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Business Succession Planning with Trusts

Business Succession Planning with Trusts

Business Succession Planning with Trusts

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business. 

Business Succession Planning with TrustsBusiness Succession Planning with Trusts

Understanding how a trust can help with your business succession is key to assuring your financial stability, both in planned transitions and unplanned transitions of your business. 

You may be looking ahead to retirement and wondering how best to transition out of your business and smoothly turn it over to a successor or want to ensure that at your death your legacy continues.

Start anticipating the future of your business. Here is all the information you need to start planning your business succession with trusts.

What is a Trust

Before understanding how business succession planning with Trusts works, you have to know what a trust is.

A trust is a fiduciary arrangement that allows a third party, called a trust, to hold assets on behalf of one or more beneficiaries.

The terms of a trust decide exactly when and how the assets that have been placed into a trust, which is referred to as “funding the trust”, will pass to the named beneficiary or beneficiaries of the trust.

Parts of the trust:

A trust generally consists of the following:

  • A grantor: The one to create the trust.
  • A trustee, acts as the legal owner of the assets that are placed into the trust. The trustee has other important duties, such as filing taxes for the trust, and distributing the assets of the trust in accordance with the terms of the trust.  You can have more than one person act as trustee, choose your trustee wisely
  • One or more beneficiaries: The person or group of people that the trust is meant to benefit. The beneficiary of the trust does not have to be a person, it can be a business or even a charitable organization.
  • Trust assets: Are what is used to fund the trust, whether it be cash or real estate or anything else of value.
  • Purpose: The intent behind creating it, whether it be tax avoidance, creditor protection, asset management or another purpose.

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business. 

Why Do You Need a Trust For Y Business

Without a trust, your business could come to a screeching halt in your absence. You’ve likely poured blood, sweat and tears and a lot of money into creating your successful business. The last thing that you want is for it to fail in your absence.

Let’s look at this scenario:

If you were to pass away from a catastrophic illness, such as cancer, or after a lengthy battle  in the hospital with COVID, money from your business, meaning both liquid assets (such as cash in the business checking account) and non-liquid assets (such as real estate) owned by the business could have to be used to pay your outstanding medical bills. 

Properly protecting business assets in a trust can keep your business from having to satisfy your personal debts as a properly established trust can protect your business assets from creditors.

A trust is an important part of a business succession plan, and its importance should not be overlooked. Trusts have played an important part of business succession planning for years. A trust can provide tax avoidance, protection from creditors, probate avoidance and management of business assets.

Some business owners wish to avoid probate- the process of probate is public record. By establishing a business trust, you can protect your business’ privacy, which could be crucial in some industries.

Related Link: Cannabis Business Plan

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business. 

What is a business succession plan

Now that you understand how a trust can protect your business, let’s talk about how a trust can help with your business succession plan.

A business succession plan is just that- A plan, preferably, a written one, that lays out a plan for your business to continue after you retire, or after you sell it to a new owner or business partner, or even after you pass away.


Why do you need a Business Succession Planning with Trusts-3business succession plan? 

A well-thought business succession plan can assist in a smooth transition from one business owner to another. A comprehensive business succession plan can help with that smooth transition by minimizing taxes, transition costs and interruptions to the business which could easily lead to lost revenue.

About 40% of businesses end up being run by 2nd generation owners. A business succession plan that includes a trust can help the business stay successful throughout the second, third, fourth or more, generation of owners.

Types of Trusts

  • Revocable trust or 
  • Irrevocable trust. 

A revocable trust will allow you, as grantor, to control the assets that are used to fund the trust. Remember, you have to place some sort of asset into the trust in order to fund the trust. Whether that is deeding a piece of real estate from your name into the trust, depositing cash or investments into an account in the name of the Trust, or even some other type of asset, like a vehicle, you must fund the trust. 

A revocable trust keeps these assets in your control, and you will be able to “dissolve” or end the trust at any time that you desire to. Once you die, a revocable trust will generally become irrevocable. Assets in a revocable trust do avoid probate however, they generally do not avoid taxes nor do they generally provide protection from creditors as these assets are still in your control.

An irrevocable trust is one that once it is established any assets put into the trust will be out of your control and you will not be able to change the terms or dissolve the trust at will.

Assets that have funded an irrevocable trust also avoid probate just as assets used to fund a revocable trust, but by putting your business assets into an irrevocable trust, the trust will be able to avoid taxes at your death, and they will be protected from claims by creditors, creating a better outlook for your business. 

There are many different types of trusts. Some are better for business succession planning than others. You should consult an attorney before deciding what type of trust is right for your situation. Every situation is unique. However, common types of trusts used in business succession planning include:

  • Irrevocable life insurance trust (ILIT)
  • Grantor Retained Annuity Trusts
  • If your business is set up as an S Corp, The Qualified Subchapter S Trust, or “QSST” 
  • Electing Small Business Trust (ESBT).

An ILIT keeps the proceeds from the decedent’s taxable estate while providing liquid assets to the beneficiary of the trust. This cash infusion could be used to continue day to day operations of the business during the transition period from decedent to the new owner. 

A Grantor Retained Annuity Trust is an irrevocable trust that will transfer your business assets upon your death, and this transfer would not be subject to estate taxes. During your lifetime, the assets that have been used to fund this trust will pay you an annuity income. This effectively passes on rapidly growing business assets to your children. The grantor retains control of these assets during the term of the annuity, which is usually 2-5 years. However, if you die during the annuity terms ends, because you retained control over them, the assets are considered part of your estate and subject to taxation. 

A Qualified Subchapter S Trust, or QSST, and is a way to pass ownership of S Corporation Stock. This can allow for the owner of a business to control the business even after death through the directions left for the Trustee. There are several specific requirements in order to establish a QSST. Among those are: 

  • there must only be one beneficiary of this type of trust, 
  • the beneficiary must receive all of the trust income annually
  •  any principal distributed must be distributed to the beneficiary.
  •  A grantor of a QSST should appoint a non-beneficiary trustee for the purposes of making trust distributions.

And the other type of trust that can hold S corporation stock is the Electing Small Business Trust (EBST). An EBST is more flexible than a QSST in that it can have more than one beneficiary, and the trustee has discretion in making distributions.  There are differing tax treatments for QSST and EBST, so consult an attorney when establishing these trusts. 

We hope this Business Succession Planning with Trusts post has helped you to see a few of the varying ways that as a business owner you need a trust as part of your business succession plan. Here at Collateral Base we have an estate planning attorney that is ready to help you plan for the successful transition of your business.



Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
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When Is An LLC Needed

When Is An LLC Needed

When Is An LLC Needed

Want to Get your LLC Drafted?

When is an llc neededWe want to help you out on your business journey and explain to you when a corporate liability shield, like an LLC or corporation is needed or not.

As small business owners it can be extremely valuable to find guidance in what you should be doing for your business and when.

We are going over when you need to get a liability shield for your business.

There is no requirement that you create an LLC before you go into business, it can be a smart move and highly recommended sometimes but is not necessary to have your business running.

You can just start sending out invoices and creating value from your labor or sales of goods. Start helping people and charge appropriately.

Needing or not to create an LLC will depend on the type of business you own and its structure.

If you are wondering if you should have an LLC for your business and if the benefits will outweigh the cost and hassle of setting one up, this will definitely interest you:


Want to Get Your LLC Drafted?

What is an LLC


LLC stands for limited liability company. It’s a business structure that provides a business with limited liability. Although the structure is similar to corporations, the LLC is easier to establish and simpler to maintain.

The key aspect of LLCs is that it  provides protection to the LLC owners by limiting the owner’s personal liability

Meaning that debts owed by the business, and other claims, like liens and lawsuits, are limited to the assets of the business itself, and in no case to the owner’s.

Therefore the personal assets of the business owners, under most circumstances, are protected and cannot be pursued.

Be careful, that does not mean owners are protected from negligence or  illegal acts committed in the name of the LLC.


What would an LLC do for your business?


An LLC gives your business a legal identity on it own. It becomes a separate “person” in the eyes of the law and it can own money, have a bank account, make agreements, buy property, sue and be sued.

Not having an LLC means that you and your business aren’t legally separate, and everything you own is at risk if your business is facing liens lawsuits or others


Does My Business Need an LLC?

The first thing you should do to see if it is time to start an LLC is: examine your business. Ask yourself these questions:


  • Do you have partners?
  •  Do you have high risk transactions?
  • Do you sell food?
  • How about anything where you have locations that could be sites of slips and falls?


If you need to form an LLC yet or not will mostly depend on your liability and taxes.

when is an llc needed

Many businesses are sole proprietors, so they cannot have all the disputes that partnerships can. Therefore, they are less likely to need an LLC until we look at what they are doing and how much they are making.


How about your blog that you have monetized with advertisements and merch, or online courses.  Does that business need an LLC?  Not until they are making tens of thousands of dollars a year.


In that case the transactions are all at a low price point.  A few dollars for online ads and some sales of merchandise money. There is not much risk there. Someone is not going to have a slip and fall on your website. No one is going to get food poisoning from your online course. There is no liability benefit from splitting the cash flows away from the owner.


In this situation, it does not make sense to form an LLC until you get enough money each year to get hit on taxes so much that it makes more sense to become an s-corp so that you can work for yourself and get a paycheck from your own company and earn lower tax on the dividends. But that’s a tax question that can change over time.


What if you are the sole proprietor of a bar & restaurant? You need an LLC immediately. You have huge risks. Slip and falls, food poisoning, over serving a customer that gets in a car accident on the way home from your place. An LLC allows the owner to be a legally separate person than the cash flows.


How about an independent contractor that does home improvements? Then you want the liability shield because your job to redo a kitchen and bath could be 40 grand or more. You want that to be the company’s problem, not the owners. Large transactional liability is another reason to form the LLC. So if you are in enterprise sales, get an LLC.


Finally, partners complicate things far more. When you break up the ownership all sorts of things arise. How do partners exit the business; how do new people get into the business; what duties do the owners have to the business; and much more. Multiple owners of any business, as far as I’m concerned, always should have an LLC.


Want to Get Your LLC Drafted?

Key Points to consider when doubting to create or not an LLC


  • You need an LLC when you have premises liability, brick and mortar stores.
  • You need an LLC when you have transactional liability. Protect the big fat contract checks.
  • You need an LLC when the tax man says you earn too much as a sole proprietor so get an accountant.
  • You need an LLC when you have partners. Be smart, have an exit plan before you start with any partners.


How to Start an LLC 

Now that you know when you need an LLC – let’s talk about how to form one.  Make sure you you follow us for future content! 

Filing with the State

If you are a small business, it would probably make more sense to start your LLC in your home state.

But you should know that there are other states to fill your LLC that may be more favorable  due to beneficial tax laws and business infrastructures. 

If you serve a local demographic you should file in that state, but for cyber or internet type of business the location has no real importance and you could research the state regulations that fit your business model best.

Each State has its own process when it comes to filing the articles of organization for an LLC.

Most of them offer to file online making the process easier, otherwise, you’ll have to fill out the articles of organization by hand and send it to your Secretary of State’s Office.


Determining If You Want To Be Manager or Member Managed

There are two forms of management for an LLC, it can be managed by the members or managed by a manager:

manager-managed LLC: Creates a manager role separated from the ownership. The manager has the authority to decide on the day to day operations. But the owners have authority for higher level decisions.

Member-managed LLC: the owner or one of the owners is the manager and handles operations accordingly.


Getting a Registered Agent

A Registered Agent is a person that could be a member of the LLC, or a third-party who acts on behalf of the LLC to collect legal notices from the State or other. 

The registered agent needs a physical address in the State in which the company is registered. 

If you do decide to incorporate an LLC in a different state from where you live, you will need to find a Registered Agent that resides in the same state where you incorporated your business. 


Drafting an Operating Agreement 

Next step is to draft your LLC Operating Agreement which is intended to be kept for internal record-keeping. This is where the ownership percentage of the company is outlined. Here are a few important things you should include in your LLC Operating Agreement:

  • Names of all Members and all their signatures
  • Members’ Percentage Interests and Capital Contributions
  • Date of Annual Meetings

Once your LLC Operating Agreement is complete, each Member should have a copy.


Getting an FEIN Number

A FEIN is a Federal Tax Identification Number, also heard of as an Employer Identification Number (EIN), is issued to companies that do business in the United States. It iis a unique nine-digit ID number, like a security number but for companies. 

  • A FEIN is a way for government entities to identify and track businesses tax and financial activities.
  • A FEIN is required to file tax returns, and to set up accounts to offer benefits to employees

Not every small business needs a FEIN, but the following do:

  • Any business with employees.
  • Any business that operates as a corporation or a partnership.
  • Any business that pays employment, alcohol, tobacco or firearms tax returns.

You can apply for a FEIN

  • By phone.
  • By fax or mail:
  • On the IRS website

Even if your business is not required to have a FEIN, you may decide to get one. There is no charge, and you never know when your business circumstances change.


Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens


How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Skitting ScamsCheck kiting is one of the many ways your financial securities can be violated.


It constitutes a type of bank fraud very popular in the early 2000’s, that was in its majority shut down by a regulation called check 21 act. 

Even though not as common as it used to be, check kiting is still present in many fraudulent transactions. Here we explain to you everything there is to know about this illegal procedure 


Definition of Check Kiting

Check kiting is the fraudulent procedure of deliberately issuing  a check for which there is not sufficient money to pay the stated amount.

The scheme usually involves several checking accounts at different banks. In effect, a bank deposits accessible money into an account while waiting for cash to be processed from an account at another bank when in actuality the other account holds no money.

Check kiting is always intentional. Those engaged in kiting have a detailed understanding of the bank’s timing, and will take advantage of it to withdraw cash just before the bank discovers that there is something wrong,  keeping ahead of the funds-clearing mechanism.

Check kiting schemes have resulted in multi-million dollar losses.

Elements to Check Kiting:

  • Having checking account A, and checking how to stop check skiting scamsaccount B from different banks,
  • Writing a check from checking account A, for which there is not sufficient cash in the payer’s account.
  • Deposit the fraudulent check in checking account B.
  • Withdraw the funds from checking account B.


Examples of Suspicious Circumstances That could lead to check kiting


This examples have been provided by regulatory agencies to help the identification of suspicious transactions that may indicate check kiting:

  •  Several accounts with similar names, owned or controlled by the same individual
  •  Regular or excessive drawings against uncollected funds
  •  Frequent daily negative ending balances or overdrafts
  •  Deposits of large checks drawn on nonlocal banks or foreign banks
  •  Frequent, large deposits drawn on the same institution
  • A large number of check deposits each day
  • A large proportion of cash in an account that has not yet cleared the paying bank
  • Deposits being made through multiple bank branches
  •  A low average daily balance in relation to deposit activity
  •  A low collected funds balance in relation to the book balance
  •  A volume of activity or large debits and credits inappropriate in relation to the nature of the business

Is check kiting the same as playing the float.


You may have heard of the expression playing the float, and don’t worry it’s not the same as check kiting.

Float refers to the amount of time it takes for money to move from one account to another. Meaning, Playing the float is the process of writing a check with no bank balance covering it, expecting the fund to be in the bank when the check clears.

In the past, it was easier to play the float, because the period of time between when a check was written by the payer and when the funds were transferred to the payee was longer. The Check 21 law had the practical effect of shortening that opportunity.

There is a fine line between playing the float and actual check kiting. Check kiting is the illegal act of knowingly writing a check from a bank account without sufficient funds and depositing it into another bank account. While playing the float is taking advantage of the funds-clearing time period to have to receive the sufficient funds to cover the check.

Check kiting is a fraud, playing the float is not. Playing the float doesn’t result in harsh penalties, while check kiting does.


Check 21 Act


Check 21 law, is a federal law to combat check kiting that became effective on October 28, 2004.

The Check Clearing for the 21st Century Act, or Check 21, is designed to enable banks to handle more checks electronically, instead of moving the original paper checks from the bank where the checks are deposited to the bank that pays them, making check processing faster and waymore efficient.

Check 21 act may seem like a very subtle and expected change, but its consequences are enormous.

It meant that not only could banks exchange the images between themselves, customers could deposit an image instead of a paper check as well.

Since its passing, the services have evolved exponentially, and the necessary computer hardware has improved and become less expensive and more available for all americans.

More importantly, Check 21 has allowed us to receive and have access to our funds sooner.


How to prevent Check Kiting


The entity harmed by check kiting is mostly the bank that has allowed funds to be withdrawn from the new checking account without first waiting for funds to arrive.

Banks fight  this by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the lack of funds in the payer’s account will have been discovered.

But any individual could be subject to check kiting, as well. Here are some tips to prevent becoming a victim of check kiting:

1 . Only accept checks for the exact amount owed to you.

  • If a customer offers you a check for more than the amount they owe, then asks you to give them cash for the difference, and you accept and then the check is returned by the bank, you can become a participant in a check-kiting scheme unintentionally .
  • For online transactions a check kiter might send you payment, then inform you that they “accidentally” overpaid you. They’ll ask for you to pay the difference by wiring transfer or cash.


2. Wait until the check clears to refund the overpayment.

  • If someone overpays you with a check and wants a refund, tell them that you’ll gladly do it after the check clears.
  • Refuse to pay any refund until the check no longer says “pending” in your bank account.


3. Look into checks that clear your bank account out of sequence.

  • Checks out of sequence might indicate that someone has stolen a checkbook and is using your bank account for a check-kiting scheme.
  • Checks out of sequence could also indicate that someone has ordered checks on the account starting at a different number than the ones you’re currently using.


4. Restrict access to company checks if you’re a business owner.

  •  A check kiter can use your company checks for its check-kiting scheme without your knowledge
  • Keep all blank checks in a locked safe with restricted access.

How To Stop Check Skitting ScamsPenalties to Check kiting

Penalties for check kiting always vary depending on the case, but millions of dollars cases can end with sentences of more than 10 years in prison and enormous  fines. Smaller or first-time infractions can result in harsh penalties.


Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens


Fiduciary Duty Litigation

Fiduciary Duty Litigation

Fiduciary Duty Litigation in Corporate Law


Fiduciary Duty LitigationA fiduciary duty is an obligation that exists in a relationship in which one of the parties has the best interest when acting on the other party/es behalf. 

There are multiple types of fiduciary duties. Some examples can be the obligations between lawyers and clients; shareholders and directors; between business partners; and many others where special trust is part of the nature of the relationship, or a reliance on the one party exists to exercise its expertise or discretion on behalf of the others. 

Breaches to fiduciary duties are extremely common, especially in corporations. Here are all the details you should know about fiduciary duties and what to do when you have to appeal to litigation because a breach has occured.


Fiduciary Obligations

A fiduciary duty consists of two main fiduciary obligations.  

  • Duty of loyalty, the fiduciary prefers the beneficiary’s interests to his or her own 
  • Duty of care,  the fiduciary acts as a reasonably careful person would act under the same or similar circumstances safeguarding the beneficiaries’ interests.

Depending on the state’s legislation other duties such as the duty of good faith and the duty of acting according to law can also be considered. The failure of either of these duties may result in fiduciary duty litigation.


Who Is Part Of This Relationship


  • Fiduciary: The person who holds the obligation that exists in the relationship, Fiduciary Duty Litigationhaving best interest when acting on the other partiy/es behalf
  • Principal: The person to whom the fiduciary owes the duty

Who has fiduciary duties?


These are the persons the law denominates as fiduciaries, keep in mind states may differ in these considerations:

  • Partners: Business partners in a partnership owe each other a fiduciary duty. Some of these duties are to account for profits, property, opportunities, or other benefits derived by the partner, and to abstain from competing with the partnership.
  • LLC Managers: A duty to account to the LLC, and hold any property, profit or LLC benefit, as a trustee for the LLC; and, A duty to abstain from competing with the LLC; to refrain from negligent or reckless conduct, intentional misconduct, or knowingly violating the law.
  • Corporate Directors: The board of directors of a corporation owes duties to the corporation itself, and the shareholders. Directors must act in the best interest of the corporation and the shareholders
  • Corporate Officers: the fiduciary duty requires officers to apply their best business judgment, to act in good faith, and to promote the best interests of the corporation.
  • Controlling Stakeholders: As Someone who has a legitimate interest in serving the company so that the company performs well overall their duties are similar to the corporate officers one, as they may take decisions in the name of the company.

Breach of Fiduciary Duty Fiduciary Duty Litigation

Breaches of fiduciary duty happen when a binding fiduciary relationship is in effect and actions that are counterproductive to the interests of a specific client are taken, to benefit the fiduciary’s interests or the interests of a third party instead of a client’s.

A breach can also come from a failure to provide critical information that may lead to misunderstandings, or misinterpretations. Identification or disclosure of any potential conflicts of interest is important in fiduciary relationships because all types of conflicts can be a source for undesired intentions.

Elements Of a Breach Fiduciary Duty 

To be sure you have a case of breach of fiduciary duty, you must look for three essential elements: 

  • A duty existed, You must determine if the specific relationship in question created a fiduciary duty under the law
  • A breach of the duty occurred: You must prove that a breach occurred and that the defendant acted on his own behalf instead of in the best interests of the other parties. 
  • Damages were suffered: You must prove that the breach caused harm and compensation is available. 

Most common breaches of fiduciary duty

There are many ways in which fiduciaries may breach their duties. The most common breaches of fiduciary duty include:

  • Self Dealing, through conflict of interest business, transactions for personal gain or personal economic profits.
  • Usurpation of business or corporate opportunity
  • Misappropriation of corporate funds and property.
  • Neglect, business imprudence, or lack of necessary business skill.
  • Deficiently acting in the business owners, shareholders, or members best interest.
  • Failure to provide accurate corporate information.
  • Breach of confidentiality.
  • Misuse of superior knowledge.
  • Giving inappropriate advice or counsel 
  • Abusage of superior or influential position.

Fiduciary Duty Litigation

When a fiduciary duty has been breached, those affected can consult with a corporate litigation attorney about filing a lawsuit. 

If you believe you have a case for breach of fiduciary duty,  you should really know all your options, don’t forget litigation could worsen the situation.

While these types of disagreements need to be resolved, there are other alternatives, such as mediation. Be sure you consult it with an expert before making a final decision. 

Going to court can be time consuming, stressful and expensive and private disputes will become a matter of public record. All litigation processes are complex, and fiduciary duty litigation is not the exception.

You do not want to spend time and money going to court only to be unable to prevail and obtain the legal remedy you seek because you were unprepared, a fiduciary duty litigation attorney could make a difference in the result.


Key Points Of Fiduciary Duty You Should Know

  • A fiduciary is legally obligated to put their client’s best interests ahead of their own.
  • Fiduciary duties appear in a range of business relationships, including a trustee and a beneficiary, corporate board members and shareholders, and executors and legatees, but also in many civil relationships.
  • You may have heard the term investment fiduciary before, and it is anyone with legal responsibility for managing someone else’s money.
  • Fiduciary duties are both ethical and legal. 
  • A fiduciary must avoid any conflicts of interest between his own interests and the interests of the principal, as well as to avoid any conflicts that may arise between different clients of the fiduciary.

If you are looking for a Fiduciary Duty Attorney don’t hesitate to contact us.


Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens


What Is an Accredited Investor?

What Is an Accredited Investor?

What Is An Accredited Investor

accredited investor

What is an accredited investor?

An accredited investor is a person or legal entity with a special status under financial laws, who is allowed to participate in non-registered investments, since being considered an individual with the experience and means to participate in riskier investments and bear any potential losses.

The Securities and Exchange Commission (SEC) concedes companies and private funds the opportunity to not register certain investments as long as the firms sell these assets to accredited investors exclusively.

Who Is an Accredited Investor? 

In order to qualify as an accredited investor, a person must meet certain criteria involving his annual income and net worth.

  • Annual Income: The investor must have an annual income that exceeds $200,000 or $300,000 for joint incomes, for the last two years. The individual must also expect the same or higher revenue in the current financial year.


  • Net worth: The investor must have a net worth of $1 million or higher, either as an individual or jointly if married, at the time of purchase.  In the case of an entity, assets must be valued at $5 million or higher or have an owner who is considered an accredited investor.

However, entities formed for the sole purpose of purchasing unregistered securities will not be allowed accredited status. 


How do I become an accredited investor?

There’s no formal process of certification offered to prove you’re an accredited investor. There is no government agency to review an investor’s credentials, and no exam or certification exists stating that a person has become an accredited investor. Instead, it is on the companies selling the non-registered investments to verify the qualifications of the buyers. 

Typically, the investor is required to fill out a questionnaire that requires details of their annual income and their net worth attaching supporting documents like financial statements, account information and tax return. It is possible some companies require additional information, like letters from financial advisors and attorneys or credit reports.


Why do accredited investors exist?

The Securities and Exchange Commission (SEC) created this distinction to refer to individuals considered “sophisticated investors”, who are not in need of the same levels of financial protections the common investor does. 

Allowing only accredited investors to participate in offerings of non-registered securities has the purpose of:

  • Regulating companies against advertising to or soliciting investments from non-accredited investors.


  • Protecting the regular investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss


  • Making sure that those who meet the qualifications have the financial sophistication necessary to evaluate a private investment and potentially riskier opportunity 


  • Assuring that the risk of losing their investment falls on those who financially prepared to bear the situation.

Amendment to the Accredited Investor Definition

The SEC announced the adoption of amendments to the definition of “accredited investor,”. In efforts to “simplify, harmonize, and improve” the rules governing the private offering of securities while maintaining investor protections by adding new categories of qualifications, including

  • Individuals with professional certifications, designations or credentials issued by an accredited educational institution, which the SEC may designate from time to time; 


  •  Individuals who are “knowledgeable employees” of private funds;


  • Limited liability companies (LLCs) with $5 million in assets;


  • Entities, such as Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries, that own investments, in excess of $5 million


  • Family offices with at least $5 million in assets under management and their family clients; and


  • Spousals may pool their finances for the purpose of qualifying as accredited investors, describe as “spousal equivalent”

Here is the full text of the amendment  

The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.

The amendments to the accredited investor definition in Rule 501(a):

add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.  This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.  Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;

include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;

clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;

add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;

add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and

add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendment to Rule 215 replaces the existing definition with a cross-reference to the definition in Rule 501(a).

These amendments were announced on August 26, 2020, and they will take effect 60 days after publication in the Federal Register. 

If you are interested, here you can find SEC’s official Press release And if you have any questions about how accredited investors work, do not hesitate to contact us


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