Arthur D. Warady | Tax aware legal care

Call Me: 305-600-2432

Arthur D. Warady | Tax aware legal care

Tailored Business Counsel From An Attorney With An Entrepreneurial Background

Answers To Frequently Asked Questions From A Lawyer With A Business Background

My name is Arthur D. Warady, and I have practiced law for 50 years. I am also a certified public accountant (CPA), and I have been an entrepreneur in software development and other fields. Below are some common questions and concerns that my business clients raise. To address your specific situation, contact my Florida law firm, Arthur D. Warady, to arrange a consultation.

Does a single-member LLC provide asset protection?

  • Generally, claims for liabilities arising “inside” an LLC cannot reach a member’s assets owned “outside” the LLC.
  • On the other hand, in virtually all states, with the exception of Delaware, Nevada, and Wyoming, assets inside a single-member LLC (in contrast with a multi-member LLC) are not protected from liabilities arising outside the LLC.
  • Delaware, Nevada, and Wyoming are the only states that provide a single-member LLC with the same liability protection as a multi-member LLC.
  • It is possible to establish a Wyoming LLC to own assets located outside of Wyoming. I prefer Wyoming because it is less costly to establish and maintain a Wyoming LLC than in Delaware or Nevada. However, it’s important to verify the laws of the state in which the assets are located. You might be required to register the LLC as a foreign entity doing business in the respective state.

Are all written and signed contracts legally enforceable?

  • No, there are technical requirements that must be met to make a contract legally enforceable – for example, the party seeking to enforce the contract:
    • Must prove that the other party received legal consideration for signing the contract; and
    • Must prove that its promises to the other party were not illusory.

Can a verbal contract be enforceable?

  • Yes, many states have a law called “the Statute of Frauds” that specifically validates some verbal contracts.
  • Even if a verbal contract is not protected by the Statute of Frauds, various facts and circumstances may make it legally enforceable, such as when the party seeking to enforce the verbal agreement has performed its obligations to the other party.

Is there an advantage to having an LLC elect to be taxed as an S-Corp?

  • Sometimes, yes.
  • If a shareholder-employee earns enough income, then the accountant might declare part of the income to be W-2 wages and the balance to be a distribution of an S-Corp dividend.
  • The W-2 wages portion is subject to payroll taxes, including FICA (Social Security) and Medicare taxes
  • The S-Corp dividend is not subject to payroll taxes.
  • The audit risk for the shareholder-employee is that if capital is not a material income-producing factor of the business, then the IRS or state revenue department may determine the salary to be unreasonably low, reclassify part or all the dividend as salary and assess penalties for failure to pay payroll taxes.
  • On the other hand, if the LLC keeps its default classification as a disregarded entity or partnership, then the IRS will classify all income of the LLC as self-employment, which is subject to self-employment tax but not other payroll taxes.

Is a covenant not to compete enforceable against an employee or an independent contractor?

  • Effective September 4, 2024, under Federal Law, Covenants Not To Compete for all Workers are no longer enforceable, except for grandfathered non-competes with Senior Executives.
    • This is when the new FTC Non-Compete Rule takes effect.
    • The Rule applies to all workers, whether or not paid, whether designated as employees, independent contractors, or other.
    • The basis for the Rule is that a noncompete clause is an unfair method of competition, in violation of Section 5 of the Federal Trade Commission Act.
  • For more information on this topic, see my Blog on this Website.

What is a ‘flow-through entity’?

  • “Flow-through entity,” also known as “pass-through entity,” is a term invented for federal income tax purposes. It is not a specific legal entity.
  • The term includes a class of entities whose income is not usually taxable to the entity but rather is taxed to the entity’s owner(s).
  • An S-Corp, a partnership, and a limited liability company (LLC) that is taxed as a partnership are examples of flow-through entities
  • A C-corp is not a flow-through entity.

Does a distribution from an LLC to a retiring member result in taxable income to the retiring member?

  • This depends on a number of factors:
    • If the LLC is elected to be taxed as a corporation, then generally it would be taxable income if a C corporation. If an S-Corp, it may or may not be taxable depending on other circumstances.
    • If the LLC is taxed as a partnership (the default tax classification), then generally, no, the distribution to the retiring member would not be taxable income, though there are some technical exceptions.

What’s the difference between a state nonprofit corporation and a Section 501(c)(3) organization?

  • A state nonprofit corporation may be exempt from that state’s income tax or sales tax – if properly registered; however, it is not exempt from federal income tax, and donations to it are not deductible on the donor’s federal income tax return.
  • All 501(c)(3) organizations are state nonprofit corporations or trusts, but not all are recognized as exempt from federal income taxes unless approved by IRS based on an application for income tax exemption submitted to and approved by the IRS.
  • If approved, IRS issues a favorable Determination Letter as evidence that a nonprofit has been approved as a 501(c)(3) organization.
  • Contributions to most Section 501(c)(3) organizations are deductible on the donor’s federal income return if that characteristic is included in the organization’s Determination Letter.

Will my tax ID number change if I change my company’s tax formation from an LLC to a C-corp?

  • It depends on your answers to the following questions:
    • Are you the only member (sole owner) of your LLC?
    • Have you been filing income taxes of your LLC on Schedule C of your personal 1040 (as a sole proprietorship or disregarded entity for IRS purposes) or on Form 1065 (as a partnership)?
    • Do you want only to change the IRS income tax reporting to a C-corp, or do you want to change the structure under state law from an LLC to a C-corp?
    • Why have you decided to change the tax structure from an LLC to a C-corp?
      • If you just want to change it from an LLC to a C-corp for IRS income tax purposes, then you should file IRS Form 8832. It will be treated as a name change, and you will keep the same EIN.
      • If you want to change both the IRS income tax structure and the state law structure, it’s more complicated and not as clear. However, with the right steps, I believe (again, not as clear) that it can be treated as a tax-free reorganization for IRS purposes, and I believe you will be able to keep the same EIN.
      • Why is it important to keep the same EIN? This can be more complicated, depending on the accumulated income, assets and liabilities of your LLC (if any). It is best to discuss this by making an appointment.

I’m Here To Field All Your Business Law Questions

You will work directly with me at my firm. Call my office in Boca Raton, Florida, at 305-600-2432 or send me an email. I practice in Florida, Georgia, New York and Pennsylvania.