Good Housekeeping and the Art of Business Entity Maintenance
Tuesday, August 23, 2011 at 4:03PM
Admin in Corporate Law, General Business, LLCs, Litigation, corporate structure, operating agreement

 

by Robert A. Hull

How many times have you heard that you should not mix your business with your pleasure?

Well, here’s yet another reason to separate the existence of your business affairs from your own:Viewtech, Inc. v. United States (9th Cir. 2011). More on that in a moment.

As a Los Angeles business lawyer and estate planning attorney, one of my most common refrains to clients is to ‘respect the formalities’ of your business entity. Like any successful relationship, you must respect boundaries – in this case, by complying with government-mandated formalities. 

That means, among other things, maintaining: 

▪ Adequate Corporate Minutes

▪ State Filings

▪ Clear Separation of Personal & Business Identities:
Online business formation and legal forms services often ignore these, and other aspects of an entity’s ongoing obligations.

If you do not comply with the above, you may face personal liabilities as the result of any business liabilities, defeating the very purpose of having such a business entity. Or, as the recent 9th Circuit Viewtech case indicates, your business might suffer as the result of your personal liabilities.

Here’s what happened:

1. The IRS subpoenaed bank records of an S-Corporation, Viewtech, in the IRS’s search for funds of an assessed taxpayer, Jung Kwak, the primary owner of Viewtech.

2. Viewtech moved to quash the subpoena on the grounds that it had not been given proper notice by the IRS (notice of such a third-party subpoena does not have to be given to the third party if the party was a fiduciary or transferee of the assessed taxpayer, among other exceptions).

3. The Court found on several grounds, that the IRS did not have to give notice to Viewtech. One of those grounds was that Kwak transferred personal funds into Viewtech’s account, and the corporation both paid money into his account, and paid some of his taxes (presumably, there was no contemporaneous promissory note which established separateness between the corporation and its shareholder).

The Court noted that this ground supported the conclusion that Viewtech was Kwak’s fiduciary or transferee, and the IRS could subpoena Viewtech’s bank records in a case relating to Kwak’s tax deficiency without any notice whatsoever to Viewtech.

The IRS Will Treat You the Way You Treat Yourself

It’s important to note that the Court found that Viewtech was also not entitled to notice because Kwak, as a 100 percent and 97 percent shareholder during the relevant periods, was entitled to substantially all of Viewtech’s income, and was a Viewtech employee and officer, and therefore had a sufficient interest in Viewtech.

So, even if separate accounts are maintained, the IRS may be able to subpoena your business entity’s records without notice to your company.

But this is no reason to ignore the formalities. Since Kwak did not maintain a separate business entity and commingled his accounts, he risked his corporation’s financial well-being, in addition to his own. The IRS may be able to seize not only Kwak’s personal assets transferred to the corporation, but also the rest of the corporation’s assets as well.

The IRS can argue that since Kwak did not treat Viewtech as separate from himself, the IRS can do the same.

Practicalities & Precautions in Housekeeping

Federal courts often give the IRS more leeway than they would give to a private party suit against you (for example, allowing the IRS to apply certain tests “non-technically” as indicated by Viewtech Court’s recounting of a prior applicable case).

This means that it is even more important that entity formalities are maintained – they are no guarantee against a successful suit by the IRS, but dollars to doughnuts the IRS will use the slightest entity upkeep irregularity to come after your assets for your corporation’s liabilities and vice versa. Why? Because it can. Don’t give the IRS that ‘in’ – keep your business and personal houses in order. An ounce of maintenance is worth a pound of cleanup.

The Takeaway – “Good Housekeeping” is not just a magazine, but sound advice when conducting your business through an entity such as a corporation or limited liability company.

If you have any questions regarding business formalities for your entities, or any other questions regarding your particular business, please feel free to Michael Hackman: 818.990.2120.

 

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Article originally appeared on Los Angeles Attorneys (http://www.lewitthackman.com/).
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