A number of subscribers to my newsletter on asset protection strategies have asked what's involved in managing and administering a legal entity such as a family partnership, a trust or a corporation. Some of their concern is about what needs to be done to ensure that the legal benefits of the entity are not lost because of a failure to do whatever is required to preserve the separate existence of the entity. At a more basic level, some subscribers are asking about more mundane procedures, such as separate bank accounts, bookkeeping and reports to the IRS. 

First, I'll offer some general suggestions that I believe will help you to operate and administer a limited partnership, limited liability company, a trust or a corporation - regardless of it's unique features. Then I'll offer some comments on any special requirements that might apply to any of these specific entities. In case I might overlook any important issues, I welcome follow up comments and suggestions from any subscribers.
 

The next thing you need to do is to open a bank account in the name of the separate legal entity. It would usually be a good idea to have a checking account with minimal charges for deposit and checking transactions, with a separate money market account for any medium term cash savings. The bank will usually ask you to sign a form giving information about each of the officers, partners, members or trustees who have any authority to act for the applicable entity. They may also ask for a copy of the corporate charter and by laws, the trust agreement or the partnership (or LLC) agreement. It would be helpful for you to have a supply of those documents available. 

As a precaution against losing valuable original documents, you might want to open a bank deposit box in the name of the entity to keep any original documents and valuable papers. 

Where the entity is to own various kinds of investments, it will be necessary to open an account with a brokerage firm. 

If real property is to be owned by the entity, you may need to have a local lawyer help you with the proper procedures to change title to the property with the appropriate state or county offices. If you live in California (or any other state with a property tax freeze), you should check with a local real estate lawyer to be sure you aren't going to be exposing the property to much higher real estate taxes - or that it's worth that risk. 

If any property is encumbered, you will also need to notify the lender. Tax considerations may dictate whether you want to transfer the encumbrance with the property or whether you want to offer the lender some alternate collateral for the loan. 

At various times, there may be a need to use an automobile (or other vehicle) to conduct the business of the entity. If you have a good reason to have the vehicle owned by that entity, you will need to have the vehicle registration retitled. An alternative is to have the entity pay you the going IRS allowed mileage rate for any use of the vehicle relating to the business of the entity. (For 1995, the rate is 30 cents per mile for business use.) 

Where the entity is to own any other tangible property, I suggest that you prepare a statement describing each such item of property, it's value and the consideration to be given to you for the property. Except for transfers to a trust, you should either get shares of stock, additional interests in a partnership or evidence of a debt to you for the property. For transfers of property to a partnership or corporation, the statement should also show the adjusted tax cost (basis) of the property. 

If the entity is to use any of your other personal property, like a computer, your telephone, fax or similar services, some reimbursement arrangement should be established. 

For convenience in doing business and paying for any travel expenses, I'd suggest that you try to get a credit card issued in the name of the legal entity or one of the new debit cards. If you can't accomplish that, the second best option is to open a new credit card account in your own name but to only use it for purchases and any travel expenses relating to that entity. 

A separate set of books should be set up and used to keep track of the transactions of the entity. Special care should be taken to get a full list of the value of all assets initially transferred to the entity and the amount of any debts that are transferred with those assets. Those amounts represent your opening values on the entity's balance sheet. 

Income received and expenses paid after the initial transfer of any applicable assets should be deposited to and paid from the entity's bank account. At a minimum, the entity should keep a checkbook with a running account balance for ongoing transactions from each bank account and savings account. Records should also be kept of any credit card transactions during each year. 

If there should be any reason why you would need to loan money to the entity or to borrow money from the entity, you should prepare suitable loan documents showing the dates, the amounts, how and when the money is to be repaid and the applicable interest rate. The entity will need to prepare information returns on interest payments in accordance with current IRS requirements. 

If the entity has any employees, payroll tax withholding and payroll tax expenses will need to be made on a timely basis. One way to avoid having to worry about that is to use a paycheck type of service to do it for you. Another way is to use a service where the people that work for you are actually employees of a temporary employment service. With a corporation, you will be an employee and any compensation to you is subject to payroll taxes and withholding. As a trustee, partner or member of a LLC, payments to yourself for services rendered would not be subject to withholding. 

An accountant can reconstruct the financial transactions of a separate legal entity with one or more check books, an opening statement of assets and debts, any credit card transaction forms and any monthly brokerage statements. Unless you have a better than average grasp of debits and credits, I strongly suggest that you use an accountant to help you prepare annual accounting statements.
 

However, it is necessary to make a formal transfer of title for any assets that you want to have in a living trust in order to avoid probate. Until an asset is formerly re-titled in the name of your living trust, it's still in your probate estate. (Any jointly owned property or property with named beneficiaries will be transferred directly to the joint owners or the beneficiaries.) 

If you choose to have someone else serve as the trustee of your living trust (like a bank trust department), the trustee will then have to apply for a taxpayer I.D. number and will have to file an annual form 1041 to report any income of the trust. 

If a revocable trust has more than one beneficiary, or if it has beneficiaries other than the donor of the trust, it will need to prepare an annual form 1041 and annual K-1 forms.
 

But, with an irrevocable trust, if the trust has any income in excess of its distributions to the trust beneficiaries, then the trust must pay income taxes on that retained income. That means that quarterly estimated tax payments will be required to avoid penalties for underpaying estimated taxes. Any state that has a state income tax would also require annual tax returns for trusts. 

If you aren't familiar with preparing these forms, I would urge you to find a tax preparer who has that experience. By the way, a lot of tax preparers never prepare a trust tax return or quarterly estimated tax deposits for a taxable trust. So ask around to find one who does have specific experience with taxable trusts. Problems can occur easily when the preparer doesn't have any real experience with these entities. 

Even if the irrevocable trust has distributed all of its income to the trust beneficiaries, it must file a form 1041 and must file a form K-1 for each of the beneficiaries.
 

Most public accountants should have the necessary software to prepare partnership tax returns and the K-1 forms. If the accountant that you know doesn't have the required software, it basically means he or she has very little experience with this type of entity. Take my word for this. You don't want someone to learn about partnership tax rules at your expense. Get a tax preparer who is already doing partnership returns for other clients.

Any compensation you pay yourself from a corporation should be subject to payroll tax withholding the same as any other employee. Severe penalties can be imposed on the responsible officers of a corporation who fail to make the required payroll tax payments.

Further details about protecting your assets from future lawsuits  are available in our subscriber's web site. Changes in the tax laws and various federal and state laws affecting various asset protection devices are provided in our monthly newsletter on Asset Protection Strategies.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

About the author:

Vernon Jacobs is a CPA/CLU who works as a tax author and consultant.  He  sponsors and moderates a free discussion group on asset protection and offshore topics.  His email address is vkj@rpifs.com.  He can be reached by phone or fax at (913) 362-9667.

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