Business

Tax rates and paying taxes seem to consume our minds for very good reason – the U.S. Tax Code is complicated. A common area of confusion for some small business owners surrounds the topic of an “L.L.C. (Limited Liability Corporation) versus an S Corp”. Many people, to their detriment, use these terms interchangeably. THESE TERMS ARE NOT ONE AND THE SAME. 

An L.L.C. is a formal business structure that, when used correctly, provides protection for the business owner’s personal assets by separating personal and business activities. An S Corp is a type of tax classification that can be used by both corporations and LLCs and has the potential to save some business owners money while positioning their business for growth.

Corporations are normally taxed at the corporate entity level, but an S Corporation is not. S Corporations instead elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This pass-through means that all financial considerations are assessed at the individual income tax rates of shareholders and a benefit is that the S Corporation can therefore avoid double taxation on corporate income.

To qualify as an S Corporation, the company must not have more than 100 shareholders, must be a US company, must be meet certain shareholder qualifications and cannot be what is considered an ‘ineligible corporation’ under the law. If the company meets all the requirements, the corporation must submit Form 2553 no more than two months and 15 days after the beginning of the tax year the S Corp election is going take effect (IRC 1362(b)).

The S Corporation election may be of great benefit if you are considering starting a small business, or perhaps are already a shareholder in one. However, it is important to know your options and carefully consider how to best structure your entity. 

Do you own a small business? Do you have questions on how best to structure your business or how to plan for business continuity in times of incapacity or death? Give us a call (972) 945-1610 or comment below.

Continuity refers to something occurring in an uninterrupted state or on a steady and ongoing basis. In part III of our 3-part series, we will discuss how to close a small business when an owner passes away. Yes, continuity planning includes deciding when and how to shut down. 

How does a business wrap up operations when an owner passes away?

1. It must be decided if the business can and will continue to operate. If the business will continue, the deceased owner’s interest must be cleared. That interest must be properly conveyed through some type of legal process: will, trust, operating agreement, buy-sell agreement, etc. Planning in advance for business continuity can allow this transition to happen with little to no disruption to the business.
2. If the business will be completely dissolved, a dissolution will be filed with the Secretary of State. A dissolution is an official notice to the public that a business is no longer active. Note: final expenses and taxes must be paid from the business before the remaining proceeds can be distributed to heirs, partners, etc.
3. If a business is going to carry on without the deceased owner, the formation filings must be updated with the Secretary of State to show the deceased owner no longer has an interest in the business. It is important to make these filings or changes with the Secretary of State to avoid incurring more dissolution fees over time. 

Business owners certainly have plenty on their plates to keep them busy, but that is all the more reason to have a business continuity plan in place. If you have questions about planning for your business to continue without interruption upon your incapacity or death, please contact us.

Continuity refers to something occurring in an uninterrupted state or on a steady and ongoing basis. In part II of our 3-part series, we will investigate three of the many ways in which a business, governed by an LLC agreement, can continue operations when an owner/operator dies or experiences incapacity. 

Business continuity planning becomes more involved when a business has multiple members, partners or employees. What happens if one partner passes away or becomes incapacitated? Answers to this question are varied, but here are some of the most common ways to address this situation.

1. Properly prepared operating agreements: Many times, business partners create an LLC for liability protection but fail to craft comprehensive operating agreements citing no need for “that mumbo jumbo”. Operating agreements play a critical role when death or incapacity takes place. Topics that should be included in such agreements are (at minimum):

• Company’s contact information
• Listing of all partners names, roles, and responsibilities
• Listing of percent of shares owned by each partner
• Emergency operations policies and procedures
• Disability and death planning
• Guidelines for business meetings, taking votes and financial decision making/accounting

1. Buy-Sell Agreements: In the same vein as an operating agreement, yet different, a buy-sell agreement outlines, in contractual language, specific occurrences that automatically trigger the disposition of business shares should a partner retire, pass away, become disabled or just leave the business. This type of agreement creates valuation mechanisms as well as guidelines for the how and the who of the sale and purchase. 
2. Key-Person Life Insurance: Key-person insurance is a type of life insurance for which the business pays the premiums on behalf of an owner or executive. The insurance payout can be used for many things including business operations, payroll, and capital expenditures. It is also a great way for remaining business partners to potentially buy the shares of a deceased partner from an heir if necessary.

It is important to plan, IN ADVANCE, for the distribution of your personal assets as well as the distribution of business assets. Email us or comment below to learn more about how business continuity planning can benefit your business and your family. 

Continuity refers to something occurring in an uninterrupted state or on a steady and ongoing basis. Today begins a 3-part series about the importance of business continuity planning. Whether you own 1 rental property, run a small business employing 3 people or have a family farm, it is EXTREMELY important that you not only plan for the distribution of your personal assets but that you plan for the perpetuation of business operations.

A very common small business structure is the single-member LLC. LLCs are commonly used for rental properties or a service business. LLCs offer great liability protection paired with simple management, but their simplicity can often leave problems when an owner becomes incapacitated or passes away.

A properly formed LLC should have an operating agreement that explains what happens, and who is in charge when the owner passes away or becomes disabled and unable to guide business operations. Why? Because business owners owe it to every person affected by their business to have a continuity plan in place. Employees, customers, vendors, and family members are all impacted when the owner of a business is no longer able to oversee daily operations. 

REAL-LIFE EXAMPLE

It is common for an LLC to have bank accounts titled in the name of the LLC. Often, the single-member (business owner) is the only person with access to the funds in those bank accounts. Unlike an individual checking account, a business account cannot pass upon death through a beneficiary designation. A bank holding these accounts will treat the business accounts as part of the deceased person’s estate, requiring a court order to access the funds. This presents a problem when the funds are needed to either keep the business going or to wrap-up business transactions. To keep the LLC from coming to a standstill upon incapacity or death of the owner, an operating agreement can appoint another responsible party to carry on the business.

Do you have an LLC? Does it have an operating agreement that details who will be in charge in times of death or incapacity? Comment below or schedule a free consultation to learn more about LLC management best-practices.