Often life changes impact your business that you may not expect.  We will be exploring some recent issues we have come across that people should be aware of.

When you form a Limited Liability Company (LLC) or a Corporation (S Corp or C Corp), there are some formalities that need to be followed.  While there are fewer with the LLC, there are still some essential things that must be maintained.

The first example is an easy one to forget about, you have to pay all annual fees and file all required annual forms.  I have seen both new businesses (1 year) and more seasoned businesses (nearly 40 years) end up having their status suspended because they failed to maintain their business with their Secretary of State.  When you initially formed your business entity, the Secretary of State probably gave you some paperwork that advised of what you had to do, if not (or if you do not remember), research it and make sure you do what you need to.

The second important thing to do is ensuring the Secretary of State is updated (with everything).  Have you moved? Have you changed your registered agent? Have you changed your Directors/Officers (some states require notification, others do not).  If your business is formed in one state, where you live & you opt to be the registered agent (to save money, or for another reason), and then you move out of state, you need to get a registered agent for your original state AND at a minimum, possibly file with the new states Secretary of State as a foreign entity.  The reason I say ‘at a minimum’ is that sometimes what you did in one state, will not work in the other state (or may just cost you a lot more money).

The third thing I would recommend is to ensure your documentation is always up to date.  Keep minutes of meetings, ensure that your governing documents are current with both how you want to manage your business and with any changes in the law.  Also ensure that you have succession planning for the business.  What happens if the owner (or one of the owners) becomes disabled or dies?  Who takes over? Who gets what? Who makes the decisions?  Does your estate get money or does the business just vanish?  There are many things to think about with succession planning, including a properly executed and funded buy/sell agreement.

The last thing, which you have probably heard before (especially if you have the assistance of an attorney) is to ensure that there is no commingling between your  business and personal accounts.  Never pay for personal expenses out of your business account(s)!  Let me repeat that, NEVER pay for personal expenses out of your business account(s).  Do I need to repeat it a third time with larger letters? (Can you tell how important this is?)

The reason it is so important for a business to follow all of these (some say silly) rules, is because it protects your personal assets from business liabilities.  If there is a lawsuit and the plaintiff can show that you are not really a “Corporation” (or LLC), that you are really just one entity, they can pierce the corporate veil and go after both your business and personal assets.

Essentially, if you create a situation where someone can pierce the corporate veil, you have wasted all of your time and money of forming the business entity because the protections would essentially be thrown out the window.

There is no requirement to create a partnership agreement, however it is smart to do so.  A Written partnership agreement helps to avoid misunderstandings between partners and a failure to have a written agreement will result in default rules based on the states statute.  A written agreement also permits the partners to discuss various aspects of the business and expectations of the partners.

General Partnership

A General Partnership is the simplest and least expensive partnership to operate.  It does not require any documentation to form, nor does it require anything to be filed with the state to establish.  Partners are personally liable for all business debts and obligations, including court judgments. This means that if the business itself can’t pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner’s house, car, or other possessions.

Limited Partnership

A Limited Partnership is a lot like a General Partnership, with one key difference.  A Limited Partnership has at least one General Partner who controls the company’s day-to-day operations and is personally liable for business debts and obligations, and at least one Limited Partner, which are passive investors whose limits of liability are limited to the amount he/she has contributed.  General partners are personally liable for all business debts and obligations, including court judgments. This means that if the business itself can’t pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner’s house, car, or other possessions.  A Limited Partner can lose the limited liability protections if they become more active, such as managing aspects of the business.

Limited Liability Company

A Limited Liability Company (LLC) is not a partnership, but is a common alternative to a partnership.  The LLC provides liability protections to the partners that a partnership does not permit.  The LLC typically provides the best features of a corporation and a partnership.

Comparisons

In both general and limited partnerships, general partners have unlimited personal liability since they manage their respective businesses.  When handling partnership business, general partners are liable for their own conduct as well as the acts of their fellow general partners, known as joint and several liability.  Limited partners only risk their capital contributions in limited partnerships, similar to shareholders in a corporation or members in an LLC.  However, if a limited partner participates in managing the business or signs a personal guarantee for the business they may be held personally liable for these business obligations.

LLC members typically are not personally liable for LLC debts or legal liabilities, putting only their financial contributions to their LLC at risk.  LLC owners may still be personally liable for their own conduct that harms others, for breaches of their duties owed to their LLC or personally guarantees LLC loans.  Any business owner should consider appropriate insurance and other liability protection strategies to help shield personal assets and business resources.

Delaware

The Good:

(1) Delaware offers some of the most developed, flexible, and pro-business statutes in the country

(2) Delaware has a tremendous amount of case-law spanning 110 years that adds to the ability to predict the consequences for doing something that the company should not do.

The Bad:

(1) State Corporate Income Tax and Franchise Tax

(2) Corporate reporting requirements

(3) Regulations compelling disclosure of information

Nevada

The Good:

(1) Nevada offers Officers and Directors some of the highest levels of protection from lawsuits.

The Bad:

(1) Nevada has Limits on stock/par values

(2) Nevada legislature has been trying to pass business taxes for the past couple of years to offset a budget deficit

Wyoming

The Good:

(1) Wyoming is one of the most cost-effective states to incorporate in, (although only incorporating in the state you do business in is more cost-effective)

(2) Wyoming offers Officers and Directors the some of the highest levels of protection from lawsuits

(3) Wyoming was the first state to provide Limited Liability Company statutes in the country, dating back to 1977 and updated in 2010 to ensure they remain current.

(4) Share certificates are not required

(5) The ability to move an established Corporation to Wyoming while maintaining the original incorporation date

The Bad:

Wyoming business statutes closely resemble Nevada, however there is less case-law backing up those statutes.  This means that when a case goes to trial, depending on what is being litigated, the predictability of the results is less certain than in Nevada or Delaware.  Over time, this will likely improve, but for now it is what there is.

Where to Incorporate…

For a small business operating in one state, it is often (not always) recommended to incorporate in your home state.  If you are a larger business, working in several states, or plan to operate in the other state, then it is often (once again, not always) recommended to pick the best state out of the states that you do business, giving appropriate weight to costs and benefits of choosing the state.

Deemer Law Group, P.C. is licensed to practice in Wyoming and we incorporated our firm in Wyoming because we do business in Wyoming.  If we had no ties to Wyoming, we likely would not have incorporated in Wyoming.  With that said, Wyoming has been wonderful with making it easy to be incorporated there.  As an example, when we needed a certificate of good standing, it was as simple as going on-line, requesting one, and it immediately comes up.  No wait.  No costs.  Done.

We also have clients that choose to incorporate in Wyoming because it makes sense for what they want to happen with their business.  It is a relatively inexpensive endeavor, but the majority of our clients incorporate in the state where they reside because it saves them money every year.

The bottom line, it is up to the client where they want to incorporate.  We will provide the benefits and drawbacks to a clients specific situation, and allow them to decide.

This is a question that I am often asked, and although we can explore the legal issues as to where you should incorporate, there are non-legal issues to consider as well.  People often hear advertising focusing on “Incorporate here, it is tax free!”  The problem with the advertising is people don’t really understand how things work, and that will end up just costing more money when their only focus is to save money, and that just leaves people feeling ripped off.

The thought process about where to incorporate can cover many aspects, from logical, to financial, or to emotional.  Most people have some sort of idea of what they are looking for, but they often only focus on single issues.  I know we enjoy exploring those ideas, and I would assume many lawyers that are passionate about helping people would as well.  It is also important because it can often educate us more about the business and what the clients priorities are.  The following four ‘clients’ were portions of actual client conversations [boiled down to their basics] that we have had.

Client 1

The first client I am thinking about said that they were incorporated in Delaware but they have issued payments to a couple of contractors and wanted to know if they needed to register the business in a specific state (insert any state other than Delaware you wish) as a foreign corporation.

Unfortunately, that is not enough information to answer the question and we would need to learn more to help address the clients concerns.

Client 2

The second client wanted to incorporate in a jurisdiction because it was his belief that “being a Corporation in [insert any state] would look better and help my business.”

Client 3

The third client was all about the money, always asking if a decision would cost more.

Client 4

The last client did not have any idea what they wanted, other than they were thinking of several businesses, looking far into the future and wanting to build a multiple layered structure with a  holding company and several subsidiaries (which made me think: Berkshire Hathaway).

Analysis

When exploring forming a business, we often like to learn about the clients business and desires to ensure we address all of their concerns and the issues that probably should be a concern to ensure that they are fully informed before they make a decision.

Our conversations include the purpose of the business and how the client intends to operate the business.  The first thing we will discuss here is where the client intends to conduct the business.

(1) What states, territories, or district (Washington D.C.) do they intend to operate?  This is important because it helps us advise of the potential issues within each jurisdiction that they intend to operate.  For example, if they told us that they were going to actively conduct businesses in Colorado and nowhere else, we could have a conversation about the benefits and potential drawbacks of incorporating in Colorado, and compare it to another jurisdiction to see if there are any benefits to incorporating elsewhere.  In contrast, if the client said that they intend to have an active business presence in Colorado, Missouri, and Wyoming, we would be able compare all three of those locations, to help determine the best course of action.

Deleware, Nevada, and Wyoming are typically considered corporate havens and many businesses that do not conduct any business in any of these states have formed their corporation in those states.  If you are conducting business in one of these three states, it would typically cause me to lean more toward recommending one of those states.  If you are not conducting business in any of those three states, I’d look to see if there are any other compelling reasons for this client to indicate that the additional expense would be worth it for the client.

Our firm (Deemer Law Group, P.C.) is a Wyoming Professional Corporation, partially because we do business there, because we can help in forming Wyoming Corporations, but also I have found them to be very easy, quick, and efficient to establish businesses with them.  To me, that is valuable, because it frustrates me waiting in limbo.  The longest wait I have found for Wyoming is waiting for the Registered Agent to sign the appropriate paperwork.  Two examples that have made me happy with Wyoming (in comparison to some other states):

(a)    When the Secretary of State completes the processing and your Corporation is officially active,
they e-mail you to let you know.  I have not found this to be true for many states.

(b)    When you need a Certificate of Good Standing to tell another state that you are in good standing
in Wyoming, you can go on-line and get one immediately, FOR FREE.  Simply go to a website,
type in some information to locate your corporation, and press submit.  Then print out the form
that comes up.  To my knowledge, there is only one other state that offers the ability to get the
certificate on-line, and that is Colorado (which we can also help with).

To me, this is real-world benefits that everyone can appreciate, and it doesn’t even touch on financial or legal implications.

Financial Considerations

If you are doing business in (pick any state), and you incorporate in (pick any state other than the first one), then you will have additional costs for choosing that path.  You will need to pay the government filing fees for both states (State of Incorporation and State where you are doing business as a ‘foreign corporation).

You will likely also have to pay for a Registered Agent for the State that you incorporated in (since you will be living elsewhere).  The fact that these “Corporate Havens” have no state income tax does not save you money in this situation, because you will still have to pay the income taxes for the state that you do business in and some of those states have minimum tax liabilities as well, so the minute you register, you will owe at least the minimum for that tax year.  These tax liabilities for where you do business are there no matter where you incorporate, so you will need to look for other reasons to see if it is worth incorporating in the other state.

Legal Considerations

In Part 2, we will discuss legal implications for where to incorporate.

Corporation

The Corporation, according to Black’s Law Dictionary, is an entity having authority under law to act as a single person distinct from shareholders who own it and having rights to issue stock and exist indefinitely; a group or succession of persons established in accordance with legal rules into a legal or juristic person that has a legal personality distinct from the natural persons who make it up, exists indefinitely apart from them, and has the legal powers that its constitution gives it.  A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law…[I]t possesses only those properties which the charter of its creation confers upon it.

The Corporation is an entity that works well to protect personal assets, if it is formed and operated correctly.  The drawback to the corporation is that it has more formal procedures than a Limited Liability Company (LLC), but it is also often better for the business owner, depending on their individual needs.  Sometimes it is required where the Limited Liability Company is not permitted, and sometimes it is better for tax purposes or even marketing purposes, or maybe it is as simple as the business owner likes the name better (Acme, LLC vs Acme, Inc.).

If we revisit Bert & Ernie with Disney’s fall caused by Ernie negligently spilling the butter and failing to clean it, both Bert and Ernie’s personal property would be safe from a lawsuit unless Disney was able to pierce the corporate veil.  If the corporation were formed and operated properly, it would be unlikely that Disney could get to the personal assets of Bert or Ernie.

Location Considerations

This information applies to forming either a Corporation or a Limited Liability Company.

I see a lot of advertising for “Incorporate here, not there” primarily encouraging people to incorporate in Nevada, Wyoming, or Delaware.  Often the advertising pushes that Nevada and Wyoming do not have state income taxes.  Please note, that where you conduct your business, you will be liable for those state’s income taxes.  If you live in Missouri (or any other state that has a state income tax), and you incorporate in Wyoming, and all (or most) of your business is conducted in Missouri (or any other state that has a state income tax), guess what, you still have to pay those state income taxes and despite your formation in a tax-free state, it does not change your tax liability.

In addition to not really saving on income taxes, you will also be required to pay annual fees to the state you incorporate in (i.e. Wyoming) in addition to the state(s) you do business in.  This means that it will cost you the additional $100 per year to the Wyoming Secretary of State (or more in Nevada and Delaware) plus the fee for a Registered Agent in Wyoming (or whatever state you form your corporation) PLUS the fee to the Secretary of State (or equivalent in your state) that will cost you an additional $300-500 per year.  In total, you will pay approximately $400-1,000 per year in additional costs than if you incorporate in your home state.  Some states also have additional minimum tax fees for a Limited Liability Company and a Corporation, that would be required to be paid, even if you did not make any money, nor do any business in that state.

These states (Nevada, Wyoming, and Delaware) may offer a little more protections (and privacy) that rarely come into play, but I would guess if it did, you would be thankful that you incorporated in one of those states.  For most people, they do not find the additional expenses necessary and they choose to simply incorporate in their home state.

I have recently expanded my law firm into new states and incorporated into a Wyoming Professional Corporation.  I have chosen to incorporate in Wyoming because of the protections afforded by Incorporating in Wyoming because I will also be doing business in Wyoming.  If I was not going to be doing business in Wyoming, I likely would not have opted to spend the additional $350 it will cost per year.

Tax Considerations

Most of us have to pay a state income tax, and all of us are responsible for a federal income tax.  The two most common questions when it comes to business corporations is the difference between a C-Corporation and an S-Corporation.

I want to be clear, both Corporations are formed, operated, and appear exactly the same with minor differences.  That biggest difference is the limit on shares of the S-Corporation (or Limited Liability Company).  There is a maximum of 100,000 single-class shares (or units for a Limited Liability Company) and a maximum of 100 shareholders (or members for a Limited Liability Company).  This means that all of the shares (or units) are exactly the same with the same ownership interest, same dividends, and same voting rights.  This can be true of a C-Corporation as well, but with the S-Corporation it is required by the IRS to qualify as an S-Corporation.

So if a C-Corporation and an S-Corporation both have 100,000 of a single class of stock, and less than 100 shareholders, what is the difference?   The only difference is an additional form filed with the IRS to change how the Corporation (or Company) is taxed.

The Subchapter S within the IRS allows the income of the Corporation to flow through to the shareholders on an individual basis.  This avoids what is commonly referred to as double-taxation where a corporation pays income taxes, then issues dividends to shareholders causing the shareholder to also pay an income tax on the dividends.  With an S-Corporation the income of the corporation flows to the shareholders automatically to avoid the double-taxation.

I would always advise speaking to a licensed attorney to ensure you properly form your business and to ensure you meet the continued requirements of operating your business.

Limited-Liability Partnership

A Limited-Liability Partnership, defined in Black’s Law Dictionary 9^th Edition, is a partnership in which a partner is not liable for a negligent act committed by another partner or by an employee not under the partner’s supervision. All states have enacted statutes that allow a business (typically a law firm or accounting firm) to register as this type of partnership.

Limited Partnership

A Limited Partnership, defined in Black’s Law Dictionary 9^th Edition, is a partnership with one or more persons who control the business and are personally liable for the partnership’s debts (called general partners), and one or more persons who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution (called limited partners). The chief purpose of a limited partnership is to enable persons to invest their money in a business without taking an active part in managing the business, and without risking more than the sum originally contributed, while securing the cooperation of others who have the ability and integrity but insufficient money.

In borrowing from Part 1, let us revisit Bert and Ernie’s partnership where Ernie spilled the butter and failed to clean it up.  If Bert and Ernie had formed a Limited Partnership with Bert as the General Partner and Ernie as a Limited Partner (rather than the General Partnership used in Part 1), Ernie would not have his personal assets at risk from the lawsuit, his limit of liability is only what he invested into the Partnership. In contrast, Bert would still have unlimited liability for the negligence of Ernie.

Limited Liability Company

A Limited Liability Company, defined in Black’s Law Dictionary, 9th Edition, is a company (that is) statutorily authorized in certain states that is characterized by limited liability, management by members or managers, and limitations on ownership transfer.

The Limited Liability Company has quickly grown to one of the most common business entities because it combined the simplicity (for lack of a better term) of a Partnership that has minimal filing and organizational requirements with the limited liability of a Corporation.

Once again, borrowing from Part 1, let us revisit Bert and Ernie’s partnership where Ernie spilled the butter and failed to clean it up.  If Bert & Ernie had properly formed a Limited Liability Company, their personal (non-business) assets would be protected from a lawsuit by Disney.

For many people, the Limited Liability Company is the perfect business entity, but it still must be formed correctly.  Everyone should also explore if the Limited Liability Company is the best entity for them, including tax considerations, expected business locations, and options for growth.  The state(s) that you wish to do business must both recognize the entity of a Limited Liability Company, but also may need to recognize the specific type of Limited Liability Company.  As an example, if it is a Professional Limited Liability Company, not all states recognize the Professional Limited Liability Company and would require a Professional Corporation.

In Part 3, we will explore Corporations and tax considerations in business formation.  Once again, for discussing your specific situation, you should discuss it with an attorney that is licensed in your state.

During a lecture I was attending once, the speaker said, “Anyone can start a business, but not everyone can run a business.” That, combined with a recent conversation I had got me thinking that I should write about this topic, and all of the questions that come with starting a business. While this is a general discussion of legal principles, it will provide a good foundation of information to think about and discuss with your attorney.

The first topic that should be discussed is different business entities, some basic Business 101 type of information.  Some states recognize different entities, and not every entity is recognized in every state. There are four basic types of business entities, and each offers benefits and drawbacks.

1. Sole Proprietorship
2. Partnership
3. Limited Liability Company
4. Corporation

 Sole Proprietorship

A Sole Proprietorship, defined in Black’s Law Dictionary 9^th Edition, is (1) A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity; (2) Ownership of such a business.

A Sole Proprietorship is the most basic business entity, and it is essentially just a person that is doing business on their own. The benefit is that there are minimal (if any) government requirements and it is fairly easy to maintain the business. The drawback is that essentially personal and business assets are the same and if the business is sued, and the business loses, all of the business assets and all of the personal assets may be lost because there are no limits to liability with a sole proprietorship.

Partnership

The easy part: A Partnership, defined in Black’s Law Dictionary 9^th Edition, is a voluntary association of two or more persons who jointly own and carry on a business for a profit. Under the Uniform Partnership Act, a partnership is presumed to exist if the persons agree to share proportionally the business profits or losses.

The more confusing part: There are different types of partnerships (over 20 listed in Black’s Law Dictionary) including a general partnership, limited-liability partnership, and a limited partnership. In general terms, without a government filing that meets the government requirements, you will form a general partnership.

A General Partnership is easy to form, with or without anything in writing. In the conversation that I referred to above, there were a group of four people that decided to start a business together, and then decided to add a fifth partner and said they would decide the ownership interests later. They decided what the business would be, and who owns what percent of the partnership and they started the business, which for simplicity I will refer to as “Acme Plumbing” (of course not the real business name). They proceeded to start the business, and the business funds were deposited into one partners bank accounts to be distributed to other partners. Another partner handled the ‘petty cash’ funds through their personal bank account.

Everything was going great, but they lost a $20,000 client, according to them, because they did not have a Limited Liability Company. I believe there were more issues that they do not realize, but that is the reason they provided. One of the issues that I noted was that they were conducting business in a fictitious (made up) name of “Acme Plumbing” (once again, not the real name). Now if the owner was named Acme, Acme Plumbing would have been fine. However, since the business owner was not named Acme, the Partnership had failed to file a fictitious name statement with their county and is prohibited from conducting business under the name “Acme Plumbing”. These people properly formed a general partnership (easy to start a business) but failed to understand the legal requirements for doing business with a fictitious (made up) name.

Another issue that these people did not realize was that in a general partnership, like theirs, each and every partner is liable for the other partners. If one partner commits the partnership to do something (enters an oral or written contract), then the entire partnership is liable. This is true, even if the partnership does not permit that partner to enter into the agreements, as long as the third party reasonably believed that the partner was permitted to enter into the agreement.

To ensure clarity on this issue, we will explore the following hypothetical:

A Partnership is formed between Bert and Ernie to sell cookies. Bert and Ernie agree that only Bert has the authority to enter into any agreements for the Partnership and that each cookie would be sold for $1 each. Ernie then proceeds to go to Disney and enters into an agreement to sell cookies for $0.10 each, and Disney reasonably believes that Ernie has the authority to enter into the agreement, and Disney reasonably believes the price is a fair price. The partnership, and both partners would be obligated to fulfill the agreement and would be liable if they breached the contract.

Now if Ernie had spilled butter all over the floor and failed to clean up the mess, there could be liability for any injuries caused. Using the Disney hypothetical again, Disney came to the store to pick up the $0.10 cookies, and slipped on the spilled butter. Disney sues the partnership for injuries and both Bert and Ernie are jointly liable for the injuries caused by Ernie’s negligence, and both Bert and Ernie’s business and personal assets may be lost because there is no limits to liability with a general partnership.

In part 2, we will explore a couple of limited partnership options and limited liability companies.

The Affordable Care Act has become a highly debated topic and this article is not addressing the merits or drawbacks to the law, it is simply explaining what is required.

According to the ObamaCare Facts website, the mandate affects only 4% of all firms within the United States.  Two Hundred Thousand (200,000) out of 6 million total firms have over fifty (50) employees and can be penalized for choosing not to provide health coverage to their employees. 96% of those 200,000 firms already offer health coverage to their full time employees.

That means less than .2% of small businesses (10,000 out of 6,000,000) will actually have to provide insurance to full time employees or pay the shared responsibility fee due to ObamaCare.

To determine if you are one of the 10,000 employers that will now be required to offer health coverage to your full-time employees, we will now explore some of the requirements.

The Affordable Care Act requires that any employer that has a total of fifty (50) or more Full Time Equivalent employees (FTEs) is required to provide affordable health coverage and effective for the calendar year 2015, you may have to make a payment if you do not offer adequate affordable coverage to your full-time employees.  If you have fifty (50) or fewer FTEs, you can purchase insurance through the Small Business Health Options Program (SHOP) (some states may permit using (SHOP) with up to 100 employees).

The first question most people have is trying to understand the concept of what a FTE really is.  If you had one employee that worked full-time, you would have one FTE.  If you then hired three additional part-time employees, you would take the total weekly hours of those part time employees, divided by thirty (30) and add that number to your full time employees.  The reason for the thirty (30) hours is the Affordable Care Act was attempting to avoid employers from simply reducing the hours of employees to slightly under 40 hours per week.  The part time employees hours can be averaged anywhere between three and twelve months.  There are some exceptions to these numbers where seasonal employees, contractors, and business owners are not included in the final numbers.

If you are a small business with fifty (50) or fewer FTEs, your business is not subject to the Employer Mandate of the Affordable Care Act.  If you have 25 or fewer full-time employees and you pay at least 50% of your employees premiums AND their average annual wages are below $50,000, you may also apply for tax breaks of up to 50% of your contribution to their premiums.  The average costs to an employer in 2014 is approximately $5,100.  With a 50% tax credit, that would mean the average actual cost to the employer is only approximately $2,550.

One caveat to the Employer Mandate is that the first thirty (30) employees are exempt from the Employer Mandate of the Affordable Care Act.  To illustrate this more fully, if you have:

25 Full Time Employees

60 Part Time Employees that each work 15 hours per week (30 FTE)

You are subject to the Employer Mandate because you have 55 FTE, but since your first 30 Full Time Employees are exempt from the mandate fee, it likely wouldn’t cost you anything, since the first thirty (30) employees are exempt.

The current mandate requires that employers with 50-99 FTEs start insuring their employees by 2016 and those with 100 or more start providing insurance to at least 70% of their FTE by 2015 and 95% by 2016.

If you are one of the employers that is required to offer affordable health insurance and fails to, there is an annual fee of $2,000 per employee, per year (once again, the first 30 full-time employees are exempt).  If any of your full-time employees receives a premium tax credit because their coverage is not ‘affordable’ or the employer does not pay at least 60% of the total costs, instead of the $2,000 per employee, the employer must pay the lesser of $3,000 for each of those employees receiving a credit or $750 for each of their full-time employees.

The second question most people have is what is considered affordable.  If an employees premium is more than 9.5% of their yearly household income, the coverage is not considered affordable.  This creates an area where employers can’t determine an employees household income but it can impact the affordability of coverage.  To avoid potential issues, it is often recommended that the premium is no more than 9.5% of the wages of the individual employee as reported on their W-2 form.

In conclusion, the vast majority of employers are not subject to the Employer Mandate of the Affordable Care Act.  If you have fifty (50) or more FTE employees, then you need to provide affordable coverage that does not exceed 9.5% of the employees wages and covers at least 60% of their medical expenses.  If you are subject to the Employer Mandate and opt to not provide coverage, you can expect it to cost your business $2,000 to $3,000 per year, per full time employee (the first 30 are exempt).

In a comparison of a will provided by LegalZoom and a will from an attorney, I think most people would agree that a more educated and legally proficient person may be able to obtain a better end-result with DIY product than a less educated and less-proficient person.  In exploring this theory, a Minnesota attorney named Gregory Luce decided to compare LegalZoom with a will drafted by an attorney. The article about his experience can be found here.

There are two things that caught my attention with the article, the first is that Gregory Luce was not trying to get more estate planning business, he was not an estate planning attorney, he is the Practice Development Director for the Minnesota State Bar.  The endeavor was for educational purposes, to do a real comparison.  In contrast, I practice in transactional work (non-litigation) where DIY companies claim to provide high quality comparable products.  I have seen first-hand the differences in the products and I do not like seeing people make mistakes without fully understanding the consequences of a DIY transaction.  The second thing that caught my attention was some of the items pointed out, such as “80 percent of the people who fill in blank forms to create legal documents do so incorrectly” and it did not address specific protections for his child from his previous marriage, possibly disinheriting his eldest son.

Similar to Mr. Luce’s experience, I decided to explore how LegalZoom worked.  Although I didn’t purchase anything from LegalZoom, I entered information to open my own law firm (for Professional Services), including the states we will be doing business on LegalZoom.

• LLC? C Corp.? S Corp.?  Confused about your options?  Answer a few simple questions and find out which one may be right for you.  — I selected “Help Me Decide”
• Then I was asked “Where do you plan to run your business?” — I selected From an office or location separate from my home (and did not select: From my home or home office)
• In what state is your business officially located?  — I selected Wyoming
• Will your business be outside of Wyoming? — I selected Yes
• Which of the following describes the nature of your business? — I selected “My employees or I will physically conduct work outside of Wyoming (and did not select: My business will ship goods to customers outside Wyoming)
• Which states outside of Wyoming will your business operate?  — I selected California, Colorado, Montana, North Dakota, Nebraska, Missouri, Washington DC, Maryland, and Virginia
• What is your primary business activity? — I selected Professional Services
• Will your business have other owners besides yourself? — I selected Yes
• How do you intend to finance this business? — I selected my own money
• Which of the following best describes your goal for the business?  — I selected Grow the business but keep it with original owners or within our families (and did not select Grow the business so it can be publicly traded nor Sell the business)

I chose the answers that I would have chosen in establishing my own firm, with my expectation of where the firm is going to operate in the future, from the options they provided.  The result:  81% of customers in Wyoming chose to form a Limited Liability Company (LLC).  If I change the options to form the entity in California, LegalZoom said 67% of their clients form an LLC and 33% form a Corporation.  These results could make most people think that the Limited Liability Company is the best option.  The problem with this result is that not all states recognize a Professional Limited Liability Company and if my firm were to operate in a state that does not recognize a Professional Limited Liability Company would be a Professional Corporation.  Please also keep in mind, these questions and answers from LegalZoom do not look at other considerations, such as tax, corporate governance, etc.  LegalZoom puts a round peg into a square hole, many times it may fit, but it does not cover the intricacies of life, nor the law.

I think every lawyer (and law student) quickly learns that they are always being asked for (free) legal advice.  Nearly every week I get asked for either “free” advice or “pro bono” advice.  In law school, I often replied with “I am not a lawyer, I am a law student.  I may know enough to think I know the answer, and be completely wrong.”  Now I can’t use that excuse, but I also know to keep to the areas of law that I am familiar and comfortable with, and where I am licensed to practice.

In conclusion, although things can go well with a DIY document, mistakes can be far costlier than even not doing anything and even if it does work, it may not cover the intricacies of what you really want to happen, or what you would have wanted if you knew the option was available.  If you opt to purchase a DIY document, you may want to have it reviewed by a licensed attorney.  Best case, you find out that the document meets all of your needs.  Worst case, you find that your document does not meet your needs, and obtain a properly drafted document by an attorney.

While these DIY options to establish a plan do exist, the question remains of the quality of the plan that these DIY options create.

The first issue, before we even start talking about the differences in the end-result (quality), is to point out that DIY operators, like LegalZoom, are not law firms. One of the first differences is illustrated with the LegalZoom disclaimer from their website  (Emphasis added):

Disclaimer: Communications between you and LegalZoom are protected by our Privacy Policy but not by the attorney-client privilege or as work product. LegalZoom provides access to independent attorneys and self-help services at your specific direction. We are not a law firm or a substitute for an attorney or law firm. We cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies. Your access to the website is subject to our Terms of Use.

LegalZoom clearly states that they are not attorneys, they cannot provide advice, and that anything you tell them does not have the legal protections of attorney-client privilege or as work product.

In contrast, hiring an attorney provides the legal privacy protections of attorney-client privilege and the legal knowledge that ensures your specific situation is addressed in a manner that you want. They get to know your situation, your concerns, and your dreams so they can address all of that in your estate planning or business formation documents.

The second issue is quality of the product you obtain from the DIY company.  For simple legal needs, a DIY company may provide a document that works, but rarely explores the complexity of the situation.

Example 1:  If you obtained a Revocable Living Trust from a DIY company, do you also have a Pour Over Will?  Do you also have a Healthcare Power of Attorney?  Do you also have a Financial Power of Attorney?  Life is rarely simple.  Most people would think that it is a simple process to fill in the blanks on forms and they would be set.

Example 2:  If you establish a business with a DIY company, did you form the correct entity?  Is a Sole Proprietorship correct? A Limited Liability Company (LLC)?  A C-Corporation?  An S-Corporation?  Do you have the appropriate documents to run the business?  Do you have the appropriate licenses?  Do you need a Registered Agent?  Do you need to file paperwork with any other government agency?  Did you get your Employer Identification Number?

When most people buy a car, they take it for a test drive before they buy the car. When most people buy a house, they examine several houses before they decide to buy the house. Unfortunately, that is not possible for DIY documents and that is why most people need the assistance of a licensed attorney that understands both the law and the impacts that these decisions will have.  Both opening a business and establishing an estate plan can be a fairly simple and straight forward processes to accomplish, but if it is done without the appropriate planning, it can be far costlier in litigation and other expenses.  Most things in life are not simple and straight forward, and trying to make decisions thinking that it is, can be costly.

In Part 2, we will finish exploring DIY compared to attorney products.