It is extremely important to understand why Corporations, Limited Liability Companies (LLCs), and Limited Partnerships (LPs) are used to conduct business. These entities are legal beings created and regulated by state laws. Therefore, these entities are legally separate from the individuals who own them.

To retain this separation between the individual owners and the entity, certain legal requirements and formalities regarding the maintenance and operation of the entity must be followed. If these requirements are not met, the separation between the individuals and the entity may be disregarded-sometimes with disastrous consequences.

What's At Stake? If certain legal formalities and requirements (discussed below) are not met, your Corporation, LLC, or LP could be disregarded as an entity separate from its owners or managers. The following is a brief summary of some of the consequences that may result:

• Loss of Limited Liability: If you were to ask a randomly selected group of small business owners why they elected to do business using one of the above legal entities instead of operating as a sole proprietor or general partnership, the answer you are most likely to hear is that they want to protect their personal assets from the liabilities of the business. This is the number one reason business owners incorporate or organize an LLC or LP. If you do not treat your business entity as separate from yourself, it is possible that the business entity will be disregarded at some time in the future by a court or government agency like the Internal Revenue Service. The result could be financially devastating. If the business entity could not pay its debts, whether from regular operations or from liability attaching as a result of lawsuit or government action, the personal assets of the owners would be made available to the creditors of the business entity.

• Continual / Perpetual Existence: Becausebusiness entities are legally separate from their owners, the death or disability of the owner does not mean that the business is dissolved (in the case of death) or unable to conduct business (in the case of disability). Changes in ownership and management are specifically addressed in the by-laws of corporations, in the operating agreements of LLCs, and in the partnership agreements of LPs.

• Access to Capital: A business entity is a more attractive vehicle for investors than a sole proprietorship. Private investors are able to invest in business entities with confidence. This confidence comes from being able to invest and receive either a debt obligation (which may be convertible into equity under certain circumstances) or a portion of the ownership of the entity.

• Potential Tax Benefits: The owners of corporations and LLCs taxed as corporations (yes, an LLC may be taxed as either a C corporation or an S corporation) may be able to receive tax benefits by sheltering business income in the entity-thus reducing the owners' overall tax liability.

• Commercial Credibility: American consumers are more accustomed to purchasing goods and services from businesses than sole proprietors. This instant reputability is another leading reason individuals use a legally separate entity as the business vehicle of choice.

The Challenge: Often, the requirements of just keeping a small business running leave little time for the owner or owners to engage in corporate/LLC/LP "housekeeping" and "maintenance." Without some level of diligence on the part of the owners, a gradual merger of the life of the business and the life of one or more of the owners can begin. When this happens, the separate legal status of the business entity begins to fade.

The Fix: If you have been neglecting the "housekeeping" and "maintenance" of your corporation, LLC, or LP, in all but the most extreme cases, the fix can be very simple. The following steps should be taken by all business entities, even those owned and managed by only one person .

As an initial matter, you should ensure that your business entity is in good standing with the Secretary of State. Even if your entity is delinquent in annual filings or other matters, it is usually very easy to bring your entity into compliance with the Secretary of State. Typically, this will involve the filing of a delinquent annual statement or, possibly, reinstating your entity if it has been deemed dormant or inactive.

Once the Secretary of State's office shows your entity to be in compliance and good standing, it is time to bring your internal entity governance up to date. This step cannot be over emphasized in its importance. Being in good standing with the Secretary of State is only the initial step in having your business entity recognized as separate from you (as the owner) at some future time whether in court or by a government agency.

The very first action item is to ensure that your business document binder is up to date. (This binder is universally referred to as the "Corporate Book" irrespective of whether you own a corporation, LLC or LP.) The binder should contain your entity's organizing documents (articles of incorporation or articles of organization), the operating documents (by-laws, operating agreement, or partnership agreement), evidence of ownership (stock certificates, membership certificates, or partnership certificates), transfer ledgers, resolutions and agreements to extraordinary actions (opening bank accounts, signing a lease, making tax decisions, appointing officers, etc.), minutes of each annual meeting, tax documents (such as the Request for Employer Identification Number on Form SS-4 [the tax identification number for domestic business entities], S-Corporation Election on Form 2553, Tax Returns on the applicable forms [1065, 1120, 1120-S, etc.]), required permits and licenses for your type of business, leases, loan documents, and any other documentation that is evidence of your respect for the separation of the business entity from yourself.

Once the business document binder is put together, the final step in bringing your entity back into compliance with legal requirements involves preparing for and holding a meeting of the owners and directors (or managers). If your business entity has never had a meeting, or if it has been a while since a meeting was called, the preparation will include drafting several documents to allow the entity to record and approve its past actions and plan for its future actions.

Hiring a Professional to Help: A small business attorney can assist you in all aspects of bringing you business up to date. An experienced small business attorney can do so in an extremely time effective manner. Before you hire an attorney to assist you with your small business, you should always find out how many business entities he or she has brought into existence and how many annual meetings he or she has prepared for and presided over.

If you have any questions, We will be happy to assist you in understanding the need for or preparation of:

• Selecting the appropriate business entity (corporation [including subchapter S corporations under the tax code], LLC, LP, general partnership, and their variants);

• Putting together a comprehensive business entity binder;

• Drafting the various business entity governance documents needed to comply with state and federal law; and

• Presiding over your annual meeting.

Clearwind Attorneys

Title: Planning Considerations After Receiving or Liquidating a Significant Asset

Type/Anticipated Audience: Legal Consumers and Clients

Date: January 22, 2010

The Need For An Estate Plan

If you are reading this, chances are good that you have:

• Received an inheritance;

• Benefited from a severance package;

• Liquidated a significant asset; or

• Have otherwise received a large value from somewhere, whether anticipated or not.

If one of these things has happened or is about to happen to you, now is the time to determine whether your estate plan is comprehensive enough to fully protect you and your family.

Estate Planning

An estate plan means different things to different people. My definition is a plan that allows you to:

DURING LIFE

• Manage and enjoy your assets as completely as possible.

• Transfer assets to the next generation while minimizing transfer tax upon the transfer or at death.

• Meet your charitable or religious contribution goals.

UPON DISABILITY (meaning your inability to make decisions for yourself for a day, week, year, or the rest of your life)

• Have at least one primary and one alternate financial decision maker legally recognized and ready to assist you.

• Have at least one primary and one alternate medical decision maker legally recognized and ready to assist you.

UPON DEATH

• Designate who will receive your assets at your death.

• Specify how those individuals will receive your assets.

• Designate a Guardian for your minor children.

• Minimize any transfer taxes.

• Ideally, replace any value lost to taxes.

Foundational Planning

The foundational part of all estate plans contains either a Last Will or a Revocable Living Trust, as well as a Financial Power of Attorney, a Medical Power of Attorney, and a Living Will. These documents are considered to be the bare minimum for almost all individuals and families.

The combination of these documents allows you to designate how your assets and health will be managed upon your disability. Further, the Last Will or Revocable Living Trust provides for the distribution of your assets upon your death--to the individuals or organizations you choose, and in the manner you decide.

Wealth Transfer

Wealth transfer refers to the ability to move accumulated wealth to other individuals, typically children, utilizing methods that result in a minimum amount of transfer tax.

The use of Family Limited Partnerships (FLPs), Family Limited Liability Companies (FLLCs), and a variety of trusts may be useful in certain situations to pass wealth to successive generations at a discounted cost. However, this area of planning has undergone significant changes in the past few years and an experienced planner is a must to reap the potential benefits of these tools.

Wealth Replacement

Life insurance is used in many estate plans as a wealth replacement device. An Irrevocable Life Insurance Trust (ILIT) may be used to own life insurance to replace the value of an estate that is taxed. Value in such a trust will not be taxed in any estate, and will reach the beneficiaries income tax free. Additionally, the individual who sets up the trust may dictate how the beneficiaries receive their payouts.

Asset Protection

Asset Protection is many things to many people. At its most basic, it is simply segregating investments that could generate liability (such as investment properties) from "safe" investments. This is typically accomplished by establishing one or more entities with limited liability such as a Limited Liability Company (LLC) to hold the assets that have the potential to create liability.

Additionally, many forms of Asset Protection Trusts (in-state, in asset protection jurisdictions such as Alaska, and in Foreign Jurisdictions) can be used to minimize the likelihood of an adverse impact from a future creditor. This type of asset protection planning is typically utilized by those with professions that have the potential to generate significant liability.

Special Needs Planning

Planning for a family member with special needs is often a difficult endeavor for families with significant assets. Many planning techniques are available to ease this responsibility.

Clearwind Attorneys

Title:  Charitable Planning Utilizing Charitable Lead Trusts and Charitable Remainder Trusts

Type/Anticipated Audience: Legal Consumers and Clients

Date: December 30, 2009

Giving to charity using split interest trusts (where the current or "income" beneficiary and the ultimate or "remainder" beneficiary are different, with one of them being a charitable organization) provides significant tax planning opportunities to the donor and the ability for charities to receive larger gifts than may otherwise be possible.

In the typical charitable trust plan, the overall charitable benefit of the trust is reduced to current-year dollars, giving the donor the benefit of the entire charitable tax deduction in one year. These trusts can be designed to be effective during the life of the donor, typically providing income tax benefits, or effective upon the death of the donor, thereby providing estate tax benefits.

THE QUALIFIED CHARITABLE LEAD TRUST: A Charitable Lead Trust is a trust that is set up to provide an annual payment to one or more charitable institutions of either a set amount (an annuity from a Charitable Lead Annuity Trust, or "CLAT") or a set percentage of the trust assets, valued annually (a unitrust interest from a Charitable Lead Unitrust, or "CLUT"). At the end of the trust term (which can be either a set number of years or the life of the donor), the funds in the trust are turned over to one or more noncharitable beneficiaries (often the donor or his or her family).

A qualified CLAT or CLUT is one that is designed so that the future charitable gifts are deemed for tax purposes to be completed at the time the trust is established. Therefore, the donor receives one charitable deduction in the year the trust is established.

If the CLAT or CLUT is established during the life of the donor, the greatest benefit is usually an income tax deduction for the present value of the future charitable contributions.

If the CLAT or CLUT is established through a testamentary document such as a Last Will or Revocable Living Trust, the greatest benefit is usually an estate tax deduction for the present value of the future charitable contributions.

THE NONQUALIFIED CHARITABLE LEAD TRUST: A nonqualified charitable lead trust is similar to the qualified trusts discussed above. However, with the nonqualified charitable lead trust, the trust is designed so that the future charitable deductions are not deemed complete at the time of the establishment of the trust. Therefore, the charitable deductions are not available until distributions are actually made to the charitable beneficiaries (which occurs at least annually).

THE CHARITABLE REMAINDER TRUST: A charitable remainder trust is a split interest trust that provides an annual payment to one or more noncharitable beneficiaries of either a set amount (an annuity from a Charitable Remainder Annuity Trust, or "CRAT") or a set percentage of the trust assets, valued annually (a unitrust interest from a Charitable Remainder Unitrust, or "CRUT"). At the end of the trust term (which can be either a set number of years or the life of the donor), the funds in the trust are distributed to one or more charitable institutions (which were determined when the trust was established).

PLANNING OPPORTUNITIES: Charitable trusts are often used to remove low basis property from an estate. Here in Colorado, estate planners often see real property that has become very valuable in the last generation (typically farm land) but that has a very low basis for tax purposes (because it was purchased by the family or received from previous generations prior to the explosion of real estate values). This land is often contributed to a charitable trust. The property is then sold inside the trust, which is a nontaxable disposition for the donor. The donor receives a charitable tax deduction, removes a valuable asset from the future taxable estate, and typically receives an income distribution annually for life from the proceeds of the sale of the property by the trust.

A charitable lead trust can be used to minimize the tax burden from a large receipt of income, such as a severance benefits. The donor (the recipient of the severance or other benefit) can move the income into a charitable lead trust, generating a charitable income tax deduction and thereby reducing the amount of income tax due in the year of receipt. The donor will then be able to pay the income tax due over the term of the trust.

Additionally,a donor may use an existing Donor Advised Fund (a "DAV") as the charitable beneficiary. In this manner, the donor has the ability to suggest which charities should benefit on an annual basis, instead of determining which charities to benefit at the establishment of the trust.

Clearwind Attorneys

Title:  The Use of Pet Trusts in Estate Planning  

Type/Anticipated Audience: Legal Consumers and Clients

Date: December 17, 2009

THE NEED: Pet Trusts are extremely useful in a number of situations. For most household pets, Pet Trusts are used as "just in case" planning, very similar to naming a guardian in your Will for minor children. For pets with a very long lifespan, such as many types of tropical birds, Pet Trusts may be viewed as a necessity so that pet owners can provide certainty of care for pets which will almost certainly outlive their human companions.

Pet Trusts are also useful to provide continuity of care for pets in the event of the disability of a human companion.

THE CHALLENGE: In general, trusts need certain types of beneficiaries before they will be recognized and upheld by the law. Typically, these types of beneficiaries have been either ascertainable individuals or charities. Therefore, historically, it was difficult to provide for the continuing care of pets after death. Many types of planning involved leaving assets to a trusted friend or family member with the understanding that they would use the assets to care for the pet. Although this method has certainly worked, there have undoubtedly been times when the pets have not been taken care of in the way that their human counterparts would have expected. There have also certainly been times when the pets have not been cared for at all, with the trusted friend or family member using the assets for self-benefit instead of the benefit of the pet. Finally, the most obvious choice of an individual to care for a pet may not be the best choice of an individual to manage the assets placed in the trust.

THE SOLUTION: Several states now have legislation that specifically authorizes the establishment of trusts to benefit pets and other animals.

The Colorado law, reflected in Colorado Revised Statues Section 15-11-901, allows a pet owner to put aside assets and ensure that the assets are used for the benefit of the pet.

PET TRUSTS IN COLORADO: Many Colorado estate planners draft their Pet Trusts to allow pet owners to leave assets for the benefit of their pets as well as to allow the pet owners to designate both a Pet Guardian to manage the care of the pet and a Trustee to manage the assets in the trust and make appropriate distributions to the guardian. Because of this separation of duties, the creator of the Pet Trust can ensure that the best person is selected to care for the pet and the best person is selected to manage the assets funding the trust.

SPECIFICS OF THE COLORADO PET TRUST: Under the Colorado law, Pet Trusts operate in the following manner:

•  Assets can be placed in trust for the benefit of a pet.

•  The trust can be written so that if the pet is pregnant at the time the trust goes into effect, the trust will remain in force to provide care for the offspring of the pet.

•  The trust will remain in effect until there is no living animal covered by it, unless an earlier termination is provided for in the trust itself.

•  The trustee is not allowed to use any portion of the principal or income of the Pet Trust for the trustee's benefit or in any way that is not for the benefit of the animals covered by the trust.

•  The creator of the trust has complete freedom to designate where any assets left in the trust upon its termination should go.

•  The appropriate use of the trust funds can be enforced by a Trust Protector designated in the trust instrument, by any person having custody of an animal for which care is provided by the trust, by any beneficiary designated by the trust creator to receive assets at the termination of the trust, or, if none of the above, by an individual appointed by a court if someone makes an application to the court to review the use of the funds.

•  If there is ever a situation in which a Pet Trust comes into effect but there is no trustee able or willing to serve, a court has the authority to designate a trustee and make other orders and determinations so that the intent of the creator of the pet trust will be carried out.

WHEN TO SET UP A PET TRUST: Pet Trusts can be set up at death, at disability, or immediately upon signing a trust instrument. Pet Trusts are typically set up in a Last Will so that upon the death of the creator of the Will, the Pet Trust is established and funded. However, Pet Trusts can also be established in a Revocable Living Trust so that upon the disability of the creator of the Revocable Living Trust, a Pet Trust will be established to provide for continuity of care of the pet or pets. Additionally, at any other time, any individual can set up a stand-alone Pet Trust to establish a Trustee and fund a trust for the benefit of a pet.