LLCs are a lot like shoes – fit matters!

June 20, 2012 By Leave a Comment

The Limited Liability Company (LLC) has become a popular business structure in the startup world. Savvy small business owners often opt for this structure over a traditional corporation, as the LLC offers personal liability protection without the red tape, paperwork and formalities that can be burdensome for a young startup, small business or solo entrepreneur.

Many small business owners are surprised to know that there are choices for your LLC. From a single-member LLC to a multiple-member LLC, member-managed LLC to manager-managed LLC, how do you know what’s right for you?

Single Member LLC or Multi-Member LLC

As the names imply, a single member LLC (SLLC) has a single owner, while the multi-member LLC has multiple owners.

For example, John Utah started a consulting business; he’s the sole owner, but plans to hire a few account managers and other employees. In this case, Utah could form an SLLC because income from a single member LLC isn’t divided (as it would be for a partnership or if there were multiple owners of the business) and there are no separate taxes to file with the IRS. The IRS treats an SLLC just like a sole proprietorship. But note that LLCs can also choose to be taxed as a corporation.

Now if Utah decided to launch the business as a joint venture with a colleague, there would be two owners, and they could form a multi-member LLC.

Member Managed LLC or Manager Managed LLC

Once a multi-member LLC is formed, you’ll need to set up your desired structure in the LLC operating agreement: member-managed or manager-managed.

A member-managed LLC is run by the owners of the company. This is the simplest structure and means that every owner has the authority to act on behalf of the business (i.e. take out a business loan, negotiate contracts and handle other financial and operational tasks).

Using J. Utah and his consulting business as an example, let’s say that Utah and his colleague Bodi launched the business. Both plan to be active participants in the business, with Utah handling client relations and Bodi managing the administrative aspects. Since they both will have direct involvement in the business, a member-managed LLC will probably make the most sense for them.

Now let’s say that Utah and Bodi are launching their consulting business but need some financial support to get the business off the ground. A few of their friends and family pitch in and invest in the business. In this case, the manager-managed LLC would probably be optimal.

A manager-managed LLC is typically used when there are passive members in the LLC, such as investors who aren’t actively involved in the business. With a manager-managed LLC, the LLC members elect managers who have the authority to operate the business. In our scenario, Utah, Bodi, investing family and friends are all members of the LLC. Then, the members elect Utah and Bodi to be managing members. Utah and Bodi are responsible for the day-to-day operations, while the non-managing members remove themselves from the direct operations of the business.

In most states, an LLC is member-managed by default. That means that if you don’t specify management structure in the formation documents you file with your state, your LLC most likely is member-managed.

Domestic LLC or Foreign LLC

In this case, domestic or foreign refers to the state where the LLC is created and operates. A company that is registered in Colorado and does business in Colorado is operating as a domestic LLC. If the same company does business in Texas (and has a physical presence there), it is operating as a foreign LLC in Texas.
This situation commonly comes up when an LLC is created in states with business-friendly tax laws but does business in its home state. It can also occur when a business starts expanding into other states. A foreign LLC is required to register with the Secretary of State in the foreign state (as well as meet the regulatory and tax requirements of the foreign state).

Be aware that just having a client or selling to customers in another state doesn’t necessarily mean you’re operating in that state and must register as a foreign LLC for that state. While exact requirements vary state to state, operating in a state generally means:

  • Having a bank account in the state.
  • Selling in the state through some party directly tied to the LLC (a distributor or sales rep).
  • Owning property in the state.
  • Having offices, owning facilities or holding regular meetings in the state.

Contact Stoneman Legal to help determine which LLC is right for you

The LLC structure is a great option for young and small businesses that don’t want to be burdened with excessive paperwork and requirements. Once you understand the different types of LLCs, it should be relatively straightforward to determine which shoe fits you best. As with any legal matter, don’t delay. The sooner you get your business structure squared away, the better.

Filed Under: business, business, corporate, Corporate Law, entity, liability, limited liability, LLC, partnership Tagged With: , , , , , , ,

Installment Plans with the IRS

April 20, 2012 By Leave a Comment

You’re at the mortgage lender’s office, all juiced to purchase that home you’ve had your eye on. You ask the broker where rates are at, what she thinks you’ll be able to qualify for, what kind of origination fee she is contemplating smacking you with, etc.  And then she does it (with your authorization of course), pulls your credit like it’s a slot machine at Harrahs. No worries you think, my credit is stellar, I pay my bills on time, I keep low balances on my credit cards … ummm, except I do have that outlandish bill Uncle Sam delivered to me years ago. But it’s fine, it won’t show up, that stuff doesn’t show up on credit reports … WRONG!!! Depending on how long that bill’s been marinating, it is going to show up in one manner or another, most likely as a lien. And guess what the next question from the broker or the bank is? “Mr. Hopeful, what exactly do you plan to do about this tax lien?” More likely than not, you can kiss your chances on purchasing that dream crib good bye.  Buh bye.

This is but one of the many reasons to refrain from debt shirking. Especially IRS debt! If there is one entity you do not want to neglect, it is the IRS. They will hunt you down – Hunger Games style. But rest assured, there are options available.

If you are like most of us, you do not have the resources to put down a lump sum to extinguish the debt. Therefore, so long as the debt owed does not exceed $50,000, you can qualify for an installment repayment plan with the IRS. What follows is a brief version of how it works.

The number that matters is termed the “assessed total.” This amount cannot exceed $50K. If your delinquency stems from within the last two most recent tax years, you can estimate your “assessed total” being 80-85% of that intimidating figure eyeballing you from that IRS notice sheet. If the delinquency relates back to more than two tax years ago, you can figure the “assessed total” to lie somewhere between 60-95% of the grand total.

Typically, the term of these installment plans will extend over a maximum 6 year period. However, if the matter warrants appellate IRS review, these folks are usually more understanding and more forgiving and more apt to let you string out the payment plan over the statutory maximum for collection purposes, 10 years.

The rate you can count on (yes, you will have to pay interest over this installment plan) will be in the 6% neighborhood. Not shark water.

For a rough estimated payment, for those of you without a fancy finance calculator, take your assessed total and divide it by 72. Keep in mind, however, that without the fancy calculator, this payment estimate does not account for interest.

As for abating penalties (getting rid of them), the IRS has become increasingly stingier as of late … perhaps this is an indication of our times, the IRS actually laid off 1,000 employees recently. Clearly a sign that the IRS is struggling … yeah, I feel horrible for them too … and therefore acting even greedier than before. Unimaginable but true. The analysis performed in determining whether or not abatement is allowed is termed “reasonable cause criteria.”

The following questions are meant to uncover what may be reasonable causes in your case that may qualify for penalty abatement: 

Were any business records lost or destroyed?

Were there any circumstances that led to a substantial drop in collecting on accounts receivable?

Was there any transition in the business that lead to the failure to pay taxes?

Was there a death or serious illness that directly affected the business or personal wages?

Was there any embezzlement of funds, theft of valuable property, or identity theft?

Were there any alcohol or drug abuse issues that affected the business or wage earning capability?

Was there a natural disaster that impacted you or your business?

Did you rely on the advice of a CPA or IRS employee in making tax decisions?

Were there any circumstances that created substantial financial hardship, to the point where you or your business was close to going bankrupt?

Two important reminders:

1. IRS does not contemplate abatement until a resolution is effectively in place. Cart before the horse thingy.

2. Interest on taxes owed is not abated

One of my father’s favorite sayings was “Do not go driving through life looking through the rear-view mirror.” Accept the past for what it is, deal with it responsibly, and you will better off for it tomorrow.

There you have it, the down and dirty on installment plans with the IRS.

Filed Under: business, business, corporate, Corporate Law, IRS, liability, Tax Tagged With: , , , , , , ,