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In this Episode, Steve and tax attorney Chris Housh come together to discuss how Moskowitz LLP can help businesses with Corporate Formation and Formalites by creating an annual plan and meeting throughout the year to stay ahead of the game. An annual plan with Moskowitz LLP is talior-made to help save you time and money, and more importantly, give you peace of mind so you can focus on growing your business.
Listen to the full episode to learn more!
Episode Transcript
Intro:
You’re listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Welcome everyone and thank you for listening to our podcast, and this is part two. So if you haven’t heard part one, that’s okay ’cause you could really do either one of these parts, first or second. But if you like what you’re hearing here, do go ahead and listen to the other part ’cause we have a lot of good information in there.
And just basically as a real quick summary, on the other one we talk about the asset protection of a corporation or other entity. Where if you get sued or something bad happens or you can’t pay the bills, how the entity protects you from the other side going after your personal assets or other corporate assets? We’ve talked about how there’s tax advantages. We’ve talked about how there’s a special workaround for certain corporations to get around the limitation on deducting state taxes on the federal returns, for those of you that are in states that charge state taxes. And some of the states charge a lot of state taxes.
We’ve also talked about potential pension benefits of a corporation and a lot of other things. And an awful lot of people are in business as a sole proprietor and that’s sometimes fine, but a lot of times it’s not. And a lot of times that person would be much better off if they were in an entity like a corporation. And we explained the differences between a C-Corp and an S-Corp. Where C-Corp has a double taxation, whereas an S-Corp doesn’t. And a partnership, and LLC. And sometimes one entity is better for something than something else. But the bottom line is, go ahead and listen to the other podcast for this. Today, on this podcast, we’re gonna work on the formalities and the formation. And one of the things that I hear when I recommend this to people is, “Well, what about, oh, there’s all of these technicalities. Now I’m busy doing business, I can’t be bothered with all this formal stuff.” And to answer that, I’d like to introduce my friend and colleague of over 20 years, Attorney and EA, Chris Housh.
Chris Housh:
Thanks Steve. Yes, we understand. If you did the time for every crazy formal thing that is requested for you, you’d have no time to actually do the business that you actually are out there doing, the thing that you’re best at. So as the attorneys that are working with you on this, we let you know what the formalities are, and also help you take care of them.
Steve Moskowitz:
So do you help ’em take care or do you just do it for ’em?
Chris Housh:
I look at it as that we are a team. And so I will do the actual writing up of the elements. I’ll do the hard work, but I need their input. I need their help on things. I also schedule times to make it easier. Make it where you can say, okay I’m gonna set aside this time because I understand time is very valuable for everybody especially a business owner. And I try to make it where it’s as easy as possible for you to go and be able to do these things.
So I narrow down at the beginning, when I’m setting up for a business, I send out a eight question questionnaire so that it’s not a overwhelming burden. I’ve seen some places that will send you a 20 page questionnaire. If you had time to do that, you know, you’re not really going in needings that situation. I can narrow it down, get you started, and then ask you a couple of key questions to make it where I can get the properly formed entity, LLC, corporation or partnership and have it cover your needs. Because I know what’s out there. I know what the rules are, and therefore I can tailor everything to what you need. So similar to going to a tailor, you go in, the tailor knows how to make the suit right but he still needs you there to at least make sure that it fits your body.
Steve Moskowitz:
So I like that. Just like with that tailor, it’s I don’t need to know anything about tailoring or how to sew or anything else. Basically, I just stand there and the tailor literally tailors the suit to me.
Chris Housh:
Right, but the tailor will ask you certain questions, also to make it where it meets what you want. He’ll ask you, how much of a lapel you want? How do you like to wear this or that? What do you feel comfortable with? We do the same thing. We go and say for your business what’s gonna be comfortable, but also give you what you need?
Steve Moskowitz:
And like that suit close, can you make adjustments as the business changes?
Chris Housh:
Yes, that actually becomes part of the ongoing elements. Which is, you are required under, I’m gonna say California law, but most state corporate laws are the same, that you have to have a board meeting every 12 to 13 months. California law is 13 months. And during that board meeting, what that is, is that you’re supposed to have a recorded meeting of the officers. And if you have any board members, sitting around and talking about here are the reports of how the business is doing. Cover old business. What did you talk about last year, and is there any follow up about that?
And then new business, what are you looking for as being your next stage for next year? If you have a change, bringing in new officers, hiring a new important person that you’re gonna give authority to go and sign a contract, entering into a new lease, changing where your office is. You wanna have that in your board minutes. And there have actually been some recent decisions coming out of Delaware, saying, how people not properly reporting what they were putting in there, into their board minutes, actually left them exposed in a lawsuit.
So it is important to go and do that. And you can make the changes. You have a vote. And I do this for a lot of businesses that are one or two members. Sometimes husband and wife. During the day to day, you’re just so busy running the business and you’re naturally doing things. Setting aside a board meeting gives you that chance to think about, how was the last year? How did we do and what are we dreaming about? What are we think about doing for the next step? And it would feel weird to sit in a room by yourself and go, I would like to do this, all in favor? Yes, me. Right? But by having someone like me, help guide you through that and record it and then write it up for you, makes it, well, it feels better. You have that opportunity to reflect, look forward and go and make your changes recorded.
Steve Moskowitz:
So Chris suppose somebody comes in and they say, they’re unmarried, they own the business 100% themselves. They ask the question, “You mean I have to have a meeting with myself?”
Chris Housh:
And the answer is, yeah. That’s what you’re supposed to do. And again, actually, it’s even more important for that person to be having those board meetings, because, someone down the road says, your business did something wrong. You need proof that you were treating the business as being, not just you. So whether it’s an employee that gets mad, a customer that gets mad, some regulatory agency that says, “Hey we’re coming after you.” To keep your personal separate from the corporation, you wanna keep your assets protected, right? Don’t want them coming after your home. You have to go and show that you treated everything as being different. And that especially becomes the element of going, hey, let’s go and have somebody else guide your meeting, show you where you need to be saying these things and make it efficient. By going and telling you ahead of time, here’s the things we need to cover. And being able to guide you through that and record it and then write it up for you. I can make it where it’s efficient and is effective.
Steve Moskowitz:
And I think what I’ve heard in there that’s so important is that if something goes, ’cause a lot of people ignore that. And I also know as a practicing attorney, they just don’t bother. And they’re usually the ones that go to those popup, just sign here and do it. And they don’t have a real attorney do it for ’em. They don’t even realize this is needed. And then they get sued, and they think, oh, well they’re a corporation, they’re protected. They haven’t met these corporate formalities. And now the enemy lawyer says, “Judge, he wasn’t acting like a corporation. Don’t give him the protection of the corporation.” That’s why that’s such a big deal, what you just said.
Chris Housh:
Exactly, and I have been the attorney standing there representing my client, and the paperwork comes out. And they go, “Okay, where’s your board meeting minutes that is going to show that you approved this? Oh, you didn’t have that? Oh, well, when was the last time you had one? The day you founded your company? Well, congratulations, you’re not actually a corporation. We can go after your personal assets.” It’s more than just filing that tax return every year and remembering the statement of information to the Secretary of State every one to two years. And frankly, we run into a lot of people that walk into the door not knowing that we were even supposed to do that. And that’s the problem with the popups. All they did do is say, oh you’re interested in something? Mmh, type in a few items that may, and will give you a boilerplate that doesn’t match what you need and not advise you on how to take care of it yourself.
Steve Moskowitz:
And, and that’s what I’ve seen so much in practice too. Where somebody has been in corporation for years, and I’ll ask, ’em what they’ve done. And they’ll say absolutely nothing since the day they were incorporated. And they are just leading with their chin, if they get sued, they’re gonna be in for a rude awakening. That’s why it’s so vitally important for the owner to do exactly what you’re doing.
Chris Housh:
And especially for those of us that have just gone through this horrible pandemic. So many business decisions had to be made. How many people never took that time to actually record it and say what they did? The PPP loan or if you did an EIDL, the Economic Impact the Disaster Loan? Having it actually in your board meeting that you did it, that you reviewed to make sure it was your best option, the best option that you took out. And recording it, now, if anything goes wrong, if you’re not able to go and either meet the conditions to go and have the forgiveness or if you have to pay back under EIDL, and run into trouble, you have official documentation to help keep it inside the corporation and not come after you.
Steve Moskowitz:
And that’s what’s so vitally important because so many people become a corporation for that protection. Protection of their personal assets. And they don’t realize by them not doing these meetings, by them not doing these corporate formalities, they don’t have the protection they think they do. And that’s the worst of all worlds. It’s much like having a backpack and thinking it’s a parachute. That’s worse than, you know, say, look, I know I don’t have a parachute. And that’s what I’ve seen in practice so many times. And what else should people know about these formalities, Chris?
Chris Housh:
Also one of the big things is having a record of what did you actually contribute in as your investment to your corporation? And that’s both, what did you initially put in? And then what have you had to put in during the lean times? Because that makes it where then, when money is coming back out. In the past, it was always an internal bookkeeping element. You were going, okay, we wanna make sure so that, like if a feature person joins in your company, you have a record to say here’s how much you as the have already put in versus what you’ve already taken out, therefore what you’re entitled in the future. But now, alongside of having the tax situation going, money that the corporation pays out, should first go to paying you back your capital investment and returning you individually to being whole, not taxable.
So you have that as a benefit of going and getting that money back. And now the IRS starting this year is asking for a specific form to say, how much did you still have in your capital account? How much money did you pull out? Therefore, what do you have left at the end of the year? So they can help you track that as well. Of course they’re looking for when is it gonna be taxable, but you’re looking at it for what can I show is not taxable? Also for those future investments, when you have, either getting a new partner in the business or if you’re having to close down the business. Being able to say, here’s the money I put in, therefore I’m entitled to get back.
Now at the end of the business you’re the last creditor to get paid back. You have to pay off everybody else, otherwise it can be clawed back. But being able to say here’s why I’m entitled to this money and not be taxed is important. And saying here’s the breakdown of when are you gonna be taxed for what you get out of your corporation? Having that properly documented is important, and recording in the board meeting. Here’s my loan that I paid. Is there an interest rate on it? When is it expected to be paid back?
I’ve had a client that had a 30 year business. He kept a spreadsheet saying all that, but he stopped writing any loan notes, 20 years into the business. He just then kept letting it flow back and forth. He would go and use his credit card, have the company pay him back at the end of the year. When the state came knocking because they felt he didn’t have a proper salary for himself, they declared because he didn’t keep any of those loan documents going, and he didn’t have a proper accounting for his interest rates, they declared it all to be actually his salary. And so he ended up having to pay taxes on the money that he was just paying back to himself for what he lent to the company, ’cause he didn’t do a record.
Steve Moskowitz:
Still another reason why it’s so vitally important to do this. because we’re saving taxes, and also for business purposes, when people sell their interests, they can say to whoever they’re selling, “Look, this amount I’m taking is to pay myself back. And this amount is for whatever.” That is so vitally important and so many people overlook that. What are some other common things that people overlook?
Chris Housh:
Alongside of going and having the element of, what is that history of what your investment is, is also going and saying that you understood the risk. So all of my entities I prepare, I have one specific document that is put in saying, that you could take the financial risk when you invested this in. And later on that becomes something that any new partners coming in have to sign as well. So that you don’t have someone going, “Oh well I had no idea that there was a risk.” You have to go and have knowledge of risk. And that actually further proves, this separation between you and the business. Making sure that you then also get the proper independent bank account for your business. Having it so that everybody can see that there’s a difference between the two. The government term for if you don’t do this is called Alter Ego. Where they go, you’re just going out there and saying yourself under a different name. And unfortunately is that the government or any creditor will be able later on to say, if you didn’t see a difference between yourself and your business, why should they see a difference? And that leaves you exposed.
So we wanna make sure that you have information, properly written bylaws or articles, depending on which one you are, a corporation or LLC. A document saying that you understood and read everything, authorizing us to make you into that corporation or LLC. What your investment was and that you could afford to invest into it. We then also go and advise you about, what business license are you gonna need? Is there something specific to your industry that is special for LLCs or corporations. Or if you’re not even allowed to be a corporation, because there’s certain businesses that are not allowed in California or in other states.
To actually be a corporation, they have to be specialized. We also will tell you how to go and register yourself in your county, if that’s required to get your business license. A lot of people will forget about that. They’ll think, oh, I’m just working from home. I’m not exposed that much out there. And then the City comes after you or the County comes after you for something you didn’t even know about. That was a simple paper to file. And then we make sure that you know, here is when you need to go and do your annual stuff, the board meeting, the updated statement of information or whatever the same thing is for a different state that you have to file. And how often do you need to file it? Because the state can actually take away your corporation status. Make it where you are exposed just because you forgot to fill out three questions and pay ’em a small dollar amount on an annual element. So we make sure that you’re aware of that and are reminded of when that’s gonna be needed.
Steve Moskowitz:
And Chris, these annual meetings are you actually there with the client?
Chris Housh:
Pre pandemic I would actually, if a client wanted me to, I would actually have them meet with us in our conference room, and actually run the meeting in person. Nowadays under the pandemic, I’ve been doing it over zoom. I bring out a gavel, I have an official statement that’s read. And the benefit is you have a recording. I guide you through it so that you can do it efficiently. And you have a written one, with me having a video backup of it.
Steve Moskowitz:
And one of the reasons that’s so vitally important, I’ve seen enemy attorneys, accuse people of not having the meetings and then claiming, oh you did all the meetings, you back date ’em, you did ’em last night before you came here. And that’s an ugly allegation. Although let’s face it, there’s a lot of businesses don’t do the meetings and their lawyer says, well, you’re in trouble and all of a sudden documents show up. This is a good way to prove that. First of all, that’s an outrageous allegation holding without merit. However, I have proof that, that’s not the case because my attorney was actually there and recorded it as part of his business records to prove that it actually happened when the books say it happened.
Chris Housh:
Exactly. And also because we do run into the client that walks in here for the first time, hasn’t had a board meeting in two years, three years, five years, a decade. What in that situation we do, is we only have one board meeting. To do that, what we do is we then have a list of what’s the major elements that need to be reported, and have you ratify those elements afterwards. But we do have it where nobody can say that your documentation is false. And have it where it meets the rules that are in Roger’s rules, which is the traditional way that you go and say what level of voting do you have to have done to go and be approved for board meeting but also make sure it meets the state laws as well.
Steve Moskowitz:
And that’s so vitally important. And although like some of the other areas of life, we would always recommend you do things properly. If you haven’t, there’s still a way to fix it, protect it, then we need to be properly from there on end. Everybody I’d like to thank you for listening to us. Don’t forget about the other part. And I’d like to thank my friend and colleague Chris Housh, attorney and EA, for giving us all this tremendous information. Thanks again, Chris.
Chris Housh:
Thanks for having me.
Outro:
You’ve been listening to the Practical Tax Podcast, with tax attorney, Steve Moskowitz. To hear more podcasts, go to Moskowitzllp.com/practicaltax. The information contained in this podcast is based on information available as obtained at the date of it’s release. MoskowitzLLP and it’s affiliates are under no obligation to update this information as changes occur. Applying this information to your specific situation requires careful consideration of all factors, which may be applicable, and any information is not to be considered tax advice or legal advice. Further, this is attorney advertising and the facts and circumstances displayed in this case are dependent entirely on the facts of that particular case. Please consult your tax advisor before acting on any matters discussed.
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