E-signing technology is becoming more and more prevalent, and there is no denying the convenience.  Affixing your signature with a simple tap on your phone screen is a beautiful thing.  After all, the alternative is to print the document, sign it, scan, and then email the scanned copy.  Sometimes you have to go find witnesses, and, if notarization is required . . . well, now you really got yourself a project.

So, naturally, we would all prefer to e-sign documents.  However, the convenience may not be worth it if e-signatures are not enforceable.

Legal Analysis

The legal analysis here is actually the easy part.  The Electronic Signatures in Global and National Commerce Action (ESIGN) has been in place at the federal level for over 20 years.  The same is true for the Uniform Electronic Transactions Act (UETA), which has been adopted at the state level by all but two States.  Simply put, the legislation says:

A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

So, from a legal point of view, an electronic signature has exactly the same validity as a handwritten signature.

Practical Application

Here, the analysis gets a bit more interesting.  After all, the goal is to bind people to the rights and obligations in the agreements they sign.  What we really care about is enforceability.

Is it easier for someone to weasel out of a contract with e-signing than it would be with a handwritten signature?  The answer to that question turns on how easily the person can say: “Hey, that’s not my signature.”

In the end, what a judge wants to know is whether or not the parties intended to be bound by the agreement.  Assume for a moment some people might be willing to lie in order to get out of a contract.  Shocking, I know, but it could happen.  So, now, you have to prove that the person actually meant to sign the contract.  How can you do that?

The traditional method of having witnesses and/or notarization is a pretty iron-clad way of proving that someone voluntarily signed a document.  These methods of «acknowledgement» are still very good evidence nowadays, but they are not as undeniable as they once were.

The reason is that, with software available today, it is not particularly difficult to take a picture of someone’s actual signature and affix it to another document. 

Someone looking to commit fraud could use PDF and/or JPEG manipulation software to fake signatures of both the signer and the witnesses.  The same is true for notarization.  All one would really need is a picture of the notary’s stamp.  With that, and maybe a little old-fashioned forgery, a fraudster could put together a document that appears to have been signed, witnessed and notarized.

So, the traditional methods are still good, but they are no longer airtight.  In fact, they never have been (e.g. Catch Me If You Can).  If someone wants to fake a document, they can.

If signatures can be faked, then the person you are trying to hold to a contract can say: “That does look like my signature, but I didn’t sign the contract.”  So, now what do you do?

Modern Solution

Since there is no way to ever know with 100% certainty that a signature is authentic — even with witnesses and notarization — should we not take advantage of the convenience we get through e-signing?

On top of the convenience, in some important ways, e-signatures can be even more secure than handwritten signatures. 

For one thing, the e-sign apps generate a Certificate of Authenticity showing when and where the electronic signature was affixed.  That is certainly not proof positive, but it might be just about as good as notarization.

Now, I know what you are thinking.

E-sign apps depend solely upon email addresses, so it might be very easy for a person to get out of a contract by just saying “Someone hacked my email” or “Another person who has access to my email account signed, but I didn’t authorize that.”

Best Evidence

That brings us to the crux of this article.  What if, in addition to the other party’s e-signature, you also have an email thread showing discussions leading up to execution of the document?  How is the other party going to wriggle out of that evidence?

Even if you only have a single confirmation email saying something like “I received the document you e-signed earlier today,” any judge would find that to be very compelling evidence.

As long as the other side does not respond to your email with something like: “What are talking about?  I didn’t sign anything,» then those written communications are likely to be very hard to overcome.  In most cases, you will have a fairly extensive thread of communications, both before and after electronic execution, so you should be in very good shape if you later have to enforce the contract.

Conclusion

So, when you get down to the actual purpose of a signature, which is to demonstrate a person willingly entered into an agreement, today’s e-signing apps are not only amazingly convenient and environment-friendly, but they also tend to authenticate signatures more effectively than the traditional methods.

Of course, there are many agencies that have not caught up with the times.  For example, we still have to submit immigration documents, loan documents, and others with wet ink originals.  But, it is clear e-signing technology is the future, and we are all be better off for it.

     ~ Jeff Harrington, Esq.

It is true the American legal system is set up to shield owners/officers from corporate liabilities, but nothing draws public outcry like an executive who fills his pockets through misdeeds and then hides behind the corporate skirt.  

It is the perception of corrupt business practices with no punishment that leads judges and legislators to weaken corporate protections and put officer heads on the chopping block.

So, in this climate of suspicion, what can a business owner do to limit liability for company activities? in this section, we will focus first on what not to do.

I. Shell Companies

By «shell company,» we mean a company that is set up for specific business transactions but which has no significant assets.  In Florida, where our firm is headquartered, it is extremely cheap and simply to set up a new company.  That is intended to encourage entrepreneurship, which is a good thing.  What is sometimes not a good thing is the ease of setting up a new company also lends itself to creating «throw away» companies.

So, if an unscrupulous person wants to rip people off, he or she can open a company, do bad things and then abandon the company.  And repeat . . .

Judges are wise to this tactic.  If your company is accused of misconduct, a judge will be curious to see how vested you are in the company.  Was the company properly capitalized at the start, or was it run on a shoestring?  There is nothing wrong with running a company on a tight budget, but you do not want it to seem like you were never serious about building a viable business.

Consider other countries around the world, such as European countries, where it is not nearly so quick and easy to start a new company. In fact, the process is rather involved and requires significant capitalization upfront.  This tends to have a chilling effect on startups and, perhaps, reduces the likelihood of abuse.

Of course, many small businesses will be started with minimal capital and grow organically. There is nothing wrong with that. It is one of the things that makes the United States an attractive destination for the entrepreneurial-minded.

If you are starting your company on a small budget, then consider purchasing an insurance policy (such as an «errors and omissions» policy).  Judges tend to view that as a good-faith attempt to be a responsible business owner.

II. Alter Ego

Another important consideration is whether the business owner treats the company as a separate entity, rather than just an extension of himself.  As a small business owner, it is easy to form bad habits — such as using the company card to pay personal expenses, commingling company funds with personal funds, using your personal card to pay company expenses, making company decisions with no semblance of corporate process, etc.  These are very common practices, which Florida courts tend to view as reducing the company to a mere «alter ego.»

Many small business owners think: «What difference does it make? It’s all my money, anyway.»

Of course, there is some truth to that. That is why in business litigation we refer to the «corporate fiction.»  After all, it is a fiction . . . one that you should foster, not disregard.

Think about it this way. If your company gets itself into a situation where it cannot pay its bills or is being sued, then you are going to want to separate yourself from the company’s creditors as fully as possible.  If someone gets a judgment against the company, you do not want him coming after your personal property, your personal bank account, etc.

Should that situation come up, your argument will be «Hey, that is the company’s debt, not mine.»  By and large, that is a good argument, and the courts will support it.  However, you can’t really have it both ways.  If you want the judge to treat your company as a separate entity that is responsible for its own obligations, then you need to have treated the company that wayall along.

More on Business Law

To protect against corporate liability, you want to avoid weakening the corporate fiction. So, you do not want to give the impression that you were planning to «tank the company» all along, and you do not want to make the company your alter ego.

Next week, we will discuss affirmative measures you can take to foster a strong corporate fiction, thereby strengthening your protection against corporate liability.

~ Jeff Harrington, Esq.

The post BUSINESS PRACTICES: Limiting Personal Liability (Part II) first appeared on Harrington Legal Alliance.]]> https://Harringtonandsheppard.com/es/business-practices-limiting-personal-responsibility-part-iii/ Mon, 05 Feb 2024 21:54:07 +0000 https://www.harringtonlawassociates.com/?p=1406 This is the final part to our discussion aimed at helping owners and officers avoid personal responsibility for the obligations and liabilities their companies take on in the course of doing business. The first part provided an overview of the key issues related to corporate liability. The second part focused on what not to do. Here, we get to proactive techniques for guarding against personal responsibility.

See page 16 here.

One of the great things about doing business in the US is how quick, easy and inexpensive it is to form a company.  Florida is no exception.  And, as one of the States that has good weather and no income tax, Florida has become a target destination for entrepreneurs, both domestic and foreign.

Register with the State Department

As with all States, the Florida Department of State requires business entities of all types to be registered with its Corporations Division.  The process can be done online through the Department of State’s website.  The process can also be done by mailing in paper forms, but that takes much longer.

The information you will need to provide depends a bit on what form you want your company to take — i.e. limited liability company (LLC), corporation (Inc.), limited partnership (LP), etc.  However, there are some basics that apply to all forms:

Company name

You may find it a little more difficult than expected to select a company name.  As Solomon said: «There is nothing new under the sun.»  The name you give your company cannot be «confusingly similar» to that of an existing company.  So, you will need to be rather creative with your name choice, and have a couple of  alternates ready to go.

You should first do a Clearance Search to see if there is another active company with the same or similar name as the one you want to use.  To do that, you can use the «Search Records» tab at the top of the State Department’s website.

If you skip this step, you may very well go through the entire process only to have your registration rejected . . . and then have to start over.

Registered Agent

Every business entity must have a registered agent with a physical address in Florida.  The registered agent’s job is to receive official correspondences, such as lawsuits and communications from governmental entities.  (You probably will not use your registered agent for regular mail.)  You may act as your own registered agent, which will save on the expense of paying a professional agent.  That is not necessarily recommendable, though.  The cost of a professional registered agent is very low, and they generally keep an eye on things such as the annual deadline to renew your company, etc., in addition to being responsible for receiving official/legal documents.

You Florida company is permitted have an out-of-state office and mailing address.  Likewise, the owners/officers may provide out-of-state addresses as well.  However, the company must have an in-state registered agent with a physical address.

Owners & Officers

The owners may be listed in the company’s registration, but it not required.  Depending upon the nature of the business, and any confidentiality concerns, you can decide whether it makes sense to name the owners in the registration or not.  For example, if it is an owner-operated company, you may want to list the owner because doing so will make it easier to open bank accounts, etc.  But, if it is a company with employees, there may not be any good reason to expose the owner’s name in the public record.  (Click here for tips on limiting liability)

At a minimum, though, you will have to list a manager or director.  You have to give the State the name of the person or entity with authority to take decisions for the company.

That said, neither owners nor officers have to be human beings.  You could name another company or trust as the owner and/or officer.  That is a technique sometimes used for asset protection and/or flexibility.  Be aware, though, that ultimately a person has to sign on behalf of the entity that is acting as owner/officer, so somebody’s name will have to appear in the registration.

Governing Documents

In the US, the two most fundamental documents of a business are generically called the «Articles» and the «Bylaws.»

Articles

If you register your business in Florida, the State Department will automatically generate Articles based on the information you provide through the registration process.  After all, the Articles are simply the most basic information about the company.  Your company’s Articles will be available for download on the Department of State’s website.

Do not be confused by the title «Articles of Incorporation» versus «Articles of Organization.»  The difference is merely due to the form of the company.  Only corporations can «incorporate.»  So, if you create an LLC, for example, your document will be called «Articles of Organization.»  It’s the same thing, though.

Bylaws

Similarly, the actual title of this document will vary depending upon the form of your company:

• Operating Agreement
• Shareholder Agreement
• Corporation Charter
• Partnership Agreement

These are just different names for document that contains the details of your company’s governing rules.  This document is not generated automatically by the State Department, nor does it appear on the State Department’s website.

The bylaws will generally be prepared by an attorney.  Because bylaws are not required by the State Department, so business owners do not bother with them.  This, however, is a terrible idea.

If the company has partners or investors, then operating without bylaws is like jumping out of a plane without a parachute.  And, as a more immediate matter, all banks I know of require a copy of the bylaws in order to open a company bank account.

Taxpayer ID

This is not the place to get into taxation issues, such as whether the company will be «pass through,» taxed as a partnership, S-corp, C-corp, etc.  That is a discussion to be had with your tax attorney or accountant.  Moreover, there is no need to make those decisions at this point in the process.  First, just get the company registered with the State Department.

Once that is done, you will need to apply for an Employer Identification Number (EIN).  In many cases, that can also be done online here.

If nobody associated with the company has a Social Security Number or ITIN, then the application for an EIN cannot be done online.  That is a bit unfortunate because applying by fax or mail can take much longer.

From a legal point of view, there is no urgency to get the EIN.  As long as the company has a taxpayer number by the time it is ready to file a tax return, you will be fine.  However, most companies need a bank account sooner rather than later.  And, all banks I have seen require an EIN in order to open a business account.

Local Business License

Rather annoyingly, most cities and counties in Florida use alternate terms for describing a business or occupational license.  Some municipalities in our area use the term «Tax Receipt.»  Just the same, if you call or go to the website, you can get the information you need by asking for a «business license.»  Everyone knows what you mean.  It is a small fee you will need to pay the local municipality(s) where your business is located.

Do be aware that you will probably need to pay a separate fee to both the city and the county where your business has its address.

Miscellaneous

With just the items listed above, you will have the basics in place to start a business in Florida.  Obviously, if your particular business requires licenses or permits, those are separate matters you will need to address in order to legally operate your business.

There are some strategic decisions to be made along the way, which are more difficult to address in a generic article.  That is why you should always consult an attorney along the way.  You will find additional information here describing some of the key considerations.

~ Jeff Harrington, Esq.

Just because you intend to do business primarily in one particular state does not mean that you necessarily have to set up your company in that state.  On the contrary, you can organize your company in any state (or even foreign jurisdiction) and then register that company to do business in the state where you do most of your business.

You have probably heard that large corporations tend to select Delaware as their state of incorporation.  Usually, these companies are not headquartered in Delaware.  In fact, they probably do not have an office in Delaware at all.  So, why have a Delaware corporation if your business has nothing to do with Delaware?  And, does it have to be Delaware, or are there other advantageous «jurisdictions» to consider?

Corporations start up by “incorporating.”  All other forms, such as LLCs and partnerships, start up by “organizing.”  It means the same thing.

That is why the governing document for a corporation is called “Articles of Incorporation,” while the equivalent document for other companies is called “Articles of Organization.” 

Tax Implications

Let’s start by dispelling a common misconception.  It is true that some US states charge income tax, while others do not.  However, you should not be under the impression that you can avoid state taxes merely by setting up your company in a state that has no income tax.  That would be a fatal mistake.

Corporate taxation is determined by where the money is generated, not by state of incorporation. 

So, for example, if your company’s office is in California, and you sell widgets to Californians, you cannot escape state taxes merely by organizing your company in Nevada.  If only it were that easy, right?  You can be sure that many, many people have tried to do just that.  And, when the Department of Revenue catches on . . . well, it’s not pretty.

Therefore, when determining the jurisdiction for domiciling your company, tax implications should not be a primary consideration.  If you are going to try to escape state taxes by setting up in a different state, you do so at your own risk.

Confidentiality

This is one of the big differences among the different jurisdictions.  Just how easy is it for the public to see your business and personal information?

Transparent States

Some states, such as Florida, are extremely transparent.  A good deal of business information, including owners’ names and addresses, are easily accessible online.

For lawyers, this is very useful.  When we need to sue a company, we just go online to the Department of State’s website (www.sunbiz.org), and we can get most, if not all, the information needed for the lawsuit right there.  It’s great.

On the flip-side, however, this transparency may not always be the best from an owner/officer perspective.  Besides making it easy for lawyers to prepare lawsuits, Florida companies also open themselves up to «trolls.»

If someone wants to find out whether you have enough assets to be worth suing, they can do a quick search online and see all the ventures you have going in Florida.  Similarly, if you have neighbors or family members that might be prone to jealousy, they can also easily find out what you have going on financially.

This «concern» is very situational, of course.  For many small business owners, having your information in the public record may be of absolutely no consequence. 

In that case, just go ahead and organize in the state where you are doing business.  That is the simplest and most convenient thing to do.  It will simplify setting up company bank accounts, minimize the need for a professional registered agent, etc.  It’s just easier.

Privacy-Conscious States

There are a number of states that are much more protective of a company’s confidential information.  If you go to the State Department’s website in one of these states, you will be able to see that a company exists.  In some cases, you may even be able to see whether the company is currently active.  But, that is about it.  No other corporate information will be available to the public on those websites.

Most of the states in New England tend to guard corporate information, as do the common «asset-protection» states, such as Wyoming, Nevada and Alaska. 

Again, what is best for individual business owners is situational, but an argument could be made that it is really a better business practice to set up in a state that will protect your company’s confidential information.

There is a bit of a trade-off, however.

Registered Agents

If you are going to set up your company in one state, but then do business in another state(s), you will need to hire a registered agent in the state of incorporation/organization.

Example:  You live in Florida and plan to do business in Florida, but you want to incorporate in Delaware.  At the time of incorporation, you will be required to provide a «registered agent» that has a physical location in Delaware.   So, unless you have a buddy in Delaware that is willing to act as registered agent for your company (not a great idea, by the way), then you will have to hire a professional registered agent in Delaware.

The purpose of a registered agent is to receive official documents on behalf of the company, such as lawsuits, governmental correspondences, etc.  Registered agent services are not particularly expensive (less than $100/year is common), but it is an extra step.

Double Registration

Continuing the example above, hiring a Delaware registered agent is not the end of the initial set up.  Since you are planning to do business in Florida, you will still need to register your Delaware company as a «foreign company doing business in Florida.»

If you live in Florida, you have the option of acting as your own registered agent (also not a great idea), so you do not necessarily have to hire a professional company for those services.  Still, you will need to maintain two registrations in two different states.  So, that too is an extra measure.

Thankfully, in the US, all states make it relatively easy and inexpensive to register a business.  The biggest thing is remembering to file annual renewals in both states and keeping the registered agent paid.  If you miss a renewal deadline, your company will be «inactive» or, even, «dissolved.»  And, to reinstate, there is usually a fairly nasty penalty ($400-600).

Asset Protection States

The main reason big corporations have traditionally incorporated in Delaware has to do with the governing statutes.  First of all, Delaware is the state with the most extensive case precedent when it comes to business matters.  That is advantageous because it prevents surprise.

Since almost every corporate situation you can possibly imagine has been litigated at some point in Delaware, you know ahead of time where the Delaware courts stand on all essential issues.

The predictability of Delaware courts is valuable to companies, especially those doing business on a large scale.

Second, the Delaware laws have traditionally been owner/officer/director friendly.  At some point in history, Delaware made conscious decision to be protective of owners/officers/directors in order to encourage companies to incorporate in Delaware.  It worked.

Simply put, Delaware law makes it more difficult to impose personal liability on owners, officers and/or directors for the bad luck, negligence or, even, misconduct of their companies. 

Owners, officers and directors are the decision-makers for their companies, and they like the protection.  So, everyone flocked to Delaware.

Now, because Delaware has been so successful at attracting businesses, certain other states have basically adopted the same laws.  They don’t even try to be subtle about it.  If you look at the case law, you will find judges openly stating «we follow Delaware law.»

As a result, these days, it is no longer necessary to set up in Delaware in order to get the benefits traditionally associated with Delaware.  I refer to the group of states that actively vie for your company’s business through these kinds of incentives as «asset protection states.»

Best Jurisdictions

Delaware

Naturally, you cannot go wrong with Delaware.  The only drawback is that it is a little more expensive than the competition.  At this point, Delaware sees itself as the «gold standard,» so you have to pay a little more to be there.

Nevada

The first state to aggressively compete for corporate filings was Nevada.  I think Nevada wanted to establish itself as the «Delaware of the West.»  And, it was largely successful in this regard.

Progressive states like California and Washington tend to offer more protections to consumers and employees, and less to owners/officers.  So, that created a great opportunity for Nevada to set itself up as the closer-to-home alternative to Delaware.

Unfortunately, Nevada, your recent overhaul of your Corporate Divisions website, and accompanying fee hike, is a disaster.  Your system has become terribly frustrating to deal with.  Even your own employees hate it.  On top of that, you decided to start charging more???  No, I’m out.

Wyoming

These days — at the moment, at least — my favorite asset-protection state is Wyoming. 

Wyoming has a simple, user-friendly online system for registering companies, and the fees are cheaper than the other jurisdictions I have looked at.  Also, you can get a human being on the phone when you need one, and the human will be nice to you.

As for asset-protection, Wyoming staunchly adheres to Delaware law, so you get the same liability limitation features in Wyoming as you would in Delaware.

Other Options

I know from my research that there are some other good options out there as well, most notably Alaska and South Dakota.  I am sure they are lovely.  I just have not had a lot of personal experience with these other jurisdictions.

~ Jeff Harrington, Esq.

The Opportunity Zone program has been around since 2017 but, since the Pandemic, it has received some beneficial tweaks you should know about.

Benefits

Some of the deadlines under the program have already passed, but the benefits still available are impressive.

The first thing you need to understand is that we’re really talking about TWO separate tax-saving opportunities.   We’ll call them GAIN #1  and GAIN #2.

GAIN #1 – Previous Capital Gains

Here, we’re talking about the capital gains you made in 2021 (or the first quarter of 2022).

You’re just sitting on this money at the moment, getting ready to pay taxes on it.  But, hold on.  There is an alternative.

If you act quickly, you can take those gains from 2021 and reinvest them in a Qualified Opportunity Zone Fund.  That will exempt those gains from your 2022 tax return.

Then, you can defer the tax on those 2021 gains until 2027.  So, you have six (6) years in which you can make money on Uncle Sam’s money.  Let me give you an illustration.

Example:  Let’s say you sold real property last year and made a profit of $500,000.  Depending on your tax bracket, you probably owe 20% in capital gains tax on that money, which would be $100,000.  Under this program, Uncle Sam basically says:

You can hold onto my $100,000 as long as you reinvest it in an Opportunity Zone.  And, whatever you earn on that money in the next six years, you get to keep. 

That is not a bad deal AT ALL.  But, brace yourself.  Here comes the crazy part.

GAIN #2 – Capital Gains from QF

Continuing with our example, if you leave that $100,000 investment in the Qualified Fund (QF) for at least 10 years, you are going to get all the capital gains derived from that investment TAX FREE.  Let that sink in.

Example:  Let’s say you find a good QF for your $100,000.  You can probably expect your Fund Manager to grow the fund at a rate of 10% to 15% per year.  That will essentially double your investment in five (5) years.  So, by year five, give or take, your $100,000 investment will have grown to $200,000.  And, by year ten (10), it will be worth $300,000.  That leaves you with a capital gain of $200,000 by the end of the 10-year cycle.

Guess what.  You will pay exactly zero taxes on that $200,000 gain. 

That, my friends, is rather amazing.

Now that we have your attention, look for follow up articles with details on _

• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

The good news is that, for purposes of a QF, what is considered «capital gains» is not just proceeds from the sale of real estate.  In fact, all of the following are qualified capital gains:In order to get the tax advantages available under the Opportunity Zone program, you have to invest «qualified capital gains.»  So, it is not just any kind of money that can be invested in a Qualified Fund (QF).  For example, if you have put away some cash from your regular salary or other compensation, that money will not qualify for the tax benefits because it is not «capital gains.»

• Sale of Real Estate
• Sale of stocks and bonds
• Sale of shares in a corporation
• Sale of a partnership interest
• Sale of cryptocurrency 
• Sale of REIT
• Sale of land
• Sale of machinery
• Sale of timber and other natural resources
• Sale of unharvested crops and livestock
• Gains from leaseholds (at least 1 year old)

So, as long as the funds you intend to invest can be defined as «capital gains,» you can invest in a QF and receive the very advantageous tax benefits of the Qualified Opportunity Zone program.  That is one significant advantage of a QF over the traditional 1031 exchange.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

These QOZs were created to spur economic growth by extending generous tax incentives to investors who invest their qualified capital gains into Qualified Opportunity Funds (QOFs).  Ultimately, the federal program open to ALL investors.

First, be aware that the investor can be either an individual or an entity.  Many people wisely hold their investments in an LLC or trust (even REITs).  That is not a problem.  Also,  the investor, whether an individual or entity, does not have to be a US citizen or US resident.

Foreign nationals can also invest in a Qualified Fund (QF).

If you do your investing through an entity, you will likely want to use that same entity as the «investor» in the QF.  However, if you may not be required to do so.

The analysis turns on the question of «Who is the taxpayor?»

If the investment vehicle you use is a «pass-through» entity, such that you report the gains/losses on your personal return, then you personally are the «taxpayor.»  In that case, you have the option.  You can either make the investment in the QF with the same investment vehicle — usually an LLC or trust–or you can make the investment in your individual name.

By contrast, if your investment vehicle is taxed as a C-corp, then that entity is itself the «taxpayor.»  So, you should use that entity as the investor in the QF.

Caveat:  In order to get into the Opportunity Zone program, you have to invest in a qualified fund (QF).  These QFs are privately owned and managed, so some of them may impose certain restrictions.  One common restriction is that you be an «accredited investor,» as defined in the tax code.  To be clear, this is not a requirement imposed by the federal program itself.  But, you may find it is a criteria imposed by managers of certain QFs

This article addresses just one specific aspect of the Qualified Opportunity Zone program.  Be sure to follow these links in order to get additinal information:

• What are the benefits of a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

According to the IRS:

Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.

The legislation passed with bipartisan support.  The Republicans liked the tax savings, while the Democrats liked the investment in under-developed neighborhoods.

Where are the Opportunity Zones?

Congress left it to individual states to determine what areas would be designated as an Opportunity Zone.  (See List of Designated Tracts)  There are some nice interactive mapping tools available online as well.

With some notable exceptions, you can expect opportunity zones to be neighborhoods traditionally considered «under-developed» or «disadvantaged.»

Projects Permitted by a Qualified Fund

Keep the purpose of the legislation in mind, you will understand why Qualified Funds (QFs) are not permitted to invest in just any kind of project.  Here are some of the guidelines.

New Construction

QFs are not allowed to buy a property and simply throw some paint on it.  The project must be brand new construction or a «substantial rehabilitation,» which means the QF put more money into the improving the property than it did to purchase the property.

 Examples of Qualifying Projects

Generally, QFs are expected to invest in projects that bring a benefit to the community by creating jobs or otherwise.  Some examples include the following:

• Affordable Housing
• Community Revitalization
• Economic Development
• Infrastructure Investment
• Mixed-use Development
• Multifamily Residential
• Renewable Energy Investment
• Single Family Residential
• Small Business Development
• Workforce Housing

Profitability

Naturally, an important aspect of the projects is profitability.  You can expect good QF managers to make strategic decisions when determining what projects to undertake in the Opportunity Zone.  After all, investors not only receive the capital gains from the projects, but they also participate in the yearly cash flow.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.