Consider Keeping Minute Book for your LLC

Posted on July 13, 2009 by Todd Goodwin

Similar to the required practices of maintaining a Corporation, it is a good idea to keep the important documents and minutes recording important transactions and happenings of an LLC in a minute book, to be maintained at the main business office and at the office of your attorney who can then remind you to annually file your annual report and update your minutes.  

Statutory requirements for Wisconsin LLC's are less than that of a Wisconsin corporation. However, it is important to note that pursuant to Wisconsin Statutes, a LLC is required to file an annual report, keep certain written records, including copies of the LLC's tax returns, records of the LLC members, the value of each member's contributions to the LLC, records of the times at which, or the events upon which, any additional contributions are agreed to be made by each member.

The minute book would be an appropriate place to keep much of this information. In addition, even though "formalities" such as annual meetings are not required of LLC's, following such formalities can be important to help protect the limited liability benefits provided by the LLC law in Wisconsin.   For example, maintaining an LLC minute book is one of the things you can do to help ensure that the "limited liability veil" is not pierced. When the courts "pierce the limited liability veil", they assign liability to individuals for actions that the limited liability company performed. It is not uncommon for plaintiffs to name individuals associated with a corporation or LLC as defendants in any litigation against a LLC or corporation.

Plaintiffs do this to make the court determine if the veil can be breached, in which case the individuals can be held personally responsible. If the limited liability veil is intact, the court will not be able to hold individuals responsible in legal actions against the LLC. If the individuals are held personally liable, it could cost them greatly.

Some of the questions that may be asked by the courts when deciding whether to "pierce the veil" are: (i) Did the owners commingle business and personal bank accounts? (ii) Was the business undercapitalized? (iii) Did the owners fail to procure reasonable amounts of insurance? (iv) When signing documents, executing checks, or executing other contracts, did the owners signify that they were signing on behalf of the LLC? (v) Do all of the business documents (invoices, checks, etc.) have the letters "LLC@ on them?"

Documenting major transactions (including all transactions between yourself and the LLC) in an up-to-date minute book, as well as holding and recording regular members meetings (even though said meetings are not required by state statutes) should help in the process of protecting your individual assets from actions commenced against the LLC.
 
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Your Rights Against Co-Guarantors in Wisconsin

Posted on March 8, 2009 by Todd Goodwin

Almost always, when a business seeks money from a lender to finance the enteprise or enters into a commercial lease for space to run the business operations, the individual business owners themselves will be required by the bank or the landlord to execute personal guarantees of the loan or lease as appropriate.  The owners often do so without really understanding not only what ramifications that personal guarantee can have on their own personal non-business related assets (and those consequences are extremely important to consider and truly require a separate article addressing just the issues involved therewith), but also they fail to understand what their rights are with respect to the other guarantors in case the loan or lease is defaulted on by the business entity.  Unfortunately, in today's current economic climate, this issue is coming up more often that anyone would like.

In Wisconsin, even if both or all of the guarantors did not sign the same guarantee, but signed separate guarantees of the same obligations, in the absence of a separate agreement governing the rights of contribution between co-guarantors, a right to contribution exests for each "co-guarantor" against all other co-guarantors if he or she has paid more than a fair share of the common obligation.

This "right of contribution" means that the co-guarantor that has paid more than his or her fair share of the underlying business obligations has a cause of action in court against the other co-guarantors.  The Wisconsin courts have held that this right is based upon the belief that those who insure or become a surety with another ought to share the results of a default. 

This also means that if more than one person guarantees the debts/obligations of the business their fair share will likely be held to be their proportional amount of such debt, not necessarily their proportional ownership in the underlying entity.  Therefore, if you are a minority shareholder about to personally guarantee a loan or lease of the business, make sure that you limit your exposure under such guaranty and rights of contribution to your ownership percentage in the business, or whatever other percentage you can agree upon with your fellow guarantors, and get it in writing. 

Otherwise, for example, if you are a 30% owner in a business with one other owner who owns the remaining 70%, and you both sign a personal guarantee of a business bank loan, you could be on the hook for 100% of the loan as between you and the bank and then would be limited to seeking only 50% of the loan as between you and your fellow guarantor.  Therefore, "your fair share" could be more than you expected.

Please seek the advice of counsel before entering into personal guarantees of significant obligations.

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Selecting the Right Entity to do Business

Posted on February 18, 2009 by Tom Schober

Once coupled to a development idea, every entrepreneur faces the challenge of deciding which business entity would best suit his or her needs.  While one would think that there is one right answer to this dilemma, in fact, the answer depends on a number of factors that are unique to each business, resulting in many different entities being the "right" choice, depending on the circumstances.

Factors affecting entity choice include:

  • Liability Protection
  • Owner Relations
  • Income Tax Consequnces
  • Other Tax Consequences
  • What Others are Doing
  • Cost

Considering these factors, the owner has the following choices:

  • Corporation (S-corp or C-corp)
  • Partnership
  • Sole Proprietorship
  • Limited Liability Company (LLC)
  • Limited Partnership (LP)
  • Limited Liability Partnership (LLP)
  • Others, such as Joint Venture, etc.

Perhaps the best way to compare all these choices is through a table which sets forth some of the most common advantages and disadvantages of each type of entity in comparison to the above factors:

 

Issue

LLC

LP

S Corp

C Corp

Sole Proprie-
torship

General Partner-
ship

LLP

Limited Liability

Yes, for members even if participated in management

Yes, but only for limited partners who do not take too active of a role in mgt. General partner has unlimited liability

Yes, for shareholders, even if participate in mgmt.

Yes, for shareholders, even if participate in mgmt.

No

No

Yes, however, certain limitations
to liability exist

Formation Requirements

File Articles of Organization with State with fee; pay annual fee and file annual report.

File Certificate of Limited Partnership with State with fee; pay annual fee and file annual report

File Articles of Incorporation with State with fee; pay annual fee and file annual report

File Articles of Incorporation with State with fee; pay annual fee and file annual report

None

None

File Certificate
of LLP with State and fee; pay annual fee and file annual report

Operational Formalities

After filing organizational papers with state, and paying annual fee and doing annual report there are few, but should have a written operating agreement.

After registering with State, just paying annual fee and filing annual report

Corporate Formalities must be observed (i.e. annual minutes, annual meetings, etc.). Should have written Shareholder Agreement.

Corporate Formalities must be observed (i.e. annual minutes, annual meetings, etc.). Should have written Shareholder Agreement.

None

None, but should have written partnership Agreement in place

After registering with State, just paying annual fee and filing annual report

Management

By all members unless manager appointed

By general partner; limited partners need to make sure not to be too involved or lose liability protection

By board of directors (who may be and often are shareholders)

By board of directors (who may be and often are shareholders)

By individual owner

By all partners

By all partners

Taxability of Income

No tax at entity level, if it qualifies as a nonpublicly traded partnership

No tax at entity level if it qualifies as a nonpublicly traded partnership

No tax at entity level, except on certain passive income, capital gains and built-in gains

Entity level tax imposed

Tax on owner

No entity level tax, tax on individual owners

No entity level tax

Levels of Federal Taxation

One

One

Generally One. However, if a former C Corp, may have built in gains or passive income issues causing additional taxation

Two

One

One

One

Number of Owners

Most states require only one. (if publicly traded may be considered a corp for tax purposes)

At least two. (if publicly traded may be considered a corp for tax purposes)

One to 100 with further rules;

No restrictions

One

At least two

At least two ((if publicly traded may be considered a corp for tax purposes)

Types of Owners

Any type

Any type

Only U.S. citizens, residents and certain U.S. trusts. No corps, LLCs or partnerships can be shareholders except for certain tax exempt charitable foundations, certain trusts, ESOPs and qualified S Corp subisidiaries

Any type

n/a

Any type

Any type

Classes of Ownership

Multiple classes allowed

Multiple classes allowed

Only one class of stock permitted, but can have different voting rights

Multiple classes allowed

One class

Multiple classes allowed

Multiple classes allowed

Taxation of Contributions of property to entity

Nontaxable unless a disguised sale; the LLC would be an investment company if incorporated, or if the member is relieved from debt

Nontaxable unless a disguised sale; the LLC would be an investment company if incorporated, or if the member is relieved from debt

Taxable, unless the investor meets the 80% control test of IRC Section 351 whereby the transfer would be nontaxable at that time unless for relief of debt

Taxable, unless the investor meets the 80% control test of IRC Section 351 whereby the transfer would be nontaxable at that time unless for relief of debt

Nontaxable

Nontaxable unless a disguised sale; the LLC would be an investment company if incorporated, or if the member is relieved from debt

Nontaxable unless a disguised sale; the LLC would be an investment company if incorporated, or if the member is relieved from debt

Special Allocations of Taxable Income or Loss

Yes

Yes

No

N/A

N/A

Yes

Yes

Deductibility of Losses

Member can deduct his/her share of LLC losses, but only to extend of his/her basis in the LLC ownership interest, including his/her share of the debt of LLC

Member can deduct his/her share of P’ship losses, but only to extend of his/her basis in the P’ship ownership interest, including his/her share of the debt of P’ship

Shareholders can deduct allocoable share of corp’s losses only to the extent of (i) the shareholder’s tax basis in the stock, which does not include any portion of the corp’s debt; or (ii) the amount of any shareholder loan to the corporation, subject to certain limitations.

Shareholders can not deduct any of corp’s losses, unless shareholder is another corporation filing a consolidated return

Generally no restrictions

Member can deduct his/her share of P’ship losses, but only to extend of his/her basis in the P’ship ownership interest, including his/her share of the debt of P’ship

Member can deduct his/her share of P’ship losses, but only to extend of his/her basis in the P’ship ownership interest, including his/her share of the debt of P’ship

Continuity of Life

Yes

Generally, NO, but continuity can be achieved by majority vote of general partners after an event of dissolution.

Yes

Yes.

N/A

Generally, NO. Any partner can trigger dissolution by withdrawal. Can create by vote of partners.

Generally, NO, but continuity can be achieved by majority vote of general partners after an event of dissolution.

Self Employment Tax on Distributive share of Income

Yes as to active members and any manager, No, as to non-active members or return of capital

Yes as to general partner; NO as to limited partners

No

N/A

Yes

Yes

Yes

Health Insurance Deduction

100%

100%

100%

100% if company reimburses taxpayer or their dependents for medical care expenses, even if discriminatory; not income to shareholder.

100%

100%

100%

Reasonable Compensation Issue

No

No

No, but can be challenged if comp is unreasonably low to avoid employment taxes

Yes

No

No

No

These are not all of the factors that should be taken into account and you should consult your legal and accounting advisors when making this decision.  Sometimes factors conflict, and a good advisory team can help point out which entity would do best in the long run.
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