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How To Transfer Real Estate [4 Requirements]

Transcript:

Hey everyone welcome to V-FAQ’s I’m attorney Joe Collier and today we’re going to talk about how to transfer real estate. Now, to transfer real estate there are four things that you want to either do or have. And I’m going to briefly go over those four things, and then talk about which ones you need when you’re transferring real estate to a relative, a friend and a stranger. So the first thing that you need is a deed. That’s going to be either a quitclaim deed or a general warranty deed I go over the different types of deeds in another video. But that is what actually transfers the property that is the title to the property. It must be notarized witnessed and then recorded the county recorders office. The next thing that you will need is the seller’s disclosure forms, those forms, just disclose any known defects or risks or hazards in the house that the seller knows of. The third thing is a purchase contract. And that one’s pretty obvious just determines the term the price the closing date, all that good stuff. And then lastly a title search that relates to the deed in the chain of title who owned it previously, and that will show you what title you have to the property, if there are any easements or any other. I guess rights to the property. So when you’re selling or transferring to a relative. All you need is the deed. The law, excludes relatives from the requirement to do seller’s disclosures, so if they’re a relative you’re not required to do those disclosures. And if you’re doing a transfer by deed, mostly by quitclaim, then you don’t need a purchase contract, you will need a purchase contract, if you’re working with a lender because they always require one. But if it’s just a transfer, it’s just the deed. Now if you’re transferring to a friend. You need the deed. And you have to have those sellers disclosures, since they’re not a relative the law doesn’t say your friends don’t have to do so, therefore, you need the deed and you needed to seller’s disclosures. Now if you’re buying or selling from someone that you don’t trust or that’s not a friend or a relative. You will need the deed, the sellers disclosures, and you pretty much need the purchase contract it’s not legally required to transfer the property. But if you don’t know them or trust them. Then you need, or just contract. And at that point, you also want the title search. Typically, you’re not going to transfer by quitclaim deed. If it’s a stranger. And so you want to do a title search to see what encumbrances are on the property. And what kind of title you’re actually acquiring it and you will also want to make sure that that person owns the property that they’re claiming to sell. And that’s what the title search does. So, if you want more information on the deeds go check out my other videos, and that’s all for today, I’ll see you next time.

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V-FAQ’s: How to start a 501(c)3 charity [4 Steps]

Transcript:

Hey, everyone, welcome to V-FAQ’s. I’m attorney Joe Collier and today we’re going to talk about how to start a tax exempt company. A lot of you know this as a 501(c)3 and to get started, you have to have one of three eligible entities, that’s a trust and unregistered association or corporation. We’re going to start with a corporation because a trust is very inefficient, it’s a hassle to use, you have to title assets in a certain way, and no one wants to deal with that. Non-registered association have to follow the same steps as a corporation, but you don’t get the benefit of registration. So we’re not going to talk about that.

Now, in a previous video, I discussed how to start a corporation. So watch that video, write down those steps. And we’re going to make two changes to that. The first change is in your Articles of Incorporation, there’s a purpose clause, there’s also going to be a purpose clause on your bylaws. The purpose clause, normally, I would advise you to write down any lawful purpose that allows you to do any business conduct without being pinned down to one industry or activity.

Now, for a tax exempt company, you have to pin yourself down you have to write exclusively for the purpose of whatever activity you’re pursuing under 501(c)3. There are three activities that will grant you tax exemption: charity, religion, and education. So if you’re going to start a charity, you write exclusively for charitable conduct permitted by 501(c)3, that’s your purpose clause in your articles and your bylaws. Now, the second change is that shareholders are going to be called members. That’s because there’s a rule saying there can be no private interest holders in your corporation. A tax exempt company cannot be for the private financial interest of individuals. So that means that there’s no shareholders and that people working for the corporation have to be paid reasonably. If you’re going to be the founder and elect yourself to be on the board of directors, you can pay yourself, but it has to be within reason.

Now, those are the two changes that you make to receive your tax exemption status you have to apply on the IRS website. For the tax exemption, you also have to apply on your state’s tax department’s website, or submit their paper filing, if that’s what they require. That way you receive both your federal and your state tax exemption. Now, you have to do this at least at the IRS level, within 27 months of starting your company. Otherwise, you have to start a new company because it’s only eligible for the first 27 months. To do that filing, you’re going to need your basic business startup documents, bylaws articles of incorporation the certificate of registration you receive. When the state approves your filing, and financial statements for the past however long you’ve been open. Even if these financial statements are blank, you still have to submit them it’s part of the application package. Also, for at least the IRS, there’s going to be a filing fee of usually $275.

So you submit all that information with your filing fee. It comes back you’re approved for tax exemption, you just have to maintain your purpose and your financial interest where owners or directors are not being paid ridiculous amounts of money. And again, there’s no owners because there’s no shareholders. There are only people that run the company and that’s going to be the board of directors. So that’s it, you’ve got your tax exempt status. Thank you for watching, and I’ll see you next time.

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How To Start a 501(c)3 Charity

Starting a charity or tax-exempt company can be a daunting task. I am going to break it down into two simple, easily digestible steps so that you know exactly how to run a new tax-exempt company.

Starting up

To start the company you must first have one of the following entities: (1) a corporation, (2) a trust, or (3) an unregistered association. The purpose of this entity must be exclusively for the tax-exempt purpose. Under 501©3, the purposes are charity, religion, and education. Then, you must apply for tax-exempt status with the IRS. With the application you will submit your startup documents, such as articles of organization, EIN, and bylaws or trust documents. You will also submit financial statements for the last 3 years. Most companies must apply for tax-exempt status by the end of the 27th month from the date they are legally formed. You must also include the filing fee which is typically $275 for a 501©3 company. Once you submit the application, you can operate the company as a tax-exempt company until the IRS processes the application and approves or denies the application.

Maintaining Status

Maintaining your tax-exempt status is all about tax filings, wages, and conduct. The 501©3 tax return is IRS form 990. If your company receives business income unrelated to the exempt purpose, you must also file form 990-T. If you have any employees, you will have to pay employment taxes.

You can pay employees and yourself as long as the payments are reasonable. The rule is that you cannot pay unreasonable or excessive salaries because the charity must not be used for a private interest. You can, however, pay those who do work for the charity including yourself.

Conduct simply refers to doing what your company is intended to do. If your company is a charity, only do charitable work through the company. Don’t start selling products or consulting for profit.

By following these guidelines you can start and maintain a tax-exempt company in no time. If you want help starting your 501©3 company, contact me using the information below. I start companies for clients and am happy to help you start yours.

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V-FAQ’s: How To Start A Corporation [4 Requirements]

V-FAQ's

“Video” answers to “Frequently Asked Questions”

Transcript:

Hey everyone, welcome to V-FAQ’s I’m attorney Joe Collier and today we’re going to talk about how to start a corporation. Now we’re going to break that down into four requirements, the first being the articles of incorporation. That’s the filing that you make on the Secretary of State’s website. That’s the business registration.

The second step is corporate bylaws, that’s going to be a large document that governs the entire structure of the business how everyone is elected board of directors officers, how everyone is terminated. It’s the most important document that you’re going to have in your corporation. I suggest you have a lawyer at least review your template, if not draft it for you.

Now the third requirement is an initial shareholder meeting. The meeting is for signing the bylaws and electing the board of directors. You have to have documentation of the meeting, even if it’s just you you can start a corporation with just one person, but they have to satisfy all of these requirements, including the meetings, so you want to document your meetings. You want to have an itinerary of what happens, you want to have anyone who attends sign in. And then at this initial meeting for shareholders, you have to, again, sign the bylaws, and elect the board of directors, even if it’s you electing yourself.

Now the fourth requirement is an initial board of directors meeting. That’s where the board of directors is going to elect the officers. So those are the Ohio requirements, a corporation has to have a board of directors and they have to have three officers. the Secretary, the treasurer and presidents. Now, one person can satisfy more than one position. So if one person started the corporation, they will elect themselves to the Board of Directors, they would elect themselves to be the president, treasurer, and secretary. After you’ve met all of these requirements, you’re going to have to hold annual shareholder meetings and annual Board of Directors meetings. Again, if it’s just one person maybe two you just have this standard document that records your activities during these meetings and you sign it. And that’s all the requirements. Thank you for watching and I’ll see you next time.

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V-FAQ’s: How To Start A Business [4 Steps]

V-FAQ'S

“Video” answers to “Frequently Asked Questions”

Transcript:

Hey, everyone, welcome to V-FAQ’s. I’m attorney Joe Collier and today we’re going to talk about what you need to start a business. Now what you need to start a business is yes, registering your business name. But a lot of people stop there, that’s not enough that you will not get any legal protection from this business entity that you haven’t created yet, because you’ve only registered a name. What you need is to create that entity, it’s got to be different than yourself, which means it needs to have its own tax ID number that’s called an EIN, you go to the IRS website to get that. Then you take that tax ID number and you get it bank accounts, you cannot be commingling your money and the business money in the same accounts.

Now, the next thing you want to do is you want to get a document that creates rules for your company, that nine times out of 10 you’re starting an LLC. So that document is called an operating agreement. Why do you need that? Why do you need rules, even if it’s just one person that owns the company, even if it’s just you on your own? You need that because when someone sue’s your company, they are going to try to sue you as well. So all of these things create a separate entity, it makes it look like it’s not just you acting under a name, it’s a separate entity, it creates the separation is called a corporate veil. And part of that corporate veil is documentation that creates rules for the company. When someone tries to pierce that corporate veil, and get your personal assets, your home your income from actual wages, that corporate veil is pierced by five factors. One of the factors is the existence of a document that creates rules that govern the business. And another factor is whether or not your business follows those rules. So two out of five of the factors are completely dependent on the existence of an operating agreement. If you don’t have that, you’re probably going to be personally liable. And there was really no point starting the business at all. So make sure you get that operating agreement. Get your name registered Secretary of State country I am with the IRS, create your bank accounts, get your rules and follow the rules of the operating agreement that you set. That’s all for this video. Thank you for watching, and I’ll see you next time.

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Do I Need A Realtor To Transfer Property?

The worst part of buying and selling property is the out-of-pocket expenses. After agreeing to take on hundreds of thousands of dollars of debt and pay the majority of your income every month to a mortgage, you still get stuck with a few thousand dollars in closing costs, a down payment, and the realtor commission. When we decide to purchase a house, we’ve already wrapped our heads around the debt and monthly mortgage payment. Our biggest barriers become these expenses. There are a few ways to reduce closing costs such as certain grants, financing options, and splitting the fees with the buyer or seller. You can even reduce the down payment with certain loan programs or by having a great credit profile. But what about these realtor commissions . . . How much are they and how do we reduce them?

A realtor is paid a commission of a percentage of the total sales price. The percentage is typically 5-6%. For property that’s selling for $250,000, the commission comes out to $12,500 – $15,000. That’s a huge expense to pay out-of-pocket. The good news is that it can be reduced significantly.

A realtor handles the marketing of a house, finding either prospective buyers or sellers, showing the house, and filling out the paperwork. To reduce the charges of a realtor, you have to be willing to do some of these jobs yourself. However, most people don’t know how to legally transfer property and don’t have quality forms to protect their legal interests. These are tasks that you still want someone to help you with. The good news is that you don’t need a realtor for these. A real estate lawyer can help you legally transfer property and provide quality forms to protect your interests.

How do you replace a realtor for the other tasks? If you are a seller, you may already know someone who is interested in buying your property. If not, you can post information about the property on online sites like Zillow. Buyers can find prospective houses for sale on these sites as well. To conduct a walkthrough, simply make a list of all the rooms in your house and then list all of the important features in those rooms. These features include appliances, electrical work, flooring, and aesthetics. When you finish your list, you can use it as the itinerary for your walkthrough with the prospect.

There are three major benefits of choosing a real estate agent over a realtor. First, you don’t pay a commission. This means that you don’t have that massive out-of-pocket expense to deal with. Second, the real estate attorney will likely charge flat fees. This lets you know exactly what you are paying at all times, and allows you to keep any profits made from negotiating a better price. Third, you will build a relationship with an attorney. This is useful for many different reasons including future property transactions or a future issue with the property you are currently buying or selling.

Conclusion

You can receive these benefits today and easily get in touch with a real estate attorney. Simply contact me today. I am here to help.

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4 Reasons Why You Need An Operating Agreement

Operating agreements are the governing documents of an LLC. They set rules for various issues a business faces during its life cycle. LLCs have become the most popular business structure, making it more important than ever for business owners to understand what operating agreements are and to take advantage of their value. Although operating agreements are optional, every LLC should have them and here are 4 reasons why:

1. Predetermines Business & Legal Issues

Businesses face many issues during their life cycle, such as:

  • Adding new owners/investors
  • Daily operations and management
  • Fundamental changes
  • Transferring/selling shares
  • Owners leaving by choice
  • Death or incapacity of owners
  • Dissolving/selling the business

The operating agreement can determine how these issues are handled before they occur. This predetermination is valuable because it brings peace of mind to the owners that a specific outcome is certain to result. The agreement also ensures that the certain result will be easier and faster to achieve because a dispute over an issue properly addressed in the agreement will not go far. For those who need some financial incentive, the operating agreement saves more money than it costs every time a dispute is deterred or disposed of by the agreement. Lawsuits that go to trial can easily cost over $10,000 so a good operating agreement can save you this amount for each lawsuit that it prevents.

2. Bolsters the Corporate Veil

The corporate veil is the legal protection given by a business to its owners. That legal protection does not exist automatically just because you own a business. There is a five factor test to determine if your corporate veil can be “pierced”, meaning that a person can hold you personally liable for something you did through your business. Two of these factors are the existence of governing documents and following the rules and procedures set by the governing documents. Since 40% of the test revolves around the governing documents, it is highly beneficial to actually have these documents (aka an operating agreement for LLC’s).

3. Creates a Will for the Business

A will determines which one of your inheritors gets certain parts of your estate when you die. The operating agreement can do this for a business and its owners. The agreement does this by determining how shares can be transferred. This includes whether shares can be transferred to inheritors upon the death of an owner, whether an owner can unilaterally decide to sell their shares to a third party, and whether the company has the right to buy back any shares that owners seek to transfer. These provisions allow the owners to know where the company shares are going and prevent unwanted people from becoming owners.

4. Gives Solo Owners More Control

Solo owners can write an operating agreement before others join the company and start fighting for their own interests. If you plan on growing your business, you may have to part ways with some equity. It is also extremely common for a spouse to want to share ownership of a business with their SO. If you are a solo owner and think you might not need an operating agreement, consider this example:

You make distributions from your business to yourself in the amount of your personal tax bill and keep the rest in the business to grow it. You then take on an investor to grow your business even more. He splits his equity with his wife because they own everything together. Then, your spouse wants to split your shares. Now, you have to convince 3 people that you should require distributions in at least the amount of everyone’s tax bill. If you fail, you won’t have any money to pay your taxes.

By writing the operating agreement before any of these new owners join, you can require the tax distributions and the new owners will be forced to accept that fact when they take their shares.

Conclusion

An operating agreement is a valuable document that every LLC should have. If you have any questions or if you are ready to improve your LLC with an operating agreement, contact me today.

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How-to Do Your Taxes In Columbus, Ohio

Different taxes that apply to a Columbus citizen:

Any person who makes money is potentially liable for 4 different phases of income tax. These phases are federal, state, school district, and city taxes. I will be using the example of a Columbus, Ohio citizen to explain these taxes but if you do not live in Columbus simply follow the steps laid out in this post and find your city/school district rates using the tools and methods below.

What if I don’t need to file tax returns?

If you don’t need to file a tax return because your income falls below the required amount, you will need to file them anyway if you have a job. If you were hired and signed the tax form (W-9) without making any changes, then your employer is withholding your taxes. This essentially means that you are pre paying your estimated taxes. If you do not make enough money to pay taxes at all, then you need to get that money back. Thus, if you owe money in taxes or if you have a job you need to file your tax returns.

Where to start

I’ve already mentioned that the order you should fill out your returns in is federal, state, school district, then city. This is because the state and school district returns use the same instructions form in Ohio and these tax returns depend on numbers from other returns. Now you need to know specifically what forms to fill out for each return and what forms you need to send with your return to validate it. I am not including how to fill out the forms in detail because each form has a matching “instructions” form that explains how to fill out the return.

Federal income

Your federal income tax return is the first phase because the other tax returns use your calculations from your federal return. In the past there were 3 different 1040 forms: 1040EZ, 1040A, and 1040. This year, the IRS has revised their approach by replacing these forms with a single 1040 form and multiple supplemental forms called schedules. The cheat sheet at the bottom of this post will help you determine which forms you need and will also link you to these forms. The general idea for the federal returns in the past was if you earned all your money through wages as an employee, then you could use the 1040EZ, which is the shortest and simplest form. If you earned any money through investments, rental properties, or you are not paid through an employer (self-employed), then you would need to fill out a 1040A and a Schedule C. If you own a business, partnership, or an LLC then you are self-employed and needed to fill out the 1040A/Schedule C. If you own shares or interest in a business that you do not manage or provide work for, then money received from that interest is a dividend and also requires the 1040A/Schedule C. The idea today is similar; the easy form and the extensive form have been removed and everyone fills out a basic 1040 form. Now, the different ways of earning income and certain types of deductions are reflected in the 6 schedules. The link in the cheat sheet takes you to the list of schedules and each schedule has a description of when to use it. For now, just know that Schedule 1 seems to be for alternative income such as investments and unemployment income, and Schedule 4 seems to be similar to the old Schedule C for reporting self-employment.

Now that you know the forms you need to fill out, you need paperwork to show your earnings and expenses. The idea here is that if you are going to write a number on your tax return, you need a piece of paper that shows how you got that number. For wages earned from employment, your employer is required by law to send you a W-2 form that looks like this:

Make a copy of this form, submit the copy with your tax return, and keep the original. If you lost your W-2 or threw it away, you can request another copy from your employer.

For dividend income, the business should send you a form showing what you received in payment throughout the year. Again, make a copy and submit it with your return while keeping the original.

Self-employment income is a little different to show because you are not given a form by someone else showing your income. Instead, you either need to use receipts from your transactions, pictures of checks that you deposited, or pictures of bank statements. If you have the receipts or pictures of checks, use them. If you are reading this for the first time right before filing your tax returns, you probably did not save an entire year’s worth of receipts from your business. In that case, it is going to be annoying but you will have to go back through your bank statements online for every month of the previous year, identify any transaction that is either you receiving money from self-employment or you paying an expense related to self-employment, adding up these numbers to fill out the tax return, and taking a screenshot of the monthly statements to submit with your return.

Now you have all the supporting paperwork and the numbers you need to fill out those tax return forms from before. Simply follow the instructions form step by step and your federal return will be completed. Don’t send it off yet though. Keep all your returns until they are all completed, and send them off together.

State income tax

With a completed federal return, we move on to the state return. Go to this site to find the Ohio state tax return. This form is a bit simpler than the federal form and is mainly based on 1 number from the federal form: federal adjusted gross income on line 6 of the federal return. The state return also has instructions to help you fill it out. A significant difference here is that you do not include income earned in other states from wages or self-employment. So if you worked or did business in another state during the year, the money earned in that state will be taken out of your taxable income that was calculated on the federal return. If you are filing a joint return and your spouse earned money out of state, the principle is the same.

You may be wondering if you earned money in another state, say Michigan, and you don’t claim that money in your Ohio taxes, do you have to file a Michigan state tax return? The answer is that you don’t have to file the return if you did not meet their income requirement for filing, but you may want to anyway. Every tax return for individuals at the federal and state levels are not required to be filed if you didn’t earn enough money. For example, an individual filing alone that earns less than $10,000 does not need to file a federal tax return. The principle is the same for state returns, but the numbers may vary. So if Michigan requires everyone who earns $10,000 to file a tax return and you only earned $5,000 in that state, you are not required to fill out the Michigan tax return. The reason why you might want to is due to employment tax with holdings. If you worked for an employer in Michigan and they withheld money from your wages that were allocated to state taxes, then you can get that money back by filing the state tax return. If you earned self-employment income in Michigan, then you probably did not withhold money from yourself and give it to the Michigan state government so there would be no benefit in filing the return.

School district tax

The next phase of taxes is the school district tax. This tax has a similar exception to the city income tax; if you do not own the property in the school district you reside in, you do not owe school district taxes. If you do own the property, you will need to pay the district taxes. Each school district has been assigned a code and has an independent tax rate. Use this form for the return, and click here to find your school district information (on page 40). You will need to put the code for your district on your return and use your Ohio income tax base, found on the state return (Ohio IT 1040 line 3 – line 4) to complete this form.

City income tax

City tax returns are independent of previous returns so they do not require the use of figures from those returns. Find your city’s department of taxation and fill out the form according to the instructions. The Columbus city tax return form can be found here. If you’re like me, you may not live in the city you work in and you may be wondering if all those Columbus tax withholdings are coming back into your pockets when you fill out the Columbus city return. The unfortunate answer is no, those withholdings were proper and you will not be seeing that money again. Although you may not live in the city, if you work there you are accepting the benefit of government such as the use of their roads and emergency response teams like police and EMTs. Because you’ve accepted these benefits by working there, the city can tax you.

At this point you may be thinking that you have to pay taxes both where you live and where you work, and you’re probably not happy about it. However, there is good news for renters. People who do not own property in a city do not need to pay the city tax because they do not “live” in the city. This means that if you rent a place in Dublin and work in Columbus, you only pay the Columbus city taxes.

Once you have completed this final tax form you have completed your tax returns for the year. You can now submit them all and await your refund checks. I would advise submitting your forms online because you will get your refunds much faster than if you submit by mail. If you made it this far and don’t want to go through this process yourself or want to make sure you are saving as much money as possible, contact a Columbus Tax Attorney and we will do your taxes for you. We charge less than the average tax preparer; that way you know you are making the most out of your money this tax season.

Cheat Sheet

1040
Instructions for 1040
Schedule Descriptions
Schedule 1
Schedule 2
Schedule 3
Schedule 4
Schedule 5
Schedule 6
Ohio online tax filing
Ohio state tax return for individuals
Ohio School district tax return
Instructions for Ohio state and school district tax returns
-The City of Columbus tax return code for the school district is 2503

Tool to find tax rates and your location for tax purposes

-First time filers must file manually. After your first year, you can use online here. Contact a Columbus Tax Preparer

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Why You Need a Lawyer to Start a Business: Part II

There are 2 reasons to start a business: (1) saving money on taxes from income producing activity, and (2) protecting your personal assets from creditor liability. This post concerns protecting your personal assets from creditor liability.

You protect your personal assets by doing business under a separate legal entity. Certain business formations are separate legal entities from their owners and creditors can only pursue the assets of the legal entity that is liable on the debt. Separate legal entities include partnerships, corporations, and LLCs. A sole proprietorship is not a legal entity and does not offer liability protection. An LLC is the easiest to form and offers owners the choice of what type of legal entity they would like the LLC to be taxed as.

Doing business under a separate legal entity would be the only necessary step for asset protection if it wasn’t for piercing the corporate veil. The corporate veil is liability shield for the owners created by the separate entity. Piercing the veil refers to creditors being able to pursue the personal assets of the business owners for the business’ debts. This may seem illogical considering that the business entity is formed for the liability protection, but it actually makes sense considering how the veil is pierced.

The underlying theme behind piercing the veil is that the owner(s) of the business use the business as if it is not a separate entity. The theory used to pierce the veil is that the business is the alter ego of the owners. Basically, a court will look at about 5 factors to determine whether the business is really an alter ego, and if they find that it is then the owners are personally liable to the creditors. These factors are (1) the failure to observe corporate formalities, (2) shareholders holding themselves out as personally liable for certain corporate obligations, (3) diversion of funds or other property of the company for personal use, (4) absence of corporate records, and (5) the fact that the corporation was a mere facade for the operations of the dominant shareholders.

All of this means that protecting your personal assets while doing business is a 2 step process: (1) create a separate legal entity, and (2) use the 5 factors to show that your business is not your alter ego. The good news is that the factors are not complicated and can be complied with efficiently. For starters, factors (1) and (4) rely on company records. Company records include the bylaws, which are the rules governing the company. Failing to draft bylaws creates an absence of company records (factor 4) and a company cannot follow company formalities if it never creates company formalities by drafting bylaws. Therefore, drafting and following the bylaws can protect against 2 of the 5 factors, which is 40% of the goal.

The discussion of bylaws deserves a special note to single member LLC’s. A single member LLC offers no tax advantage because it will be treated as a “disregarded entity” for tax purposes and will receive the tax status of a sole proprietorship. This means that the only reason a person would create a single member LLC is for the liability protection. A person would not normally draft a document of rules for only themselves to abide by. However, if bylaws affect 40% of the factors used to pierce the veil, then a single member LLC needs to draft bylaws or they could have their personal assets at risk. Without the liability protection, a single member LLC is completely worthless so even these companies need bylaws.

As far as the other factors are concerned, the discussion is simple. To prevent holding yourself out as personally liable for company obligations don’t sign deals with your personal name, don’t guarantee that any payments or contracts will be completed using your personal name, and don’t tell people any of these things even if they aren’t in writing. To prevent diversion of funds, don’t use the company card to pay for your personal expenses, and don’t use your personal account to pay for company expenses. Transfer money from one account to the other before using it in the proper account, and write a receipt for the transaction. All transfers from your account to the business are loans, and all transfers from the business account to yours are either distributions of income related to your ownership or they are repayments of the loans you have been recording. The final factor mainly concerns using the business for fraud, so don’t run away with people’s money and you should be good.

Between the tax consequences of the business structure, the liability consequences of company actions, and the drafting of bylaws, there is a lot to consider when starting or operating a new business. If you have any questions along the way, or just want the process to go a bit smoother, please contact me. I’m here to help.

part1

Why You Need a Lawyer to Start a Business: Part I

There are 2 reasons to start a business: (1) saving money on taxes from income producing activity, and (2) protecting your personal assets from creditor liability. This post concerns saving money on taxes.

Saving money on taxes 

All money earned is subject to a Social Security tax and a Medicare tax. The Social Security tax is 12.4% and the Medicare tax is 2.9%. When you are doing business on your own, you pay this entire tax on your own. This is known self-employment tax. However, when you do business under certain types of business structures, the taxes are split equally between an employer and employee. This is known as payroll tax. 

The owners of sole proprietorships are considered self-employed and will be liable for the full 15.3% self employment tax. Owners of corporations and partnerships are not considered self employed, except for general partners of partnerships. A general partner is a partner that is personally liable for partnership debts and is not commonly found anymore, especially since the introduction of LLCs. Corporations and partnerships pay payroll taxes on the wages of employees. Thus, owners of these entities can pay Social Security and Medicare taxes at half the rate of a sole proprietor. This, however, does not consider the corporate tax structure. A corporation is taxed twice; once as money is earned by the corporation, and again as the money is distributed to individuals whom file income tax returns. This means that, while a corporation may save money on Social Security and Medicare taxes, the total tax bill may be higher. 

This analysis poses a problem for sole proprietors. Is a sole proprietor doomed to pay 7.65% more in taxes than a partnership? Not necessarily, under the business structure of an LLC. 

An LLC is special in that it can choose how it wants to be taxed. In theory, a single member LLC could elect to be taxed as a partnership and lower its tax bill by 7.65% immediately. However, there is a rule that a single member LLC can only elect corporate tax status, or else the tax status of the LLC will be disregarded and the IRS will consider it a sole proprietorship. Fortunately, there are two types of corporations: the C corporation and the S corporation. The C corporation is the double-taxed entity discussed previously that pays taxes at the corporate level and the shareholder level. An S corporation is a special type of corporation that is also a pass through entity. S corporations have special formation rules, but can be owned by a single member. Remember, however, that the business of the single member is still an LLC whom is simply electing to be taxed as an S corporation, so they will not have to comply with some of the formation rules and complexities. They simply have to file an S corporation tax return in addition to their individual tax return.

There is 1 catch: the member of the S corporation must pay himself a “reasonable salary”. Remember that payroll taxes are the same as self-employment taxes, just split between the employer and employee. Income treated as a shareholder distribution avoids this, but wages trigger the payroll tax. Since you will be both the employer and the employee in this situation, you will be paying the self employment tax on whatever amount a “reasonable salary” is. Some people find it difficult to come up with a figure for what a reasonable salary is. I would simply search employment sites such as Glassdoor and Indeed to see what other people in that industry, job title, and experience are being paid. The lowest number you find and the highest number create the range, and obviously you should choose the lower number to reduce your taxes. Also, save or print a screenshot of the salary and information you are basing your reasonable salary on, in case of an audit. 

With the knowledge of what a reasonable salary is, you will know at what point your taxes are going to be reduced. If your reasonable salary is $50,000 then all income you earn up to that amount is subject to self-employment tax rates. All income earned above that amount can be treated as a distribution and will not be subject to the 15.3% tax. 

Choosing your business structure has a major effect on how much your earnings will be reduced by taxes. Deciding on the right structure, complying with formalities to create your business entity, and filling out a tax return that you’ve never seen before can add unnecessary stress to your already busy schedule. If you have any questions along the way, or just want to lighten your work load, please contact me. I’m here to help.