CpaGuy

About Richard C. Keyt

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So far Richard C. Keyt has created 47 blog entries.

How Do I Get a Federal Employer Identification Number for an LLC?

Question: I just formed my limited liability company. I know I should get a federal employer identification number (an EIN) for the LLC to open a bank account and to give to 1099 contractors and vendors. How do I get an EIN form my LLC?

Answer: The IRS makes it very easy to get an EIN with its online wizard. In a 5 – 10 data entry session a person connected with the LLC can get the EIN by answering a series of questions posed by the IRS’ website wizard. Apply for an Employer Identification Number (EIN) Online.

By |2016-12-13T21:20:16-07:00January 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I|0 Comments

Who Should Borrow Money to Purchase Real Estate – Me or My LLC?

Question:  I intend to borrow money to purchase investment real estate.  Should I borrow the money or should my LLC be the borrower?

Answer:  If it is ok with the lender, it is best for the LLC to be the borrower.

I’ve been a real estate and business lawyer since 1980.  Based on my knowledge and experience the type of entity to form to hold  real estate is an  LLC.  When I represent buyers of multi-million dollar properties the lenders always require that the borrower form a single purpose LLC to own the real estate.  Over two thirds of the 4,200+ LLCs I have formed have been to hold investment real estate.

Your other choices are the corporation and the limited partnership.  Both of these types of entities have been replaced by the LLC as the entity of choice to own investment real estate.  A general rule is never own investment real estate in a corporation because of adverse tax consequences.  That’s why the limited partnership, not the corporation, was the entity commonly used to own investment real estate before the invention of the LLC.

When you have an LLC, you want the LLC to be the borrower that signs the promissory note and becomes obligated to repay the loan.  The general rule is that if the LLC is the borrower, the owner(s) of the LLC are not liable to the lender to repay the loan if the LLC defaults.

A sophisticated commercial lender will require you to form an LLC and have the LLC be the borrower and take title at closing and require you to guaranty the loan.  Single family home lenders and lenders that do not understand the legal reasons for having the LLC be the borrower will require a person or people to be the borrower.  If your lender will not let the LLC be the borrower then you must be the borrower and take title in your name and then transfer the real estate to the LLC after closing.

If you are an owner of an LLC that will borrow money, the best structure for you is for the LLC to borrow the money and sign the promissory note without you signing a guaranty by which you promise to repay the lender if the LLC defaults.  If you can do this, then if the LLC were to default on the loan and did not have sufficient assets to repay the loan, the lender would not be able to pursue you for the unpaid amount due to the lender.

By |2016-12-13T21:20:16-07:00January 3rd, 2014|Categories: Asset Protection, FAQs, Real Estate Issues|0 Comments

If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?

Question: I am considering starting a new business and I anticipate that it will produce losses, rather than profits for the first few years. Should I form a limited liability company or an S corporation to own and operate the business?

Answer: People ask this question of me a lot, but this question mixes the type of entity formed under state law with a method of federal taxation under the Internal Revenue Code of 1986, as amended. When you are thinking of forming an entity in California to operate a business or to own investment real property, the first question is what type of entity should I form under California law? More often than not the answer is a limited liability company.

After you form your company, the next question is what is the best method of income tax for the entity? If your tax advisor says that your LLC should be taxed as an S corporation and if it is eligible for that method of tax, then all of the members of company must sign an IRS Form 2553 (see the instructions) and file it with the Internal Revenue Service before the deadline for making the S corp election.

An LLC taxed as an S corporation is a “pass through” entity (it does not pay income taxes), which means that losses are passed through to the owners who can deduct the losses on their personal income tax returns (if they have sufficient basis).  Note: An LLC that elects to be taxed as a C corporation, an S corporation, a sole proprietorship or a partnership for federal income tax purposes does not change its character. The entity always remains an LLC created under California law regardless of the method of federal income tax applicable to the entity.

Bottom line: If S corp tax treatment is important and your business is in California, form a California LLC and cause it to be taxed as an S corporation by filing an IRS form 2553 in the first 75 days after forming the LLC.

P.S.  I recommend that everybody who forms an LLC consult with a good tax advisor as soon as possible after forming the entity to obtain advice on which of the four federal income tax methods (sole proprietorship, partnership, C corporation or S corporation) is best for the limited liability company. The election to change the default method of income tax (sole proprietorship or disregarded entity for a single member LLC or partnership for a multi-member LLC) must be filed within 75 days of the date of forming the LLC for the election to be effective from the date of formation.

By |2016-12-13T21:20:16-07:00January 2nd, 2014|Categories: CA LLC Formation, FAQs, Tax Issues|0 Comments

President of Corporation Personally Liable for Signing Contract

Improperly Worded Company Contracts can Cause Signer to be Liable

One of the primary reasons people form limited liability companies and corporations is to protect the owners from the debts and liabilities of the company. The general rule of California law is that the members of a California LLC and the shareholders of a California corporation are not liable for the company’s debts. One of the biggest exceptions to this rule arises when an owner signs a contract and becomes personally obligated to pay the company’s debt.

The Personal Guaranty

The most common type of contract that obligates an owner of a company to pay the company’s debts is called a “guaranty” or “personal guaranty.” A guaranty is a contract by which the signer/guarantor promises to pay or satisfy the debt of another person (the company). Guaranties are frequently required by landlords and lenders who know that if the company doesn’t pay, the debt will never be paid.

Contracts that Create Personal Liability

Owners and employees of a company can create contractual personal liability for themselves if they sign a contract on behalf of the company, but the wording of the contract does not make it clear that the signer is signing on behalf of a company.

If the signer of an LLC or corporate contract wants to avoid becoming personally liable for the debts of the company created in the contract, the language in the contract must clearly state that the party is the LLC or corporation and indicate the capacity of the signer.

Iowa limited liability company and corporate attorney Marc Ward reports on a recent Iowa case that where the court found that the person who signed a two page contract on behalf of a corporation was personally liable to pay the corporation’s debt under the contract.

The Iowa Court of Appeals opinion in Builders Kitchen and Supply Co. v. Moyer, N0. 0-655/09-0194 (September 2, 2009) is a deceptively simple case. On the one hand it represents the folly of not having even run of the mill contracts reviewed by lawyers before they are signed. And on the other hand, it is a warning to lawyers that things aren’t as simple as they appear.

Unfortunately for Moyer the contract contained a clause that said “I hereby personally guarantee to pay on demand any and all sums due that my/our company shall fail to pay.”

Mr. Moyer did not sign the signature block for the personal guaranty, but the court found he was liable anyway.

Proper Way to Sign Contracts

Right Way to Designate the Company in a Contract:

World Wide Widgets, LLC, a California limited liability company.

Note the LLC after the name and the written out “limited liability company.” Make sure both the abbreviation and the full designation are used. Typically the proper designation of the company should be in the first paragraph and in the actual signature block where the signer signs. If it is not, the signer should hand write the missing information above where he or she signs and/or on the first paragraph where the company is named.

Right Way to Designate the Capacity of a Signer in a Contract:

Homer Simpson, President (for a California corporation), or Homer Simpson, Manager (for a manager-managed California LLC), or Homer Simpson, member (for a member-managed California LLC).

Wrong Way to Designate the Company in a Contract:

World Wide Widgets

Wrong Way to Designate the Capacity of a Signer in a Contract:

Homer Simpson.

Beware of Personal Guaranty Language in the Contract

If a contract contains any language that would cause the signer to be a guarantor and impose personal liability on the signer, the signer who wants to avoid personal liability must take a pen and cross-out or strike-out all of the guaranty language. If you are signing a contract, you must read it and strike-out any language you don’t want and write on the document any additional language you want. You can modify with hand-written changes all pre-printed contracts before signing.

By |2017-10-05T10:36:19-07:00January 1st, 2014|Categories: Asset Protection, LLCs & Corporations, Operating LLCs|0 Comments

How Do I Open a Bank Account for an LLC?

Question: I just formed by new California limited liability company. I now need to open a bank account in the name of the LLC. How do I open the account?

Answer: Tell the bank you want to open a bank account in the name of the LLC. Give the following to the bank officer:

  • A copy of the LLC’s Articles of Organization with either the California Secretary of State’s filed stamp.
  • A few banks also require a copy of the LLC’s Operating Agreement.  If you do not have an Operating Agreement for your California LLC you may hire us to prepare a custom Operating Agreement that complies with California’s new Revised Limited Liability Company Law effective January 1, 2014.

Most banks will allow you to open a bank account in the name of the LLC if you give the bank your social security number, but I recommend that you get an EIN for your LLC instead.  In this age of identity theft, it is better to get an EIN for the LLC so you do not have to give out your SSAN to banks or others from time to time.

By |2014-06-04T21:51:52-07:00January 1st, 2014|Categories: CA LLC Formation, Operating Agreements|0 Comments

Olmstead vs. Federal Trade Commission

This Florida Supreme Court case involved the attempt by the Federal Trade Commission to enforce collection of a $10 million judgment it got against Shaun Olmstead and Julie Connell for their involvement with entities that operated an advance-fee credit card scam. The issue before the court was:

“Whether, pursuant to Fla. Stat. § 608.433(4), a court may order a judgment-debtor to surrender all, ‘right, title, and interest’ in the debtor‘s single-member limited liability company to satisfy an outstanding judgment.”

Olmstead argued that the issue should be answered in the negative because the only remedy available to a creditor who has a judgment against a member of a Florida single-member LLC is a charging order.  The court said:

“we rephrase the certified question as follows: ―Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in the debtor‘s single-member limited liability company to satisfy an outstanding judgment. We answer the rephrased question in the affirmative.”

The reason the court allowed the creditor to get to the assets of the single member Florida LLCs is because the court ruled:

“that there is no reasonable basis for inferring that the provision authorizing the use of charging orders under section 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor‘s interest in single-member LLC.

California LLC law is different from Florida’s LLC law.  California’s LLC member charging order protection is contained in California Corporations Code Section 17705.03, which states:

On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. A charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.

See “Olmstead Decision Does Not Make All Single Member LLCs Useless.”

By |2016-12-13T21:20:23-07:00June 24th, 2010|Categories: Asset Protection, Charging Orders, Lawsuits|0 Comments

Can My California LLC Do Business in Another State?

Question:  If I form a California limited liability company, can it do business in a state other than California?

 Answer:  Yes.  An LLC formed in any of the fifty states may engage in business in any of the other state if the LLC registers to do business in the other state.  Registering to do business in a state means filing a form and paying an initial registration fee and annual fees each year. If the state where the LLC registers to do business has a state income tax then if the LLC earns income from within the state the LLC must file a state income tax return and pay state income tax to the registration state.

By |2015-02-26T20:17:54-07:00October 2nd, 2009|Categories: FAQs, Operating LLCs|0 Comments
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