Limited Liability: Statutory Exceptions Part 2

Many incorrectly believe that if you form a limited liability entity such as an LLC that there is no personal liability. This is untrue.

There are federal statutory and usually state statutory obligations. The relevant federal  statutes provide that so called “responsible parties” are personally liable for the non-payment of trust fund taxes. IRC Section 6672.

Trust fund taxes are the taxes withheld from employees paychecks to be paid to the federal government on behalf of the employee. These taxes include social security, medicare and income.

The responsible party is the person(s) who is responsible for collecting or paying over these taxes and who willfully fails to do so. The parties can include: officers or employees of a corporation and the equivalent persons in LLCs and other entities. Often these persons have to prove that they are not the person who has this responsibility.

This personal liability should it arise can not be erased through personal bankruptcy. That is these debts may never go away.

Many small business owners who are struggling  financially find this a convenient source of funds. This is the last source of funds that one should use.

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Limited Liability: What does it really mean? Part 1-Definitions

The term limited liability gets used often but without a full understanding of what it really means. Business people want it but perhaps are not really sure what it means. Most lawyers and other professionals think they know what it means too. But do they really know? This post and the ones that follow will examine this legal principle in some detail.

Whether you consult, Black’s Law Dictionary or the popular Wikipedia, you will find that it means that the owner/investor in the business entity can lose his/her investment but no more. In essence, the owner can lose what they invest no more/no less.

If the owner/investor is also active in the business, however, he/she is liable for his/her personal negligence. That is, if the investor/owner commits a tort within the scope of business he/she is responsible for it. Also, it is quite normal for investor/owners in small businesses to be a personal guarantor of business bank debts or other debts such as leases.

Thus, if the investor/owner  has not committed a tort nor personally guaranteed any debts, he/she will only lose his/her investment.

There may also be statutory responsiblities for certain debts that  will be discussed later.

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Joe Boucher New Book on Drafting LLC’s

As of September 1, 2011, Joe Boucher authored a book entitled: “Drafting LLC and Partnership Agreements” published by James Publishing. It focuses on Operating Agreements by specific industries. There are Operating Agreements for agriculture, manufacturing, construction, wholesale, retail, insurance, real estate developers, service companies. tech companies, medical device companies, computer software and tech hardware businesses.  It can be purchased through James Publishing at 3505 Cadillac Avenue, Suite H, Costa Mesa, CA 92626. It can be used in hard copy and digitally.

Your comments are welcome.

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Lawyers and Limited Liability Entities

Attached are the statistics for LLC’s in Wisconsin for December 31, 2010. 84% of the new entities formed in Wisconsin were LLC’s in 2010 with 10% as corporations. 5% were non-profits and the balance LP’s and LLPs. As of December 31, 2010, 59% of all entities now in Wisconsin were LLC’s with 38% corporations and the balance non-profits, LP’s and LLPs. Wis LLC Stats Dec 31, 2010

There are some excellent reference materials. The first is the Seminar for the ABA Tax Section from February 17,2010. It is entitled Impact of New Tax Rates of Entity Issues Moderated by Atty Tom Nichols of Meissner Tierney Fisher & Nichols of Milwaukee, Wisconsin. It shows what might happen to entity choice with what were proposed tax changes. Now that the existing tax cuts have been extended one must carefully review these materials. But there are several tax comparisons among entities that are still valid. Suggest anyone wanting to look into the tax reasons for one entity versus another review these materials.

There is an excellent checklist for forming LLC’s that was prepared by the ABA Section on LLCs, Partnerships aned Unincoporated Business Entities . It is available if you are a member of the ABA and join this section. I highly recommend it for serious students of business entities This checklist is outstanding.

On September 15, 2010, the State Bar of Wisconsin through its Inside Track published an article I co-authored with my colleauge Attorney Jennifer Knudson entitled “Choosing a limited liability entity: Which form is best for your law firm?. It highlights the various options for lawyer including LLC’s. Note the specific requirements for Wisconsin lawyers includes: registration with the state bar; purchasing a minimum level of malpractice insurance; and client notification.

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LLC’s More Reasons to Use Them

In both the publications page of the blog and the LLC Entity of Choice and Uses, I have listed an article I wrote and was published September 6, 2010 by Wisconsin Technology News. I have also posted the unabridged version of this article along with an August 21, 2010 article entitled ” The Eclipse of the Public Company” published by the Economist. All of these pieces give further credence to the use of LLC’s. Enjoy!!The Advantages of LLCs EBD Edits Long Version; The Eclipse of the Public Company Economist Aug 21 2010

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C Corporation-Be careful before choosing it

Note the description of the August 2010 Journal of Taxation article here in the Current Hot Topics post. In essence, if you choose a C Corporation you must stay one becuase the cost to switch is too high.

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LLC’s-Current Hot Topics

The Journal of Taxation is a respected and leading tax monthly  publication. In the August 2010 publication, a lead article is “Converting a C Corporation into an LLC: Quantifying the Tax Costs and Benefits, ” by John O. Everett, Cherie J. Hennig and William A. Raabe. In essence, the article concludes that although asset prices are lower now than for some time and the cost to liquidate is lower than before the tax cost still exceeds the future tax benefits. It states that this upfront cost outweighs the long term tax savings. It provides many examples in spreadsheet format. What this means is that the initial choice of a C corporation is problematic since there is a tax penalty at exit. Thus the initial choice of entity is crucial. As discussed elsewhere in this blog, an LLC is a flexible entity which most easily permits shifting from one form to another.

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Site Under Construction

I did not add anything of substance for some time. I am now trying to add information more frequently. If you have anything to add regarding LLC’s, please contact me.

I recently began this blog. I am in process of loading this site with useful information. Then, I intend to update it periodically. As of August 26, 2010 there is much work to do to get it to the point of initial completion.  Thank you for your patience. I will let  you know when  the initial work is completed.

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Interesting News Notes

In December 2010, I co-authored an article in the Wisconsin Lawyer entitled: E-Legacy: Estate Planning for Digital Assets. The exact cite for this article is in my bio. This article does not directly relate to LLC’s. It only applies indirectly in so far as LLC’s own digital assets and wish to control them.

This Friday, August 27, 2010, our law firm, Neider & Boucher, S.C., is sponsoring along with several other organizations including Capital Entrepreneurs, the first annual Forward Technology Conference at the UW Memorial Union. At 11 am in the Class of 24 Reception Room I will be on a panel along with local entrepreneur Matt Younkle as the chair and fellow panelist CPA/Partner Kevin Kelbel of Smith & Gestelend to discuss using LLC’s in start up companies. It should be an interesting discussion. All are welcome.

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Introducing LLCs Made Easy- Wisconsin Style

My name is Joseph W. Boucher. I have been practicing business law in Madison Wisconsin since 1978. During that time one of the most significant business legal changes has been the addition of LLC’s. My personal interest in them began when I was an editor of the National CPA exam during the mid-1980’s. A colleague shared the information on LLC’s which had then been approved in Colorado after starting in Wyoming in the late 1970’s. Having seen my father and father in law operate as sole proprietors because of the barriers they perceived to using either C or S corporations, I realized that LLC’s were a huge benefit to them and those like them. We formed a committee in Wisconsin in the early 1990’s, which I chaired, to draft Wisconsin’s law. Wisconsin’s law was passed in  1993 going into effect January 1, 1994. Starting with a small percentage, LLC’s are now over 80% of the new businesses formed in Wisconsin.

As part of the legislation, we saw to it that the state agency regulating business formations created an online process to form LLC’s. This process is very popular. Forming an LLC in Wisconsin, is easy and less expensive online. You can go to www.wdfi.org to begin.

For further discussion, please see LLC’s 101 on this blog.

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