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Corporations and Limited Liability Companies (LLCs): Charging Orders and the Differences in Protection!

I always say that when choosing a business entity, you must evaluate the tax advantages and disadvantages BUT ALSO the level of liability protection. LETS LOOK AT A COMMON TRUTH: Many attorneys recommend the corporation to their clients. For the most part, corporations will provide good protection from traditional liabilities. In other words, if the business is sued for its business activities, then I consider this a traditional liability situation. In most instances (a properly set up and maintained corporation) will protect the owners from personal liability.

Most attorneys (myself included), who stay up-to-date with court precedents and how creditors (and collection attorneys) actually work, will tell you that a multi-member LLC will usually provide enhanced benefits. Here are a few reasons:

1. LESS FORMALITY = LESS MISTAKES: The corporation requires annual meetings and has a number of rules which create a forced management structure. For example, every corporation is made up of a tri-parte management structure (tri-parte means 3 levels). This means that all corporations will have to force or channel operations through this structure of directors, officers, and shareholders. The trouble with small to mid-sized businesses is that the same person or perhaps a handful of people must occupy all of these positions. This can create confusion and more opportunity for error. The limited liability company (LLC) is simpler to operate because state law does force this tri-parte structure upon LLC owners and employees.

LLCs (unlike corporations) are not required to have annual meetings. Although we think LLC meetings are a good idea, you probably wont lose your protection if you forget to have a meeting. These simplicities mean less technicalities and less confusion. It also means that there will be less mistakes available for an attorney to use against you when trying to pierce the entity in order to hold its owners personally liable.

2. CHARGING ORDER PROTECTION: Alright, lets move forward to another VERY IMPORTANT issue. I am going to say that this is perhaps the KEY REASON why an LLC is favored in most situations. The LLC will protect you from business liabilities but it can also protect your business from personal liabilities. DID YOU CATCH THAT? We said the LLC will protect you personally from business liabilities, BUT IT CAN ALSO protect your business from personal liabilities.

Ok, enough word manipulationlets look at a concrete example:

EXAMPLE: Lets say that you are driving and taking your family to the park on a Sunday afternoon. Negligently, you tap someone who is crossing the street and they are slightly injured. The injured person finds a sharp and hungry personal injury attorney who milks the case for every penny. They sue you for $1,000,000 and win. Your insurance pays out the $500,000, but there is still $500,000 owed. What happens next? The answer will depend on whether you have a corporation or LLC.

Did you know that once a judgment is obtained against you, the attorney may pass the case on to a collections specialist (an aggressive attorney who handles collections)? These attorneys are very knowledgeable and may only focus on collections in other words, they know the ropes. This attorney would go to the judge and request a Write of Execution. With this writ they many visit your residence or office (with the local sheriff) and begin seizing personal assets. The problem is the corporate stock shares are personal property. As a result, generally they can seize 100% of corporate stock shares.

Now you may say...Wait a minute, my business was not involved in the accident. I was taking my family to the park on a Sunday. Understand, the creditor is not trying to enter your corporation through the front door, but through the back door! Have you ever heard the expression, He who has the gold makes the rules?. I dont always agree with this, but in this situation, lets say, He who has the stock shares makes the rules. In other words, if the creditor seizes your stock shares they can vote to dissolve or end the corporation. As a result, any assets in the corporation must be distributed to you personally.

Now you may ask, Why would anyone want to break up my corporation?. THE REASON: Once the corporation is dissolved the assets of the corporation will be distributed to you, the owner. GUESS WHAT? Now the collection attorney will have more money to satisfy the rest of the judgment (the $500,000 still owed). Remember we discussed the importance of protecting your business from personal liabilities? The corporation wont do that very well because of this reason: Stock shares are personal property. They can be seized if you have a personal judgment against you.

The same thing can happen if you are doing business in a corporation made up of 2 or more parties. In such an instance, a creditor who obtains enough shares could vote to dissolve the company or they could become a substituted owner. You see, you cant control the actions of all your co-owners all the time. For this reason, there is undue risk when corporations are used (especially if there is more than one owner!).

I am a licensed attorney and attend training conferences each year to keep up with my required hours of continuing legal education. I can tell you that while I love to learn about all the updates and nuisances of setting up companiesI know that the real benefit comes from understanding how collection attorneys work. The goal is to learn what tricks they use to tear companies apart. Believe me, most will foam at the mouth when they learn the business owner is using a corporation. They are not so pleased to learn the business owner is an LLC or other partnership-style entity.

So at this point you may be wondering how the LLC is different. This is a complex issue, but generally we can say that the laws of all states (except Pennsylvania and Nebraska) have included special rules for LLCs which allows them to be protected in this type of situation.

In other words, if we had the same facts in which you hit someone on the way to the park on a Sunday and $500,000 of the judgment was not covered by your insurance, the creditor would generally not be able to gain control of your LLC. The creditor also could not vote to end the LLC, could not force a distribution, and could not break up the LLC. The creditor would be limited to a court order called a charging order.

So what is a charging order? The charging order is a specific court order that first must be granted by the judge. It is a court order which says that if any money is passed on to the owner who was involved in the accident, this money must first go to the creditor until the debt is paid off. The only problem is that the creditor does not have the right to force the LLC to make this payment. This means that the creditor could wait a very long time for such payment to be made. If your LLC is run by parties who are friendly to your situation, they may choose to stop all distributions made to you. State law limits a creditors collection efforts to this charging order. Second, once the creditor obtains the charging order they may have to pay taxes on money that the LLC made, but which was not distributed to you (we call this phantom income).

What does all this mean? Generally it puts you in a much better position if such an event occurs, since it may force the creditor to try to settle the judgment debt or just drop the collection efforts. At the very least it can help keep your business intact. If you were using a corporation the end result would likely be the end of the company. If an LLC was used, managed correctly, and its owners properly reserved this charging order limitation then the result will be quite different.

Here are a few other things to consider: An LLC will need to have more than one member in order to ensure this type of protection. Lets also say that in community property states it may be useful to have someone other than your spouse (family member or close friend) own a small percentage interest in the LLC. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Second, you must make sure that the LLC is run and managed in the correct manner. None of these protections will hold up in court unless you truly become a MASTER of good business practices and learn how to keep up with LLC formalities.

To learn more about how you can become a MASTER of good business practices, create, run, and maintain an iron clad LLC please see Mr. Barazandehs, Wealth Building LLC course at http://www.theinformedinvestor.com and http://www.attorneysecrets.com.

I want to wish you all the best in your business and email me if you ever need help: taxenterprises@yahoo.com

By: Darius M. Barazandeh, Attorney at Law / M.B.A. Insurance Online Term
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posted by unusual-christmas-gifttkzgxajo @ 7:54 PM 0 comments

The New America Should We Outsource

If you were to look at many large corporations such as Sprint, Dell, and so on, you would find a number of jobs are outsourced overseas. Outsourcing is nothing new but the trend of global outsourcing has ignited a firestorm of controversy.

North American businesses are increasingly outsourcing business functions to companies outside of the United States. Often this outsourcing is seamless to the outside world. The company maintains control over the processes and results, while certain business functions are quietly conducted in another country. Companies often benefit from reduced operating costs and an eager workforce. For the employees, particularly those in struggling economies, they are afforded higher wages and an increased standard of living.

While this may seem to be a win-win proposition for all, it does not come without its share of naysayers who believe that this practice is further eroding the already shaky North American economy. To understand this controversy, we must look at why companies decide to outsource as well as the type of jobs being outsourced. Companies cite a variety of reasons for outsourcing from lack of qualified, available labor to cost concerns. Unfortunately, while many people in the United States want to work and some actively seek positions, sometimes these individuals are not qualified or unreliable. To the company, this creates a risk of missed deadlines, understaffing and its inherent consequences, under production, and so on.

Cost and competition raise another issue. Businesses around the country are vying for ways to reduce cost while increasing effectiveness and productivity. By using overseas outsourcing, companies are able to save on one of the largest line item expenses in business human capital. Consider alone the skyrocketing cost of healthcare in the United States. Businesses can spend an additional $8000 10,000 per employee, per year on benefits alone. When added to salaries, workers compensation, and operational expenses it is easy to see why global outsourcing becomes an option.

Global outsourcing can also offer competitive advantages. Companies can take advantage of specialized knowledge and emerging technologies by outsourcing certain processes to other countries. In this way a company can hire those leading an industry and leverage that competitive advantage in the marketplace.

The underlying discontent with global outsourcing has to do with wages. In example, outsourcing to countries such as India and Mexico enables companies to pay much lower wages than they would pay North American workers. With an abundance of people in foreign countries interested in making higher North American wages, finding help is never a problem. For instance, a telecommunications company pays a customer service representative in the United States between $20,000 and $30,000 per year on average. If the company were to turn the same job over to someone in another country, they would likely pay between $10,000 and $15,000. For the foreign worker this salary enables them to significantly raise their standard of living while the same salary would be at the poverty level for North Americans. For the company and the overseas worker it is a win-win situation. However, this also means workers in the United States are being forced out of or passed over for jobs thus the controversy.

American Express was one of the first companies to publicly come under fire for global outsourcing. Dell too has come under attack for basing customer service in India. United States customers complain about the language barrier and lack of service but neither company has suffered the loss of profits as a result of outsourcing.

From the viewpoint of the overseas employee, they simply want to make a decent living. With jobs difficult to find in their own country, accepting an outsourced job is a gift from Heaven. These people often make 100% or more of what they could make in their own country, which makes outsourcing highly profitable and very attractive. Obviously, with so much at stake, the outsourced workers are willing to be trained, to follow rules to the tee, to respect authority, and be to work on time, every time.

As you can see, outsourcing overseas is a huge dilemma, with growing concern. When you consider the growing positions being outsourced, the concern rises. Although you might generally think of customer support as being the number one outsourced job, you might be surprised. Below is a list of other jobs that are often outsourced:

Customer Service Although this was not one of the original aspects of a business outsourced, we now see a huge number of companies, small to large, using overseas services in all areas of customer support.

Data Analysis The amount of data being generated by companies throughout the United States is staggering. In most cases, conducting market analysis and reviewing trends is crucial to a number of industries. For instance, much of the data coming out of the New York Stock Exchange is sent to India where it goes through a complete analysis process.

Research Research is also another large area where overseas outsourcing is used. In this case, companies will outsource large or portions of large research projects to people in other countries, which covers everything imaginable such as pharmaceutical trials to genetics to nano stocks.

Engineering Design More and more, we see engineering design being outsourced. Typically, companies in the United States establish what is known as an Offshore Development Center or ODC, which includes a number of design fields such as architectural, mechanical, hardware, structural, and product.

Medicare Many people are unaware that Medicare is also outsourced to foreign countries. Services provided by employees could include data entry of doctors transcripts to interpretation of an MRI, CAT scan, or other medical imaging processes.

Art and Animation With different countries offering unique levels and genres of creativity, a company needing a website, illustrations, artwork, book cover design, television show, graphic art, and other similar functions would turn to other countries for fresh ideas

Legal Finally, we also see legal support services being outsourced overseas. Although professional services would not be included, we do see some of the more low-level tasks such as data entry of legal documents or transcripts and patent searches being performed.

Although outsourcing to other countries has been done since the early part of the 1990s, it has become a multi-billion dollar business for other countries. Although many of the workers are low skilled, they are again, eager and willing to work. The trend of outsourcing will likely to continue to expand. We often view the negative impact to North American workers but the reality is we too benefit from outsourcing.

Many small businesses provide services to other countries. Writers, web developers, marketing consultants and many others build a business that is largely global. These small businesses are often started by laid off or out placed corporate employees. Other countries outsource to the United States for the same reasons we do specialized knowledge, lower costs, and qualified labor. Lets face it the world has changed. The debate over outsourcing is unlikely to subside any time soon, but the rules will continue to be written.

Richard A. Hall is founder and President/CEO of LexTech, Inc., a legal information consulting company. Mr. Hall has a unique breadth of experience which has enabled him to meld technology and sophisticated statistical analysis to produce a technology driven analytical model of the practice of law. As a busy civil trial attorney, he was responsible for the design and implementation of a LAN based litigation database and fully automated document production system for a mid-sized civil defense firm. He developed a task based billing model built on extensive statistical analysis of hundreds of litigated civil matters. In 1994, Mr. Hall invented linguistic modeling software which automatically reads, applies budget codes, budget codes and analyzes legal bill content. He also served as California Director and lecturer for a nationwide bar review. Mr. Hall continues to practice law and perform pro bono services for several Northern California judicial districts.Fibromylagia And Chronic Pain
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posted by unusual-christmas-gifttkzgxajo @ 4:53 AM 0 comments