Raleigh Estate Planning and Corporate Law Attorneys

You are here: Home / Blog

Why A Will Is A Critical Estate Planning Tool

By

Have you ever asked yourself what will happen to your family and assets after you die? There’s a common misconception that only the wealthy need to prepare a Will. The truth is, almost everyone needs a Will. Just like you took care of your family and estate while you were alive, you can continue doing so even in death through a properly structured Will.

Putting together a Will can be a hassle on your own, and it’s important to have an experienced estate planning attorney on your side to guide you through the intricacies of Will planning. We understand our clients’ needs vary, and that’s why we custom craft your estate plan according to your unique needs.

What Is A Will?

A Will is a legal document where you specify clear guidelines and instructions on how your estate will be managed in the event of your death.

Why A Will Is Important?

1. Peace of mind

While alive, you have to take care of your family and oversee your assets. Unfortunately, this can change in the blink of an eye. Your death can leave your family unprepared if you don’t have a plan. Knowing that you have clearly outlined and explained how your family and estate should be taken care of and managed will give you much-needed peace of mind.

2. To Provide Legal Clarity

There are no restrictions on how long your Will should be. Therefore, you can include as much detailed information as possible. If any of your wishes are unclear or disputed after your death, referring back to the Will can remove any ambiguity. To fulfil your Will, you – the testator – have to name a trustee or executor who oversees the execution of the Will. Additionally, your Will clearly outlines the distribution of your estate.

3. To Avoid Potential Disputes

Dividing your assets after you die comes with its challenges and heightened emotions. Your will clearly defines your assets’ divisions and the direction your family is to take, which can avoid any disputes or misunderstandings.

Frequently Asked Questions

1. I Co-own Property, What Now?

Co-owned property is usually held in joint tenancy with survivorship rights, which means the surviving co-owner will automatically own any assets you jointly owned in the event of your death, and they will not be handled in the probate process.

2. Can I Change My Will?

The law allows you to make amendments as much as you wish. However, the law will only recognize the one in existence at the time of your passing as the relevant and valid one. When editing your will, consider essential and life-changing events such as marriage, divorce, death of a beneficiary or trustee, to mention a few. For peace of mind, it’s a good idea to review your will every two or three years.

3. When Will My Children Receive Their Inheritance?

Any children under the age of 18 cannot receive any assets. A trustee is mandated to manage the children’s inheritance till they reach 18, after which they can receive their share of the estate. However, there are unique situations which can apply that may allow them to directly receive assets before reaching 18.

You can also specify that funds be held in a trust and distributed to your children as they hit certain ages, or other milestones.

4. Should I Include Everything in My Will?

No. Certain assets are better off excluded. Some of them include:

  • Jointly owned assets
  • Assets in a trust
  • Property with already named beneficiaries such as bank accounts and life insurance policies
  • Personal wishes and desires such as funeral arrangements
  • Any gifts such as to your spouse

5. Should I Have Witnesses and a Lawyer Present?

In North Carolina, for an attested written Will, you are required to sign your will in front of at least two witnesses, and they must sign in your presence according to NC General Statute § 31-3.3. There are also less common wills such as handwritten Wills, oral Wills and joint Wills, which each have their own requirements.

Challenges Surrounding A Will

A Will can be challenged in a number of different ways. Some of the most common are:

  • Lack of testamentary/mental capacity
  • Forgery and fraud
  • Disagreements either between beneficiaries or between beneficiaries and the executors
  • Sideways disinheritance
  • The absence of a date, purpose, and signature from the testator
  • Jurisdictional conflicts like when you move to another state that has varied statutes from your previous state.

Such issues commonly arise when a Will is prepared in the absence of legal counsel. To reduce the likelihood of such contention, it’s important to have your Will created by an experienced North Carolina estate planning attorney.

Contact Our North Carolina Estate Planning Attorneys

Preparing is a Will can be challenging, but our estate planning attorneys have the know-how and experience to guide you every step of the way in preparing a Will and planning for the future. When you’re ready to get started with protecting your family’s future, reach out to us to schedule a consultation!

Employee or Independent Contractor: Which Should You Choose for Your Business?

By

As a business grows, so do the tasks and responsibilities necessary to sustain it. It may not be possible for a sole business owner to handle everything on his or her own. He or she must soon delegate certain tasks and responsibilities to someone else by hiring an employee or an independent contractor. Like many important relationships, choosing an employee or independent contractor carries with it financial and legal consequences which the business owner should evaluate before entering into the relationship. 

Employee v. Independent Contractor: What is the difference?

Generally, an employee is someone who works for wages or a salary under the supervision of an employer who provides the training, benefits, and tools for the employee. An independent contractor performs a specified project for a specified price for a client or customer using his or her own training and tools, without the supervision of the client or customer and generally does not receive additional benefits. 

Sometimes, the distinction is not clear. To help provide clarity, the courts and government agencies, like the IRS, focus on the level of control over the employee and the relationship between the parties. For example, if the business owner exhibits significant behavior and financial control over the person providing the services, the person providing the services will likely be considered an employee for tax and other legal purposes. 

Control Over The Work

Behavior control involves directing and controlling the work. This includes providing instructions and supervision over how, when, and where to do the work. The more direction and control the business owner has over these factors the more likely the worker is an employee, not an independent contractor. 

Financial Control

Financial control involves the business aspect of the work, not just the mechanics of how the work is performed. An independent contractor has more of a significant investment in the work, is usually responsible for his or her own expenses, and realizes a profit or loss from the work, instead of receiving a salary or hourly wage.

Consider the checker at the local grocery store versus the handyman hired to fix a kitchen cabinet door. The handyman likely bought the tools to do the job, paid for the ad in the local newspaper or the internet, will realize the profit or loss from the job, and will have to remit the taxes on the amount received. The checker, on the other hand, likely did not invest in the equipment or training used to do the job and will receive a wage after the employer deducts the taxes. The amount of revenue the grocery store generated during the pay period will not impact the amount the checker receives. 

Relationship Between the Parties

How the parties view their relationship is another factor to determine what kind of relationship exists. For example, does the worker view the recipient of the services as an employer or a client? Does the business provide benefits to the worker, such as paid leave and health insurance? A written contact may help clarify the parties’ understanding of the relationship but may not be dispositive if the other factors described above portray a different kind of relationship. 

Why does it matter?

The distinction between an employee and an independent contractor carries important legal and financial responsibilities for the parties. For example, an employer is responsible for paying payroll taxes, workers’ compensation insurance, must pay the worker overtime if the worker works more than a certain amount, and may be responsible for providing certain benefits.

An independent contractor obtains his or her own insurance and is responsible for remitting his or her taxes, instead of having them deducted from the payment received from the recipient of the services. An independent contractor also does not get paid more if he or she ends up working more to complete the task unless the parties have agreed to it. 

Which should you choose?

The answer to this question depends on the size of your business and the type of services you need. You may want to hire an employee if the person will be part of the ongoing operations of the business, the work is indispensable to the business, and your business is large enough to shoulder the regulatory and tax burdens associated with an employment relationship. On the other hand, it is better to hire an independent contractor if you only need periodic help with a project involving a specialized skill. 

To illustrate this, let’s take a look at Tim, a former mechanical engineer who opened a florist shop called Dogwood Bloom, LLC in Asheville, North Carolina. During the first few months of the business, Tim handled everything himself – selecting the flowers, creating the arrangements, and handling the sales. However, now that business is growing, he needs help running the store and making deliveries. In this scenario, Tim would probably hire an employee because the skillset, (creating the arrangements, cleaning the store, making deliveries, and processing sales), will be part of the ongoing business operations. Tim will train the worker, supervise him or her, provide the equipment for the job, and pay the person a wage. The person will also have a set schedule at the florist shop. 

Now that Tim has hired an employee, he has time to strategize on how to grow the business. He realizes his weekly ad in the newspaper and word-of-mouth are not sufficient to attract new customers. He decides to hire a digital marketer to create exposure on the internet through social media and search engine optimization. Tim pays the digital marketer a set rate to generate ten social media posts a week and an additional fee to revamp Tim’s website. Tim does not provide the equipment for the digital marketer or any training or supervision. The digital marketer simply delivers the agreed-upon content at an agreed-upon date. In this scenario, the digital marketer would be an independent contractor. 

Consult An Experienced Business Law Attorney

The line between an employee and an independent contractor can be blurry sometimes. One of our experienced employment law attorneys at Wilson Ratledge can bring clarity and assist you with structuring the relationship in a legal way to help foster the long-term success and growth of your business. Call us today at 919-787-7711 or fill out our online contact form to schedule a consultation!

Bankruptcy vs. Debt Relief: Which is the Better Way Out?

By

Debt can be mildly stressful at best, and absolutely crippling at worst. And unfortunately, after the coronavirus pandemic rocked the world – and the American economy – throughout the past year, thousands of Americans found themselves knee-deep in seemingly insurmountable financial troubles.

After a year or more of watching your balances increase and interest accumulate on your loans, you may be desperate for an easy way out. There are options – but for many Americans, the solutions often feel scarier than the debt itself. Words like “debt relief” and “bankruptcy” can dredge up a whirlwind of emotions and preconceived opinions, and for good reason. There is no one-size-fits-all, easy solution to debt (short of suddenly winning the lottery or inheriting enough cash to simply pay the balance in full). Debtors would do well to acknowledge this.

Nonetheless, two of the most popular options for escaping debt – a debt relief program and bankruptcy – have their benefits, so long as they are kept in their proper place. Bankruptcy is an extreme, last-resort option that can get you out of debt, but also leave a lasting mark on your credit. On the other hand, debt relief programs provide a less extreme recourse, but can often be costly and pose obstacles for some consumers – especially those with poor credit.

If you are considering bankruptcy or debt relief as a solution to your financial issues, reach out to a financial advisor or attorney to help you do your due diligence. Regardless of your situation, it’s vital to understand both the short and long-term impacts of your choices. To help, here is a brief list of the top pros and cons of each option: bankruptcy and debt relief. Please note, however, that this does not supplant the tailored, personalized advice of an experienced attorney or financial advisor. 

Bankruptcy Impacts Your Credit for up to Ten Years

While bankruptcy may seem like an easy way out, keep in mind that a consumer bankruptcy filing under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code is a matter of public record. This means that the credit agencies can and will find out about it. This can severely impact your credit score.

Your score will tank as soon as your debts are discharged through a bankruptcy filing. This is because your debts will be reported to the credit bureaus as not satisfied, or not paid in full. These notes can stay on your report for seven to ten years, depending on the specifics of your bankruptcy filing, and they can impact your employment prospects to your ability to obtain a loan in the future.

Bankruptcy Can Eliminate or Reduce Your Debt Payments

At its most basic level, bankruptcy is essentially debt forgiveness wrapped up in a formal legal process. If you prevail in your bankruptcy hearing, the court may discharge your debts, with some exceptions (like student loan payments and back taxes). In a Chapter 13 bankruptcy, you can apply for debt consolidation and a feasible repayment plan. Both of these options can give you a clean slate and an opportunity to start fresh.

Both Bankruptcy and Debt Relief Can Cost You

Nothing is truly free, and debt relief is no exception. Bankruptcy filings involve steep court fees and, of course, attorneys’ fees, which may not be recoverable. And debt relief programs frequently charge an upfront cost for their services. Many will apply a fee equal to a percentage of your debt amount, while others may simply charge a standard fee. In some cases, working with a debt relief agency may end up costing you more than you would have paid by simply paying off your creditors: this may happen in cases where you still need to pursue a bankruptcy filing or other legal action even after working with a debt relief agency.

Debt Relief Can Make Your Payments Less Burdensome

Through avenues like debt consolidation, a debt relief agency can help you consolidate and streamline your monthly payments so they are less of a hassle. For example, with debt consolidation, you can roll your debts into a single amount owed, with a new, negotiated interest amount and repayment timeline, and make one single payment instead of multiple payments to different creditors. Many debtors find this option far less stressful than simply managing their payments separately.

Bankruptcy Involves Litigation, but Debt Relief Clients Can End up in Court Too

While bankruptcy inevitably involves the legal process, clients who enroll in debt relief programs are not guaranteed a simple, straightforward solution. For example, debt relief counselors will only negotiate with your creditors once your accounts become delinquent. Nonetheless, some creditors will move swiftly in turning your account over to a collections agency even before your agent can contact your creditors. Collections companies tend to be far less forgiving than original creditors in negotiating down an amount owed, offering repayment extensions, or otherwise cooperating with debtors, and so these cases can often end up in small claims or district court (depending on the amount owed).

Bankruptcy Offers A Clean Slate

Though not a panacea, bankruptcy is known for providing debtors a fresh start by discharging their debts. If you are a candidate for either a Chapter 7 or Chapter 13 filing, speak with an experienced North Carolina corporate bankruptcy attorney to learn more about your options.

In Every Case, Do Your Due Diligence. 

Ultimately, neither debt relief nor bankruptcy may help you get out of debt. Perhaps for you, the best option is to simply press on and pay down your balances. If you are struggling with debt in your business, reach out to one of our experienced business and tax attorneys to learn which option, if either, is best for you.

What Is an Automatic Stay and How Does It Work?

By

The ongoing coronavirus pandemic has had a devastating financial impact on many individuals and businesses. Due to unforeseen job losses, medical bills, and the general downturn in the global economy, many individuals and businesses were forced to file for bankruptcy. As such, this article explores a key component of bankruptcy – the automatic stay and how it impacts debtors and creditors. 

What is the automatic stay?

Bankruptcy is a process in which a debtor struggling massively to pay off delinquent accounts seeks protection through the formal legal process. In the typical bankruptcy case, the debts are compared with available assets, and the court approves a plan to repay a portion of the debts with the assets and discharges or forgives the remaining debts by “discharging” them. 

The automatic stay is a court-ordered injunction or pause on collection actions, including litigation, against the debtor. It is automatic because it becomes effective immediately when the debtor files the bankruptcy petition. The automatic stay provides the debtor some breathing room to organize its financial affairs and prevents a race to the courthouse by the creditors to collect against the debtor while there are still available funds. By pausing enforcement actions against the debtor, the debtor, with the help of the trustee and approval of the court, has time to develop a plan for repayment of its debts, if possible. 

How long does the automatic stay last?

The automatic stay lasts for the entirety of the case until the debts are discharged. Once the case is over and the debts are discharged, a creditor can resume collection actions on debts not discharged during the bankruptcy. However, a creditor is prohibited from ever attempting to collect discharged debts. 

To prevent abuse of the bankruptcy process, the automatic stay does not last as long for repeat filers. If the debtor had a bankruptcy case pending in the previous year, the stay terminates after 30 days, unless the debtor or someone else involved in the case, like the trustee, asks the court to continue the stay by proving the debtor initiated the current case in good faith. If a debtor has filed three or more bankruptcies within a one-year period, the debtor is likely abusing the process, and the stay will not take effect.

Are there exceptions to the automatic stay?

Congress has decided some actions are so important that the automatic stay does not apply to them. The most common of these enforcement actions include the following:

●      lawsuits to establish paternity or to collect child support or alimony; 

●      criminal proceedings;

●      repayment of loans from certain pensions;

●      evictions by a landlord when the lease has been terminated prior to the bankruptcy filing; and

●      actions by taxing authorities to conduct tax audits, issue deficiency notices, demand tax returns, and make tax assessments. However, attempts to collect the deficient taxes like issuing a tax lien or seizing the property are stayed. 

A creditor can also request relief from the automatic stay, even if the situation is different from the scenarios described above. A creditor does this by filing a motion for relief from the automatic stay, also called a motion to lift the stay. To do so, the creditor must convince the court that there is “cause, including the lack of adequate protection of an interest in property of such party in interest,” that would justify the court removing the protection of the automatic stay from the specific enforcement action involving the creditor. In other words, the court must determine if keeping the automatic stay in place will unfairly prejudice the creditor and provide no financial benefit or harm to the other creditors. Given the broad standard for relief from the automatic stay, a court has wide discretion in making this determination.

If a creditor files a motion for relief from the automatic stay, the debtor or other creditors may oppose the motion, arguing there is no good cause to remove the collection action from the protection of the automatic stay. The court will hold a hearing on the motion, and, if successful, the creditor can continue to pursue the collection action in a different forum like state court. 

How does the automatic stay impact a civil litigation case?

The answer depends on who filed bankruptcy. If a defendant in the case filed bankruptcy, the civil litigation case is stayed, and the plaintiff must wait for resolution of the bankruptcy case before continuing the civil litigation case against the defendant. A defendant usually notifies the court and other parties by filing a notice of automatic stay or similar document. If the potential debt at issue in the civil litigation is discharged in the bankruptcy case, the case against the defendant would not continue even after the bankruptcy is over. 

If there are multiple defendants, the automatic stay generally applies only to the debtor defendant, not the other defendants. However, the entire case could be stayed if the proceeding against the other defendants would impact the bankruptcy estate. 

In certain situations, it may be possible for the bankruptcy court to lift the stay to allow the civil litigation case to continue. For example, in a case where the plaintiff’s claim is covered by insurance, the plaintiff may want to seek relief from the automatic stay if the defendant files bankruptcy. The insurance payment would not be considered part of the bankruptcy estate to be divided among potential creditors, and the plaintiff would be prejudiced by being prevented from seeking recovery of the insurance proceeds.

If the debtor is a plaintiff in a civil litigation case, the automatic stay would likely not impact the case. The automatic stay prevents collection actions directed against the debtor. The bankruptcy trustee would likely be motivated to continue the case to obtain more money for the bankruptcy estate to be split among the applicable creditors. 

What happens if a creditor violates the automatic stay?

Given the policy reasons for the automatic stay, violations of the stay are not taken lightly by the bankruptcy court. Collection actions in violation of the automatic stay are unenforceable, and, depending on the case, a creditor could be required to pay the debtor punitive damages, compensatory damages, and attorney’s fees. 

As seen above, the interplay between bankruptcy and civil litigation can be challenging to navigate. One of our experienced tax and business attorneys will be able to advise you on the impact of bankruptcy on your case and the next steps to avoid violating the automatic stay. 

Where Should You Form Your New Business?

By

Starting a new business is an exciting and stressful endeavor. While a new business owner visualizes boundless opportunities, he or she also confronts a seemingly endless list of decisions to make and tasks to do – product designs, marketing strategies, financing, office location, insurance, and more.

To reduce the risk of personal liability, a business owner may want to form a limited liability company, limited partnership, or corporation. Deciding how to form your business is a critical inquiry, but few business owners take time to consider another key question: where to form it. While it may seem trivial, the impact is real: choosing the right state to form your business entity can save you substantial administrative burdens, money, and time. Not to mention, it can reap tremendous rewards from a taxation standpoint.

Delaware or Bust?

The Advantages of Forming a Business in Delaware

For various reasons, many business owners choose to form their entities under Delaware State law, even if they live (and run the business) in a different state. Delaware is viewed as a business-friendly state with a well-developed body of corporate law, making it attractive to investors. Specifically, its Court of Chancery is a respected, specialized court that focuses solely on business issues. Delaware’s Secretary of State’s Office prides itself on its service and how easy it is to file formation documents on its website. Delaware also provides certain privacy protections not found in other states. Most notably, Delaware does not require an LLC to list its members or managers in its formation document or require annual filings by the LLC. The filing fees may be but are not always, less than other states. 

As such, it’s not hard to see why Delaware is the leading state for publicly-traded corporations listed on U.S. stock exchanges. It is also the leading state for out-of-state incorporations, where a business based in a different state incorporates in Delaware. Nonetheless, a Delaware formation presents some challenges, especially if the business owner lives and works in another state. 

Drawbacks of Forming a Business in Delaware

At the outset, filing fees can be more expensive in Delaware than in other states: Delaware charges $90.00 to form an LLC, and while it does not require annual reports from LLCs every year, it charges an annual tax of $300. Other states charge far less. For example, Mississippi only charges $50 to form an LLC and $25 to file an annual report.

The filing fees are a small matter, however, compared to some of the other potential drawbacks. Administratively, a non-resident entity formed in Delaware faces double fees and paperwork. Specifically, when a non-resident business owner forms in Delaware, he or she must register the business as a foreign entity in the owner’s home state, then register an agent for service of process (someone to accept service of a complaint in a lawsuit), in both states. This can cause substantial logistical hurdles and present potential legal pitfalls.

Further, while Delaware is a business-friendly state, a company that forms there agrees to submit to Delaware law, even regarding its internal operations and affairs. For instance, Delaware law would apply to disputes between shareholders and directors. However, Delaware law would likely not apply to disputes between employees and/or outside actors, especially if the company conducts business outside of Delaware. 

A Practical Example

To illustrate, consider the example of Tim, a former mechanical engineer who opens a florist shop in North Carolina. 

Tim wants to protect himself from personal liability, so he decides to form an LLC called “Dogwood Bloom, LLC.” His friend tells him all the biggest businesses in the U.S. are formed in Delaware, so Tim decides to file his Certificate of Formation online with the Delaware Secretary of State’s Office. He pays $50 to a registered agent in Delaware to accept service. Tim is impressed with how easy it is to form his LLC, and he thinks the $90 filing fee and $50 service of process payment are a small price to pay for the protection an LLC affords. 

However, since Dogwood Bloom is based in North Carolina and conducts business there, Tim must also:

  • Pay $250 to apply for a Certificate of Authority with the North Carolina Secretary of State (the application must contain the business name, the state of formation, the period of duration, the principal office, the officers, and the name and address of a registered agent located in North Carolina);
  • Hire a registered agent for service of process in North Carolina;
  • File an annual report in North Carolina for Dogwood Bloom and pay $200 for the annual report fee; and
  • Pay $300 in annual taxes to the State of Delaware.

Tim would have saved himself significant administrative headaches by forming his LLC in North Carolina, where he lives and conducts 100% of his business. Tim is not planning on seeking millions in initial funding from angel investors throughout the U.S., and he is likely not going to be sued by shareholders for breaching a fiduciary duty he owed to the shareholders based on his position as an officer in the company. As such, there are few practical advantages to forming his entity in Delaware. 

Final Thoughts

For small business owners like Tim, it is wise to form where you live and operate. The advantages of forming a business in Delaware will likely not outweigh the increased fees and administrative headache of forming in Delaware but operating elsewhere. Of course, this may change as the business scales. In this case, it’s advisable to reach out to one of our business formation attorneys to discuss your options. 

What Is A “S Corporation”?

By

Selecting an entity type for your new business venture can feel overwhelming. From an LLC to a C-Corporation or S-Corporation, the options all present their share of pros and cons, risks and benefits. 

One entity type that has risen in popularity among small and medium-sized businesses is the S-Corporation – a twist on the traditional C-Corporation. S-corporations are entities that pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes.

The shareholders within an S-Corporation report their income and losses on their individual tax returns and are assessed tax at their separate rates. This enables S-corporations to avoid double taxation, to which typical corporations are subject.

As such, many business owners choose S-Corporations over C-Corporations for these massive tax savings. Many start as an LLC, then reorganize as an S-Corporation to gain some additional administrative and tax benefits. 

Here, we will break down some of the specifics of the S-Corporation: what it is, how to qualify, and some pros and cons.

How Do You Qualify as an S-Corporation?

According to the IRS, to qualify for S corporation status, an organization must meet the following requirements:

  • It must be a domestic corporation.
  • It must have only allowable shareholders, which:
    • Can be individuals, certain trusts, and estates, and
    • May not be partnerships, corporations, or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

To become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation, which is available on the IRS website. This document must be signed by all the organization’s shareholders. 

In North Carolina, S-Corporations are taxed under Subchapter S in the Internal Revenue Code.

North Carolina S-Corporations 

An S-Corporation is considered separate from the organization’s owners and stockholders. Under North Carolina law, there is no organizational or administrative difference between an S-Corporation and a C-Corporation. An S-Corporation is simply a designation for tax purposes. Those seeking limited liability and a more formal corporate structure can benefit from organizing as an S-Corporation. 

A few practical differences apply:

  • A C-Corporation must declare profits and losses and pays taxes on profits. Shareholders also pay income tax on what the corporation pays them. This is known as “double taxation.”
  • An S-Corporation files a K-1 tax return but doesn’t pay income tax. Shareholders declare their share of the profits on their individual tax returns.

However, there are also several administrative similarities:

  • Both types of entities require filing of articles of incorporation or a certification of incorporation.
  • Shareholders comprise and are owners of both types of corporations, and are charged with making all management decisions.
  • The organizations provide liability protection for their shareholders.

S-Corporation Designation Pros and Cons

Before you decide how to organize your business, it is vital to consult an experienced attorney who can help you determine which designation is best for your purposes. However, in general, there are a few pros and cons to the S-Corporation designation.

Pros:

  • The corporation is an entity separate from its shareholders, so it will continue beyond the incapacity or death of one or more of the shareholders.
  • The setup makes it simple to issue fractional stock ownership shares.
  • The purchase, sale, and gifting of stock make it possible to transfer ownership without disturbing the entity’s ability to conduct business. 
  • The requirement to separate the corporation’s finances and records from its stockholders’ reduces the risk of unrecognized equity distributions.
  • With a few exceptions, the organization pays no income taxes, and corporate profit and loss are not passed to the shareholders.
  • It is simple to run an S-Corporation from an administrative and tax perspective.
  • Annual stockholder meetings open the door for continued communication and collaboration internally.
  • S-Corporations tend to have good access to credit and loans.
  • Earnings are not subject to self-employment tax so long as stockholders receive adequate compensation for their business management efforts.

Cons:

  • Lenders may require personal guarantees from officers to give credit (this then erodes the liability shield).
  • Conflicts among stockholders could stunt progress and growth.
  • Restrictions on the sale of stock may prevent minority stockholders from recovering a return on their investment.
  • Stock ownership can be divided among many different parties who are not as active in managing the business’ day-to-day affairs.
  • Corporation-paid stockholder benefits may become too costly.
  • Employee benefits are taxable income to stockholder employees with two percent or more stock ownership. 
  • If the corporation owns appreciated assets and it is subsequently dissolved, it will pay substantial taxes on the appreciation amount.

Contact Our Experienced Business Law Attorneys.

If you find yourself in need of advice on how to organize your business, our attorneys are experienced in helping founders organize as S-Corporations and are here to help. 

At Wilson Ratledge, we assist businesses in taking steps to keep them financially secure, while protecting them from legal pitfalls. For assistance growing your business or navigating a deal, contact one of our experienced North Carolina business attorneys today at 919-787-7711 or via our contact form below.