Well, the answer is more like, “There’s reason for caution here.” Why?

Let me share with you a specific court case that sheds some light on my answer.

The Stone v. Hobby Decision
In Stone v. Frederick Hobby Associates II, LLC, the court found that the “instrumentality and identity rules” could be applied, under the facts of the case, to “pierce the corporate veil” of an LLC and hold the individual members personally liable. The plaintiffs, husband and wife, were both physicians. The plaintiffs had entered into a sales agreement with the defendant Connecticut LLC in December 1999 to purchase a residence in Greenwich, Connecticut, for $3,300,000. The home had been only partially completed at the time the sales agreement was executed. The sales agreement contained certain express warranties concerning the condition of the premises, and provided for the completion of certain “punch list” items within 60 days of date after the date of the agreement.

The plaintiffs subsequently filed a lawsuit, alleging defects in the subject property, and that the defendant had failed to complete all the punch-list work. The plaintiffs further alleged the defendant had, on or near the closing date for the purchase of the premises, transferred substantially all of its assets, including the proceeds from the sale of the subject property, to another LLC and to private individuals, including the sole members of the original LLC.

After a court hearing, the court granted the plaintiffs’ application for the statutory prejudgment remedy, and ordered disclosure of the assets of the defendant LLC members. In essence, the court “pierced the veil” of the defendant LLC.

The court further stated that “[t]he limitation on liability provided by incorporation or the formation of a limited liability company is not . . . without boundaries.”. The court held that the same rationale that applies in connection with piercing the corporate veil also applies in the case of an LLC. The court stated further that “[t]he instrumentality and identity rules may be applied in order to ‘pierce the corporate veil’ of a limited liability company.”

Turning to the facts of the case, the court found the defendants were the sole members of the LLC, and that the LLC office was located in a private home (although the LLC did not pay any rental for the space). The court also noted that the LLC never had any assets other than the residential property that the plaintiffs purchased from the LLC and which was now owned by the plaintiffs. Particular attention was paid to a statement made by an attorney for the defendant LLC members to the plaintiffs, “go ahead and sue us. There is no money in [the LLC]. Why do you think we set it up as an LLC in the first place?”

Conclusion
There is no apparent good reason why the “piercing the corporate veil” doctrine should not be applied to LLCs when the facts are comparable. Unless future case law suggests otherwise, the only prudent course for LLC owners to follow is to assume they will be held to the same compliance standards and practices as owners of corporations. 

Other lessons from this case: establish a clear and separate identity for the LLC apart from its constituent members (including a separate office, stationery, books, and assets); clearly designate the LLC as the entity entering into and executing business agreements and contracts intended to bind and benefit the LLC; and don’t “dare” potential plaintiffs sue by arguing that “the LLC doesn’t have any money or assets you can reach, and that’s the reason we formed it.”

If you are operating an LLC, I would strongly recommend you speak with the folks at Bulletproof Veil. Either visit their website, or give them a call at 1-888-716-3180.

Misclassification of Employees Under the FLSA
In general, the FLSA determines employers’ obligations to pay overtime wages to employees. It requires employers to pay employees one and one-half times their hourly rate for any hours worked above 40 hours in a work week. Employers cannot average hours worked by an employee over a two week period to avoid the requirements of the FLSA. The calculation is determined on a “work week by work week” basis.

Certain exemptions to the overtime requirement exist for some employees such as those classified as “executive,” “administrative,” “learned professional,” or “creative professional” employees.

In order to be exempt, these employees must be paid on a salary basis and make at least $455 per week ($23,660.00 annually). In addition, in order to be exempt, an “executive” employee must supervise the work of two or more full-time employees and have the power to hire, fire, or promote those employees.

An exempt “administrative” employee must conduct office or non-manual work directly related to the management or general business operation of the employer’s business with the ability to exercise independent discretion and judgment as to matters of significance. A financial controller is someone who would likely fit into this category.

A “learned professional” is someone whose primary duty is performing work requiring advance knowledge in a field of science or learning such as a doctor or dentist. Finally, a “creative professional” is someone whose primary duty is performing work requiring invention, imagination, originality or talent in a recognized artistic or creative field such music, writing, or graphic arts.

Employers make mistakes when they:

1. Simply refuse to pay overtime;
2. Think that a certain employee falls within the exemptions when he or she does not; 
3. Rely on an employee’s “waiver” of rights under the FLSA.

Employees cannot “waive” their rights to overtime pay under the FLSA. Employers who, either intentionally or unintentionally, fail to pay their employees overtime will be subject to audits, fines and penalties by the United States Department of Labor.

Cash v. Cycle Craft Co.
The importance of proper classification of employees was highlighted in a recent Circuit Court case. In Cash v. Cycle Craft Co., Inc., (2007 US App. LEXIS 26808 (1st Cir. 2007)), an employee, after being terminated by his employer, brought suit claiming that he was entitled to overtime compensation which he had not been paid while working.

The employee’s job title was “New Purchase/Customer Relations Manager” for a motorcycle shop. Among other responsibilities, the employee made sure that motorcycles being sold were property “outfitted and delivered” and communicated with customers to make sure that they were satisfied with the services they were receiving. If ordered parts had not been installed on a particular motorcycle, the employee would contact the manager of the service department to fix the problem.

The employee claimed that he would often work more than 40 hours a week and thus was entitled to overtime. The employer claimed that the employee was an “administrative” employee and therefore exempt from overtime requirements.

In agreeing with the employer’s classification, the Court noted that the employee was “engaged in something more than routine selling efforts focused simply on particular sales transactions. Rather he focused on improving customer service generally by coordinating with various departments to ensure that customers were satisfied with purchase.”

Most importantly, he “exercised discretion in reacting to the unique needs” of the employer’s customers as opposed to being “a skilled worker who operated within a strict set of rules.” Accordingly, the employee was within the “administrative employee” exception to the overtime requirements of the FLSA.

Neary v. Metropolitan Property & Casualty Insurance Co.
In contrast, in Neary v. Metropolitan Property and Casualty Insurance Co., (2007 U.S. Dist. LEXIS 72524 (D. Conn. 2007)), the US District Court of Connecticut found that an insurance adjuster did not qualify for the overtime exemption. The adjuster did not exercise independent discretion in performing his job, because “he merely entered numbers into his laptop computer and the software more or less did the work of valuing the claim and deciding whether the claim was to be characterized as a total loss” and the adjuster had no authority to “negotiate and bind the company financially”. Consequently, the insurance company was required to pay the adjuster overtime wages.

Of course, Bulletproof Veil can help you better understand the FLSA, as well as help you keep all of the rules related to your business and your employees. Visit (www.bulletproofveil.com) or call (1-888-716-3180) them today1
 

C Corps are separate taxable entities with their own tax rates and returns. S Corps pass through corporate income and deductions to owners’ individual income tax returns.

S Election Benefits vs. a C Corporation
Depending on your circumstances, an S Corp may be more tax-efficient. You may lower your income taxes and be able to sell the business in a more tax-efficient way.

C Corps pay their own taxes on any corporate income. Taxable distributions (dividends) are then made to owners. This creates a potentially costly “double tax” trap. Owners of S Corps avoid this trap. They can also potentially reduce their Social Security and Medicare taxes.

When a C Corp is sold, the corporation is taxed on the sale gain. The remaining proceeds become a taxable distribution to owners. This can consume much of the value of the business in taxes. By contrast, S Corps can structure a business sale with a much lower tax burden.

S Corporation Restrictions
Business owners who elect S Corp status accept some restrictions in how they own and operate their corporation:

1. No more than 100 shareholders;
2. Must be a domestic corporation;
3. Limited to one class of stock;
4. Cannot have any nonresident alien shareholders;
5. Must not be a bank, insurance company, or domestic international sales corporation (DISC);
6. Only allowable shareholders are individuals, estates, exempt organizations described in I.R.C. §401(a) or §501(c)(3), or certain trusts described in §1361(c)(2)(A).

Maintaining compliance with S Corp status is important. The IRS can disallow your S election and charge heavy tax penalties if you violate S rules.

Restrictions for Owners of 2%+ of Stock
Certain S Corp restrictions apply only to shareholder-employees with 2%+ ownership. These individuals have tax deductibility limits on treatment of fringe benefits. Violating these limitations can create IRS trouble for business owners. For 2%+ owner/employees, fringe benefits are included as taxable wages. While deductible to the S Corp, they increase the owner’s taxable income.

The fringe benefit rules only apply to “statutory fringe benefits”, not to stock options, qualified retirement plans, and nonqualified deferred compensation. Fringe benefits reported as wages under the >2%-owner rule include:

• Group term life insurance premiums
• Accident and health benefit plan insurance premiums
• Meals and lodging furnished by the employer

Other fringe benefits, like compensation for injuries, sickness, and dependent care assistance, aren’t considered wages. Note also that 2%+ shareholders usually can still deduct statutory fringe benefits using sole proprietorship rules. Check with your CPA for more information.

One of the most common S Corp pitfalls is when owners try to transfer shares of the S Corp into trusts or partnerships not allowed under S Corp restrictions. They also frequently see violations of tax deductibility rules. If you have made an S election for your corporation, you need to follow the rules that accompany this particular business form. You should also benefit from all the distinctive benefits of your S election.

Since a C Corp is the default corporate form, many businesses end up using it without considering whether it is best for their circumstances. If you are operating as a C Corp, Bulletproof Veil can walk you through an analysis to see whether making an S election is right for you. Regardless of which business form you choose, Bulletproof Veil can help you get the greatest benefit from it. Why not call them at 1-888-716-3180 and take advantage of their free 15-minute consultation to learn more about whether a “C” corp or an “S” corp is best for you?

For a number of privately held businesses, an S Corp has features that may make it more attractive than a C Corp. A flurry of 1996 tax law changes increased the income tax appeal of an S corporation. More recently, the American Jobs Creation Act and private letter rulings from the IRS have eased restrictions that apply to S Corps.

If you currently operate an S Corp, you need to stay abreast of changes in the law so you can remain compliant. Bulletproof Veil’s company monitoring and education services are the best way to do this. They intervene in many instances where business owners risk imperiling their S election due to compliance missteps.

If you are currently a C Corp, you may benefit from a BPV review to see if changing to S status would be more advantageous. One benefit could be lower income taxes.

A multitude of factors must be considered when selecting a business entity type. Bulletproof Veil can provide you with the guidance and information you need to make the right choice. Visit www.bulletproofveil.com for more information.
 

Technorati Tags: C corporation, incorporate, S corporation, Bulletproof Veil

To illustrate how this works, let me refer to a court case involving the estate of Theodore Thompson, who had been told by his financial advisor that he needed to protect his assets with family limited partnerships (FLPs). The advisor said the primary advantages were: “(1) lowering the taxable value of the estate, (2) maximizing the preservation of assets, (3) reducing income taxes by. . . provid[ing] medical, retirement, and ‘income splitting’ benefits for family members, and (4) facilitating family and charitable giving.” (Thompson, 84 T.C.M. at 376). In essence, the advisor said Theodore could convey his assets to an FLP, realize major tax and asset protection benefits, and still control the assets as before.

Thompson transferred $2.8M to two FLPs in return for partnership interests. His children also received partnership interests. Upon his death, Thompson’s estate tax return applied a 40% lack of control and lack of marketability discount to his FLP interests. The IRS disagreed and pursued over $700,000 in estate taxes.

The court sided with the IRS, noting that Thompson “parted with almost all of his wealth”. This “outright transfer of the vast bulk of [Thompson’s] assets… can only be explained if [Thompson] had at least an implied understanding that his children would agree to his requests for money from the assets he contributed to the partnerships, and . . . [would] do so for as long as he lived.” (Thompson, 84 T.C.M. at 386-87). This “implied understanding” violated Internal Revenue Code §2036(a)(1), concerning estate valuations for estate taxes.

An exception to the §2036 violation would exist if the asset transfer was a “bona fide sale for adequate and full consideration.” (26 U.S.C. §2036(a)). The court felt there were no transfers for consideration because the transactions “were not motivated by . . . legitimate business concerns.” (Thompson, 84 T.C.M. at 388)

Elements of a Bona Fide Sale
Looking at Thompson and other court rulings and IRS positions, you can determine what you must do to successfully sell assets from your estate. Here’s a short list of things to watch out for:

• “Arm’s length” transaction – does the transfer resemble what would happen if two strangers negotiated in a competitive market environment?
• “Good faith” transaction – did the respective parties actually part with the items being exchanged? Did the transferor lose “possession, enjoyment, or rights” to the transferred property? Or was the transaction merely feigned, with the original asset owner retaining overall control of the asset?
• Legitimate business concerns – does the business entity have legitimate business operations providing a substantive non-tax rationale for transferring assets? If not, courts may view the transfer as a mere “contrivance”.
• Full and adequate consideration – did the transfer involve enough of a trade-off in value? The IRS argues that if the value of assets in a business entity is discounted for estate tax purposes, there is no “full and adequate consideration” in the sale. However, the Fifth Circuit identified business benefits that could make up for a dollar value decrease, such as management expertise, security and preservation of assets, and avoidance of personal liability.
• Loss of the right to designate possession or enjoyment – even if an asset transfer is not shown to be for “adequate and full consideration”, it can still avoid I.R.C. § 2036(a) if the person who transfers the asset can be shown to have lost the right to designate the persons who would possess or enjoy the transferred property.

When evaluating an asset transfer, courts look at both the form and the substance of the transaction. “Form” questions usually look at whether a business entity, trust, or transaction was planned, set up, or documented correctly. “Substance” questions tend to look downstream, at whether subsequent operations of the business entity, trust, or transaction are proper. As in sports, follow-through on your asset transfers is essential.

Summary & Conclusion
If you transfer assets correctly, you can achieve significant liability and tax advantages. If you don’t, the penalties can be costly. The IRS has multiple strategies to go after gift and estate taxes. If you claim a sale, they’ll seek to call it a gift and charge gift taxes. If they can’t prove it was a gift, they’ll argue it was not a bona fide sale and try to assess estate taxes. If you follow the rules, you can withstand any challenge the IRS or a private litigant might raise.

Under current tax law, people with significant estates can count on the bulk of their wealth being consumed in taxes unless they address the issue through wealth and estate planning. While the federal estate tax is slated to disappear in 2010, it comes right back in 2011 unless Congress passes new tax laws. Also, more and more states are levying estate taxes at the state level in an effort to increase revenue. Even if the federal estate tax is abolished, you may still be subject to state estate taxes.

Using Bulletproof Veil is the best way to ensure that your asset transfers have substance. We help you maintain proper behaviors on an ongoing basis so your asset gifts or transfers will succeed. Visit BulletproofVeil.com for more information, or call and take advantage of the free 15-minute phone consultation available through their toll free number 1-888-716-3180.

The most important part of an employee handbook is the “At-Will Acknowledgment” that an employee signs when he or she receives the employee handbook. The ‘At-Will Acknowledgment” requires an employee to confirm that the employee is “at-will,” meaning that he or she can be fired by the employer for any reason (except reasons prohibited by federal anti-discrimination statutes such as race, sex, national origin, age, or disability).

Employee handbooks should be drafted in such a way as to give the employer as much flexibility as possible. Policies relating to the employer’s conduct should use discretionary language such as ‘the employer may” or “at the employer’s discretion.” Conversely, policies relating to the employee’s conduct should use mandatory language such as “the employee will” or “the employee must.”

Employee handbooks should, at the minimum, contain an “At-Will Acknowledgment,” Equal Employment Opportunity Statements confirming the employer’s commitment to not discriminate on the basis of one of the protected classes mentioned above, policies prohibiting sexual harassment and instructions to employees as to how they should report sexual harassment. It is also important to include drug and alcohol testing policies and policies regarding leaving under the Family and Medical Leave Act.

As with other aspects of corporate governance, it’s all about knowing the rules and having proper documentation in your Employee Handbook. Fortunately, BulletproofVeil.com is prepared with a unique Employee Handbook Audit service that will completely analyze and review your current handbook for errors, omissions, and other problems that could cause you legal headaches. Take advantage of their free 15-minute phone consultation to learn more about this valuable service by calling, 1-888-716-3180.

Technorati Tags: bulletproof veil, business protection, employe handbook, employee, employer, at-will agreement

1. Owners must maintain proper corporate behaviors;
2. Owners must maintain proper corporate documentation.

“Proper behaviors” means observing required governance actions, protocols, and formalities. “Proper documentation” means consistently maintaining records of proper behaviors so you have a “paper trail” providing evidence of ongoing corporate compliance.

“Commingling” is defined as the sharing or pooling of personal and business assets. This can occur in multiple ways between the owner and his/her company, or between multiple companies owned by the same individual(s). Most business owners have been guilty of commingling at some point. Ask yourself if you have ever done any of the following:

• Deposited corporate funds into your personal account or vice versa;
• Paid personal obligations with company funds, such as using a corporate credit card to buy groceries, or paid corporate obligations with personal funds (without formally transferring the funds to the business via a loan or capital contribution);
• Failed to set up separate bank accounts for your company;
• Failed to pay your company for services it rendered to you or failed to have the company pay for goods or services it received from you;
• Moved assets between a company and its owners for the main purpose of generating or accessing cash;
• Failed to properly account for costs shared between companies, and for those companies to pay their proportionate share of such costs from their own bank accounts;
• Failed to properly document loans made to or by the company and/or failure to comply with loan terms.

This is not a comprehensive list of all commingling actions, but it shows the broad range of activities that can create commingling problems for business owners. Bulletproof Veil’s research into veil piercing and corporate governance shows a significant pattern: in virtually every case where courts identified the factors leading to veil piercing, commingling of funds was mentioned first. Clearly, misuse of corporate funds via commingling is a lightning rod for the courts.

A business’ cash or credit can be a strong temptation and source of veil piercing problems to its owners. Commingling occurs when business owners use corporate money for personal use or vice versa. Unauthorized diversions of corporate funds happen when business owners knowingly or unknowingly perform transactions without regard to formal corporate procedures. Either offense can create serious personal liability problems for business owners.

Bulletproof Veil’s helps you avoid pitfalls associated with improper use of business assets.

In short, here are some of the problems that can arise if you violate asset gifting or asset sale rules:  

1.     Gifts that don’t qualify for the IRS gift tax exclusion and create a large tax liability;  

2.     Invalid gifts that return to the donor’s estate and create estate tax problems;  

3.     Asset sales that fail the “bona fide sale” test and go back into your taxable estate;   

4.     Asset gifts or sales that leave the original owner with unlimited liability for the asset.  

One recent gift tax court case, which has already become “a classic,” demonstrates the problem with encumbering gifts. In Hackl vs. Commissioner of Internal Revenue, Albert Hackl created an LLC and put about $12 million in assets into it. He and his wife then began transferring LLC ownership interests to their family members on an annual basis. The Hackls called these transfers gifts and sought to use the gift tax exclusion.

The IRS audited the Hackls and disallowed all their gift tax exclusions. In court, the IRS pointed out that Albert Hackl had structured his LLC so he retained a very high degree of control over it. Namely:

1.      Albert served for life as manager, or until resignation, removal, or incapacity;

2.      Albert had the power to appoint his own successor and also to dissolve the company;

3.      Albert controlled any financial distributions, and the children needed his approval to withdraw from the LLC or sell their membership units;

4.      If any family members transferred his or her membership units without Albert’s consent, the LLC rights of the recipient would be severely curtailed.

Albert had so encumbered his gifts that they became “future interests” – his family couldn’t really sell, use, or enjoy the assets as they saw fit until after he died. The gift tax penalty to the Hackls was about $400,000. Bulletproof Veil can evaluate your planned or completed asset sale to see if you have any problems, and resolve any that may exist. Visit the BulletproofVeil.com website, or simply call 1-888-716-3180 for a free, 15-minute consultation. 

1. Q: Are you actively auditing all my business entities (corporations, LLCs, limited partnerships) on an ongoing basis to ensure they are in compliance with all federal and state corporate governance requirements that are applicable to my situation?

   A: When you establish a business entity, there are a number of corporate compliance protocols and requirements that you must maintain under the law. Failure to do so can result in significant personal liability should you or your business entity be challenged by the IRS, Dept. of Labor, or a private legal dispute. There are over 100 different reasons related to federal/state statutes and case law that courts might use to “pierce your corporate veil” and hold you personally liable. Examples include undercapitalization, commingling, overlap, personal guarantees, non-functioning officers and directors, among others. Unless you understand the compliance rules and continually monitor your obedience to them, you could be at risk.

2. Q: Since we have been working together, how many shareholder, director, officer, or special corporate meetings have you organized and facilitated for me? Do you know and abide by the meeting requirements for my specific entities?

   A: The law requires business owners to regularly hold formal corporate meetings in order to conduct the affairs of the business. Certain meetings must be held periodically; other special meetings are required whenever the business is contemplating a major business decision (e.g. investment, restructuring, purchase or sale). These meetings must be held in compliance with corporate law requirements as well as rules defined in your corporate bylaws, partnership agreement, or operating agreement. Different rules apply depending upon the type of entity in question. If you are not properly conducting and documenting all required corporate meetings, your business entity will not withstand a challenge.  

3. Q: Are you maintaining a complete corporate record of all documents for my business entities and continually updating and archiving them to reflect all of my ongoing compliance actions? Have you created, distributed, and archived the required documentation to support my corporate meetings? (e.g. notices, proxies, waivers, agendas, resolutions, minutes)

   A: A business entity is simply a set of documents that have been created, some of which are registered with the Secretary of State. Examples of critical business documents include Articles of Incorporation, Bylaws, Stock Certificates and Ledger, Redemption Agreements, and so on. The full set of documents forms the “corporate record”. Together, they include important rules that govern the business and its owners. Part of ongoing corporate compliance involves reviewing and updating documents in the corporate record so they are complete, accurate, and current. Additionally, all business documents must be reviewed to determine if they are congruent and operate to the same end, rather than conflicting with each other in any way. It is also particularly important to maintain comprehensive records of corporate meetings. These include notices of scheduled meetings, resolutions that document decisions made in the meetings, and minutes that record important meeting events. Business owners who fail to maintain proper corporate records lack the critical proof they will need to successfully withstand legal scrutiny.

4. Q: Are you tracking corporate governance milestones and deadlines on my behalf and informing me when actions need to be taken, describing what actions are necessary, and following up to ensure tasks are completed on a timely basis?

   A: Business owners have a recurring set of tasks and actions that they must perform in order to maintain proper corporate governance. A variety of meetings, filings, registrations, and document creation must consistently occur to keep your business entity compliant. Unless each milestone and deadline is understood, tracked, completed, and recorded, the business entity falls out of compliance, creating significant liability problems for the owners.

5. Q: Are you analyzing both my business documentation and my behaviors as a business owner to help me avoid any corporate compliance mistakes of omission or commission?

   A: Proper corporate governance includes maintaining both proper behaviors and proper documentation. There are certain actions that business owners must consistently perform, and others that they must consistently avoid. Following company bylaws and maintaining proper documentation of loans are two examples of actions that must be performed. Commingling of personal and corporate funds and overlap of assets between different business entities are two examples of actions that must be avoided. Reviewing both behavior and documentation to avoid mistakes of both omission and commission is essential for proper corporate governance.

6. Q: Are you advising me on the statutory and common law reasons for veil piercing at the federal and state level, and recommending specific strategies to help me avoid them?

   A: Courts rely on both statutory law (laws created by legislatures) and common law (precedents established by the courts) at the federal and state levels to determine whether or not to pierce corporate veils and hold business owners personally responsible. Examples of statutory reasons for veil piercing include ERISA violations, Medicare disputes, labor disputes, and tax violations. Examples of common law arguments for veil piercing include Alter Ego, Misrepresentation, Instrumentality, and Domination & Control. Understanding the differences behind the various veil piercing arguments is necessary to devise an effective compliance strategy. If you don’t know what the rules are, you won’t be able to keep them.  

In my opinion, there is only one source for complete and comprehensive corporate governance. That source is Bulletproof Veil where all your privately held business entities can be protected.  
 

The upshot of the whole thing is simply this, threats against the corporate veil are increasing all the time. If you’re not paying attention to even the smallest details of corporate governance you’re at risk. The information & the service provided by Bulletproof Veil is worth investigating further.