Types of business plans are not all created equal. There are benefits and disadvantages to different types of planning. There is no one size fits all. The best plans are customized to the person or business. The business owner needs to understand the business unit as a whole, how the business currently functions, and how the business should function based on certain contingencies. Starting a business is a complicated undertaking. Business owners should get an attorney who can understand their business quickly to help them organize and prepare the necessary paperwork.
1. “I am starting a new business, what do I need to do to protect myself and my other assets?”
Answer: What to do depends on the industry, the type of business enterprise, the risks inherent to the business activities, and how the business operates. There is no one-size-fits-all strategy, and asset protection strategy should change with the growth of the business. Successful businesses have a strong understanding of their liability exposures, and plan and resources to respond to those liabilities.
Practical Example: Carl’sis starting two businesses, a snow cone shack and business consulting firm for other snow cone shack owners. For tax purposes and other reasons but mainly because Carl will employ teenagers to make the snow cones, Carl forms an LLC for his snow cone shack business. Carl’s consulting firm might also be organized as an LLC, but because Carl’s primary liability in consulting will be from his personal advice and services, an LLC will provide very little limited liability protection. Carl should consult with an attorney and other professionals on the other things he should and must do when starting his businesses.
2. “Both I and my business are getting sued; my LLC will protect my other assets from my business liabilities, right?”
Answer: Maybe. It depends on the source/cause of the liability for which the person and the business are being sued. This is one area where, online, free services, or inexperienced legal professionals commonly fall short in explaining.
Practical Example: Brian is a business owner, and he gets in a car accident while out on business that his business and personal insurance does not cover. Brian was also out on business, so it was proper to name his business as a party-at-fault in the lawsuit. If a court rules that his business is fully or partially responsible, all of the business’ assets will be available to the plaintiff to recover against for the losses. Brian was also driving the car, so it was proper to name him personally as a party-at-fault in the lawsuit. If a court rules the he is fully or partially responsible, Brian’s personal assets, which include the business, will be available to the plaintiff to recover against for their losses.
3. “My cousin got an S-Corp for his business and it saved him some money on taxes. I have an LLC and also want to save on taxes, how do I change my LLC to an S-Corp?”
Answer: Several years ago, the IRS adopted regulations that made it more flexible for LLCs to elect different tax structures. The benefits and disadvantages of that choice, like the S-Corp election, should be considered with an experienced tax professional. Re-organizing an LLC into a Corporation may be unnecessary, assuming the business qualifies for the tax election.
Practical Example: Joe Average has an HVAC business organized as an LLC. Jimmy Bookkeeper knows that many of his HVAC clients are S-Corps and save taxes. Jimmy tells Joe to get an S-Corp to save on his taxes. Excited about saving taxes next year, Joe spends several thousand dollars to shut down his LLC and create a new corporation. Joe calls business lawyer to draft the corporate bylaws, and explains what he has done. Lawyer informs Joe that he could have kept his LLC and made an S-Corp tax election. Joe then asks CPA about the S-Corp election, and CPA states that although it can be elected, Joe needs a lot more revenue in his business to benefit from an S-Corp election. Joe fires Jimmy Bookkeeper.
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Practice Tip: It is easy for clients to take for granted how complex their personal and business affairs are. If a key player is removed from the game, what usually happens? Trusts, LLCs and Estates are no different. Life insurance or corporate insurance funds help, but money only goes so far and it is only as effective as the person directing the grand plan. Throwing money at a bad plan usually amplifies harm. Complex life situations or complex asset structure dictate a detailed planning need.
*Watch for big “life”events. Birth, marriage, death, divorce&disability, trigger these kinds of questions.
*The information provided in this article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, does not create an attorney-client relationship, and you should not act upon it without seeking independent legal counsel.