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Is Your Website Ready For ADA Compliance?

by | Jun 29, 2017 | , ,

New Court Case May Indicate Future Requirements

Winn-Dixie, a large supermarket chain, was sued under the Americans with Disabilities Act (ADA). Juan Gil, a blind Florida resident, went to court because the chain’s website was not accessible to him.

The ADA requires that places of public accommodation provide “full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation.”  The U.S. District Court Judge for the Southern District of Florida relied upon previous court holdings that the ADA covered both tangible and intangible barriers that restrict individuals with disabilities from the enjoyment of a public accommodation’s service. Since the supermarkets’ website did not accommodate the visually impaired, it denied Mr. Gil “the full and equal enjoyment of Winn-Dixie’s goods, services, facilities, privileges, advantages, or accommodations because of his disability.”

The court issued an injunction requiring Winn-Dixie to make its website accessible to the disabled. A new standard has emerged known as the Website Content Accessibility Guidelines (WCAG), version 2.0. Screen reader technologies can now read website content to individuals with blindness and assist them in navigating the site with voice prompts. Integrating such technologies into a “public” website will help satisfy the new and developing WCAG requirements.

Is your website ADA compliant? Hotels, restaurants, retailers and other places of public accommodation that transact business with the public over their website should take note. If not now, at some point in the future you may be required to bring your website into compliance with WCAG 2.0.

Is an LLC a Separate Legal Entity?

by | Dec 9, 2015 |

To answer this question, first let’s answer what an entity is.

What is an Entity?

An entity is a business organized according to state law to limit the liability of the owners. Entities can be corporations, limited-liability companies (LLCs) and limited partnerships (LPs). All provide much greater asset protection when compared to a sole proprietorship or general partnership.

An entity is a separate legal being. It is the ‘separateness’ of an entity which protects you – the entity’s owner – from unlimited personal liability. Without that separation, if an angry customer sues you, any assets you own such as your house, car or bank account can all be taken should a judgment be found against you.

It’s critical to know that an entity can’t protect you if it is not set up right at the start. You can’t set up a corporate entity while you’re being sued and expect it to protect you. Furthermore, it can’t protect you if you don’t properly maintain your entity over the long term.

Maintaining an LLC or Corporate Entity

In order to maintain the limited liability protection provided by corporate entities, you must follow certain requirements called “formalities.” These include:

  • Filing statements
  • Paying annual fees
  • Maintaining a resident or registered agent to receive all legal documents
  • Keeping corporate minutes

Failure to follow these formalities can result in personal liability to officers, directors and shareholders.

When Should You Use an LLC?

A limited liability company (LLC) is a great entity for a beginning business that:

  • wants to invest in assets that will appreciate over time
  • is intended to be an estate-planning vehicle to transfer wealth to the next generation
  • wants its owners to hold their interests in the names of other entities or trusts
  • wants to be able to sell ownership interests all over the world
  • wants to provide its owners with flow-through taxation
  • wants to divide up the profits and losses in ratios other than strict ownership percentages
  • wants to protect its assets from creditors

LLCs are one of our favorite entities to use. They provide both the limited liability protection found with corporations, as well as the flow-through taxation of a partnership. They allow you to divide up profit and loss allocations among the owners in varying ways — and not based strictly on ownership percentages, as is required in C and S Corps. Ownership may be held by individuals, corporations or trusts, and there are no restrictions on where owners live.

Annual meetings are not required but are strongly recommended, both as a good method of communication between the Managers and the Members, as well as establishing that the LLC is a distinct, stand-alone entity. That last point is important, as when corporate formalities are not followed creditors may attempt to pierce the veil of protection of LLCs as well as corporations.

The Top 12 LLC Advantages and Disadvantages

by | Jul 1, 2015 | , , , , ,

When looking to start a business or protect investments you have several options in the type of entity you can form. As with anything, there are advantages and disadvantages to limited liability companies.

Advantages

  • It limits liability for managers and members.
  • Superior protection via the charging order.
  • Flexible management.
  • Flow-through taxation: profits are distributed to the members, who are taxed on profits at their personal tax level. This avoids double taxation.
  • Good privacy protection, especially in Wyoming.
  • This is a premier vehicle for holding appreciating assets, such as real estate, stock portfolios, and intellectual property.
  • Extraordinary flexibility in the ability to allocate profits and losses to members in varying amounts.

Disadvantages

LLCs and the Charging Order

One of the great asset protection advantages of the LLC is the charging order.

Charging order protection arises from each state’s law and is a key strategy for shielding your assets from attack. As with anything in the law, the charging order is subject to change and interpretation by the courts. Some states view the statute differently than others, which is why it is important to choose the right state when forming a limited partnership (LP) or limited liability company (LLC). It is also important to keep up on the new court cases and trends in this area to keep yourself better protected. Remember, the LLC has only been widely used in the USA in the last 25 years or so. We are just now starting to see court cases defining their scope and use.

Going back to the original statute (the rule passed by each state’s legislature) we consider section 703 of the Uniform Limited Partnership Act. It states that if a partner of an LP owes money to a judgement creditor (one who has gone to court and prevailed) the court may order a ‘charge’ against the partner’s interest to pay the judgement creditor. Thus the term ‘charging order’. This rule also applies to LLCs.

For example, if John owns a 50% membership interest in XYZ, LLC and John owes money to Mary after losing to her in court, Mary can seek a charging order to receive John’s 50% share in the distributions from XYZ, LLC. Of course, John’s other partner Carlos is not as keen to this, but any disruption is minimized with the charging order. Mary does not step into John’s shoes as a substituted partner. She can’t vote and tell Carlos how to run the business. Instead, she is only assigned the distributions that would have been made to John.

Again, the charging order is a court order providing a judgement creditor (someone who has already won in court and is now trying to collect) a lien on distributions. A chart helps to illustrate our example:

illustration of charging order

In our example, John was in a car wreck which injured Mary, the other driver. Mary does not have a claim against XYZ, LLC itself. The wreck had nothing to do with the duplex. Instead, Mary wants to collect against John’s main asset, which is a 50% interest in XYZ, LLC. Courts have said it is not fair to Carlos, the other 50% owner of XYZ, to let Mary come crashing into the LLC as a new partner. Instead, the courts give Mary a charging order, meaning if any distributions (think profits) flow from XYZ, LLC to John then Mary is charged with receiving them.

Mary is not a partner, can’t make decisions or demands and has to wait until John gets paid. If John never gets paid, neither does Mary. The charging order not only protects Mary, but it is a useful deterrent to frivolous litigation brought against John. Attorneys don’t like to wait around to get paid.

This short video also explains the charging order:

But what if there is only a single owner?

The Difficulties of Single Member LLCs

In a Single Member LLC, there is no Carlos to protect. It’s just John. Is it fair to Mary to only offer the charging order remedy? Or should other remedies be allowed?

llc advantages and disadvantages charging order single member llc

A key issue is whether the charging order applies to a single member (one owner) LLCs. There is a nationwide trend against protecting single member LLCs with the charging order. Courts are starting to deny single owner LLCs the same protection as multiple member LLCs. The reason has to do with the unique nature of the charging order.

In June of 2010, the Florida Supreme Court decided the Olmstead vs. FTC on these grounds. In a single owner LLC there are no other members to protect. The court allowed the FTC to seize Mr. Olmstead’s membership interests in order to collect. Other states have followed the trend.

How Corporate Structure Can Increase Protection

Say you have a property in Oregon. That property is entitled to an Oregon LLC, which is owned by a Wyoming LLC. You then invest in a property in North Carolina, so you set up a North Carolina LLC owned by the Wyoming LLC.

If a tenant of your Oregon property sues over something that happened on the property, they have a claim against the Oregon LLC, not against you personally. They can’t get at your North Carolina LLC, and they can’t get at equity held on your personal property.

As you can see it’s beneficial to spread your properties across multiple LLCs. If you have 10 properties all in one LLC, it becomes a target-rich LLC. Often, we recommend only having one property per LLC. You may wish to have two or three properties in an LLC, but it really depends on how much equity you have in each property. The structure of your business really comes in to play during an inside attack, which is where the lawsuit is against an LLC, not the owner.

In the case of an outside attack, where the owner of the LLC is the target of a lawsuit, the charging order comes into play. In our example above where Mary is trying to get at John’s property, let’s assume John is the owner of a Wyoming LLC, and he has LLCs in North Carolina and Oregon. The car wreck has nothing to do with John’s Wyoming LLC, the holding in Oregon or the holding in North Carolina, so Mary can only go after John. And since John has a Wyoming LLC, even if he is the sole owner of the Wyoming LLC, Mary’s only option is the charging order. If the Wyoming LLC makes no distributions, Mary gets nothing. If the Oregon LLC and the North Carolina LLC make no distributions to Wyoming, Mary gets nothing.

This is not a great situation for attorneys who are on a contingency fee. They get a percentage of what is collected and it’s not a really good way to operate if they have to sit around get a charging order against the Wyoming LLC and then sit around and wait to get paid. Attorneys, being rational, economic animals are going to take the next case that has insurance instead of waiting for John to pay Mary.

You want to use the strategic positioning of the Wyoming LLC, which will own all your other out-of-state LLCs. States like Oregon and North Carolina may not protect the single member LLC, so you really need a Wyoming entity for protection in a case like the car wreck example. The Wyoming LLC creates a firewall against attorneys and frivolous lawsuits.

Entity Structuring is Our Specialty!

 

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Before You Invest In Real Estate, Educate Yourself

by | Apr 15, 2015 | , ,

I’m not suggesting that you need to know everything. You don’t. You’ll continue to learn as you go. But you must educate yourself in the basics to get started on the right foot. A little education goes a long way in accomplishing four essential goals:

1. Demystify Investing and Lessen Your Fear

Learning about real estate will demystify it for you, reducing your fear of the unknown. Without that fear, you’re more likely to take the leaps necessary to progress to the next level and reach your goals. As I mention below, take in as much information as you can through books, seminars and mentors.

2. Know that Ordinary People Can Be Successful

It will show you that you don’t need to have any innate real estate talent or know-how. You’ll truly see that anyone can do this. You don’t need a degree in law, finance or real estate, and you don’t need outrageous sums of cash. Ordinary people just like you, with ordinary reserves of cash, have achieved great results in real estate investment, and you can too!

3. Pick an Area of Real Estate to Specialize In

It will help you to narrow down which area of real estate you’d like to specialize in. When you understand some of the unique qualities of each type of real estate, you’re more likely to discover the type and location that best suit your investment style and needs. If you need help developing a Real Estate Investment Business Plan, check out my guide.

Learn How to Create a Real Estate Investment Business Plan in 4 Steps. How to Create a Real Estate Investment Business Plan

4. Identify Experts to Assist with Your Investment Strategy

It will also help you to identify which experts might be best for your particular kind of investment strategy. When you assemble your team of advisors, one of them will be your real estate agent. He or she will be an expert in one particular sector—the one you’re investing in—but most likely won’t be an expert in other sectors. For example, he or she might specialize in duplexes, but not strip malls. So by sticking with one sector, you can retain the same team of advisors without having to seek others.

 So where do you get all this education?

A good place to start is to read books, newspapers, magazines and online articles on related topics. One resource will lead to another, and then another, and as you find yourself asking questions or wanting more information on a specific issue, it will guide you to the next article or book.

For more on this topic, check out my book, Loopholes of Real Estate.

Loopholes of Real Estate by Garrett Sutton

LoopholesRE Sutton.Front Cover.Final .HiRes .2019 scaledLoopholes of Real Estate reveals the legal and tax strategies used by the rich for generations to acquire and benefit from real estate investments. The book clearly identifies how these loopholes can be used together to maximize your income and protect your investments.

Written in easy to understand language, this book de-mystifies the legal and tax aspects of investing with easy-to-follow, real-life examples.

Real Estate Investors: 2 Passive Loss Rules Can Save You $25,000

by | Apr 7, 2015 | , ,

The biggest tax challenge for real estate investors are the passive loss rules. Under these rules, passive losses can only be used to offset passive income. A business activity is passive if the owner does not spend much time (typically less than 500 hours per year) participating in the business.

The challenge for real estate investors is that losses from rental real estate are generally considered passive regardless of how much time the owner spends working on the real estate. There are two exceptions to this rule.

The Active Participation Exception

The first, which is very easy to achieve, is referred to as the “active participation” exception. Any owner who spends some significant time on his/her real estate investments during the year qualifies, at least where the owner directly owns the real estate (that is, not as a limited partner in a partnership). This could include reviewing reports from the property manager, researching properties to buy, or handling the financing of real estate purchases. The IRS has been pretty generous in allowing this exception. The active participation exception allows up to $25,000 worth of losses during the year from rental real estate to be treated as ordinary deductions not subject to the passive loss restrictions.

This exception only applies, however, when the owner’s “adjusted gross income” (AGI) is not more than $100,000. If your AGI exceeds $100,000, then the $25,000 limit is phased out by 50 cents for every $1 the AGI exceeds $100,000. So, for example, if your AGI is $110,000, then the limit for that year will be $20,000 (or $25,000 minus $.50 x $10,000).

The Real Estate Professional Exception

The second exception to the rental real estate passive loss rule is the real estate professional exception. The real estate professional exception is the “get out of jail free card” for real estate investors. If you meet this exception, then none of your rental real estate income and loss are subject to the passive loss rules.

This is a much tougher exception to get than that for active participation, because you actually have to meet two criteria:

  1. You spend more than 750 hours per year (which comes to about 14 ½ hours per week) as a “material participant” in a real estate business, which could include management, brokerage, construction, development, leasing, rental, and operation; and
  2. You must spend more time in real estate businesses than all other businesses (including employment) that you’re involved in, combined. If you meet both of these criteria, then you qualify as a real estate professional.

For more information please see my book Loopholes of Real Estate.

About the Author

Garrett SuttonGarrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.

When Buying an Existing Business, Here’s What You Need to Know About a “Letter of Intent”

by | Jan 8, 2015 | ,

What is a Letter of Intent and how does this help (or hurt) you when you want to buy a business? As soon as a buyer and seller have come to an agreement on price and major terms, a letter of intent may be prepared. This document precedes the more formal and detailed purchase agreement. It clearly states what each party has agreed to and states that this is all contingent upon the signing of the purchase agreement. It should include price, terms and access buyers will have to sellers’ business premises, records, employees, customers and suppliers. Be sure to consult with your professional advisors before drafting and using such an agreement.

Some buyers or sellers may not be 100% certain of the deal at the time of signing the letter of intent. They may request that conditional language be included such as: “This Letter of Intent shall be non-binding until a more formal purchase agreement is signed.” Be careful. Just because you have conditional language inserted, doesn’t mean that a contract hasn’t been formed. If the buyer, for example, in good faith takes all of the steps required under the letter of intent, you as the seller may be precluded from deciding at the last minute not to sign the purchase agreement. There are plenty of court cases where “non-binding” letters of intent have been enforced. The point is, if you go through the negotiation phase and reach an agreement, assume that you are buying or selling the business when you sign the letter of intent. If you are not completely sure about the whole deal, then don’t sign the letter of intent. Don’t create the legal liability for yourself to buy or sell if that’s not what you want to do. It is not fair to you and is certainly not fair to the other person across the table who has likely spent thousands of dollars in attorney, accountant and due diligence fees to get the negotiations to a letter of intent threshold.

That said, there are numerous contingencies that can be placed in a letter of intent (or a purchase agreement) that will protect the buyer. These conditions or precedents to a purchase include the following:

1.   Review of the seller’s books and records to the buyer’s satisfaction.

2.   Lining up suitable financing to the buyer’s satisfaction.

3.   Reviewing and acceptance by the buyer of all lease and purchase agreements.

4.   The ability to obtain necessary insurance to the buyer’s satisfaction.

5.   The occurrence of no material adverse change in the seller’s business.

As a general rule, the time period for a review of the books and records will be a fixed and limited time, i.e., 15 or 30 days. If you as buyer are not satisfied after your due diligence investigation you may want to send formal written notice within the time period to the seller of your intent to cancel the sale. You may want your attorney’s assistance in preparing this notice letter. Depending on the terms of the agreement, the cancellation letter may perhaps generally read as follows: “Based upon my review of your books and records and pursuant to the 30-day contingency for such review, I have decided not to purchase the business and thus withdraw my offer to purchase dated ………….” Such a letter will protect a buyer from a desperate seller willing to use any argument to force a sale.

Keep in Mind These Home Office Zoning Issues

by | Jan 8, 2015 | , ,

By Garrett Sutton, Esq.

Where you do business will certainly affect costs, but that should not be your only concern. Here are 5 hazards to consider before deciding to work from home.

1. Zoning & Residential Restrictions

If you’re doing business out of your house, you have to take into consideration whether your neighborhood is zoned to allow you to run a commercial enterprise from home. In some residential neighborhoods you can’t display signs. Others look at increased vehicular and pedestrian traffic and parking concerns.

2. Home Office Challenges for Selling Goods or Storing Chemicals

If you’re selling goods rather than services or storing any kind of chemicals or hazardous materials you may not have the option of a home office. This means you may not be able to run your house painting business out of your house. Your local planning department or zoning board in city or county offices can tell you whether or not what you have in mind is legal. If you’re in an apartment or condo, administration for the building should be able to tell you, or at least indicate what governmental body can tell you.

3. Location, Location, Location

On the flip side, some businesses flourish in the right location. You may find you’re more visible in an office building or warehouse or strip mall and that the extra traffic you bring in will more than make up the difference you’re paying in rent.

4. Household Distractions

One more consideration if you’re thinking about a home office is separating home and home office. That isn’t always as easy as it sounds. The temptation to throw in a load of laundry instead of returning phone calls or working on a project might not make or break the new business, but your time is better spent pursuing your business, not doing laundry. Even if you’re sure you have the discipline to run a business out of your home, you need to take into account whether your family is, and whether they’ll give you space and time to work.

If all systems still seem go for working from home, consider some of the following:

  • For a professional address and consistency if you happen to move to a new house, get a post office box for your business (this also stops customers from coming by without an appointment, at least the first time when they don’t know where you live).
  • Get a second phone line for your business use.

5. Working 24/7

Working from home allows you to be flexible in your schedule, cuts out any commute time and means you can run back in to “the office” if you forgot something that just can’t wait till the next day. Just don’t fall prey to the 24/7 aspect of working where you live – just because you’re awake doesn’t mean you have to be working.

Why Is Your Insurance Broker So Important When You Invest In Real Estate?

by | Jan 8, 2015 | ,

The insurance broker is an essential part of the team you assemble when you purchase your real estate property. You must look for an experienced professional who strives to find personalized options for your business or investment. What you don’t want is someone who is just interested in selling you the most expensive policy and collecting premiums.

A broker with years of experience can offer coverage pertaining to certain laws and requirements that clients are probably unaware of. For example, in Napa, California, all new single-family homes are required to have interior fire-retarding sprinkler systems installed. With this requirement in place, a policy providing only replacement coverage would be inadequate. A broker in that area would be familiar with such a requirement and would advise his clients to consider coverage for an increased cost of construction in the event of damage. This way, if the home is ever damaged and needs to be rebuilt, the required installation of the sprinkler system will be covered by the insurance.

Brokers can also advise clients on other types of coverage that are commonly overlooked. One example is the non-owned and hired auto coverage. If you have an employee that is making a delivery or deposit for your business in their own car and gets into an accident, you could be held liable if attorneys find out that the employee was on an errand for your business. The non-owned and hired auto policy would cover your defense costs and claims in this type of suit.

If you own a business and have just one employee, your broker may also suggest that you consider employment practices liability, which would cover any claims of wrongful termination, discriminatory actions, or sexual harassment filed against you. Whether these claims are legitimate or not, it still offers peace of mind should a lawsuit be filed. If you have an employee that handles large amounts of money for you, consider insurance that covers employee dishonestly, including embezzlement or theft.

Finding an insurance broker you trust can help you ensure you will be fully covered. The benefit of having a broker’s advice is that your insurance coverage can be custom tailored to your needs.

Seven Steps for Successful Asset Protection When Buying Real Estate

by | Jan 8, 2015 | , ,

You have made your decision to invest in real estate. You know what property you want to buy. Your offer has been accepted. Now what do you need to do to make sure your property is protected from the start? Here is a checklist of the seven steps for asset protection when you are buying real estate.

1. Getting in Escrow.

If your entity is already formed, you will list the entity name as the buyer on your offer to purchase the property. If it isn’t yet formed, list your name and the right to assign the contract to an assignee (your new LLC or LP). So the offer would be from “your name and/or assigns.”

2. Form your Entity.

If you are going to be in escrow for a period of time (30 to 45 days) in order to get your due diligence inspections done you will have time in most states to get your entity formed. Also know that Nevada has an expedite service whereby LLCs and LPs can be formed in a matter of hours. Remember, your entity must be in existence at the time of transfer.

3. Financing Issues.

Some lenders do not want you to take title in the name of your LLC. Some will offer very technical arguments for why they don’t allow it, others will tell you they straight out they think you are trying to hide assets. The way around this is to take title in your individual name and then transfer the title from you into the new LLC. More and more lenders are okay with this solution. The banks I work with are. Know that in such a transfer the lender’s position hasn’t changed. They still have your personal guarantee and a first deed of trust against the property. There is still a ‘continuity of obligation,’ – a technical term you can use with them. But I personally wouldn’t ask the lender if such a transfer is okay. If you have you heard the old saying, “It is better to ask for forgiveness than permission,” it applies here. Pay the mortgage from an LLC checking account. Virtually all lenders are not going to call a performing note. Have a title company or attorney prepare a grant or warranty deed and transfer to your LLC.

4. Transfer Taxes.

If you immediately transfer from your name to the LLC beware of transfer taxes. Many states make an exception and don’t charge a fee when you are transferring from yourself (your individual name) to yourself (your new LLC). Others, like Nevada, don’t charge when the property goes from you to the LLC, but do charge, as in a refinancing scenario, when you transfer from the LLC back to yourself. The key state to be careful in is Pennsylvania. They charge a 2% transfer tax no matter what. So say you have a $1 million property with $900,000 in financing on it and you want to transfer into your LLC. A 2% tax on a $1 million property is $20,000. Ouch!

5. Insurance.

As I have often said, insurance is the first line of defense. When you insure the property make sure the insured is the LLC. (There have been cases where the title has been transferred from an individual to an LLC, the insurance company wasn’t notified and, using their contract loopholes, claims were denied because they didn’t insure the LLC.) If the insurance company says an LLC is a business and higher fees apply (which is nonsense – since they are insuring the same property) ask them to list the LLC as an additional insured. So the policy is in your name and the LLC is also listed as an additional insured. Send a C.Y.A. letter to your insurance agent notifying them that the LLC is on title to the property.

6. Banking.

You will open up a bank account in the name of the LLC. You will take a copy of your state filed articles of organization into the bank along with your EIN (tax id) number. If you are a single member disregarded entity (and work with your CPA on this) you will use your Social Security Number instead of the EIN. If you are a foreign national investing in the U.S. the procedures are a bit different and too far afield for this section. Consider calling our office for an explanation. (Please know that it is not a problem and can be done.) The bank may ask for a copy of your operating agreement. Have it with you in case they do. Your checking account will list the name of the LLC (including the designation LLC) right on the check. You want the world to know you are doing business as “XYZ, LLC” and not as an individual. Have your tenants make out their rent checks to “XYZ, LLC.”

7. Succeed.

Do all your business in the name of the LLC. Contracts, vendor work and the like are all done not for you personally but for the LLC itself. Always pay the annual LLC filing fees and prepare an annual tax return for the LLC. You want ongoing protection and to get that you have to follow all the rules. For more information on following the formalities see Run Your Own Corporation. Consider segregating properties into separate LLCs. We don’t want to create a target rich LLC. When you sell the property it is sold by the LLC, which receives the money and then distributes it to you. Enjoy the process and succeed with protection.

Why Bearer Shares Are A Bad Thing

by | Jan 8, 2015 | ,

By Garrett Sutton, Esq.

Bearer shares have been used by some to engage in fraudulent conveyances. As a result, Nevada and Wyoming have outlawed the use of bearer shares.

Bearer shares are stock certificates that, instead of listing the owner by name, list the owner only as “The Bearer.” The supposed advantage of this was to maintain privacy of ownership. The bearer was whoever held the certificate, so shares could be transferred from one person to the next without notice to anyone or it being recorded anywhere.

But bearer shares bore problems. If someone comes to you with a bearer certificate, how do you know the certificate wasn’t stolen or forged? The idea of simply handing a certificate from one person to the next may sound nice and easy (if a bit crafty), but such a transfer can create all sorts of tax problems. If you hand a certificate representing a million-dollar business over to your friend you’ve made a significant gift, for which gift taxes are due. And when by prearrangement he hands the certificate back to you there’s another taxable event. Worse yet, what if your “friend” won’t give you the certificate back?

The reason bearer shares were outlawed in Nevada and Wyoming had to do with fraud. Less than ethical corporate promoters would sell their less than ethical corporate clients on the idea that by simply handing the bearer certificate over to a friend they could deny a judgment creditor (one with a court-awarded judgment) access to the business or other asset. Of course, such a transfer is a fraudulent conveyance, meaning that a court could overturn the transfer if anyone ever found out about it. The problem was that it could be very difficult to find out about it. Look for bearer shares to be outlawed everywhere.