The Choice of Business Entities in Virginia

Posted on June 7, 2018

Article modified and edited by Bennie A. Wall, Esq.

So you are starting a new business and wondering: What choice of business entity is right for me? How do I choose among the Virginia business entities? Which business entity will best suit my needs?

You may have heard a lot about the benefits LLCs (Limited Liability Companies), C Corporations, and S Corporations. You may have even heard the perils of sole proprietorships and general partnerships. When choosing which Virginia business entity is right for your business, knowledge is power. So, we have provided you a general outline of the many choices of business entities in Virginia.

The Sole Proprietorship

A sole proprietorship is a business entity which has no separate existence from its owner.  Any person who does business alone is a sole proprietor by default. In a sole proprietorship, the owner is personally liable for all debts of the business. In short, a sole proprietorship is an “easy” business entity that offers no liability or asset protection for the owner and has no defined structure. If you are interested in protecting you and your family’s personal wealth, home, and other assets from your business venture, then perhaps this is not the best Virginia business entity for you.

The Partnership

A partnership is a business entity in which partners share with each other the profits or losses of the business. If two or more people engage in a business they are a partnership by default. Absent an agreement, the partners share profit and loss equally. Such an equal division of rights and liabilities is called a general partnership. By default, every partnership begins as a general partnership. Like sole proprietors, general partners are personally liable for all debts of the business.  A partnership agreement can determine how the partnership is managed, the allocation of profits and losses and the liabilities of the individual partners to each other and to the business. Keep in mind, however, that each partner is jointly and severally liable for the obligations of the business. Thus, a creditor can seek full satisfaction from either partner attacking his personal wealth just as a sole proprietor. But wait! We just told you that by default business owners in a partnership share losses equally, how can a creditor go after just one of us? Great question: If a creditor satisfies their debt by going after one partner, the aggrieved partner can then bring suit against his other business partner(s) for them to pay up their fair share. The only problem is the added cost and headache of litigation. If you must choose this route, please have a well drafted partnership agreement made by an experienced attorney. Again, if it is asset protection you are interested in, this may not be the best option for you.

The Virginia Limited Partnership

A limited partnership is a type of partnership which is organized into two classes of partners: general partners and limited partners. General partners manage the business and are personally liable for all debts of the business. Limited partners may own part of the business but they do not manage the business. The limited partners’ responsibility to pay business debts is limited to their investment in the business. This limited liability means that if the business goes bankrupt, all the business assets may be lost but the personal assets of the limited partners are protected from creditors of the partnership  The general partners enjoy no such immunity and remain “on the hook” for business liabilities. Therefore, business owners will find it easier to find investors if the business is a limited partnership.

The Virginia Corporation

A corporation is a business entity that has an existence separate from its owners.  Corporations have 3 Major Benefits over partnerships:

  • While a general partner would be personally liable for business debts, every shareholder’s liability is limited to his or her investment in the company. That is to say, all of the shareholder’s other assets are protected.
  • The corporation can continue in perpetuity ensuring everything you have worked so hard building can continue as your legacy even once you retire or pass on.
  • Shares of a corporation are easier to transfer than other business interests.

If Virginia Corporations are so great, then why doesn’t everyone have them? Many do not know it is an option. Others believe that it is too much red tape. In Virginia, Corporations must be created in a legal document and must be registered with a State Corporation Commission to legally conduct business in the Commonwealth.

If you want powerful asset protection and a company’s investors are comfortable investing with and a little paperwork does not scare you, then a Virginia Corporation may be a great choice for your business venture. The next question is, which type of Virginia Corporation will you choose?

There are two main forms of corporations: C Corporations and S Corporations.

Difference between C Corps and S Corps

C Corporations are more commonly used for publicly traded or growing companies because there are no limits as to who may own stock. C corporation stock is the easiest business interest to sell; publicly traded companies are typically C corporations. Unlike S Corps, C Corporations can have different classes of stock to suit the needs of the directors and investors. The disadvantage of C Corporations is that they pay double taxation: they pay tax on corporate earnings first and then shareholders pay income tax on dividends upon receipt.

S Corporations are taxed like partnerships (to the shareholders). This is good for companies with high earnings but whose value is unlikely to increase. Some accountants use S Corporations to treat some income as a dividend to shelter income from self-employment taxes for contractors. S Corporations have limitations: They are limited to one class of stock, there can be no more than one hundred shareholders, and all shareholders must be United Stated citizens or US residents and must be personal (and not entity) taxpayers.

At this point you may be thinking:

I really like the protection the Corporation provides me, but all this legal and tax talk has my head spinning—it sounds like an administrative nightmare.

Perhaps you a doubting whether either of these types of Virginia Corporations are right for you at the present time. Yet, at the same time, you are intrigued at the possibility of asset protection from your business. Well, then you may want to read on to learn more about another great choice of Virginia business entity: The Virginia Limited Liability Company.

The Virginia Limited Liability Company

The Limited Liability Company (LLC) is a business entity which shares both the liability benefits of a corporation with the beneficial tax treatment and structural flexibility of a partnership. In many ways, an LLC is like a corporation. Both LLCs and corporations are business entities that enjoy limited liability for owners, have their own separate existence, and can continue in perpetuity. Like corporations, LLCs must be registered with a state to conduct business there. Owners of an LLC are typically called “members” instead of a corporation’s “shareholders.” Like a C Corporation, an LLC can have multiple classes of membership (stock).

LLCs are more flexible and less burdensome than corporations. An LLC can choose to be taxed as a sole proprietor, a partnership or a C-Corporation.  An LLC in Virginia can have only one member or it can have many. Like a partnership, an LLC can operate without a written agreement but to do so would be risky and not advisable.

LLCs share the major benefits of corporations and are easier to create and manage. As a result, LLCs have becoming the choice of entity for businesses ranging from personal contractors to service and sales companies.

I know what you are probably thinking at this point: Nailed it! I get a corporate shield over my personal assets, but with the ease of a partnership. Sign me up. Not so fast. While the LLC has been the business entity of choice for most Virginia business owners, there is a relatively new kid on the block: The Virginia Business Trust.

The Virginia Business Trust

A Business Trust is the newest form of business entity offered in Virginia and is quickly becoming the entity-of-choice for holding and managing rental real estate, particularly where there are several properties. It has all of the benefits of LLCs, plus several additional benefits and advantages.

A Business Trust is an association of beneficial owners formed under the laws of the Commonwealth and registered with the Virginia State Corporation Commission, in which a Trustee or Trustees (a fiduciary who acts on behalf of the beneficial owners or beneficiaries) directs the business operations (similar to the Officers of a Corporation – i.e. president, vice-president, secretary and treasurer or the Manager of a Limited Liability Company). A Business Trust, like Corporations and LLCs, does not terminate upon the death or dissociation of a beneficial owner. Further, the Trust may incorporate a governing document called a “Trust Agreement,” which is akin to the Bylaws of a Corporation or an Operating Agreement of an LLC. And, very importantly, the beneficial owners of the Trust can have limited exposure to liability and can transfer shares during their lifetime or upon death in accordance with the beneficial owner’s estate plan.

A very useful feature, which sets it apart from other types of business entities, is that a Business Trust may be structured to hold different income producing properties, the income of which may go to different beneficiaries in multiple “Series.” Each Series may designate a separate set of trustees, beneficial owners, or beneficial interests having separate rights, powers, or duties with respect to specified property or obligations of the Business Trust. Further, profits and losses associated with any Series may have a separate business purpose or investment objective.

A single Business Trust is superior to forming multiple Limited Liability Companies (LLCs) or Corporations for the following reasons:

  1. Ease of administration: Since a single Business Trust can provide limited liability protection for each Series within it, forming a separate company for each asset is not necessary; the result, one entity instead of many;
  2. Limitation of liability: Each individual Series established under a Business Trust enjoys liability protection separate and apart from any other Series;
  3. Flexibility of management: Each Series can have a different management structure and ownership allocation, thus allowing each beneficial owner to exercise control over a Series;
  4. Easy transferability of ownership: Each beneficial owner of a Series can direct his/her beneficial interest in a Series to his or her heirs;
  5. Flexibility in the division of income and expenses: Income and expenses can be allocated to each individual Series;
  6. Effective transition of management: Upon the incapacity or death of a beneficial owner, a Business Trust can provide for successor trustees to manage the business;
  7. Variety of taxation choices: Similar to an LLC, a Business Trust can choose to be taxed as a disregarded entity, a partnership or an S-Corporation. Like an LLC, a Business Trust can have only one member or it can have many; and
  8. Business Structure can be Simple or Complex: Like a partnership and an LLC, a Business Trust can operate without a written agreement, but to do so would be risky and not advisable.

Conclusion

I hope this gets you on the right path for selecting a Virginia business entity. As you have seen, Virginia has many options when choosing the best business entity, so determining which of the many business entity options is right for your business takes a careful consideration of the nature and size of your business as well as your business’ goals and objectives. It is always imperative that you explore these options with an experienced attorney as well as your business’ tax advisor.

Want to learn more about these different business entities, or help determining which entity best suits your needs? Then take a look around our free resource center or call today and schedule an appointment with one of our experienced attorneys.

Posted in Estate Planning

The Last Will and Testament

Posted on May 14, 2018

 

 

 

 

 

 

Article written by Eldridge Blanton, Esq.

Wills are legal instruments used to transfer property upon one’s death. The person who creates the Will is referred to as the testator (fem. testatrix), one who makes a testament.

The person (or entity) who carries out the terms of the Will is the executor (fem. executrix), one who executes the Will.

There are numerous ways to transfer property without using a Will. For example, a joint bank account will transfer to the other person on the account when one of them dies. In like manner, a joint stock account will transfer to the other co-owner, although brokerage firms will usually insert the word “survivor” to clearly indicate that the account goes to the survivor upon the first death. Retirement accounts (IRAs, 401(k)s, etc.) will have a beneficiary, as will life insurance policies. In all of these examples, the joint ownership or beneficiary designation will trump the provisions of the Will.

If property does pass via one’s Will, that means that the local probate court will be involved. The clerk of the court will inspect the Will for proper witness signatures, notary stamps and anything that might appear irregular. If the Will passes muster with the court, the next step is usually to the Commissioner of Accounts, a lawyer appointed by the court, who will supervise the process to ensure that all creditors are paid and that the Will provisions are carried out. Some estates (those under $50,0000) will fall under the “Virginia Small Estate Act” and the process will be significantly shortened.

A Will does nothing while the testator is alive. A Will “speaks” at death.  If the testator becomes incapacitated, he/she will have to rely on a power of attorney for financial decisions and a Virginia advance medical directive for healthcare matters. In the absence of these documents, a family member will have to petition the court for appointment as guardian for health related matters and conservator for financial ones. This is sometimes referred to as “living probate” because the court will be involved for the rest of the person’s life (or for the remainder of the person’s incapacity).

In recent years, living trusts have come into widespread use as a “Will substitute.” Living trusts can hold title to property and can pass the property to family members without the intervention of the probate court. It’s a private process whereas Wills are public records. Whether one uses a Will, a living trust or any of the other methods, it’s VERY IMPORTANT to affirmatively document your wishes and not leave your family to sort out your affairs after your death.

Posted in Estate Planning

Does your Estate Plan Need Remodeling?

Posted on April 30, 2018

 

Content provided by WealthCounsel.

Article written by James W. Garrett, Esq.

Estate Plans, like houses, need updating and remodeling from time-to-time. If you haven’t reviewed your Estate Plan in the last five years, you probably should. Congress recently passed two major tax laws that impact estate planning: the American Taxpayer Relief Act of 2012 (“ATRA”) and the Tax Cuts and Jobs Act of 2017.

If you are married and haven’t updated your Estate Plan since the passing of ATRA, your will or trust likely includes an “A/B trust” tax plan designed to minimize estate taxes. Since the 2017 Tax Cuts and Jobs Act raised the estate tax exemption to $11.2 million in 2018 ($22.4 million for a couple), the “A/B trust” tax plan adds unneeded complexity and may result in your children paying higher capital gains taxes. In many instances this tax planning ought to be removed.

If you have substantial retirement plan assets, you need to consider the taxation issues related to passing on these assets to your children and grandchildren. Further, you need to be aware of the impact of the 2014 ruling in Clark v. Ramaker where the U.S. Supreme Court ruled that inherited IRAs are not asset-protected from your children’s creditors. Fortunately, with proper planning, retirement assets can be passed down in trusts for asset-protection purposes, without foregoing your children’s or grandchildren’s ability to stretch-out distributions over each beneficiary’s life expectancy.

Aside from tax issues, if you have experienced some combination of changes involving your family, your health or your wealth, your Estate Plan is probably out-of-date because it no longer reflects your situation and goals. You should have your Estate Plan reviewed if you have experienced any of the following:

  1. Changes in your family structure, such as divorce, remarriage, birth of a new child or grandchild. If you are married and have children from a previous relationship, you need to update your plan to balance your desire to provide for your spouse, while insuring that your children do not get disinherited. And, if you desire to name an underage grandchild as a beneficiary of your life insurance policy or IRA, you need to understand the problems that will arise when a minor child inherits without proper planning in place.
  2. Changes in your risk profile. If you own rental property in your own name, you need to understand the legal risks. Since personal ownership subjects you to legal liability, you ought to consider establishing a business entity, perhaps a Limited Liability Company or Virginia Business Trust for asset-protection benefits and other management considerations.
  3. Changes in the risk profile of your children. When you did your plan several years ago, your son was a successful business owner and you left his inheritance to him outright. Now, as a result of poor business decisions and uncontrolled spending by his wife, your son has accrued much debt. If you were to die today, your son’s creditors could seize the inheritance you left to him. In such circumstances, you should consider changing your estate plan to protect your son’s inheritance by leaving it to him in a trust with an independent trustee.
  4. Changes to give your adult responsible child asset protection. Historically, most parents would leave an adult responsible child an inheritance outright. Today, many parents – after learning about the asset-protection benefits and family-line protections of a trust – leave that same child an inheritance in a lifetime, beneficiary-controlled trust.

Many old irrevocable trusts need updating too

Many irrevocable trusts need updating and remodeling, too. Old trusts can be hard to work with on a variety of levels. Remodeling these old trusts, consolidating them, or otherwise modifying them to make administration easier saves costs.

A common misunderstanding is that irrevocable means unmodifiable. Did you know that the Virginia Uniform Trust Code provides many ways for an irrevocable trust to be modified without court involvement?

Are you the beneficiary of an irrevocable trust established by a deceased spouse, parent or other family member? If so, the old trust may need updating to minimize capital gains taxation.

Are you the beneficiary of an irrevocable trust trusteed by a bank? Are you dealing with an out-of-state call center? Would you would prefer that you own financial advisor handle the trust’s investments? If so, you need to know that in many instances, a bank trustee can be removed and replaced with an administrative trustee, allowing your financial advisor to manage and invest the funds. (Note: Our law firm established Legacy Fiduciary Services, PLC to serve as trustee in such instances.)

As mentioned earlier, even if a trust is irrevocable, it is often possible to change it without court involvement, provided the change does not violate a “material purpose” of the trust. The exact mechanics will always vary depending on the trust and your situation, but it’s almost always possible to make some improvements.

If your estate plan is more than five years old or if you are the beneficiary of an old irrevocable trust, we’d love to explore whether a remodel is in order. Give us a call today and achieve the peace of mind knowing that your plan will address all of your concerns and goals.

Posted in Estate Planning

Estate Planning Concerns for Blended Families

Posted on April 10, 2018

Article by Beth Ann R. Lawson, Esq.

Estate Planning for blended families is and should be of the utmost importance to couples in a marriage where either they or their new partner, or both of them, have been in a prior marriage. A blended family is defined as a family consisting of a couple and their children from the current and all previous relationships. How do we plan for our spouse while still protecting our children from a prior relationship(s)?

A blended family in America is not a unique occurrence. Statistics indicate that over 50% of American marriages end in divorce, showing that up to 41% of first marriages, 60% of second marriages, and 73% of third marriages end in divorce. Wow! What this means is that your estate planning for a blended family will be very different from first marriage estate planning. In a first marriage, many individuals leave assets first to their spouse and secondly to their joint children. In a blended family, we often want to protect our existing spouse while still protecting our own children, all at the same time.

For blended families, estate planning best begins prior to marriage. A pre-nuptial marital agreement is the gold medal for creating a more organized division of assets in a divorce in blended families. Both parties agree to asset division if necessary while the parties still want the best for everyone. That agreement is memorialized in a formal pre-marital agreement. Hopefully, the parties have discussed the issues and both families understand where everyone stands in the estate plans for the newly blended family.

In Virginia, it is important to have clearly stated estate plans in a blended family which coordinate with laws on an augmented estate/elective share. If you are not careful coordinating your document (or lack of any document if you are intestate) with Virginia law on an augmented estate/elective share, your estate may well be contested in court by your descendants or the new spouse. How can you protect all the different family members at the same time and prevent this?

Be sure to consult with your Carrell Blanton Ferris and Associates, PLLC attorney who will be well versed in estate planning for blended families.

Beneficiary designations on retirement accounts, insurance, financial accounts, real estate and cars are critical in blended family estate planning. You must correctly align your payable on death or transfer on death assets with the best legal protection possible for your beneficiaries. These are assets where you have named a direct beneficiary who will receive a designated portion of a particular asset without court intervention.

Unfortunately, a payable on death or transfer on death designation does not care if your beneficiary is a minor or an incapacitated individual with government benefits which is why many people use Revocable Living trusts as a named beneficiary of these payable or transfer on death accounts.

Revocable Living Trusts can provide great piece of mind in blended family estate planning. Not only can you create married separate trusts to provide for your surviving spouse while they are living and still protect your children, but you can use independent third party trustees to manage the assets in the best interests of all parties. Keep the piece even when you are not there to be the immediate referee.

What is the outcome of carefully crafted Estate Planning for Blended Families? PEACE OF MIND for you, your new spouse and all sets of children. We look forward to meeting all of you to help create legal protection for your blended family.

Posted in Estate Planning, Prenuptial Agreements

Wealth Transfer Taxes: Gift, Estate, Inheritance, and Generation Skipping Transfer Taxes

Posted on March 20, 2018

Article written by Bennie A. Wall, Esq.

“In this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin

 

It seems that one of the most common questions I get from clients is how will their estate be taxed when they pass. I anticipate that these questions will only increase with the attention brought by the most recent tax reform under the Trump administration.

This article will serve as a primer on the most common Wealth Transfer Taxes with updated information from the Tax and Jobs Act of 2017.[1]

Types of Wealth Transfer Taxes

There are four types of wealth transfer taxes: the Gift Tax, the Estate Tax (sometimes referred to as the “Death Tax”), the Inheritance Tax, and the Generation Skipping Transfers Tax.

The Gift Tax

Gift Tax—Gift taxes are imposed on certain transfers made to any individual for less than full and adequate consideration (measured in money or monetary value)—more simply, when you do not get the full fair market value for an item.[2] There are some exclusions from this general rule. Generally, the following gifts are not taxable gifts:

  • Gifts that are not more than the “annual exclusion” for the calendar year.
  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  • Gifts to your spouse.
  • Gifts to a political organization for its use.[3]
  • Gifts made to qualifying charities without receipt of goods or services in return.

Any gifts made that are not excludable or deductible, will first draw upon your “basic exclusion amount,” which is treated as a credit for gift tax purposes.[4] For example, if you have an 11.2-million-dollar basic exclusion amount in 2018 and you make a gift to your sister of $100,000, you have made a taxable gift of $85,000 ($100,000 given to your sister less your $15,000 “annual exclusion” for 2018). Your tax liability on the gift would be $0.00 because your “basic exclusion amount” would be applied. You are now left with 11.115 million dollars of exclusion (11.2 million less 85,000).

The Estate Tax

Estate Tax—Sometimes referred to as the “death tax,” estate taxes are charged against the estate of a deceased taxpayer. The federal government imposes an estate tax on America’s wealthiest individuals—some estimates citing that less than .2% of Americans are affected; however, some states will impose their own estate tax and will be much less forgiving than the federal government. Virginia, however, is for lovers and does not impose an estate tax.

The Inheritance Tax

Inheritance Tax—not to be confused with the estate tax—is a tax on the inheritance and charged against the beneficiary of an estate and not against the estate itself. The federal government does not impose any form of inheritance tax—the Revenue Code is clear that any receipt of property from a deceased person is not considered income.[5] The inheritance tax is only at the state level, so it is important to consider where your potential beneficiaries may reside when determining the best method for leaving an asset to them. Again, Virginia does not impose an inheritance tax.

The Generation Skipping Transfer Tax

Generation Skipping Transfer Tax – This is a more complicated tax that comes into play when you make lifetime gifts or testamentary bequests to a generation below your children. It was designed to keep the ultra wealthy from passing down money for several generations while escaping taxation. Essentially, it is a way to ensure that when you skip a generation, you are taxed similarly as you would have been had you left it to the generation directly ahead.

Some other important terms to know:

American Tax Relief Act of 2012, or “ATRA”: This Act was signed into law by President Obama in 2013. The main take-aways about this act for estate and gift taxation are: (1) it made permanent many of the tax reduction or deduction provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001; (2) it set the “basic exclusion amount” at $5,000,000 to be adjusted for inflation; and (3) it allowed married taxpayers to “port” their basic exclusion amounts.[6]

Annual Exclusion: The annual exclusion is the amount that a taxpayer may gift to any individual in a tax year without incurring any gift tax liability. For 2018, this amount is $15,000. So, if you give your brother $15,000, there is no need to worry with a gift tax return; however, if you give your sister $16,000 you will need to speak with your accountant about filling a gift tax return this year.

Basic Exclusion Amount: The basic exclusion amount[7] (or applicable exclusion amount[8]) is the amount that we may pass either during life or upon death without having to pay any tax liability. In the 1990’s this amount was moving between $600,000 and $1,000,000. The ATRA raised this amount to $5,000,000 to be adjusted for inflation. In 2017, this meant that every taxpayer had a 5.49 million dollar exclusion that they could pass on without paying a dime in estate taxes. The Tax and Jobs Act of 2017 has provided for a $10,000,000 exclusion to be adjusted for inflation, giving each individual 11.2 million dollars in 2018. It is important to note, however, that this rise in the basic exclusion amount is temporary and is set to drop back down to the $5,000,000 (adjusted for inflation) rate in 2025 if Congress does not renew the plan.[9]

Portability: Portability solved a very complicated issue many married couples faced. Before the ATRA was enacted, it was very important to use estate planning to preserve a deceased taxpayer’s basic exclusion amount. Otherwise it was lost forever upon death and the taxpayer’s estate was subjected to more taxation. This often led to complicated trust planning that was designed to shield the credit amount form estate taxation. Unfortunately this led to assets being locked down in an irrevocable trust for the surviving spouse and children. Also, any assets appreciating over the lifetime of the surviving spouse were building up capital gains to be passed on to the ultimate beneficiaries of the trust. The ATRA allows married couples who make a timely election to port their unused basic exclusion over to the surviving spouse. This will ensure that the amount is preserved and can now be passed on by the surviving spouse to the next generation. Since the surviving spouse has full control over the assets until she passes, the assets will receive a step up (or down) in basis to the fair market value of the assets as of her date of death. This has allowed many to have much simpler estate plans and administration.

In Sum

The Federal Estate and Gift Taxes work together. Each taxpayer has a basic exclusion amount. Married couples may, through portability, draw on each other’s basic exclusion amount. A surviving spouse may elect to add the deceased spouses unused exclusion amount, but a timely election must be made. Every gift a taxpayer makes above the annual exclusion is credited against the taxpayer’s basic exclusion amount (or applicable exclusion amount). When a taxpayer passes away, the executor will use the remaining basic exclusion amount (or applicable exclusion amount) to pass the rest of the assets in the estate to its beneficiaries. If after accounting for lifetime gifts there remains an exemption amount, then the taxpayer will not owe any estate taxes. However, if the exemption amount is not sufficient to cover the full bequests, there will be some tax levied against the estate.

If you are concerned about potential tax consequences of your estate plan or lifetime gifting plans, I encourage you to reach out to an experienced estate planner and a trusted tax professional today. Together we can create a plan that best meets your goals and minimizes or eliminates adverse gift and estate tax consequences.

[1] See H.R.1 — 115th Congress (2017-2018)

[2] See 26 U.S. Code § 2512

[3] See 26 U.S. Code § 2503

[4] See 26 U.S. Code § 2505

[5] See 26 U.S. Code § 102

[6] See H.R.8 — 112th Congress (2011-2012)

[7] See 26 U.S. Code § 2010(c)(3)

[8] See 26 U.S. Code § 2010(c)(2)

[9] See H.R.1 — 115th Congress (2017-2018)

Posted in Estate Planning