, such documents are generally never executed - they just sit on the shelf in a binder, as they have since they were mailed out by the incorporation service, and thus without any force or effect whatsoever. Frequently, they contain numerous blanks that the owner was supposed to fill in, but didn't because they didn't know how to, or just never got around to it.

These defects are not the fault of the incorporation service per se, but they are indicative of the different level of service provided by such companies, in comparison to an attorney. Such lack of completion can and does lead to problem later, however, because the company's limited liability status and good standing with the state can be jeopardized by missing or incomplete corporate documents, or by failure to create annual minuets and file initial and annual state level filings. Difficulties also occur when disputes among partners or co-owners later arise, and upon review of the bylaws or operating agreement, the parties find that the documents were never signed (and thus may not control), that they lack buyout procedures, or that they are vague or silent on how to handle disputes. It goes without saying that most of these disputes are much more costly to resolve later, once the proverbial horse of improper documentation and agreements has left the barn.

Hidden fees:

The actual fees charged by incorporation services often ends up being as much as two or three times higher as they low rates they advertise, once such "add-ons" (which in many cases are needed to achieve your legal aims) as name reservations, corporate minute books, expedited or rush service, EIN numbers, S-corp election, first meeting minutes, and initial statement of information, sales tax reseller's permit, business license, or other state or federal filings are made. Some services offer rates so low, they do not account for the minimum level of costs that must be expended to properly set up a company! In many but not all instances, law firms offering flat fee incorporations do not have hidden fees.

In any case, incorporation service prices cannot and do not include legal advice on the incorporation process or related legal issues, hand-holding, referrals to other professionals such as accountants and insurance agents, or follow-through to ensure that the business entity is actually implemented correctly. Upon seeing all the work that goes into an incorporation or LLC organization, the most common remark from my clients is not, 'That was easy; I should have used an incorporation service, saved your legal fees, and done it myself.' Rather, it is, 'I can't believe some people try to do all this themselves!' You should keep in mind the difference in the level or services provided when evaluating price, be on the lookout for hidden or additional fees beyond the base rate, and realize that if you are choose to select an attorney over an incorporation service, you are paying not only for that attorney's time and end work product, but also his education, experience, skill, and legal advice and counsel for your business.

Relationship with a lawyer:

In deciding to go it alone, you should keep in mind that sooner or later, if your business grows, you will need a business attorney. It may be more prudent to establish that relationship now via an incorporation and set yourself up for future growth and success, rather than wait until a legal emergency arises, only to find you don't know any attorneys, or that the attorney you do retain finds that there are numerous steps you could have taken in the past to avoid current fees, taxes, problems, and disputes.

The fact that these problems don't become apparent until months or years after the company's formation (especially if professionals such as attorneys and accountants are never hired and thereby given the opportunity to review the company and spot issues) means that many customers of incorporation services are initially well pleased with the service they have received. If you don't know what you didn't get, you have no reason to be unhappy about; instead focusing on the money saved now.

In my experience, rarely does money saved on legal services now pay off in long-term savings. More often, it's the old, pay now, or pay (more) later situation. Some errors, such as choice of entity decisions that were not tax favorable, cannot be undone, they can only be changed going forward. Likewise, after a shareholder or partnership dispute has arisen, it's usually too late for proper buy-sell provisions in the bylaws or operating agreement, a separate buy sell agreement, or an arbitration clause. If you don't have enough money to afford an attorney at the outset, perhaps you and your partners should consider committing additional funds to the enterprise, utilizing loans or credit cards to access additional funds, or wait until more financing can be accumulated or obtained, before proceeding in a less than optimal way. Most entrepreneurs are convinced of the future growth and profit prospects of their companies; thus, it is surprising they often don't follow in the footsteps of other successful enterprises and allocate appropriate funds for legal services. The adage, "Failing to plan is planning to fail" applies here.

Volume business:

Incorporating services are sometimes called incorporation mills. By their very nature, they are in a volume business; they cannot charge low prices and provide personalized attention or service. In general, they make their profits by selling a non-customized or a minimally customized product over and over to as many customers as possible. Law firms, on the other hand, provide customized legal advice and services to each client on an individual basis. Law firms can handle unusual capital, profit, loss, or other allocation issues that fully and correctly utilize corporations and LLCs, and advise when such use is appropriate and when it is not. Incorporation mills will, for the most part, sell you whatever you ask for; it's your responsibility to determine whether you are ordering the right product from them.

Attorney Adam S. Tracy provides competitively priced llc formation services. You can visit him at www.tracyfirm.com

BENEFITS OF AN LLC

A Limited Liabilities Company is a business structure formed loosely on a German style of business called GmbH (legal abbreviation) and literally means limited liability. The concept spread throughout Central Europe and in 1997 the first LLC was formed in Wyoming. The Internal Revenue Service ruled one way and then another, making regulations unclear until 1988 when they ruled to treat multi member LLCs as partnerships and single member LLCs as sole proprietorships for tax purposes. Nearly ten years later, all states had LLC statutes and the Uniform Limited Liability Company act was adopted. LLCs are currently the most popular form of business entity. Note that laws vary from state, therefore you need to be familiar with those in your state.

There are advantages to starting an LLC. For one thing members may be individuals, other partnerships; they may be non-resident aliens or a trust. This allows for more flexibility for the company formation. Distributions need not be equal. If one member invests more or contributes more to the business, that member may reap more of the profits. The agreements of disbursement are stipulated in the LLC operating agreement. Additionally, there need be no organized meetings and minutes, often an unnecessary formality for a small business. Taxes “pass-through” the company, and the individual members are taxed at an individual levels and not the company level according to their profits or losses. While LLCs file tax returns, the company does not pay federal income tax. Consequently, administrative paperwork and accounting are simpler for an LLC. Perhaps the most important advantage to LLCs is that it provides liability protection to the business owners, since owners are considered separate entities from the LLC. Personal assets are not connected to the company if the LLC is in litigation.

Attorney Adam S. Tracy provides LLC formation services to individuals and businesses alike. You can reach him at www.tracyfirm.com

BANKRUPTCY AND AN LLC

Since Limited Liability Corporations (LLC) are a relatively new type of business entity, LLC owners have some difficulty finding out how courts will treat their bankruptcy LLC cases. As an LLC declaring bankruptcy, the owner may get some liability protection since their business is a separate legal entity. However, this protection is not absolute. Why? B ecause as CEO of the legal entity, the owner has fiduciary duties that effectively give them the same liabilities as a sole proprietorship.

So some important questions remain. Will the judge treat them like an LLC, as a corporation or as a partnership? What will happen during a bankruptcy LLC when the company has only one owner? Currently, there is no code or law that directly addresses bankruptcy LLC proceedings.

Partnership Versus Corporation In Bankruptcy LLC

There are two different ways a bankruptcy court may handle the case of Limited Liability Corporation with a single owner. First, the judge may treat the bankruptcy LLC like a partnership. In this case the court would dissolve the LLC and deal out all remaining assets to creditors. Anything remaining goes to the owner. And as in most business bankruptcy cases, there isn't usually much left.

But the judge may decide the LLC is a corporation. Here the judge would not dissolve the owner from the bankruptcy LLC. The former owner could give over ownership interest to another party. If the former owner decided not to do this, the bankruptcy judge would treat the former owner like a corporate shareholder. The owner would not have to give up stockholdings, just as a shareholder wouldn't in a large corporation bankruptcy case. Usually under this scenrio, the owner ends up a little better off.

Legalities of a Bankruptcy LLC

One of the greatest drawbacks to filing bankruptcy as an LLC is that owner has no idea how the judge will treat them. Unfortunately, there are no specific rules for dealing with a Limited Liability Corporation in a business bankruptcy filing.

Because of this, there may be several different factors that a bankruptcy court considers when deciding what to do. The most important factor is the number of member owners in the corporation. That said bankruptcy laws do not define the number of individual owners a corporation must have, especially for an LLC.

Because the lines are so blurry here, it is hard to tell how the bankruptcy court will decide who needs to consent to the bankruptcy filing. All members of the LLC may have to consent to the bankruptcy LLC filing. On the contrary if the judge treats it like a corporation, then only one member must consent. Most often in LLC proceedings, the bankruptcy judge looks to state laws and codes to determine how to deal with the bankruptcy. Therefore these proceedings may vary from state to state.

Filing The Bankruptcy LLC

Before filing for bankruptcy as a corporation or partnership, schedule an appointment with a Since Limited Liability Corporations (LLC) are a relatively new type of business entity, LLC owners have some difficulty finding out how courts will treat their bankruptcy LLC cases. As an LLC declaring bankruptcy, the owner may get some liability protection since their business is a separate legal entity. However, this protection is not absolute. Why? B ecause as CEO of the legal entity, the owner has fiduciary duties that effectively give them the same liabilities as a sole proprietorship.

So some important questions remain. Will the judge treat them like an LLC, as a corporation or as a partnership? What will happen during a bankruptcy LLC when the company has only one owner? Currently, there is no code or law that directly addresses bankruptcy LLC proceedings.

Partnership Versus Corporation In Bankruptcy LLC

There are two different ways a bankruptcy court may handle the case of Limited Liability Corporation with a single owner. First, the judge may treat the bankruptcy LLC like a partnership. In this case the court would dissolve the LLC and deal out all remaining assets to creditors. Anything remaining goes to the owner. And as in most business bankruptcy cases, there isn't usually much left.

But the judge may decide the LLC is a corporation. Here the judge would not dissolve the owner from the bankruptcy LLC. The former owner could give over ownership interest to another party. If the former owner decided not to do this, the bankruptcy judge would treat the former owner like a corporate shareholder. The owner would not have to give up stockholdings, just as a shareholder wouldn't in a large corporation bankruptcy case. Usually under this scenrio, the owner ends up a little better off.

Legalities of a Bankruptcy LLC

One of the greatest drawbacks to filing bankruptcy as an LLC is that owner has no idea how the judge will treat them. Unfortunately, there are no specific rules for dealing with a Limited Liability Corporation in a business bankruptcy filing.

Because of this, there may be several different factors that a bankruptcy court considers when deciding what to do. The most important factor is the number of member owners in the corporation. That said bankruptcy laws do not define the number of individual owners a corporation must have, especially for an LLC.

Because the lines are so blurry here, it is hard to tell how the bankruptcy court will decide who needs to consent to the bankruptcy filing. All members of the LLC may have to consent to the bankruptcy LLC filing. On the contrary if the judge treats it like a corporation, then only one member must consent. Most often in LLC proceedings, the bankruptcy judge looks to state laws and codes to determine how to deal with the bankruptcy. Therefore these proceedings may vary from state to state.

Filing The Bankruptcy LLC

Before filing for bankruptcy as a corporation or partnership, schedule an appointment with a bankruptcy attorney to discuss these issues. As an alternative, you can also talk to state or county bankruptcy officials who can clarify how they will determine the proper procedures for bankruptcy LLC. Make sure you interview several =attorney before you select one. They should specialize in bankruptcy and be well versed in the specific rules for your state. If possible, try to find a attorney who has experience filing bankruptcy cases for Limited Liability Corporations.to discuss these issues.

Adam S. Tracy
Attorney at Law
www.tracyfirm.com

LLC VS SOLE PROPRIETORSHIP

When creating an LLC as a single member LLC, the business owners gains 4 significant advantages over a sole proprietor business structure. With the costs of starting and maintaining a limited liability company being so minimal, most lawyers and CPAs would advise on the use of the single member LLC. . . it is a protection vehicle and does not create any added complexity when it comes to operations and taxes.

PROTECTION FOR THE MEMBER OF THE SINGLE MEMBER LLC

A limited liability company provides a legally enforceable shield protecting you personally from the obligations and liabilities of your business. If anyone ever wanted to file a lawsuit against your business, then you would not be personally liable just because you are the owner. If you run your business as a sole proprietorship, you are inextricably part of the business and so you become the target of anyone who has a claim or wants to make trouble for your business. You cannot avoid this personal liability in a sole proprietorship. You need a single member LLC.

Do not think that given the nature of your business, a lawsuit is unlikely. Business lawsuits are now an epidemic in America. The more your business interacts with others, the more likely there could be a claim.

So, any third party, whether it be a customer, a service provider, contractor, employee or anyone who just visits your business is a potential threat..
Now, you can start to think through the chances of who can sue you but instead, try to understand what lawsuits are all about. They are about money. If your business becomes successful, your chances of lawsuits are higher because you will be getting and keeping more assets.

Instead of justifying or hoping you never get sued as a sole proprietor, it is better to ask whether paying the few hundred dollars to create and maintain an LLC each year is worth having this protection. Check with your specific state to see what specific fees apply when it comes creating an LLC and maintaining it on file each year.

NO ADDED COMPLEXITY WHEN IT COMES TO OPERATIONS OR TAXES

From an operational perspective, a single member LLC can operate his or her business in almost the same way as a sole proprietorship with a few exceptions.
When creating an LLC, the entity should have a simple operating agreement in place but otherwise, there are no legally required formalities like meetings and written approvals as there are with corporations. Maintenance is minimal.

When conducting business, it is very important to make clear to all parties that it is the LLC that is the business. This usually means including your LLC business name in all your written material (marketing material, advertisements, contracts).

For a single member LLC, there is no difference in how the business reports and pays federal income taxes . A single member LLC is disregarded by the IRS for tax purposes only and so you pay taxes using the exact method of rules for sole proprietorships. By operating a single member LLC, you get all the advantages of the limited liability company as a business vehicle without any added difficulties when it comes to income taxes.

TAXATION AND THE LLC

The Limited Liability Company (LLC) is a terrific tax entity. The number one reason is its flexibility. Specifically, an LLC can be taxed as:

- a sole proprietorship
- a partnership
- a C corporation
- an S corporation

Do you know how your LLC is taxed?

If your LLC did not make an election, then it is taxed as the default classification. The default classifications are:

If your LLC has one member (owner), then it is disregarded for tax purposes. This means that all the LLC activity is reported by the owner and the LLC files no separate federal tax return.

*Important note: Some sates require disregarded LLCs to file a state tax return.

If your LLC has more than one member, then it is taxed as a partnership and files a partnership tax return.

*Special rule: If you and your spouse are the only owners and you live in a community property state, then you can choose which of the two classifications you want to use.

If your LLC made an election, then your LLC is taxed as a C corporation or an S corporation.

Do you need to make an election for your LLC to be taxed as a C corporation or an S corporation?

This election is typically recommended for operating businesses that are profitable. This election is typically not recommended for LLCs that hold investments, such as stock or real estate. LLCs that hold investments are typically best left in their default classification.

When should your LLC make the election to be taxed as a C corporation or an S corporation?

Once you have determined your LLC needs to make the election, you then need to consider the rules of when the election can be made:

*General rule: The election can take effect up to 75 days prior to the date the election is filed and up to 12 months after the election is filed.

Example: An LLC files its election to be taxed as a corporation on October 15th. The effective date for the tax election can be as early as August 2nd (75 days prior to October 15th) or as late as October 15th of the following year or any date in between.

*Special rule: For newly formed LLCs, in most cases, the LLC can file the election as late the original due date of the first corporate tax return and the election is effective as of the first day of the LLC.

Example: An LLC is formed on October 1, 2007. The LLC files its election to be taxed as a corporation by March 15, 2008 which is the due date of the first corporate tax return. The effective date of the election can be as early as October 1, 2007.

Understanding the fundamentals of entities, particularly LLCs, is a key part of building a wildly successful tax strategy.

Adam S. Tracy

Attorney at Law

www.tracyfirm.com

IS AN LLC RIGHT FOR YOUR BUSINESS?

Up until a few years ago there were only 3 types of formal business formations. These were the corporation, a partnership and a sole proprietorship. Each had both positives and negatives and depending on your situation, you would choose the right one for you.

The latest business type however has attempted to create like a hybrid with the benefits of sole proprietorship and protections of a corporation without the formalities.

An LLC (limited liability company) provides the benefits of liability protection, like a formal corporation but also features the tax design of a sole proprietorship or partnership. The biggest benefits of an LLC are in the taxation and liability areas, although unlike a corporation, an LLC can be set up for a limited amount of time only.

Unlike a corporation where income is taxed twice, an LLC business passes through income to the owners. That is, the income goes directly to the owners of the company who then are responsible for the taxes. Of course good business practices are a must and this doesn't mean that the company can be treated as a personal piggy bank for the owners.

As the rules that bind an LLC are more in line with a sole proprietorship, many of the corporate governance like a board of directors is not required. The LLC formation also makes it easy to dissolve without the filing and notice requirements of a formal corporation.

LLC's can usually be formed with a simple form filed with the state. Check your local authorities for more information on the type of filing, forms, and other information that may be needed. One identifying characteristic to note is that the name of any limited liability company needs to end with the letters "LLC." Here's an example: Joe's Shoe Repair,LLC.
Filing LLC business documentation though is not difficult and can be accomplished in several ways.

An attorney can generate the basic documentation at a reasonable cost. This is recommended if you're planning to change the business type of an ongoing business. If you already have a business in operation, it's necessary to cover all the details. Using an attorney also can give peace of mind should you be concerned.

If however, you're just starting out or have a brand new business, filing the necessary paperwork is really very easy. To set up an LLC, you file articles of formation or articles of organization with the state. This document is usually an easy to complete one-page form. It has areas where you can fill in the blanks with basic information about your new company including the name and other important information. The state agency that is usually charged with accepting LLC filings is the state department of corporations. If your state doesn't use this name, a quick call to the secretary of state office can point you in the right direction. Some state also have additional minor requirements to open an LLC company. The state department where you file the documents will let you know of any additional requirements.
After the state accepts your articles of LLC formation and you complete any other state requirements, you're done with your LLC formation.

Adam S. Tracy
Attorney At Law
www.tracyfirm.com

3 TIPS FOR LLC FORMATION

Starting an LLC for your business is a necessity in the world today where predators are everywhere looking for ways to take your hard earned personal assets.

But, before you start an LLC, you must learn about the LLC so you do not fall into an unknown trap of personal liability even with an LLC.

This Article summarizes 5 things you should take care of before you start an LLC.

ONE. If you do not start your LLC properly by forming the limited liability company who in accordance with your state laws and requirements, you could have a defective LLC. A defective LLC is like building a house with big holes in it or without any locks.

Over time, as predators learn about the LLC you formed, those defects can expose you personally.

Insist on retaining a qualified attorney who is knowledgeable about LLC requirements. Beware of fly by night cheap services who do not know the rules.

TWO. Before you start an LLC, you need to come up with an LLC name that works for your business and is available as an LLC name in your state of formation. Many business owners faced major filing delays when they start an LLC.

Make sure your proposed LLC name is available PRIOR to submitting your LLC formation filing. In most states, once a filing is rejected, it could take 3-5 times as long to fix and complete.

Insist on retaining a qualified attorney who will work with you to confirm a name is available prior to submitting your filing to start an LLC.

THREE. When you really learn about the LLC, you find out that it does not protect you personally in every instance and situation.

Every business owner should start an LLC because the protection is well worth it, but there are requirements after formation that every LLC owner and manager should know about to preserve the protection and there are some situations where the LLC will not provide protection.

This knowledge is invaluable to a business owner and something you should learn about and understand prior to the time you start an LLC. By learning the fundamentals about the LLC and how it works and does not work, you can better plan for business protection by using other methods to protect you in those areas where the LLC has some limitations.

Unfortunately, it is difficult to find this information in an easy to learn format. You can seek the advice of an attorney but this can be quite expensive and most LLC books for business owners out there do not provide the necessary information. Do your homework and make sure you learn this at the beginning of your LLC business.

Adam S. Tracy
Attorney At Law
www.tracyfirm.com