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CalAttorney2
CalAttorney2, Attorney
Category: Estate Law
Satisfied Customers: 10238
Experience:  Civil litigation attorney for individuals and businesses.
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Are you familiar with "masachusettes business Trusts?" If

Customer Question

Are you familiar with "masachusettes business Trusts?" If not, can you please rercommend where I may go to locate an attorney?
Submitted: 8 months ago.
Category: Estate Law
Expert:  CalAttorney2 replied 8 months ago.

Dear Customer,

Business trusts are a generally outdated form of business operation, they are generally replaced by the LLC (limited liability company) and Corporation (both S-Corp. and C-Corp.).

The reason for this is primarily that in addition to the tax benefits (mainly deferred taxation as opposed to elimination), both of these entities provide "limited liability" for its owners, which makes them much more appealing.

For local business attorneys that can help you with selecting the most appropriate form of business entity for your business, or managing a current business entity, I can provide you with some resources to find local counsel. You can find local attorneys using the State and local Bar Association directories, or private directories such as www.AVVO.com; www.FindLaw.com; or www.Martindale.com (I personally find www.AVVO.com to be the most user friendly).

Some general information on LLCs and Corporations:

  • An LLC generally offers more flexibility than a corporation. The LLC form can be manipulated much more easily to distribute assets, income, and losses between members. It does not require annual meetings, or officers as required by a corporation. It is easily formed into the specific needs of your business. A corporation is well suited to businesses of scale, so if you plan on building a business by selling shares of the company, a corporation is ideal (just understand that each share represents a proportional amount of the assets, income, and liabilities of your corporation, while you can divide share classes, it doesn't format itself as easily as an LLC). However, for some investors a corporation offers better after tax benefits (but this is something that you need to approach as part of the individual's entire tax portfolio - an LLC vs a corp. does not give you "better" tax benefits over the other in a side by side, it is only when comparing the outcome as part of your entire tax portfolio).

    Neither LLC nor Corp. can be fully effective unless you put the time and money into having your organizing papers properly drafted (I always caution new businesses against going cheap early - hire a local attorney to help you draft these documents, hammer out the details for how you are going to solve problems with your business now (while everyone is copacetic and talking to one another), rather than going cheap and buying your documents online (or using the CA Secretary of State's free documents) which are almost always just a regurgitation of the state's corporate code, then when there is a problem (and everyone is mad at one another), you will end up spending a huge amount of money trying to resolve it.

And some information on the principles of "limited liability" as offered by both LLCs and Corporations:

  • Both Limited Liability Companies ("LLCs") and Corporations (both "S-Corps." and "C-Corps.") enjoy "limited liability." This means that the owners of the entity ('members' in the LLC and 'shareholders' in the corporation) are not personally liable for the debts of the entity. So if the entity suffers a loss (defaults on a debt, or is found liable for a tort claim), the creditor is only entitled to recover against the assets of the entity (so any assets that belong to the entity, or any insurance policy held by the entity).

    There are 3 exceptions: (1) if the owner has agreed to act as a "personal guarantor" (usually you will see this with a lease, where the landlord requires the owner to guarantee the lease terms in the event the entity defaults); (2) if the owner causes their own tort (we are always liable for our own torts, for example, if the owner is driving a company car and hits a pedestrian, both the owner and the entity are liable); and (3) "veil piercing" (this is not very common, but can happen if the entity is "undercapitalized" - discussed in more detail below).

    Veil piercing is used to compensate an injured party that is harmed by a company (either LLC or Corp.) that is inadequately capitalized (or even less commonly, due to "irregularities" in corporate structure - but this is largely disregarded). What happens here is when the entity does not have enough money or assets to cover the type of risk created by the activity they are engaged in. A good example is a taxi company that doesn't have any assets (it leases a car, has no accounts receivable, no employees, and no insurance). It simply doesn't have sufficient assets to cover the type of risk it is placing on the general public (driving around mid-town with pedestrians and other vehicles everywhere). If another person is injured, they will be entitled to sue the entity's owner directly (via "veil piercing") in addition to the entity because there was inadequate capitalization. This problem can be easily fixed, if the taxi company in our example simply took out a reasonable insurance policy, they could cover foreseeable losses and the owner would not be subject to liability (they have "capitalized" their company).

    (You also see veil piercing used to prevent owners from using their companies to perpetuate fraud on third parties - so you cannot create an LLC or Corp. to defraud people and then hide your own assets, think Bernie Madoff).

    This limited liability only works "one way" - you can protect your personal assets from debts of the LLC, you do not protect your assets of the LLC from your personal debts. Many people get confused with limited liability, and believe that if they set up a separate entity, they can protect assets from their personal debt collectors (so they can shield their personal assets from their personal debts by placing their belongings into an LLC). It doesn't work this way. If a creditor has a judgment against an owner, they will simply take the owner's interest in the entity (so a member's interest in the LLC, or their shares of the corporation), and in this way take control of the individual assets.

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