November 2019 Newsletter

Arizona’s New Limited Liability Company Act

Arizona has long had laws defining and regulating limited liability companies (LLCs) organized within the state. The first law was codified in the Arizona Revised Statutes in 1992, and it remained substantially unchanged until 2018. In 2018, the Arizona legislature enacted the new Arizona Limited Liability Company Act (ALLCA). The ALLCA will affect all Arizona LLCs, including single-member LLCs. For new LLCs formed after September 1, 2019, the ALLCA became effective September 1, 2019. Limited liability companies already existing on September 1, 2019, are required to become compliant with the law by September 1, 2020. The new law governs both the internal affairs of limited liability companies and the liability of members or managers with respect to their interactions with outside parties.

The ALLCA is a product of more than seven years of work by Arizona lawyers and is based largely on the Revised Uniform Limited Liability Act adopted by the Uniform Laws Commission in 2013. The ALLCA does preserve some of the policies and procedures from the original law, but it also integrates many concepts from the Revised Uniform Limited Liability Act on which the original Arizona law was silent.

Although Arizona LLCs have been able to operate without written agreements in the past, the ALLCA has a number of provisions related to the operating agreement that effectively impose a default operating agreement on LLC members. The new law provides great flexibility in the way operating agreements are written, but if the existing agreement does not provide for a matter, the new law does. The new law states that, in the event of a conflict between a provision of the operating agreement and the new law, the provision of the operating agreement governs. If an agreement does not adress an issue, however, the new law governs.

Members of existing LLCs should consider updating their operating agreements, both to comply with the required provisions of the ALLCA and to draft around the provisions that would otherwise impose unwanted requirements or restrictions on members and the operations of their businesses.

The new law clarifies the fiduciary duties owed by members and managers to each other and to the LLC. These duties include the duty of loyalty, the duty of care, and the duty of disclosure. Definitions and existence of these duties was previously left to the courts. Now the operating agreement must address the duties and how to handle breaches of these duties.

The new ALLCA will affect your LLC. We encourage you to consult with your attorney to update your LLC’s operating agreement. If you have questions about LLC taxation or other provisions of the new law, please come in and visit with one of our tax professionals. We would weclome the opportunity to help you succeed as you integrate the new law into your business.

7 Behavioral Red Flags for Internal Fraud

Fraud can be uncovered in many different ways: a tip, management review, internal or external audit, document examination, account reconciliation, or even by accident. In 53 percent of cases, however, someone at the company has noticed something amiss and alerted the company. That means there were clues along the way.

It’s easy to miss these clues—or fail to recognize them for what they are—because it’s hard to believe that someone you trust is engaged in a criminal activity. It’s much easier to identify these clues when you consider your employee's behavior.

Certain behaviors are characteristic of people who commit fraud. Some people exhibit more than one behavior. Here are some behavioral red flags that may indicate a cause for concern:

Employees living above their means. An employee who seems to be living above his or her means may need extra money to keep up with the bills. Employers should be aware of any unusual changes in the lifestyles of their employees. The Association of Certified Fraud Examiners (ACFE) reported that 41 percent of the fraud cases studied in the 2018 Report to the Nations involved perpetrators who were living beyond their means.
Employees with financial difficulties. An employee who is going through a difficult time financially may feel pressure to commit fraud in order to make ends meet. They may internally rationalize the act of fraud because of a necessary medical procedure or other unforeseen financial emergency. The ACFE reported that 29 percent of fraud cases involved employees struggling with financial difficulties.
Unusually close association with a vendor or customer. When an employee has an unusually close relationship with a vendor or customer, this may allow the opportunity for the employee to commit contract fraud, create fictitious orders, or receive kickbacks from the other party. Twenty percent of the fraud cases studied in 2018 involved this scenario.
Employees who resist sharing control. Employees who won't share control over a financial function or a client relationship may be hiding a fraud. The person may refuse to teach another employee in the company how to perform their functions in case of an emergency or may refuse to take a vacation for fear of their fraud being uncovered while they are away. For example, is the amount in the tip jar at a restaurant consistently higher when a particular manager is not working? Do the copays at a doctor's office go down when the office manager is away? You may not make a connection if the person is out for a day or two, but the discrepancy may become obvious if the amounts change again when the person is back on the job.
Divorce or family problems. An employee going through a difficult personal struggle may feel external pressure to commit fraud. In the ACFE's 2018 Report to the Nations, 14 percent of fraud cases studied involved perpetrators who were experiencing divorce or other family difficulties.
"Wheeler-dealer" attitude. It is important to observe how managers and employees interact with co-workers in the office. An attitude that relays egotism may be an indicator of someone who may commit fraud. The type of attitude that says "I'm better than you" should be a red flag that this person may think they deserve more than what the company is giving them.
Disgruntled employees. Employees who think they aren't being paid what they deserve may be looking to make up the difference. Disgruntled employees can be a problem on many levels, but potential for fraud is not the greatest concern; the ACFE's report indicated they made up only 9 percent of fraudsters.

Fraud prevention is the best cure. Implementing internal controls that limit the opportunity to commit fraud and adjusting your hiring practices to include background checks may offer some protection against bad actors. Keep in mind that 85 percent of fraudsters in the ACFE study had never been punished or terminated for fraud-related conduct before committing the crimes in the study.

Call us if you need help uncovering potential fraudulent practices at your firm.

The Real Story on GoFundMe Deductions

GoFundMe is an online platform that lets anyone set up a website to raise money to pay for a family member's cancer treatments, college tuition payments, a new church building—almost anything you can imagine. Anyone who donates through the platform can obtain an official-looking receipt that can be used for tax purposes. But the real question is whether any donation made through the site is eligible for the charitable deduction. The short answer is "no."

The government has very strict standards for organizations that can accept tax-deductible donations. Such organizations are known as 501(c)(3) organizations, from the section of the Internal Revenue Code that governs them, and setting one up and following the rules is a complicated process.

That doesn't mean the causes on GoFundMe aren't legitimate, although you should check the bona fides of any online charitable requests. So, if you want to send $100 to help an amateur athlete attend the national curling championships, that's perfectly legal. But you can't deduct that $100, except in the unlikely event the athlete has created a 501(c)(3) organization for that purpose.

Of course, some legitimate 501(c)(3) organizations may be using GoFundMe as a fundraising outlet, and in that case your donations through the platform would be deductible. But it's your responsibility to check that out.

If you are unsure about the status of any entity, ask for proof that it is a 501(c)(3) organization. You should also be able to look organizations up in the GuideStar directory. Also keep in mind that not every not-for-profit organization is a 501(c)(3) entity and thus allowed to accept deductible donations.

Finally, what if you have set up a GoFundMe account to raise money for a cause and you are not an official not-for-profit organization—are you on the hook for income tax on what you have received? It is possible all the donations you received are simply gifts, and thus tax-free income, but that's not always the case. It can get complicated. Contact us if you have questions about the tax implications of charitable donations.

New Threshold for Overtime for Exempt Workers

A new rule was recently announced by the US Department of Labor raising the salary threshold below which companies are required to pay workers overtime. The new salary level is $35,568—up from $23,660—and American workers earning less than that amount will be eligible for overtime, typically time and a half for any work over forty hours a week. It is estimated that this new ruling will make 1.3 million more US workers eligible for overtime. The new rule takes effect on January 1, 2020.

Be sure to plan for this change if it affects your business; if you have questions, R&A can assist you.

Understanding Sales Tax in the Post-Wayfair World

In June 2018, the US Supreme Court decided South Dakota v. Wayfair. Since then, businesses that operate in two or more of the nation’s 10,000-plus tax jurisdictions have been struggling to understand what they need to do to comply with the new definition of economic nexus. Wayfair affects all businesses, from strictly online sellers to manufacturers and wholesalers to brick-and-mortar retailers.

The court’s ruling was vastly different from its 1992 ruling in Quill Corp. v. North Dakota, which found that sales tax did not have to be collected unless the company had a physical presence in the state. Then again, Quill was decided when the internet was in its infancy.

Understanding Wayfair

Wayfair did not expressly state a threshold for collecting sales tax, but the South Dakota statute in the case stipulates that any out-of-state business that makes $100,000 in sales or that has 200 or more sales in South Dakota must collect sales tax. Although that is a good guideline, businesses need to remember that not all jurisdictions follow it: some are higher and others are lower.

This creates problems for businesses for a number of reasons, including these:

Business registration. Every state has different rules about how businesses must register as taxing entities. In some states, it is enough to register at the state level, whereas in others, businesses need to register at the county and municipal levels as well. Some jurisdictions may ask businesses to prove they do or do not meet its thresholds. Noncompliance with these requests can lead to steep penalties. Other jurisdictions have voluntary disclosure programs that can help limit exposure.
Goods and service exemptions. There is no one standard for taxing goods and services. For example, clothing is not taxed in New Jersey, but in New York, a neighboring state, only clothing that costs more than $110 is taxed. The list of discrepancies between jurisdictions seems never-ending, and it can change quickly.
Other factors. Your business may need to rethink its operations. For example, is your inventory stored in another jurisdiction?
Effective dates. Just as there is no universal list of which goods and services are taxed, there is no one list of effective dates. A new effective date takes effect every time a jurisdiction decides to tax a good or service, exempt one from taxation, or impose a new dollar limit.

Analyzing Exposure

The Wayfair ruling is not going away, so businesses need to take several steps to analyze their exposure. Businesses need to

perform a detailed analysis of their annual sales and number of transactions in every jurisdiction in which they operate;
determine which goods and services are taxable in each of those jurisdictions;
figure out when and where to register, what penalties may be incurred, and whether registering will subject them to other taxes, such as franchise taxes; and
determine how to manage sales tax compliance going forward.

Business don’t need to do this on their own. Contact R&A for help in figuring out your business’s sales tax responsibilities.

Business Valuation Checklist

Business owners should always operate from a position of strength. That’s why having at least a baseline business valuation is important. The simple truth is that things happen even when we don’t plan for them—an unexpected buyout offer or an illness, for example. Deciding to have a business valuation is a proactive step that can prove quite useful as you plan for the future of your business.

Once you’ve decided to have your business valued, you need to prepare for the process. The following checklist provides a guideline for the information you will need. Remember that the goals of the valuation are to evaluate the company’s past performance as well as its projected future performance.

Financial Information

You will need to compile the following financial information:

Past five years' profit and loss statements
Past five years' balance sheets
All liabilities, including outstanding loans and payoff information, creditors, and contingent liabilities (e.g., pending lawsuits, environmental liabilities)
Profit and cash flow projections
Balances in all company bank accounts, including trust accounts
Leases (e.g., property, equipment)
Tax issues

Company Information

You will also need the following company information:

Information about ownership, including date company was formed, type of entity, number of shares owned by each owner, and who has a controlling interest
Information about family members working for the company, including role, compensation, and fringe benefits
Information about company management, including confidentiality and nondisclosure agreements, and key man insurance and employment contracts
Tangible assets (e.g., inventory, real estate owned, equipment owned)
Intangible assets, including legal rights, licensing agreements, nondisclosure agreements, and other contractual obligations
Locations

Market information

You also will gather essential market information:

Company’s current market share
List of competitors and their estimated market share
Product differentiators
Size of market
Pricing strategy
Barriers to market expansion

Information analysis

For information analysis, you will need the following:

Profit margins
Business stability

This checklist provides an outline of the information you’ll need to assemble to obtain a clear picture of your business. Working with a business valuation specialist, you may find that additional information is needed to flesh out more details. At the very least, you’ll have a road map for what needs to happen to increase the value of your business.

For more information, contact R&A. We have valuation experts to help you.

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About this Author

Jo Alenson