eNewsletter

ISSN:1559-5447
Vol. 1, No. 4
March 26, 2006

In This Issue:
-Is the Limited Liability Company (LLC) the Right Business Entity for You?"
-Use Your Business Entities to Brand Yourself!

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A Message from Germaine...

As this issue of the newsletter goes to print, we are celebrating the beginning of what promises to be a beautiful spring. It had been unseasonably wet and windy here in San Diego--as you can see in the photo, we now have several feet of snow on the mountains that is visible even from the beautiful shores of La Jolla. (I've always dreamed of living between the mountains and the sea!) But now it really feels like spring here. I hope your spring is off to a terrific start as well!

Is the Limited Liability Company (LLC) the
Right Business Entity for You?

Should you operate your business as a corporation? Or is there another, simpler alternative? You've probably noticed that in the past decade there are more and more businesses with their names followed by the letters "LLC" instead of "Inc.". "LLC" stands for Limited Liability Company, is the newest type of legal entity that exists in the United States, and for many entrepreneurs it is the ideal marriage between the tax advantages of the limited partnership and the limited liability feature of the corporation. Now available in all 50 states---even to non-U.S. citizens--most likely the LLC should have a key place in your business structure.

When it comes to legal entities for conducting business, limited liability companies are the newest kid on the block in the United States. The state of Wyoming was the first to pass legislation, in 1977, to establish this new entity. By 1999 all fifty states in the United States had enacted legislation to allow the formation of this exciting new legal entity.

But why is the LLC so attractive, so irresistible to legislators? And why have so many entrepreneurs opted for the LLC instead of a "C" corporation, or even an "S" corporation? And most important, how do you decide if it's right for you? Perhaps the most important reason is for the popularity of the LLC is that it satisfies the demands of both accountants and attorneys. Accountants tend to prefer the Limited Partnership ("LP") because they are concerned about the dangers of "double taxation" if their clients use a corporation: If your corporation pays dividends, the corporation pays taxes on its profits, and its shareholders pay taxes again on those same profits when they are taxed on the dividends they receive. By contrast, attorneys usually prefer the greater asset protection offered by the limited liability that the corporation has to offer to all its owners.

Let's begin with an understanding of what the limited liability company is. Basically it is a partnership among its owners, who are called "members". The LLC is like a limited partnership (and an S-corporation), because it is a "pass-through entity"--each partner's or member's share of the net gain or loss for the year "flows through" to the individual tax-payer's 1040 individual tax return. There is no separate tax to which the LLC itself is subject. On the other hand, the LLC is also like a corporation, because unlike the limited partnership--which requires a general partner, who is responsible for all results of all decisions and actions of the partners--all its owners benefit from limited liability.

People choose to form LLCs basically for the same reasons that they would elect to set up an S-corporation or a limited partnership. The LLC, like the S-corporation, is attractive if you have earned income that puts you in a high tax bracket, and you would like to be able to offset that income with the losses that you can normally expect to incur in your first years in a business. When I formed my first business entity twenty years ago, my husband and I selected the S-corporation. We both had salary income that placed us in a high tax bracket, and we knew that our new consulting business would incur significant capital expenses in the first few years. After all, we would have to purchase new equipment such as a fax machine, a laser printer, personal computers, and the replaceable supplies to operate them. We were also aware that it would take some time to build a clientele, so our income from the business would take a few years to take off. The S-corporation allowed us to carry the losses we incurred onto our individual 1040 tax returns. The losses were deducted from our gross personal salary income, and we paid dramatically lower taxes. If you can get this advantage from an S-corporation, why would you bother with an LLC? The LLC has a number of advantages over the S-corporation:

1. First, the LLC does not have the limitations that the S-corporation has on who can be a member of the LLC. Only individuals, estates, some trusts, and other S-corporations can be members of an S-corporation. Individuals (shareholders) must be either U.S. citizens or residents. By contrast, the LLC is not subject to these limitations. Thus, it is an ideal entity that you can combine with other entities in your business structure. For example, you can have a corporation or other legal entity be a member of an LLC.
   
2. The LLC has much greater flexibility for allocation of rights, profits, and assets than the S-corporation. The S-corporation can have only one class of stock: In other words each share of stock has the same rights as every other share. This means that the allocation of profits and assets is extremely rigid. If Parties A and B are equal shareholders in a corporation, and the corporation decides to distribute its profits of $10,000, then A and B must each receive $5,000. This might not necessarily be equitable if one partner was much more active and produced a much greater share of the profits than the other. The LLC allows for A to receive, say, $8,000 if its business activities generated 80% of the profit, leaving B with the remaining 20%, or $2,000. This can be very attractive in a partnership in which there is a significant difference in the amount of capital and ongoing business activity that the partners are contributing to the business.
   
3. The LLC is not subject to the same corporate formalities that are required of the S or C corporation. While the LLC must still maintain appropriate LLC records and bookkeeping, it is not required to be managed by a board of directors and maintain minutes of regular board of directors meetings.
   
4. Unlike the S-corporation, liquidation of an LLC is generally not a taxable event. As your personal and business financial situation change over time, you may determine that it is no longer in your interest to maintain a "pass through" entity for your business. Once your business begins to turn a regular profit after the relatively high costs of the first year or two, you may decide that a C-corporation that is taxed at a maximum of 25% (unless it is a personal service corporation) would be more advantageous to you. If you have been operating as an S-corporation and you liquidate it by selling the liquidated assets to the shareholder(s) at their fair market value, the liquidation will be a taxable event. This does not apply to the LLC. This is one of the factors that makes the LLC particularly attractive for holding real estate.
5. The concept of the charging order makes the LLC especially effective for asset protection. This makes it a particularly attractive entity for holding real estate. The corporation should not be used to hold real estate, because if the corporation is sued, the court might award shares in the corporation in the judgment. Control of the corporation translates into control of the property, and you effectively lose control over your real estate holdings. By contrast, the charging order, used with Limited Liability Companies as with Limited Partnerships, gives the plaintiff only the right to receive income distributions from the interest of the party or parties against whom the suit was brought. The charging order grants no voting rights or management powers. Thus, the existing managers or members could vote simply not to distribute income, thus leaving the plaintiff with no recourse; yet the plaintiff will have to pay taxes on the income allocated to her, even though the funds were not distributed(!). This offers a strong incentive for the plaintiff to negotiate for a settlement.

Disadvantages of the Limited Liability Company

Needless to say, there are also some disadvantages with the LLC--otherwise there would not be remain so many other attractive options for structuring your business. Why might the LLC not be the best option for you?

1. Increased taxes for LLC members in high tax brackets. Once your LLC is making a profit, its income passes through the individual members, who are taxed directly on that income, whether it is actually taken out of the LLC or not. Thus, members who are in a high tax bracket by virtue of, other earned income might pay higher taxes than they would if they used a C-corporation, which is subject to lower marginal tax rates. Proper planning of disbursements for expenses and other aspects of the business could overcome this disadvantage.

   2. Higher initial filing fees for LLCs in some states. Some states may levy heavier tax obligations on LLCs in their initial years. Our home state of California requires that an LLC pay a minimum $800 tax in its first year, while corporations are exempt in their first year--whether the business has any earnings or not! Even if you have organized your LLC in a state with more favorable tax policy, such as Nevada, you state may still require that your LLC be registered as a foreign entity to do business in your home state, and it may still be subject to that LLC tax. (You can elect that your LLC be taxed as a corporation to avoid this tax in your first year, but do be aware of the implications of that treatment for your bottom line.) Other states require that LLC filers publish notices in legal journals, which can cost over $1,000.

   You need to be sure that it will still be worthwhile for you to start your LLC: If you have high start up costs, tax savings in the thousands of dollars will outweigh these higher filing fees.

2. LLCs do not have continuity of life, that is they are limited usually to a specific period of time (say, 50 years) depending on the state. By contrast, corporations continue to exist regardless of the personal fate of its individual shareholders.

   If an LLC member dies, the remaining members may vote to continue the LLC business. LLC interests can be gifted to other family members; and the LLC can have a trust or family limited partnership as a member, thus providing for effective estate planning.

3. The LLC is a relatively untested entity. There is the large body of case law on corporations but on LLCs. We may also expect to see changes in the laws governing LLCs as the implications of this new entity become more apparent to legislators.
   

Despite these disadvantages, because of its tremendous strengths, the LLC can be an ideal component of your overall business structure. It is a powerful tool for operating your business, protecting your assets, and planning your estate. It is easy and inexpensive to set up an LLC on your own, if you use one or more of the items on our Wealth Structuring Resources page.

©Azur Pacific Associates 2006

How do you establish an effective brand? Branding--creating a distinctive corporate identity for your business--is critical to your success as an entrepreneur. You can, and must, use the process of setting up and managing your business entities to establish your own distinctive brand. The world's greatest companies have mastered this art of branding. You don't need even need to to see the name of the company to recognize the Mercedes or MacDonald's logo, so effectively have these companies imprinted their identity into the minds of the consumer. But branding is not just about a logo. It's also about making sure that you have a consistent identity, one that is reflected in your website, your stationery--all communications with the public. Individual entrepreneurs often use a haircut, accessories, even style of dress-as the "Man in Black" Johnny Cash did--to imprint their identity into the minds of the public. Even a small business owner doing business on eBay will profit from having a consistent, memorable image as an established, reliable firm associated with expertise in its niche. You can use the process of structuring your business to start building a strong brand. Whether you are establishing an LLC or a corporation or other entity, you will want to follow a number of steps to make sure that your structures will build a strong foundation for your brand. I recommend that you follow the sequence below: 1. Make a list of several possible names for your company that reflect your area of expertise and your USP--"Unique Selling Proposition". Number them 1 to 5 or even 10 in order of priority. 2. Check with the U.S. Patent and Trademark Office ( http://www.uspto.gov/main/trademarks.htm (or the Intellectual Property Office in the country where you live if you live outside the United States) to make sure that you have not selected a name, one you might soon be using in a potential trademark, that is already taken. Running a search is an easy matter on the internet. If you find that the name or mark is already taken by someone engaged in a line of business close to your own, make a note of it and move on to check the next name on your list. 3. Conduct a similar search on the web site of your state's or province's authority for establishing corporations--in most cases, the Secretary of State. If you are considering setting up a Nevada corporation or LLC, be sure to do the same both in Nevada (https://esos.state.nv.us/SOSServices/AnonymousAccess/CorpSearch/CorpSearch.aspx) and in your home state or province. You can find the appropriate authority in your state easily by doing a search on Google. Make sure that you check both the LLC and the Corporation databases. There could be a corporation with a very similar name to the one you want to use for your LLC that your sate authorities might not catch if the corporation and LLC divisions are separate. Too close a similarity with the name of an entity of a different type will cripple your efforts to establish a distinctive brand and could cost you in the long term. Years ago the Body Shop did not bother to do this checking outside of California, and ended up being forced to change their name when challenged by a more successful business started earlier with a similar name years later. 4. Next, conduct a search on the fictious names (or DBA "doing business as") registry of your county or other local jurisdiction. Once your make a decision on a name for your entity, if you are using anything other than your own name or a name that clearly indicates exactly what you are doing (something other than Mary Jones Plumbing, for example) or if you add something like "Associates" to your name, you will need to file a fictitious name statement with the County Clerk. There is usually a nominal fee associated with doing this, but Don't think of this as an annoyance. It is actually an effective way establish your exclusive claim to the use of your DBA. By the way, you'll also need to check with your municipal government to see if you need to register to do business in their jurisdiction. This will no doubt cost something, but it is an essential part of doing business. I prefer to think of it as yet another opportunity to brand myself in the mind of the public. 5. Check with a web domain registrar (such as LuckyRegister.com) to see if your preferred name or names are available. If your first choice is not available as a .com or .net or other common domain type, you now have the option of setting up a .ws (for web site) domain. You can do that at: http://www.azurpacific.ws. Or, you can choose a variant like yournameonline.com or yournamelive.ws. Go ahead and purchase the domain names that correspond to your preferred business name. Even if you don't use it, domain names are valuable virtual real estate these days--you might be approached to sell one of the names you've purchased later and make a tidy profit! 6. Select your preferred name and reserve it with your state authority. Sometimes the entity formation process can take longer than expected, and you want to be sure that the name is reserved exclusively for you long enough for your structure to be put in place. The reservation is good for a certain period of months or days. 7. Be sure to register your preferred entity name as a DBA or fictitious name if required by your regional authority. Once your entity is in place, you're ready to brand yourself by developing a memorable graphic logo, ordering your professional stationary, and getting your web site developed around your new corporate identity. There is, of course, much more you can do to build your brand. Kim Castle's free BrandU newsletter is an excellent resource that I recommend very highly. You can sign up for it free at http://www.WhyBrandU.com. ©Copyright Azur Pacific Associates 2006

We'd like to hear from you...
Be sure to check out the links to the powerful products that we recommend to help you build your business structures and your brand in this issue.

Meanwhile, I'd very much like to hear your feedback concerning our eNewsletter. I would particularly welcome your letting me know what subjects you would like to see addressed in future newsletters. Please feel free to contact me with your ideas at:
germaine@wealthstrategies202.com.

I've prepared a Special Report on "Starting Your Own Business--Do's and Don'ts for the New or Experienced Entrepreneur"; available for just $4.97 at www.wealthstrategies202.com/specialreports.htm, it can help you save thousands of dollars. I am also completing an e-book entitled "Insider's Guide to Structuring and Operating Your Small Business." If you'd like to receive an announcement when it's ready, just send a blank e-mail to ebook@wealthstrategies202.com.

Tax attorney and entrepreneur J.J. Childer's Secret Millionaire™ Asset Security System home study course includes both guidance in this area for all types of structures, as well as the forms you need to maintain correct records. For the next 14 days, I am offering this valuable course to my subscribers only at a 15% discount. Learn more and order your copy at: http://www.wealthstrategies202.com/secretmillionairesubscriber.html

Coming up! Kim Castle's
BrandU^® Three-day Branding Intensive
Friday, Saturday & Sunday, April 7-9, 2006
in Los Angeles, California, USA

Kim Castle is offering a brand new 3-day conference designed (in her own words) " specifically for entrepreneurs, independent professionals, and small-business owners in any industry who know they are sitting on a million-dollar, even multi-million dollar business, and are stuck trying to make it a reality."

"This is the same exact process that companies have paid me $50,000 to do for them, taking anywhere from 3-9 months. The same exact steps that we’ve been using successfully for the past 15 years to help grow hundreds of businesses." Click on the banner below to get signed up today!

Need a Line of Credit for Your Business?

Are you looking to establish credit for your business? Successful entrepreneurs (Donald Trump comes to mind!) know the importance of establishing and using credit in the name of their businesses rather than relying on their personal credit lines to build their business. Fine for the Donald, you think, but how do I get started building this sort of credit?

I have just discovered a terrific new resource to help your started building your business credit. Credit Corporate Concepts offers a valuable service that helps you obtain lines of credit for your business. Initial lines obtained average about $30,000, but depending on the length of time your business been in existence and your own personal credit, you could obtain lines as large as $50,000 to start. See the details of their business credit establishment programs at the Corporate Credit Concepts website.

Of course if you have just established your business or are just starting out, banks will rely more heavily on your personal credit. If your personal credit is not as strong as it should be, you'll want to strengthen it in conjunction with seeking funds for your business. In cooperation with the Consumer Rights Law Center, Corporate Credit Concepts also offers a program that will help repair your credit either before or after they obtain credit for your business. You can get details on their credit repair program at: http://tinyurl.com/hv2p9.

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