Please be aware that these reporting requirements must be completed annually. It is your responsibility to make sure the filings are completed by the required due dates or properly extend due dates.

Form 3520

Purpose of Form: U.S. persons and executors of estates of U.S. decedents file Form 3520 to report certain transactions with foreign trusts and receipt of certain large gifts or bequests from certain foreign persons a separate Form 3520 must be filed for transactions with each foreign trust.

Due Date: Form 3520 is due on the date that your income tax return is due, including extensions.Explanation: You must file Form 3520 if:
(1) You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or a person related to the trust) that you treated as a qualified obligation during the current tax year.
(2) You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules.
(3) You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust during the current tax year or a related foreign trust held an outstanding obligation issued by you (or a person related to you) that you treated as a qualified obligation during the current tax year.
(4) You are a U.S. person who, during the current tax year, received either:

(a) More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

(b) More than $13,561 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

A reportable event includes:
(1) The creation of a foreign trust by a U.S. person

(2) The transfer of any money or property, directly or indirectly, to a foreign trust by a U.S. person, including a transfer by reason of death.

(3) The death of a citizen or resident of the United States if:

* The decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules or

* Any portion of a foreign trust was included in the gross estate of the decedent.

Form 3520-A

Purpose of Form: Form 3520-A is the annual information return of a foreign trust with at least one U.S. owner.  The form provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.

Due Date: Form 3520-A is due by the 15th day of the 3rd month after the end of the trust’s tax year.  An extension of time to file may be granted.

Explanation: A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).  Each U.S. person treated as an owner of any portion of a foreign trust under sections 671 through 679 is responsible for ensuring that the foreign trust files form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.

Form TD F 90-22.1

Purpose of Form: Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing this report with the Department of the Treasury.

Due Date: Form TD F 90-22.1 is due on or before June 30, of the year following the calendar year reported.  There are no extensions of time for filing this report.

Explanation: A financial interest in a bank, securities, or other financial account in a foreign country means:
(1) A United States person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-United States persons.

(2) A United States person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is: (a) a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person; (b) a corporation in which the U.S. person owns directly or indirectly more than 50 percent of the total value of shares of stock or more than 50 percent of the voting power for all shares of stock; (c) a partnership in which the U.S. person owns an interest in more than 50 percent of the profits or more than 50 percent of the capital of the partnership; or (d) a trust in which the U.S. person either has a present beneficial interest, either directly or indirectly, in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.

(3) A United States person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is a trust, or a person acting on behalf of a trust, that was established by such US person and for which a trust protector has been appointed a financial account includes any bank, securities, securities derivatives or other financial instruments accounts.  Such accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds).  The term also means any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution or other person engaged in the business of a financial institution.

A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature to the bank or other person with whom the account is maintained.  Other authority exists in a person who can exercise comparable power over an account by communication with the bank or other person with whom the account is maintained, either directly or through an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person, either orally or by some other means.

Form 1041

Purpose of Form: The fiduciary of a domestic decedent’s estate, trust, or bankruptcy estate uses Form 1041 to report:

• The income, deductions, gains, losses, etc. of the estate or trust;
• The income that is either accumulated or held for future distribution or distributed currently to the beneficiaries;
• Any income tax liability of the estate or trust; and
• Employment taxes on wages paid to household employees. Due Date: Form 1041 is due on or before April 15 for calendar year estates and trusts.

Explanation: A trust or decedent’s estate figures its gross income in much the same manner as an individual.  Most deductions and credits allowed to individuals are also allowed to estates and trust.  A trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries.  The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.  The beneficiary, and not the trust or decedent’s estate, pays income tax on his or her distributive share of income.  Schedule K-1 is used to notify the beneficiaries of the amounts to be included on their income tax returns.  With a decedent’s estate the fiduciary must file Form 1041 for a domestic estate that has gross income for the tax year of $600 or more, or a beneficiary who is a nonresident alien.  With a trust the fiduciary must file Form 1041 for a domestic trust taxable under section 641 that has any taxable income for the tax year, gross income of $600 or more (regardless of taxable income), or a beneficiary who is a nonresident alien.

If you have any questions about this article or the tax reporting requirements, contact us.

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters.

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using ‘Content here, content here’, making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for ‘lorem ipsum’ will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

A Series Limited Liability Company (“Series LLC”) is a relatively new form of LLC that may be formed under the laws of some States (e.g., Delaware, Illinois, Nevada, Iowa, Oklahoma, Tennessee, Texas, Wisconsin, and Utah). A Series LLC comprises of a Master LLC whose organizing documents and Operating Agreement provide for separate sub-units (or series), each of which operate as independent LLCs. When assets are placed into each series, they are theoretically protected from liabilities arising from activities in the other series. In overall structure, the Series LLC is comparable to a corporation with several subsidiaries.

California does not allow for a Series LLC to be formed in California. However, a Series LLC formed under the laws of another State may register with the California Secretary of State and transact business in California.

Pros:

•    The Series LLC only requires one Registered Agent and one State Annual Report Fee (Delaware) per year regardless of the number of series within the Series LLC.

•    Presumably, the Series LLC files one income tax return each year if each series Member is also a Founding Member of the LLC. When Non-Founding Members are added to a newly created cell within the Series LLC, that new cell should file a separate tax return for that cell. The federal tax standards for a Series LLC with multiple Members remains unclear.

•    Each unit has the ability to hold many assets in separate “cells” under one Master LLC.

•    The Members of each unit are treated under the laws of the State where the Master LLC is formed as owning an interest in only that unit, and have no rights in the assets or income of another unit.

•    Each unit is liable only for its own debts and obligations. In general, creditors of one unit may only make claims against the assets of that unit.

Cons:

•    Since the asset protection and planning advantages of the Series LLC have not been thoroughly challenged in asset protection cases, they remain theoretical, and unproven.

•    As noted below, California does not have Series LLC legislation, and will require separate tax returns for each unit within the series.

Tax Filing Guidelines:

•    As of this writing, the Internal Revenue Service has not stated whether a unit within a Master LLC is a separate entity from the Master LLC for tax purposes.

•    On January 18, 2008, the Internal Revenue Service issued Private Letter Ruling 200803004, which ruled that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently.

•    The California Franchise Tax Board has taken the position that if each unit will be treated as a separate entity for filing and tax purposes.

•    The FTB Form 568 Instructions contained in the package for the 2005 tax year specify that “each series in a Delaware Series LLC is considered a separate LLC and must file its own Form 568 Limited Liability Company Return of Income and pay its own separate LLC annual tax and fee if it is registered or doing business in California.” Presumably, these instructions apply to Series LLC’s created in jurisdictions other than Delaware.

The Series LLC is not more widely used because its tax treatment has not been fully resolved and because its effectiveness has not been tested judicially. Be very careful in following the advise of a promoter who would suggest a Series LLC in California. The Series LLC is mainly for people whose only alternative is a single traditional LLC. I always advise people to form separate entities as an alternative to a Series LLC. More predictable asset segregation comes from multiple entity filings.

If you feel that the costs to file and maintain multiple entities are not justifiable, as a baseball fan would say, “You may win the game, but lose the series.”

QUESTION: Within a LLC, how do you clearly communicate to an investor that they only have a profit’s interest and no input on operations of the Company?

ANSWER: One of the many benefits of an LLC is the ability to separate investors from managers. This arrangement is similar to limited partnerships, where the limited partners are mere investors, and the general partner manages the partnership. With an LLC, however, the members can also be involved in managing the LLC as managers, if desired.

LLC’s Operating Agreements come in two common forms: (1) Member-Managed; and (2) Manager-Managed. Member-Managed is the simplest structure and means that every member has authority to act on behalf of the business. If all your members will have direct involvement in the management of the company, then a Member-Managed LLC usually makes the most sense.

With a Manager-Managed LLC, the members may (but need not) be managers. This form of LLC allows for a separation between ownership and management. A Manager-Managed LLC is generally used when there are “passive” members in the LLC. Passive means investors in the LLC who do not actively manage or otherwise operate the business of the Company. With a Manager-Managed LLC, the members, by virtue of being members, do not have authority to manage and operate the business of the limited liability company. Instead, the members elect “managers” and it is the managers who have this authority.

It is important in a Manager-Managed LLC that the LLC Operating Agreement have specific rules and processes for the managers to follow when managing the LLC. The LLC Operating Agreement is the governing document for the Company, the Managers, and the Members. Within the Operating Agreement is where you can clearly established the roles of the manager and the members. Here is where you can “concisely communicate to an investor [Member] that they shall only have a profit interest in the entity [Company] and not any input in the operation of the Company.” I strongly suggest you contact a competent corporate attorney. There is a lot to consider when preparing a LLC Operating Agreement and good legal counsel will go a long way to ensure proper operations of the Company and reduce conflicts among the parties involved.

QUESTION: I would like to protect my small business assets from those who might file frivilous lawsuts like slander, personal liability, etc. Is a LLC the best option to protect small business assets?

ANSWER:

For most assets and businesses, a Limited Liability Company (“LLC”) is your best option. Similar to other limited liability entities, so long as proper accounting and other formalities are followed, LLC’s and Corporations both offer asset protection from Company creditors and judgment holders (i.e., inside creditors).

Unlike Corporations, however, LLC’s also offers unparalleled asset protection from personal judgments and creditors (i.e., outside creditors). So, if someone were to win a lawsuit against you personally, they could not take away the assets inside the LLC. Setup properly, what the personal creditor would receive is a “charging order” against your Membership Interest.

A charging order does not give the creditor management rights over the LLC. At most, they would be entitled to any distributions made out of the LLC, if any. It is strictly up to the LLC Manager whether or not to make distributions. Let’s say the LLC made $50,000 in profits and you (as the Manager) decided to keep it all in the LLC and reinvest it. In other words, no distributions were made. The creditor holding the charging order cannot participate in management, and therefore, cannot force a distribution or liquidation of the LLC assets. In addition, there is a strong possibility if the charging order is foreclosed on, the creditor would owe the IRS income tax on any Company income. Ouch!

Because a properly setup LLC’s prevents outside creditors from interfering with management, and limits a Member’s creditor to a charging order remedy, when faced with a LLC, lawyers usually encourage their clients to settle their claim rather than face the uncertainty and waiting-game imposed by LLC charging orders.

To schedule a complimentary teleconference with me to discuss LLC’s or other asset protection matters, contact us.

ANSWER: I think this question can only be addressed if we know the level of business sophistication of the Company’s Organizer. In my experience, setting up LLC’s is not rocket science, but making sure the Company does what it is intended to do is. Here is where online legal formation services fall short. There is no professional relationship established when you do-it-yourself. There is no one to turn to when you have a question. There is no one to turn to to help make sure you are operating the Company correctly. It’s not the creation of the LLC that is challenging, it’s the on-going implementation and real-world issues that come up when the Company is dealing with third parties and vendors that make it difficult.
Over the years I’ve seen and read hundreds of do-it-yourself corporations, limited partnerships, and limited liability companies. For the most part, these documents are complete and look good in their pretty kits. But many times, the Company assets are not properly titled, the officers and managers are not signing documents properly, corporate formalities are not being respected, accounting and record keeping requirements are not being followed as required by the Bylaws or Operating Agreement. Why? Because nobody ever explained these things to the Owners. Their “understanding” of what the documents say, and what the documents “actually” say are many times inconsistent.

So how much are you actually saving by using these online services? 50% of legal fees? 75% of legal fees? Is the savings going to matter when the Company gets sued and a new lawyer fresh out of law school can “pierce the corporate veil” because you had no idea what you were doing? So you saved 75% of the legal fee (probable a $1,500 savings), but you lost the Company, your personal life’s savings, and your home because you had no advice on how to operating and maintain the Company correctly. You didn’t mess up the Company’s formation, you messed up the Company’s operations and management; and it’s here that we nail you. Was the savings worth it?

You need to understand that whenever you deal with the public, or put some product into the stream of commerce, you face being sued. 94% of all the world’s litigation occurs here in the United States. Our laws provide you with limited liability. Pay the extra $1,500 and get good competent legal advice. There is no such thing as a “one-size-fits-all” Corporation or LLC. Your corporate attorney should form the Company with your specific goals in mind, and should be available to answer questions from time-to-time to make sure your Company will be there to protect you when necessary. After all, that’s why you set it up in the first place.

To schedule a complimentary teleconference with me to discuss the formation of a LLC, or other asset protection matters, contact us.

QUESTION: “What kind of legal fees should I expect in a small business buyout?”

ANSWER: Dear Seller,

I agree with many of the comments already posted, but I want to add one additional legal-fee arrangement I’ve used in the past. In addition to the traditional hourly rate (reduced or not), you should consider an incentive options. Under this arrangement the attorney works at his or her hourly rate but your out-of-pocket legal fees will be capped at an agreed amount per month; say $3,500. Now the attorney may have done more than $3,500 worth of work at their hourly rate – which they continue to keep track of.

When the deal finally closes, your Engagement Letter states that the attorney will be entitled to reimbursement for their unpaid hourly fees up to 10% (or whatever %) of the sales price of the business, whichever is greater. This way, the attorney is getting a small fee as the project progresses, and will truly be paid when the job is complete. This provides both an incentive for the attorney to work, and provides predictability to your overall legal fees on a monthly and total basis.

I’ve found this arrangement to be very effective. Sometimes I win and the incentive fee is greater than the hours put-in, and sometimes I lose where the time spend was more than the 10% cap. Either way, the deal got done as originally agreed at a price we both negotiated to be fair.

One more thing I want to throw into the mix, and speaking from personal experience, once you start the buyout process, it’s very difficult to predict how long the process will take. Buying or Selling a business is not like making a car deal where the negotiations are limited to whether or not you get floor mats. Many times the thing that holds up the transaction has nothing to do with the parties themselves, for example, terms and conditions lenders want to see in the contract, or other indemnity or personal guarantee matters. I don’t think having an hourly cap is wise. This can cause tension between you and your attorney.

My job is to do the best job possible for you, but if our contract prevents me from acting, how can I? Also, if your attorney feels they are not going to get paid for their efforts, they might start considering shortcuts to get the deal done which may have liability consequences because they didn’t spend the time hammering out the details (and the devil is always in the details). On the other hand, what if the Buyer’s attorney does not share your concern for hours spent? They may purposefully drag the process out to get you to “give” on a point in their favor because you didn’t want to spend the time working it out!!

From my point of view, you want an attorney to work in your best interest, at the same time, I want a client who’s going to pay me for my time and expertise.

To schedule a complimentary teleconference with me to discuss your purchase/sale of a business, contact us.