LLC considered community property

Is Your Share of an LLC Considered Community Property in a Divorce?

While thousands of LLCs, or limited liability companies, are formed every year in Arizona, that’s just the business entity. What about the people who are members of the LLC? If a member gets divorced, is the LLC considered community property?

Defining Community Property

Arizona is a community property state. That means community property law controls the division of all assets of the marital estate. All community property acquired during the marriage is generally divided equally when divorce occurs. The only exception is when the presumption of community property is overturned or if the property is separate property.

If you formed an LLC while you were married, should you get divorced, your spouse may have rights to half of the economic benefits you receive from the business. However, your spouse will probably have no rights to the management or control of the business.

The same holds true if you die as a member of the LLC.

In the instance that you die as an LLC member, your heir, representative, or other successor may be assigned the membership. Still, though, they will not have control or a say in the business.

If the business is truly your business and your spouse does not want any part of it, it is wise to document that with a proper disclaimer.

If you have partners in the business who are married, even if you are not, you should have a proper operating agreement, which addresses the rights of all spouses who are not active members of the LLC to make sure you do not end up with someone else’s spouse as your partner. That could be a disaster.

Pre-planning to Protect Your LLC

These kinds of situations are why you need to be prepared in advance. Contingency plans help protect your business. More often than not, in the event of a divorce or death, members may prepare an operating agreement with buy / sell sections to purchase the membership interest from the surviving spouse or divorced partner.

As you form your LLC, it is important to consult with a professional business attorney. They can help you plan for any contingencies in advance so you can protect your LLC and determine if your LLC is considered community property. Attorneys provide counseling on these issues and present alternatives for your unique situation; online forms just do not.

Poulos Law Firm has extensive experience with forming LLCs and can support you and protect your investment from community property laws. Contact us to learn more.

LLC protect you

Will Your LLC Protect You?

There’s a reason it’s called a “limited” liability company and not a “no liability” company. But just calling yourself an LLC and filing your articles of organization isn’t enough. If something goes wrong, that LLC alone won’t be enough to protect your personal assets. In fact, you may have completely overlooked creating an operating agreement, especially if you filed your own paperwork or hired a low-cost agency via the internet.

Sure, there are advantages in LLC ownership, namely that there is flexibility in management, and profits and losses can pass directly through to the owner’s personal income tax return while personal assets are shielded from liability. But if you don’t operate the LLC as a real and separate business, you may be asking for trouble.

Is Your LLC in Compliance with Court Regulations?

You’ve likely heard the term “piercing the corporate veil.” When a disgruntled employee, customer, or anyone else who wants a piece of your pie chooses to sue you, that corporate veil is what protects your personal assets. However, if the court finds that you disregarded the corporate form, you’ll be left wide open.

Here are some things a court may consider:

  • Did you disregard LLC formalities?
  • Did you provide enough capital to run the business or remove capital, leaving the LLC bone dry?
  • Did you use the LLC bank account as your personal piggy bank?
  • Do you and your LLC share phone numbers, address, etc.?
  • Were your decisions to benefit you or the LLC?
  • Did you personally pay or guarantee the debts of the LLC?

Protect Your Company’s Limited Liability

There are a few things you can do to protect your company and yourself. You first need to keep your LLC papers and actions organized as if someone were looking over your shoulder. And make sure that you separate your personal stuff and your LLC:

  • Keep separate bank accounts.
  • Pay your business expenses from your LLC’s account.
  • Do not put personal funds in the LLC account.
  • Do not use LLC funds for personal expenses.
  • Set a percentage ownership for each owner and distribute profits accordingly, or draw an annual salary for each owner of the LLC.

By keeping everything very black and white, you’ll protect yourself and your LLC. Treat your company like the precious creation it is; it may surpass your own expectations in the long run, and such rewards are priceless.

Questions about Your LLC?

Poulos Law Firm has extensive experience forming and protecting LLCs. Whether you are considering launching a business or have an existing LLC, we can ensure that your business and personal assets are protected. Contact us to learn more.

quitclaim deed to llc

Quitclaim Deed to LLC: Is That the Right Choice for Your Real Estate?

Protect Your Real Estate Investment

I am often asked by clients whether it makes sense to transfer a real estate investment property to a limited liability company. This is called a quitclaim deed to LLC. This question comes up for investors who own only a few residential investment properties. There is no question that this is probably a very good asset-protection strategy. By operating the rental property through an LLC, if you do it properly, you can protect your other assets from claims of third parties relating to the specific property.

Similarly, if you own more than one property, keeping each in a separate LLC will shield the others from being accessible to creditors who have a claim against the first property.

Keep in mind that you must observe the formalities of running each LLC like a business and not co-mingle income, expenses, or assets with personal ones or those of other LLCs. You should also speak with your tax professional about how to structure the LLCs for income tax purposes. Be aware that an LLC will not be protected from any personal claims against you since it is your asset.

How to Quitclaim Deed to LLC

A quitclaim deed to LLC is actually a very simple process. You will need a deed form and a copy of the existing deed to make sure you identify titles properly and get the legal description of the property. Legal descriptions are written in odd language that either describes where the original description was recorded with the county recorders office or language, called metes and bounds, that reads like a map with references to points, compass directions, and distances. A cover sheet may be necessary. You can do this yourself, but most attorneys will only charge $75 to $150 plus small recording fees to do this for you. A title company may also be willing to help you.

I would recommend language in the deed that in some way reflects that the transfer is subject to the underlying mortgage.

Will the Quitclaim Deed Violate My Mortgage?

This is another question that comes up frequently and, I think, is often misunderstood. The reason for the confusion is that most if not all mortgages contain a “due on sale” or “due on transfer” clause. This clause basically says that if the real property is sold or transferred, the mortgage becomes accelerated and the entire amount is due. This is also known as an “acceleration” clause.

When you took out the mortgage to buy the property, the bank made its decision to loan you the money based upon your income, credit, and the value of the real property. Seemingly, the transfer of the title to an LLC would trigger the acceleration clause.

Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. 12 U.S.C. § 1701j-3(b)(1). That law provides exemptions from enforcement of acceleration clauses, including transfers on death and transfers to trusts.

Keep in mind that the mortgage with an acceleration clause does not prohibit the transfer but merely gives the lender an option to accelerate. There is no duty to report such a sale, but you probably should. Whether you should or not is something to decide with advice of counsel. I would recommend that you request approval from your lender and expect that most if not all will agree as their collateral is really not being undermined since you are still on the mortgage personally, not the LLC. In legal speak, the LLC has not “assumed” the debt.

A lender might accelerate the mortgage because of title transfer when the transfer presents additional risk to the lender. The lender is concerned about ensuring that payments on the note are made and that their ability to foreclose in the case of default is protected.

Do be wary of using “trusts” to avoid triggering the acceleration clause. Several people on the internet recommend such a ploy. I won’t go into it other than to suggest you do not do this without the advice of counsel.

Transferring Real Estate Ownership

These days, transfers of real property into LLCs is quite common. While technically a violation of a due on sale/transfer clause, the reality is that if the lender continues to be paid, even if through the LLC, it is unlikely that there will be any consequences. The prudent course is to notify your lender and get their written approval before you make the transfer.

If you have questions about how to do this, contact us. We’re happy to provide counsel in the process of quitclaim deed to LLC.

 

contract changes

How to Make Contract Changes and Amendments

There are many advantages in using standard contract forms if you do similar or multiple transactions. Often, such forms have evolved from earlier litigation battles and the editing of legions of attorneys. While I often counsel clients who are presented with such contracts to have them reviewed at the first transaction, they do have their use. Often, the use of such contracts might reduce disputes and legal action within the industry. Plus, most practitioners are familiar with them.

On some occasions, it is necessary to include specifics about a particular or specific project in the standard contract. Or some of the terms can change over time due to the evolving course of dealings between the parties. Amending the contract in writing gives you the opportunity to make contract changes without having to rewrite the entire document. It also tracks and documents the course of conduct changes.

How Not to Make Contract Changes:

Most contracts contain a clause that says that they can only be changed, amended, or modified in writing. For businesses that are engaged in a series of transactions over a period of time, maybe even years, that clause is a time bomb if there is a dispute. Why? Because odds are you will have modified the terms of the contract in practice, but if there is a dispute, you may be bound only by the terms of the actual contract. It can get ugly.

Oh, by the way, marking up the original contract with notes and changes then initializing them is another recipe for trouble. It never reads the same when you look back at it when there is trouble. And I can almost guaranty that someone is going to claim that the changes were put there after the fact.

The Right Way to Make Contract Changes:

Do it in writing. But make sure that the amendment clearly references the original contract and states that whatever is not being changed in the amendment remains as is. A basic format is something like this: Amendment to Contract Form.

Might I suggest that if you are doing business under this type of contract that you periodically take a look at it to make sure that you are still doing business the way the contract says you are. If not, get your pen out and make those changes.

Get Help with Your Contract Changes and Amendments

Keeping your contracts up to date and correct can be cumbersome. Poulos Law Firm can help. Contract us now to schedule time to review your contracts and make the appropriate contract changes.

Transferring LLC Membership Interests Part 3—Involuntary Transfers

An involuntary transfer of an LLC membership interest is just that—a transfer prompted by a creditor action or the occurrence of a triggering event outside of the member’s control. An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

  • A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
  • A foreclosure on the member-debtor’s LLC ownership interest.
  • A court order to dissolve the LLC.

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Transfer Provisions – Other Triggering Events

Transfer provisions are typically specified in the LLC’s operating agreement or in a separate buy-sell agreement. There may be some overlap with creditor actions, as these are often included as triggering events in the transfer provisions.

Examples of triggering events that can be specified in an LLC’s transfer provisions include the following:

  • A deceased member’s membership interest passes to a prohibited individual or entity
  • A member’s bankruptcy or other involuntary transfer of a membership interest to the member’s creditors
  • A member’s separation or divorce, or the transfer to a member’s spouse under property division or under a divorce or separation decree
  • A member’s membership interest becomes subject to a valid court order, levy, or other transfer that the LLC is required by law to recognize
  • A member’s breach of the LLC’s confidentiality
  • A member’s failure to comply with any mandatory provision of the operating agreement
  • A member’s failure to maintain a license or other qualification that disqualifies the member from engaging in the LLC’s primary business

If a triggering event occurs, the transfer provisions may prompt a mandatory redemption of the member’s membership interest or a right of first refusal to the LLC or to the other members. If an involuntary transfer does occur, the recipient of the membership interest—the assignee—typically receives only an economic interest in the LLC with no management or voting rights.

Transferring LLC Membership Interests Part 2—Voluntary Transfers

An LLC affords its members a certain amount of personal asset protection. Part of this protection hinges on the restricted transferability of LLC membership interests.  Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.

  • Most (but not all) LLCs impose requirements or restrictions on the transfer of a member’s interest.
  • If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.

This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers done with the intent to grant full membership rights to the recipient.

Step 1 – Determine the Transfer Process

The LLC’s operating agreement should specify the process for transferring a membership interest. If the LLC has a buy-sell agreement in place, that must also be consulted.

  • Find the provisions that detail allowable transfers, the steps to complete them, and the method for calculating the value of the membership interest, if any.
  • The membership interests may be freely transferable but are likely subject to restrictions set forth in the operating agreement, the buy-sell agreement, or by state law.
  • Some transfers may be permitted without prior approval of the other members, such as transfers to a member’s immediate family or to a trust for the benefit of a member or a member’s immediate family.
  • The LLC or the other members may have a right of first refusal before a transfer can be made.

If the operating agreement or buy-sell agreement doesn’t specify the process for transferring a membership interest, you will have to look to state law. Once you determine the authority governing the transfer process—the operating agreement and buy-sell agreement or state law—be sure to note all requirements and restrictions.

Step 2 – Determine the Value

Calculate the value of your membership interest. If the operating agreement or a separate buy-sell agreement doesn’t address this, you will have to work with the other LLC members to determine and agree upon the value of the membership interest.

Step 3 – Follow Transfer Process

Complete the LLC transfer process as determined in Step 1. Make sure you follow all requirements. For example, if the operating agreement requires the unanimous written consent of all LLC members (a common requirement), meet with all of the LLC members to obtain their written consent.

Step 4 – Obtain or Draft the Transfer Document

 If the LLC does not have a standard transfer document, you will need to draft a transfer document.

  • Check the operating agreement or state law to determine what the transfer document must include.
  • Typically, it must include the transferor’s name, the LLC’s name, the recipient’s name, and the percentage of the membership interest being transferred.
  • If a form is not provided by the LLC, note that the form of the transfer document is usually subject to the LLC’s approval; make sure to obtain this approval if necessary.

 Step 5 – Execute the Transfer Document; Other Documents

 Sign and date the transfer document. Make a copy for your records, for the recipient, and for the LLC.

  • The recipient typically receives the original transfer document.
  • The LLC may have additional documents that the recipient must sign in order to be admitted as a member.
  • State law may require the operating agreement and certificate of formation to be updated with the new member information.
  • The LLC may pass the costs associated with the transfer to the new member.

Conclusion

Making a proper transfer of membership interests requires the transferor to jump through a lot of hoops. The first step in the process is determining which hoops are required. Taking the time to properly transfer membership interests ensures that the recipient obtains full membership rights and protection.

 

We offer proactive business planning strategies. We help businesses draft thorough operating agreements that provide clear directions to the LLC members—to exercise membership interest transfers and other important member rights. We also assist existing LLC members who want to properly transfer their membership interests in the absence of a thorough operating agreement.  Contact us today to learn more about our business services.

Transferring LLC Membership Interests Part 1—An Overview

Say you are a member of an LLC. You own membership interests in the LLC. But what if you want to leave the LLC? What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your membership interests? The answer depends on how transferable those membership interests are.

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

● Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.

● Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests. On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

On the other hand, LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member decides to transfer membership interests. Restricted transferability places limits on transfers and the status of the recipient.

Are Membership Interests Freely Transferable or Restricted?

The members decide. The good news about forming an LLC is how flexible the structure is. At the outset, the founding members can adopt transferability provisions— either in the operating agreement or in a separate buy-sell agreement.

● If neither document addresses transferability, the default provisions of state law prevail.
In other words, if the founding members fail to address transferability in the operating agreement or in a buy-sell agreement, they’ve relinquished control and subjected the members and the LLC to the state law default provisions.

● Although planning for a member’s departure from the LLC when you’re just forming it may be difficult, thinking through all the possible exit scenarios—and planning for them—is essential.

If your LLC is already up and running and you don’t have transferability provisions in place, the members can amend the operating agreement or adopt a buy-sell agreement. Look to the operating agreement for directions on how to amend the LLC’s terms.

How are Membership Interest Transfers Restricted?

While membership interests are freely transferable in the sense that any member generally can transfer his or her economic rights in the LLC (subject to the operating agreement, a stand-alone buy-sell agreement, and state law), the management or voting rights in the LLC are usually what are restricted—otherwise, other members would be forced to become “partners” with someone not of their choosing. Typically, a recipient of restricted membership interests can receive economic and management rights—a full membership interest—only with unanimous member consent.

operating agreement

Operating Agreement vs. Revocable Trust—Which One Wins?

As a member of an LLC, you have an operating agreement. But as an individual business owner, you may also have a revocable trust. When they don’t agree with or support each other, which one takes precedence in the eyes of the law?

Operating Agreement: One Side of the Equation

Let’s assume that you and a partner have formed an LLC. The two of you draw up an operating agreement to outline the business’s basic structure.

Each of you has 50% membership interest in the LLC. Through your operating agreement, you indicate that your membership interest includes:

  • the right to distributions, allocations, and information
  • the right to vote on matters that come before the members

You also specify that, in the event of a member’s death, all member interest will transfer to the surviving member. Alternatively, that member may bequeath his interest to an immediate family member—and only to that family member.

The Other Side of the Equation: Revocable Trust

Years after the formation of the LLC, your partner has completely forgotten about the operating agreement. Without giving it a second thought, he amends his revocable trust to provide a specific gift of half of the LLC’s distributions to a friend.

Then the partner dies.

His friend, armed with the information he received from the trust, shows up at the business asking for his share of the distributions.

Which has precedence: the operating agreement or the revocable trust?

The Legal Precedence

In a 2011 court case, a situation similar to this occurred. The case went to probate court. That court sided with the friend and determined that the LLC was an estate asset. Therefore, the friend was entitled to half of the distributions.

The deceased LLC member’s children appealed the decision, which was reversed in a district court of appeals.

This court stated that this particular trust provision was nullified to the extent that it was contradicted by the LLC’s operating agreement and contractual provisions.

Protect Your Assets and Business

If you are a member of an LLC, you want to protect your assets. And if you are in an LLC with another member, you want to be sure everyone is on the same page. While your operating agreement needs to be equitable, your revocable trusts should support your goals for the business.

Poulos Law Firm has more than 30 years of estate-planning experience. We ask the right questions to ensure you avoid these challenges. We can work with you, your family, and your business partners to create estate plans to meet your goals, now and into the future. Contact us to schedule your appointment and learn more.

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Ins and Outs of a Business Purchase Agreement

Have you ever thought about buying a business? If you do at some point your going to be asked to sign a purchase agreement. (You will bring it to an attorney for review, correct?)

Often first time buyers or sellers are unfamiliar with what is covered in a typical purchase and sale agreement.

For most people the first time they see such a document is when they are selling their business or buying one for the first time. Like most legal documents reading them without understanding the legal significance of the words can lead to problems down the road. Too often people contact us and tell us the document “seems okay.” Maybe it is…or maybe not.

A Definitive Purchase Agreement (DPA) is a legal document is used to transfer the ownership of a company. In short, a DPA is used when two parties enter into an agreement for a merger, acquisition, divestiture, joint venture or some other form of alliance. This binding contract includes all the terms and condition under which the merger, acquisition, etc. will take place, and includes assets to be purchased, purchase considerations, representations and warranties, closing conditions and more.

There are two types of DPAs — a Share or Stock Purchase Agreement or an Asset Purchase Agreement. In a Share Purchase Agreement, the seller transfers the shares of the company into the name of the buyer. In an Asset Purchase Agreement, the individual assets are transferred to the buyer, rather than the entire company. The seller remains the owner and the buyer merges the assets into his existing company or forms a new company.

You should expect the following clauses to be included in a DPA:

Purchase Consideration — what the buyer will pay to the seller, any adjustments made to purchase price and why, timeline of payment(s), earnest money deposited in escrow, any third-party financing, required working capital, etc.

Representations and Warranties — seller states or represents the true facts about the company and then warrants that the statements are true.

Limitations of Representations and Warranties — the seller can add limitations to the representations and warranties including how long warranty period lasts (the seller won’t represent of warranty past a certain date), disclosure schedules and more.

Indemnification Clauses — this clause says that if the seller has failed to disclose a liability, he or she will pay a huge fee.

Closing Conditions — generally, there is a gap between signing and closing of deal, during which certain conditions must be met by both parties for a successful closing.

Miscellaneous Provisions — may include things like required inventory levels at time of closing, dispute resolution in case of problems, penalties to buyer or seller if deal falls apart, who pays the fees to banker, attorney, etc.

Purchase Agreements can be complicated and certainly require an experienced business attorney to help protect a your interests. Poulos Law Firm has more than 30 years of experience helping individuals navigate through these transactions.

SMALL BUSINESS LAW – We can help you with every aspect of your business including business formation and organization, business negotiations, business planning, transactional business law, purchase and sales of businesses, and business litigation, as well as succession planning with wills, trusts and buy sell agreements.

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Why Quitclaim Deeds Stink!

A quitclaim deed (also known as a quick claim deed) is used transfer title on real property. People on their own use them all the time and almost always create future problems. Quitclaim deeds stink, first and foremost because the deed doesn’t even say whether or not the person even owns the property and offers no guarantees as to his or her ownership interest.

Because there is no need for strong guarantees, plenty of people use them to transfer property into and out of trusts, LLCs, between husbands and wives and family members. That can be a recipe for disaster. For example, a father quitclaim’s a property to his oldest son, then dies a few months later. Upon seeing a notice in the paper, the other owner of the property shows up to claim his share. Unfortunately, the son knew nothing about another owner and now finds himself hip deep in legal problems.

Some people believe that a quitclaim is necessary if a property has lien on it. This is not true. In point of fact, a Warranty Deed and Special Warranty Deed have a “subject to” statement that says all existing claims have been disclosed, which doesn’t prevent them for being used in property transfer. A “subject to” looks something like this:

“SUBJECT TO: Current taxes and other assessments, reservations in patents and all easements, rights of way, encumbrances, liens, covenants, conditions, restrictions, obligations and liabilities that may appear of record.”

That means any liens that are publicly recorded are part of the deed. When you purchase a title insurance policy, the title company will do a search and list every commitment they find during the search.

So we’ve listed a lot of reasons why quitclaim deeds stink, but here’s the nail in the coffin. Title companies hate them! Many title companies won’t accept a quitclaim deed without additional documentation signed by the grantor. The title company has every right to question whether or not the owners actually had legal claim to the property before continuing on with the sale. Naturally, this puts a kink in the escrow process and can hold up the purchase until previous grantors (owners) have been tracked down.

In short, when in doubt, contact an experienced attorney to help you draw up a deed (Warranty Deed or Special Warranty Deed) that won’t gum up the works!

Should you own real estate through an LLC?

With the economy strong, more and more people are investing in real estate. I am getting plenty of questions about whether those properties should be held through a limited liability company — an LLC. So, should you own real estate through an LLC? Well, there are certainly plenty of advantages (and disadvantages) to setting up and LLC to protect your property investments.

Advantages

Privacy — An LLC offers a layer of privacy since the only public information available is the entity name and number, agent of service process plus agent’s address. So looking for your LLC, a searcher might only find a name like Sagebrush Group, LLC, rather than your personal information.

Limit Personal Liability — Legal actions against the properties will be directed at the LLC, rather than the owners of the LLC. However, this is not an absolute rule (see below).

Taxes — If properly structured, the LLC can be set up as a “pass through” entity which allows for certain deductions and allows income tax at the individual rather than the corporate rate. While the new tax law makes changed they are complex and only apply to limited situations. For most homeowners, the new tax law makes no changes.

Management — Delegating management responsibilities is much easier than either the corporation or partnership structure. LLCs can be easily managed by owners or third-party managers.

Fees — In most states, LLCS pay a lower state registration and maintenance fees that corporations. An in Arizona, once your LLC is formed, there are no future filing fees unless you make changes to the basic structure such as new members or address changes.

Flexibility — LLCS offer a tremendous flexibility when distributing profits. Cash flow distributions do not have to be pro rata according to ownership like in an S corporation. That means owners can financially reward the sweat equity of select members through appropriate distributions of available cash flow.

Foreign Ownership — Foreign ownership and investment in U.S. real estate is possible through an LLC.

Transfer of Ownership — LCC owners can easily transfer ownership in real estate holdings by gifting interests in the membership of their heirs each year. Over time, it is possible to pass ownership to loved ones without have to execute a record a new deed on the property. That allows property owners to avoid transfer and recording taxes and fees.

Disadvantages

Yes, there are a few:

“Piercing the Corporate Veil” Just because you set up an LLC does not mean you cannot lose the protection of the entity. Failing to follow corporate formalities (meetings, resolutions, minutes) or using the business bank account as your piggy bank might lead to a loss of the protection. Personal liability applies for negligence.

Your Own Negligence. If you are acting on your own and injury someone or property as a result of your own personal negligence, the LLC form may not help you. For example: failing to have adequate, failing to property conduct a background check on an onsite property manager, or failing to properly or timely repair a dangerous condition on the property.

Insolvency and Bankruptcy. If the LLC is becoming insolvent you cannot make distributions to yourself if that will leave creditors holding the bag. They may be able to come after you personally. Also, if the LLC files bankruptcy based on a 2003 Colorado case, you may lose the protection of the LLC when the Trustee takes over.

Mortgage Issues. Mortgages contain “due on sale” clauses. Transferring a property from your name to an LLC without the lender’s permission could trigger that clause and prompt a call on the loan.

Insurance Issues. If you owned the property in your own name and then transfer it to an LLC there may be an impact on your liability coverage. Some carriers will permit naming the LLC as an “additional insured” on your policy, but others may require the policy to be rated as a commercial policy which can be much more expensive.

Do the Advantages outweigh the Disadvantages? Well, here’s a lawyer’s answer: “it depends.” Probably the answer is yes, but each situation deserves its own analysis. Forming an LLC is easy. Doing it properly and complete is not.

Discussing the process with experienced business attorney is a good idea to avoid any unanticipated consequences.

If you wish to discuss how these issues apply to your investment properties, please call us any time!

You’re Dead. What about your single member LLC?


Ugly title. I know. No one wants to think about dying, especially when just starting up a new LLC, but succession planning (who gets the business once you die) should actually be part of the startup process. An interest in an LLC is an asset. Even if it is a service business only, over time the LLC will have its own good will. Why would anyone want to let the value of asset just dissipate when the are gone?

As an example, let’s assume Jenny James owns a marketing company with two employees. She lives in Phoenix and is married to John James. Her accountant tells her to form an LLC to protect her personal assets from claims against her business if she or one of her employees does something to harm a client or other third party. Jenny wants her husband to inherit the LLC, but she failed to write that down anywhere. So now she has died. What happens to her LLC? If Jenny didn’t address this ahead of time John is either going to let the business also die or is going to end up going through a protracted probate.

Jenny could and should have taken some simple steps as she began setting up her LLC to ensure a smooth transition to John.

Three Possible Solutions

Solutions #1: The simplest and least expensive way for Jenny to secure the inheritance is to create an operating agreement. In the agreement, she would state that her LLC membership will pass to her husband, John, upon her death.

Solution #2: The second way Jenny could have approached the issue is to create a revocable trust. While that is more complex and more expensive, it does mean she doesn’t have to amend her LLC operating agreement if John dies before she does. It also covers many other assets besides the business.

Solution #3: The third way to handle the situation would be for Jenny to create a community property with right of survivorship membership. An LLC started during a marriage is considered community property so the spouse owns a ½ interest in the LLC. That however does not address what happens to Jenny’s half. So it make sense to draft the operating agreement so that it shows that upon Jennies death, John not only gets his half of the community but hers as well. This completely avoids probate upon her death and automatically transfers the business to John upon her death. The operating agreement should clearly state that Jenny will be entitled to manage the LLC as she wishes, and will protect her from having to share management with John unless she wants his involvement.

Note if Jenny does not want John to have any interest in her LLC she would have to get his signature on a disclaimer.

Oh. And don’t get us started about divorce and the LLC. That might be a topic for another post….

If you are concerned about your succession plan you should choose, your best bet is to ask an experience business attorney and have your situation reviewed.

Sole Proprietor? What Happens to Your Business Without You?

It’s All About You, Except when it about Them.

In a sole proprietorship, you and your business are the same.  If you die so does your business. Harsh? Sure, but it’s a fact. If you die your family will have to sell any assets of the business (if you have any), pay off debts and anything left will be distributed according to your will. You have a will or trust, right? There will be no more income to support your family and if your debts are substantial, your family gets nothing. That is a horrible result.

If you are like most small business owners all of your time. Really ALL of your time is spent trying to sustain, manage and hopefully grow the business. You are also most likely in a service business so you have few hard assets. You may have heard about “Succession Planning” but do not think about it because you believe that is for big companies. Bad thought. Even if you think that there is no business if you die, you are forgetting about the consequences to your family.

Many people avoid seeing an estate planning attorney because the need is not urgent (hopefully). Well, the same is true for most sole proprietors. You don’t think about this. Guess what? The issue won’t go away.

Well, there are things you can do that are not so onerous and that will make a big difference. Whether you choose to let your business end or find a way to continue it, you know what happens if you fail to plan at all. You have the ability to create a path that makes it easy or hard.

What Should your “Business Estate Plan” look like?

  1. Life insurance.  Your business is probably the sole or primary source of household income.  Life insurance can provide funds for your family to pay expenses and perhaps live on until they can find another source of income. If you have a partner, life insurance can pay for your partner to buy out your interest.
  2. Assembly your Important Documents.  To make it easier to sell or transition your business you should have your paper ducks in a row. The last question your family should be asking is “where are those documents” or “how did this get done.” Take the time to organize your paperwork. Include:
    1. An operations manual. That’s right. Memorialize how you do things. Hate to write? Dictate it electronically. Siri can help….
    2. Have an organized customer list and database.
    3. Make sure some has access to your passwords for banking and any websites you access. Think about using a password app like LastPass.
    4. Create a paper or electronic folder with your legal documents.
    5. Create another folder for your important business documents e.g. contracts, leases, operating agreement
    6. Make sure you have a Durable Financial Power of Attorney in case you become disabled.
    7. Finally. You knew this was coming….GET YOUR ESTATE PLAN DONE and seriously consider a trust. Putting a business through probate can be a nightmare.
  3. An Emergency Account.  Having access to cash to pay immediate bills and other needs would go a long way to provide comfort. This would give your family and advisors time to make decisions calmly without having to rush around trying to figure out how to keep things in place until decisions can be made about what to do with the business.
  4. Instructions. This may be the simplest thing to do, but the hardest to get done. Sit down and over time create an instruction document for your family. Tell them where your important documents are. Leave them information about what must be taken care of immediately. Avoid having your family in the dark about what to do at a time when they are in the middle of grieving. If they have such a document or checklist it will make it easier for them to step in and keep things running until they can get a handle on what to do.

What if you have an LLC?

LLCs should have an operating agreement, even if it is a single member LLC. In Arizona, if you do not have an operating agreement, the state provided one for your and that might not be what you want especially if the immediate dissolution and distribution of assets is required. The operating agreement should say what will have in the event you or another member if you are a multi member LLC.

Certainly, if your business is bigger than just you, the more effort you should be putting into your succession plan, but as pointed out even the sole proprietor has plans that can make a big difference.

If you have any questions, please feel free to schedule an initial call with Greg Poulos to discuss this and other business law concerns Schedule a Call.

This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

4 Steps to Protect Your Business Name

Your brand is everything … your reputation, your recognition value for your customers, your product, image, service, etc.

So how do you protect your brand and business if a competitor sets up a company that is similar, or even identical to yours? There are 5 steps you should think about to help ensure that your good name will stay that way!

Step 1: Form and File a Business Entity
One of the best ways to protect your business name is to form a business entity (LLC or Corp) and file the entity in your state. No state will allow two businesses with the same name to be filed, and some states won’t allow even similar names. Before getting your heart set on a name, check business name availability. Many states allow you to search for business names online. You should also consider a national search just in case you will be doing business outside of your state.

Step 2: File a DBA or Register Your Business Name
Some organizations have one official name and then a “trade name” they use for their business. For Instance, Tom Smith Pool Cleaning, LLC might have a shop called The Pool Whisperer. That trade name is often called a DBA, which is short for “doing business as.” Registering a DBA lets people know who owns the business and creates a public record of your use of your business name.

Step 3: Trademarks
You can trademark your business name with the U.S. Patent and Trademark Office for nationwide protection if you meet two criteria:
• The name must be distinctive
• It must not cause confusion with other registered trademarks.

Note that while copyrights protect original works of authorship, names and business names are not considered works of authorship and are not eligible for copyright protection.

Step 4: Secure Your Online Identity
You can protect your business name online by registering it as a domain name. That’s the address you type into your internet browser. So www.pouloslawfirm.com is a domain name. Even if you don’t plan on creating a website immediately, buy the name before someone else does. Generally, original names should cost between $8 – $10 to reserve each year. You might consider buying variations on your domain name as well to cover all the bases. So pouloslawfirm.net, or pouloslawfirm.info, for example, are viable options. In addition, register social media accounts under your business name to prevent someone else from establishing a Facebook, LinkedIn, Twitter, Pinterest or other account with your business name.

If you are concerned that you might be treading on another name, you may want to consider an attorney who specialized in this area.

Can you get out of a contract?

What happens if you’ve signed a contract for your small business that you probably shouldn’t have? Or if the circumstances have changed and are you are being asked to perform tasks that you didn’t agree to or are grossly unfair? Is there any way to get out of a contract?

Review the Contract
The first step is to read the contract and study it closely. Does the contract actually obligate you to do what the other party is asking or demanding? Is there a way to terminate the contract? What are the conditions of the contract? Is the other party meeting their side of the contractual agreement?
Read the contract from beginning to end. Have an experienced business attorney review the contract with you and help you understand exactly what is in it and what is required of you.

Is it Enforceable?
The next thing your attorney should do is check to see if the contract is enforceable. In order to be enforceable, a contract must be an agreement between at least two people exchanging something of value (consideration). No consideration, no contract. This is often a legal issue. In addition, the language should be clear and concise. If the language is so muddy or ambiguous that you can’t tell what it means, then the enforcement of the contract is a serious concern.

Is it illegal?
A contract to provide illegal services is void. In addition, there may be something in the contract that is against your state’s public policy, in which case, you can void the contract. Again, a good business attorney will know the details.

Is it unconscionable?
Courts don’t usually uphold contracts that are grossly unfair to one party. A good example is an energy provider who asks you to sign the contract as-is with no negotiation or you can’t have service. If the provider is the only one in the area and charges you three times the national rate, then likely the contract will be considered unfair (unconscionable) because one party has all the power and the other has none. Keep in mind that this mostly protects consumers. Business people are supposed to read and understand their contracts.

Is the other party backing out?
If the other party gives you some indication that he or she is not going to uphold his or her end of the agreement, that is called an anticipatory breach of contract. With the help of an attorney, you may be able to void the contract.

Is it executed correctly?
In some cases, another party may have forged your signature on a contract, in which case, you are not obligated to hold to the contract.

Is it fraudulent?
In general, both parties must understand what they are agreeing to and each side must perform and deliver as promised. For example, you buy a used car and the dealer tells you the vehicle is in excellent condition. However, when you get it home and the motor mount breaks because it has been broken and soldered back together. The dealer has misrepresented and failed to deliver as promised, so you can get out of the contract and hopefully get your money back. In the business context, if the other party made statements or representations that were not true and they knew it and you can prove that, you have a stronger case for getting out of the contract. Proving fraud is not so easy however. You must have “clean and convincing” evidence which is way beyond a hunch that they lied.