Category: business owners

Business Ownership Deals: Buying And Selling (Transferring) Membership Interests In LLCs – Part 5, Filings With The Secretary Of State

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Categories: Business Law & Contracts, business owners, business partners, limited liability company, llc

bigstock Businessman And Businesswoman 471976647

A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?” Of course, you can also have a situation in which a current Member is only transferring or selling some of that Member’s interests in the company.

This Part 5 of our ongoing series focuses on the filings that can or should be made with the Secretary of State as a result of a change in ownership / membership. See Part 1 of this series for a general overview of sale / purchase / transfer of company membership interests and the legal process, Part 2 for more information on the Purchase and Sale Agreement / Membership Interest Transfer Agreement, Part 3 regarding “Resolution” which should be a part of the membership interest (ownership) transfer process, and Part 4 for important information about Operating Agreement issues.

A transfer of membership / ownership interests in an LLC can, and sometimes should, result in new filings with the Secretary of State. The most common change, but not necessarily the only one, would be made by filing an Amendment to Articles of Organization. That Amendment could identify the changes in ownership structure. Similar information would be contained in the next-filed Annual Report, at least in states like North Carolina which require your typical limited liability company to file such reports.

Whether such an Amendment to Articles of Organization should be filed – and what exactly it should say – will depend on each specific circumstance. An Amendment document on file with the Secretary of State would be evidence of what information the Amendment contains.

An example of another appropriate filing with the Secretary of State would be for the LLC’s Registered Agent. (Click here for an explanation of Registered Agents.) If the Registered Agent has been an outgoing LLC Member, it would almost certainly be preferable to change the identity of the Registered Agent. That change is made by filing documentation with the Secretary of State, and of course the new Registered Agent (which could be our law firm, if the company is located in the Carolinas) has to have given permission.

These sorts of LLC filings are commonly worked on by business law attorneys. However, attorneys need to pay attention and have their brains and skill sets engaged even when performing straightforward work. Paying attention gets the best results for clients, which is what we do here at McGrath & Spielberger.

If you’d like assistance with business compliance services, please click here: https://mcgrathspielberger.com/business-compliance-services/.

Business Ownership Deals: Buying And Selling (Transferring) Membership Interests In LLCs – Part 4, Operating Agreement (“OA”) Changes

Posted on by g83js92js91
Categories: Business Law & Contracts, business owners, business partners, limited liability company, operating agreement, series

A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?” Of course, you can also have a situation in which a current Member is only transferring or selling some of that Member’s interests in the company.

bigstock Business Man Signing A Contrac 262517662

This Part 4 of our ongoing series focuses on Operating Agreement amendments and/or similar changes as a result of a change in ownership / membership. See Part 1 of this series for a general overview of sale / purchase / transfer of company membership interests and the legal process, Part 2 for more information on the Purchase and Sale Agreement / Membership Interest Transfer Agreement, and Part 3 regarding “Resolution” which should be a part of the membership interest (ownership) transfer process.

A transfer of membership / ownership interests in an LLC should result in amending the Operating Agreement (shorthand = “OR”) or the creation and execution of a new Operating Agreement. We’ll now address 3 different common scenarios, and keep in mind these are brief summaries, they are not intended to be a detailed or comprehensive listing of all relevant or necessary items / issues.

  1. AMENDING THE WRITTEN OPERATING AGREEMENT. If there is a written, executed OA in place of reasonable quality, then an amendment document can be utilized. The Amendment to OA would at least summarize the situation and the changes, reference other key documents, be dated, and be executed by the LLC itself and each individual Member (including any new Members and any outgoing Members).
  2. REPLACING AN EXISTING OPERATING AGREEMENT. There are times when replacing a past-written OA with a new one makes the most sense, including when there is a change in ownership. We’ll address this in more detail in a separate article.
  3. CREATING THE COMPANY’S FIRST WRITTEN OPERATING AGREEMENT. Many LLCs do not have a written OA. In nearly every instance, the creation and execution of a written OA should take place in light of the change in ownership structure. Interestingly, depending on the circumstances and applicable strategical goals, sometimes it makes sense for that OA to come into existence: before the change in membership (which may then also require an Amendment to OA as discussed above); or concurrent with the change in membership; or after the change in membership. We may address those timing options, and why each could make sense, in a different article.

An Amendment to Operating Agreement is often 1 or 2 pages long. An entire Operating Agreement is typically between 10 and 50 pages long. Yes, you correctly infer that there is a wide variety as to how complex and detailed Operating Agreements can be.

An LLC Operating Agreement is typically a private document vs. something which gets “filed” with anyone. This doesn’t mean it is forever confidential, it’s just internal. The contents of an LLC OA could be agreed to be confidential by the parties, although that also does not guarantee it will never be seen by outside persons or entities.

The law does not require an LLC OA to be notarized or witnessed by any third parties. In concept, there could be a requirement within a certain limited liability company which does require it – but that would be uncommon.

The LLC OA – including any properly agreed upon amendments – are typically part of the formal proof of the issues covered in the OA. This means that membership / ownership listings (including changes) in such documents are excellent proof of who owns how much. Anyone who is a signor to an OA or related Amendment should have a tough time later claiming to be unaware of the content of such documents or to deny that they agreed to the content.

LLC Operating Agreements and their Amendments are commonly worked on by business law attorneys. However, attorneys need to pay attention and have their brains and skill sets engaged even when performing straightforward work. Paying attention gets the best results for clients, which is what we do here at McGrath & Spielberger.

Business Ownership Deals: Buying And Selling (Transferring) Membership Interests In LLCs (Part 2)

Posted on by g83js92js91
Categories: Business Law & Contracts, business owners, business partners, limited liability company, llc

The Purchase / Sale / Transfer Agreement Itself

Big Large White And Black Sign On Brick Wall Under New Managemen

A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?” Of course, you can also have a situation in which a current Member is only transferring or selling some of that Member’s interests in the company.

See Part 1 of this series for a general overview of sale / purchase / transfer of company membership interests and the legal process. This Part 2 focuses on the contract between the parties involved in the transaction, typically the Seller (Transferor) and the Buyer (Transferee), with the limited liability company itself often being a party to the agreement as well.

The agreement between the parties involved in the transaction is often called the “Membership Interest Transfer Agreement” or “Membership Interest Purchase and Sale Agreement” and states the terms of the agreement between the parties transferring ownership interests amongst each other. It’s important to note that the LLC itself may also want to be or need to be a party to such agreements.

Is this business contract a private document or does it become a public record? Typically, a Membership Interest Purchase and Sale Agreement is a private document and does not get “filed” or “recorded” anywhere. That doesn’t mean it can’t be ordered produced by a court, and of course there are other situations in which it must be or should be produced to certain government agencies or other private third parties.

What are the goals and purposes of a Membership Interest Transfer Agreement? There are many, and to some extent they will vary from situation to situation. The most common, most fundamental goal and purpose is to set forth in specific, clear detail what the

Here are some key issues which should definitely be covered in a Membership Interest Purchase and Sale Agreement, and of course this is not a complete list.

  • The full names of the parties; the full name of the LLC should be listed even if the LLC is not a party.
  • The date the transaction is effective.
  • The ownership structure before the transaction and what it will be after the transaction.
  • What items of value are being exchanged between the transacting parties (most often, Member A is selling ____% of the company’s membership interests in exchange for $_____).
  • What responsibilities / liabilities each of the parties has and doesn’t have as a result of the transaction, and the timing of the same.
    ○  For example, if Member A is selling all Member A’s interests, does Member A retain any responsibility or liability after the date of the transaction?
    ○  What happens if the new Member is subjected to negative consequences related to a new legal claim for events which occurred before becoming a Member, especially if Member A helped cause the claim?)
  • That the transaction has been approved, to the extent necessary, by other Members and/or the limited liability company itself.
  • Signatures of the parties (and sometimes of relevant other persons or entities).

We also point out that there are arguments to be made that the selling / transferring Member’s spouse (if there is one) should join in the Membership Interest Purchase and Sale Agreement.

Finally, we observe that if it’s a purchase / sale situation and the selling Member is not receiving all the purchase price up front, there are additional important items to add to the Membership Interest and Purchase Agreement and the use of a well-qualified attorney becomes even more important.

Look for more parts of this series to come!

Business Ownership Deals: Buying And Selling (Transferring) Membership Interests In LLCs (Part 1)

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Categories: Business Law & Contracts, business owners, limited liability company, llc

 

The “owners” of a Limited Liability Company are traditionally referred to by attorneys as the LLC’s “Members”. It’s important to realize that (with some variation from state to state) there can be “Members” but also what may be referred to as “Economic Interest Owners”, and those are not the same thing. However, for the rest of this article and related articles, we’re just going to use the terms “Member” and “Owner” as synonyms, and Owner is going to mean someone who has full rights in the Company (mainly meaning having voting and economic rights).

A very common question we get asked at our law firm of McGrath and Spielberger is “What do I need to do to add an owner to my company?” The answer to that exact question is similar to the related question of “How do we transfer the ownership interests of a Member who is leaving the LLC?”

We’ll discuss which of these documents are public records filed with the Secretary of State vs. private records in a different article.

Whether you’re selling part of your LLC in North Carolina, buying into a limited liability company in South Carolina, or transferring membership to a family member in Tennessee, the steps are going to be similar. Of course, this article is not specific legal advice and you need to consult an attorney about the specifics of your situation.

  1. The agreement between the parties involved in the transaction. This might be called the “Membership Interest Transfer Agreement” or “Membership Interest Sale and Purchase Agreement” and states the terms of the agreement between the parties transferring ownership interests amongst each other. It’s important to note that the LLC itself may also want to be or need to be a party to such agreements.
  2. The LLC resolution. For key issues and situations, limited liability companies should generally hold votes or otherwise make decisions according to the law and the Operating Agreement and memorialize (record in writing) the issue and the outcome. In other words, what was decided / approved, if anything? An LLC decision to approve the transfer of ownership interests should be memorialized in a document called a “Resolution”.
  3. Operating Agreement: amendment or new agreement entirely? The changes in the LLC’s ownership structure should result in the Operating Agreement being formally amended. Sometimes the company doesn’t have a written Operating Agreement, meaning one needs to be created. In certain other instances, a change in membership structure for the limited liability company could or should result in a brand new Operating Agreement even when there was a written one in existence.
  4. Filings with Secretary of State. Some changes in company ownership will require new, updated, or different documents to be filed with the Secretary of State. Other instances should trigger such documents.
  5. IRS filings. We aren’t going to attempt to get into the many twists and turns of when changes in an LLC’s ownership may require X, Y, and/or Z changes with the IRS – just be aware that could need to occur.
  6. Beneficial Ownership Information Report filings / compliance with the Corporate Transparency Act. This article is not going to delve into this issue in any detail, although others will. Just be aware that changes to LLC ownership could require (updated) Beneficial Ownership Information Report filings.

Business Meeting.

This is not necessarily an all inclusive list; the more complex the ownership structure is and/or the more complex the changes are, the more likely there would be additional formal steps to take.

Also keep in mind the many business-oriented and practical changes and updates which can be required because of a change in ownership structure.

Other interesting questions related to business owner deals are “Can (or should) just 1 attorney do all this work? Does each party involved in the deal need their own lawyer? Can the attorney represent the LLC and also give advice to individual members?” We’ll address those sorts of issues in a different article.

Most experienced business law attorneys can handle this sort of work. It’s not always that complicated from an attorney perspective, but it takes time and dedicated effort, and the attorney needs to keep the brain engaged instead of lapsing into cruise control. Paying close attention helps the client get the best results.

Tax Rates on Ordinary Income for Businesses

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Categories: business law, Business Law & Contracts, business owners, income, Life and the Law, North Carolina, Tax Issues, tax rates

When you decide to start a business venture, there are a myriad of things to consider. We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal. There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business. This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity. The most prominent federal tax considerations in choosing a business entity include:

  • Capital Contributions

 

  • Ownership Restrictions

 

  • Business Income and Loss

 

  • Allocations of Income or Loss

 

  • Basis Limitations and the Deductibility of Losses

 

  • Distributions

 

  • Employment Tax Considerations

 

  • Tax Rates on Ordinary Income

This article discusses the tax rates for businesses and business owners.

Ordinary Income Tax Rates

For most C corporations that have significant taxable income, the corporate income tax rate is essentially a flat rate of 34-35%. Corporations with smaller amounts of income enjoy lower rates (15-25%) on their first $75,000 of taxable income. As you can see below, a very small number of small businesses will receive the lower tax rates of 15 and 25%.

corporate tax rates

Additionally, certain personal service corporations (i.e., lawyers, accountants, architects, and the like) are not entitled to graduated tax rates but receive a flat rate of 35%. Individuals pay tax at the graduated rates of 15%, 28%, 31%, 36%, and 39.6%.

With a presidential election fast approaching and presidential hopefuls throwing their hat in the ring, you can expect some campaign talk of tax reform. On the corporate side, Marco Rubio has talked about tax reform that would lower the tax rate for corporations and passthroughs to 25% (although many of the credits and deductions would be eliminated) and allow businesses to expense the cost of their investments 100% in the year of acquisition. On individual tax reform, Rubio proposes reducing the number of individual tax brackets from 7 to 2 (15% and 35%), eliminate the standard deduction and replace it with a refundable personal credit, and create a $2,500 child tax credit.

Depositphotos 6663610 sacks of money

The relationships among these tax rates can greatly influence the choice of entity. At one time the maximum individual tax rate on ordinary income peaked at 70% and the top corporate tax rate was 46%, making forming a C corporation an attractive option to avoid the higher individual tax rates. The difference in rates prompted most business owners to organize their entities as a corporation rather than a pass-through entity because corporate income was taxed at much lower rates. During these high individual tax rate times, shareholders that wished to withdraw earnings created tax efficient strategies to avoid the double tax (e.g., owner-employees of a C corporation would distribute profits in the form of salary or fringe benefits, which are tax-deductible by the corporation and the fringe benefits are excludable from income of the employee in most situations). Shareholders also loaned money or leased property to C corporations and withdrew earnings from the corporation in the form of rent or interest payments that were tax deductible as well. The IRS began to crack down on these strategies and attacked payments of salary or interest as unreasonable compensation or disguised dividends. Congress fought back by enacting penalties to patrol against excessive accumulations or avoidance of the individual progressive tax rates. It wasn’t hard for a corporation with good tax planning to justify the payment of reasonable compensation and accumulation of earnings on the basis of reasonable business judgment and thereby avoid constructive dividends and the corporate penalty tax.

Now, individuals and corporations are subject to the same top tax rate and dividends and long-term capital gains are both taxed at relatively low rates, the C corporation earnings accumulation strategy is much less compelling. The parity in the individual and corporate tax rates, in conjunction with the prospect of two levels of tax when a C corporation is sold, provides a greater incentive to use a pass-through entity instead of a C corporation, particularly if the business intends to distribute its earnings currently, does not have owners who work for the firm, or holds assets that are likely to appreciate in value over a relatively short time frame. It would not be beneficial to organize a venture that invests in passive assets such as real estate or financial assets to operate as a C corporation because the costs of doing so would be prohibitive in light of the double tax. In some cases, however, C corporations still offer tax savings, especially for businesses able to pay out most of their earnings as compensation to their high-income owners.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation’s publication entitled “Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations.”

McGrath and Spielberger, PLLC assists clients with all sorts of tax issues, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact us about your tax matter.

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 McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.