Making the right choice when it comes to setting up a Corporation or LLC is crucial. What is even more critical is giving these entities substance. I hear from a lot of people that I talk to that they were told to setup an LLC, but they are not really sure why, or the benefits they are supposed to receive. Setting up the right entity is imperative because the last thing you want to find out is that you are in the wrong entity and must go back and cleanup/restructure the business, or even worse lose everything you have worked hard for.
With the litigation explosion in today’s society at an all-time high, it is important to have the proper entity setup for liability protection of both personal and business assets. Having a Corporation or LLC is great if you are using it correctly. When I speak to Business Owners and Entrepreneurs throughout the nation about their entity structures there is one common thing that most people overlook, the Minutes and Resolutions. They either do not know how to do it, or they are told that they should form an LLC and are advised that they are easier to use, and you do not have the same compliance requirements as a Corporation. These people have been misinformed by their professionals or friends and are led down a path that can cause serious havoc on their businesses and personal assets.
One example is my firm had a client come to us after an awfully bad situation arose within his business. I will just call this client “Jim.” Jim has a large construction company who built a custom home for one of our ex-vice presidents in Wyoming. Jim’s company was setup as a Corporation. He had one of the most prestigious CPA firms in the nation and has the most pristine financials. He received a notice of an Audit from the IRS. Jim, knowing that he had a Corporation structured and his financials were in order, was greatly confident that he would prevail in this Audit.
On the day of the Audit, Jim walked into the IRS building with his CPA in tow. Feeling very confident that he was going to overcome, he walked in very proudly and placed all of his documents on the revenue agent’s desk. The first question the revenue agent asked was if he could see the company’s documentation. Jim pushed the financials across the desk to the revenue agent, the revenue agent pushed them back and asked for his Corporate Records. Jim, having a nice fancy corporate book, pushed it across the table. The revenue agent opened the corporate book only to find that Jim had only completed the initial Minutes and Resolutions, had issued himself ownership and had then closed his book. He never kept any documentation (i.e., Minutes and Resolutions) past the initial meeting. The revenue agent closed the corporate book, pushed it back across the table and said, “I now know what I am dealing with, a Sole Proprietorship.” He asked Jim for the financials again. He noticed that Jim had taken advantage of over $250,000.00 in Corporate Deductions over the course of the 3-year Audit. But, because Jim had not treated the entity as a Separate Corporation and more of what would be considered “Alter-ego,” Jim was not entitled to these deductions as a Sole Proprietor. His penalty was to pay the taxes on the $250,000.00 and he was penalized to the tune of 45%. This does not only happen in Audit situations, but this also happens if there is ever any kind of liability issue against the business. If this were a lawsuit, Jim would have lost everything he and his wife had worked so extremely hard to obtain and pass on to their children to create generational wealth.
Jim is now a client of mine and is in full compliance. You see, the Government, Courts, IRS, etc., allow us as business owners to reconstruct documentation based upon recollection. This does not mean we are back dating documents. Back dating is 100% illegal. However, reconstruction is fully admissible.
With all that being said, the definition of a Corporation/LLC is: It is an artificial person created by law. It can do anything you want it to do but think and speak for itself. This means that you, the Shareholder, must keep Minutes and Resolutions which are essentially giving the company the voice and thought process not only to defend itself, but also to defend its owners. Minutes and Resolutions are required by law. Now, I know a lot of people will tell you that an LLC does not have to have Minutes or Resolutions. This is absolutely incorrect! Minutes and Resolutions are what proves that you and the company are completely separate. If anyone tells you this about an LLC, they are misinforming you. Should the company ever be challenged in a Lawsuit, Audit, Contract Dispute, etc., the very first set of documents any Judge, Revenue Agent or Arbitrator would look at are the Minutes and Resolutions. They do this to determine whether you have been treating the company completely separate or simply just as an alter ego of you, the principles. If there are no Minutes or Resolutions which gives the company substance, the company will be set aside, essentially the piercing of the Corporate Veil, and all liability will fall through to the Shareholders/Members, where personal assets can now be affected by liability against the business. I cannot stress enough about the importance of Corporate Formalities. Do not freak out! There is a Solution! My firm, Controllers, Ltd., can help you reconstruct the Minutes and Resolutions to bring your company back into Compliance, with our Compliance & Strategy coaching program. Give us a call today at 866-786-3462 or send us an email to: contact@controllersltd.com. We look forward to speaking with you!
My name is Scott L. Arden, CEO of Controllers, Ltd., in Reno, NV. I have been in the Asset Protection and Estate Planning industry for over 24 years and have helped thousands of business owners and Entrepreneurs throughout the country clean up the messes their families and professionals have gotten them into based upon misinformation or by simply forming a Corporation or LLC themselves and not knowing what to do next.
