Singing Auld Lang Syne and Inventorying Special Purpose Entities

Whitman Legal Solutions, LLC

Whitman Legal Solutions, LLC

As the ball drops in Times Square on New Year’s Eve, millions of people join in singing Auld Lang Syne. National poet of Scotland Robert Burns first recorded the words to this poem on paper in 1788.

The melody, believed to be Scottish dance tune, The Miller’s Wedding is no stranger to classical music. It was in English composer William Shield’s comic opera, Rosina, first performed in Covenant Garden in 1782. In 1814, Beethoven included Auld Lang Syne in his 12 Scottish Folksongs. And in 1999, British singer Cliff Richard sang the Lord’s Prayer to the now-famous Scottish melody in Millennium Prayer.

The English translation of “Auld Lang Syne,” which in lowland Scottish, means “old long since” and roughly translates to “for old times’ sake” or “days gone by.” The English lyrics envision two old friends who meet at a pub to raise a cup and reminisce about old times.

At year-end, businesses and real estate investors also revisit the past -- but not solely to reminisce. It also is the ideal time for a business or real estate investor to revisit its special purpose entities (SPEs) from bygone business divisions and real estate transactions. And it is the time to decide whether those SPEs continue to be necessary.

What is a Special Purpose Entity?

Special purpose entities got a bad name with the Enron scandal. Enron created a massive web of SPEs jointly owned with third parties, and under accounting rules disguised its precarious financial condition.

Regardless of their reputation, SPEs are a necessity for real estate investors. Most mortgage lenders require that commercial real estate be owned by a special purpose entity whose only business is ownership of the real estate asset. By having an SPE own the real estate, liability from other assets should not impact the real estate that is the collateral for the loan.

SPEs also may make sense for some businesses. The business may have an SPE own its office building or condo for the same reasons real estate investors have them. A company also may form a separate business entity to purchase a new business or pursue a new business venture. SPEs also can be instrumental in structuring joint venture arrangements.

Why is an Annual Special Purpose Entity Inventory Important?

Each SPE costs money to maintain. States usually charge annual fees (sometimes characterized as a tax) to keep the SPE active. Each SPE must have a registered agent in its state of formation and each state in which it conducts business. Frequently, a third-party resident agent service performs this function – for an annual fee. The labor cost and attorney and accountant fees associated with filing annual paperwork and conducting meetings can add to the expense of keeping the SPE active.

Many companies and real estate investors will form SPEs for new endeavors, only to abandon the SPE when the deal does not close. The real estate owned by the SPE may have been sold years ago without cancelling the SPE. Or, a joint venture may have long since ended while the SPE connecting the parties remains. Because of this, it makes sense for every business and real estate investor to make an annual inventory to see if it has unnecessary SPEs.

When Should a Special Purpose Entity be Terminated?

There is no need to keep SPEs that never owned assets or conducted business. Owners may terminate real estate investment SPEs after the real estate has been sold, provided there are no post-closing seller obligations or rights. Owners should terminate other SPEs if they are no longer conducting business.

I usually recommend that real estate investors maintain their SPE for at least one year after disposition of the real estate in case any unknown claims arise. If there are possible liability or contract claims, the SPE should remain in existence longer, possibly until the expiration of the statute of limitations.

SPEs with pending litigation or open investigations or claims should be maintained in good standing until those matters are resolved.

Formal Owner Action

Occasionally, an SPE’s organizational documents, such as the articles or certificate of formation, or operating agreement for a limited liability company (LLC) or articles or bylaws for a corporation, may specify an ending date for the SPE. Usually, the formation documents don’t give an automatic termination date.

Usually, the SPE owners must take formal action authorizing termination of the SPE. Formal action usually will be in an owner resolution authorizing dissolution and winding up of the business. The authorizing resolution should authorize an individual to effect the dissolution and winding up process unless the organizational documents already do so. Likewise, the resolution should describe how the SPE’s assets will be distributed on dissolution, even if the resolution references the organizational document provisions on this topic.

Pay Creditors

Real estate investment SPEs usually already will have disposed of the real estate and paid all expenses. The same is less likely to be true for SPEs created for business divisions.

Regardless, the SPE must pay all creditors before the owners receive their final distributions. Some state laws may require that the SPE send all creditors written notice before termination. Some state laws may require that the SPE publish a notice before terminating an entity.

It’s particularly advisable to send vendors letters telling them the SPE is dissolving if the SPE is selling its real estate or business to a new owner. Otherwise, the vendor may inadvertently bill the SPE for charges the new owner incurs.

Final Tax Returns

Even if the SPE has not conducted business for some time, it needs to file final federal and state income tax returns. When filing final tax returns, owners should not forget to close payroll, employment, sales/use tax, and other non-income tax accounts. Frequently, this involves simply checking a “final return” box on the SPE’s tax return.

If the SPE hasn’t filed a final tax return, taxing authorities may pursue penalties for not filing returns. If there was no income to report, owners might eventually resolve these issues with the taxing authorities. However, the process can be time-consuming, costly, and frustrating. It is better to file formal final tax returns.

State Government Filing

To cancel an SPE, the owners must file cancellation documents with the state secretary of state (or in Maryland, Department of Assessments and Taxation) in the SPE’s formation state. The owners also must cancel the SPE in every other state where it is authorized to conduct business. The name and contents of the document varies from state-to-state, but most states have prescribed forms on their websites.

Most states also require that the SPE appoint a resident agent to accept service of process for post-termination legal notices. Many states also require documentation showing that the SPE has paid all required taxes before allowing termination.

A second option which works in some states is not to renew the SPE. The secretary of state then will administratively terminate the SPE due to nonpayment of the renewal fee.

Administrative termination usually isn’t the preferred approach, and in some states, it can cost the owners more money. For instance, in Maryland, personal property taxes will continue to accrue until the owners formally terminate the SPE and create hundreds of additional dollars of tax liability.

Tail Insurance

Owners also should check with their insurance agents to be sure there is insurance to cover any post-termination liability claims. SPEs usually will protect the owners from personal liability for SPE obligations. However, once the SPE terminates, claimants may attempt to pursue the owners – whether or not they are legally responsible. Since defending claims can be costly, it is important there be insurance to cover those costs.

Most real estate insurance packages include liability insurance on an occurrence basis. Those insurance policies will cover claims made after the policy is cancelled. However, some insurance policies, including most professional liability policies, are on a claims-made basis. If the SPE had claims made insurance, it should purchase tail insurance, which will cover claims made after the insurance policy is cancelled.


Discussion of issues surrounding termination of employees is beyond the scope of this article. SPEs with employees may have additional obligations under federal and state WARN laws or may have to pay employees for unused leave. SPEs that have had employees may need to address pension or benefit plans under ERISA or workers’ compensation laws.

Distribute Assets

After paying all creditors, taxes, and employees, the party managing the SPE dissolution should distribute the remaining assets to the SPE’s owners, as directed in the SPE’s organizational documents or owner resolution authorizing the dissolution. Cash is easily transferred via wire transfer or check. Personal and intangible property may be transferred via a bill of sale or other appropriate transfer document.

For Auld Lang Syne

While we reflect on the past year, it’s also apt to conduct an SPE investor at year-end. SPEs are reminders of a business's or investor’s past. They remind the owners of real estate transactions, business divisions, and joint ventures now flourishing and of others that now are in the past.

SPEs are reminiscent of successes and failures and of deals abandoned before they had the chance to succeed. SPEs tell the story of business relationships – some of which may engender nostalgia and others, which may have ended poorly.

Although we sing Auld Lang Syne at the new year, it is really a song of goodbye, as it describes two old friends who part ways. A later verse captures this sentiment.:

We two have paddled in the stream,

from morning sun till dine;

But seas between us broad have roared

since old lang syne.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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