Taking over a dormant LLC
Forming your own new entity is a better idea, the experts say.
Thomas
Dear FSB: I am looking to form an LLC on a new business with a group of partners. The S-Corp. is less expensive and less complicated and has deductions on personal taxes, but I was informed that an S-Corp must have all the corporate officers drawing a salary – and this is not applicable for a startup company. So, I recently found a colleague that has a dormant LLC that has never been used (he formed it and let it sit dormant because his business partners split up.) I am considering buying it for a greatly reduced price so he could recoup some of his costs, but wonder whether there are potential liabilities to be concerned about – even for a dormant NYC LLC. Am I correct in assuming that there could be potential hazards and liabilities involved – even if my colleague (who owns the dormant LLC) assures me it’s been sitting idle since inception?
By Lenora Chu, Fortune Small Business contributor
Dear Thomas: On the whole, the experts recommend forming a new LLC rather than acquiring a dormant one.
Why? For starters, it’s possible that even an inactive LLC might have incurred tax or other liabilities that are unknown, despite the assurances of your colleague.
“My reluctance would increase with the amount of time the LLC has been dormant,” says attorney and partner Edward T. Savage of the international law firm Reed Smith, LLP.
For example, some states impose a type of franchise tax payable on an annual basis simply to keep an entity in good standing with the state, according to Washington, D.C.-based attorney Bob Reif of Epstein, Becker & Green.
If the LLC in question did not pay these fees, the state could revoke its charter, in which case there would be costs to “re-start” the LLC, Reif says.
Realize also that any cost savings you anticipate by acquiring a dormant LLC – rather than forming a new one – may be immaterial, Savage says.
The “publication costs” associated with forming an LLC can be as little as $225 in some counties, or as much as $2,000 in New York State.
Even if your colleague gives you the dormant LLC free of charge, the amount you might save by taking this route is at most the publication cost.
“I would question whether such savings justify the potential risks of liabilities that might be inherited,” Savage says.
Savage adds that he generally favors the use of S-Corporations over LLCs because S-Corporations are less complicated and are subject to a well-established framework.
The legal fees needed to prepare a limited liability company agreement for the LLC may also be substantial, and you’re also more likely to incur additional legal costs when new investors join.
Consider using an LLC in those circumstances where you’ll need a tiered capitalization structure, or varying types of equity to provide different measures of return to investors, Savage says. Indeed, as Reif says, an LLC is often more flexible than an S-Corporation because the principals have greater opportunity to address unique economic arrangements for sharing profits and losses.
Furthermore, other entities, such as corporations, can also be owners of the LLC, yet with a few exceptions only individuals can be owners of the stock of an S-Corporation.
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Taking over a Dormant LLC. I agree with the comments made by Lenora Chu, but would add a few comments.
1. LLC is an approved state entity regulated by statue and responsibility assigned to a state agency. You can find most of the information you are seeking on the responsible agencies web site, and using the search engine to search for legal entities on file.
2. The fees charged vary by state. Arizona cost to form an LLC is $50 or $85 if you want to expedite the request. Paying the $35 will get the LLC or Corporation approved within 3-4 days.
3. Publication cost is approximately $50-$60.
As you can see, in Arizona the costs to form an LLC are reasonable. All that is required are Articles of Organization, Operating Agreement (recommend using the service of an attorney), and publishing the Articles. Again, in Arizona costs would not be a major consideration.
4. I would say all states make available all filing requirements, forms, costs, etc on the state agency that is responsible for corporations. In AZ the AZ Corporation Commission has that responsibility, but I formed an LLC in Georgia and the responsibility is vested with the Department of Commerce (if not mistaken). Point do your research and find out the law and rules for your particular state.
5. You need to quiry the Corporation web site and you will find all actions submitted under the LLC. Articles, publication, termination, member(s), amendments, statutory agent, and more.
Having this knowledge will allow you to find out the liabilities to the agency responsible for Corporations. To be on the safe side if after getting the above information, e-mail or go to FAQ’s to find out information on fees or e-mail the agency.
If the entity was dormant since formed, I would look into the publication rules/law. In AZ you form and publish within 60 days. If you do not publish, the status will be, “Not In Good Standing”. If you submitted indicating perpetual and not disolution within x number of days, the status will remain Not In Good Standing” or due to 60 day publication not complied with, they will send a letter of desolution. I would check, the LLC might already be dissolved. Again, quiry for LLC name and find out status and rules for LLC at your state.
Other things to consider:
– Was an EIN assigned to the LLC?
– Was LLC for as a single member?
– Type of business the LLC is used for and the purpose it was formed. This information can be found on the Operating Agreement.
– Was the entity used to register for any business startup state requirement. State, city and county Sales tax license(s), Health department, Des, County Assessor, Depart of Liquor Licensing, etc.
I agree that the best course of action would be to form a new LLC.
Other factors to consider, type of business, length of time since formation of entity, agencies involved during a business startup and the above information I mentioned.
maybe hiring an escrow officer or a service provider especializing in UCC and liabilities research is cheaper than both Amending the dormant LLC and forming a new LLC.
In closing, filling out the form used for Articles of Organization is a simple task, but their is much more to know about LLC’s laws and rules of the State, so highly recommend you seek legal counsel.
Good Luck