However, even with the protection of an entity, an owner must remain diligent.  In a recent New Hampshire case, the court ruled that an individual member (owner) of an LLC could be liable if the owner participated in the action that caused the harm, even if it was on behalf of the LLC.  For example, if the owner had knowledge of lead paint and did not do anything to correct the problem, then the owner could be liable.  But more importantly, the Court found that merely being a member (owner), without some other overt act, is not enough to make the member (owner) liable for the operations of the business in the entity.

It is important to note that protection provided by the entity may not be absolute and any owner should be aware of how their business is operated.

Disclaimer:

This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC. This information is not intended to create or provide an attorney-client relationship. Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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This program addresses some of the options for formation and transfer of a business, but also cautions that one way may work for one party and not for another. There is no standard fit and the agreement should be tailored to the needs of the parties involved.

Laws vary from state to state, so when forming companies and setting forth agreements, it is imperative that you consult state laws while drafting the agreement to make sure that all issues comply. This applies to not only the state where the company is formed but the particular state where the company will operate.

As always, this information is not intended as legal advice but as a generic overview of the options available to all parties involved in the formation of a company or an agreement relating to that company.

Consider the full details of the previously published article using the link below:

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We have had communications with several of our clients about this program and thought it would be beneficial to send a brief overview. Applications can be submitted starting April 3. However, talk with your lender to ensure it is handled efficiently.

These loans are available at a very low-interest rate, provide for deferred payments, do not require personal guarantees and lastly, have the potential for forgiveness of some or all of the loan, subject to the requirements of the program, we highly recommend each and every business who is eligible for the program consider applying.

In order to gather more information about PPP and to access the application, the link below should be used.

https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses

This communication in no way fully addresses all aspects of this program. You should rely on the Treasury and your lender to provide full details. It is simply our intent to encourage you to consider utilizing this resource.

As always, should you wish to discuss in more depth, feel free to call. We are here to support you.

Beware of Scammers

Scammers are out in force right now! The latest scam is related to the CARES Act distribution of stimulus checks to citizens. People are receiving phone calls asking for their bank account numbers so that the government can directly deposit their checks into their accounts.

Please spread this information to your circle of friends, co-workers, and family. And make sure they are aware that government representatives will never call them and ask for personal information.

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Disclaimer:

This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC.  This information is not intended to create or provide an attorney-client relationship.  Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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Putting an entity around your business basically creates a wall between the business and your personal assets; if something happens inside the entity, it won’t put your personal assets at risk.  There are exceptions to this statement, but in general, that is the effect.  There is some work you must do to maintain that protection.  Specifically, you need to respect the entity.  An entity is a separate legal person; thus, it must be treated as such.  Therefore, if you want to pull money out, you need to document it, whether as a loan, compensation, or a distribution.  If you want to put money into an entity, do it either as a loan or a contribution.  If you’re borrowing cash for less than a year, traditionally, it is okay to do it as a journal entry on the books.  If it is longer than a year, you need to document it with a promissory note.  The IRS wants to see that documentation for income tax purposes.  Do not pay your personal expenses out of company assets unless you are willing and able to justify it as a business expense and can document it properly, otherwise, claim it as a personal disbursement to yourself.  With corporations, there are also requirements to maintain annual minutes. 

None of these issues alone traditionally cause problems, however, if a person decides not to respect the entity, all of these problems seem to exist.  Any entity you own should be operated like any other prudent business investment.  Maintaining proper liability protection for the entity is always recommended and failure to do so could be classified as failure to respect the entity.  If you fail to respect the entity, then the liability of the entity could reach your personal assets, and your creditor’s attorney will argue: “Your Honor, he doesn’t respect the entity, why should we be subject to it?”  This is not an easy argument to win, however, no one wants to be in a position of being on the opposite end of that argument.

Basic rules:

• Form an entity – the form of the entity (corporation, LP or LLC) will depend on the particular circumstances of your business.
• Respect the entity
• Protect the entity

Disclaimer:

This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC.  This information is not intended to create or provide an attorney-client relationship.  Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

The post Should I Form a Company For My Business? appeared first on Benenati Law Firm, P.C..

The new rules replace the “tax matters partner” with the “partnership representative”, who has much more power and is the sole person with authority to talk with the Internal Revenue Service on behalf of the entity.

As many of you know, an entity taxed as a partnership is a flow-thru entity, which means the partners and not the partnership pay the tax. So, when there was an audit of a partnership tax return (form 1065), each partner’s return would need to be revised as well and the partner could potentially owe additional tax, as opposed to the partnership.

Now, the process has changed. If a partnership tax return is audited and if it is determined that the partnership tax return should be adjusted, then the tax, interest, and penalties will be assessed against the partnership and the tax rate assumed is the highest marginal income tax rate. There will no longer be a need to then audit each individual partner’s tax return.

Moreover, if a partnership tax return is audited, any adjustments apply in the years of the audit and not the year being audited; thus, if the partners are not the same, then the partners in the year of audit could be subject to such expense even though they were not partners for the year being audited.

All partners are bound by any determination made at the partnership level and there are no partner level defenses to penalties. Thus, the decision about who will serve as partnership representative should be carefully considered.

This new rule applies to all partnerships unless the partnership opts out of such treatment; however, there are requirements before a partnership can elect to opt out, which can be tedious. If you elect to opt out of the new law, then you should discuss that option with your CPA.

The new rules apply to all partnerships and LLC’s taxed as partnerships beginning in 2018, unless the entity elects to opt out of the new law. It is strongly recommended that you amend your partnership agreement/company agreement to comply with the new law.

If the election is made by the partnership to opt out of the new law, then the IRS will conduct any audit under the old rules and the tax will not need to be paid at the partnership level. Instead, the individual partner for the applicable tax year will be responsible for the tax.

However, the election needs to be made annually. But, to opt out of the new law, then for the applicable tax year, (1) the partnership also has to opt out of the new law, (2) each partner must be an individual, a C corporation, an S corporation, or an estate of a deceased partner, (3) the partnership has to have 100 or less partners, and (4) the partnership notifies each partner of election.

So, if a partnership has another partnership as a partner or a trust as a partner, then the partnership will not be permitted to opt out of the new law.

The foregoing is merely an overview of the new law. When it is time to file your tax return, you will need to discuss filing requirements with your CPA. Further, how a partnership can reduce its tax liability if it is audited is beyond the scope of this article.

Moreover, if you have a partnership or LLC taxed as a partnership, your partnership agreement/ operating agreement should be amended to comply with the new law, even if you anticipate opting out of the current law.
The fee for the amendment is $385.00. Please contact us if you would like us to prepare such amendments to comply with the law.

Contact Information:
2816 Bedford Road, Bedford, TX 76021
Phone: 817-267-4529
sgoldman@benenatilaw.com
www.benenatilaw.com

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The other situations become harder.  If someone becomes disabled, how do you define disability?  When do the other owners have the right to buy him out?  What are the terms?  Is it paid out over 5 years? 10 years?  What is the interest rate?  Is it prime? Prime +1? Prime +2? Prime -1?  How much of a down payment?  Is there a “due on transfer” provision so if the company is sold all amounts due and owing under the promissory note will be paid at the time of sale? 

What if an owner becomes divorced?  Is that company ownership interest community property?  If so, then the owner’s spouse has a right to an interest in the company, not just to cash but actually an ownership interest.  It may not be the best situation or in the best interest of the company to find yourself in business with the ex-spouse of one of the owners.  Thus, a good  Buy-Sell Agreement provides for the spouse to sign the Agreement and agree to sell his or her interest if there is ever a divorce between the owner and his or her spouse. 

In the event that the spouse of an owner dies and leaves all of his or her interest to someone other than the surviving spouse/owner, the Buy-Sell Agreement will be in place to protect the spouse/owner. For example, if the spouse of the owner was previously married and that spouse has children from a prior marriage, then, upon the non-owning spouse’s death, he or she may leave all property, including his or her community property interest in the business, if any, to his or her children.  If that happens, the owning spouse, as well as the other owners, are now in business with the children of the deceased spouse (the stepchildren). Thus, you also need to provide that upon death, the business or the other owners have the right to buy from the estate of the non-owning spouse, the interest of a deceased spouse not involved in the business.

Probably the most difficult position is when an owner stops performing or quits working.  If two or three people go into business and all of them are supposed to work in the business, a business is doomed to failure if one owner is perceived to be doing less than the other owners.  Under those circumstances, the question is when did that owner quit, if at all?  So, I always advise my client(s) in those situations to have employment agreements for the owners.  Let’s determine how the owners get paid.  A lot of business owners believe it is best not to take a salary and merely share in the profits.  This can create a difficult relationship between the owners.  In other words, if A, B and C are in business together and A works 2,000 hours, B works 2,000 hours, and C works 1,000 hours, their compensation should be different.   It is only fair that the owners get paid for the work they perform, that payment comes out of the profits of the business, and only after all owners have been adequately compensated should the profits be shared.  If this process is followed, then the owners that are working more, get more from the business, and hopefully, do not build resentment because the third owner is working less. On the other hand, if somebody quits, it is no longer fair, and the other owners should have the right to buy the interest of that owner.  In some situations, you actually provide that if an owner quits prior to a certain date, the purchase price is subject to a discounted value.  For example, if the business is valued at $600,000.00 without any discounts and someone quits prior to three (3) years after signing the agreement, and they own one-third of the business, then the value for one-third of the business would be $200,000.00.  However, the agreement states that if someone quits before three (3) years, the buyers (the other owners) only have to pay seventy-five cents on the dollar, or $150,000.00 for his or her interest.  When people go into business together, they go into business “together” and expect everyone to commit and for one of them to leave quickly without any notice isn’t fair to the other owners who made that same commitment. 

Disclaimer:This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC.  This information is not intended to create or provide an attorney-client relationship.  Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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