Fundamentals of Administering Nested Business Entities
Forming business entities is a big step forward, but administering them properly is critical to successfully enjoying many of asset protection their benefits. Here are some helpful fundamental tips to make sure you follow:
1. Observing Corporate Formalities
It’s important that you realize that your business entity is a living breathing creation. It has to be maintained and administered properly. Remember to:
1. Every year, have your annual meeting and be sure to give proper notice
2. Every year, prepare your annual meeting minutes reflecting the resolutions passed at the meeting.
2. Don’t Commingle Assets
Do not double dip or commingle assets in your entity. Business assets are the business’s assets, and your assets are your own assets. Have separate bank accounts and books for each business entity. Do not pay personal bills with the business funds. Do not pay one business’s expenses with another business’s assets. Keep everything separate and organized. Similarly, do not pay business expenses with personal funds. Keep them separate. Otherwise, a creditor will make a good argument that the entity is really an instrumentality of you that is one and the same, thus invalidating, or piercing through the limited liability protection you may have created the entity in the first place.
3. Proper Funding and Distributing Profits and Losses
Funding your entity should be done pursuant to the governing document. That may be the operating agreement if you have a LLC, or bylaws and/or shareholder’s agreements for corporations (s-corporations and c-corporations). Beyond the scope of the operating agreement, be sure to make contributions to the entity only from the owner of the entity. For example, if the owner is a trust, make sure the trusts is funded first, and then transfer funds from the trust to the entity. Make sure to follow the chain of ownership. As another example, if you have holding company parent entity that wholly owns subsidiary companies, be sure to fund the parent company first through its owner. Then have the parent company fund its subsidiary entities directly. It’s important to follow the chain of ownership.
Similarly, if you are distributing cash or other assets from a company as distributions to partners, make sure to pay its owner. If you want to withdraw funds from a subsidiary company and it’s characterized as a distribution to partner (rather than salary), be sure to pay the parent company first before further distributing those funds to the parent company’s owner.
In both the above cases relating to funding and distributing assets, be sure to follow the chain of ownership at all times. Click on the image below for a visual example of a complicated asset protection structure using limited liability companies (LLCs) and limited partnerships (LPs).
4. Financial and Legal Reflecting the Economic Realities of the Entity
It’s important that the company or companies are administered in accordance with how the documents say they are to be administered. In other words, if the governing document says that one partner is to receive 45% of distributions, then that partner actually has to receive 45% of the distributions. Otherwise, the internal revenue service will impute differing ownership allocations or worse, invalidate the entity entirely.
5. Keep Separate Books for Each Entity
It’s important that each entity keep its own books and records. This helps to strengthen the legality and independence of the entity. Records do not need to be prepared by your attorney if you do good record keeping. Similarly, the books do not need to be prepared by a book keeper, accountant or CPA if you can keep good records. Just remember to keep separate books and records for each entity.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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