Atlanta Business Attorney Blog

Most small business owners form what are called “pass-through” entities. Two examples of a “pass-through” entity are S-corporations and Limited Liability Companies. A pass-through entity means that, for tax purposes, the income of the business passes through to the business owners, and the business owners are taxed themselves. Large corporations such as Coca-Cola are generally C-corporations and the corporations are taxed on the profits that are generated, and then taxed again on the money that is passed onto the shareholders.

As a general rule, forming a Georgia corporation or LLC does not provide liability protection to its business owners for tax liabilities. This rule was made clear in the case of Littriello v. United States, 484 F.3d 372 (6th Cir. 2007). In this case, the Plaintiff, Frank Littriello, challenged the validity of the Treasury Department’s “check-the-box” regulations, 26 C.F.R. §§ 301.7701-1 to 301.7701-3. Littriello had incorporated several separate LLC’s, and he was the sole owner of each LLC. The operations of the LLC resulted in unpaid federal employment taxes totaling $1,077,000. Of course, the Internal Revenue Service brought actions against Littriello personally for these unpaid taxes. One of Littriello’s arguments to the Court was that the IRS had disregarded the separate existence of an LLC under state law. In their seven page opinion, the Court discussed the history of the “check-the-box” regulations and the difference between pass-through taxation and corporate taxation. After an extensive analysis, the Court found that the IRS may seek unpaid employment taxes from the sole owner of an LLC.

Despite the existence of LLCS for almost two decades, many Atlanta business owners still have questions about the extent of protection an LLC provides to its owners in contract disputes. Fortunately, Georgia appellate courts are upholding the corporate veil of the LLC. In the case of Milk v. Total Pay and HR Solutions, Inc., 634 S.E.2d 208 (Ga. App. 2006), Joseph Milk formed Burrito Joe’s Holding, LLC (“Burrito Joe’s”) to open a fast food Mexican restaurant in Canton, Georgia. Milk was the sole managing member and Jay McGhee and Frank Struck were to manage the restaurant without compensation with the goal of eventually becoming LLC members if the restaurant was successful. The managers entered into a client-service agreement on behalf of Burrito Joe’s with Total Pay and HR Solutions, Inc. (“Total Pay”). However, the restaurant never operated at a profit and was closed due to mounting financial difficulties. Total Pay brought suit in the trial court against Burrito Joe’s and Milk for damages. Fortunately for Milk, the Court of Appeals noted that LLCs have a legal existence separate from their owners just like any other corporation. As Milk’s signature did not appear on the agreement with Total Pay and no evidence was introduced on the record that Milk ever executed a note personally guaranteeing the payment of payroll services, the Court of Appeals maintained the corporate veil of the LLC in favor of its owner.

In this case, Milk never prepared a written operating agreement, and Total Pay argued that the Milk should be personally liable because he did not have a written operating agreement. The Court, however, reinforced its longstanding corporate law principle and applied it to LLCs, stating that Georgia officers and shareholders are not personally liable for corporate acts until such time that the corporate veil has been successfully pierced. The Court also found that the filing of the Articles of Organization with the Secretary of State were conclusive proof that all conditions of the formation of the LLC had been satisfied. There was no requirement for an operating agreement to be typed up and therefore, the lack of an operating agreement was not a proper basis to pierce the corporate veil.

Recently, we received an official looking letter in an official looking envelope sent to our client, a Georgia corporation. This letter instructed the Georgia corporation to fill out the included annual minutes requirement statement, and return the form along with a check for $125 to the address listed. The only indication that this letter came from a business was small type on the outer envelope, which stated “this is not a government document.” This letter is misleading as Georgia corporations DO NOT need to pay anyone to maintain corporate records, as it is perfectly acceptable for Georgia corporations to keep their own records. One of the only accurate assertions in the letter is that Georgia corporations may need to hold annual meetings and record minutes. For more information on records that should be kept by Georgia corporations, please refer to the Georgia Code or your corporation’s operating agreement.

It is important to note that some Georgia corporations do not need to keep corporate records. In order to avoid recordkeeping, Georgia corporations must identify themselves as statutorily close corporations by claiming the appropriate code section (O.C.G.A. §14-2-902) on the articles of incorporation filed with the Georgia Secretary of State. Corporations that are eligible for this election typically include small, family-owned corporations and ‘mom and pop’ businesses. However, prior to making the election, please contact an experienced Georgia business attorney to ensure that your business qualifies and that you properly make the election.

Most small business owners form what are called “pass-through” entities. Two examples of a “pass-through” entity are S-corporations and Limited Liability Companies. A pass-through entity means that, for tax purposes, the income of the business passes through to the business owners, and the business owners are taxed themselves. Large corporations such as Coke are C-corporations and the corporations are taxed on the profits that are generated, and then taxed again on the money that is passed onto the shareholders.

As a general rule, forming a Georgia corporation or LLC does not provide liability protection to its business owners for tax liabilities. This rule was made clear in the case of Littriello v. United States, 484 F.3d 372 (6th Cir. 2007). In this case, the Plaintiff, Frank Littriello, challenged the validity of the Treasury Department’s “check-the-box” regulations, 26 C.F.R. §§ 301.7701-1 to 301.7701-3. Littriello had incorporated several separate LLC’s, and he was the sole owner of each LLC. The operations of the LLC resulted in unpaid federal employment taxes totaling $1,077,000. Of course, the Internal Revenue Service brought actions against Littriello personally for these unpaid taxes. One of Littriello’s arguments to the Court was that the IRS had disregarded the separate existence of an LLC under state law. In their seven page opinion, the Court discussed the history of the “check-the-box” regulations and the difference between pass-through taxation and corporate taxation. After an extensive analysis, the Court found that the IRS may seek unpaid employment taxes from the sole owner of an LLC.

Despite being around for almost two decades, many Atlanta business owners still have questions about the extent of protection an LLC provides to its owners in contract disputes. Fortunately, Georgia appellate courts are upholding the corporate veil of the LLC. In the case of Milk v. Total Pay and HR Solutions, Inc., 634 S.E.2d 208 (Ga. App. 2006), Joseph Milk formed Burrito Joe’s Holding, LLC (“Burrito Joe’s”) to open a fast food Mexican restaurant in Canton, Georgia. Milk was the sole managing member and Jay McGhee and Frank Struck were to manage the restaurant without compensation with the goal of eventually becoming LLC members if the restaurant was successful. The managers entered into a client-service agreement on behalf of Burrito Joe’s with Total Pay and HR Solutions, Inc. (“Total Pay”). However, the restaurant never operated at a profit and was closed due to mounting financial difficulties. Total Pay brought suit in the trial court against Burrito Joe’s and Milk for damages. Fortunately for Milk, the Court of Appeals noted that LLCs have a legal existence separate from their owners just like any other corporation. As Milk’s signature did not appear on the agreement with Total Pay and no evidence was introduced on the record that Milk ever executed a note personally guaranteeing the payment of payroll services, the Court of Appeals maintained the corporate veil of the LLC in favor of its owner.

In this case, Milk never prepared a written operating agreement, and Total Pay argued that the Milk should be personally liable because he did not have a written operating agreement. The Court, however, reinforced its longstanding corporate law principle and applied it to LLCs, stating that Georgia officers and shareholders are not personally liable for corporate acts until such time that the corporate veil has been successfully pierced. The Court also found that the filing of the Articles of Organization with the Secretary of State were conclusive proof that all conditions of the formation of the LLC had been satisfied. There was no requirement for an operating agreement to be typed up and therefore, the lack of an operating agreement was not a proper basis to pierce the corporate veil.

As a general rule, when a Georgia corporation (which would include a Limited Liability Company) is formed, it becomes a living entity that “exists” separate from its owners. The Georgia Corporate Code allows the corporation’s owners to operate a business under a legal “veil” of protection. That veil can provide certain layers of protection from certain kinds of liability.

There are three broad categories of potential liability: tort, contract, and tax. An example of a “tort liability” would be an employee causing an automobile accident while working for the corporation. Contract liability arises out of a breach of a contract between the corporation and an individual or another business. An example of a tax liability would be the corporation making a sale and it fails to collect the necessary sales tax.

If Georgia business owners take the right steps, they can shield themselves from a variety of liabilities by incorporating their business in Georgia. Incorporating, however, is just the first step. Many business owners fall prey to self-help incorporation services and find themselves in legal trouble later. Competent legal counsel can make sure that business owners do the right things to stay incorporated.

Georgia recognizes certain business entities, such as Limited Liability Corporations (“LLC”), S-Corporations, and C-Corporations, as “legal persons” separate from the individuals who form them. People organize these entities for a variety of reasons, one of which may be to stem their personal liability and protect their individual assets. As business attorneys in Atlanta, one of the most frequent mistakes we see in business cases is the failure of a business owner to properly sign agreements in a corporate capacity. Thus, these unsuspecting small business owners make themselves personally liable for whatever agreement they are entering into thereby defeating the very purpose of setting up the corporation in the first place.

In order to lessen the risk of exposing themselves to personal liability, representatives and agents of such entities in Georgia should ALWAYS sign contracts in a format that includes: (1) the person’s name, (2) the entity he represents, and (3) the person’s title with the company (such as owner, vice president, etc)..

Example that may create personal liability: “John Doe” or “John Doe, President.”

Example that doesn’t appear to create personal liability: “Fulton Corp., by John Doe, CEO” or “DeKalb LLC, by John Doe, Managing Member.”

So before you sign that next vendor agreement or sales contract, pause and make sure all of your efforts in setting up and properly maintaining your corporate immunity veil are complete by taking the very basic action of signing your name properly on all contracts and agreements in such a way it is clear that you are acting on behalf of the company, and not yourself.