Tuesday, March 22, 2016

Top Five LLC Mistakes of March

March has provided a slate of mistakes as to entity form, focusing (as it almost always does) on limited liability companies (LLCs) and various outlets calling such entities "corporations."  These are not in any particular order, but lists are neat. Enjoy! 

(1 ) Politifact Checks Trump Facts, Forgets to Check Entity Law Facts

In an article on Politifact.com, Donald Trump incorrectly says Virginia winery is the largest on East Coast, which determines that Trump's claims about the size of a winery that his son runs to be false and notes some statements are incorrect. Ironically, the article also claims: 

A legal disclaimer on the winery website says the GOP presidential candidate doesn’t own the winery. The venture is a limited liability corporation, and its owners are not a matter of public record.

Wrong. The winery site says, "Trump Winery is a registered trade name of Eric Trump Wine Manufacturing LLC, which is not owned, managed or affiliated with Donald J. Trump, The Trump Organization or any of their affiliates."  An LLC is still not a corporation. 

(2) Big Bang Theory: Big Brains Don't Know Entity Law

I don't watch the Big Bang Theory, but my colleague at Valparaiso University, Professor Rebecca J. Huss, is a reader of this blog who also cares about precise language with regard to LLCs alerted me to this one.  The story line of the March 10 show (the show can be found here) related to a the creation of a partnership agreement for some of the characters. One thing that is realistic is that the folks think it's a good idea to form an entity and draft contract language without a lawyer.  One character says he has some concerns about the partnership, and another replies with this "joke": "Are you suggesting a limited liability corporation, because I did not LLC that coming." (The offending segment is roughly 14 minutes into the show.) (This was also covered at Kentucky Business Entity Law Blog, here, which noted, "Ughhhh.   LLC ≠ limited liability corporation.  Rather, LLC = limited liability company.") 

(3) Ghost LLCs Masquerading as Corporations

The Washington Post last week ran a story, How ‘ghost corporations’ are funding the 2016 election. The article discusses how entities can be used to shield those backing political candidates. The article states: 

Advocates for stronger campaign-finance enforcement fear there will be even more pop-up limited liability corporations (LLCs) funneling money into independent groups, making it difficult to discern the identities of wealthy players seeking to influence this year’s presidential and congressional contests.

. . . .

Many corporate givers this cycle are well-established hedge funds, energy companies and real estate firms. But a significant share of the money is coming from newly formed LLCs with cryptic names that offer few clues about their backers.

That LLC definition is wrong, and LLC giving is not "corporate" giving. Perhaps political funding via opaque entities is a problem, but we should try to get our entities right.  There may be problems (and solutions) unique to one entity form or another, so this could be more than semantic.  

 

(4) Pass-Through Tax Law Isn't Really About Corporations (mostly)

The Topeka Capital-Journal Editorial Board wrote on March 20: LLC loophole needs plugging: Even some small business owners think the tax exemption should be eliminated.  The editorial is related to a 2012 Kansas law, HB 2117, which eliminated taxes on pass-though entities like LLCs, S corps, partnerships, farms, and sole proprietorships. (So, I admit, S corps are corporation, but they are essentially partnerships for federal tax purposes.)  Even though I agree with some their concerns, the board makes a couple mistakes here when they assert that the bill "was simply an unconditional gift from the state for anyone who has created an entity called a limited liability corporation (LLC)."

First, it assumes that just LLCs get the benefit, which is not true. All pass-though entities benefit.  Second, of course, the "limited liability corporation" is a corporation, not an LLC, and the corporation (other than one chosen to be an S corp) does not get the benefit of the law.  

(5) Court Gets Entity Right, Regulations Not Quite

I'm not one to leave the courts out of this.  Judge Robert M. Dow, Jr., of the United States District Court, Northern Illinois has an incredible resume.  A member of Phi Beta Kappa and a Rhodes Scholar, his credentials are impressive.  In a recent decision, though, his opinion refers to a defendant LLC correctly, but then goes on to say that Treasury Regulations are silent on treatment of "limited liability corporations." Alas, that's not accurate.  Here's the passage: 

It is undisputed that, as of the date of Anderson Bros.' withdrawal from the fund, Anderson Bros. (an Illinois corporation) was 100% owned by Anderson. Anderson therefore had a “controlling interest” in Anderson Bros. 29 U.S.C. § 1.414(c)-2(b)(2)(A). At the same time, Defendant (an Illinois limited liability company) was also solely owned by Anderson. Section 1.414(c)-2 of the Treasury Regulations does not address specifically the treatment of limited liability corporations, and the Board does not address this issue in its brief. According to the Internal Revenue Service (“IRS”), “an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes * * *, unless it files Form 8832 and affirmatively elects to be treated as a corporation.” IRS, Single Member Limited Liability Companies, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies (last visited Mar. 16, 2016).

Bd. of Trustees of the Auto. Mechanics' Local No. 701 Union & Inustry Pension Fund v. 6516 Ogden Ave., LLC, No. 14-CV-3531, 2016 WL 1043422, at *4 (N.D. Ill. Mar. 16, 2016) (emphasis added).

 

https://lawprofessors.typepad.com/business_law/2016/03/top-five-llc-mistakes-of-march.html

Corporations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink

Comments

C'mon at least "I did not see that LLC coming" is funny, tho, right?

Posted by: Steve Diamond | Mar 22, 2016 12:13:07 PM

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