By Attorney Kelly Jesson
One of the main reasons why business owners formalize their businesses by forming an LLC or a corporation is so that their personal assets and liabilities can be separated from their business assets and liabilities. If the business is sued, the owner’s personal assets will be protected, and vice versa.
However, in certain circumstances, a court may disregard the corporate entity and hold its owners personally liable for business debts if the corporate entity, at the time, had no separate mind, will, or existence of its own. In making this determination, a court will consider, among other factors, whether a business has complied with “corporate formalities.” Corporate formalities include issuing and following bylaws, issuing shares, electing a board of directors, holding annual meetings of the board and shareholders, sending proper notice of these meetings, and keeping minutes and other corporate records. Owners should not intermingle business and personal assets or employees. Owners should not deal with third parties in such a way that the third party does not know they are doing business with an LLC or a corporation.
Some closely-held corporations may enter into a shareholder agreement in lieu of some of the above requirements. With an LLC, some of these corporate formalities do not have to be observed, since LLCs are subject to fewer formal statutory requirements than are corporations.
If the owner of a business complies with corporate formalities and consistently lists the business’s name on contracts and other documents, third parties will be considered to have voluntarily dealt with the business, and a court will be less inclined to hold the individual owner personally liable for the business’s debts. However, if corporate formalities are being ignored, even inadvertently, that could lead to a court ignoring the existence of the LLC or corporation, which may result in the business owner’s personal assets being at risk.
If you or someone you know needs assistance bringing a business in line with its required formalities, please give Jesson & Rains a call! We offer flat fee packages for these formation documents. We also offer flat fee annual plans that include preparing annual meeting notices and minutes, filing annual reports with the Secretary of State’s office, and other legal services. More information can be found here. We work with our clients to reduce the likelihood that they will ever be responsible for business liabilities.
By Attorney Kelly Jesson
Jesson & Rains, PLLC, is offering a couple of new business plan packages that include discounted legal services.
Our clients are busy and they sometimes forget to keep their information updated with the Secretary of State’s Office or file their annual reports; they pay for a registered agent who does nothing more than forward their mail; and they sometimes fall victim to scams like this and this.
We’re offering a yearly plan that includes serving as our client’s registered agent and filing their annual report, among other things. A description of the plan is attached to this email. This plan helps to ensure your privacy (if your business is ever sued, the lawsuit will be delivered to our office’s address); you will be less likely to fall victim to a scam (we will sort through and destroy junk mail); you will be more organized and have less paper (we will scan and forward your mail immediately to your attention after sorting); and we will ensure that corporate records and Secretary of State records are kept up to date.
We’re also offering an upgraded yearly plan that includes unlimited access to attorneys throughout the year. No more billing for .1 emails or .2 telephone calls. We want to encourage people to contact us anytime they need us instead of being afraid to get a bill from us.
This is a continued effort from us to offer flat fees instead of hourly billing. Annual reports are due April 15, and they can be filed now, so this is a great time to switch over to having Jesson & Rains handle it. Please contact us if you’re interested, and please forward to any busy business owners you think may need our help!
By Attorney Kelly Jesson
Creditors come in all shapes and sizes: ex-spouses, bankruptcy, personal and business debts, and claims involving real estate or professional malpractice. People in high risk professions or who deal with circumstances that are prone to litigation sometimes want to take steps to protect assets. However, this must be done before a dispute arises, because moving assets around afterwards can sometimes be deemed a fraudulent conveyance and voided by a court.
Unfortunately, there is no “magic wand,” and protecting assets oftentimes involves investing your earnings into protected accounts, such as life insurance and retirement. An individual’s retirement account is exempted from their own creditors (but not from a beneficiary’s creditors once the assets are inherited, which will be discussed in the next blog dealing with asset protection in estate planning). The cash value of a life insurance policy is also protected from the insured’s creditors, but again, not from a beneficiary’s creditors once the assets are inherited.
Additionally, the state of North Carolina exempts certain amounts of property from creditors:
One of the most important things you can do is title property as “tenants by entireties” (TBE). If a husband and wife purchase property together, by default, it is owned as TBE and is therefore protected from the creditors of just one of them, meaning a lien will not attach. However, if a creditor gets a judgment in both spouses’ names, a lien can attach. Also, if the spouses divorce or one passes away, a lien can attach if the remaining owner is the debtor. Another alternative or high-risk professionals is to have the low-risk spouse own the majority of assets because they will not be responsible for debts unless joint.
Another really important step is for self-employed people to form businesses and formalize businesses to protect assets. If you follow business formalities, business creditors cannot reach your personal assets for business debts. If you own investment properties, you are running a business. In fact, the definition of “operating a business” is pretty loose, and oftentimes people will move high-value assets over to LLCs for asset protection purposes. Again, you must follow business formalities (set up a tax identification number, maintain a separate bank account, have an operating agreement).
If you own a business but you have personal creditors, those cannot reach assets titled in the name of your business. They are limited to collecting only the distributions you receive from the business, which you control as the business owner. Distributions do not include your pay made through payroll, which is another reason to run your business like a business.
Finally, we’re often called by people to set up trusts to avoid creditors. General living trusts or revocable trusts are not protected from creditors of the grantor (the person who sets it up), although the funds could be protected from beneficiaries’ creditors after the grantor dies (the subject of our next blog). North Carolina residents have a few not-so-great options: First, they can set up an irrevocable trust for the benefit of others. For example, if you are married, you can create an irrevocable trust that benefits your spouse for his or her lifetime. Presumably, your spouse will take care of you while you’re married, so you will indirectly have access to the money you put into the irrevocable trust, although on paper it will no longer belong to you, so your creditors cannot reach it. This obviously has risks, but it is an option.
Another option is an asset protection trust. In an asset protection trust, the trustee has discretion to distribute money to the grantor as well as other beneficiaries. These trusts are not valid in North Carolina, although they are available in seventeen other states and other countries. However, North Carolina residents can pick the situs (jurisdiction) of their trust and where the trustee is located, meaning, for example, that you can state that Georgia law applies to your trust even though you live in North Carolina. However, lawmakers in North Carolina have questioned whether this practice is valid for asset protection trusts, and, therefore, there are some risks involved. Of course, transferring funds to another country is always risky.
If you are interested in implementing any of the above ideas in order to protect your assets, please give the attorneys at Jesson & Rains a call!
By Attorney Edward Jesson
Whether good or bad, it is sometimes necessary to dissolve a corporation or limited liability company (“LLC”). If the business has no assets or liabilities, then closing down is relatively simple. However, business owners can get into trouble when they attempt to close down their businesses if it has remaining assets and liabilities. It is recommended that they work with an attorney. There are some subtle differences between dissolving an LLC and a corporation, but we are just going to use a corporation as an example below.
The first step in voluntarily closing a business in North Carolina is to file the articles of dissolution with the Secretary of State. Once the articles of dissolution are filed, the corporation still must adhere to its bylaws with regards to its directors and shareholders. However, the corporation is no longer allowed to carry on its normal business and must only do things in furtherance of winding up its affairs and liquidating. The North Carolina Business Corporation Act specifically states that a business may:
The next step in the process is liquidation. During this process, the owners of the business are responsible for selling assets and for settling the corporation’s debts. In the North Carolina Business Corporations Act, there are notice and publication procedures that a corporation can use to give notice of its dissolution or liquidation to creditors or potential creditors. While the Act does not impose any legal requirement to do so, it is beneficial for businesses to follow this procedure because it starts a clock and establishes deadlines within which creditors must bring claims.
The potential claims against a corporation fall into two main camps: known claims and unknown claims. If a corporation sends written notice of its dissolution to known creditors, it can establish a claims due date of 120 days from the date of the notice. If the claim is not made by that deadline, the claim will be considered time barred. For unknown claims, a corporation must publish, among other things, notice of its dissolution in a newspaper in the county where the dissolved corporation has its principal office. This will start a five-year clock for unknown claims.
Generally, when liquidating a corporation, all assets of the corporation will be distributed to any creditors first and then to the shareholders. If the assets are not properly distributed (e.g. if a shareholder received assets instead of a creditor), then the aggrieved creditor could potentially file a lawsuit against the shareholder and against the directors who authorized the distribution.
As you can see, closing down a business can be a minefield for all involved. The attorneys at Jesson & Rains can help you close down your corporation or LLC properly or help you figure out alternatives to closing down your business.
The privilege license tax is a tax levied on the privilege of conducting a particular trade or business. If you are a professional that is licensed by a board, you most likely should be paying state privilege license tax every year (for example, accounts, attorneys, general contractors, realtors). There are some exceptions to this requirement, like professionals working for the government or non-practicing physicians, to name a couple.
However, there are some surprising professions on this list; most notably, photographers.
A list of applicable professions can be found here:
And the license application can be found here:
The license is issued to the individual and not the business. While the individual can go ahead and form his/her business, the license should be applied for before beginning business. It is unlawful to engage in business without obtaining a required privilege license. The penalty for failure to obtain a license is the greater of five dollars ($5) or five percent (5%) of the amount prescribed for the license per month or fraction thereof from the time the amount is due until the amount is paid, up to a maximum not to exceed twenty-five percent (25%).
The privilege license tax is annual and is due by July 1 of each year. The penalty for failure to pay any tax when due is ten percent (10%) of the tax due.
Because the license is issued to the individual and not the business, if an individual is engaged in more than one business, he/she will have to obtain a privilege license for each business. If you are a licensed psychologist who has a photography business on the side, you must obtain two privilege licenses and pay two taxes, for example. The license must be displayed conspicuously at the location of the licensed business, trade, or profession.
If you have questions about the privilege tax, please give us a call!
We have had clients contact us who are interested in forming several LLCs for liability protection but then have heard that it is a good idea to form a “holding company” to then own these LLCs under one umbrella.
Traditionally, holding companies are corporations that own stock in other corporations, and all they do is collect dividends from the stock. Berkshire Hathaway is the most famous holding company. It owns stock in many notable companies. It’s beneficial for the holding company to own a majority amount of stock, too, for control and tax purposes. Holding companies are a way for investors to buy shares of companies and make money by receiving dividends for doing nothing but investing. The owners of Berkshire Hathaway (its shareholders) don’t run any of the companies it owns. The board and officers of Berkshire Hathaway (including Warren Buffet) don’t run any of the companies Berkshire Hathaway owns. Of course, if Berkshire Hathaway owns a controlling amount of stock, it could vote to replace the board if the subsidiary wasn’t doing well.
Nowadays, people are forming “holding companies” for other purposes. Modern holding companies are really used as a tool for liability protection. If you form one LLC to own or “hold” the real estate, you can form a second LLC to operate / manage the properties. That way, if one LLC gets sued, the property of the other is not up for grabs. For example, if someone sues the property management company and it has to file bankruptcy, the building is safe because it is owned by the other LLC and its owners (also the owners of the operating LLC) can form another operating LLC immediately.
We think it is a great idea to form multiple LLCs. The more segmented and specific you can get it, the more liability protection there is. However, with each new LLC, there are additional costs: formation fees, annual report fees, and accounting fees.
Some people think that there is a benefit to having a parent LLC own multiple LLCs. So, in our example above, Real Estate Enterprises LLC would own the property holding LLC and the operating LLC. Again, creating a parent company for the purposes of simply “holding” the separate LLCs is an added expense without much of a benefit. There’s no increased liability protection forming a parent company. Each LLC has to file annual reports and tax returns each year, so consolidating isn’t making that easier. There is possibly an extra layer of management, too (management of the subsidiary and management of the parent) that may be unnecessary.
For investment purposes, though, there may be some benefit. The subsidiary LLCs are assets on the parent company’s books. There are also some estate planning benefits. Instead of having the deceased’s ownership interest pass to the heirs for 12 different companies, the parent LLC’s interest could pass to the heirs and they would automatically own all the subsidiary LLCs.
With any business formation, it is important to contact a business planning attorney and a reputable CPA.
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