X-Banker

Archive for August, 2008

Series LLCs: Where Angels Fear to Tread

August 27th, 2008

By The XBanker

There’s a lot of talk about Series LLCs. More and more people are wondering if they’re a smart idea. The short answer is that they aren’t – they haven’t been tested, giving them limited applications if they have any at all.

First, some background. LLCs alone are an excellent structure for many different uses. For instance, they work well as a method of holding high dollar assets like real estate. If you own commercial or rental property, it’s important that you hold title to that property in an entity. If this entity (most likely an LLC) is run and managed properly, it can protect you from any personal liability.

Many people own a number of different investment properties. They want to protect both their investments and themselves by placing them into one or more LLCs. The task then is scenario, every investment is held under a different LLC. That’s not a popular answer for people who have lots of investments, but it’s built on sound reasoning. Think of LLCs as giant shoeboxes. As many investment items as you like can be placed inside, but they’re all at risk if something happens to the box. If a lawsuit happens, every investment you’ve placed into that LLC will be in danger.

The solution is to separate your investments. Ideally, you should use a separate LLC for each one. If you can’t, be sure to examine the equity you have at stake in every investment along with its liability potential. Then group them in LLCs accordingly. As an example, it’s not a good idea to include a single family beach front rental in Maui in the same LLC as a duplex on the wrong side of town. You may have several thousand dollars of equity stored in the house on Maui, which is placed at risk by including it in the same LLC as the rough edged duplex. Keep them separate. However, if you own three single family homes in Idaho, each within about twenty thousand dollars of equity, you might feel that placing them together is an acceptable risk. But that segregation strategy can get expensive.

If you have ten properties, using ten different LLCs might seem confusing and costly. Series LLCs seem to provide a solution as statutes in certain states allow you to create separate series within a single LLC, the debts and liabilities of which are only enforceable against that series. These laws allow LLCs to establish separate series of interests, members and managers, giving them separate duties, powers and rights. Those include the rights to profits and losses with respect to specific property and obligations. In states that have this kind of enabling legislation, each series within the LLC works as a separate entity under state law. This is why many people are attracted to series LLCs – they theoretically have the ability to shield property in different series from liabilities incurred in or against one another without paying state fees for multiple entities. This means that an LLC containing two properties can choose to place each into a separate series, so that liabilities from one can’t cause problems with the assets of the other. (Remember the same effect can be created using two different LLCs to hold these two properties.) Many people prefer series LLCs because at first glance they appear to be cheaper to set up. However, this assumption is false. It’s actually more complicated to set up a series LLC, making it more expensive than the basic type. In California you might find a series LLC appealing because the Franchise Tax Board charges an annual fee of eight hundred dollars for each entity. Many people think that setting up a single series LLC means paying only one fee in California. However, the Franchise Tax Board takes the position that each series counts as its own LLC for fee purposes, meaning you’ll have to pay the same whether you set assets up in series or in their own separate LLCs.

The biggest problem with series LLCs is that many states (including California) don’t have series legislation and may choose to ignore the laws of the state where the series was created. That’s because you’re subject to their rules when doing business in their state. The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since series LLCs are so new they’ve never been tested by courts, even in the states that permit them. That means there’s no guarantee that limited liability protection will be extended to each series until every state rules on the subject. It’s hard to see how a court would choose to grant this kind of protection inside one entity, and only time will tell if courts will do this. But do you want this type of uncertainty when you are trying to protect your assets?

Again, one should be concerned about how series LLCs will be treated by the states that don’t have laws permitting them. If you set up a series LLC in Nevada then register it as a foreign entity conducting business in the state of Massachusetts, each series in the LLC own a separate piece of property. If there’s a lawsuit in regards to one of these properties you can’t be sure that the Massachusetts court will honor the series structure of the LLC, applying Nevada’s law to the real estate and activities that are located in Massachusetts. If they do, the claimant can collect only against the property in that series. If they don’t, the claimant can collect against the properties in other series as well. States are expected to give full faith and credit to legislation of other states, but the answer is uncertain. Exceptions do happen. It is also important to note that the American Bar Association did a review of series LLCs and declined to endorse them. You can be certain that future court cases will take note of this development.

Since the laws about creating series LLCs are different in every state that permits them, it might take a long time before enough case law is accumulated to give us any level of comfort about using them. If you want to make sure your assets have good, solid protection, it’s a much better idea to avoid corporate structures that don’t provide reliable protection. Avoid series LLCs as a form of protection until a definitive case law is established and rely instead on known, tested entities such as individual LLCs.

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Protect Yourself from Your Assets

August 21st, 2008

By The XBanker

How can you best protect your personal assets? Here are some things to consider.

• Keep Your Personal and Business Assets Separate

If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.

As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.

Or perhaps you’ve formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.

To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.

• Protect Your Business Assets

You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.

A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker’s Compensation insurance. The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years. If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses. A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.

But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.

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Don't miss this free teleseminar series!

August 12th, 2008

By The XBanker

My fellow XBanker co-founder Garrett Sutton and I have been asked to be part of a tremendous teleseminar series for business owners. Not only am I presenting during this virtual event, but I am attending these sessions myself as a guest because there is so much I want to learn from the other presenters in this power-packed event. I’ve heard a few of them speak, and there are others I can’t wait to “meet.”

Oh, and it’s free…so how can I resist? How can you?

Here’s the official announcement, but I’ll give you my opinion: if just one of these presentations puts money in your pocket you’re way ahead of the game!

Who Else Wants To Learn ‘Secrets’ That Most Small Business Owners/Online Marketers, Entrepreneurs, Writers and Coaches Will Never Know About How To Really attract more leads, close more sales, set up automatic marketing systems, increase profits, and keep more of your cash each month as you build wealth?!

Give us about 28 hours over the next few months and we’ll force 22 of the world’s top marketing & small business experts to reveal their most powerful, most clever, and most profitable & guarded secrets for unparalleled personal & financial success.

Learn more and register here.

Not sure? Here is an example of what you will learn;

The Freedom Formula author Guru Christine Kloser who will show you “How to Put Soul in Your Business and Money in Your Bank”

Rich Dad’s Advisor Garrett Sutton will tell you about the 5 mistakes most small business owners make when setting up a corporation

Million Dollar Lifestyle Business Coach Melanie Benson Strick shows you 101 Ways to Triple Your Income by Outsourcing Your High Payoff Activities

Branding expert Kim Castle shows you through interactive exercises how brand worthy your business is.

James Roche, (The Info product Guy) will show you how to get paid for your knowledge via his Info Marketing Action plan (iMap program)

PR and marketing expert Susan Harrow will show you How to Get a 6-figure Book Advance

Online Marketing expert Katrina Sawa will tell you what you need to know to get more exposure and clients FAST

Elizabeth Potts Weinstein (CFP(r)& Attorney) shows you an Easy, GUARANTEED System to Take Control of Your Cash Flow in Just 15 Minutes per Week

For full details and to register for the FREE events!

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Save Your Business in Bankruptcy

August 11th, 2008

By The XBanker

My Xbanker colleague Garrett Sutton has written extensively on the value of incorporating a small business, and here’s another reason to do so:

Incorporating can literally save your business.

I doubt many sole proprietors realize that filing for personal bankruptcy (due to medical debts, divorce or many of the other reasons people file) could mean the end of their business.

I didn’t.

But in a recent post on the Bankruptcy Law Network, California bankruptcy attorney Cathy Moran describes a recent case in which a couple who owned a business as a sole proprietorship were in danger of losing it – even though it was doing just fine – because they had to file for personal bankruptcy due to real estate investment debts.

She points out that:

…(the) business was a sole proprietorship. If we filed Chapter 7 now, Chapter 7 trustee’s first reaction to a going business is to shut it down. The trustee is concerned about his liability for regular business debts the operation may incur and the possibility that a customer may be hurt on the premises. The trustee wants to preserve the status quo by shutting the doors, even if there is nothing in the business that he can sell for the benefit of creditors.”

In this case, she was able to incorporate the business to save it.

But as another California bankruptcy attorney Douglas Jacobs points out in another post, waiting until you are contemplating bankruptcy to incorporate your business is risky business. It can be considered a “fraudulent conveyance” and can backfire.

If you haven’t been convinced yet that you need to incorporate, what else can I do to convince you that you need to check it out? It may literally save your business.

 

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Keys for Using an S-Corporation

August 6th, 2008

By The XBanker

If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once.  While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends, a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business.

While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders.

Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:

• Incorporate the Business – As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.
• File an S-Corporation Election Form - To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.
• Notice and Obey S-Corporation Limitations – Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants’ estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.

Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations’ tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form, you will ensure that you take advantage of available opportunities.

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How Hot is Your Deal?

August 5th, 2008

By XVulture

Whether you need $50,000 in seed capital or $5,000,000 in bridge financing, raising the temperature of your deal is mission critical. Every entrepreneur is looking for the source, or the sorcerer that can truly connect them to the right accredited private investors-each of which is looking to put money into deals with the right ingredients.

What’s it take to get on the menu?

Keep reading to find out…

REALITY BITES
Why deals get chewed up & spit out

YOU’VE BEEN LIED TO-by your banker, your broker, your bean-counter-a long line of stuffed shirts who like to hear themselves croak about “getting outside of the box,” only to cram you back into one when it’s time to start raising money for your business.

Don’t get me wrong. These aren’t bad people and they may even be wildly successful, they just don’t get where they are by packaging and positioning early-stage opportunity. Unfortunately for you, all that well-meaning advice can cost you time and money-lots of it.

Alright, so you’re here because you want to raise money. If it’s the truth you seek, you’ve come to the right place. The bad news is, if you’re like most people, you will:

1. Be underwhelmed by the message here
2. Scan the page for what you think is important
3. Miss the real point and move on

If you’re still reading, good for you, because what you just read isn’t merely a profile of how most people surf the Net, IT’S HOW INVESTORS LIKE US SURF OPPORTUNITY.

If you’re in the market for private debt or equity capital and that doesn’t scare you, look down-that line you just crossed may well cost you your business. Sure, you may think you’ve got your act together, that you’re ready to talk to serious money players, but you’re not. I see it day in and day out, and it’s because most entrepreneurs don’t understand one thing: THE VALUE OF TIME.

One of the many benefits a surplus of capital affords investors is the freedom to cherry-pick opportunity and draw a distinction between entrepreneurs and misguided dreamers. This is why we prefer deals we can understand quickly, caluculate the upside and effectively assess the risk.

HALF-BAKED
What are you trying to sell us?

All but the most savvy of entrepreneurs fail to recognize the heart of their own deals and kill their fundraising efforts before they even begin. In order to raise the right kind of money, you need to think like an investor. Remember, you’re competing for mindshare here. It doesn’t matter if you’re a concept stage start-up or a growth company looking to take things to the next level, every successful financing effort begins as a bid for an investor’s time, not his money.

Do your materials clearly, concisely and compellingly articulate the market opportunity and the mechanics of your deal? Probably not. Odds are, it’s a room-clearing testament to the reasons most early-stage deals die slow, painful deaths: Emotional founders, plodding, techno-saturated narratives, muddy corporate structures, baseless valuations, bad investment vehicles…the list goes on and on.

Unfortunately, most of the misguided efforts to slim them down yield nothing more than quarter-scale versions of the original 50-page abominations. BEWARE: Just because it’s short, doesn’t mean it’s sweet. The short-form pitch isn’t a short-cut-it’s an art form.

FEAST OR FAMINE
It’s not just what you serve, it’s how you serve it

If you really want to get an investor’s attention, less can be more-provided you’ve got the right ingredients and know how to mix them up. Find a quick way to whet our appetites with something that’s got the right flavor-not too spicy, not too sweet-and you’ll find us more than willing to sit down at the table with you. Who knows? If you’re the real thing, we may even pick up the check…

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