Category: Limited Liability Company (LLC)

LLC formation, operation and other issues

Business Entities, Corporations, Limited Liability Company (LLC)

USING AN LLC FOR YOUR REAL ESTATE OR SMALL BUSINESS ACTIVITIES?

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IT’S SMART TO ENGAGE YOUR ESTATE PLANNING ATTORNEY FOR GUIDANCE.

That LLC (Limited Liability Company) recommended by your accountant to hold a real estate interest or to hold a small business that you have is a good idea. But the planning doesn’t end there. Absent thoughtful discussion with your estate planning attorney (before or after setting up the LLC) there can be unintended consquences later.

The accountant explained that the LLC can be set up to be a pass-through entity for tax purposes, while still creating the all-important layer of limited liability for LLC Members (sometimes referred to as the “corporate veil of limited liability”). That’s right. And these are the primary catalysts for using an LLC.

With real estate, the LLC can convert a real property interest when the deed is transferred to the LLC into a personal property interest consisting of the Member Interest (think of shares, but we usually use percentage of ownership, rather than shares).

What’s the advantage? Most of all, the ease of transfer to spouse or children, or later for sale to others. With the LLC and proper planning a deed transfer of the real estate later is no longer required to essentially transfer the beneficial interest at that time.

But we have to be thoughtful when considering the use of the LLC in conjunction with your estate planning. 

Will transfer the LLC Member Interest to your Living Trust? Will we use a form of Transfer On Death (TOD) registration so that the Member Interest goes to the surviving spouse or children or others immediately at death? Are there asset protection reasons to be considered that may drive a different approach? 

There are management issues, too, so that activities for the LLC can continue without interruption using Powers of Attorney during incapacity of the Member, or by using thoughtful management or ownership techniques (think Living Trust) after the Member has passed away.

An equally important issue arises when the LLC has multiple Members and the operating agreement that guides LLC ownership issues is not reviewed and modified by the Estate Planning Attorney. Frequently overlooked is this important concept: The new LLC Member who takes their interest by Will or by Trust distribution does not automatically become a Member for other than distributional purposes. Unless proper planning is done, the transferee of the deceased Member’s interest does not step into the LLC for all management/control purposes. 

We can imagine the surprise for the spouse or children of the original LLC Member who thought that they were going to step into the deceased Member’s role. We can also imagine the uncomfortable discussion between the spouse and children on the one hand and the accountant who recommended the LLC but didn’t recommend reaching out to the Estate Planning Attorney at the same time.

The thoughtful approach? Reach out to your Estate Planning Attorney to be sure to start the discussion. Don’t have one? Call or email to Attorney Marc Sherman: https://mshermanlaw.com/contact/

Business Entities, Limited Liability Company (LLC)

Will An LLC Unlock Benefits For Your Personal Business Activities?

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In most cases using a Limited Liability Company (LLC) is a thoughtful step, whether you are investing in your own business activities, real estate or side hustle.

Limited liability.

Important words, for sure. The owner of an LLC, called a Member, is shielded from personal liability for acts of the LLC and its other members. Creditors seeking to collect amounts owed by the LLC cannot pursue the personal assets (house, savings accounts, etc.) of the LLC Members to pay business debts.

There are exceptions, for sure. For example, if the Member signs a personal guaranty agreeing to pay the LLC’s obligation (such as a Lease guaranty), or if the Member commits a fraud in the course of dealings with another. And, in some instances, a federal or state statute may create a potentional personal liability for the Member (think about certain wage and hour responsibilities to employees or environmental liabilities under the environmental protection laws).

But in the main, the limited liability “umbrella” as it is called will shield the LLC Member in much the same way that the corporate veil of liability protection applies to a shareholder.

Flexible Management Structure.

A positive aspect of utilizing an LLC that is specific to this type of business entity is flexibility.

The LLC Members have a variety of options for the management structure and they can usually be quite creative. Control over LLC business operations ultimately rests with the Members. But the LLC Operating Agreement can be developed with the cooperation of your LLC Attorney to provide that the day-to-day Company activities will be controlled by a Manager.

Think of the Operating Agreement in the same way that the ByLaws of a corporation identify and define its business operations.

An LLC can be managed by Members or non-Members; by persons or by other business entities. Whether you have a few owners wanting to run the LLC’s business together, or many owners involved in the LLC operation, the flexibility to set up the LLC management is a plus.

This is why the LLC structure is sometimes used for family businesses, where the parents look to maintaining management control and provide financial participation to the children, as Members. Management control and transfer of Member Interests to the next generation can be used to assist in a variety of issues that are often unrelated to the LLC — from tax planning, estate planning, easing new family members into the business activities, and more.

Creative Approaches To Financing And Ownership, Including Ownership Transfer.

The ownership interest of an LLC Member (called the Member Interest) has two broad aspects, and they can be separated in full or in part. The Member’s financial rights (requirements to supply capital for operations and the right to receive distributions from the LLC activities, for example) are able to be separated from the second aspect of the Member’s Interest — the interest in management rights and participation in Company activities.

A Member’s financial rights, including the right to participate in profits and losses and to receive distributions can be designed to work as the Members decide and as they provide in the Operating Agreement. Will only one Member be providing the most substantial part of the financing for the business? Depending upon the circumstances, this Member may receive a repayment of some of their funding before other Members receive distributions. Perhaps, as well, this Member will not participate in making decisions about the day-to-day activities of the Company. The LLC should be tailored to the needs and realities of the business and owners.

A Member’s Interest in the LLC is personal property of the Member and the LLC Act in Illinois provides that those rights may be transferred without restriction.

But it is beneficial for the new LLC Members to know that the Operating Agreement may include restrictions on how a Member’s Interest may be transferred (sold or gifted) to another person. Some of the requirements under the LLC Act, like the transfer of an ownership interest, can be tweaked. So there can be a right of first refusal built into the LLC documentation, requiring the Member to first offer the ownership interest for sale to other Members before selling or gifting the Member Interest to another person. Likewise, the transferee of the Member’s Interest, depending upon the circumstances, may be restricted from participating in the LLC business activities and may only become a financial interest Member.

These concepts can be used to create important limitations in the event that a Member is sued or has to file for bankruptcy. We never hope that this comes to pass, but if it does and if the Members have planned properly, there will be useful limitations on what a creditor or bankruptcy trustee can do. And that helps the business to avoid an unfortunate situation.

Starting a business with others without using an LLC, by comparison, leaves the partners exposed in many ways: Each partner in a general partnership is personally liable for the debts of the partnership. Therefore, the law provides that the partner’s personal assets can indeed be reached by partnership creditors. Ouch! In the partnership scenario, each partner has the right to participate in the business operations, and the right to receive a ratable share of profits and losses (regardless whether the partner’s day-to-day participation may be more or less than other partners). And each partner has an equal right to control the partnership business by their vote.

We can see how the LLC protects the participant’s personal assets from LLC debts. And using the partnership example we can also see how the LLC Operating Agreement can be designed to refine and define each Member’s participation interest in the business. So information flow to some Members may be tailored to the specific circumstances, decision-making by some Members may be limited to significant decisions (such as a sale of the business or substantially all of the business assets, or the hiring of highly paid managers or officers), and participation may be expanded or limited in other ways. Flexibility is key.

Transparency Of Members’ Outside Interests & Activities.

The participation by Members can be specified in the Operating Agreement so that some of the Member’s own activities will be clearly described and transparent. Imagine that one Member is involved in other activities (for instance, a software developer client who was recently becoming involved with one of my client LLCs), and that Member wants to be certain that other participants in the LLC business do not have a claim to her separate development and app creation activities for others who are not clients of the LLC.

Another real life client example from our office real estate representation archives, is the use of the Operating Agreement to ensure that a Member’s outside activities were clearly her own. The Member, who is involved in other real estate development opportunities (she is an active real estate broker who frequently gets leads for new properties and new development opportunities) wanted the new LLC Operating Agreement to clearly state her understanding that she did not have to share all of her future opportunities and listings outside of the newly created real estate development with other Members or the LLC.

Pass-Through Taxation.

An LLC entity can be created so that it is effectively a disregarded entity for tax purposes, sometimes called a “pass-through” tax entity. This means that LLC gains, losses, income, deductions and credits can flow-through to the Members and be reported on their personal income tax returns. Taxes can therefore be paid at the Member’s individual tax rate. In this scenario, the LLC is not subject to being taxed at the corporate level like a regular “C” corporation.

Other Benefits.

There are other benefits of using an LLC, even if you are the only Member at the start. Talk with your LLC Attorney to understand how an LLC works, how it can benefit you and your business, and whether there are any downsides that you should consider. And be thoughtful and do your homework — LegalZoom and similar on-line LLC creation tools will not explore all of these considerations in the same way that an LLC Attorney will do.

Attorney Marc Sherman is available to review the creation and use of the LLC with you. Reach out to schedule a time to discuss: https://mshermanlaw.com/contact/

Business Entities, Corporations, Limited Liability Company (LLC)

The Illinois Business Annual Report Form: Part II [The LLC Report]

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The Attorney’s Role In Filing Your Limited Liability Company’s Illinois Annual Report

            THIS IS TIME-SENSITIVE! The State of Illinois Domestic Limited Liability Company Annual Report discussed here is issued once a year and it is important because it involves your business corporation’s continued good standing status in Illinois.

            Your Registered Agent has received Annual Report Form. It must be completed each year for your LLC. If it is not filed, there can be late-filing penalties, and eventually the LLC  may be involuntarily dissolved. The costs to seek reinstatement can be significant.

            When must the Annual Report be filed?

            The Annual Report must be filed by the deadline that appears on the upper left-hand corner of the form. 

            Can you file the Annual Report on your own? 

            Yes. You can reach out to your Attorney to assist you, or you may access the State of Illinois Business Services Division portal and submit the Annual Report on your own in most cases.

            If you would like Marc Sherman to file the Annual Report for your LLC, do the following:

            >         Review the Annual Report form that you received and confirm that all of the information is still accurate, including spelling of names, addresses, and other information. Inform your Attorney of any changes during the past year prior to the filing with the State of Illinois, including any changes to your LLC Members,  issuance of new Member Interests, and changes to the management of the LLC (have you decided to be a “manager-managed” LLC or a “member-managed” LLC or changed the Manager identity?).

            >         Notify us at least ten (10) days prior to the Annual Report filing deadline that you would like Marc Sherman to file the report on your behalf. 

           >          Provide us with the payment information for the attorney fees and out-of-pocket expenses (this will be provided to you with the Annual Report Form). We will process an e-check or a credit card payment through an Attorney-approved, secure on-line payment portal.  

            >         Confirm your agreement for Marc Sherman to sign the Annual Report form and submit the form on your behalf to the Illinois Secretary of State. 

           Important: Your Attorney is not responsible for late fees or other charges resulting from an absence of updated information or delay in notification or delay in payment from you. Your Attorney will NOT file the Annual Report if all of the steps are not taken.

            One of the important steps for LLC Members, to ensure the limited liability protection, is to be sure that the activities necessary to demonstrate that activities are consistent with the LLC  entity status are accomplished. Your Annual Report filing is one of those steps.

Contact Marc Sherman for further information or for assistance at (847) 674-8756 or by email to msherman@mshermanlaw.com.

Business Entities, Corporations, Limited Liability Company (LLC), Partnerships

Discuss Tax Issues For Your Entity Choice With Your Accountant [But Entity Formation And Planning Is Your Attorney’s Role]

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Your Accountant’s role in helping you select the appropriate business entity is key. Depending upon the nature of your business, the business relationships that you expect with partners, and other factors, the accounting and taxation considerations are going to be important for selecting the appropriate form of business entity.

However, we often see that some clients have engaged their Accountant to accomplish the business formation steps with the Secretary of State. Perhaps the client and Accountant were thinking that there is a fee savings. Perhaps the Accountant encouraged this additional step to be more involved in the entity setup. For many clients, it was not the best or the most cost-effective decision.

Focusing on the legal aspects of business creation and guiding you through the issues for consideration is an important role for your Attorney. When the Accountant begins the entity creation process, this implies that the Attorney’s involvement is a lesser concern or, worse, is not necessary. The client loses out.

The Attorney’s experience and training in a variety of legal areas provides an opportunity to consider much more than taxes and accounting elements relevant to you and your new business. Some examples bring home the point:

Considerations Of Potential Claims Can Guide Entity Choice.

What is likely to happen if someone tries to enforce a claim against the business? The business entity choice can provide limited liability in many instances. Still, there are some types of claims and business obligations that can be brought against owners or managers despite trying to protect themselves with the “corporate veil of limited liability.” Industry laws and regulations, some business laws involving labor and operations, and vendor and customer agreements and activities may provide unique considerations for your business model and your personal decisions.

Discussing your business entity choice and your business plan with your Attorney should take into consideration your personal assets (and obligations), and your Estate Planning that has been created or can be developed for you, and consideration for options that may become important if the business doesn’t go as planned.

For many entrepreneurs, the first time being involved with a significant claim in or out of court is an eye opener; particularly when the legal claim prompts the question: “How could this affect me personally and my family?” There are planning opportunities that are purposeful and useful. Considering those opportunities early and adapting to changes in the business in a timely manner are important.

Consideration Of Business Partner Activities And Disputes Can Guide Entity Choice.

The relationship between you and your business partners will frequently have many layers — even if your business partners are family or friends.

What are your expectations of the amount of time you will each give to the business? What expectations do you each have for investing funds for the business or for willingly participating in financing the business with loans or with a personal guaranty? What happens if your business partner can no longer provide their time, guidance and financing?

Are there consequences of having to unwind the business entity if things do not go as hoped, and how is that done? Should you be concerned if your business partner becomes disabled and can no longer participate or passes away and their interest in the business may go to their spouse or children?

The Attorney’s role? Discussing entity selection and its impact on business relationships. Creating a Shareholder’s Agreement or incorporating terms of future transfer of the business ownership interest in a Partnership Agreement or LLC Operating Agreement. Helping the business owners create and express their expectations.

Get Your Attorney Involved Early And Often.

From a tax and accounting standpoint, your Accountant will surely be adding value. Including your Attorney in the business planning early and often is equally and sometimes more valuable. Engaging your Attorney to assist with your business entity planning and business entity creation not only adds value, but also helps you make good decisions to preserve that value and to accomplish your business goals.

If you have questions about the cost of Attorney time to assist with business planning and business entity creation, you can reach out to Marc D. Sherman & Colleagues PC. If you have already set up your business entity, but you have not reviewed the considerations discussed here with an Attorney, we can also assist you and your business partners.

Business Entities, Contracts, Corporations, Limited Liability Company (LLC), Partnerships

How You Draft Your Business Contracts Is Important; Speak With Your Attorney

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A new decision from the Illinois Appellate Court reminds both attorneys and clients alike that attention to all aspects of business contract drafting should be a priority.

In the case of Nord v. Residential Alternatives of Illinois, Inc., 2023 IL App (4th) 220669, published on November 3, 2023, the Court was presented with a case asserting negligent nursing home care against Manor Court of Freeport Illinois. Naomi, a former resident of the nursing home passed away, and her Executor sought damages for the nursing home’s alleged treatment that the Executor insisted was the cause of or a contributing factor in Naomi’s death.

Manor Court moved to dismiss the case, directing the Judge’s attention to an arbitration agreement in the Manor Court contract materials. Businesses with potentially significant exposure to lawsuits will frequently include arbitration clauses in their contracts. These clauses require that claims be brought by disgruntled clients in an arbitration setting that is often less public and sometimes more favorable than state or federal court. There is a significant body of law outlining when and how those arbitration clauses can be enforced.

Considering Manor Court’s motion, the trial court held that the arbitration clause was unfair and unconscionable because it was buried in some 27 pages of documents included with the Manor Court resident admission materials. Also, reviewing the agreement to arbitrate, the court found that its terms essentially shifted all of the costs (potentially thousands of dollars) of the arbitration expenses to the resident. The trial court denied Manor Court’s motion to dismiss.

When the nursing home appealed, the Illinois Appellate Court considered another important aspect of the Resident Admission Agreement: Naomi’s Executor argued that all of the language of the resident contract should be read together, and here the agreement stated that the “term” of the contract terminates on the day that the resident is discharged from the facility. As a result, the resident contract, including the arbitration provision, terminated on the date of the resident’s death. The arbitration clause, Naomi’s Executor urged, was no longer enforceable. The Appellate Court agreed and the Court permitted the claim by Naomi’s Estate to continue in the Illinois court.

What should attorneys and business owners take away from the Court’s decision? 

Choose the language of your contracts carefully. The Appellate Court pointed to the fact that the arbitration clause did not state that it applied to claims filed after the termination of the resident contract. The Manor Court nursing home and its attorneys could have clarified the concept of termination, the definition of the “term” of the contract, and what provisions were intended by the parties to survive the conclusion of the contract — all important considerations that could have significant impact upon the enforcement of the contract. Eyes on the contract language can support the client’s enforcement of the contract later, both in and out of court.If you are concerned about the enforceability of your contracts, or are preparing for new or revised agreements for your business, Marc D. Sherman & Colleagues P.C. can help.