What are the basic out of pocket costs to Register an LLC in Wisconsin?

Posted on February 1, 2011 by Todd Goodwin

 

If you exclude attorneys fees for services (such as preparing an operating agreement and determining what additional filings, permits, etc. that the business will need to get up and running), the most basic cost to register or “organize” an LLC currently in Wisconsin online is $130.00 paid to the Wisconsin Department of Financial Institutions, which simply involves the registration of the LLC’s Articles of Organization. There may be additional non-attorney fee costs as well, such as if the LLC will be making sales subject to Wisconsin Sales/Use Tax which would require the current $20.00 fee to submit an Application for Business Tax Registration to the Wisconsin Department of Revenue whereby the entity applies for a Seller’s Permit and/or it’s Wisconsin Employment Identification Number among other reasons.   It is recommended that you also draft an operating agreement which among other things sets forth the percentage ownership interests among the members (owners) of the LLC as well as their capital contributions and how distributions will be made. In addition, in most cases the LLC should obtain a Federal Tax Identification Number from the IRS which can be done online at no cost.

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Beware of "Capital Calls" in LLC Operating Agreements

Posted on December 30, 2010 by Todd Goodwin

One item often overlooked by parties while negotiating or deciding to enter into an Operating Agreement for a limited liability company or (“LLC”) with more than one member is what is often times referred to as a “capital call.” Buried deep in what can be voluminous pages of “legalese” contained in many LLC operating agreements, may lurk a requirement that members of the LLC contribute additional capital to the LLC - that is, more than their original investment . This can be triggered by majority vote, or, if so provided in the Agreement, by demand of a single Managing Member if he or she is given such power. 

Many investors in an LLC assume that once they make their initial capital contribution, they will not be required to contribute more, even if the underlying business is performing badly, unless they specifically agree to do so, or if “everyone” agrees to do so. Many times quite the opposite is true, and the unsuspecting investor could be facing some rather negative consequences.

For example, if a “capital call” provision exists and is exercised by the majority members or by the managing member and one of the members cannot afford to put in the required capital, such member could face expulsion from the LLC, dilution of their ownership percentage in the LLC, super-dilution of their ownership percentage to the point where their percentage is effectively worthless, or other negative consequences. (There can be other consequences, but these are some of the typical ones seen in these types of agreements)

Capital calls in and of themselves are not “bad” or disadvantageous, and can and do serve an important purpose for the LLC and its members, but the members negotiating their operating agreement should be aware of such provisions and discuss fully with the other members when and on what terms capital calls can be made, if at all.  For more information, please contact us.
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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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Think First Before Getting Into an LLC

Posted on July 9, 2009 by Tom Schober

Think first before getting into an LLC. While the LLC has become the entity of choice, there are plenty of reasons to avoid them and consider the use of other forms within which to operate. This article will expose and arm you with the 10 best reasons for you to consider avoiding LLC’s.

  1. LLC's are not unique. When LLC’s first came into vogue about 20 years ago, everyone – attorneys, accountants, bankers, insurance experts – all said that LLC’s would change the business world. In those 20 years I have attended dozens of business seminars related to the type of entity within which to do business. I’ve asked the experts what you can do with an LLC that you couldn’t have done with the already existing entities, such as an S corporation. I have never gotten a good answer

  1. (continued) to that question, because there is no good answer. Anything you can do with an LLC you can also do with another entity.
  2. People don’t even know what LLC stands for. I’ve heard experts, even attorneys and accountants refer to limited liability companies as "limited liability corporations." Aren’t all corporations "limited liability?" LLC stand for "limited liability company," by the way.
  3. LLC terminology is not standard. Owners are "members." The LLC can be "member managed" or "manager managed." An owner can "dissociate" from an LLC. LLC’s don’t have bylaws. The relationship between LLC members is set by state statute that varies greatly from state to state. This creates a formula for mistakes to easily be made when experts advising the LLC use incorrect terminology, thinking the others understand them, when in reality, they are each understanding something different.
  4. People think LLC’s don’t have to keep records. Since when is it ever good business practice not to keep good records. This thinking just gets people into trouble.
  5. Non-attorneys set up many of the LLC’s, often making mistakes in the setup. Many states have made LLC setup something that can easily be done online. While that seems to make sense, many untrained people have set up their own LLC’s, thinking that’s all they have to do to enter the business world, not even considering the numerous licenses and permits that may be necessary as well as the way owners relate to each other.
  6. The 80-20 rule applies to LLC’s in an unusual way. At the point that LLC’s made up 20% of all business enterprises, LLC’s comprised 80% of the business problems I ran into. This came about for a number of reasons, including inconsistent terminology, lack of record keeping and insufficient legal history to rely upon.
  7. There is insufficient legal history relating to LLC’s. While LLC’s have been around some 20 years, most states have had the corporate form since their inception, going back 200 years or more. Since case law makes up a huge amount of the law related to how an entity operates or how the entity’s owners relate to each other, the huge amount of corporate law definitely gives that type of entity a vast edge over the LLC form.
  8. You can’t merge an LLC and a corporation without tax problems. Most successful existing entities are corporations. Growth often occurs by way of merger. So if you are likely to some day consider a merger, it helps to be of the same type of entity that you may merge with.
  9. There are no standard LLC documents. Whereas corporations have pretty standard articles and bylaws, no parallel exists for LLC’s. Nearly every LLC has unique articles of organization and very few have consistent operating agreements. That means that each time a problem comes up, the experts will have to read and understand all the documents relating to the LLC, since there is very little boilerplate.
  10. LLC's cost more to maintain than other business entities. While LLC’s may have a very small entry cost, the cost to deal with ongoing operational problems and the fact that they have non-standard documents requires attorneys to spend much more time maintaining LLC clients than other business clients. While that’s good news for attorneys, it is very bad news for owners of LLC’s.

While LLC's have their place in business, think about the above 10 points before you jump into your next LLC!
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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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