To add some levity to the otherwise serious topics in my newsletter and to show my lighter side, here is this issue's lawyer joke of the month. I hope you enjoy it!
Mark D. Klein
A plane full of New York lawyers was heading for their annual Las Vegas Convention when it was hijacked. The plane was forced to land at Chicago's O'Hare Airport, and the hijackers radioed to ground control with a huge list of demands.
When asked what would happen if their demands weren't met the hijacker spokesman stated, "If you don't do exactly as we say, we will release one lawyer every single hour."
LIMITED LIABILITY COMPANIES-THE BEST OF ALL WORLDS?
A limited liability company (LLC) is a business structure that combines some of the best features of sole proprietorships, partnerships, and corporations. LLC owners, like their counterparts for partnerships or sole proprietorships, report profits or losses on their personal income tax returns. Like a corporation, however, the owners of an LLC have "limited liability," that is, they are shielded from personal liability for debts and claims arising from the business.
The limited liability for LLC owners is not absolute. Owners still can be held liable if they (1)
personally and directly injure someone; (2) personally guarantee a loan or business debt on
which the LLC defaults; (3) fail to deposit taxes withheld from employees' wages; (4) intentionally
commit a fraudulent or illegal act that harms the company or someone else; or (5) treat the LLC
as an extension of their personal affairs rather than as a separate legal entity.
The last exception to limited liability is the most significant. It carries the potential for complete
removal of the protections for individual owners. If the line between LLC business and personal
business becomes too blurred, a court could find that a true LLC does not exist, leaving the owners
personally liable for their actions.
Most states allow a single individual to be the sole owner of an LLC. An LLC makes the most
sense in circumstances where there is a concern about personal exposure to lawsuits stemming
from operation of the business. Most laws prohibit establishment of an LLC in the banking, trust,
and insurance fields.
Unlike corporations, LLCs can carry on their business without holding regular ownership or
management meetings. Of course, formal meetings backed up by written minutes still may be
advisable to document important decisions, such as a change in membership or a major expenditure.
Setting up an LLC is relatively simple. Articles of organization must be filed with the appropriate
state office, usually the Secretary of State. The articles of organization include the name and principal
office for the LLC, the names and addresses of its owners, and the name and address of the person
or company that agrees to accept legal papers on behalf of the LLC.
Even if it is not legally required, the owners should prepare an operating agreement that spells out
the owners' rights and responsibilities. The absence of an operating agreement will mean that state
statutes will govern the operation of the LLC by default. An operating agreement acts as a guide
for resolving common issues that an LLC will face, and thereby helps to avert misunderstandings
between the owners. It also underscores the authenticity of the LLC itself, which can be helpful when
a judge is deciding whether the owners are protected from personal liability.
A standard operating agreement includes the members' percentage interests in the business; the members'
rights and responsibilities; the members' voting power; allocation of profits and losses;
how the LLC will be managed; rules for holding meetings and taking votes; and "buy sell" provisions that control what happens when a member wants to sell his interest, becomes disabled, or dies. Although it is
frequently overlooked when an LLC is created, a buy sell agreement is important as a sort of "premarital agreement" among the owners. The buy sell provisions can clarify and ease the transition when the inevitable changes come to the members of the LLC.
Since an LLC is not considered separate from its owners for tax purposes, the LLC pays no income
taxes itself. Like a partnership or sole proprietorship, an LLC is a "pass through entity." Each owner
pays taxes on a share of profits, or deducts a share of losses, on a personal tax return. The IRS regards
each member as a self employed business owner, not an employee of the LLC. There is no tax
withholding, and owners must estimate taxes owed for the year, then make quarterly payments to the IRS.
By converting to the LLC business structure, sole proprietors and partnerships can gain the protection
afforded to LLC owners without changing the way their business income is taxed. Conversion usually
can be accomplished either by filling out a simple form or filing regular articles of organization. Federal
and state employer identification numbers will have to be transferred to the name of the new LLC, as
will such items as sales tax permits, business licenses, and professional licenses or permits.
The process for creating an LLC is streamlined and free of highly technical considerations. However,
there is an important place for professional advice concerning such matters as choosing an
LLC over other business structures, preparing or reviewing the operating agreement, and setting up
accounting systems. For more information on this topic or help with other legal concerns please email us or visit our website.
Mark D. Klein, Esq. is a senior attorney at Klein Law Corporation, a Southern California-based
law firm providing legal assistance to businesses and individuals alike. Klein Law Corporation
provides an extensive range of legal services aimed at helping clients with issues involving corporate law, business law, intellectual property matters and estate planning while actively working with entrepreneurs starting business ventures and those purchasing or selling businesses.
The foregoing information is presented by Klein Law Corporation as a news reporting service to clients
and friends of the firm and is distributed with the understanding that Klein Law Corporation is not
rendering legal advice and assumes no liability whatsoever in connection with its use. If you have
questions about the subject matter presented or desire to obtain more information on legal issues related
to your business, please contact us at mark@KleinLawCorp.com