The Griess Law Firm, LLC http://griesslaw.com/blog Beyond Law, Building Business. Mon, 02 Apr 2012 13:00:00 +0000 en hourly 1 http://wordpress.org/?v=3.3.1 LLCs Taxed as S-Corporations, and Membership Restrictions http://griesslaw.com/blog/llcs-taxed-as-s-corporations-and-membership-restrictions.html http://griesslaw.com/blog/llcs-taxed-as-s-corporations-and-membership-restrictions.html#comments Mon, 02 Apr 2012 13:00:00 +0000 Douglas Griess http://griesslaw.com/blog/?p=317 When an LLC elects to be taxed as an S-Corp, for tax purposes, the members of the LLC are treated as shareholders of an S-Corp.  Under Colorado statutes, the fact that an LLC member is treated as a shareholder does not alter their designation as a member or restrict how the LLC can operate.  However, there can be serious consequences and conflicts between how the LLC works under its Operating Agreement and the treatment of the members as S-Corp shareholders for tax purposes.

Under the tax code, the persons, and number of persons, who can be shareholders of an S-Corporation are limited.  For example, S-Corporations can have no more than 100 shareholders.  And S-Corporations cannot have partnerships, LLCs, Corporations, or non-resident aliens as shareholders.  Furthermore, S-Corporations can have only one class of stock.

LLCs under Colorado law do not have these limitations.  An LLC could have a Corporation as a member, but if it does, it cannot be taxed as an S-Corp.  Accordingly, if an LLC elects to be taxed as an S-Corp, but a member then transfers their interest to an LLC, the S-Corp tax status is undone.  And this results in all of the members losing the benefits of the status, not just the member who makes the erroneous transfer. 

As a way to address this, an LLC can include in its Operation Agreement provisions that restrict a member’s ability to transfer an interest if such transfer would disqualify the LLC’s election for S-Corp tax status.  In short, the Operating Agreement can state that such transactions are void as if they never happened. 

Operating Agreements are very flexible and should proactively be used by members to address this kind of situation, as well as a host of other situations to protect and reinforce the deal within which the members are engaged.

]]> http://griesslaw.com/blog/llcs-taxed-as-s-corporations-and-membership-restrictions.html/feed 0 LLCs and Tax Consequences, Specifically Self-Employment Taxes http://griesslaw.com/blog/llcs-and-tax-consequences-specifically-self-employment-taxes.html http://griesslaw.com/blog/llcs-and-tax-consequences-specifically-self-employment-taxes.html#comments Thu, 29 Mar 2012 13:00:00 +0000 Douglas Griess http://griesslaw.com/blog/?p=313 Limited liability companies, (“LLCs”)  are extremely flexible.  For tax purposes they are disregarded.  What that means is that there is no tax status of an LLC in and of itself. Instead, the taxes for an LLC’s revenue is based on the election of the taxpayer for the entity.  As a default, this is as a partnership or, in the case of a single-member LLC, like a sole proprietorship.  But an LLC can elect to be taxed like an S-Corp or a C-Corp. 

Accordingly, the tax statutes and regulations are extremely important to the formation of an LLC.  The same LLC will be treated differently under tax code for the same transaction depending on whether it is taxed as a partnership, S-Corp, or C-Corp.  For example, the tax implications of a member contributing property to an LLC taxed as a partnership can be different than if the member contributes property to an LLC taxes as an S-Corp.  Furthermore, under tax law, a member is treated like a shareholder/employee when the LLC is taxed as an S or C-Corp rather than as having a partnership interest when taxed as a partnership.

One well known reality is the difference in how self-employment taxes are assessed against a member-employee of an LLC taxed as a partnership, versus a member-employee of an LLC taxed as an S-Corp.  In short, revenue received by a member of an LLC taxed as a partnership is all taxable for self-employment tax purposes.  This is because all of the revenue received by the member is taxed just like the situation where a individual makes all the money on their own.  But revenue received by a member of an LLC taxed as an S-Corp can be allocated between salary and dividends.  Salary is subject to self-employment tax, but dividends are not.

Aware of this reality, the IRS requires that member-employees of an LLC taxed as an S-Corp receive in compensation from the LLC a salary that is the reasonable value of their services to the LLC.  Members who pay themselves all in dividend are at risk of the IRS determining that the compensation received as dividend is actually salary, and subject to taxation as such.  Penalties can be assessed because the member-employee failed to pay those self-employment taxes when they were due.

]]> http://griesslaw.com/blog/llcs-and-tax-consequences-specifically-self-employment-taxes.html/feed 0 Legal Services Increase Value, in Addition to Protecting Value and Revenues, and Facilitating Revenue Generation http://griesslaw.com/blog/legal-services-increase-value-in-addition-to-protecting-value-and-revenues-and-facilitating-revenue-generation.html http://griesslaw.com/blog/legal-services-increase-value-in-addition-to-protecting-value-and-revenues-and-facilitating-revenue-generation.html#comments Mon, 26 Mar 2012 16:00:00 +0000 Douglas Griess http://griesslaw.com/blog/?p=311 Most often the value of legal services is expressed in terms of avoiding risks and loss, which is very true. This line of reasoning focuses on how a small business is able to keep the revenues it generates, keep its assets, protect its assets and resources, and similar issues. 

Beyond avoiding risks or losses, it seems lawyers have a hard time showing that the work they do is increasing, or could contribute to increasing, revenues.  Lawyers do not set client prices, do not often create deals, do not really reduce the cost of production, and do not usually directly generate paying customers.  The savings is usually a  future amorphous amount contingent on events which may or may not occur.  Because there is, at best, an indirect connection between the lawyers work and the revenues generated, small business often have a hard time justifying hiring a lawyer whose cost looks like an expense which does not necessarily directly increase the value of product or services provided. 

There are ways to explain how legal work can actually relate to an increase in revenue in different situations, but they are not well suited for short blog posts or elevator pitches and are more often indirect.

However, while revenues may not directly increase from the work of a lawyer, and the lawyer’s work may help to keep businesses from loosing revenue, there is a difference between value and revenue. Lawyers often help businesses increase value and capture value.

An analogy is real property which appreciates in value over time or due to improvements even though no cash is received until there is a liquidity event such as a sale, or actual use of the improvements. Legal work is like the creation and maintenance of the improvements to property.  One spends resources building a house, remodeling the kitchen, adding space for customers or inventory, refinishing the deck, and so on. While the initial outlay is an investment, the work itself does make the property more valuable at the time it is done.  It also makes the property easier to live in or more functional, but it doesn’t necessarily directly increase cash on hand. But the improvements do make it possible to increase revenue, perhaps in a more secure manner or flexible manner.  And the legal improvements make the business more valuable to potential purchasers of the entity.

It is not until the improvements and property is used or sold that the increase in value is realized.  In short, it is possible to live on a plot of land in a tent, but it is better to have running water, a roof, walls, and a carpet. Legal work for a business is like putting up walls, adding a roof, installing a heater and other improvements that make use of the business more functional, secure and comfortable.  It may not increase revenue directly, but it certainly has value.  Furthermore, the legal work for a business creates value that may not be realized until there is a transfer or sale.

]]> http://griesslaw.com/blog/legal-services-increase-value-in-addition-to-protecting-value-and-revenues-and-facilitating-revenue-generation.html/feed 0 A “Short List” of When To Seriously Consider Getting Legal Help http://griesslaw.com/blog/a-short-list-of-when-to-seriously-consider-getting-legal-help.html http://griesslaw.com/blog/a-short-list-of-when-to-seriously-consider-getting-legal-help.html#comments Mon, 12 Mar 2012 16:00:00 +0000 Douglas Griess http://griesslaw.com/blog/?p=308 There are all kinds of situations in which legal advice or just education will be advantageous for a small business owner, even if not absolutely necessary.  When a particular business, owner, or officer will actually seek legal insight often depends on a combination of issues such as whether there is money in the operating account, how risk averse they are, how proactive they are, whether they have had a bad/good legal experience, how much is at stake in the transaction at issue, and so on.  There are no hard and fast rules for when to talk to a lawyer.  It may be that your attorney is a great general advisor who happens to have a legal perspective.  But at the very least, here are some examples (not an exhaustive list) of situations in which a business should seriously consider getting legal help:

  • negotiating a franchise agreement;
  • creating standardized forms that the company will use repeatedly in the business;
  • buying or selling a business or business assets;
  • negotiating loan terms;
  • negotiating leases of land or equipment;
  • buying or selling property;
  • registering and protecting intellectual property rights;
  • negotiating agreements or licenses regarding patents, trademarks, confidential information, trade secrets, copyright rights, whether they are your rights, or rights you are obtaining;
  • negotiating and drafting independent contractor agreements, commission plans, consulting agreements, employment agreements or manuals;
  • negotiating and drafting joint venture, strategic partner, service agreements, and similar contracts;
  • responding to a subpoena, lawsuit, service of any kind, or any serious threat of legal action;
  • filing a lawsuit on behalf of a business;
  • dealing with the government on a serious issue like regulations or zoning;
  • dealing with tax authorities on a serious issue;
  • seeking new investors;
  • opening offices or conducting business in other states or countries;
  • exit, succession, disability, emergency, or legacy planning; and,
  • strategies for dealing with troubled businesses (bankruptcy).

Many business only think to talk to their attorney when they perceive there is a problem.  However, many of the situations where an attorney is most helpful are when there are opportunities. 

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