News & Events

COMPARING LLCs TO PARTNERSHIPS

Wednesday, June 15th, 2011

San Diego Business Lawyer and Contracts Attorney providing a first class “one stop shop” for all your business, contract, will, tax and estate planning legal needs. Contact us today: (619) 400-4942.

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Phone: (619) 400-4942
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The most important distinction between LLCs and general partnerships is that the partners of a general partnership are personally liable for the debts of the general partnership whereas the members of an LLC generally have limited liability. Partners acting in the ordinary course of business may bind the general partnership. However, a member who is not acting as a manager has no power to bind a manager managed LLC in transactions with third parties. Finally, a general partner in a general partnership may cause a dissolution of the general partnership when no definite term or particular undertaking is specified. A member of an LLC does not have any such right.

The striking distinction between LLCs and limited partnerships is that while every limited partnership must have at least one general partner who is potentially liable for all the obligations of the partnership, all members of an LLC have limited liability regardless of their participation in the management of the business. While this problem can usually be resolved through the use of a corporate general partner, this increases the organizational complexity and administrative and compliance costs. Moreover, despite changes in the California limited partnership statute that permit greater participation in management by limited partners, limited partners may jeopardize their limited liability status if they actively participate in the business of the limited partnership.

Contact Kehr Law today
Phone: (619) 400-4942
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Email: dan@kehrlaw.com

Tags: Business, Corporate Formations, Corporate Forms, Corporations, Kehr, Kehr Law, Law, Lawyer, Limited Liability Company, LLC, Partnerships, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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DISADVANTAGES OF LLC’S IN RELATION TO CORPORATIONS

Thursday, June 9th, 2011

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Phone: (619) 400-4942
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Email: dan@kehrlaw.com

While LLCs enjoy significant advantages over corporations, there are some disadvantages that need to be considered. For example, members of an LLC will not enjoy all the advantages of the numerous fringe benefits available to shareholder-employees of a C corporation. For example, members of an LLC: may not receive tax free life insurance and medical benefits; may not participate in a cafeteria plan established for the LLC’s employees; and will find significant restrictions with respect to qualified retirement plans (e.g., inability to borrow from the retirement plan). Members of an LLC may also be subject to higher marginal tax rates than corresponding corporate tax rates.

In addition, until LLCs become more widely known and used, there may be practical inconveniences in using an LLC rather than a corporation for certain transactions or business activities. For example, banks are not accustomed to dealing with LLCs, and such unfamiliarity may delay or prevent the LLC from obtaining loans. There are likely to be many situations in which business promoters and investors will prefer the more formal structure and certainty of corporations over the relative uncertainty of LLCs.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Corporate Formations, Corporate Forms, Corporations, Kehr, Kehr Law, Law, Lawyer, Limited Liability Company, LLC, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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ADVANTAGES OF LLC’S OVER CORPORATE FORMS

Thursday, May 12th, 2011

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Phone: (619) 400-4942
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Email: dan@kehrlaw.com

The fact that an LLC can be treated as a partnership for tax purposes provides it with several tax advantages over C and S corporations. Of course, because it is treated as a partnership for tax purposes, an LLC will not be subject to double taxation and the members are free to allocate income and loss under the rules applicable to partnerships. Also, an LLC that is taxed as a partnership does not generally recognize gain or loss upon liquidation. Only the members may be subject to tax on distributions received from the LLC’s liquidation. In addition, a C corporation may have a portion of the salary deduction for an officer-shareholder disallowed as unreasonable compensation. Any disallowed portion would typically be treated for tax purposes as a dividend rather than as salary. In contrast, a LLC member’s income is either taxed as a guaranteed payment or as the member’s distributive share of LLC income.

LLCs are often compared to S corporations, since both offer limited liability and pass-through taxation. In general, LLCs offer a great deal of flexibility in relation to S corporations. For example, while S corporations are subject to certain restrictions on the number and type of shareholders they may have, as well as the number and variety of ownership interests that may be issued, LLC’s are not subject to any of these restrictions. In addition, S corporations may not hold more than 80% of the total voting power and total value of another corporation’s stock. LLCs are not subject to this restriction. Furthermore, unlike LLCs, S corporations are not permitted to specially allocate income, gain, deduction, or loss among their shareholders or make disproportionate distributions to their shareholders. Finally, S corporations are subject to certain penalty taxes for built-in gains and excessive passive income that do not apply to LLCs.

On the nontax side, LLCs are attractive in that they are not subject to the same formalities as corporations, such as the requirements for calling and conducting meetings, and annually electing directors and officers. The rights, duties, privileges, and preferences of an LLC’s members are usually defined in the operating agreement, which is not a publicly filed document. While amendments to the articles of incorporation of a corporation that may adversely affect one or more classes of stock generally require approval of at least a majority of all shareholders, amendments to an LLC’s operating agreement may generally be done without a separate class vote unless specifically required in the operating agreement.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

S CORPORATIONS – ADVANTAGES AND DISADVANTAGES

Friday, May 6th, 2011

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Phone: (619) 400-4942
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S corporation status may be available in certain situations, depending on the number and identity of the shareholders and their willingness to accept a relatively simple capital structure. Conducting business in the form of an S corporation avoids the problem of double taxation, since an S corporation is treated as a conduit entity in much the same way as partnerships. Therefore, an S corporation combines many of the best features of both a partnership and a corporation from a tax perspective. Limited liability is achieved through the corporate form, and the double tax of the corporate form is eliminated.

Operating the business in the form of an S corporation can be beneficial for family owned businesses. S corporations are ideal for spreading income among inactive family members, while avoiding many of the tax, legal, and operating problems that are experienced by family partnerships. The S corporation may also be a good choice during the early years of the entity when losses are expected. The losses may be used by shareholders to offset their other income, subject to the passive loss limitation imposed on inactive members.

S corporations also have certain disadvantages. The need to adopt a simple capital structure has already been mentioned, and the transferability of ownership interests will be limited by the need to insure that all shareholders satisfy the requirements listed in the Internal Revenue Code. Another disadvantage to S corporations is that the deductibility of certain fringe benefits is limited. Medical reimbursements, disability retirement benefits, premiums on group term life insurance, and cafeteria plans paid to a stockholder holding a 2% or greater interest in the corporation are taxable to the shareholder but not deductible by the corporation. Also, there are differences in the tax treatment of distributions to the shareholders of an S corporation that may result in the recognition of gain, where a similar distribution to partners of a partnership would not be a taxable event. Finally, an S corporation’s income is taxed to the shareholders regardless of whether the corporation distributes funds to the shareholders for use in paying the tax liability.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Kehr, Kehr Law, Law, Lawyer, S Corporations, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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TAX DISADVANTAGES

Tuesday, May 3rd, 2011

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Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

The two major tax disadvantages to conducting a business in corporate form are double taxation and the tax imposed upon liquidation of the corporation. While double taxation is not a very attractive proposition, in practice, most corporations are small and are merely incorporated partnerships or sole proprietorships. In these types of situations, the corporation pays no tax at all, because the earnings are taken out by the shareholders in the form of deductible salary, bonuses, or other benefits. Dividend distributions are rarely, if ever, made so that double taxation never takes place.

The other major tax disadvantage to corporations is that the liquidation of the corporation is a taxable event to the stockholders. This is also true of mergers and consolidations that do not meet statutory requirements. Corporations may also be subject to additional rules if they become personal holding companies, if they fail to distribute earnings, if they issue preferred stock, or if they engage in many other actions covered by the Internal Revenue Code.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Kehr, Kehr Law, Law, Lawyer, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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NON-TAX DISADVANTAGES

Monday, May 2nd, 2011

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Corporations may be more expensive to maintain than other business forms. Costs to incorporate, exclusive of professional fees, can run to $2,500 depending on the state of incorporation. Prudence dictates that records be kept of meetings of directors and shareholders, as well as share issue and transfer records. For a start-up company, it is rare that the founders will have these skills, so they must either be purchased or deferred, with the later creating its own set of problems. Partnerships, on the other hand, require little documentation to maintain the entity.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Kehr, Kehr Law, Law, Lawyer, Non-tax Disadvantages, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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TAX ADVANTAGES OF A CORPORATION

Friday, April 29th, 2011

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Operating as a corporation can lead to a smaller tax bill than if the corporation did not exist. For example, the first $50,000 of earnings can be left in the corporation to be taxed at 15%, and the remainder can be drawn as salary. Depending on the other income of the taxpayer, part of that might be taxed at 15% also, with the rest going into the 28% and higher brackets. If the taxpayer has other income, leaving even more earnings in the corporation may save taxes (although leaving too much in the corporation may result in accumulated earnings taxes being applied). Additionally, the ability to establish a deferred compensation plan, a medical plan, group term insurance, and death benefits plan might, combined, be worth several percentage points of tax. A corporate retirement plan also has several minor advantages over a Keogh plan.

In situations where the business may face a problem with respect to passive losses, a C corporation may be the entity of choice. Any corporation in which more than 50% of the stock is owned by more than five individuals is not subject to the passive loss limitations. Even one with five or fewer stockholders can offset passive losses against business income (this is not true of a personal service corporation). In contrast, if the owners have profits from other passive operations, a partnership may be preferable so that losses may be used to offset passive income.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Corporations, Kehr, Kehr Law, Law, Lawyer, San Diego, San Diego Business Attorney, San Diego Business Lawyer, Tax advantages
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NON-TAX ADVANTAGES OF A CORPORATION

Wednesday, April 27th, 2011

San Diego Business Lawyer and Contracts Attorney providing a first class “one stop shop” for all your business, contract, will, tax and estate planning legal needs. Contact us today: (619) 400-4942.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

As a general proposition (to which there are some exceptions), a corporation’s shareholders have “limited liability.” They are not personally liable for the debts of the corporation, but rather can only see their investment rendered worthless (or diminished) should the creditor pursue the corporate debtor. However, in a start-up environment, where the new corporation may have few assets and no credit history, the reality is that the founders may well find themselves asked to personally guarantee such obligations, as a building lease, bank line of credit, or supplier credit. With fiscal success of the business, such guarantees may be expected to fall away.

Corporations enjoy relative ease in raising and operating capital and in transferring the ownership interest represented by its shares. In other words, it is relatively easy to buy and sell shares of stock as compared with the sale of assets or partnership interests. However, issuances and transfers of corporate securities must be done in a manner that complies with applicable federal and state securities laws.

Corporations also offer ease of control at both the ownership level and in the management area for the majority shareholders. Voting rights depend on applicable state law. In some states, a majority of the shareholders can elect all members of the board of directors. In other states, however, including California, cumulative voting provisions assure minority shareholders of some representations on the board. In either case though, the majority of the shares can control the board and the selection of the management team. The shareholders, as a class, have no right to participate in the day-to-day management of a corporation as, for example, partners would in a general partnership. Moreover, in corporate form, outside investors can be issued nonvoting preferred shares so that the founders, despite a much smaller cash investment, can retain voting control.
Finally, another unique facet to the corporate form is the ability to limit the personal liability of directors with respect to actions brought by or in the right of the corporation for breach of the director’s duties to the corporation and its shareholders. The scope of protection is determined by applicable state law; however, it normally does not extend to intentional misconduct, bad faith acts contrary to the corporation’s best interests, transactions from which a director derives improper personal benefit, reckless disregard of a director’s duties, or an unexcused pattern of inattention to one’s duties as a director.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com

Tags: Business, Corporations, Kehr, Kehr Law, Law, Lawyer, Non-tax Advantages of a corporation, San Diego, San Diego Business Attorney, San Diego Business Lawyer
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STEPPING UP TO TECH

Friday, April 15th, 2011

RECENT PUBLISHED ARTICLE Entitled “Stepping Up to Tech” – Written by Attorney Dan Kehr & Published in San Diego Lawyers Magazine’s March/April Edition. Read the full story at: Stepping Up to Tech – San Diego Lawyer Magazine. This article appeared in the March/April 2011 issue of San Diego Lawyer Magazine. It is reprinted (posted) with the permission of the San Diego County Bar Association.

Tags: Business, Kehr, Kehr Law, Law, Lawyer, San Diego, San Diego Business Attorney, San Diego Business Lawyer, San Diego Lawyer Magazine, Technology
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San Diego County Bar Association Law Practice Management and Marketing Section Monthly Meeting

Thursday, April 14th, 2011

I’m sitinng here discussing how the content of your blog increases traffic to your website!

Tags: San Diego County Bar Association Law Practice Management and Marketing Section Monthly Meeting
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News & Events

COMPARING LLCs TO PARTNERSHIPS

DISADVANTAGES OF LLC’S IN RELATION TO CORPORATIONS

ADVANTAGES OF LLC’S OVER CORPORATE FORMS

S CORPORATIONS – ADVANTAGES AND DISADVANTAGES

TAX DISADVANTAGES

NON-TAX DISADVANTAGES

TAX ADVANTAGES OF A CORPORATION

NON-TAX ADVANTAGES OF A CORPORATION

STEPPING UP TO TECH

San Diego County Bar Association Law Practice Management and Marketing Section Monthly Meeting