No matter how sophisticated a Client may be, there is always a sense of concern and fear upon learning that litigation has been filed against them. Knowledge of a lawsuit comes when a Summons and Complaint are served. Irrespective of size, odds are that every business will someday be sued. Remember, if you are sued do not panic; seek qualified legal assistance immediately.
Litigation is the formal means by which parties seek the assistance of the Courts in order to resolve a dispute. Sometimes a contract will provide for arbitration, which may be quicker and less expensive than a lawsuit filed with the Courts.
Litigation is commenced when one party files a legal action (the “complaint”) against another entity (whether an individual or a business entity). The party commencing the action is the Plaintiff and the person being sued and served is the Defendant. Generally the Defendant has 30 days after service to “respond” to the litigation (the rules are different as it relates to a small claims matter or an unlawful detainer action). There are several options available, which a qualified attorney may recommend and use, including challenging the complaint (demurrer), answering the complaint, and/or filing a cross action for damages that the person being sued may have suffered. It is important to remember that you are required by law to file a response to the original complaint, otherwise, you may be waiving your rights. If the Defendant fails to timely respond, the Plaintiff may take a default against the defendant, which means a judgment would be entered and the case is lost before it even begins.
Remember to be patient. Even though the legal problem may be paramount in your mind, the court system takes time and, in all likelihood, your legal matter will take anywhere from six months to two years. There is a process known as “discovery” whereby oral testimony and written documentation are obtained to determine all of the facts before a court hearing. Usually once all of the parties understand all of the facts, the parties are able to work toward a settlement of their problems.
I urge anyone who is sued, to seek advice from a business attorney who is well versed in litigation, to protect their rights. An attorney should be willing to meet with you for an initial consultation, at no cost.
When providing tax and business advice to individuals and companies, an attorney must keep in mind many aspects of the law and goals of the business owner. Over the past several months, I have written several articles relating to the “protection” of individuals and corporations and avoiding “piercing of the corporate veil.” As the year-end draws to a close, individuals and companies seek to find deductions to lessen the amount of taxes they will be paying.
This article focuses on the fact that the Income Tax Law is written in such a way to give individuals the “right” to tax plan in order to “avoid” paying taxes. Specifically, by paying certain expenses before the close of the tax year (such as property taxes, estimated taxes to the Franchise Tax Board, medical bills, and yes, even deductible legal expenses), can decrease this year’s tax burden. In addition, a company (which is on a cash tax basis) may desire to defer certain billings so that income is received in the next tax year, while increasing “ordinary and necessary” expenditures for this year. Such planning is perfectly legitimate and proper. I urge each and every taxpayer and business to spend some time with a qualified business/tax professional (such as an attorney or an accountant specifically versed in taxes) to do your year-end planning.
One of the largest deductions that is overlooked by various businesses is the establishment of a pension and profit sharing plan for their employees (and for the owner/operator). If the appropriate documents are prepared prior to the year end, the actual contribution to the profit sharing plan can be deferred up to 8 1/2 months. This is the only “accrual” item that a cash basis (taxpayer) can take advantage of.
The second part of this article deals with the issue of “evading” paying taxes. Unfortunately, I have conversations on a periodic basis with people who have decided not to “declare cash” or fail to report various earnings. In some cases, these individuals choose not to even file tax returns. Both of these actions are “illegal” and are considered “evading” taxes. The act of evading taxes is illegal and is both a Federal and State crime. What I find amusing is, if such individuals would report all of their income and with proper tax planning, they would not pay any more taxes, and not subject themselves to potential criminal action. These would include individuals who try not to report all of their income, use these funds to pay their rent, pay their living expenses, make payments on cars, and other related items. When the Internal Revenue Service conducts an audit, this becomes very clear to them as they check “life style” and determine that the amount of money being declared is not sufficient to make all of the payments that the individual is making. Everyone should report all of their “income” and use a tax advisor/attorney to help develop a tax savings plan.
If you have taken any action which could be considered “illegal,” you should meet with a tax attorney to discuss these issues and to correct the problem. Such meetings are confidential and are protected under the attorney client privilege. While there are various accountants who are well qualified to provide you assistance, there is no “accountant/client privilege” and such conversations with your accountant could be subject to discovery in criminal proceedings.
As the year ends, I urge each of you to seek proper tax and business advice, in order to avoid paying excessive taxes and to utilize the provisions of the Internal Revenue Code to your best advantage.
Over the past several months in my articles, I have been stressing to business operators and owners the fact that in order to protect their assets from potential creditors or claims, it would be prudent to incorporate or form a limited liability company. As I have been informing you, a corporation will not only provide certain protection of assets, but if done correctly, can also provide for a reduction in taxes being paid.
Since writing these articles, I have been contacted by several individuals who have a corporation that was set up by either an accountant or through a company providing “incorporation services.” These individuals have asked me to review their corporate documents and how they are operating their actual businesses. Unfortunately, I have found that many of these corporations are deficient in their documentation and provide a means for a creditor to possibly go directly after the shareholders by “piercing the corporate veil.”
Just filing Articles of Incorporation with the Secretary of State will not provide the protection that business operators seek. A corporation is intended to be a distinct “person,” and as such, must really exist in more than just a name. After formation, the formalities of transference of assets, establishing bank accounts and issuance of stock must be completed before the corporation really exists.
It is important that the corporation continue as a separate entity; examples include: (i) separate bank accounts, (ii) no commingling of funds, (iii) that the shareholders who are also employees, are paid an appropriate salary, (iv) that taxes are paid, and (iv) that certain transactions are approved by the Board of Directors. Another mistake that is made is the failure to keep up the formalities of the corporation and that the yearly minutes of both the shareholders and board of directors are prepared.
A founder of a corporation must make sure that they do not refer to themself as the “owner” or to the other shareholders as their “partners.” If founder(s) are officers and they own stock, do refer to themselves as the “owner” or to other shareholders as a “partner,” it could create an alter-ego situation and personal liability could be created. These are just some of the basic rules you need in order to be properly advised by an attorney to make sure you are protected.
I urge people who have incorporated, to assure themselves that they are properly conducting business, taking the steps to protect themselves from personal liability and from paying unnecessary taxes. If you used someone other than an attorney to create your corporation, you should have the documents reviewed by an attorney and you will know if your books and records are in proper order.
At the end of every year, there is a flurry of activity as individuals and companies seek to find last minute “tax write-offs” and to “protect their assets.” Unfortunately, while there are some very legitimate and proper ways to accomplish some last minute tax and asset protection, individuals and companies fail to use foresight and take advantage of year long tax planning and asset protection programs.
As the New Year begins, each individual business operator who has not taken the proper steps necessary to protect their assets, should immediately be in contact with an attorney to discuss the establishment of a corporation or some other entity, which would assist in protecting personal assets from liability in the event of a lawsuit or a down turn in their business.
Unfortunately, at this time in our economy, no one can be certain as to the strength of any business. Each business operator must understand that, at any given time, the economy can change and a profitable business can suffer a down-turn.
Individuals who continue to operate their businesses as a “sole proprietor” or through a “partnership,” are placing themselves at great personal risk of losing all their assets which they may have built up over the years as there is no shield that protects them. By incorporating (or using some other entity that limits liability), the owner of a business can transfer most of the risk of losses due to an economic downturn, to a corporate entity and, except for items of personal liability (such as a personal guarantee), can also separate the business operator’s personal assets from those of the business. Specifically, a sole proprietor gets sued for something that arises at their business (from a vendor, employee, or customer), it is not the business that is being sued but the individual. A judgment against a sole proprietor or a partnership is a judgment against the individual and all of the individuals assets could be liquidated in order to pay the judgment.
Through incorporation, the business operator establishes a “separate” entity which, under the law, is a separate person. So long as formal proceedings are utilized, litigation undertaken against a corporation is not litigation against the individual. In the event that the corporation has a judgment taken against it, the individual’s assets (home, bank account, stock, cars, etc.) cannot be used to satisfy a judgment.
In order to enjoy the benefits of a corporation, as it relates to the asset protection, it must be established before any problem arises. Liabilities incurred prior to incorporation will still remain the responsibility of the individual.
Using a corporation also affords great benefits as it relates to income tax planning. By making proper use of deductions and tax brackets as set forth in the Internal Revenue Code, great savings can be achieved through the use of a corporation. Certain expenses which may be subject to certain limitations on an individual return, may be fully deductible though a corporation as well as the fact that a corporation can enjoy a different tax bracket than an individual. It is important to have full utilization of these tax benefits to start your planning at the beginning of the year and not wait until the end. A tax plan is only as good as the time given to implement it.
Each business operator should seek the advice of a qualified business attorney that has knowledge of income tax law, to fully plan for protecting assets and taking advantage of the income tax laws. An attorney should be willing to meet with you for an initial consultation, at no charge, and discuss the potential benefits that are available to you.
Recently, some governmental agencies have stepped up their efforts to have various “independent contractors” classified as employees and have been taking action against business owners. Many small business operators attempt to have individuals who are providing services to them be classified as “independent contractors”, in order to avoid the cost and paperwork of reporting an individual as an employee.
The law is fairly clear on this issue, and I find myself frequently admonishing owners who have persons that they consider to be “independent contractors” but are actually employees. In essence, one who provides services to your business for whom you have set the compensation, hours of service, restriction as to what they can be doing (such as providing similar service to another person and/or restricting when they can provide services exclusively for you) and for whom you provide the tools that are necessary for them to accomplish their work (which can include such items as desk space, office space, telephones, etc.) fall within the general definition of an employee. There are some severe consequences when a business owner reports someone who is actually working for them as an “independent contractor”, when they are in reality an employee.
Failure to properly report an individual as an employee could result in some substantial fines and levies against an employer. These fines and expenses could include the responsibility for paying both halves of unreported earnings, social security tax obligations, and in some cases could result in the obligation to pay actual income taxes that should have been withheld as it relates to the earnings. In addition, if there should be an injury while the employee is working for you, you would, in all likelihood, not have coverage under workers’ compensation and if the injury was caused to a third person (such as an automobile accident during the performance of the individuals job task), your general liability insurance carrier may take steps in order to avoid providing coverage.
When discussing this matter, many individuals will state that they will “never be found out.” Outside of a normal audit through either the Federal or State agencies (Internal Revenue Service, Franchise Tax Board, or EDD) which may disclose the information which triggers an audit of the “independent contractor’s” status, there is the real risk that the agencies will be alerted to the issue of an employee being paid as an “independent contractor,” in the event that the employee is terminated and seeks to get unemployment insurance, there is an injury and the employee attempts to collect state employment disability, or when an individual goes to retire and the Social Security Administration does not discover that any wages have been paid in on behalf of the employee.
If you truly feel that the individual who is providing services is an “independent contractor,” you need to take certain steps in order to document this fact and to provide adequate protection for yourself. First and foremost, you need to have a proper “independent contractor agreement” prepared which clearly sets forth that the “independent contractor” is not employed, is engaged to provide certain specific services, and is also free to continue to conduct other business relationships independent to services being provided to you. In addition, planning can be done with the “independent contractor” to assure that they meet the status by verification that they truly have their own “business.” Some of the items that will help to clarify that the person conducts his own business is for them to obtain the appropriate business licenses, file the appropriate DBA, be operating under a separate corporation, and demonstrate that they have other clients.
A qualified business advisor (an attorney or an accountant) should be able to assist you in determination as to whether or not an individual classifies as an “independent contractor” or is in reality an employee. In some cases, with the appropriate planning, a qualified attorney should be able to develop the frame work to protect you in establishing that the individual providing assistance to you is truly an “independent contractor.”
As we begin the new year, it is time for all businesses, large or small, to consider steps to protect and preserve their business and assets from unwanted claims and liabilities. Most business owners work hard to establish and grow their business and to create personal net worth.
Unfortunately, as business grows, so does the potential for someone to seek to recover money for real or perceived claims. Many businesses are still being operated as sole proprietorships or partnerships, which means that the individual owners are personally liable for the debt and obligations of their business.
What this means is that a business owner, without adequate protection, could lose their home, savings and other assets that they have worked so hard to obtain. This risk can be alleviated through simple business and asset protection planning.
For relatively little cost, a business owner can make use of one of many forms of business entities which are available to prevent personal liability. The most common of these entities is a corporation. All businesses, at a minimum, should operate as a corporation in order to preserve the owner’s personal assets and avoid potential personal liability.
A corporation is a “Person” under the law and is separate and distinct from its owners. In the event of problems with a creditor or other individual, they would be required to recover damages from the corporation (being its own person) and not from the individual shareholders.
While a shareholder (which could be one or many people) may be employed by the corporation, so long as the corporate formalities are observed, the personal assets of the shareholders will be protected.
In addition to asset protection, a corporation provides additional means of tax savings, when full use of the Internal Revenue Code is made. This will include, when appropriate, the fact that a corporation has its own tax rates, which may be substantially lower than individual taxpayers.
As we begin the New Year, this is the optimum time for a business to incorporate, to protect itself from unwanted liabilities, and take full advantage of a full year’s potential tax benefit.
The exact business entity which is best for each individual business should be reviewed with your legal advisor and the tax benefits discussed with an Attorney or Accountant who is familiar in this field.
“Death” is a subject that most people try to avoid discussing, but is an event that will affect each one of us and should be addressed in order to protect your family and your business. Proper estate planning is critical to everyone. The need to plan exists for all individuals, whether or not a person owns a business, is an employee, owns property, is a renter, or is rich or not so rich.
In order to protect the family, property or a business, each person must have an estate plan, usually accomplished by a written Will or a Living Trust. The purpose of writing such documents provides a means for setting forth instructions as it relates to the transfer of property, the continuation of a business, avoiding excess estate taxes, and most important, instructions regarding guardianship and care of your minor children, which may include instructions as it relates to the child’s day to day care, education and training.
Periodically, there is a great push in the advertising of Living Trusts and the need to prepare such a document. Before deciding to write a Living Trust, consult with an attorney who you trust to decide if such a document is best for you. In deciding between a standard Will or a Living Trust, consider some important elements, age, size of the estate, willingness to follow formalities, and personal goals. In most cases, a Will with a Testamentary Trust is the appropriate document to be used for individuals who are under the age of 55 and who are in good health. Living Trusts can be cumbersome and may not be necessary to accomplish your goals.
Many people who are young and do not have any real assets feel that they do not need a Will. While there are other ways to plan an estate without the need of a Will (such as joint tenancy of property), if there are minor children, the worst thing that a parent can do is not provide for a guardian in the event of the death of the child’s parents. The last thing that a child needs to worry about, if they should learn that their parents have died, is with whom they will be living.
When preparing an estate plan, I ask a client what they would do if they were here to distribute their assets, and I use this information to draft the Will or Living Trust. Be cautious of generic documents. Make sure your attorney asks you what your goals are and that your Will or Living Trust is prepared to meet your needs.
It takes years of hard work to build a successful business and once created, most business operators can see themselves at the helm, directing operations for years to come. Unfortunately, most business operators do not plan for the unwanted event of death due to accident or the passage of time (old age), which can lead to the destruction of what has taken years to build.
Planning can help preserve what has taken a business operator a lifetime to build. Specifically, every business operator should spend some time with their attorney to discuss an estate plan, not just for the benefit of their immediate family, but also for the benefit of their employees and customers. Such a plan should include a method of allowing family members who have been involved in the business to continue operating it or for a key employee to take over the business.
When preparing an estate plan, an attorney should look at the goals of the client. If the goal is to have the business continue in the family, then an attorney should provide for some form of a “living trust” to be created, which specifies how the business will be controlled after the death of the founder and further, under what circumstances (if any) that the business operations could be sold. It may also be important to start transferring some of the ownership to members of the family or an irrevocable trust in order to avoid estate taxes when possible. The “control” of the business may vest in one individual, or if so desired, may be controlled by a group of trustees.
If the goal of the founder is to provide for the financial security of the founder’s family, an attorney may need to plan for a “buy-out” of the business interest by key employees, which event could be funded from operations or through the purchase of life insurance. There are many different plans that can be selected, but what is important is that the business operator selects one.
An estate plan can be done through a “will” or when appropriate a “trust.” Circumstances may vary as to which instrument should be utilized, and a qualified business attorney who is versed in estate planning can be of assistance. Make sure the attorney you choose to advise you has a background in tax planning and business. You need to provide for a smooth transition while paying the least in both income taxes and estate taxes upon the transfer of the business operations.
While I know it is hard for anyone to consider their eventual death, it is a subject that must be considered by all business operators. It does not matter if your business is large or small, it does not matter if you are the sole owner or there are many shareholders, you must make appropriate plans. Some examples of the need to consider the possibility of death for a small operator is when a lease is entered into, if the business is personal and would not survive the death of the operator, or a long term lease without a cancellation clause due to death that could cost the business operator’s family thousands of dollars with the lease remaining in force even though the business is not operating.
Avoid potential problems, seek the assistance of an attorney who is qualified and who you trust. Remember, an attorney should be willing to meet with you to discuss your needs for a short period of time (about a half hour) for you to determine if you like the attorney and if the attorney can be of assistance to you.
As we enter the new year, I want to wish each of our readers a Happy and Healthy New Year. With the new year comes great opportunity for success and also the need to make sure legal issues are in order. It is a time to protect your personal and business assets, plan for the unexpected, and put into effect a tax plan for the next year, which will be of benefit this year and for years to come.
Each business operator should review the structure of their business, and make sure it is of a nature that provides protection for the owners and shareholders. In particular, a “veil” needs to be established through the use of a corporation or some other legal entity (such as a limited liability company), which separates the legal operation of a business from the individual. If a business is operating as a corporation, or some other form of legal entity, it is time to make sure all legal documents are in order. Specifically, update all minutes, check to confirm that the records are correct as to officers and directors and the purchase of major assets, and finally, confirm that all filings have been completed with the appropriate governmental authorities.
A business operator should have an attorney review the operating contracts and also, if necessary, make sure an employee handbook exists to avoid potential liability in the future. Except for emergency legislation, most changes to the laws in California took place as of January 1st and you should consult an attorney to see if any of them directly affect your business operations.
As you enter the new year, you should also make sure you have planned for the unexpected. By this, I mean that each and every reader should have a will or trust to protect their family in the event of death. If you have a child under the age of 18, I believe that you have an obligation to your child to make sure a will has been done to establish who will be the guardian in the event of the death of both parents. In addition, you should make sure your insurance coverage is sufficient to protect your business and assets (liability insurance) and make sure you have the correct coverage. As for your family, you may need to have in place life insurance or disability insurance as appropriate.
Finally, with the beginning of a new year, you should make plans for tax savings now, not later in the year. By putting into place a plan for tax reduction now, you will avoid losing some of the benefits that are afforded by a full year’s worth of planning.
Remember to set up an appointment with an attorney to meet and discuss the areas set forth above. As I have stated before, make sure the attorney is qualified to provide assistance in the areas set forth above and that your first half hour meeting to get to know the attorney is provided at no cost.
This is a different article for me to write. This article is not intended to be the complete authority relating to bankruptcy, nor is it intended to provide direct advice to all of the readers. The reason I am writing this article is because it is important for each company and individual to face up to certain realities now that the new bankruptcy law will soon take effect and that certain rights exist today which may not exist in a short period of time.
For purposes of this article, I want to concentrate on the three types of bankruptcy that are available and used by most individuals and businesses. The intent of bankruptcy is to allow a “fresh start” to individuals and to provide breathing room to reorganize a business in order to assist in turning it around and becoming profitable once again.
Most readers have heard of a Chapter 7 bankruptcy. In very simplistic terms, what this means is a person hands over all of their debts to the court, along with most of their assets. An individual is allowed to keep certain assets (which includes a certain amount of equity in one’s home, furniture, certain pension plans, a certain amount of equity in cars, certain personal assets and limited family heirlooms and more), which are referred to as being “exempt” and then the trustee (person who is appointed by the court to oversee the liquidation of the assets) determines if there are any remaining assets to be liquidated and sold to pay off creditors based upon a formula. An individual receives a discharge and, subject to certain rules, most debts no longer exists (certain debts such as unpaid court ordered support, taxes which are not at least 3 years old and secured debts are not discharged).
Chapter 13 is commonly referred to as the “Wage Earner’s Plan.” What an individual does when they file a Chapter 13 bankruptcy is “freeze” there current outstanding debts and using a formula, they turn over their earnings to a trustee who then, based upon a plan developed by the debtor and approved by the court, pays to the creditors a specific monthly amount until the debts have been satisfied. This does not wipe out or “discharge” the debts, but develops a payment method.
Chapter 11 is available to businesses which find themselves in an extreme amount of debt due to some unforeseen circumstances, whose creditors are not willing to work with them, but based upon a plan of reorganization, can be profitable in the future. I describe it as taking all of your bills and putting them in a shoe box for a period of time, operating your business profitably on a go forward basis, and then coming up with a plan to pay the bills in the shoe box over a period of time, and maybe even at a discount. The operator of the business maintains control of the business as they become, in essence, the trustee under the supervision of the United States Bankruptcy Trustee’s Office. Failure to fulfill obligations however can and usually results in the dismissal of the Chapter 11 or conversion to a Chapter 7.
The above explanations are summaries, and are not intended to be a full explanation of the bankruptcy laws. It is important to seek the assistance of a qualified attorney to assist you in this process. Our offices can assist a client in filing a Chapter 11 or Chapter 7, but we refer all Chapter 13 work to other attorneys.
The new law will limit the ability of individuals to file Chapter 7 and will require them to file under Chapter 13. What this means is that if someone has the need to file a Chapter 7 bankruptcy petition to protect their assets and to have a “Fresh Start” they need to do it now, not later.
There are many individuals who are not attorneys who attempt to help in the filing of bankruptcy petitions, but as I have stated in other articles, you would only go to a licensed medical professional when you are sick, so why would you trust your financial future to an unlicensed individual. If you need a referral to an attorney for assistance, you may call our offices or the Riverside County Bar Association.