Limited Liability Company - Your accountant says ‘’ Start a Limited Liability Company’’
It’s late December and your accountant requests that you form a limited liability company for tax benefits and for other reasons. You come to my law office and ask me to draw up the appropriate papers to obtain the entity for you.
A critical effort should first be made to make certain that a limited liability company is the best entity for your purposes rather than a sole proprietorship, a corporation, or a partnership.
There are many good reasons for establishing a limited liability company (LLC) including but not limited to tax benefits, health insurance, S-Corp election, affording the owner /member(s) liability protection (but that is not total limited liability) and related benefits, depending on the needs of the members/ owners.
When we learn that an accountant has suggested a limited liability company, we contact the accountant to review the reasons why the recommendation was made. This does not take a great deal of time. When we talk with the accountant, we want to know those reasons as well as other information including but not limited to: capitalization of the LLC versus loans to the LLC., transfer of assets from the organization that was in existence before the change to the LLC, transferring vehicles versus leasing. This can be an expensive procedure, not the cost of the new certificate of title but the 6% transfer tax. Also the Maryland Motor Vehicle Administration uses the NADA values (NADA is a nationally recognized resource) for determining the value of a vehicle. However, the owner can complete an affidavit stating what the owner believes to be a lower value than the NADA value but that affidavit should explain how the lower value was determined. We also seek confirmation in writing that the accountant will make the S- Corp election within the time requirements of the Internal Revenue Service.
Clients need to understand how important it is to have agreement between the attorney, the accountant, and the client over the date the new LLC will start. We want to be sure that the accountant/bookkeeper does not have to prepare documents twice, one for the current entity and another for the new LLC. We can’t express how much of a cost saving there will be but it is significant and tax season begins in January. There are many demands on the parties referred to above and if we can be less burdened and save costs, we need to work in unison.
We go over with clients many of the benefits of an LLC as well as some of the exposures to the client. Insurance must be changed because if the vehicle is leased rather than purchased by the LLC, a separate automobile policy is required if the vehicle remains titled by the owner. Clients must understand that an LLC does not provide protection for negligence of the owner/member or member and here auto insurance can protect the owner/ member up to the limits of the auto policy. Uninsured motorist coverage is very important to protect the member/owner in cases involving a third party (the person who was at fault). There are many uninsured drivers or under-insured drivers who have low coverage and so, with higher uninsured/ underinsured motorist coverage, the owner/ member has better protection. Contractual liability is lessened if the contracts between owner/member and supplier are solely in the name of the LLC and not personally guaranteed by the owner/member. We recommend to clients who have personally guaranteed their suppliers many years before when the business was started to change the name on the new entity (LLC) contract to be solely in the name of the LLC and not to sign a personal guarantee. If the supplier will not supply without a personal guarantee, then switch or threaten to switch suppliers. New registrations with the federal government and with the state government on issues of income tax, payroll, unemployment insurance, and sales tax are also required.
Fred Antenberg has over 30 years of experience advising individuals and business owners in Central Maryland and counties surrounding Howard County, Maryland. Fred’s office is in Columbia, Maryland. Contact Fred today for a free initial consultation by calling 410 730 4404.