Effective January 1, 2024, the U.S. Treasury Department Financial Crimes Enforcement Network (“FinCEN”) established the Beneficial Ownership Information Reporting Requirements Rule (the “BOIR Rule”) to implement certain beneficial ownership information reporting requirements of the Corporate Transparency Act (the “CTA”). The BOIR Rule requires most entities to report certain identifying information about their beneficial owners, unless the entity falls under a list of enumerated exemptions. Although FinCEN is expected to continue to update its interpretation of the BOIR Rule and the CTA, the current interpretation is relevant to private equity fund sponsors who, after conducting an entity-level analysis, may be eligible to avail themselves of an exemption.
Who is subject to the BOIR Rule?
Corporations, LLCs or other entities formed by filing a document with a secretary of state or similar office, as well as foreign entities registered to do business in the U.S. by filing with a secretary of state (collectively, “reporting companies”) are required to file their beneficial ownership information with FinCEN under the BOIR Rule.
The BOIR Rule provides for 23 exemptions from this filing. The primary exemptions relevant to funds include:
– Large Operating Companies – companies that have an operating presence and physical office in the U.S. with more than 20 employees and more than $5 million in U.S. sourced consolidated annual receipts.
– Registered Entities – many entities that are registered with the SEC or subject to federal supervision, such as regulated financial institutions, registered investment advisers (“RIAs”), pooled investment vehicles (“PIVs”) and registered investment companies.
– Subsidiaries of Exempt Entities – subsidiaries of exempt entities that are wholly owned or controlled by an exempt entity are also exempt; however, this exemption does not apply to subsidiaries of exempt PIVs.
What must be reported?
Reporting companies that do not fall under any exemption must report:
– Certain identifying information of the reporting company, including any trade names and its tax identification number.
– Each individual who, directly or indirectly, holds 25% or more ownership or exercises “substantial control” over the reporting company (each, a “beneficial owner”)
– Certain identifying information for each beneficial owner, including residential address and a copy of a valid governmental ID.
When is the filing due?
Entities formed after January 1, 2024 must file within 90 days of formation.
Entities formed before January 1, 2024 must file before January 1, 2025.
Entities that have made an initial filing must file an updated filing within 30 days of any change to any information reported.
Considerations for the Private Equity Industry
Private equity sponsors will need to conduct a top-down evaluation of each entity within the structure of their funds to determine if any such entity is required to file with FinCEN. Although the BOIR Rule provides exemptions for some subsidiaries of exempt entities, the subsidiary exemption does not apply to subsidiaries of PIVs and requires that the subsidiary is controlled or wholly owned by the exempt entity. Due to these limitations, many holding companies and special purpose vehicles will likely be required to file. Similarly, many upper-tier management holding companies and GPs may be subject to filing unless they otherwise qualify for an exemption. Importantly, foreign entities that are not registered to do business in the U.S. are outside the scope of the CTA and not subject to the reporting requirements.
RIAs and Relying Entities
The BOIR Rule explicitly exempts any investment adviser (as defined in the Investment Advisers Act of 1940, (the “Advisers Act”)) that is registered under the Advisers Act with the SEC. Importantly, the exemption does not extend to investment advisors only registered on the state level. Although other exemptions may apply, the RIA exemption requires registration with the SEC.
Additionally, although FinCEN has not provided specific guidance on the topic, the general consensus in the legal community is that “relying advisors” that conduct their advisory business through an “umbrella registration” are also exempt under the BOIR Rule. The SEC rules provide that relying advisors are RIAs in substance, although they are not required to file separate registrations when identified on the affiliate’s Form ADV. Given FinCEN’s reliance on many SEC rules in the BOIR Rule, an inconsistent interpretation would have little regulatory benefit, while introducing undue complexity and ambiguity.
Similarly, certain GPs created by an RIA may also rely on the exemption as a deemed investment adviser if they meet the conditions set forth in the SEC Staff’s 2005 and 2012 no-action letters to the American Bar Association. In relevant summary, the conditions of these letters are (a) the RIA established the entity to act as the fund’s GP, (b) the formation documents designate the RIA to manage the fund’s assets, (c) all of the investment advisory activities of the GP are subject to the Advisers Act and subject to SEC examination, and (d) the RIA subjects the GP and its employees and agents to the RIA’s supervision and control.
Pooled Investment Vehicles
The exemption for PIVs is likely to apply to most funds managed by private equity sponsors, but each fund must clearly satisfy the requirements of the BOIR Rule. The exemption requires that the PIV: (1) is either (a) a registered investment company, or (b) a fund that relies on an exemption under sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 and is (or will be) identified by name in the adviser’s Form ADV; and (2) is operated or advised by a bank, credit union, broker dealer, RIA or venture capital fund adviser (each as defined in the BOIR Rule). A limitation to this exemption is that the vehicle must be listed on the Form ADV. For vehicles that are not listed, the adviser should review the potential implications of listing the vehicle and consider whether the benefits of qualifying for the PIV exemption outweigh the potential downside of identification.
Importantly, the subsidiary exemption in the BOIR Rule does not apply to subsidiaries of PIVs. Direct and indirect subsidiaries of PIVs must independently qualify for a reporting exemption, unless the facts and circumstances of the fund reflect that the subsidiary is controlled by an RIA or other exempt entity. In some cases, if the PIV is wholly owned or controlled by an RIA, certain subsidiaries of the PIV may be deemed to be controlled by the RIA and therefore fall under the RIA’s subsidiary exemption. However, relying on this indirect exemption should be considered on a case-by-case basis for each PIV subsidiary, as the analysis here is dependent on the relationship among the relevant entities.
Subsidiary exemption
The subsidiary exemption under the BOIR Rule provides that “any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities” is exempt from the filing requirements. However, the availability of this exemption requires careful analysis of the ownership and control rights that an exempt entity has over the subject subsidiary, as each such subsidiary must 100% owned or 100% controlled by an exempt entity to avail itself of the subsidiary exemption.
Upon a determination that an entity is 100% owned or controlled by an RIA, such entity may avail itself of the subsidiary exemption. However, as noted above, subsidiaries of an exempt PIV are not presumptively exempt from the BOIR Rule. Such subsidiaries must independently satisfy the criteria of an exemption under the BOIR Rule unless they are otherwise wholly controlled by an exempt entity. This determination is highly fact specific and requires a review of both ownership and minority voting rights of such PIV subsidiary.
Due to the fact specific analysis required to rely on this exemption, fund professionals must carefully examine their fund structure from the top down to determine which entities satisfy the subsidiary exemption criteria. Reliance on this exemption should be based on careful consideration alongside trusted legal advisors.
Take Aways
In conclusion, implementation of the BOIR Rule presents unique challenges for the private equity industry. There are several exemptions that apply to private equity fund sponsors; however, due to the nuanced nature of these exemptions and the complex structure of most private equity funds, fund sponsors must carefully evaluate each entity within its fund structure to determine if it satisfies the criteria of an applicable exemption. Although FinCEN continues to refine its guidance, the CTA and the BOIR Rule are in effect now and private equity fund sponsors must be vigilant in determining its current reporting obligations in connection with new entity formations and its upcoming reporting deadlines for existing funds.
Dated: June 12, 2024
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
As published on January 10, 2024 and effective as of March 11, 2024, the U.S. Department of Labor (“DOL”) abandoned the two-factor test used from 2021 to 2024 to determine if a worker should be classified as an employee or independent contractor of an employer and reinstated the totality-of-the-circumstances test that the DOL used to such determination prior to 2021 (the “totality test”). The totality test requires every aspect of an employer’s relationship with a worker be considered when determining whether such worker is serving an employer as an employee or an independent contractor. The totality test focuses on the following six factors that were first described in U.S. v. Silk (the “Silk factors”):
1. Opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and potential employer;
3. Degree of permanence of the work relationship;
4. Nature of degree of control;
4. Extent to which the work performed is an integral part of the potential employer’s business; and
6. Skill and initiative.
From 2021 to 2024, the DOL rejected the totality test in favor of a test dependent on what the DOL considered to be the “core factors” – the nature and degree of control over the work and the worker’s opportunity for profit or loss. In applying this two-factor test, the core factors were determinative of a worker’s classification. The DOL indicated that even if other factors contradicted the core factors, it would be “highly unlikely” that these non-core factors would outweigh the core factors. In application, the two-factor test typically resulted in less workers being classified as “employee” than under the totality test.
The Fair Labor Standards Act (“FLSA”) defines an employee as “any individual employed by an employer.” In its most recent publication, the DOL justified its reinstatement of the totality test by noting that the FLSA’s definition of “employee” is meant to be broader than what is traditionally found in common law. Historically, under the totality test, courts consistently held that the Silk factors are not exhaustive, and there could be other considerations that may weigh heavily on worker classification. By reinstating the totality test, the DOL will re-emphasize the Silk factors in favor of considering the totality of the circumstances in determining whether a worker should be classified as an employee or independent contractor.
Understanding the applicable test is important for employers because the FLSA provides broad protections for workers defined as employees, such as the Federal minimum wage, mandatory overtime wages, and protections for workers that file complaints regarding unfair labor practices. The FLSA does not provide those protections, however, for independent contractors. Employers should consider all of the Silk factors when structuring their relationships with workers and understand the impact of its workers being classified as an employee rather than independent contractor under the FLSA.
Sources:
89 FR 1638, 86 FR 1168
29 CFR 795.110, 29 CFR 795.105
United States v. Silk, 331 U.S. 704 (1947)
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
Attention Small Business Owners:
The Corporate Transparency Act (the “CTA”) requires every business operating in the United States to file certain ownership information, unless otherwise exempt. The CTA went into effect on January 1, 2024 and is estimated to affect approximately 32 million businesses operating in the United States.
The CTA mandates that nearly all business owners report personal identifying information to FinCEN (the regulatory agency tasked with enforcing the CTA) or face fines and possible imprisonment. The CTA broadly encompasses any entity that is created by filing a document with a secretary of state or similar office. Here are a few examples of businesses that may be required to file under the CTA:
• Your side hustle driving for Uber or Instacart
• Your teenager’s car-washing service
• Your solely owned law firm
After a business submits its initial filing, in the event any of the information in the filing changes (such as a business owner changes his or her residential address or obtains a new driver’s license), a subsequent filing is required within 30 days of such change.
If you own or have substantial control over the operations of a business, you need to evaluate if your business is required to file. Given the broad scope of the CTA, it is prudent to initially presume your business is required to report and then evaluate if your business fits within any exemption (such as being a sole proprietorship, non-profit or highly regulated financial institution). Even if a business concludes it is exempt from reporting, it should establish compliance measures to ensure it quickly recognizes if such exemption fails to apply. The CTA requires a formerly exempt business to report to FinCEN within 30 days of such business no longer satisfying an exemption.
To reiterate, all businesses need to assess their obligations under the CTA and implement controls and procedures to ensure current and future compliance with the CTA. All newly formed businesses are required to adhere to the CTA immediately, and all businesses formed prior to January 1, 2024 are required to submit their initial filing by year-end. Failure to comply with the CTA will result in penalties. For more information about the which businesses are exempt and what information will be required for filing, please click here. If a business is unsure about the applicability of the CTA, it should seek professional advice before the applicable deadline passes.
When it comes to leasing commercial real estate, both landlords and tenants seek arrangements that are fair, sustainable and beneficial for both parties. The triple net lease is a common arrangement in commercial real estate transactions. This type of lease has distinct characteristics that set it apart from traditional leases, offering advantages and considerations that both tenants and landlords often find mutually beneficial.
Triple Net Lease Basics: How They Work
A triple net lease, often abbreviated as NNN, is a type of lease agreement commonly used in commercial real estate, especially for properties like retail spaces, office buildings and industrial facilities. Unlike traditional leases, where the landlord bears responsibility for ordinary course property expenses, triple net leases shift a significant portion of these expenses to the tenant.
The “triple net” in the lease refers to three main categories of expenses that the tenant agrees to cover: property taxes, insurance premiums and property maintenance. The tenant is responsible for paying property taxes assessed on the leased space, including any increases in property taxes during the lease term. Additionally, the terms of the lease will require the tenant to obtain and maintain insurance coverage for the leased premises. This often includes property insurance, liability insurance and other specific coverage that the landlord may require. Perhaps the most significant aspect of a triple net lease is the tenant’s obligation to cover maintenance and repair costs for the property. This can include everything from routine maintenance to major structural repairs, depending on the terms of the lease.
In a triple net lease, tenants typically pay a base rent, which is a fixed amount, in addition to the three categories of net expenses. The base rent is generally lower than what may be negotiated in a gross lease, in which the landlord covers routine property expenses. However, the cumulative effect of the three net expenses typically makes a NNN lease financially comparable to a gross lease.
Advantages of Triple Net Leases
One of the primary advantages for landlords is the predictability of income. With tenants responsible for property-related expenses, landlords receive a consistent stream of income, and unexpected costs are largely shifted to the tenants. Landlords benefit from reduced exposure to the unpredictable nature of property expenses. With tenants responsible for these costs, landlords can better forecast their financial commitments and allocate resources accordingly. Additionally, triple net leases often involve less day-to-day management for landlords. Because tenants are responsible for property maintenance and repairs, landlords can have a more hands-off approach, focusing on large-scale property management and strategic planning.
Tenants, especially those with experience and financial stability, may appreciate the control and responsibility that come with a triple net lease. Triple net leases often have longer terms, providing tenants with stability and security in the premises. For businesses looking for a long-term location, this stability can be crucial for planning and growth. Generally, triple net leases allow the tenant to have more say in property maintenance, improvements and even construction of the premises, allowing them to ensure the space meets their specific needs and is customized to better suit their operational needs. Due to the longer term and other benefits to the landlord, a triple net lease may result in a lower overall cost than the tenant could find otherwise, especially if the tenant proactively controls the overhead expenses of maintaining the property. Although a triple net lease may mean more administrative burden for the tenant, many commercial tenants find that the benefits from the greater stability and flexibility outweigh the drawbacks within such an arrangement.
Potential Drawbacks in Triple Net Leases
Triple net leases may pose challenges for landlords in finding a creditworthy tenant willing to commit to a long-term lease, which may result in longer vacancy periods. Because tenants are responsible for the property taxes, insurance and maintenance of the property, finding a tenant with a solid financial standing is crucial for the landlord. However, attracting such tenants can be demanding and the landlord may need to expend additional time and resources to vet the suitability of a prospective tenant. Additionally, the flexibility often granted to tenants in triple net leases for certain property modifications and changes may be undesirable for the landlord. While some alterations might enhance the property’s value, others may have adverse effects or be unsuitable for the next tenant. Striking the right balance between accommodating tenant needs and safeguarding the property’s long-term value requires careful negotiation and a comprehensive understanding of the potential implications of the lease terms.
For tenants, a potential disadvantage of a triple net lease is the exposure to variable expenses associated with the property. Because tenants are responsible for covering property taxes, insurance and maintenance costs, they may face unpredictable and potentially escalating expenses. This lack of cost predictability can make it challenging for tenants to budget effectively. Further, the responsibility for paying such costs and maintaining the property will result in additional time that the tenant will need to expend on such administrative tasks. Despite these challenges, tenants can benefit from the potential cost savings in base rent and the opportunity to negotiate lease terms that align with their business needs, fostering a mutually beneficial and transparent landlord-tenant relationship.
Legal Considerations in Triple Net Leases
While triple net leases offer benefits for both parties, navigating the legal landscape is crucial to avoiding disputes and ensuring a fair arrangement. A well-drafted lease is essential to avoiding misunderstandings and legal disputes. Given the substantial shift a triple net lease makes in the rights and responsibilities between the tenant and property owner, it is crucial that the parties have a similar understanding of the terms and goals of the arrangement. The language in a triple net lease must clearly outline the responsibilities of both parties, specifying what expenses fall under each of the three nets. Furthermore, in scenarios where multiple tenants are leasing the premises, the lease must clearly allocate the responsibilities among the tenants and their respective shares of the costs. The process of negotiating the terms of the lease should ensure fairness and transparency from the beginning of the relationship.
Before entering a triple net lease, both landlords and tenants should conduct thorough property inspections to identify any existing issues or potential maintenance challenges. The lease should address how such actual or potential issues will be handled, including who is responsible for addressing them and the timeline for resolution. Additionally, the lease should outline contingency plans to address unforeseen circumstances. For example, if a major repair is needed, the lease should specify how the costs will be divided or if there are caps on the tenant’s contributions to such a repair. It is crucial for the parties to clearly define what property expenses are eligible to pass-through to the tenant and how they will be calculated. Tenants should pay attention to these provisions to be aware of all costs, including any janitorial, security or supply costs that may be allocated to the tenant.
All leases, including triple net leases, must comply with local laws and regulations governing commercial real estate. Working with legal professionals familiar with local statutes when drafting and negotiating can help ensure the lease is legally sound.
Conclusion
Triple net leases offer a collaborative approach to commercial real estate leasing, providing advantages for both landlords and tenants. While offering many benefits, they also come with specific considerations that require careful attention. A well-crafted triple net lease, backed by thorough legal review and understanding, can pave the way for a mutually beneficial and lasting commercial real estate relationship. Given the long-term relationship that is contemplated by such leases, the parties should work toward the mutually beneficial goals of such an arrangement through transparency in both the negotiation and operation of the lease. As with any legal document, seeking professional advice is paramount to ensure that the terms are fair, enforceable and in compliance with applicable laws.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
The beginning of a new year is often a time of making resolutions and planning for the future. At Willow, we believe it is equally important to reflect on the lessons learned and achievements earned in the past, as these provide valuable insight on the direction one is heading. Please read below to see what our attorneys, Sarah and Daniel, had to say about their most memorable projects from 2023.
From my perspective, Willow’s most memorable transaction in 2023 was its representation of a corporate client in entering a $100 million, asset-backed credit facility. This was a challenging transaction. Not only were the documents and legal components of the deal highly complex, but the transaction also required coordination among several law firms representing various interested parties, all while raising interest rates and market uncertainty created a tough landscape for companies seeking private debt. Also, this transaction was incredibly important to our client, who intended to use the loan proceeds to partially finance its growing drilling program in Appalachia. Knowing this, we spent many evening and weekend hours working on this deal to ensure that our client was never the cause for delay and to demonstrate our and our client’s professionalism to all parties involved. To me, as Willow’s founder, this transaction was incredibly fulfilling as it showcased our ability to work on sophisticated transactions involving complex legal issues, large international law firms and pressing deadlines while navigating a tough credit market.
–Sarah
For myself, what stands out looking back on 2023 is not so much a single transaction, but rather the many projects I worked on for our private equity clients. When I joined Willow, I had very limited knowledge of the workings of private equity. Although Sarah has continually coached me on my private equity practice development, it was really not until this past year that I truly grasped many of the intricacies of the industry. Throughout the year, I had the opportunity to assist a number of our clients implement internal controls and processes to monitor and maintain compliance with their funds’ governance documents. Working with many different limited partnership agreements and side letters truly heightened my understanding of the concerns and needs of both funds and investors alike. The work our firm performed required that I understand not only the legal aspects of the documents, but also the practical ramifications to our clients. This repeated hands-on experience—coupled with Sarah’s readiness to thoroughly discuss any question I had—fostered a level of professional growth that is unmatched throughout my career. The reason all this stands out to me as my biggest success of 2023 is due to my satisfaction of looking back at the growth in my personal understanding of the private equity industry and the excitement of looking forward to new projects on the horizon that will continue to push my professional development. On a broader scale, I think my experience also speaks to Willow’s dedication to continuous learning and innovation in order to assist our clients achieve their goals.
–Daniel
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
Introduction
In today’s business landscape, trademarks are invaluable intellectual property for businesses, enabling them to distinguish their products and services from competition in an ever increasingly competitive market. A trademark is a symbol, word, phrase, or design that identifies and represents a brand, making it instantly recognizable to consumers. Although, to some extent, trademark protection arises automatically when a business uses a mark in commerce, the process of registering a trademark with the United States Patent and Trademark Office (USPTO) offers numerous advantages and protections to a business.
Legal Protection & Exclusive Rights
One of the primary reasons for registering a trademark with the USPTO is to establish legal protection. A registered trademark provides its owner with exclusive rights to use the mark for its goods or services and protects its owner against unauthorized use or infringement by competitors. In the event a third party infringes upon a trademark, the legal process for an owner to assert its rights and stop further infringement is much more streamlined (and less expensive) when the trademark is registered as compared to when the trademark is unregistered. This legal protection safeguards the brand’s identity and empowers a business to protect its reputation, consumer trust, and market share. Protecting intellectual property is an essential component of any business’s strategy for safeguarding and strengthening its identity in the marketplace.
Confirmation of Ownership
In connection with the trademark registration process, the USPTO confirms that the mark being registered is not confusingly similar to any other registered trademark and thereby is owned exclusively by the registered owner. This assurance protects the owner from claims of infringement by other trademark owners (whether registered or unregistered) and ensures that the brand can create and leverage its own reputation without fear that it will be confused with similar products or services. Additionally, many companies in the online marketplace, such as Amazon, Facebook, and Google, have processes in place to protect a registered owner’s trademark from third-party infringement, without the need to file a lawsuit.
Enhanced Credibility and Market Value
A registered trademark is not just a legal asset; it is a symbol of a business’s credibility and professionalism. It signals to consumers, partners, and investors that a company is committed to protecting its brand and its reputation. The added layer of trust generated by a registered trademark can be pivotal in building strong relationships and fostering consumer confidence, leading to increased loyalty and sales. A registered trademark is also an intangible asset that adds to business value. It demonstrates the company’s commitment to brand protection, which, in turn, can make it a more attractive prospect for investors, potential buyers, or strategic partners. A strong and protected brand identity can open new avenues for growth, investment, and expansion, enabling businesses to seize emerging opportunities and secure their place in the market.
Additional Benefits
Conclusion
Registering a trademark with the USPTO is a strategic decision that offers numerous advantages for businesses. It provides legal protection and market credibility, deters against potential infringement and enhances the brand’s market value. As the business landscape becomes increasingly competitive, trademark registration is an essential step in securing a brand’s future and protecting its intellectual property. Businesses that recognize the importance of this safeguard can navigate the challenges of the marketplace with confidence, ultimately strengthening their position and reputation in the eyes of consumers and competitors alike.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
The Corporate Transparency Act (CTA) will go into effect on January 1st, 2024. The purpose of the CTA is to prevent money laundering through shell companies by requiring current and future businesses to comply with new reporting requirements regarding their beneficial ownership. Although the CTA offers a number of exceptions from these reporting requirements, many small- and medium-sized businesses will be required to comply with the new reporting requirements or will be subject to severe penalties.
The CTA mandates that every corporation, limited liability company, or other entity created by state filings (such as limited partnerships) file the required reports to the Financial Crimes Enforcement Network (FinCEN), unless they qualify for an exemption. These exemptions include:
If a business does not qualify for any of these exemptions, it will be required to satisfy the CTA reporting obligations. Businesses formed after January 1, 2024, must file their initial report within 30 days of formation; however, FinCEN offers a grace period for businesses that were formed before January 1, 2024, these businesses must file their initial CTA report by January 1, 2025. After a company submits its initial report, if any of the reported information changes (including beneficial owner information), the company must report the change within 30 days. Similarly, if a reporting company has a change in its reporting status, such as becoming exempt from reporting as a “large operating company”, it must also report this change within 30 days.
Under the CTA, companies must report specific identifying details of their “beneficial owners.” A beneficial owner is an individual who, directly or indirectly, holds 25% or more ownership of the company or exercises “substantial control” over the reporting company. Most small business owners will be deemed “beneficial owners” due to the 25% ownership prong of the definition. However, the determination of substantial control may require analysis of additional factors, including whether an individual is a senior officer of the company, whether such individual has the power to appoint or remove officers or directors of the company, or whether such individual influences important company decisions, such as selling company assets or entering into contracts on behalf of the company. The rules promulgated by FinCEN provide additional indicators and examples of substantial control, however the rules do not cover all facts and circumstances. If a company has any questions about whether an individual has “substantial control” of the company, it should consult a corporate attorney for advice. Additionally, entities cannot be the beneficial owners under the CTA; therefore, any interest or control held by an entity is attributed to the ultimate individual beneficial owner(s) of that entity.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
When starting a new business, many entrepreneurs elect to structure their new business as a limited liability company (LLC). The LLC structure can protect owners from personal liability for their business operations (unlike many sole proprietorships and partnerships) and are relatively easy to form and operate (as compared to corporations, which are subject to various statutory requirements). Unfortunately, many new business owners fail to consider the tax implications of forming an LLC and are surprised to learn that the Internal Revenue Service (IRS) does not recognize LLCs for purposes of taxation.
By default, the IRS treats all LLCs as if they are sole proprietorships (for single-member LLCs) or partnerships (for multi-member LLCs). Income generated from the business passes through to the business owner, and a self-employment tax is assessed against 100% of the business profits, including all compensation paid to the owner. Under the default taxation regime, the IRS does not distinguish between compensation paid to an owner of an LLC as a return on investment and compensation paid to an owner that is also functioning as a full-time employee of the business.
As an alternative to the default tax regime, an LLC may file an election with the IRS to be taxed as an S Corporation (S Corp). Income generated by an LLC that has elected S Corp treatment also passes through to the business owner, however, owners may avoid the self-employment tax. Unlike the default regime, an S Corp owner who performs services for the LLC may wear two hats – that of the business owner and that of a business employee.
As an owner-employee of an S Corp, the owner-employee will be required to pay social security and Medicare taxes (customarily referred to as “payroll taxes”), and the LLC will be required to withhold federal income and employment tax from the employee. However, so long as the owner-employee is paid a reasonable salary, all additional distributions to the owner-employee will be treated as dividends and will not be subject to payroll taxes. Further, because the owner is viewed as being employed by the LLC, the business will avoid the imposition of the self-employment tax.
For example, if an LLC generates $500,000 of income, under the default tax regime, the LLC will be subject to a self-employment tax assessment of approximately $75,000. Under the S Corp tax regime, assuming the LLC pays its owner-employee a reasonable salary of $100,000, then the LLC would only pay approximately $15,000 in payroll taxes.
This example shows a substantial tax saving to the LLC. However, it is important to note that the LLC profits in the S Corp example will still be treated as passing through to the owner, who will then claim the profits as personal income. So, although the LLC sees savings at the business level, it is important that the owner have a thoughtful tax plan in place that takes advantage of all available income tax deductions.
Before making any decision regarding the best tax strategy for you and your LLC, please seek professional advice from an experienced accountant and corporate attorney. These professionals routinely work together to ensure that your tax planning needs are being addressed in a way that minimizes your overall tax liabilities while preserving the legal integrity of your business.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
Crowdfunding is the practice of asking a large number of people to make relatively small donations in order to finance a cause or business venture. A crowdfunding campaign is conducted on an online platform, such as Kickstarter or GoFundMe. The platform charges the user a processing or hosting fee in exchange for offering a central location to promote the crowdfunding project and accept contributions.
The most common type of crowdfunding is donation-based crowdfunding, where the fundraiser runs a campaign to raise funds in support of a certain cause without any obligation to repay the donors. Examples of donation-based crowdfunding include raising money for a family who has lost a loved one and raising money to support a youth sports league. The options are nearly limitless for donation-based crowdfunding – a fundraiser just needs an idea and the courage to solicit donations to fund it!
Although donation-based crowdfunding is the most prevalent type of crowdfunding, there are three other types of crowdfunding available to business owners that serve as useful tools for generating capital from third parties. These other types of crowdfunding are rewards-based crowdfunding, equity-based crowdfunding, and debt-based crowdfunding.
To start a crowdfunding campaign, the fundraiser generally needs to follow these steps: (1) select the crowdfunding platform; (2) set a fundraising goal; (3) set the length of the campaign; (4) create the campaign pitch; (5) define the incentives (i.e., rewards, interest rate, ownership); and (6) promote!
The emergence of crowdfunding has been one of the most dramatic changes to the business finance landscape in the last 10-15 years. Although crowdfunding is an exciting way to generate capital with low financial risk, a business should ensure its intellectual property is protected, it has appropriate form agreements in place (especially with respect to debt-based campaigns), and any equity-based campaigns are in compliance with applicable SEC regulations. Additionally, any nonprofit utilizing crowdfunding should be careful to not put its tax-exempt status at risk.
Before utilizing crowdfunding, a business should obtain advice from an experienced corporate attorney to help identify and minimize any risk associated with the anticipated fundraising and to facilitate a successful fundraising campaign.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only.
