Don’t Leave Your Business Entity in a Taxi!
It’s understandable how someone might leave a shopping bag or a small item like keys or a wallet in a taxi. However, in 2008, violinist Phillip Quint left his multi-million dollar Stradivari in a New York City taxi. The taxi driver discovered the instrument and returned it.
Quint isn’t the only musician to have left a valuable instrument on public transportation. In 2012, violinist Alexander Dubach left a borrowed Stradivari violin on a train in Switzerland. The violin ended up in a lost-and-found-office and after five days, was returned to the owner.
In 2016, Jennifer Koh left her Stradivari violin on a train, this time in Germany. She informed the police, and the instrument was returned to her.
Most surprising, in 1999, world-famous cellist Yo-Yo Ma left his multi-million dollar Stradivari cello in the trunk of a New York City taxi. He said he was exhausted from having performed at Carnegie Hall the night before. Fortunately for Ma, the police were able to track down the taxi (and the cello) at a garage in Queens. Ma had his cello for that evening’s performance.
From these incidents, it may sound like Stradivari instruments are common. Actually, they are very rare. It’s difficult to understand how a musician could forget what Ma referred to as his “voice” on public transportation.
Yet, like musicians, business owners sometimes forget important tasks relating to their business entities. Although some forgotten tasks may be correctable, others are not. By forgetting to pay attention to their business entities, an owner can lose it forever.
This article discusses business entity tasks which owners frequently overlook.
Forming a Business Entity
When starting a business, the first step should be to form a legal entity. The main entity types used are limited liability companies (LLC) and corporations. The differences between these options is outside of the scope of this article. Both provide liability protection for individual members. But they offer different ownership, management, and tax benefits.
Some individuals pick a name they like, add “LLC” or “Inc.” to the end, print business cards, and start business operations. They have skipped a critical step in the process–legally forming their LLC or corporation!
To form a corporation or LLC, someone must file paperwork with the state (usually the state secretary of state). Owners who skip this step may be personally liable for the business’ obligations.
Plus, states allow only one corporation or LLC with the same name to operate in their state. By creating the entity with the state, the business owner protects the business' name so that no one else can use it for their business.
Things to Do After an Entity is Formed
Many people form their business entities and then forget about them. Some critical tasks which should be completed after forming a business entity include:
OPERATING AGREEMENT OR BY-LAWS: For an LLC, have an attorney prepare an LLC operating agreement. An operating agreement sets out the rights and responsibilities of LLC members. An operating agreement also describes how the LLC will be managed.
An operating agreement may be very complicated and consist of dozens of pages, but it does not have to be complicated. Every LLC should have an operating agreement, even if it is short and basic.
For a corporation, an attorney should prepare by-laws. Corporate by-laws describe how the board and officers will manage the corporation.
OBTAIN A FEDERAL TAX ID NUMBER (TIN): Corporations need an employer identification number (EIN), even if they have no employees. Multi-member LLCs also need EINs. Unless it has employees or needs a separate TIN for banking purposes, a single member LLC should NOT apply for a tax ID number. Instead, it should use its sole member’s Social Security Number or other TIN.
FORMALLY APPOINT OFFICERS AND DIRECTORS: Once a corporation has adopted by-laws, the shareholders need to take formal action to appoint directors. The directors also need to take formal action to appoint officers. LLCs which have officers or directors similarly need to formally appoint them. The entity should keep a written record of these appointments in the form of meeting minutes or a written action without meeting in the business records.
OPEN BANK ACCOUNTS: Every business entity should have its own bank account and its own financial books. This is important for the member to maintain the protection from personal liability. If a bank will not open an account for a single member LLC without an EIN, the member can obtain an EIN for the LLC for this purpose.
MAKE A SUBCHAPTER S ELECTION IF DESIRED: Some business owners form corporations but wish to avoid what is known as “double taxation” (paying both corporate and individual income taxes on business earnings). Under many circumstances those corporations can avoid double taxation by making a Subchapter S election by filing Form 2553 with the IRS. Some states require a separate Subchapter S election to receive similar benefits under state income tax law. Business owners who have corporations should work with their attorney or accountant to determine whether this is the best choice for them.
Items Needing Ongoing Attention
ANNUAL FILINGS: Most states require annual filings and an annual fee or tax payment to keep an entity in good standing. If a business does not make the filings and pay the fee, the entity will be dissolved and the members will lose their protection from liability. Frequently, but not always, the entity can be reinstated by correcting the error. However, it is best to keep careful records and timely file all required documents.
QUALIFY THE ENTITY IN STATES IN WHICH IT DOES BUSINESS: Many people form a business in one state and then expand their businesses into other states without qualifying to do business in those other states. Although qualification in other states does cost an additional amount, failure to qualify can result in penalties and in denial of access to the courts of the state should a business dispute arise. It also can be very complicated and costly to qualify an entity after it has stated doing business there.
FILING TAX RETURNS: Business entities need to file separate tax returns. Corporations will file Form 1120 or 1120-S, and multi-member LLCs will file Form 1065. Corporations filing on Form 1120 will also need to pay income taxes. Taxes for LLCs and S corporations are paid by the owners.
This is a complicated area. Unless the business owner is sophisticated in financial and tax matters, it might be best to hire an accountant to prepare these returns. Single member LLCs do not file separate tax returns. However, they must report their income on their sole member’s income tax return.
FICTITIOUS OR TRADE NAME OR DBA FILINGS: Businesses must operate under their legal name unless they have officially adopted what is known as a fictious name, trade name, or DBA (short for doing business as) depending upon the state. If the business decides to use another name for all or part its business, it should make the required filing in each state in which it conducts business. For most states, this filing is made with the secretary of state, but there are exceptions.
Don’t Forget Your Business Entity
A fine musical instrument is important to a professional musician’s livelihood. Similarly, protections afforded by a business entity and the goodwill associated with its name are critical to a business.
Just as musicians need to keep track of their instruments, business owners need to keep track of their entities. There is no guarantee that a lost Stradivari will be recovered. There also is no guarantee that the owners will be able to recover from the damage if they neglect their business entity.
With attention and care, both musicians and business owners can enjoy their important business assets for many years to come.
© 2018 by Elizabeth A. Whitman
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied.