The XBanker
Business Financing eXpert
Think Twice Before Dissolving
February 2nd, 2009
In times of uncertainty many owners of corporations and LLCs may consider folding up their operations. CPAs and other advisors may suggest dissolving these entities to save on fees and to be done with it all.
But hold on: The “easy” route of dissolution can have significant negative consequences.
In California, for example, shareholders can be held personally liable for corporate obligations arising before or after a dissolution. The rule is found in California Corporations Code §2011. The same rule exists for LLC members pursuant to California Corporations Code §17355.
The deadline for suing corporate shareholders or LLC members in California is either; 1) the applicable statute of limitations period or, 2) four years after the entity’s dissolution, whichever is earlier. Since many statutes of limitations in a business context can be four to six years in length, you may have four years of worries until you are safe from litigation. And don’t think that because you have a Nevada or Wyoming entity qualified to do business in California you are in the clear. California courts are notorious for applying “their” law to out of state entities doing business in California.
So what is the solution?
Do not dissolve your entity. Keep it alive until the statute of limitations period has run.
Here is an example of why it makes sense to keep your entity alive.
Joe owns Merced Consulting, Inc., a Nevada corporation qualified to do business in California. With a downturn in the economy Joe’s consulting business has suffered. His CPA suggests dissolving the corporation and eliminating the expense of an extra tax return. The CPA says his other consulting client Mary has just dissolved her entity.
But what happens in a downturn? People start to file claims over old business disputes, whether real or imagined. In good times when the money is coming in, grievances may be overlooked. In tougher times people will sue. And with business contract statutes of limitations typically being six long years, plenty of Joe’s clients may be looking for a new pocket to dip into to help pay for their current troubles.
In fact, Joe had provided Tom with project development help on a condo complex. Joe’s projections were based on the real estate market as it existed in 2006. The picture is quite different today, and Tom is suffering for it. Tom hires an attorney to sue Joe, Mary and two other consultants for their “bad” advice.
What are the consequences?
Mary, who dissolved her entity and received a distribution of corporate assets, is now personally liable for Tom’s claim.
Joe, who listened to his attorney and did not dissolve, is still protected by his corporation. While the entity does not hold a lot of assets, if Tom gets a judgment against Joe’s corporation he only gets what is inside the entity. Not much. And Joe’s personal assets are protected from the claim.
Dissolving gives a plaintiff a hopeful shot at your personal assets. Keeping your entity alive until the statute of limitations periods have run discourages plaintiffs from even filing in the first place.
Be careful in heeding the siren call of reduced filing fees and fewer tax returns by dissolving. In our current environment asset protection is more important than ever, and can only be achieved by keeping and maintaining your protective entities in place.
Regards,
Garret Sutton
www.corporatedirect.com
Garrett Sutton, Esq. is a corporate attorney and is the author of “Own Your Own Corporation” and other titles in the Rich Dad Advisor series. His firm forms and maintains corporations, LLCs and other entities and may be reached at http://www.corporatedirect.com.
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A New Barrier to Offshore Asset Protection
December 16th, 2008
You most certainly have seen the ads and heard the promoters touting the incredible benefits of offshore asset protection: Privacy, anonymity – and the big one – no taxes ever.
But there is a wrinkle in all their chatter. Uncle Sam taxes U. S. citizens on their worldwide income. So in another one of those too good to be true scenarios, setting up offshore won’t get you off the hook for federal income and capital gains taxes.
Of course, this is not enough of a deterrence for some. They will listen to the promoter and not to their U.S. advisors, who the promoters successfully argue don’t “understand” the benefits of offshore strategies. The promoter will tell them once you are set up offshore there are no filing requirements ever again for U.S. taxation purposes.
This is not the case. And the failure to file the proper form has just gotten very expensive.
The form in question is I.R.S Form 5471. All U.S. citizens who have equity in, or a controlling interest in a Controlled Foreign Corporation (”CFC”) must file one. Most offshore asset protection promoters put their U.S. clients into entities that are considered CFCs.
As of January 1, 2009, the IRS will now assess an automatic penalty of $10,000 for each CFC filing that is missed. That is $10,000 for each entity in each year that is not filed.
So let’s review an example of what can and now does happen in the offshore world.
Joe listens to an offshore promoter in Nevis about the benefits of offshore asset protection. The promoter never mentions the need to file Form 5471 each year. Joe spends tens of thousands of dollars to set up five CFCs in 2009.
In 2012, the Nevis promoter’s mistress realized the promoter won’t leave his wife. She is spiteful and turns all of the promoter’s files in to the IRS. Very quickly, the IRS is calling on Joe demanding $200,000 in penalties for the five entities for which no Form 5471 was filed for four years. And that’s just the start. Joe will have penalties, interest and taxes due on all the income he made over those years.
If you think it is unlikely the IRS could ever receive information in such a way, think again. If it is not from the promoter’s mistress, it may be from your own spouse or mistress or other aggrieved party. The IRS counts on domestic troubles as one of its best sources of information. But even if your life is trouble-free you can count on the authorities to be monitoring your wiring instructions and banking activities for offshore violations. And with this new $10,000 automatic penalty they have ever more incentive to do so.
You can complain about Big Brother and Big Government if you want (and you should; it’s healthy and to be encouraged). But it is important to know that certain offshore promoters will never tell you about these crucial requirements, to your great financial detriment.
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Foreclosure Scams
December 1st, 2008
The increase in foreclosures has resulted, predictably, in a surge in the number of scamsters pretending to want to help homeowners in need. Here are some of the scams to be aware of:
- The Bailout: The homeowner is led to believe that by signing over title to the house he or she can remain as a renter and buy the house back over time. The terms of the buyback are impossible to meet and the homeowner loses possession. The scam artist ends up with the property.
- Equity Skimming: A “buyer” approaches you with an offer of help. He will pay off your mortgage but you must move out and deed the property to him. The buyer puts a tenant in the property and collects the rents. But he does not make any mortgage payments and allows the lender to foreclose.
- The Bait and Switch: Homeowners are led to believe that they are signing documents to bring the mortgage current. Instead, they are actually turning over their ownership of the property to the scam artist.
- High Powered Help: Companies promoted as heroes to homeowners charge large and excessive fees to save the property. They perform very little work and the home is lost anyway.
How do you avoid one of these scams?
First, never be pressured to sign a contract. Take your time. If it is such a good service they will offer it tomorrow, despite their pressure to sign today. Suggest that you must have your lawyer review it (even if you don’t have a lawyer). If the person says a lawyer wouldn’t understand this or wouldn’t approve of it – you know you are dealing with a scam artist.
Second, never sign away your ownership to the property. People who put you in this position are only maneuvering to take away your home.
Third, never make a mortgage payment to anyone but the lender. If the scam artist suggests that they will pay the mortgage be assured that they will not.
Fourth, do not sign any document with blanks or lines that are not filled in. Scamsters will later add language to your detriment.
Finally, always seek the counsel of a good, local lawyer. Their job is to protect you from ever being scammed in these ways. And in this current environment there are plenty of scams to know about and avoid.
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The New Identity Theft Law: Will It Work?
November 20th, 2008
Identity theft is now a pandemic, and a scourge for its victims. Is the federal government finally ready to fight back?
The Identity Theft and Restitution Act of 2008 was recently signed into law by President Bush. The new law is supposed to make it easier for the government to convict those charged with pursuing computerized identity theft. Supporters tout this legislation as allowing federal prosecutors to be more aggressive in cracking down on identity theft cyber crime. But will it work to protect millions of future victims?
The new law provides for the following:
- Discarding the requirement that damage to a victim’s computer exceed $5,000 over a one year period before charges can be asserted for unauthorized access to a computer.
2. Eliminating the interstate jurisdictional requirement, thus allowing prosecution of those who steal personal information from a computer, even when the victim’s computer is located in the same state as the thief’s computer.
3. Allowing victims of identity theft to seek restitution for an amount equal to the value of the time reasonably spent to fix their problems.
4. Adding the charge of a conspiracy to commit cyber crimes. (The prior law only allowed for charges related to the actual crime, and made no provisions for conspiracy to commit the underlying charge.)
5. Adding the remedies of civil and criminal forfeiture to better allow federal prosecutors to combat cyber crime. Individuals found guilty of violating the act can be forced to forfeit both property used in commission of the cyber crime, as well as property obtained from any proceeds gained from the cyber crime.
6. Making it a felony to electronically damage ten or more computers no matter the value of the damage caused.
7. Making it a crime to threaten to steal or release information from an individual’s computer. (Prior law only permitted the prosecution of those who seek to extort companies or government agencies by explicitly threatening to shut down or damage a computer.)
It is intended that the new law will allow federal prosecutors to be much more aggressive in prosecuting identity theft criminals. Elimination of both the $5,000 damage requirement and the interstate jurisdictional requirement should make it easier for prosecutors to bring charges.
But will it really help?
The federal government has tried to keep up with identity theft for years with few results. If the feds are truly interested in stamping out the pandemic, it is with the enforcement of the laws, and not just new laws, that will turn the tide.
Still, there are encouraging signs that a wide ranging effort is being made. The IRS is helping out by allowing in this next year all but the last four digits of taxpayer ID numbers to be blocked out on 1099’s, W-2s, and other informational returns. There is privacy in that move.
But it is not over. Stay tuned for more on this battle.
Garrett Sutton, Esq.
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Palm Beach Businesses Still Moving and Shaking
October 22nd, 2008
I was a recent guest speaker at the Palm Beach Partners 2008 Partner Matchmaker Expo. My topic, of course, was building business credit, and I was pleased to join a panel with other experts who agreed how important it is for business owners to focus on strong business credit.
Suzanne Leeds runs Leeds Capital Solutions, a factoring firm, and she gave advice on using receivables to improve cash flow. (I was flattered when Suzanne told me that she had our Corporate Advantage CD and listened to it often! If you would like a complimentary copy, give the XBanker a call and they’ll be happy to pop one in the mail for you or get you a download link.)
Donald Nappi with Network Technology Solutions in Pompano Beach gave some great tips on financing computer equipment with business financing deals from Microsoft.
If you are in the West Florida area, I recommend you make sure you attend future events. And congrats to Shawn Lewis of Celsius Holdings for all his hard work organizing this successful event. Shawn told me he’s been successfully building his own business credit using our advice. We love success stories!
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