BusinessAdvantage News and savings for business and community groups PROTECTING WHAT’S

YOURS! page 4 Business Exit Strategies page 6 Farmer John Spotlight page 7 Practicing Mindfulness page 9

August 6 - 19, 2014 Volume 3 Number 8 FEATURE SPOTLIGHT PROTECTION FROM LEGAL LIABILITY

Two brothers spent three years building up the personal assets of the owners are better entity’s debts. That’s one of the reasons why a small specialty market in Northern protected against this business’ legal issue.” the formalities have to be followed. A red California. As partners, they shared in the There are other benefits to a flag is comingling personal and corporate profits and paid expenses through a dba corporation. Corporations can issue shares assets. You obviously should not pay your account. Things began to unravel when a to those interested in investing capital into personal bills from the corporate account.” customer slipped in the store and sued the business. Small businesses with There is also the issue of double them both personally seeking multiple partners may find incorporating taxation. “Corporations are taxed at the compensation for injuries. They realized advantageous since its partners can convert business entity level. The corporation pays too late that their partnership did not their ownership interest into shares of tax on its earnings before profit or loss is protect their personal assets from lawsuits stock. This way, a tangible value can be distributed to the owners,” explains Ken involving their business. placed on their portion of ownership. Boyd. “Normally, owners of a corporation While the idea of going solo or Corporations, however have their are shareholders. They receive business partnering with a friend or relative in a downside. A corporation is required to profits in the form of a dividend. That business venture can sound appealing, document its activities, have bylaws dividend is taxable on the shareholder’s small business owners sometimes outlining the corporation structure personal return.” Thus, the possibility of unknowingly expose themselves to personal including names of directors and officers, double taxation. liability by setting up their business as a sole hold regular shareholder meetings and proprietorship or partnership. take meeting minutes. The corporation Limited Liability Company (LLC) “I try to steer people away from using a formalities can be time consuming and A cross between a partnership and partnership. If the business gets sued, the costly, but necessary to show the corporation is a Limited Liability Company partners are jointly and separately liable,” corporation is legitimate. (LLC). “Partnerships have been losing says Gary Barr, an attorney with Alpert & “Just because one has formed a popularity since the late 1990s with the Barr, APLC in Encino, California. “Plaintiffs corporation does not guarantee that the introduction of LLCs,” says Benjamin. can pick and choose who they try to collect incorporator can protect personal assets “LLCs came about to replace partnerships.” from. If partners have a house, bank from attack, the primary purpose of A single member LLC is considered a accounts or other assets outside the incorporating. The business must keep its disregarded entity by the IRS and business they are subject to the debt. In corporate veil intact,” says Mark Mauriello, distributions are passed through on a PROTECTING W California, a community property state, the a small business owner and New York City personal tax return. For two or more pay of a partner’s spouse may also be area attorney. “You have to observe the members, LLCs issue K1s to LLC members levied. A partnership opens up almost formalities of the corporation. If you fail to who report the distribution on their everything to potential liability.” do so, someone who sues the company can individual tax return. An LLC acts like any get at your personal pocketbook.” other company entity when it comes to The Corporation Alternative “The owners, or shareholders of a paying employees. Employees are given An alternative to a partnership and one in corporation must maintain a formal legal W2s for tax reporting purposes. which owners are protected from business separation between their business and Just as important, an LLC offers the legal liability and debts is a corporation. personal finances to avoid a finding by a same owner liability protection as a From a legal standpoint, a corporation is court that the corporation is the alter ego of corporation. “This protection can be considered a separate entity from its owners. the owners or just a sham,” explains Elliott maintained with much less formality than “A corporation can offer the strongest Benjamin an attorney with Parker a corporation but nonetheless, the protection against legal liability to the Shumaker Mills LLP in Los Angeles. “The separation must still be preserved,” says owners,” says Ken Boyd, author of Cost personal liability of the owners for the Benjamin. “The company can simply have Accounting for Dummies. “That’s because entity’s debts is limited. People who sue a an operating agreement outlining how it the corporation is legally separate and corporation can try to ‘pierce the corporate will run. The agreement is optional distinct from the owners. Assume a veil’ by proving that the owners were (although most banks will require one to restaurant is incorporated. A customer is operating the business as if the entity did open a bank account), but it’s good injured in the restaurant and sues. Because not exist. If they are successful, the owners practice to have one. If you don’t have an the corporation is a separate legal entity, could be held personally liable for the operating agreement, your business will be

4 BusinessAdvantage August 6 - 19, 2014 Making the best decision to save your assets may depend on the legal entity you form for your business.

By Diane Rumbaugh

governed only by the state statute.” How popular are LLCs for small businesses? “Over the last five years, our firm has formed more than 100 LLCs but only a handful of corporations,” says Benjamin. “Corporations are becoming old school, especially for small businesses.”

Corporation or LLC? The decision on whether to form a corporation or LLC should not made solely by the business owners say experts. “I’m a WHAT’S YOURS firm believer that when a client needs to submit the Articles of Incorporation along directors meetings, and the compilation of make a decision between a corporation and with the statutory filing fee,” says corporate minutes have to be done every LLC, it should always be done in Mauriello. “However, LegalZoom or doing year. These all cost money. Small conjunction with the client’s attorney and it yourself may leave you, in the absence of businesses that are still operating as accountant,” says Barr. deeper investigation and comprehension of partnerships are living dangerously. “I Online sites such as LegalZoom.com future issues and concerns, not knowing always tell my clients not to engage in and MyCorporation.com offer to help what you do not know, and not knowing unprotected commerce, but if you are in a businesses set up an LLC or corporation. “I the filing requirements you face in the partnership you are doing exactly that,” think it is a huge mistake to use an online future—a potentially precarious condition.” says Mauriello. “We are the most litigious do‐it‐yourself program,” says Barr. “There country on the planet. Why not protect are too many decisions to be made, too Comparing Costs yourself?” many intricacies. A layperson is likely to do The fees to form a corporation or LLC are it in a fashion that could create problems at similar. “Going forward, a LLC will State Agencies a later point in time. generally have fewer expenses than a • Arizona Corporate Commission State websites provide forms, fee corporation,” says Barr. “Corporations have http://www.azcc.gov/ schedules and basic information. to file a tax return every year. LLCs usually • California Secretary of State “Formation is ultimately a very simple do not. LLCs have less accounting http://www.sos.ca.gov/ process—identify and fill out the necessary requirements from a tax‐reporting form, read the state’s basic requirements standpoint. Corporate formalities such as • Nevada Secretary of State for forming a corporation and disclose and annual meetings, shareholder and board of http://nvsos.gov/

August 6 - 19, 2014 BusinessAdvantage 5