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The IRS is Cracking Down on Trust Promoters

The IRS is Cracking Down on Trust Promoters

By: Ted Sutton, Esq.

There are some promoters out there who claim that they have a trust strategy whereby the trust avoids paying income taxes. But recent IRS rulings have started to crack down on this practice.

 

The most recent ruling came from Chief Counsel Memorandum (CCM) 2023-0006. The IRS made this ruling because some promoters claimed that if the trustee allocates trust income to the trust corpus, and the trustee doesn’t make distributions to the beneficiaries, then the trust income won’t be taxable.

 

However, this section misrepresents the tax law. Section 643 defines Distributable Net Income (DNI), which is the part of income that’s taxable to the beneficiaries. The promoters argue that because no distributions were made to the beneficiaries, that income held in the trust would not be taxable.

 

Even so, Section 641 says otherwise. This section of the tax code defines taxable income for estates or any kind of property held in trust. Under this section, if the trustee allocates trust income to the trust corpus, then the trust income is taxable.

 

Be very wary of promoters who suggest that they can set up trusts to help you avoid paying taxes. We here at Corporate Direct will help you be on the lookout for them.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

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The Difference Between Certificated And Uncertificated Securities

The Difference Between Certificated and Uncertificated

By: Ted Sutton, Esq.

A security refers to an ownership interest in a business or a financial instrument. These ownership interests can be in a private LLC, or corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in a security. You can either own it either as a certificated security, or as an uncertificated security. In this article, we will walk you through the differences between the two, and when it’s best to use each one. 

Uncertificated Security

An uncertificated security is a security whose ownership is not represented by a physical stock certificate. These security interests are registered on the books of the issuer, and are tracked electronically. Given technology’s role today, this is how most securities are held. Other names for uncertificated securities include book-entry securities and electronic securities.

Pros of Uncertificated Securities

Securities can be bought and sold electronically. There are many different trading platforms today that you can buy and sell from, and given the ease of trading uncertificated securities, it is the faster, more efficient option.

The advantage is that there is no need for filling out and transferring paperwork, which reduces the overall cost of buying and selling stocks. And because uncertificated securities aren’t in paper form, there is little risk that they can be lost or stolen.

Cons of Uncertificated Securities

While uncertificated securities are preferred in many situations, there are some downsides to using them. One of them is that its owners don’t have physical proof of ownership. This can be an issue when owners are perhaps concerned about hacking or a widespread loss of data. A physical certificate avoids such risks.

And most importantly, using uncertificated securities does not provide nearly as good asset protection. Courts treat uncertificated securities as “general intangibles.” General intangibles are non-physical assets, like electronic stock ownership, and courts in your state of residence can easily exercise jurisdiction over them. So, when an individual is sued in their home state, their home state court can exercise jurisdiction over their uncertificated security.

Here’s an example. Let’s say that you live in California and own an interest (that’s an uncertificated security) in a Wyoming LLC. You then get sued in California. Because your interest in the Wyoming LLC is a general intangible that follows you to California, California will apply their law to the dispute. In this case, Wyoming’s stronger charging order protection wouldn’t apply to protect your interest in the Wyoming LLC.

Certificated Security

A certificated security is a security that is represented by a physical certificate. When you buy a certificated security, you receive a physical paper evidencing your ownership. This stock certificate contains important information about the security, including the owner’s name, the number of shares owned, the date that the owner received the security certificate and any restrictions on transfer. When you sell the stock, you transfer the physical certificate to the buyer.

Pros of Certificated Securities

The advantages to having certificated securities is greater asset protection, as discussed below.

Cons of Certificated Securities

There are more obvious cons to owning a certificated security. Selling a certificated security is more difficult and time consuming. Given how easy it is to buy and sell uncertificated securities online, trading certificated securities for public companies is not the best option for investors. Another downside is the cost associated with physically transferring the security certificate from a seller to a buyer. And because they’re in paper form, these certificated securities can easily be lost or stolen. But for your own personal investments let’s consider Armor-8.

Armor-8

At Corporate Direct we offer certificated securities for your own personally held Wyoming LLCs with our Armor-8 protection.

There are many states that offer weak asset protection (like California). However, if you are a resident of one of those states, there is a little wrinkle in the law that can protect you. Under the UCC Article 8, if the certificated security is delivered and kept in one state, then that state’s law will apply to how a creditor can reach its assets. Said another way, this means that if the security certificate is delivered and kept in Wyoming, then the out of state court must apply Wyoming’s charging order, a much stronger asset protection remedy.

We have a safe deposit box at a Wyoming bank to ensure that the security certificate is delivered and kept in Wyoming. This places the security certificate out of reach from your home state creditors. And the only way for them to reach it is to have a lawyer in Wyoming get a court order to release the paper certificate. This is a cumbersome process for an attorney on a contingency fee. The hassle factor gives you better asset protection.

Conclusion

Holding a certificated security can come in handy when you don’t want to sell your interest and want to protect your assets. However, uncertificated securities are helpful where they are regularly bought and sold on an exchange. Knowing this difference may be able to help you before you set up your business.

We here at Corporate Direct can help you protect your assets with our Armor-8 protection. This will provide you with a certificated security interest held in Wyoming for your protection from creditors.

For more information on our Armor-8 protection, schedule a consultation with us.

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.

New York LLC Transparency Act

New York LLC Transparency Act

By: Ted Sutton, Esq.

Marissa was an aspiring barista who lived in New York City. After she graduated high school, she started her own coffee shop in Brooklyn. She properly formed a New York LLC. However, she forgot to report her beneficial ownership information to FinCen and the New York Department of State (NYDS).

After two years of making coffee, her business took off. Her new coffee shop became the top gathering place in her Brooklyn neighborhood. Everyone raved about not only the coffee, but also the shop’s ambience.

Although Marissa’s coffee shop was successful, she was hit with legal trouble. Because she failed to report her information to FinCen, she was slapped with a $10,000 fine. On top of this, she faced a separate $250 fine from NYDS for failing to report the same information to them.

The New York LLC Transparency Act

As many of you may know, the Corporate Transparency Act (CTA) requires companies and their owners to report certain information to the Financial Crimes and Enforcement Network (or Fincen) under the Department of the Treasury. You can read a separate article covering these requirements here.

However, some states will require you to report this same information to them a second time. New York Assembly Bill 3484A, also known as the “LLC Transparency Act,” will require New York LLCs to report the same beneficial ownership information to the NYDS. This bill requires LLC owners to disclose a list of beneficial owners, and any formation and registration documents.

Just when you think that wasn’t enough. This new LLC Transparency Act is even more transparent than the CTA. While the FinCen database is only available to governmental authorities and financial institutions, the LLC Transparency Act requires the NYDS to maintain a publicly searchable business entity database on their website. With this database, anyone can view the entity name, business street address, the county where the business is located, and the full names of each beneficial owner. However, beneficial owners may be able to apply for confidentiality waivers in limited circumstances.

Conclusion

Because Marissa failed to report any of this information, she faced fines from both the State of New York and the federal government. If she doesn’t cough up the $10,250 worth of fines, she could face jail time. Once she properly registers with the NYDS, her private information will be made available to the public.

Could other states follow suit and pass similar legislation? Only time will tell. This is why business owners must be on the lookout. If they don’t, they could end up like Marissa.

The CTA Applies to Your HOA

The CTA Applies to Your HOA

By: Ted Sutton, Esq.

 

The Corporate Transparency Act (CTA) will apply to many different types of entities. It even extends to Homeowners Associations (HOA’s), including condominiums, community associations, and co-ops. This means that if you own an interest in an HOA, or you serve on the HOA board, you will need to report your information to FinCEN.

 

There are currently 23 exemptions under the CTA. One of which is the tax-exempt entity exemption, which includes three types of entities. The first is that the entity is an organization described in section 501(c) and exempt from tax under 501(a). Second, the entity is a political organization defined in section 527(e)(1). And lastly, the entity is trust described in section 4947(a).

 

Most notably missing under this exemption is Section 528 of the tax code, which applies to most HOAs. While there has been talk about exempting HOAs who file tax returns under Section 528, nothing has materialized as of yet. And we’re not holding our breath.

 

As it stands right now, most HOA’s will have to comply with the CTA. And in order to comply with the CTA, they will need to report some information to FinCEN.

 

The first piece of information is the “reporting company information,” which is the HOA body itself. The HOA will need to report its name, address, jurisdiction of formation, and its EIN Number.

 

The second piece of information is the “company applicant information”, which includes the person or business who is responsible for filing the information. The company applicant will need to report their name, birthdate, street address, and a driver’s license or passport.

 

The third piece of information is the “beneficial ownership information.” A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” over the company.

 

Some HOA boards have what are called “bulk owners.” And if these bulk owners own more than 25% of the HOA, they qualify as beneficial owners. As for the “substantial control” requirement, anyone who serves on the HOA board will have the required “substantial control” to qualify as a beneficial owner. In both situations, both groups will have to report their beneficial ownership information to FinCEN.

 

Another issue for HOA boards should look out for is when there is a change in ownership. Under the CTA, when there is any change in ownership or management, the HOA must report that information to FinCEN within 30 days. This may be a difficult task for many HOA’s, as some HOA’s have rapidly changing compositions. But once something changes, the clock starts ticking.

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.

Is Your Business an “Inactive Entity” Under the CTA?

Is Your Business an Inactive Entity Under the CTA

By: Ted Sutton, Esq.

 

Introduction

Sam was a young man who began buying stocks at a young age. As he got older, his stock portfolio kept growing. But because he held the stocks in his personal name, Sam was concerned about the portfolio being exposed in a lawsuit. In order to protect his investments, Sam formed a Wyoming LLC in 2021.

Sam’s best friend was Ricardo, a Spanish citizen whom he met in college. Ricardo also loved to invest in stocks, and wanted to invest alongside Sam. So in 2023, Sam gave Ricardo a 30% interest in the Wyoming LLC. Ricardo contributed $5,000 worth of stocks into the LLC.

From that point on, it was all downhill for Sam and Ricardo. The Corporate Transparency Act (CTA) took effect in 2024. And because Sam and Ricardo didn’t timely report their Wyoming LLC, they were hit with a $10,000 fine.

What Are Inactive Entities?

Under the new CTA, companies are required to report information about their business and its “beneficial owners” to the Financial Crimes and Enforcement Network (FinCEN) at the U.S. Department of the Treasury. However, the CTA carves out 23 exemptions for certain entities.

One of these exemptions is the “inactive entities” exemption. Many business owners may try to argue that their company meets this exemption. But the exemption’s requirements are a lot stricter than you think.

“Inactive entities” are entities that:

  • Were in existence before January 1st, 2020.
  • Are not engaged in active business
  • Have no ownership held by a foreign person
  • Have had no change in ownership in the last 12-month period
  • Have not sent or received funds over $1,000 within 12-month period; and
  • Do not hold any type of assets

Your business must meet all of these requirements to be classified under the “inactive entities” exemption. And if it doesn’t, it must report information to FinCEN.

Application

As you can see, Sam’s Wyoming LLC failed all of the requirements. Sam created the entity in 2021. Ricardo, a Spanish citizen, acquired an interest in the Wyoming LLC within the past year and placed $5,000 worth of stocks into it. And, of course, the LLC owned assets in the form of stocks.

The only argument that Sam could make here is that the LLC was not engaged in any “active business.” But because the Wyoming LLC failed every other prong, it does not meet all of the “inactive entity” requirements. As such, it needed to report its information to FinCEN.

Beneficial Ownership Requirements

Another thing worth mentioning is the beneficial ownership requirements. A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” of the company. If someone meets the requirements of a “beneficial owner,” they must report their beneficial ownership information to FinCEN.

In the example above, Sam owned 70% and Ricardo owned 30% of the Wyoming LLC. Because both owned greater than 25%, they both qualify as “beneficial owners.” As such, both must report their beneficial ownership information, including copies of a passport or driver’s license, to FinCEN.

Conclusion

The CTA is a new law that nobody is talking about. It is complex and convoluted. Even worse, many business owners will be left in the dark about the law and its requirements.

Luckily, we here at Corporate Direct will help you navigate the CTA. For more information, click the link here.

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.

Texas: The New Hotbed For Business?

Texas: The New Hotbed For Business?

By: Ted Sutton, Esq.

 

In the business realm, Texas has become the lone star that is burning brighter. And it may become a top state for business in the near future.

 

They say that everything’s larger in Texas. This also includes a larger demand to form a business in the Lone Star State. Forming a business in Texas has become a popular alternative to other larger states like California and New York. Given its thriving economy and a favorable tax climate, Texas has seen an increase in new LLC formations.

 

These formations may increase further. Under the recently-passed Senate Bill 2314, Texas now recognizes the charging order as the exclusive remedy for both single-member and multi-member LLCs.

 

The charging order apples when an LLC member is personally sued and loses in court. But in order for the lawsuit winner to collect anything from the LLC, they must wait until any distributions are made from it. So, if no distributions are made, then the winner doesn’t collect anything from the LLC. This is true, even if the loser is the only member of the LLC. This new law takes effect on September 1, 2023.

 

This new law overrules Devoll v. Demonbreaun, a 2016 Texas Court of Appeals case[1]. Devoll held that the charging order was not the exclusive remedy, even if it was charged against an LLC’s membership interest. This new Senate Bill changes this outcome. Now Texas LLC owners are better protected in the event they are personally sued.

 

On top of this, Texas has also just formed the Texas Business Court. Similar to the Delaware Court of Chancery, this new court system will handle corporate disputes and complex litigation matters. Texas will eventually set up these courts in Austin, Dallas, Fort Worth, Houston, and San Antonio. This court will help expedite lawsuits and provide case law to resolve these disputes. But most importantly, this will attract even more business to the state. These new courts are set to start on September 1, 2024.

 

Another thing Texas has is its large population and rapid population growth. Currently, Texas is the second largest state with 30 million people. And since 2010, Texas has had the third-fastest growth of any state at a whopping 20%. Given these recent trends, it could take that top spot in the not-too-distant future.

 

Could Texas overtake Delaware and Wyoming as the best state for businesses? Only time will tell. However, these recent developments show that it may be possible.

_______________________________

[1] Devoll v. Demonbreun, No. 04-14-00331-CV (Tex. App. Aug. 31, 2016).

 

 

Corporate Direct has a weekly YouTube segment called Direct Answers from Corporate Direct

In this segment, we educate people on corporate law, business formation, real estate, wealth building, and asset protection. And if you have any general questions about something, please feel free to leave a comment on one of our videos!

For more of these updates, click the link below and subscribe to our YouTube channel.