Business Organization Form Choice Memorandum Instructions

For this assignment you will draft a memorandum to your instructor (pretending that your instructor is the lawyer in a law firm where you are working as a paralegal) answering the following questions for your business that you discussed in your Getting Started Exercise:

1. Which state-law business entity form is most appropriate for your business? Use LLC here some info on it:

• LIMITED LIABILITY PROVIDED BY CORPORATIONS

  The main reason real estate brokers choose the corporate form is to limit their personal liability for business debts and lawsuits. In theory, the owners of a corporation—the shareholders—are not personally liable for corporate debts. However, in realty, owners of small corporations are often required to personally guarantee their corporation’s debts, so such limited liability is often more mythical than real.Moreover, the single greatest liability exposure most real estate agents and brokers face is for malpractice—lawsuits by dissatisfied buyers or sellers alleging things like fraud, misrepresentations, negligence, failure to disclose and other violations of the agent’s or broker’s legal and fiduciary duties. Forming a corporation will not protect you against personal liability for your own malpractice or other personal wrongdoing.If your business doesn’t have enough assets to pay a judgment obtained against you, your personal assets can be taken. Thus, your personal assets will always be on the line if you are sued for malpractice. This is why real estate sales professionals should always have errors and omissions insurance.As a rule, a real estate broker is legally responsible for the actions of the real estate agents (salespeople) who work in his or her office. Forming
 a corporation or limited liability company may help limit the extent the broker can be held personally liable for malpractice committed by independent contractor agents or employees as long as the broker wasn’t personally involved in the alleged wrongdoing.Many states require that real estate brokers have malpractice insurance to obtain this limited liability. Other states limit the amount of limited liability incorporating can provide a broker. The rules vary from state to state—you should learn yours to determine if incorporating makes sense to limit your personal liability for others’ malpractice

  Limited Liability Company

  The limited liability company, or LLC, is a unique hybrid: a cross between a partnership and corporation. It provides the flexibility, informality and tax attributes of a partnership and the limited liability of a corporation. For many, this is the best of both worlds, and LLCs have become very popular in recent years. Many real estate professionals have formed LLCs. However, some states—California, for example—bar most real estate brokers from using them.To form an LLC, one or more people must file articles of organization with their state’s business filing office. Although not required, it is highly desirable to adopt a written LLC operating agreement laying out how the LLC will be governed. If you don’t prepare an operating agreement, the default provisions of the state’s LLC Act will apply.In most states, all the owners must be licensed to perform the professional services carried on by the LLC; and ownership cannot be transferred to unlicensed individuals. Thus, all owners of an LLC 
formed to operate a real estate brokerage must be licensed brokers, and no owner may transfer his or her ownership in the LLC to a non-broker.LLCs owned by two or more people are ordinarily taxed the same as partnerships. LLCs with only one owner, are taxed like sole proprietorships.The advantage the LLC provides over partnerships and sole proprietorships is that it provides its owners the same degree of limited liability for business debts and lawsuits as do corporations as described above. However, they are favored over corporations by many small business owners because they are easier to form and operate, requiring less legal formalities.

• 2. Which federal tax regime is most appropriate for you business? Use this: Corporate taxation
• For tax purposes, there are two types of corporations: S corporations and C corporations. S corporations are pass-through entities are taxed similar to partnerships. C corporations are separate taxpaying entities. C corporations must pay income taxes on their net income and file their own tax returns with the IRS. They also have their own income tax rates (which are lower than individual rates at some income levels).Because a C corporation is a separate tax-paying entity, it may provide its employees with tax-free fringe benefits, then deduct the entire cost of the benefits from the corporation’s income as a business expense. No other form of business entity can do this. When you form a corporation, it automatically becomes a C corporation for federal tax purposes. But you have the option of choosing S corporation taxation by filing an election with the IRS.

Much of the materials in the course should be helpful to you in preparing this memorandum.You must compare and contrast the advantages and disadvantages of each of the various state-law business entity forms (at a minimum, this should include the sole proprietorship or partnership, the limited liability company, and the corporation.)You must also compare and contrast the advantages and disadvantages of each of the various federal tax regimes (disregarded entity taxation (Schedule C of the Form 1040 most likely), partnership taxation (Subchapter K of the Internal Revenue Code), s corporation taxation (Subchapter S of the Internal Revenue Code), and c corporation taxation (Subchapter C of the Internal Revenue Code).

The memorandum should be approximately 3,000 words thoroughly answering the questions provided. This assignment cannot be successfully completed in less than the required 3,000 words. If you memorandum is not at least 3,000 words in length, you are missing something and should contact your professor for assistance. Cite two good authorities to support your answers to each of the questions posed for a total of at least four good scholarly, academic sources.

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Heres the business:

Getting Started Exercise Business Memorandum

1. What will be the name of your business you will form?a. The name of the business I will form is Basement Academy.

2. Call the secretary of state in your state or visit its website and check to see whether yourproposed name is available. If you made a phone call, what is the name of the person youspoke with?a. The name Basement Academy is available in California. The secretary of state inCalifornia is Alex Padilla.

3. Will you operate the business under any names other than the name indicated in youranswer to question 1 above? If so, what name?a. No, the name would not be changed.

4. Briefly describe your business and the industry in which it will engage?a. Real Estate property is the focus, and the industry would be catered to residentialhomes.

5. State whether your business will be selling, manufacturing, or purchasing anything. If so,explain.a. The business would rent our properties to residents.b. We do not manufacture any products.

6. State whether your business will be providing any type of service or services. If so,explain.a. Real Estate property is our service providing residents with beautiful properties torent.

7. Other than yourself, how many other person/entities, if any, will have an ownership interestin your business? What percentage of the total business will they own?a. There will be one other person besides myself. It will be a 50-50 investmentbusiness.

8. Who will conduct the day-to-day operations of your business?a. I will conduct the day-to-day operations until I have a solid number of clients. Iwill hire property management help once we have 5 or more properties.

9. How much time per week will you and the other owners (if any) be able to devote to yourbusiness?a. 8 hours a day, 5 days a week. Switching off every other weekend day Saturdays andSundays. Always on call for emergencies.

10. What type of start-up expenses do you think you may incur in starting your business?

a. I would need to eventually have a real estate license and extra training to file therental documents and getting the right forms to do the things I would need to do. Iwould invest about 25-30,000 to start.

11. In what states will your business operate?a. I would like to start my business in California but gradually expand.

12. Where will any needed cash or start-up monies come from (e.g., family, your own funds,bank loans, another owner, etc.)?a. My own savings, group funding and bank loans.

13. Will your business have any employees?a. Yes, I would need extra help with the Real Estate filings and searches

USING THE ANSWERS FROM THE QUESTIONS 1-13.