04.06.11
Posted in Business Law, Litigation, Real Estate Law at 08:53 by Administrator
Q. I recently attended a seminar which promoted the idea of using a business entity to own and hold investment real estate, the primary purpose of which is asset protection. What are your thoughts on this asset protection strategy?
A. It has been argued that the American legal system unduly promotes and encourages a litigious society, with California often cited as evidence for the validity of this argument. Other states, in turn, often consult – and frequently follow – California legal precedent when addressing for themselves legal issues which California has previously considered. For this reason, it is important for real estate investors – whether they invest in California or other states – to be aware of the conflicting and sometimes inconsistent rulings by California courts on the issue of whether to recognize or disregard the asset protection qualities of business entities used to hold real estate assets.
Long before Limited Liability Companies (LLC’s) and other legal entities were commonly used to hold real estate for the purpose of asset protection, the “alter ego” legal doctrine arose in the law to “pierce the corporate veil” in cases where the “corporate-separateness” of legal entities had been used to commit fraud or to otherwise shield an entity’s owners from the entity’s violation of law. When a court uses the alter ego doctrine to pierce a corporate veil, the legal protections of an LLC or other legal entity are disregarded and the owners of real property held by the entity are treated as individuals for the purpose of civil litigation.
In addition to using the alter ego doctrine to pierce the corporate veil in cases where the owners of an LLC or other entity have committed fraud – which constitutes a legitimate and uncontroversial use of the doctrine – several California courts have applied the doctrine to cases where no law was violated nor fraud committed. The justification courts have given for this expansion of the doctrine is that invoking the court’s “equitable” powers as a means to apply the doctrine is necessary to prevent an “unfair” result.
In one such case, Mesler v. Bragg Management Co., 39 Cal.3d 290, 300-301 (1985), the California Supreme Court held that a group of affiliated real estate entities that were technically exempt from a local rent control ordinance because each entity held title to four rental units or less, could nonetheless be treated as a single entity for purposes of the rent control ordinance. The court found no evidence of fraud or bad faith on the part of the defendant entities or their managers, and the defendants produced an expert declaration stating that the use of separate entities to own individual properties is exceedingly common in the real estate industry. In justifying this result, the court said that even though “there are legitimate purposes for the way Defendants are organized does not preclude a finding that with respect to the [rent control ordinance] it would be inequitable to recognize Defendants’ separate existence. Id, at 300-301.
By disregarding the legal distinctions between the entities and their owners, the court in Mesler effectively substituted its notion of “fairness” for the law as enacted by the California legislature.
Judicial change in the law, like many other types of change, is usually incremental and gradual. Given recent trends in the law, it seems more likely than not that California courts will continue to decide cases based on what lawyers in black robes consider “fair” and “unfair”, rather than on the actual text of laws. Thus, it is entirely foreseeable that many California courts will further expand the use of the alter ego doctrine, so as to apply the doctrine in new, different, and more far-reaching contexts.
This article is published in both print and electronic formats. You may register at http://earlelaw.com/newsletters to begin receiving future articles via a free email subscription to the EarleLaw Newsletter.
Earle Law Offices offers the LAW (Lawyer Available Whenever) Plan, which provides a cost-effective means of obtaining legal advice when such advice is most-needed: before a legal problem arises, or as soon thereafter as possible. For details, please visit: http://earlelaw.com/lawplan.html.http://earlelaw.com/lawplan.html.
*Anthony F. Earle, Esquire is a California attorney and real estate broker who maintains a practice in the Silicon Valley area of northern California. He can be reached at: anthony.earle@earlelaw.com. This article is intended for information and educational purposes only, and is not intended to constitute legal advice.
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03.18.11
Posted in Business Law, Litigation, Real Estate Law at 12:39 by Administrator
Q. I recently retired from my professional career and became a real estate investor. After attending several real estate seminars, reading books, and engaging in other self-study, I put my newly acquired knowledge to work by forming a limited liability company (LLC) and using the LLC to purchase distressed residential investment properties.
Now, I would like to use my LLC to purchase a California home that I can use as my personal residence. Are there any potential legal issues associated with using an LLC to purchase one’s home?
A. First, let me congratulate you on what appears to be your apparent success with initiating the process of becoming financially independent by starting a real estate investing business.
Your statements that you used your LLC to purchase “distressed residential investment properties” and that you now want to use you LLC to purchase a California property to use as your personal residence, suggest that you purchased the investment properties during some phase of a foreclosure process and that you also want to purchase a property in foreclosure for use as your personal residence.
It is not clear in what state your investment properties are located, but if you purchased those properties in a state other than California, you may be unfamiliar with California’s Home Equity Sales Contract Purchase Act (HESCPA), which is codified at California Civil Code § 1695, et seq.
The HECSA requires that contracts for the purchase of California homes in foreclosure comply with certain, detailed requirements. The HECSA contains several exemptions to its application, one of which is for purchases by persons who intend to use the property as their principal residence. In the recent case Capon v. Monopoly Game, LLC, A124964, California Court of Appeal, First Appellate District (March 4, 2011), the court held that the personal residence exemption contained in the HESCA does not apply where the identity of the purchaser of the property and the intended resident/occupant are not identical, such as where an LLC purchases a residential property for use by the LLC’s sole member/manager.
For more information regarding the HESCA, please visit: http://earlelaw.com/newsletters and download your free copy of EarleLaw Newsletters, The California Home Equity Sales Contract Purchase Act (2009-01), Buying and Selling California Foreclosure Properties (2009-27), and General Release Insufficient to Overcome Non-Compliance with Home Equity Contract Purchase Act (2009-29). You may also register at http://earlelaw.com/newsletters to begin receiving your free email subscription to the EarleLaw Newsletter.
Earle Law Offices offers the LAW (Lawyer Available Whenever) Plan, which provides a cost-effective means of obtaining legal advice when such advice is most-needed: before a legal problem arises, or as soon thereafter as possible. For details, please visit: http://earlelaw.com/lawplan.html.http://earlelaw.com/lawplan.html.
*Anthony F. Earle, Esquire is a California attorney and real estate broker who maintains a practice in the Silicon Valley area of northern California. He can be reached at: anthony.earle@earlelaw.com. This article is intended for information and educational purposes only, and is not intended to constitute legal advice.
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11.11.10
Posted in Bankruptcy, Business Law, Constitutional and Civil Rights Law, Criminal Law, Family Law, Litigation, Real Estate Law, Trusts and Estates at 12:24 by Administrator
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09.25.10
Posted in Business Law, Real Estate Law at 08:31 by Administrator
Q. My spouse and I would like to know what we can do to protect our assets in the event we are ever sued. We own both a business and rental real estate which we hold for investment purposes. What can we do to protect assets related to one activity from being used to satisfy a judgment from a lawsuit arising from a different activity?
A. The first step, which you are now taking, is to explore options for asset protection before a possible claim arises, as any transfer of assets which occurs after a potential claim arises will be subject to being undone by a court under various laws relating to fraudulent transfers.
Depending on the type of business you and your spouse own, and the particulars of your investment real estate holdings, there may be a number of asset protection strategies which may be of benefit to you and your spouse. Some can be used as “stand-alone” strategies, while others might best be used in combination with each other.
One strategy you might want to consider is a marital agreement. California is a community property state and, as such, the community assets of both spouses can be used to satisfy the claims of judgment creditors of either spouse. In other words, if one spouse is sued, the community assets belonging to the other spouse (who is not sued) can be reached to satisfy an adverse judgment.
To prevent the assets of a spouse who is not involved in a lawsuit from being used to satisfy a judgment arising from the conduct of the other spouse, married persons can “opt-out” of California’s system of community property. The way to do this is through use of a marital agreement. Marital agreements can be entered into either before marriage (premarital or prenuptial agreement) or during marriage (post-marital agreement). The technical requirements for marital agreements are complex and differ depending on when (e.g., before or during marriage) the agreement is finalized.
By using a marital agreement, spouses will acquire, own, and hold property in the same manner as unmarried persons, which will prevent the assets of a spouse who is not involved in a lawsuit from being reached to satisfy a court judgment against the other spouse. This type of arrangement is especially suitable where one spouse operates a professional practice or other business in which the other spouse does not participate, especially where the professional practice or other business is considered or perceived to have moderate to high vulnerability to lawsuits.
Opting-out of California’s community property system also may result in tax consequences, especially in the estate planning context. Many, if not all, adverse tax consequences can be avoided by opting back into California’s community property system after the professional/business owner spouse retires.
Use of marital agreements can be a formidable defense against creditors. In the event of a divorce, either spouse can challenge the legal validity of a marital agreement, but creditors – who are never a party to such agreements – may not.
*Anthony F. Earle, Esquire is a California attorney who practices in the Silicon Valley area of northern California. He can be reached at: anthony.earle@earlelaw.com. This article is intended for information and educational purposes only, and is not intended to constitute legal advice.
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07.10.10
Posted in Business Law at 20:42 by Administrator
Q. I am planning to start a small business next year. Do I need to consult with an attorney before establishing a corporation? What kind of corporation do you recommend that I form?
A. Congratulations on your decision to become an entrepreneur! There are several ways in which you might be able to structure your business. Possible options include: sole proprietorship, partnership, limited liability company (LLC), or corporation. Some of the factors that will need to be considered when choosing a business structure include: the number and identities of owners; the type of business (e.g., type of services or products); whether the business will have employees; and how the business will be capitalized.
If, operating alone, you do not affirmatively select a business structure, your business will, by default, be a sole proprietorship. If, operating with one or more persons (other than your spouse), you do not affirmatively select a business structure, your business will, by default, be a general partnership.
Sole proprietorships and general partnerships do not shield their owners from personal liability for debts and obligations of the business. In the case of partnerships, each partner has the legal ability to incur obligations for which each other partner may be personally liable. Thus, in many instances, it probably is not a good idea to operate a business as a sole proprietorship for more than a short period of time. In almost all instances, it probably is not a good idea to operate a business as a general partnership for any period of time.
Businesses may, however, be structured in a manner which will provide its owners with limited liability in certain circumstances, as well as provide its owners with certain other advantages. The business entity which traditionally has been used to obtain these benefits is the corporation. More recently, Limited Liability Companies (LLCs) have been available as an alternative to the corporation.
LLCs have become popular with some businesses because LLCs typically offer more operational flexibility than corporations, and also because they reduce the amount of certain day-to-day record keeping formalities required of corporations. There are, however, some restrictions on the type of business that can be operated through an LLC. For example, some states do not allow certain professionals to conduct business through an LLC. Professionals may, however, be able to structure their practices as professional corporations, limited liability partnerships, or similar entities.
Sources of funding for your new business should also be considered. Although beyond the scope of this article, a determination must be made regarding whether the method used to capitalize your business will subject the business to various federal and state securities laws.
Finally, as with other business decisions, tax law and consequences should be considered when selecting a structure for your business. Although corporations and LLCs are created pursuant to state law, tax law, at least in the first instance, is governed by federal law. For example, if your business is structured as a corporation, a determination should be made regarding whether the corporation is eligible for classification, for federal tax purposes, as an “S corporation” and, if it is eligible for such classification, whether the business should elect to be taxed in this manner, rather than as a “C corporation.”
Although it certainly is lawful for you to start a business without the assistance of a lawyer, doing so likely is imprudent. As a business owner and entrepreneur, you need not personally possess all the knowledge and skills necessary to make your business successful; however, you should recognize the need for – and obtain – the assistance of professionals who do possess the needed knowledge and skills.
*Anthony F. Earle, Esquire is a California attorney who practices in the Silicon Valley area of northern California. He can be reached at: anthony.earle@earlelaw.com. This article is intended for information and educational purposes only, and is not intended to constitute legal advice.
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06.17.10
Posted in Business Law, Litigation at 19:02 by Administrator
Q. We own a small business in northern California, which provides both products and services to individual consumers.
Because our success depends, in large part, on repeat business, we follow various Internet sites that post customer reviews of our business. Many of our customers have posted positive reviews. However, as the saying goes, we can’t please all of the people all of the time.
Negative postings have the potential to significantly harm our business. What can we legally do to protect ourselves from the occasional – and inevitable – disgruntled customer who publishes a negative review of our business?
A. The First Amendment to the United States Constitution states, in part, that: “Congress shall make no law . . . abridging the freedom of speech, or of the press. . . .” Prior to the Civil War, the First Amendment prevented only the federal government from censoring speech. It was not until passage of the 14th Amendment, that the First Amendment became a bar against state censorship of speech.
A government engages in censorship when (among other things) it allows private parties to use its courts to sue others based on what others publish, either verbally or in writing.
The First Amendment, however, has never been understood to protect against all government censorship. For example, it does not create or protect a constitutional right to make false statements; falsely yelling “fire” in a crowded theater is not protected speech.
Long before the First Amendment banned state government censorship of speech, state laws provided civil causes of action for defamation, the general definition of which is “[a]n intentional false communication, either published or publically spoken, that injures another’s reputation or good name. . . .” Defamation includes both libel and slander.
In the landmark U.S. Supreme Court case New York Times v. Sullivan, the court made a distinction between, on the one hand, public officials/public figures and, on the other hand, all others. For a public official/public figure to recover defamation damages, the Court said that a plaintiff must prove the defamatory statement was published with malice. Malice, in this context, means that the defamatory statement was published with knowledge of its falsity or with reckless disregard for whether it was true or false.
Mere opinions, by definition, are not capable of being either true or false and, thus, are not actionable.
For the purpose of defamation law, the term “public figure” includes businesses. Thus, in order to prevail against a person who publishes a negative review, the business must be able to show that the posting is both false and made with malice. In most cases, the business will not be able to prove falsity, as most such postings are merely the reviewer’s opinion. In cases where falsity can be proven, past court cases inform us that proving malice is usually impossible.
Furthermore, in California, as in many other states, there exists a law against “Strategic Lawsuits Against Public Participation,” or “anti-SLAPP” law, which allows a defendant to obtain summary dismissal of such cases and which mandates an order requiring the plaintiff to pay the successful anti-SLAPP defendant’s reasonable attorney fees.
Thus, businesses who seek to manage their reputations should: (1) provide the best product/service possible, at a fair price; (2) comply with all laws, regulations, and industry standards; (3) engage in a good-faith attempt to satisfactorily resolve disputes; (4) consult with their attorney regarding whether to respond to negative reviews; and (5) have their attorney draft, or at least review, any response to an adverse review that the business intends to publish in rebuttal.
As the U.S. Supreme Court recently said in a case involving censorship of political speech, which was presented in the context of so-called campaign finance reform, “when government seeks to use its full power . . . to command where a person may get his or her information or what distrusted source he or she may not hear, it uses censorship to control thought. This is unlawful. The First Amendment confirms the freedom to think for ourselves.”
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11.22.09
Posted in Business Law, Taxation Law at 19:27 by Administrator
If you own a small business, whether your business hires workers as independent contractors or as employees will determine how the financial resources the business has available to it for labor are apportioned.
Following are eight considerations for business owners who must decide whether to classify workers as independent contractors or as employees.
1. The three characteristics used by the IRS to determine the relationship between businesses and workers are: Behavioral Control, Financial Control, and the Type of Relationship.
2. “Behavioral Control” refers to facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
3. “Financial Control” refers to facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
4. “Type of Relationship” refers to how the workers and the business owner perceive their relationship.
5. If your business has the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
6. If your business can direct or control only the result of the work done – and not the means and methods of accomplishing the result – then your workers may be independent contractors.
7. Employers who mis-classify workers as independent contractors can end up with substantial tax bills, penalties for failing to pay employment taxes and file required returns, as well as non-tax penalties, such as those imposed pursuant to the California Labor Code and liability which mae arise from the failure to provide workers’ compensation coverage.
8. Employers can become the subject of an IRS inquiry following a request by a worker for a determination of whether the worker should by classified as an employee or as an independent contractor. More likely, however, workers indirectly seek such a determination by filing a claim for unemployment compensation benefits or a complaint with the California Labor Board.
Please contact Earle Law Offices today if you are an employer who needs legal advice or representation concerning the classification of a worker.
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Posted in Business Law at 19:11 by Administrator
Anyone starting a new business has a multitude of issues to consider. The following is an overview of some the important legal and tax issues:
1. A type of business entity must be selected. The type of entity will dictate, among other things, which tax form(s) will need to be filed. The most common types of business entities are the sole proprietorship, partnership, limited liability company, and corporation.
2. Business and, if necessary, other licenses must be obtained.
3. The type of business you operate will determine what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, payroll tax and sales/excise tax.
4. An Employer Identification Number is used to identify a business entity. All businesses, except sole proprietorships, need an EIN.
5. Good record keeping is absolutely essential. Generally, you may choose any record keeping system which is suited to your business and which clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the type of business you operate will affect the type of records you need to keep for tax purposes.
6. Every business must calculate its taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common.
7. Each business must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
Earle Law Offices is available to assist you with every legal and tax aspect of your small business, including entity selection and formation, accounting and tax issues, employee and personnel issues, risk management, and litigation. Please call our office today for assistance with your legal and tax issues.
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