Limited Liability Company (LLC) as Asset Protection Device

So your Ohio Limited Liability Company has been properly established, you are not commingling funds or assets, and business is going well, when disaster strikes and your find yourself on the wrong side of a lawsuit (i.e. a defendant). The situation goes from bad to worse when you lose the lawsuit and a judgment is entered against you (perhaps you ignored the summons and did not respond within the time required, or the facts were not in your favor). Before long, the winning party, now a creditor, is attempting to collect on that judgment and you are attempting to figure out the extent of your financial exposure and if your company is at risk.

Let's assume that you took the necessary steps to ensure that your limited liability company is a distinct and separate entity from you as an individual (Check out these previous posts: http://generallygoodadvice.blogspot.com/2012/08/does-your-llc-really-limit-your.html; and http://generallygoodadvice.blogspot.com/2012/10/commingle-funds-and-your-liability.html). In Ohio, Code Section 1705.19 provides that a "charging order" is the sole and exclusive remedy that a judgment creditor may seek to satisfy a judgment against the membership interest of a member. This applies equally to a single-member limited liability company and one with multiple members. That means the creditor cannot take control over the LLC's assets, and the creditor cannot demand a distribution. Rather, the creditor must apply to the court for a charging order and then is limited to LLC distributions, if they are made (practically speaking distributions will likely be made at some point). Depending upon the amount of the judgment and the details regarding your limited liability company (profits, leveraged assets, etc), a creditor may be reluctant to expend the time, legal resources and money to pursue the charging order. 

The obvious questions are:

1. Have you properly established your Limited Liability Company in Ohio (or multiple LLC's in many circumstances)?
2. Have you properly transferred the necessary assets to your LLC?
3. Once the assets are transferred, have you taken additional steps to minimize their exposure and increase the protection of those assets?

And most importantly, if and when you receive a summons (or any legal document for that matter), contact a lawyer immediately to discuss your rights and any exposure you or your company may have. 

At Hallowes & Ebbeskotte, LLC, our Ohio business law attorneys are well versed in evaluating and providing guidance to business owners. If you have questions about your business, or would like us to review the structure of your limited liability company and establish an asset protection plan for you, contact me at josh@thehelawfirm.com or (614) 759-4603. Also, feel free to subscribe to this blog moving forward so I can keep you up to date and informed. 

Your Business and Taxes

Have you given serious thought to how your business is taxed (other than the fact that you believe it is taxed too much)? For many business owners, this area is often overlooked until taxes are due, and by that time many tax advantages available to business owners may have been missed. As 2012 comes to a close, and with the threat of the fiscal cliff and higher tax rates looming, now is the time to plan for 2013.

There are a number of entity selections for your business, and the most common types of business entities are Proprietorships, General and Limited Partnerships, C and S Corporations, and Limited Liability Companies. The two issues this post will focus on are how each type is treated from a liability standpoint, and from a federal tax perspective. Think of this as a broad overview of each entity type, and should you have more pointed questions, don’t hesitate to email me at Josh@theHElawfirm.com.

Proprietorship

This is the simplest form in which you can organize your business. There is only one owner, the Proprietorship is not considered a separate entity from that owner and no separate federal income return is required (you include the income on your Schedule C). A Proprietorship is a “flow-through” tax entity which means that the net profit or loss flows through to you and is accounted for on your return. You are taxed on all the net profit, even if you leave some cash in the business, and you do not receive a tax deduction for cash draws out of the business. Further, the net profit is subject to self-employment taxes and losses from prior years cannot be carried forward or backward to offset self-employment taxes in other years.

In my opinion, the greatest drawback of a Proprietorship is that you, as the owner, are personally liable for all the debts and liabilities of the Proprietorship. While this may be less of an issue for owners engaged in lower-risk activities with adequate insurance coverage, I believe by operating as a Proprietorship, you are subjecting yourself to unnecessary risk in addition to missing out carrying forward losses to offset future income.

Partnership

When two or more individuals or business entities create a business without forming a Corporation or other legal entity, a Partnership has been created (there are some minimal state requirements which must be met including filing specific documents and paying the appropriate fees). A Partnership also receives flow-through tax treatment. All income, loss, gains, deductions, and credits flow through to the partners. Partnerships that operate a trade or business will generally result in self-employment income or loss to general partners (but not limited partners).

The liability structure differs from the Proprietorship because a Partnership is considered separate from the partners. Therefore, the Partnership is primarily responsible for its debts and liabilities. However, if the company does not have sufficient assets to satisfy its debts and liabilities, the partners become responsible. Note the distinction between General and Limited Partnerships discussed below.

In a General Partnership, the partners share liability and management. In a Limited Partnership, the general partner(s) share liability and management, but limited partners are only liable for their capital contributions to the Partnership, and any debts the limited partner(s) personally guaranty. There are some circumstances where a limited partner could be held personally liable, but that is a conversation for another day.

Corporation

You have likely heard about C-Corporations and S-Corporations. Both types provide limited liability protection to owners (known as “shareholders”) as a shareholder is generally only responsible for Corporation debts and liabilities up to the amount of the shareholder’s capital contributions and any personally guaranteed debts. But beware of Courts “piercing the corporate veil” to render a shareholder personally responsible for Corporation debts and liabilities. This can be avoided by, among other things, complying with Ohio’s filing requirements.

A C-Corporation, considered a separate entity from the shareholder, is subject to a “double tax” regime, meaning income is taxed at both the Corporation level, and again at the shareholder level as dividends. A C-Corporation is not a flow-through tax entity. Losses do not pass through to the shareholders; rather they are either carried back to prior years or forward to offset future Corporation income. See the benefit realized by GM discussed at http://online.wsj.com/article/SB10001424052970203609204574314180298525294.html. Finally, the dividend distributions to shareholders are not deductible by the C-Corporation.

An S-Corporation is also considered a separate entity from the shareholders, but is a flow-through tax entity. Generally, any item of income, loss, gain, deduction and credit passes through to the shareholders. Similar to the C-Corporation, shareholders are not subject to self-employment tax on the company’s profits. An additional benefit of the S-Corporation is that there is no second level of tax.

Limited Liability Companies

The LLC is perhaps the most popular entity selected by business owners today. LLC’s offer the liability shield present with a Corporation, but with the flexibility to be taxed as a Proprietorship, C-Corporation, S-Corporation or Partnership. An LLC can have a single or multiple owners (called “Members”), and if a Member is an active participant in management, he or she will likely be subject to self-employment tax. Ohio’s filing requirements are minimal for an LLC, but be sure to have your Company Minute Book properly created and updated regularly to avoid problems with liability, Member-buyouts and the other common pitfalls for LLCs.

I did not discuss it here, but there are some intriguing ways to combine the business entities outlined above in order to benefit your business even further. If you would like to find out more, or if you have questions you need answered in more depth, I am available at Josh@theHElawfirm.com, or (614) 759-4603. 

Commingle Funds and Your Liability Shield May Disappear

Now that you have taken to heart the information provided in the previous post, Does your “LLC” really limit your liability?, don’t jeopardize the shield created between your business and your personal assets. I have often heard the phrase, “As a business owner, it is not ‘if’ you get sued but rather ‘when’ you get sued.” In determining whether a business owner is personally liable for the debts of a company, courts evaluate a number of factors, the most important of which is whether an owner’s personal funds have been commingled with the funds of the business. Frankly, if you treat your company as your personal piggy bank by using your company’s funds as your own, there is a good chance your personal assets will be exposed to your company's creditors (e.g., Plaintiffs suing your company).

Commingling takes a variety of forms, including but not limited to:

1. Failing to establish company checking and credit accounts that are separate from your personal accounts;
2. Utilizing company credit cards or accounts to pay for personal expenses;
3. Loaning money to or borrowing money from your company WITHOUT DOCUMENTING THE TRANSACTION (for example, record a resolution in the corporate minutes, execute a valid promissory note with fair market rate interest, and ensure that regular payments are made);
4. Depositing company funds (e.g., checks payable to your company) into your personal account; and
5. Failing to properly title company property.

While the list set forth above is by no means exhaustive, it does provide an overview of the most common examples of commingling that you should avoid. In addition to risking exposure to personal liability, commingling often results in understating or overstating deductible business expenses, as well as difficulty in creating financial reports and determining the best direction for your company.

Do not succumb to sloppy business practices, and be sure to document, document, and document. In the event that commingling does occur, correct it immediately. Maintaining the separation of owner and business is a critical component to protecting your personal assets.

As a business law attorney at Hallowes & Ebbeskotte, LLC, my goal is ensure that your business operates in a manner that protects you personally. If your company is a mess, and you need help cleaning it up, please feel free to contact me at Josh@theHElawfirm.com (or at 614-759-4603) or visit our website at www.theHElawfirm.com.

Does your “LLC” really limit your liability?

As a business owner, the question is not "if" you will be sued; rather, it is likely "when" you will be sued. To protect against personal liability, the Limited Liability Company (“LLC”) has become one of the more popular entities chosen by business owners to operate their respective businesses. The LLC provides the flexibility and ease of creation of a partnership while at the same time establishing a liability shield similar to a traditional corporation.

My experience in meeting with business owners is that there is a common misconception that so long as Articles of Organization are filed with the Ohio Secretary of State, the owners will get the full protection of the LLC. However, in order to be protected from personal liability, you must establish that the LLC is a separate entity from you as the owner (or owners). In order to do this, it is advisable to take some steps above and beyond merely filing the Articles of Organization.

First, you need to choose a business name and make sure it is available. In Ohio, the name of your LLC must contain some specific words, as well as be distinguishable from any other names on file (with some limited exceptions). Typically you complete this step before filing the Articles of Organization.

You should also negotiate and execute an Operating Agreement. An Operating Agreement will differ if the LLC is a Single Member LLC versus a Multimember LLC. Additionally, the Operating Agreement should address tax treatment, buy-sell options, management, capital contributions required from each Member and how profits and losses will be allocated. While there are template Operating Agreements available, an Operating Agreement should be tailored to your business, your Members and your specific situation to increase the likelihood of protection from personal liability.

At Hallowes & Ebbeskotte, LLC, we create and maintain a Company Minute Book for your LLC that includes all of your company documents, including the Articles of Organization, the Operating Agreement, Subscriptions to Membership Interests, Organization Minutes, Membership Interest Certificates, Descriptions of Membership Interests, and Capital Contributions.

Don’t forget to determine what tax and other regulatory obligations the LLC is subject to, along with any required registrations. These include requesting an Employer Identification Number (“EIN”), registering for Ohio payroll taxes and BWC coverage, and required notifications when new employees are hired.

Once the LLC has obtained an EIN, the Articles of Organization have been approved, any requisite local licenses and/or registrations have been obtained, and bank accounts have been opened on behalf of your LLC, you are ready for business.*

Remember, to protect yourself from personal liability, it is critical that you take the proper steps to establish the liability shield a limited liability company can provide. Visit http://thehelawfirm.com for more information on how the business law attorneys at Hallowes & Ebbeskotte, LLC can guide you through the necessary steps.

*Future posts will address the importance of refraining from co-mingling your personal funds and assets with the funds and assets of the LLC in order to maintain personal liability protection. Stay tuned…

Who Pays for Dad’s Nursing Home Stay? It Might Be YOU!

It is a common misconception that parents are supposed to pay for their children and not the other way around. However, more than half of the states in this country have enacted “filial support” legislation (including Ohio) that may be utilized by long-term care facilities to collect on mom and dad’s unpaid bills. Guess who they will be collecting from? It’s you.

This practice has only recently started to pick up steam as public sources of payment for long-term care (i.e. Medicaid) begin to lag due to overuse, abuse and underfunding. Considering the current state of the economy and public resources, it is expected that this practice will increase.

As you probably guessed, the best way to defend against this practice is through planning. When your parents (or you) are in their 60’s, that should be the “last stop” for this type of planning, because once the 80’s roll around, most folks generally need some type of consistent medical care (long-term or otherwise). Options include purchasing long-term-care insurance, utilizing irrevocable trusts to transfer assets outside of Medicaid’s look-back period (currently 5 years), and the ever-popular in-law suite. Whatever option you choose, understand that the most critical component of the planning process is to ensure that there is not a gap between private coverage and public coverage that will later rear its ugly head as a collection claim by the care facility against the children for mom and dad’s expenses.

If you have any questions, please feel free to contact me at josh@theHElawfirm.com or visit our website at http://thehelawfirm.com/. Our Ohio Estate Planning Attorneys can guide you through planning this phase of life, whether for you or for your loved ones.  

Estate Planning Update – Time is Running Out

On January 1, 2011, Congress rewarded good tax planners by increasing the individual estate, gift, and generation-skipping transfer (“GST”) tax exemption amounts, and included a tax rate of only 35% for any estates or gifts that exceeded the increased exemptions. Since the legislation became effective, the individual exemption amount has been $5,120,000. That means if at the time you pass away, your “estate” is worth less than that amount, your estate will not be taxed on the Federal level (the State of Ohio tax exemptions are significantly lower, but will be repealed on January 1, 2013 – i.e. no Ohio Estate Tax for those who pass in 2013). Alternatively, you may give away gifts in an amount up to the Federal limit without incurring any Federal tax (yes, you can be taxed for giving property away). The tax rate comes into play once the value of your estate (and gifts) exceeds $5,120,000. Ultimately, this legislation permitted individuals to pass along significant gifts and engage in creative estate planning while simultaneously taking advantage of a low tax rate. However, all that may change on January 1, 2013.

Unless Congress acts to extend the legislation, it will expire on December 31, 2012, and the exemptions and tax rate will reset to $1,000,000 and 55% respectively. While $1,000,000 may seem a high threshold, if your estate consists of your home, some vehicles, and a retirement account, that threshold can be easily breached. Additionally, the exemption is a “unified” exemption – that means it takes into account the value of gifts you have given away and the value of your estate, and if combined those values exceed $1,000,000, the 55% tax rate is triggered. Obviously, the reduced exemption in combination with the significantly higher tax rate can have devastating effects on your ability to preserve and pass along your assets to family and loved ones.

Perhaps your “glass-half-full” outlook has convinced you to believe that Congress will step in at the last moment to preserve the historical legislation that currently exists. That’s cute. The current consensus is that IF Congress does create new legislation that it will not be as generous as that in place now. For those looking to hedge, if the current exemptions and tax rate are extended it still makes sense to take advantage of them now to capture the appreciation most assets experience (unless you own real estate in Southern California).

There are a variety of tools that can be utilized to plan appropriately for the sunset of the current legislation. Don’t wait until December 30^th to contact your Estate-Planning or Tax Attorney (shameless plug – I can be contacted at (614) 759-4603 or at  http://thehelawfirm.com/contact-us/) and implement a strategy to take advantage of the current estate-planning opportunities. It is critical that you take the necessary steps to ensure your legacy is passed along to those you love, and the current legislation allows you to do so in an unprecedented manner. The future legislation may not be so accommodating.

Beware the Post!

For those of you who find it necessary to post on Facebook, Twitter, or other social media sites and blogs about everything in your life, you should reconsider that thought, especially when you are involved in any type of litigation (or trying to find a job). Facebook can and will be used as evidence against you in court. Many cases, especially those that take place in domestic court consist of “he said/she said” evidence. However, your social media posts (including pictures and videos) are admissible in court and may determine the outcome of your case.

For example, in a divorce case, one party’s Facebook post contradicted that party’s claims in court, and as a result, the Court ruled against that party. This is occurring more often as the frequency with which many people are updating their social media accounts. Another common misstep is when an individual denies drug or alcohol use but posts pictures of that person engaging in those activities. Not a good move.

You may believe that the content you post is protected because you have set your account settings to “Private” where only your friends or followers can view your updates. However, a common source of obtaining your account updates is usually through mutual friends (you would be surprised at what your “friends” will share with others). Understand that your posts are never truly confidential.

The lesson here is be conscious of what you post because it will affect your life. More importantly, if you are involved in any type of a lawsuit, custody battle, or job interview process, consider shutting down your social media accounts. Staying off your accounts will help, however, if you have negative material already posted, it will have a negative effect on your case. If you are going to post something, do so as if it will be read by the judge, jury and your adversary (because it probably will). 

If you have any additional questions, please feel free to contact me office at (614) 759-4603 or our website www.theHElawfirm.com. Good Luck!