Hopefully many of you remember Vitameatavegemin from the classic “I Love Lucy” show.  How in the world does this relate to a limited liability company (LLC) you say?  Well is your LLC tired, run down, listless?  Has it fallen out of good standing and is it failing to follow corporate formalities?  If so, you may need to pep it up a little.  I touched on this topic briefly in an earlier newsletter addressing limited liability protection.  To make sure you are taking the necessary steps with your LLC, consider these tips:

A common question I hear is whether LLCs are required to have annual meetings.    The answer is “No.”  One of the benefits of the LLC as compared to a corporation is that many of the traditional legal requirements are relaxed; thus the LLC form is more flexible and more suited for many small businesses.  However the LLC should have some form of minutes or consent action signed by the managers or members to approve any major transactions within the LLC as they occur (such as a change in ownership, change in manager, or sale of business).  This does not mean you need a consent action when your LLC buys a new coffee machine, though this may be one of the most important purchases you make!  If you are not sure what transactions require approval of the members, check your operating agreement.  Whenever the LLC borrows money from a bank, the bank will require the LLC members or managers to approve the loan transaction through a similar form of consent action or minutes.  All of these documents evidence official legal action of the members or the managers and should be maintained along with the other LLC records.

The ownership records for an LLC should not be taken for granted.  Most LLCs that we organize don’t issue ownership certificates.  Again this is a distinction from corporations which usually have stock certificates.  Instead the LLC ownership is recorded and maintained on a schedule in the LLC’s operating agreement.  Whenever there is a change in ownership, such as upon death of a member or sale of an interest, this ownership schedule should be updated.  Some LLC owners prefer to rely on the LLC tax returns and their CPA to keep track of the LLC ownership, but this is a mistake and it can lead to problems later if there is any inconsistency in the tax records versus the LLC documents.  The better practice is to update the LLC ownership schedule as needed and then send a copy of the updated schedule to the LLC’s CPA or tax professional for use in the income tax reporting.

Finally, one of the most important items for an LLC is to keep the annual reports current with the NC Secretary of State.  In North Carolina an LLC must file an annual report by April 15 of each year together with a $200 annual filing fee.  These reports require very basic information about the LLC and its managers or members and can be filed online.  From time to time the Secretary of State conducts audits of its LLC filings and initiates administrative dissolution of LLCs which don’t have their reports current.  If you receive a notice from the Secretary of State along these lines, be sure to give that filing attention.

It doesn’t take much to maintain an LLC, but it is easy to let some of these simple items fall through the cracks.  If it has been a number of years since you have focused on your LLC corporate records, you should dust them off and see what you have and what you may be missing.  And if all else fails join the thousands of happy peppy people…watch I Love Lucy and you’ll understand.

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OK, I’m not talking about an actual spare tire – I’m talking about a Power of Attorney.  Yes, a Power of Attorney is just like a spare tire; I’ll let that analogy sink in for a few moments.  The term “Power of Attorney” is not foreign to most people, but how many of them really understand what it means?

 A Power of Attorney (POA) is a legal document but it has very little to do with an attorney.  Although your attorney prepares the document, your attorney is usually not named in the document and has no power under the document.  Instead, your POA allows you to name a family member or close family friend as your attorney-in-fact (i.e. your Agent) to handle your financial affairs for you, pay your bills, manage your investments, etc.  Many people consider a POA as something intended to be used if you become incapacitated, but most POAs are effective immediately and can be used if you are simply unavailable (for example, when one spouse is traveling out of the country and the other spouse needs to sign loan documents for a bank).  The important thing to know is that if you don’t have a POA in place and you become incapacitated, then your family will likely need to have a legal guardian appointed for you by the court; this  can be an expensive and time-consuming process.

 My clients often struggle with the decision of who to name as the Agent in the POA.  My advice is to name someone that you trust implicitly with everything; someone you would gladly hand your credit cards and checkbook to without any concern.  Typically a 19 year old child is not the first choice unless your chief goals are to 1) hit all the best concerts  within a 2 hour drive, 2) maintain a high profile in the local club scene, and 3) have an endless supply of Red Bull.  Most often people pick someone in their family or a close family friend who has sound business judgment and good money management skills.  Also, it is important to pick someone who is likely to get along with most everyone in your family; this will hopefully avoid potential conflicts in the future.

 A POA does not allow your Agent to do everything for you.  For example, your Agent can’t make or change your Will, can’t get a divorce for you, and can’t act in your place as an officer in a company; however, most other legal or financial matters that require your signature are fair game.  The POA may also allow your Agent to make gifts to your family from your property and you should make sure you review that option in the document if that is a concern for you one way or the other.

 In North Carolina if you sign a POA and later become incapacitated the POA must be recorded in the local Register of Deeds; most financial institutions will require that the document be recorded before honoring it in any event.  A financial institution may have other requirements and make the Agent jump through a few other hoops before accepting the POA, but ultimately once they are satisfied that everything is in order they will cooperate with Agent and allow the POA to work as intended.

 I am sure you get the point now about driving around without a spare tire.  A POA is something that you may never need, but if you do, you will be glad you have it.

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Now that we are in recovery (hopefully) from the great banking flu of 2008-2009, it has become clear that doing business with banks has changed quite a bit.  Gone are the days of quick loan approvals and business loans secured only by the underlying business.  Even more than ever, banks now look for personal guarantees from well-heeled individuals to secure a business loan, and if you are the guarantor, you need to consider several details.

 For any of you who needs a refresher on the basics of a personal guarantee, refer to my July 2009 newsletter.  The first thing you need to understand is that most guarantees are a guarantee of payment not collection.  This means that if there is a loan default the bank can show up at your door and demand payment; it doesn’t have to try to collect from the business, or other guarantors, or even foreclose on property first.  Banks are also regularly requiring guarantors to pledge liquid assets (e.g. a marketable securities account) as security for the guarantee.  This makes it even easier for the bank to recover from the guarantor immediately on default.  It also means that as a guarantor you will be required to tie up these liquid assets often for the full duration of the loan.

 If you have been asked to sign a guarantee, there are several things to watch out for.  How long is the guarantee?  Usually it will run for the duration of the loan but the guarantee will likely provide that the loan (and the guarantee) can be extended by the business without your approval.  The business can likely also agree to a higher interest rate or make other changes in the loan without your approval.  Most importantly, is the guarantee limited to a specific amount? Look carefully….it probably isn’t and that could expose you to a lot more liability than you expect.  If you have other deposit accounts with the bank, the guarantee will often provide that the bank can hold those accounts if it needs to collect from you.    The bank may be willing to negotiate some or all of these items, so make sure you ask and by all means have your legal counsel review the document before you sign.  Also it is very important that you stay informed about how the business is doing and whether it maintains the loan in good standing; the bank is not obligated to let you know if the loan falls behind.

 Many loan guarantees involve several individual guarantors which helps share the pain if the bank ever enforces the guarantee.  However the bank is usually not required to collect from all guarantors; if one guarantor has sufficient collectible assets the bank can pursue that person alone.  For this reason, many guarantors enter into an indemnity agreement to ensure that if one guarantor is required to pay more than their fair share of a loan, then all the other guarantors will reimburse them.  If you are in a transaction with several guarantors, you should also consider their personal assets and make sure you can recover from them if you get stuck paying the bank.  For example, if they have much of their wealth in retirement assets or  joint real estate with their spouse, you may have a difficult time collecting on the indemnity.

 This all  reminds me of the old poker saying….if you cant’s tell who the sucker is at the poker table, it is probably you.  Don’t be the sucker when it comes to your guarantee.

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Gifts of your real estate can be a bad idea for taxes. What?????? Many of you have probably heard that you should give real estate to your kids to help minimize estate taxes….yes that is still true….but that is only applicable if you have a large estate that will be subject to estate tax.  For most people estate tax is not a real concern.   Thanks to Congress and its ability to get only politics done….we don’t know who is subject to estate tax at the moment. We’ll know that answer at least by the end of 2010 but for now let’s just assume that if you have less than $1,000,000 then you have no estate tax concerns. 

 So if you have no estate tax concerns, a gift of your real estate is not saving your family estate taxes; you are wasting your time and money.  Of course your kids may not feel that way…who doesn’t enjoy ownership in a beach house or mountain cottage. However they may be interested to learn that the gifts can be bad for their income taxes if they ever plan to sell the property.

If you make a gift of your real estate during life instead of passing the property at death, your kids will use the same cost basis you have in the property to determine their income tax if they ever sell the property.  Basically your kids step into your shoes with regard to the built in capital gain in the property.  Admittedly, with the recent real estate turmoil, appreciated property ain’t what it used to be, but there are still plenty of old family farms out there that have vast appreciation built in which has not yet been taxed.  If that property is passed at death, the cost basis is increased to the fair market value of the property and the capital gain is wiped out, at least to the extent the gain is below $1,300,000.  On the other hand, if you transfer the property through gift during life, you loose the benefit of this basis adjustment and your kids will have higher income taxes if they ever sell the property.  This rule is true for all kinds of property (stock, art, etc), but real estate is the most common application.

As with any area of tax law there are some exceptions and special facts which may dictate a different plan of action.  For example, if the real estate is a principal residence occupied by the child, or if the property is expected to appreciate substantially, or if the family is exploring planning to help with medicaid qualification, then these factors may justify a gift even in the face of the potential income tax detriments.  Also, the basis adjustment rules are in flux at the moment and are likely to change further as part of the resolution of the estate tax, whenever that happens.

If you are considering a gift of real estate, make sure you consult your tax advisor first to determine whether you are gaining or loosing any tax benefits.

 

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