<![CDATA[JAMES LAW FIRM, P.L.L.C. - Texas and Taxes Law Blog]]>Thu, 30 May 2024 03:12:35 -0500Weebly<![CDATA[Corporate Transparency Act Is Here!]]>Thu, 18 Jan 2024 14:41:39 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/corporate-transparency-act-is-hereFinally, it is time to comply with the Corporate Transparency Act (the "CTA").  The CTA was passed over President Trump's veto as part of the National Defense Authorization Act in January 2021.  We had to wait until the Treasury developed implementing regulations and the website structure and database to comply.  That date was extended until this year.

What does that mean for business owners and, well, everyone ?  If you create a company, you need to know about the CTA.  The CTA requires for all LLC, corporations, and limited partnerships to file a Beneficial Ownership Information Report (a "BOIR") with FinCEN unless the company is exempt.  What companies are exempt?  Mainly, insurance companies, insurance agencies, banks, securities dealers, companies with a threshold revenue and employee number, and "inactive" companies are exempt.  These companies already report beneficial ownership to the Treasury in the federal tax return or to another agency as a part of federal regulation.

Neither the large company threshold or the inactive company exceptions apply to new companies.  The large company exception is for a company with more than 20 employees, an office in the U.S., and at least $5M in gross receipts derived in the U.S. for the previous year.  Upon formation, a new company does not have employees or revenue in the prior year. 

An inactive company is a company that (A) was in existence on or before January 1, 2020, (B) is not engaged in active business, (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (D) has not experienced any change in ownership in the preceding twelve month period; (E) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or affiliate had an interest, in the preceding 12 month period; and (F) does not otherwise hold any kind or type of assets, whether in or out of the U.S., including interests in other corporations, LLC, or similar entities.  As you can see, this exception does NOT apply to new entities, probably because all entities are "inactive" at the moment of formation.

Thus, you cannot create a company to hold an acre of land or some money inherited or whatever innocuous, non-business purpose.

For 2024, an entity has 90 days to file the report after formation, so hopefully, an entity can finalize all its owners by such time.  In 2025, the deadline is 30 days after formation!  What if all the planned investors have not joined the ownership group by the deadline?  Before the deadline, the entity should file the BOIR, and upon any changes, it must consider whether it must file an updated report.
<![CDATA[Who Owns this Land?]]>Tue, 11 Jul 2023 12:13:14 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/who-owns-this-landWe have had this issue many times over the years.  Sometimes, it is known who owns the land, but nothing had been done to prove it.  Other time, families know that they own the land, but they have no idea in what percentages.  How does this problem happen?  Simply, it comes from a lack of planning.  People die without Wills, and no probate is ever done.  A second reason is that people refuse to probate a Will, even if it exists.  Generations pass without a probate process.

What do you do?  There are some options.  You have to research back to the source of the problem--who was the last person or persons to acquire record title to the property?  

Then, it's time to construct that family tree!   You have to construct the family tree and then apply the intestacy laws in existence at the time someone died.  Then you move your way forward.  Often, a genealogist is required to research records.  It's a fun process, but a time consuming one.  Time consumption means money, so make sure the property is worth the expense.

Each time you determine a deceased person's heirs, you have to consider how do you prove that to a title examiner at a title company, if you were to sell the property, even if you never "plan" to sell the property (that's another issue...if you have many owners of one property,  a sale is likely inevitable).  You can prove a deceased person's heirs via affidavits of heirship recorded in the deed records.  A second option is to determine the heirs in court in a determination of heirship proceeding authorized by the Estates Code.

The effort to determine who owns property could require multiple sets of affidavits or determinations of heirship. 

Another idea is a trespass to try title action to determine who owns property.  Under the Property Code a trespass to try title action is the method for determining ownership of property.  This approach should be used when there is a dispute over ownership of property.  

What if multiple owners are determined to own certain property, but the owners do not want to sell?  How do you know if your work on ownership determination is complete and adequate?  You could create your own sale by transferring the property to a limited liability company.  This transfer could close at a title company, with a value determined for the property's transfer, and with a title policy.  That idea will place the ownership work to the test.  Further, holding the property in an LLC will provide a management structure and protection from creditors.

Often, some parties will want to sell and some will not.  Some owners will often buy out other owners.  These sales could close a title company too, with a title policy.  This closing will put to the test the work to determine owners.  Sometimes, there has to be a forced sale, and a partition action is required.  One option is the Texas Uniform Partition of Heirs' Property Act of Chapter 23A of the Property Code.

Let's consider a real example.  Client is selling his 255 acre farm he inherited from dad.  A small portion of the property, 45.43 acres came from the Walker family, via one Walker heir who purportedly acquired all the Walker heirs' interests.  A husband and wife, the Walkers, owned a 545.16 acre farm, and the survivor died in the 1940's.  They had 12 children.  Neither Walker had a Will or estate probated.  One of the children, Walker Jr., died in 1960, leaving 11 children.  In 1975, the family wanted to divide up the 545.16 acres, and 11 of the 12 are still alive.  They knew the last record owners, the Walkers, their parents.  One child, Walker Jr., was already deceased, having died in 1960, so they had to make a family tree for him.  The family tree was known; he had 11 children.

Affidavits of Heirship were recorded, along with a partition deed.  Each of the living children received 545.16 acres/12, or 45.43 acres.  Walker Jr's 45.43 acres were divided among his 11 children, but there was a wrinkle!  Walker Jr.'s wife also received an equal shareinstead of a life estate.  Normallya surviving spouse would only inherit a 1/3 life estate in separate real property, but for some reason, she received an equal share, meaning 1/12 of the 45.43 acre tract.  Perhaps, the law in 1960 required the surviving spouse to get an equal share--again the law in 1960 was relevant, but the partition deed required her to get an equal share, so knowing the law then was not necessary in this real example.  Ms. Walker died in 1983.  Guess what?  Research regarding Ms. Walker showed that she also had either 2 or 3 children (perhaps one was a stepchild) from previous marriage(s) or relationship(s) or subsequent ones after Mr. Walker Jr.'s death in 1960.  Because these children were not Mr. Walker's, some additional heirs inherited her 1/12 share; the 1/12 share did not get inherited in total by Mr. Walker's 11 children.  If there were three other children, then her 1/12 got divided among all her children, 14 of them!  So that is her 1/12 * 1/14 for each child, or 1/168 for each, with 3/168 going to other children who did not sell to the Walker heir who sold to Client's dad.  So that is 3/168*45.43 acres out of 255 that is the problem!

If you were to track down these 2 or 3 additional children and prove ownership, you would have to complete an Affidavit of Heirship or a Determination of Heirship for Ms. Walker and then these 2 or 3 children if they were not living and then so on, if one of these heirs had died.  Another option: since one Walker heir had acquired all the other heirs' interests (other than these 2 or 3) and then sold the property to client, client could file a trespass to try title action to determine a superior title to the property, including via adverse possession, or a partition action to acquire these two or three heirs out of their interest.  That would have been much work!  Fortunately, in client's 255 acre property sale, only a portion of the property (45.43 acres) came from the Walker family, and seller was able to work with buyer and title company for an exception from the warranty for any property claimed by Ms. Walker's two or three other children.  In summary, the problems arose because two generations of heirs had no Wills or estates probated, and the problem was not discovered when client's dad acquired the property, because the sale occurred outside a title company!

<![CDATA[How to setup your business and related real estate]]>Tue, 04 Jul 2023 15:29:13 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/how-to-setup-your-business-and-related-real-estateDo you have a business that is expanding and succeeding, and you want to acquire your own real estate for it--such as for an office building, warehouse, machine shop, or fabrication shop?

How do you undertake this purchase?  First, you need advisors.  You need a good business attorney who has knowledge not only in business law, but tax law and real estate law.  Some firms have someone who has knowledge in all three areas.  Sometimes, you will need a firm with multiple attorneys.  You should also have a good accountant who can perform financial analysis on purchase versus lease, with the after-tax cost of each.  You also need a good commercial real estate agent.  Finally, if you are to build, then you need a good construction management consultant and/or an engineer to help with the design and build.

You should also be in contact with your banker on the financing, and you should start the discussions before you start looking.

For the main point in this article, how do you setup the real estate ownership?  You should setup a separate company to own the real estate, and nearly every time, the separate company should be an LLC classified as a partnership for income tax purposes (for high value real estate, an LP may be used).  The operating company's business liabilities should be held separate from the ownership of the real estate.  The operating company should enter into a long-term lease with the real estate company and pay rent.  The real estate company then pays the bank.  You are not obligated to "put all your eggs into one basket" when you are in business.  Accordingly, you are not obligated to place a valuable property into your company and risk losing the business and real estate.  

Your banker should want you to place the real estate in a separate company.  Bankers will act like it such a problem to change the loan underwriting package, because the owner will be different.  Separate ownership is very common, and the banker's concern is just a lack of knowledge.  A banker should want the real estate in a separate company.  If the operating company tanks, the banker should want its collateral separate from the disaster!  Also, the bank will require the operating company to have liability on the loan anyway, along with any principals who generally own 20% or more of the company.  Instead of the operating company being the borrower, it will be a guarantor.  Big deal, there is no way around that.

There are other reasons to keep the real estate separate.  First, there are tax reasons.  Operating companies are often s-corporations.  An s-corporation should not own real estate.  If you transfer real estate outside a corporation to the shareholders (a distribution), the transfer is treated as a sale of the real estate for fair market value (even if the shareholder owns 100% of the s-corporation--would you expect that?).  If the corporation borrows money and distributes the money to the shareholders, you might create a capital gain if the stock basis is less than the amount of the distribution.  Would you expect "paying tax on borrowed money?" These are terrible tax results.  Partnerships, including LLC classified as partnerships, do not have these problems.

Second, there are business reasons, other than liability risks, to keep the operating business separate than the real estate. Do you have a key employee?  Perhaps, you want to award key employees with ownership in the business.  If the business owns the real estate, then you will also be granting the key employee ownership in the real estate too.  By keeping the two separate, you can award key people with ownership in the business and still own the real estate 100%.  Third, sometimes, only certain owners have the money and creditworthiness to invest in the real estate.  In this case, separate companies makes the ownership much more feasible.

A second business reason occurs upon the retirement or sale of the business.  If the two are separate, then you could just sell the business and keep the real estate.  Sometimes, a seller will "sell" the "stock" or "membership interest," especially if there are key contracts to keep in place.  If the real estate is outside this entity, then it is easier to sell the company and keep the real estate.  Keeping the real estate can make it cheaper for the buyer to acquire the business, and the real estate can provide retirement income--rent!

<![CDATA[Why You Need a Lawyer for an Estate Plan]]>Tue, 04 Jul 2023 15:22:08 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/why-you-need-a-lawyer-for-an-estate-planSubtitle: How to Avoid Making a $400 Will into a Court Case!

Early in my practice, I saw a Will prepared by a husband and wife for the husband, as he was very ill.  It was one of those "internet based" Wills.  It was drafted poorly and signed improperly.  The Will is considered a separate instrument from the self-proving affidavit.  Unlike today's Wills--which allow the testator and witnesses to sign only once--the prior Wills required two signatures for a self-proved Will.  The testator and witnesses only signed the self-proving affidavit.  In addition to this problem, the self-proving affidavit's language was butchered.

Oh, we cannot leave out the fact that the marriage was common law, and surviving spouse had a stepchild!  

Result: lawsuit!  Over $20,000 was spent to defend the Will and get it admitted to probate.  

What was the real problem?  The refusal or, perhaps, fear of going to see an attorney to draft an estate plan.  Many clients just need a "simple Will," a durable power of attorney, and a medical power of attorney with directive to physicians (a "living Will").  These documents are not complicated, but the client gets the opportunity to ask questions and gain some knowledge and assurance that he has an adequate and effective estate plan.

Believe me, do not let your Google search make you think that you can practice law!
<![CDATA[LLC or S-Corp?]]>Sun, 02 Jul 2023 03:28:16 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/llc-or-s-corpLLC or S-Corporation?  This question is a common one.  However, it is not even the right question!  LLCs and S-corporations are apples to oranges.  You can have both.

An LLC is a state law entity, a limited liability company.  It is governed by the Texas Business Organizations Code, a state law.  

An S-corporation is a federal income tax election made by filing Form 2553.  The "S" stands for Subchapter S of the Internal Revenue Code, the federal tax law.  You do not create an s-corporation by filing a document with the Texas Secretary of State.  Technically, you do not even "create" an S-corporation.  You make an S-corporation election.

The proper question is, "Should I create an LLC and make the S-corporation election?"  A state law corporation (filed by filing a formation document with the Texas Secretary of State), an LLC, and even a limited partnership can make an s-corporation election.  Yes, a limited partnership can be an S-corporation, because this status is an election.  An LLC and LP are eligible entities that can make an s-corporation election, if the requirements for an s-election are met.  This law is known as the "check-the-box regulations," and these regulations were actually implemented in the late 1990's!  Amazingly, the regulations still trip up other lawyers and even accountants today.

An LLC is the most common operating entity today.  An S-corporation is preferable for many small businesses, particularly those with a sole owner and employees.  An LLC with a sole member that makes an s-corporation election will then treat that sole member as an employee, if such employee is providing services on behalf of the LLC.  

Most of the time forming an LLC is the preferable entity.  Your next question is determining whether to make that s-corporation election for the LLC. ]]>
<![CDATA[Should I Set Up My Estate to Avoid Probate?]]>Sun, 02 Jul 2023 03:13:45 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/should-i-set-up-my-estate-to-avoid-probateProbate in Texas, compared to other states, particularly New York, California, and even Florida, is not as expensive and time consuming as one would think, IF you have a properly drafted Will with an independent executor.  Most estates will have some sort of probate involved with the process of transferring assets.

Let's take a step back and say what probate is.  Probate comes from a Latin word meaning "to prove."  With a Will, the applicant is offering a document to prove that it is the Last Will and Testament.  Without a Will, one has to prove who the heirs are.  A Will has no legal effect until the testator dies (yes, there is a statute that says that) and until the Will is admitted to probate.  That does not mean a Will must be probated.  There are two types of assets: probate assets and non-probate assets.

Probate assets are those that pass through the Will, or if there is no Will, then through the intestacy laws.  Probate assets include stocks, bonds, bank accounts, privately held company stock and businesses, real estate, vehicles, and other tangible assets.  Non-probate assets include life insurance and retirement accounts; each of these allow for the designation of a beneficiary for those assets.  Further, almost any probate asset can be made into a non-probate assets.  For example, stocks in an account and money in the bank can have payable on death beneficiaries or joint tenants with rights of survivorship.  Even real estate can get transferred by a transfer on death deed or a life estate deed.  Finally, a person can create a revocable living trust and transfer assets to it.  Any assets titled in the trust at death do not need to go through probate.

Now, should you arrange your estate to avoid probate?  For most of my clients, the answer is no.  For some clients, I do create living trusts and transfer the probate assets to it.  Who are these clients?

(1) Elderly clients who have no one to manage their affairs upon incapacity
(2) High net worth clients with assets and business to manage--beneficiaries should not have to wait until a court appoints an executor to manage these assets.
(3) Clients with real estate held out of state.
(4) Clients who want privacy in the administration of their estate.  Trust assets need not get reported on a probate inventory.

Of course, with the best of plans of men, invariably, a person with a living trust plan will have an asset not held in the trust at death.  To transfer that asset, what is required?  Probate!
<![CDATA[Why a Series LLC?]]>Sun, 02 Jul 2023 03:06:37 GMThttp://rcjlawfirm.com/texas-and-taxes-law-blog/why-a-series-llcWhy a Series LLC?  

You have probably heard the adage, "don't put all your eggs into one basket."  To limit your personal liability from owning a business or holding real estate assets, you should use a legal entity, such as a limited liability company, the most common choice of entity today.  

Now assume you use an LLC to own rental properties; you have a dozen of them.  Before the series LLC, you could place all 12 in one LLC, or any number in one, and create additional LLC.  Putting all your rental properties in one LLC is "putting all your eggs into one basket."  Creating a new LLC for each property is having separate baskets.

Creating a series LLC allows holding assets in divisions, or series, in an LLC.  The series LLC is like an egg carton, with each egg having its own slot.  With a series LLC, each rental property can have its own series.  Instead of filing a formation document with the Secretary of State each time to create a new entity, you can have a series LLC and create a new series with internal documents.  

The Texas Business Organizations Code provides that if you have some sort of demonstrable method of maintaining records of each series separate from another and from the LLC as a whole, then the liabilities that arise from a series will not affect the assets of the other series or the LLC itself.  Adequate records to show the activities and assets of a series leads to having a protected series.