Navigating Towards Success: The Importance of Having an Employee Handbook for Your Small Business
by Nathan Russell, Owner & Managing Attorney
Running a small business is like sailing a ship, and just like any sailor, you need a compass and a map to steer towards success. In the world of business, an employee handbook acts as both compass and map, guiding your crew towards a safe and productive journey. In this post, we’ll dive into the importance of having an employee handbook for your small business and how it can set the course for smooth sailing ahead.
Having an employee handbook is important for several reasons, especially for small businesses. Here are some reasons why:
- Clearly defines expectations: An employee handbook provides a clear outline of what is expected from the employees in terms of their job responsibilities, code of conduct, policies, and procedures. This helps to ensure that all employees are aware of what is expected of them and reduces confusion and ambiguity.
- Ensures consistency: With an employee handbook, policies and procedures can be standardized and applied consistently across the organization. This ensures that everyone is treated fairly and equally, and reduces the potential for discrimination or favoritism.
- Helps with legal compliance: An employee handbook can help a small business comply with legal and regulatory requirements, such as state and federal employment laws, industry-specific regulations, and safety requirements. It can also help protect the business in case of legal disputes, as it can demonstrate that the business has a clear set of policies and procedures in place.
- Improves communication: An employee handbook can also serve as a communication tool between the business and its employees. It can provide information about the company’s mission, values, and culture, as well as important benefits and resources available to employees.
- Sets expectations for behavior: An employee handbook can also outline the company’s expectations for employee behavior, including policies on harassment, discrimination, and workplace safety. This can help create a positive work environment and prevent workplace issues from arising.
Overall, having an employee handbook can benefit a small business in many ways. It can help ensure consistency and legal compliance, improve communication, and set expectations for behavior, which can lead to a more productive and positive work environment.
Remember, your employee handbook is not a one-time document, but a living one. As your business grows and changes, your policies and procedures may need to be updated accordingly. By keeping your employee handbook up-to-date and making sure your crew is informed, you can steer your small business towards long-term success. Russell Law Offices, S.C. has a full slate of Employment and Business Law Attorneys who can assist you on your business development voyage. Call our office at 608.448.3680 for more information today!
Powers of Attorney Explained
by Justin Brewer, Associate Attorney
A power of attorney, or POA, is a legal document that allows you to grant another person the authority to make decisions on your behalf. This person, commonly referred to as your “agent,” will make decisions and take actions as if they were you in the case you are not able to make those decisions yourself. POAs are an important part of planning for your future. What happens if you are incapacitated, and can’t make healthcare decisions for yourself? Who will make life-ending or life-prolonging decisions if you cannot? What if you can no longer manage your business or financial affairs on your own? POAs can resolve all of these questions, and give you peace of mind.
There are several types of POAs that you can create, but the two main categories include financial and health care. These give your agent specific authority to act on your behalf for financial decisions, or make healthcare choices, if you are incapacitated.
A Financial POA gives your chosen agent the authority to make financial decisions on your behalf. These can range from paying bills and expenses, or making deposits and withdrawals with your bank, to buying and selling real estate or other property. Your agent for finances will be able to sign documents and make choices as if they were you, on your behalf.
While generic financial POAs give broad authority to your agent, you can tailor your POA to meet your needs. For example, you can allow your agent to pay your bills and write checks, but prevent them from selling your property or buying new property.
A healthcare POA gives your agent the authority to make healthcare decisions for you. This can include medical treatments, medications, surgery, or in the worst-case scenario, end-of-life care. Hospitals typically want their patients to have a healthcare POA, so they know who to go to for decisions if you cannot make them for yourself. A healthcare POA agent can access your medical records for you, and will be allowed to seamlessly visit you if you are hospitalized.
Your agent under the healthcare power of attorney will only be able to act on your behalf if you are deemed incapacitated by doctors, and are unable to communicate your wishes. Healthcare POAs are an integral component of your long-term planning and should be included in any estate plan you come up with.
Related to a healthcare POA is the living will. A living will is a document where you can leave specific instructions for your care in serious medical situations. For example, if you suffer a serious accident that leaves you reliant on a feeding tube and breathing machine, what would you want the doctors to do? With a living will, you can make these choices ahead of time, and your doctors will follow them. Like healthcare powers of attorney, doctors will only turn to a living will if you are unable to communicate your wishes.
“Durable” vs. “Springing”
Have you heard of either “durable” or “springing” POAs? These terms refer to when and how long a POA is effective. Durable POAs are effective the moment you sign them, and continue to be effective when you become incapacitated. When a POA doesn’t grant your agent authority until you are incapacitated, or until some other condition is met, the power of attorney is called a springing POA.
When determining what type of power of attorney you need, you should think about when you want your agent to be able to act on your behalf. Do you need someone to help with your finances now? Or are you planning for the worst, and only need a POA agent if you are incapacitated?
Ultimately, POAs are a crucial part of your short- and long-term estate planning. They are customizable, and allow you to rest easy, knowing that even if you can’t make your own decisions, the people you trust will be able to.
Ready to create a POA or Living Will? The attorneys at Russell Law Offices, S.C. are experienced and ready to help you create a plan that works for you and your needs. Call for a consultation today!
What is Basis and Why is it Important?
by Nathan Russell, Owner & Managing Attorney
I really enjoy estate planning as it affords me the opportunity to really dig into my client’s goals. This allows me to ask a various list of questions of my clients and, in return, provide a lot of insight into their estate planning concerns and goals. As an estate planner, one of the most common concepts I have to explain to clients is the term “Basis”. “Basis” is a term used to describe the cost or original value of an investment or asset for tax purposes. It is essentially the amount used to calculate capital gains or losses when an asset is sold. The basis can be adjusted to reflect changes in value, such as improvements made to real estate or stock dividends. When a client sells an asset, their capital gain or loss is determined by subtracting the basis from the sale price of the asset. It is important to accurately determine the basis of an asset to correctly calculate taxes owed on any profits from a sale.
Improvements Can Modify Basis
While your basis in an item is generally determined at the time of purchase it can be modified.
Specifically, improvements to an asset can impact the basis in the following ways:
- Capital Improvements: Capital improvements are permanent additions or alterations to a property that increase its value, extend its useful life, or adapt it to a new use. Examples include adding a room, installing a new roof, or updating a bathroom. These improvements increase the basis of the property.
- Repairs: Repairs are expenditures made to keep an asset in good condition and maintain its value. Examples include fixing a leaky roof or replacing a broken window. Repairs do not increase the basis of the property, but they can be deducted from current year income.
It’s important to note that to qualify as a capital improvement or repair, the expenses must be ordinary, necessary and reasonable in amount, and incurred in connection with the property. Additionally, documentation should be kept supporting the expenses as either a repair or a capital improvement.
What Does Stepped-Up Basis Mean?
When drafting estate plans, it is critical to determine if you should utilize a “stepped-up basis” plan. “Stepped-up basis” is a tax term used to describe the adjustment of the cost basis of an asset for tax purposes upon the death of an owner. The stepped-up basis is equal to the fair market value of the asset at the time of the owner’s death. This means that, for tax purposes, the person inheriting the asset can treat the asset as if they had purchased it for its fair market value at the time of the owner’s death. The fair market value is often determined by the public market for stocks and bonds while an appraisal is generally necessary for real estate and business assets.
For example, if an individual owns stock worth $100,000 at the time of their death and their cost basis in the stock was $50,000, the person inheriting the stock would receive a stepped-up basis of $100,000. This would effectively eliminate any capital gain that would have been recognized if the stock had been sold for $100,000 while the original owner was still alive.
The stepped-up basis can have significant tax implications for the person inheriting the asset, as it can reduce the amount of capital gains tax they would owe if they sold the asset in the future. It’s important to note that not all assets are eligible for a stepped-up basis and that the specific rules and regulations vary depending on the type of asset and jurisdiction.
In general, in Wisconsin, if an asset is considered marital property, the surviving spouse generally receives a stepped-up basis for the entire property upon the passing of the spouse. Marital property is generally defined as property acquired during the marriage, regardless of which spouse holds title to the property.
Upon the death of one spouse, the surviving spouse typically receives a stepped-up basis equal to the fair market value of the property at the time of death. This means that, for tax purposes, the surviving spouse can treat the entire property as if they had purchased it for its fair market value at the time of the deceased spouse’s death.
It’s important to note that this stepped-up basis only applies to marital property. Any separate property that was owned by one spouse prior to the marriage or acquired during the marriage through gifts or inheritance would not be eligible for a stepped-up basis.
Basis and Gifting an Asset
When you give an asset, such as stock or real estate, to your child, the child’s basis in the asset is generally the same as your adjusted cost basis in the asset immediately prior to the gift. This means that if you bought the asset for $100 and its value has increased to $200, your child’s basis in the asset would be $100.
It’s important to note that there may be gift tax consequences if the value of the asset you give exceeds the annual gift tax exclusion amount, which is currently $17,000 per recipient for the year 2023. Additionally, if you give an asset that has declined in value, it may be beneficial to transfer the asset to your child rather than selling it, as the child would then inherit your lower basis in the asset.
In conclusion, understanding the concept of basis is crucial in estate planning and in calculating taxes owed on asset sales. It is important to accurately determine the basis of an asset, which can be adjusted through capital improvements or repairs. The stepped-up basis is a tax tool that we can use to save significantly on taxes for the person inheriting the asset. Estate planning requires careful consideration of all these factors to ensure a smooth transfer of assets and minimize tax liability. The attorneys at Russell Law Offices, SC are experienced and knowledgeable in the areas of tax basis to help you weave its consideration into your estate plan. Call for a consultation today!
But Who Gets the Dog? Cohabitation and Pet Ownership
by Taylor Lovett, Associate Attorney
Often relationships involve pets. It can be difficult and emotional to determine who gets to keep the animal when the relationship has ended. While pets feel like a member of the family, they are considered property under Wisconsin law. The Wisconsin Supreme Court has expressed some discomfort with considering pets as mere property, stating that doing so “fails to describe the value human beings place upon the companionship that they enjoy with a [pet].” Nevertheless, pets are considered property under the law. Because of this when pets are involved in divorce, the court determines custody of a pet by using the marriage property division statute, Wis. Stat. § 767.61. But this property division statute is inapplicable to non-martial cohabitation. Therefore, determining custody of a pet in a non-martial cohabitational relationship can be ascertained the same way other personal property division is decided.
In Wisconsin, the seminal case handling property division following a cohabitational breakup is Watts v. Watts. In Watts, the couple lived together for 12 years, had 2 children together, and held themselves out as husband and wife though they were never married. When the relationship ended, the Wisconsin Supreme Court recognized “nonmarital cohabitation does not render every agreement between the cohabiting parties illegal and does not automatically preclude one of the parties from seeking judicial relief.” The court outlined several legal theories a plaintiff in this situation can use—first, the plaintiff can argue the couple had a contract to share equally the property accumulated during their relationship; second, the plaintiff can use the doctrine of unjust enrichment; third, the plaintiff can ask the court to create a constructive trust; and fourth, the plaintiff can rely on the doctrine of partition.
The Wisconsin Supreme Court decided Watts in 1987, and over time “unjust enrichment” has become the so-called “cohabitated divorce action.” Also called “quasi-contracts” or contracts implied by law rather than fact, unjust enrichment involves “obligations created by law to prevent injustice.” In Wisconsin, there are three elements that must be met to prove unjust enrichment. These are 1) A benefit conferring on the defendant by the plaintiff; 2) Appreciation or knowledge by the defendant of the benefit; and 3) Acceptance or retention of the benefit by the defendant under circumstances making it inequitable for the defendant to retain the benefit. In Watts, it would have been unfair to allow the defendant to keep everything while the plaintiff received nothing after all she had contributed to housekeeping, childrearing, and the defendant’s business.
Cohabitation alone does not give rise to an unjust enrichment claim. The claimant must establish there was a joint enterprise during the relationship in which both parties made financial contributions or services to the acquiring joint assets. This may or may not include joint financial accounts, joint tenancy in real estate, joint sharing of expenses, and even housekeeping and childrearing duties that allowed the other partner to acquire income and other property. In a pet ownership dispute, a judge may look to who bought the animal and paid various costs associated it with caring for it, such as purchasing food and paying veterinary bills, but will also consider who is the pet’s primary caretaker. For example, if Partner A paid the couple’s cat adoption fees, and generally takes the cat to the vet, buys the cat food and toys, etc., a judge may decide it would be unfair to allow Partner B to keep the cat in a breakup.
To avoid involving the legal system, a cohabitating non-married couple with a pet, or pets, could reach an agreement ahead of time regarding who gets to keep the animal(s), or come to a shared custody arrangement. Russell Law Offices, S.C. is here to help with your cohabitation questions.
Wisconsin Probate Administration
by Laine Carver, Associate Attorney
After a loved one passes away, family members are often left with the seemingly daunting task of administering the decedent’s estate. This can be overwhelming for some folks, especially if the decedent did not leave a will prior to death. However, with a bit of legal consultation, administration of a decedent’s estate, also known as probate, does not need to be so difficult. This article is intended to provide family members with a basic understanding of the probate process and hopefully make the experience less stressful for everyone involved.
Opening the Estate
The first step in opening an estate is to actually apply to do so. In this application, the applicant (generally an heir of the decedent) will provide information about the decedent, family members of the decedent, whether or not there was a will, and nominate the Personal Representative. The Personal Representative is charged with administering the estate. This is sometimes referred to as the Executor in other states.
In Wisconsin, most estates are administered either by Informal Administration or Formal Administration. Informal Administration allows the Personal Representative to administer the estate without direct involvement of the court. Formal Administration requires an attorney to be hired and is often the type of administration to choose when the estate is large, if there is a question of the legitimacy of a will, or if any other type of dispute may arise.
Once the Personal Representative is appointed, he or she will be issued Domiciliary Letters, which allows the Personal Representative access to the decedent’s information and assets, such as bank accounts, investments, safe deposit boxes, etc.
Once the estate is opened, the Personal Representative must publish a “Notice to Creditors,” which, as its name suggests, notifies creditors of the administration of the estate. Creditors will have 90 days to file a claim against an estate. If a creditor fails to file a claim in that time period, the debt owed to the creditor is likely never to be paid by the estate.
The compiling of estate assets is the most time-consuming duty of the Personal Representative. The estate assets (and liens on those assets, like a mortgage) are accounted for on the Inventory statement that is filed with the court by the Personal Representative. The assets must be valued at their fair market at the time of the decedent’s death. Generally, if the asset is sold to a third party after the decedent’s death, the selling price is a sufficient value. If the asset is being purchased by an heir of the decedent or is going to be co-owned by beneficiaries, an appraisal of the asset may be necessary to obtain a fair market value.
Once the asset values are all accounted for, the Personal Representative will file the Inventory statement. Upon filing, the estate must pay an Inventory filing fee of .2% of the net value of the estate.
Closing the Estate
After the Inventory has been filed, the Personal Representative must do three things to close the estate. First, the Personal Representative must provide a full accounting of income, expenses, and distributions from the estate. This is done on the Final Accounting statement that will be filed with the Court. Second, the Personal Representative must distribute the estate assets according to the decedent’s will or the laws of intestacy (if the decedent died without a will). To confirm the assets have been appropriately distributed, the Personal Representative must obtain Estate Receipts from the heirs or beneficiaries that received the distributions. Once these are obtained, the Personal Representative files a Statement to Close the Estate, which ends the administration of the decedent’s estate.
Probate administration is a scary thought for many who just lost a loved one. However, with legal counsel who are well-versed in the process, it can be (relatively) quick and painless. If you or someone you know has questions about the administration of a loved one’s estate, do not hesitate to call Russell Law Offices, S.C. at 608-448-3360 to see how we can best serve you.
Rental Considerations for Cohabitating Couples
by Nathan Russell, Founder and Managing Attorney
When an unmarried couple shares a rented residence in Wisconsin, they may face a number of challenges in untangling their respective rights and obligations when they break up. The time that each individual spent at the dwelling – whether it’s an apartment, condominium, house, or cabin in the woods – may very well have constituted a form of a residential tenancy, each with their own rights to sort out.
When a cohabitating, unmarried couple splits up, among their initial rental considerations is determining the impact of the departure of either or both of them from the rented premises. The first step in working through this dilemma involves a review of the terms of the lease agreement. Not only would a lease agreement generally contain basic terms about the named parties, the rent and security deposit, the start and end date of the tenancy, and so on, but it may also contain terms surrounding more specific aspects of the tenancy, such as specifying how to proceed when a renter intends to terminate the agreement and vacate the premises prior to the expiration date. It may be the case that there is no written lease or that one of the residents is not named on the lease as a tenant. In such circumstances, either or both of the residents may still have developed tenancies at the premises, just in other forms, such as through a periodic tenancy or tenancy at will.
Other considerations involve the sublet or re-rental of the premises, the condition of the premises and security deposit, and the possibility of a lease termination agreement. If the lease describes procedures to sublet or re-rent the premises, the residents may find it worthwhile to communicate with the landlord about how to proceed. For example, even if the residents were able to procure new subletters, renters, or roommates to replace one or both of them under the lease, they may still need to obtain the landlord’s prior approval before putting that plan into action. If one of the cohabitants remains while the other leaves, one of them may wish to ask the landlord if they would be amenable to conducting a move-out walkthrough as, or immediately after, the former resident departs, to log the condition of the premises at that time (though the landlord may conduct one regardless, depending on the circumstances). Lastly, the landlord may offer that the departing renter/s pay a lump sum in exchange for an early termination of the lease. The parties should carefully weigh the costs and benefits of such an agreement based on their circumstances.
If the renter who remains (or hopes to remain) at the rented premises will be unable to pay their rent and other housing expenses following their former partner’s departure, they may want to act sooner rather than later, since the failure to pay timely rent could result in the accrual of late fees and an eviction being filed against them. In addition to efforts made to procure new subletters or roommates, such a renter may also consider requesting that the landlord allow them to move to a lower-cost rental unit, if the landlord or property is of a large enough scale to accommodate that request. Such a renter may also consider contacting local rental assistance programs to see if they would qualify for any financial assistance in meeting upcoming payment obligations.
Cohabitation involving a rented residence can present an added layer of difficulty when partners go their separate ways. Reach out to Russell Law Offices to assist you in navigating this legal landscape so you don’t have to go through it alone.
Cohabitation and Personal Property
by Justin Brewer, Associate Attorney
Cohabitation has become an increasingly popular for Wisconsin couples, young and old. Many couples live together for years, sharing property, financial accounts, expenses, and housekeeping and childrearing responsibilities, all without getting married. But what happens when a cohabitating couple breaks up? When a married couple decides to separate, they have the divorce process. Further, the married couple’s personal property is considered martial property, and each partner has a legal right to it.
However, Wisconsin does not allow non-married couples to get a legal divorce, and their property is never considered marital property. While many states recognize common law marriages, which treat un-married couples as if they were married for legal purposes, Wisconsin abolished common law marriage in 1917. This creates unique problems for couples who may have lived together for years, accumulating personal property and financial assets, but who never married and thus do not have marital property protections.
One of the biggest problems facing cohabitating couples after a separation is deciding who owns shared property, and who gets to keep it. Personal property – generally any property that can be moved, as opposed to real estate – can be difficult to split. Some personal property comes with ownership papers or title information, like vehicles, or bank accounts. For other property, ownership is unclear, like furniture or appliances. Without the divorce process or marital property protections, cohabitating couples are left without a clear legal process for fairly and efficiently dividing their personal property.
How do couples split up property when both partners are legal owners or title holders? What happens when one partner takes more than their fair share of personal property? While cohabitating couples are left out of the divorce process, there are still some legal avenues for resolving these questions, namely unjust enrichment, and partition actions.
For Wisconsin cohabitating couples, unjust enrichment claims are one of the main legal options available during a separation. Unjust enrichment is legal relief and cause of action that relies on the principle that someone who receives a benefit has a duty to pay restitution if keeping the benefit would be unjust. For cohabitating couples, it is the primary way for partners to fairly distribute the value of their shared property – in some ways it is the divorce action for unmarried couples.
If a cohabitating couple separates, and one partner takes more of the personal property than is fair, an unjust enrichment claim is an option for the other partner. For example, if one partner takes all the furniture the couple purchased together, it would be unfair for that partner to keep it without paying the other partner. After all, it they didn’t buy the property by themselves! Similarly, if one partner stays at home to raise the couple’s children while the other partner goes to school or works, they might be able to claim that the other partner’s earnings should be split to avoid unjustly enriching that partner.
In cohabitation separations, couples can bring unjust enrichment claims to make their partners pay them for their contributions to property they have taken. To prove an unjust enrichment claim, a claimant must show that they worked together with their partner to accumulate property and financial assets, which the other partner has kept in an unreasonable amount without compensating the claimant. Claimants will have to show that they helped contribute financially to the accumulation of property either financially, or by contributing to childcare or housekeeping.
Claimants can show that they contributed to accumulating property in a number of ways. If the couple shared financial accounts, made home improvements for each other, paid for each other’s expenses or education, or contributed to childcare, then unjust enrichment claims may be available when another partner takes too much property after a separation.
Successful unjust enrichment claims make the partner who took or received too much property pay the other partner enough to make the split equitable.
When a couple owns property that has ownership papers or titles, splitting the property becomes trickier. While there is no legal document showing who owns a couch or appliance, there is for cars and bank accounts. When two partners co-own vehicles or accounts, one partner cannot just take the property. Partners can buy each other out of their ownership interests in this property, but when they can’t agree, they can turn to the court for a partition action. In a partition action, the court will order that the property in question be sold at a public auction. While this allows a cohabitating couple to fairly divide jointly-owned property, they are unlikely to get fair market value, and both partners would lose their interest in the property.
Neither unjust enrichment claims, or partition actions are imperfect solutions. Lawsuits cost time and money, and the results aren’t always what a party wants. The best way to deal with a cohabitation break up is to plan for it before it happens. By creating a cohabitation agreement with your partner, you can establish rules and processes for who receives what property, and when after a separation. Cohabitation agreements are contracts, much like prenuptial agreements, that allow cohabitating couples to plan ahead. While it can be weird to plan for a breakup that hopefully never happens, a cohabitation agreement can save you an enormous amount of stress and money should you split from your partner.
If you are interested in making a cohabitation agreement, or are going through a cohabitation break-up and need help, the experienced team of family law attorneys at Russell Law Offices S.C. would be happy to discuss your case.
How to Choose an Entity for Your New Business
by Laine Carver, Associate Attorney
After years of dreaming of starting your own business, you have finally decided to take the chance in search of a better life. That’s a big step in the right direction—however, there is still so much to figure out. Among these unknowns is the type of legal entity you should use to structure your business. You’ve done a little research and are aware of corporations, limited liability companies and even limited liability partnerships. However, determining the legal structure that is best for your budding business can be overwhelming, and it is an important decision. This brief article should give you a basic understanding of the different legal entities, but consulting an attorney will always be the best way to ensure you are starting your business on the right foot.
The simplest way to structure your new business is without a legal entity at all. This is what is called a sole proprietorship. A sole proprietorship is an arrangement that is very informal and consists of no organization. The business is the individual themselves. This poses a few legal problems.
First, there is absolutely no liability protection for the individual. For example, if you are an electrician operating as a sole proprietor, and you make a mistake that results in a house burning down, your entire net worth may be at risk in a lawsuit, including your house, vehicle, and retirement. Although you may have insurance, it may not cover all incidents and it may have a policy limit, leaving your personal assets exposed.
Second, sole proprietorships are more difficult to sell to a third party or pass down to your next generation. Because there is no legal entity, there is no business interest that can be sold, like stock or a partnership interest. Instead, there are simply the assets owned by the individual that can be purchased by a third party or passed to the next generation. This can be difficult to coordinate and market, reducing the value of the business. Furthermore, it could have negative tax implications.
For these reasons alone, most attorneys would not generally recommend that a person operate a business as a sole proprietorship.
Corporations, on the other hand, are their own legal entity, completely separate from the individual owners. Corporations are a structure in which the owners of the business own shares of the corporation. The corporation owns the business assets and conducts operations. The corporation income can then be paid out to the shareholders in the form of a dividend. The most commonly known characteristics of a corporation is its liability protection for shareholders and what is commonly known as double-taxation.
Since a corporation is its own legal entity, any claims against the corporation generally end at the corporation level, thus protecting the corporation’s shareholders. Of course, if there is some sort fraudulent action taken by a shareholder, liability could flow to that shareholder. However, in general, corporations protect the shareholders from any liability that may result from the business’s actions.
The major downside to most corporations is the what is commonly referred to as “double-taxation.” When a corporation earns net income, that income is taxed at the corporate level. The rate is currently 21%. However, as mentioned above, the owners of the company do not have access to the corporation’s earnings until the corporation pays the shareholders in a form of a dividend. This dividend is taxable to the shareholder at the shareholder’s personal tax rate. Thus, since the corporation’s income is taxed at the corporation level and the dividend is taxed at the shareholder level, the income is double-taxed. This is not always bad, and can be used to a shareholder’s advantage in certain situations. However, most of the time, double-taxation is best avoided.
Some types of corporations avoid taxation at the corporate level. These are corporations that are allowed to make an election under subchapter S of the Internal Revenue Code. There are many restrictions on so-called “S” corporations, including limitations on the number of shareholders, the types of shareholders, etc.
LIMITED LIABILITY COMPANIES
Limited liability companies (“LLCs”) are a relatively new form of legal entity. They offer liability protection for the owners (“members”), and they can be taxed as a pure “pass-through” entity in which the business itself pays no taxes—only the individual members do. Because of this, LLCs have become extremely popular in the past couple decades.
The liability protection for LLCs is generally regarded as being equal to that of corporations. However, to benefit from the liability protection of an LLC, the business must be structured correctly. The business should have its own bank account. There should be a process for transferring money in and out of the account. Employees should be paid using a payroll system and payroll taxes must be paid accordingly. So long as procedures are installed and followed, the members of the LLC should be completely safe from any liability incurred by the business itself.
The biggest benefit of an LLC is the ability for it to be taxed as a partnership under Subchapter K of the Internal Revenue Code. This allows for the LLC to be a pure pass-through entity in which the LLC itself will not incur income tax. Additionally, setting itself apart from S corporations that are mentioned above, there is much more flexibility in the types of members, the number of members, and different tax strategies that may be used in an LLC compared to the S corporation.
In summation, there are many factors to consider in choosing a business entity type. For that reason, it is better to seek the advice of legal counsel in making such an important determination. If you or someone you know is considering starting a business, feel free to contact our team at Russell Law Offices, S.C. to set up a consultation and help decide what entity is best for you.