Posts by: jarombergeson

Feds Make Change to Help Entrepreneurs Raise More Money

May 9, 2017 Business planning, Real Estate, Small Business Comments Off on Feds Make Change to Help Entrepreneurs Raise More Money

Your federal government has modified rules making it easier to raise more money from so-called “unaccredited investors”. Under the updated rule, known as Rule 504, you can raise up to $5 million from unaccredited investors in a 12-month period. Prior to the 2017 update, you could only raise $1 million from unaccredited investors. The updated $5 million cap is available under Rule 504 offerings and should only be used when the offering is a private placement memorandum offering (“PPM”), where you aren’t marketing the offering to the general public but privately to know persons and contacts. The new $5 million cap will make it easier to raise larger amounts of money from unaccredited persons and we expect to see an increase in persons using Rule 504 to raise money for operating businesses and real estate investments.

Background to Securities Offering Exemptions

At some point in its lifespan, just about every business needs an infusion of capital, whether to buy equipment or inventory, hire more employees, make additional investments or something else.  Obtaining that capital can be accomplished in several ways – maxing out credit cards, getting a business line of credit, tracking down private money loans, bringing on partners who invest money but also participate in the decision-making process of the business, or maybe even having a bake sale!

However, sometimes it makes sense to raise cash by bringing on investors – silent partners who have funds to contribute, but who would rather not (and maybe who you would rather not) participate in the business.  These are the type of folks who want to invest their money, step away, and then have you make the hard decisions and put in the blood, sweat and tears to produce a return on their investment.  When you bring on an investor of this type, whether you know it or not, you have sold that investor a “security” and you are now under the purview of the Securities and Exchange Commission (the “SEC”) – perhaps the only federal agency with a less developed sense of humor than the IRS.

Created by FDR and Congress while the country was in the throes of the Great Depression in 1934, the SEC exists to make sure the excesses and outright frauds that created the 1929 Stock Market Crash do not repeat themselves.  The intervening decades have seen the number and complexity of SEC regulations wax and wane, but in 2017 we are left with a multi-layered, multi-faceted system that those seeking to raise capital should not attempt to navigate without expert guidance.

Regulation D and the 2017 Federal Securities Exemption Options

One of the most popular tools for small businesses looking to raise money is something called “Regulation D.”  In a nutshell, under Regulation D, the SEC allows businesses to raise capital through the sale of securities without requiring those businesses to register said securities with the Commission (an extremely expensive and time-consuming process).  For the past 35 years or so, there have been three separate and distinct sets of hoops to jump through to comply with Regulation D, called Rule 504, Rule 505 and Rule 506.

Rule 506 has been the most popular of the three.  For all intents and purposes, Rule 506 only allows businesses to offer and sell securities to “Accredited Investors” – people with a net worth over $1 million, or whose annual income exceeds $200,000 (individually) or $300,000 (jointly with a spouse).  In exchange for only dealing with Accredited Investors, issuers of Rule 506 offerings get to raise an unlimited amount of money from an unlimited amount of investors over an unlimited amount of time.  In some situations, they may also be eligible to solicit their offerings to the general public (think email blasts and radio and TV ads).  Rule 506 offerings are also simple at the state level – where only the same short document filed with the SEC (the “Form D”) has to be filed (and a fee paid) in each state where Rule 506 securities are sold.

2017 Update

The recent SEC change that will help entrepreneurs raise money comes in Rule 504 of Regulation D.  The nice part about Rule 504 has always been that it allows the company raising the funds to accept money from both accredited and non-accredited investors – a huge advantage if you don’t have contact info for a bunch of super-rich folks in your phone.

The main problem with Rule 504 has always been that you can’t raise more than $1 million in any 12-month period, and $1 million doesn’t go quite as far today as it did in 1988 (which is when the $1 million cap was instituted).  Well, apparently late last year the powers that be at the SEC woke up one morning and realized that 1988 was almost 30 years ago, so they decided to increase the cap from $1 million to $5 million in any 12 month period.  This increase became effective January 20, 2017.  The increase is a potentially significant change, so let’s recap the parameters of the new Rule 504 Offering:

1)   You may offer up to $5 million in securities in any 12 month period.

2)   You may offer securities to an unlimited number of both accredited and non-accredited investors.

3)   Unless you jump through some pretty onerous hoops, you may not “generally solicit” your offering.  You will still need to rely on “word of mouth” marketing.

4)   You can’t play in the Rule 504 sandbox if you have run afoul of the SEC previously and have been branded a “Bad Actor” under their rules.

5)   You still have to comply with state-by-state “Blue Sky” laws.  This can be tricky.  Unlike with a Rule 506 offering, state law compliance is not always as simple as filing the SEC Form D and paying a fee.  In some blessed states (let’s give a shout out to Colorado and South Dakota) the process is exactly the same as a Rule 506 offering.  In others (I’m looking at you California and Texas) the rules are restrictive and complex, and you will be very limited on the number of folks you can accept money from (or even solicit) without “qualifying” the offering in that state.

The bottom line is that if you want to bring on investors and raise up to $5 million in capital, but you are worried about only being able to take money from “accredited investors” then the Rule 504 Offering absolutely needs to be on your radar.  It’s going to take a bit of heavy lifting on the state compliance side of the coin, but depending on the states involved, it could be a very attractive option.  Please speak with an experienced securities attorney to see if a Rule 504 Offering could make sense in your specific situation.

What Being Dragged Off a United can Flight Teach Us about Contract Law?

April 18, 2017 Business planning, Law, Litigation, Small Business Comments Off on What Being Dragged Off a United can Flight Teach Us about Contract Law?

Unless you’ve been in a coma for the past week or so, you’ve probably seen the cell phone camera footage of airport police dragging a kicking and screaming Dr. David Dao off a United Airlines flight at Chicago’s O’Hare Airport last week.

At this point, the story is well known.  United needed to get four additional flight crew employees on Dr. Dao’s flight, so they asked paying customers to give up their seats voluntarily, for increasing levels of compensation.  When there were no takers, United selected four passengers “at random” for involuntary removal from the flight.  Dr. Dao was one of the “lucky” four selected.  However, when the time came to make the walk of shame down the aisle and off the plane, Dr. Dao refused to get up.  That’s when airport security was called in to physically remove him and cell phone cameras started to roll.

This fiasco, and the seemingly incessant media coverage thereof, has been a PR nightmare for United Airlines.  It has also brought an unprecedented amount of attention to the legal term “contract of carriage.”  Simply put, a contract of carriage is an agreement between a carrier of goods or passengers (such as an airline) and the consignor, consignee or passenger. These agreements define the rights, duties and liabilities of both the airline and the passenger.

You agree to your chosen airline’s contract of carriage when you buy your ticket.  The very broad framework for these agreements is established by federal law and the FAA (for domestic airlines), but the contracts can, and do, vary considerably from airline to airline.  Among other things, in your contract of carriage, you agree that you can be bumped from your seat due to overbooking, or because the airline needs to move employees.  You also agree (at least in the contracts of carriage for the four largest U.S. carriers) that you can be removed from or denied boarding to the plane for the following reasons (among many others):

  1. You decided shoes are overrated – boarding can be denied to those who are barefoot or not properly clothed.
  2. You decided showering is overrated – airlines can refuse to board individuals who have or cause a malodorous condition.
  3. You spent your entire long layover in the airport bar – airlines don’t have to board folks who appear to be intoxicated or under the influence of drugs to the degree that they could endanger other passengers or crew members.
  4. You spent your entire long layover in the airport’s all-you-can-eat buffet – if you are unable to sit in a single seat with the seat belt properly secured or are unable to put down armrests between seats for an entire flight, the airline isn’t obligated to give you a seat (or two).

What can we learn from all of this (other than to make sure to wear shoes to the airport)?  I think the takeaway is that even if we don’t know we’re doing so, most of us enter into legal agreements (i.e. contracts) multiple times each day, and it behooves us to know (and when we can do so, also to control) what is in those contracts.

This is especially important in your business.  Do you have a written contract with your vendors/suppliers/customers?  If not, then what happens if there is a dispute?  What is the basis of your agreement?  An email chain?  A phone call?  A face-to-face meeting that ended with a handshake?  If you do have a written contract, when was the last time you looked at it?  Do you understand the language in the contract and your rights and responsibilities under that language?  Have you had a trusted, experienced attorney review the contract to make sure it is in your best interest?

As Dr. Dao’s experience has taught us, the consequences of a contract can be serious, and can even put us in the national spotlight.  Taking the time to review and, if necessary, to change the contracts that you rely on to run your business is absolutely worth the time and effort.  The few hundred bucks you might spend could save you thousands in defending or pursuing a lawsuit regarding a poorly drafted or non-existent contract.

Eight Spring Cleaning Ideas for Your Business

March 14, 2017 Asset Protection, Business planning Comments Off on Eight Spring Cleaning Ideas for Your Business

Don’t ask me why, but my seven year-old daughter is obsessed with the cheesy early 1990’s goodness that is Full House.  Nick at Nite has scheduled a two-hour block of Danny Tanner, Uncle Jesse, Joey and the Tanner girls from 7-9 p.m. most weeknights, and my daughter begs to watch at least one episode every night before she goes to bed.

Because there are much worse things she could be asking to watch, we typically oblige.  As such, over the past year or two I’ve endured more than my fair share of Full House catchphrases (think: “Have mercy!” “How rude!” and “You got it dude!”).  Let’s just say that when Nick at Nite (or my daughter) moves on from Full House I won’t exactly be sad.  Anyway, in a recent episode that I’m sure probably originally aired in March 1990, the notoriously tidy and meticulously organized Danny Tanner exclaims: “I love this time of year!  First, spring cleaning – and now tax season!”

This got me thinking, while most of us do participate in spring cleaning for our homes, garages, and backyards, the concept of spring cleaning, with the feeling of renewal that it brings, is probably also a good idea in our businesses.  With that thought in mind, here are eight spring cleaning ideas to give your business a bit of a fresh start:

1)         Revisit your Business Plan.  If you’re like most small business owners, you’ve probably changed and adapted your business plan over the years to adjust to unexpected challenges and market changes – maybe to the point that you don’t feel like your original plan is even all that useful.  Instead of discarding it, you should think about taking some time to revisit it – maybe each spring – to update it based on what’s changed, and to evaluate if some changes may not have been necessary.  Going back to the basic foundation you built your business on will always be beneficial.

2)         Clean-Up Your Company Records and Documents.  Have you been maintaining your entities (LLCs, S-corps, IRA/LLCs) by completing minutes annually? Have you had any changes to the entities? Make sure your company documents are up to date. Also, what about the state? Are your state renewals up to date? If the legal foundation of the company is a mess it only gets more difficult to clean-up and address later.

3)         Think about your Long-Term Goals.  While you’re taking a look at your business plan, think about your long-term goals, both for the company and for your own professional life. You might find that what you really want is different than what it once was.  Maybe your concept of how your business should look five years down the road has completely changed.  It’s absolutely fine for your goals to change – but you have to be aware of what has changed and what you will have to do differently to get there.  If you determine that your aspirations are the same, then check in on your progress towards achieving them.  What could you be doing more or less of?  Are you gearing as many parts of your day – and your business practices – into moving in that direction, into attaining those goals?

4)         Take a Look at Staffing.  Spring is a great time to do employee evaluations and reward those who deserve it for their hard work – and trim what doesn’t seem to fit.  It’s most effective to sit down with your management team first and discuss your employees’ objectives, strengths and weaknesses.  Then, take the time with each individual employee to go over their measurable results.  Always remember to ask for employee feedback about your management style, as well as those of your managers.

5)         Spruce up your Web Presence.  In most lines of business, an up-to-date and useful website is necessary for attracting and retaining customers.  Potential customers and clients expect a smooth user experience that incorporates the latest Internet trends and styles.  If your website looks like something cobbled together in the era when we were all waiting for the dial up to connect so the AOL voice could tell us “You’ve got mail!” then customers probably won’t stick around long enough to find out how great you are.  Consider including marketing content on your website such as blog articles, white papers and videos.  In addition, everyday it becomes more important for your business to be active and engaged on social media.  Your website should include links to your social media channels, and those channels should be updated frequently with useful and (if at all possible) entertaining information.  In many cases, your online presence is the only tool new customers and clients will use learn about you, and it’s important that you make a good first impression.

6)         Lock Down your Intellectual Property.  Has your business progressed to the point where the name of your business or of a particular product or service has enough value that you want to make sure no one else can use it?  If so, you should think seriously about filing for a registered trademark.  Similarly, if you want to keep copycats from stealing online, recorded or printed content, filing for registered copyright protection may also make sense.  Finally, you should examine your policies and procedures to make sure trade secrets (like customer lists, manuals, databases, etc.) remain, you know, secret.

7)         Actually Deep Clean the Office.  Seriously, when is the last time anyone vacuumed behind that filing cabinet?!

8)         Dissolve and Shut-Down Entities You No Longer Use.  Do you have entities that no longer have business activity or assets in them? Are you paying fees to keep them open? Consider shutting them down if you have no future plans for their use. Keep in mind, that the liability protection of an entity still protects you for acts that occurred when the entity was in existence and in good standing.

Hopefully, these ideas can serve as a jumping off point for how to renew and refresh your business and take it to the next level!

Just “Having” an S-Corp May Not be Enough

February 21, 2017 Business planning, Law, Real Estate, Tax Planning Comments Off on Just “Having” an S-Corp May Not be Enough

Just “having” an S-Corporation may not be enough. It’s important you make sure to reap the tax and legal benefits of your S-Corp if you’re going to set one up.

If you routinely read articles in this space or have heard any of our attorneys speak around the country, you are probably aware that we are big fans of the S-Corporation structure as a way for folks who own and operate small operational businesses (i.e. ones where they are selling goods or services and are not someone else’s W-2 employee) to get some limited liability protection and (probably more importantly) to save on self-employment taxes.

When self-employed folks don’t incorporate and instead operate as a sole proprietorship, their entire net profit from the business is subject to self-employment taxes. If you don’t do anything about them, self-employment taxes will eat up about 15.3% of your income – before we even talk about income taxes. So, on a net profit of $100,000, a self-employed person will pay about $15,300 in self-employment taxes

If instead, a self-employed person operates as an S-Corporation, they can do a “salary/dividend split” on the net income from the business. In a salary/dividend split, the business owner will pay himself a “reasonable” salary from the S-Corporation’s profits. A general rule of thumb is that roughly 1/3 of the company’s net profit is considered a reasonable salary. Self-employment taxes are paid on the amount of the salary, and the rest of the income flows through to the business owner as a type of “dividend” from the S-Corporation. That dividend is not subject to self-employment taxes.

So, if a small business owner has the same $100,000 of net profit and operates as an S-Corporation, he will pay himself a “reasonable” salary of about $33,000 and pay self-employment taxes of about $5,000 (instead of $15,300). The remaining $67,000 flows through to the owner free of self-employment taxes. We love the S-Corporation structure for self-employed doctors, dentists, engineers, realtors, commissioned salespeople, certain types of real estate investors, and others whose income would otherwise be subject to the 15.3% tax.

Right now, you’re probably either thinking: “Yep, Jarom, you’re preaching to the choir. I already have my s-corp and I’m saving a bunch on my self-employment taxes!” OR “Man, I need to look into an s-corp right away!” Either way, please keep reading because establishing an s-corp and doing the correct tax filings is only part of the equation.

The recent U.S. Tax Court Case of Fleischer v. Commissioner (2016 T.C. Memo. 238, filed 12/29/16) demonstrates that just having an S-Corporation may not be enough to save on self-employment taxes. Mr. Fleischer is a financial consultant who signed on as an independent contractor representative for a couple different brokerage houses. He also established an S-Corporation, and funneled his income through that entity to save on self-employment taxes in roughly the same way I described above.

So, why was Mr. Fleischer in Tax Court? Well, the IRS sent him something called a Notice of Deficiency. The Notice basically said that his use of the S-Corporation to save on self-employment taxes was invalid, and that he owed roughly $42,000 in back taxes, plus penalties and interest. Mr. Fleischer disputed the Notice, and the case went before a Tax Court judge.

The IRS argued that the Notice they sent was proper because the income at issue belonged to Mr. Fleischer, personally, and not to his S-Corporation. In support of this argument, the IRS presented evidence (which was unrefuted by Mr. Fleischer) showing: 1) Mr. Fleischer signed both independent contractor representative agreements in his personal capacity, not on behalf of his S-Corporation; and 2) Payment for Mr. Fleischer’s work went to Mr. Fleischer personally, not to his S-Corporation’s bank account.

Mr. Fleischer’s primary argument in response was that he had to sign the agreements and receive payment in his own name because he, not his S-Corporation, is licensed and registered as a financial advisor, and it would cost him millions of dollars to get the same required licenses for his company.

The Tax Court wasn’t impressed with Mr. Fleischer’s arguments, and ruled that he was indeed on the hook for all the taxes, penalties and interest the IRS asked for in the Notice. While the Tax Court’s decision in Fleischer isn’t necessarily binding on other cases, it is instructive for those hoping to use the S-Corporation to save on self-employment taxes – and have that use stand up under IRS scrutiny. Namely, it drives home two important points:

1)   To the extent possible, all of your S-Corporation’s contracts – especially those where it will be receiving income – should be in the name of your S-Corporation. This is crucial. One of the huge factors the IRS looks at when determining whether income belongs to a corporation is the existence “between the corporation and the person or entity using the services [of] a contract or other similar indicium recognizing the corporation’s controlling position.” A contract between your S-Corporation and the person or entity paying it will satisfy this factor. Besides, entering into contracts in the name of the S-Corporation also helps from a limited liability standpoint if the other party wants to sue for breach of that contract.

2)   Again, to the extent possible, all payments for goods or services provided should be made to the S-Corporation directly. Such direct payments may serve as “other similar indicium recognizing the corporation’s controlling position.” At the very least, these direct payments will save you from being in a position where you have to explain to the IRS why income being reported through you S-Corporation went first to you personally.

The S-Corporation is a wonderful and legitimate tool to save on taxes. Please just take the time to make sure you are using and operating it correctly. Doing so will save you time, money and headaches if you are ever audited by the IRS (or sued in your business).

What Is a “Holding Company” and When Could It Make Sense to Have One?

February 7, 2017 Asset Protection, Business planning, Real Estate, Small Business Comments Off on What Is a “Holding Company” and When Could It Make Sense to Have One?

We have lots of clients who come to us after dealing with promoters and would-be practitioners who have recommended elaborate (and usually expensive) entity structures for their businesses. This “up-sell” approach tends to happen whether the business sells cheeseburgers or invests in buy-and-hold rental properties.

One of the structures that is almost always included in these intricate structures (especially when real estate is involved) is something called a “holding company.” Simply put, a holding company is a business entity that exists solely to own other business entities. In our practice, we see this most often in the form of a holding company LLC, which owns one or more additional LLC’s, each of which, in turn, owns a single rental property.

At first glance, this structure may seem like overkill, and in many situations it is. Owning a rental property in the name of a single properly established, maintained, and operated LLC will provide the LLC owner with limited liability for the potential debts and obligations associated with that property.

In several states (but certainly still less than half), this simple structure also does a great deal to protect the rental property from the debts and obligations of the LLC owner. In these states, if an LLC owner has some sort of judgment against him or her, the sole remedy available that judgment creditor has to get at the LLC owner’s interest in the LLC that owns the rental (and the rental itself) is something called a “Charging Order.” Let’s call these states “Charging Order States.”

The Charging Order lets the judgment creditor step into the LLC owner’s shoes if and when the LLC makes a distribution of profit – but it doesn’t let that judgment creditor do much else. For that, and several other reasons, the Charging Order is a particularly weak remedy that many judgment creditors will simply decide not to pursue (or that they may be willing to walk away from for pennies on the dollar).

So, given the protections offered by a single LLC, when can a holding company, set up in a Charging Order State, actually make sense in the context of rental real estate? Here are a few:

1)         You work in a profession that tends to get sued a lot (think doctors and engineers), and your rentals (and their associated LLC(s)) are located in a non-Charging Order State. In this situation, the holding company can be an effective barrier between the people who might sue you for malpractice and your rental property assets.

2)         Even though you don’t work in a “high risk” profession, you are a bit of an asset protection junkie, so for you, because your rentals (and their associated LLC(s)) are located in a non-Charging Order State, the additional cost and paperwork of having another entity is worth the additional protection from personal creditors. Here, the holding company may have less practical effect than in number one above, but it will serve as that same barrier if you get tied up in a lawsuit you end up losing.

3)         You are a bit of an asset protection junkie, and you like the idea having two layers of limited liability protection between the liabilities associated with your rental property and your personal assets. In this situation, if a plaintiff in a lawsuit is for some reason able to pierce the corporate veil of the entity that owns the rental and get at the owner, they will find yet another corporate entity whose veil will also have to be pierced before they can access your personal assets to satisfy a judgment.

You’ve worked hard to accumulate the assets you have, and it makes sense to take steps to protect them. Don’t be fooled by those who say “you have to” do X, Y or Z. There is no one-size-fits-all-approach. The art and science of asset protection involves one cost/benefit analysis after another. Make sure you are seeking and following the advice of a knowledgeable professional who has your best interests at heart.

5 New Year’s Resolutions to Make Your Business Great (or Great Again)

January 9, 2017 Business planning Comments Off on 5 New Year’s Resolutions to Make Your Business Great (or Great Again)

The dawn of a new year is traditionally a time for self-reflection on what we need to do to improve our lives.  Many of us focus on goals to make ourselves better physically, mentally, spiritually, and yes – even financially.  For those of you who own a small business, it’s also a great time to apply some mental capital to figuring out ways to improve that business.  In that vein, here are five ideas for New Year’s resolutions that will help you make your small business great (or great again):

1) Get Started! – This resolution has lots of possible applications.  If you don’t have a small business yet, but believe you have the concept, the determination, and the skills to make it on your own – then don’t procrastinate any longer!  Make 2017 the year you at least get on the path to making those dreams a reality.  If you already own a small business, make 2017 the year you take things to the next level.  Develop that idea you have into a profitable product or service.  Find your niche.  Your business will never get off the ground or take that next big leap if you don’t get started doing something you weren’t doing before.

2) Develop a Strategic Plan – My colleague and friend, Mark Kohler wrote about this last week.  In a nutshell, your Strategic Plan is your roadmap for how to get from where you are now to where you want to be.  It’s hard to make just about anything work without a plan.  Read Mark’s article from last week, listen to the podcast, and take the time to establish and adapt your Strategic Plan throughout the year and beyond.  If you do, I can promise you will find that taking your business to the next level will be a much smoother and shorter trip than it would be without it.

3) Get Serious about Limiting Your Liability – You may not be aware of this, but sometimes small businesses and/or their owners get sued!  Maybe it’s a disgruntled ex-employee, or a former partner, or a vendor or a client who thinks you breached a contract.  Regardless of the source of the lawsuit, there are steps you can take to limit both your personal liability and the liability of the business itself.  Speaking generally, these steps may include:

1)   Incorporating your business.

2)   Making sure your business has the correct underlying documents and state filings to maintain the protection you already think you have.

3)   Looking into additional insurance.

4)   Making sure all contracts related to the business are in writing, and that the language accurately reflects the nature of the contractual relationship.

4) Learn Something New – Without a doubt, it can be easy to get caught up in the day-to-day of running your business, but you should also set aside time to learn new skills or strategies that could make your business an even bigger success.  It may be as simple as learning QuickBooks so you can get your financial house in order. Or maybe it’s learning a new industry skill, such as becoming a licensed realtor, so you can take commissions on some of those real estate deals you come across.  While there are plenty of resources on the internet, you can also attend seminars, workshops or industry training events to pick up your new skill (depending what you learn, you may even be able to get a certification).  When you invest in yourself in this way, you are also investing in your business.

5) Make the Difficult Decisions – Making these decisions is hard, and putting them off may make things easier in the short term.  But, at the end of the day, putting off difficult decisions just makes them harder/ for your business. Is there an employee that’s just not working out? It’s usually best to let them go before the situation gets worse.  Is a new product just not generating the revenue you expected?  It may be the time to revamp it or get rid of it.  A huge part of being a successful business owner or entrepreneur is facing these types of trials as they come and making honest, informed decisions for the long-term health of your business.

Making (and keeping) these resolutions will go a long way to making your business great in 2017!

The Law of Christmas Light Displays according to the Hon. Clark W. Griswold

December 20, 2016 Business planning, Law, Small Business, Tax Planning Comments Off on The Law of Christmas Light Displays according to the Hon. Clark W. Griswold

According to a 2011 survey, Americans spend in excess of $6 billion per year on Christmas decorations – and there’s no truth to the rumor that more than half of that number was spent by Clark Griswold for his annual Christmas light extravaganza.

What is true is that displays get bigger and more expensive every year, and the desire to have the best and brightest Christmas display in the neighborhood (or maybe in the town, the state, or even the country!) could land you in a lawsuit if you’re not careful.  Let’s take a look at three of the biggest issues to watch out for as you enjoy your Christmas lights this year:

1) Is Your Display a Nuisance?

Many among us look forward to driving around with our kids looking for the most ostentatious displays we can find.  Even here in little Cedar City, Utah there are some very impressive presentations, including one neighborhood where all the houses are involved with thousands of lights, and hand-painted signs retelling ’Twas the Night before Christmas.  However, what happens when your lights are too much for your neighbors?  Remember, not everyone loved Clark Griswold’s “25,000 tiny twinkling lights,” along with the miniature sleigh and eight tiny reindeer.

Holiday decorations can create additional traffic and noise from those coming by to get a look (or noise from the displays themselves).  They can also result in parking issues, blocked driveways, and unwelcome late-night revelers.  The display itself can also be a nuisance to the folks next door or across the street who have to deal with flashing lights at all hours of the night.  Displays using older incandescent bulbs also use much more electricity and could cause power outages.

While I’m not aware of any particular case law, it’s absolutely conceivable that an aggrieved neighbor could sue and demand a restraining order for a particularly gaudy holiday display.  However, in the spirit of Christmas, I would certainly hope that before it gets that far, neighbors could get together to work out a compromise that is acceptable to everyone.  While being on a court docket during the holidays doesn’t necessarily guarantee you’re on Santa’s naughty list – it is pretty close!

2) Getting “Professional” Help to Hang Your Lights

If you’re like me, you love how your house looks when it’s decorated with a dazzling Christmas display, but you’re not a huge fan of the work it takes to get there (and you’re not in a huge hurry to place yourself on your roof to make it happen).  Those of us in that rather large boat are in luck – there are plenty of “professionals” out there who are ready, willing and able to do that work for us – for a reasonable fee of course.

Seems like a win-win, right?  What could possibly go wrong?  Well, a lot of the folks who perform this work are unlicensed.  So, what happens when the wind kicks up and one of the workers is blown off your roof and becomes seriously injured?  If the contractor you hired is licensed, then they will carry worker’s compensation insurance and you can rest easy.  On the other hand, if you hired an unlicensed contractor, then you may wake up on Christmas morning to a present you didn’t want to receive – a process server handing you a summons and a complaint for a lawsuit from the guy who fell off your roof.

3) Issues with Laser Lights

The past two or three years have seen a huge proliferation in the number of homeowners eschewing the traditional strands of Christmas lights, and going instead with one of several different “laser” holiday light products, which project lights onto the exterior of your house.  The main selling point of these systems is that they produce attractive displays with less work and less danger than hanging actual lights yourself.  While all of that is true, these systems are not without their issues.

Several news outlets have highlighted concerns with these lights, claiming that they can cause issues for pilots.  There are also reports of arrests coming after people “intentionally” pointed the lights at aircraft.  Because these systems are so new, this is still a developing area of the law.  However, it’s probable that cities and other municipalities will begin implementing regulations on these systems – including how close they can be used to airport facilities.

These systems have also been in the news for how easily then can be pilfered.  While it’s fairly difficult for a Grinch to steal lights that are affixed to your residence, he will have very little trouble making off with the compact device that sprays laser light all over your house.

Being aware of these issues and taking steps to mitigate them can help you enjoy the holidays without needing to get your attorney involved – after all, we all know the Child Born in Bethlehem wasn’t the biggest fan of lawyers!

November 30, 2016 Health Care, Small Business, Tax Planning Comments Off on The Election Didn’t Kill ObamaCare (yet): What You Need to Know

As Americans awoke on the morning of November 9, 2016, the reality of a Donald Trump presidency began to sink in.  Many believed that a Trump administration would mean the end of the Affordable Care Act (a.k.a. the ACA or ObamaCare) on day one.  Well, the reports of ObamaCare’s death have been greatly exaggerated (or are at least premature).  ObamaCare is alive and well for 2017 and Open Enrollment began November 1st and runs through January 31st.  Here’s what you need to know for what may be ObamaCare’s last ride:

  • Turns out that insurance under the Affordable Care Act isn’t really so affordable: Unless you’ve been under a rock for the past couple of months, you know to be prepared for a bit of sticker shock. ObamaCare Premiums for 2017 are up by an average of about 25%, and eight states (Alabama, Georgia, Illinois, Minnesota, Nebraska, Oklahoma, Pennsylvania and Tennessee) will see increases of more than 30%.  The steepest increase belongs to the Sooner State – as Oklahomans will see their premiums increase by an average of 76%.
  • You may have to choose between paying more for insurance and paying more for not having insurance: Insurance premiums aren’t the only prices on the rise. The penalty for not having health insurance has increased as well, and is calculated in one of two ways.  It’s either: a) 2.5% of your income; or b) $695 per adult and $347.50 per child, with a maximum of $2,085 per family.  The penalty is whichever amount is higher.  This means that anyone with an income of $83,400 or more who fails to obtain health insurance will be paying a penalty of at least $2,085, regardless of the size of their family.
  • Not all employers are required to provide health insurance for employees: The “employer mandate” which requires employers to offer acceptable coverage to their workers or pay tax penalties was one of the most controversial aspects of ObamaCare. However, this mandate only applies to employers with 50 or more full-time employees, so many small businesses are off the hook.  In addition, employers with less than 25 full-time employees with annual wages of less than $50,000 can qualify for employer tax credits through ObamaCare’s Small Business Health Options Program (SHOP).  More information on SHOP is available at https://www.healthcare.gov/small-businesses/.
  • A Health Savings Account (HSA) can be your friend: This strategy can be a huge opportunity for the small-business owner. Although non-business owners can also use a HSA, small-business owners have much more control over their health insurance plans and can utilize creative strategies to acquire the right type of insurance to allow for an HSA. In order to qualify, you have to enroll in a high-deductible health plan (HDHP), and if you’re generally healthy, this is a great chance to save on premiums and avoid the doctor as much as possible.

In the meantime, contributions to your HSA are deductible from your gross pay on the front page of your tax return, potentially putting you into a lower tax bracket.  In 2016, the tax deduction is up to $3,350 for singles and $6,750 for families.  The funds grow tax-free and aren’t a “use it or lose it” type plan.  The account can continue to grow and build year over year for your future healthcare needs. You can also spend the money tax-free on qualified medical expenses, and you can invest the money in much the same way you invest an IRA.  You can even invest HSA funds in real estate!

Knowing the deadlines is huge in order to take advantage of an HSA in 2016 or 2017. There are two deadlines to be aware of: the Setup Deadline and the Funding Deadline:

The Setup Deadline: Dec. 1, 2016 (as in this Thursday!!!) – In order to qualify to make contributions and take deductions in 2016, you must have established your HSA by this date.

The Funding Deadline: April 15, 2017 – Deadline to contribute to your HSA for 2016 and receive the tax deduction on your 2016 tax return.

  • Don’t forget about the Health Reimbursement Arrangement (HRA): This is a great strategy, but it only works for business owners, and it really benefits those with higher-than-average medical expenses. The HRA allows you to set up your own “benefit plan” for health care and reimburse yourself for ALL of your health care expenses — thereby getting a 100 percent write-off for all of your medical expenses.

The only challenge can be the structure you need to use in order to make the plan work. Sometimes it takes a little extra business planning and structuring – and certainly some attention to bookkeeping – to make it happen. But again, it can be very lucrative and worth the extra time.  With a little bit of planning with an attorney or CPA who understands the HRA, you can take massive tax deductions for your healthcare expenses over and above your health insurance.

The Trump administration and a Republican-controlled Congress means that in 2017 we may finally have the chance to bid a fond farewell to ObamaCare, but for the time being the ACA remains the law of the land.  Take steps to make sure you are doing all you can to capitalize on its advantages and avoid its pitfalls.

Series LLC’s (Somewhat) Demystified State-By-State

October 31, 2016 Asset Protection, Business planning, Real Estate Comments Off on Series LLC’s (Somewhat) Demystified State-By-State

Many of our clients, especially real estate investors, have heard of the Series LLC.  However, the Series LLC seems to have a bit of a mysterious aura that keeps it from being understood.  I think this comes from the fact that the Series LLC is relatively new (Delaware was the first state to adopt the Series LLC – in 1996, and many states have adopted it within the last 5-10 years), as well as the fact that only about 1/3 of the states have a Series LLC statutes and those statutes are not in any way uniform.  Additionally, Series LLC’s do not receive any sort of standard treatment when used in non-Series LLC states.

All of this sort of makes the Series LLC “a riddle wrapped in a mystery, inside an enigma” as someone famous once said.  So, let’s try to peel back the layers a bit

What the Heck Is a Series LLC?

The Series LLC is a species of LLC in which there is a “Parent” LLC that is formed and registered with the state.  The Parent LLC’s formation documents permit the LLC to create separate and distinguishable “Baby” LLC’s within its structure.

Ok. Why in the World Would I Want One?

Well, the nice thing about a Series LLC is that when correctly formed and operated, it provides limited liability protection not just between the owner and the Parent LLC, but between the Parent LLC and each of the Baby LLC’s, and between each of the individual Baby LLC’s themselves.

The most common use of a Series LLC is for a real estate investor who owns multiple rental properties in a given Series LLC state.  That real estate investor can establish a Series LLC with a separate Baby LLC for each rental property, deed each individual property into its separate Baby LLC, and establish a bank account for each Baby LLC and receive income and pay expenses for each separate property out of its own separate bank account.

At this point, if a slip and fall or some other liability occurs on one of the properties deeded into a Baby LLC, only that baby LLC’s assets (the property itself and the funds in that Baby LLC’s bank account) will be at stake in a lawsuit.  The assets belonging to the other Baby LLC’s, the Parent LLC, and the owner(s) personally, will not be available.

The difference between the Series LLC structure and just establishing a separate standard LLC for each property is that (in most cases) only the Parent LLC is filed and renewed at the state level.  This means that only the Parent LLC is paying filing and renewal fees.  The proof of the existence of the Baby LLC’s is in the Company’s Operating Agreement and other underlying documents.

Sweet! Where Is the Series LLC Available?

Sixteen jurisdictions with electoral votes (I’m taking Puerto Rico out of the mix) have LLC statutes that have provisions for Series LLC’s.  I have listed them below, with some information about naming and filing requirements for each.  Please note that for the sake of clarity, we typically advise clients to include the name of the Parent LLC when naming Baby LLC’s:

  • Alabama: The home of the defending National Champion Crimson Tide entered the Series LLC fray last year. Alabama does not require the Baby LLC’s to be registered at the state level, and has no specific naming rules.
  • California: Just kidding! The Golden State has a long and storied tradition of avoiding innovation in this area of the law! If you try to bring an outside series LLC to California, the Franchise Tax Board has warned that they’ll charge you $800 annually per series doing business in California. They’re not saying the series are valid in California, but if you try it is $800 annually for each.
  • Delaware: The First State was also the first to adopt the Series LLC, in 1996. In keeping with its business-friendly tradition, Delaware does not regulate Baby LLC names or require them to make any particular state filing.
  • District of Columbia: Our Nation’s Capital requires the name for any Baby LLC to include the name of the Parent LLC. In addition, the name of each Baby LLC must be filed with the District.
  • Illinois: The Land of Lincoln has the distinction of having the most stringent (and expensive) requirements for Series LLC’s. Every Baby LLC’s name must begin with the name of the Parent LLC, and a separate “Certificate of Designation” for each Baby LLC must be filed (and renewed each year).
  • Iowa: The Hawkeye State requires that the name of any Baby LLC include the name of the Parent LLC. However, it does not require any separate Baby LLC filing.
  • Kansas: Like Illinois, the Sunflower State requires a separate “Certificate of Designation” for each Baby LLC. It also requires that the name of each Baby LLC include the name of the Parent LLC.
  • Minnesota: The LLC statute for the Land of 10,000 Lakes makes mention of Series LLC’s, but doesn’t provide Baby LLC’s with any limited liability protection from each other of from the Parent LLC. Sort of defeats the purpose, right?!  So for all intents and purposes, Minnesota is not a Series LLC state.
  • Missouri: The Show Me State calls for all Baby LLC names to include the name of the Parent LLC, and requires a separate filing for each Baby LLC.
  • Montana: Big Sky Country has a, shall we say, quirky Series LLC statute. The law calls for Series LLC’s to have and file a separate Operating Agreement for each Baby LLC with the Articles of Organization.  As such, this is not a popular structure and is one I would avoid until the law is improved.
  • Nevada: The Silver State does not have name requirements for Baby LLC’s, and does not mandate any additional filings for Baby LLC’s.
  • North Dakota: See Minnesota, its neighbor to the east.
  • Oklahoma: There are no additional naming or filing requirements in the Sooner State.
  • Tennessee: The Volunteer State does not impose and additional filing requirements or name restrictions.
  • Texas: Everything’s … different in Texas. While the Lone Star State doesn’t have any naming restrictions or require a Certificate of Designation for Baby LLC’s (like Illinois and Kansas do), it does require the filing of a “Certificate of Assumed Name” – which is essentially a DBA – for each Baby LLC.
  • Utah: The Beehive State requires Baby LLC names to include the name of the Parent LLC. However, there are no Baby LLC filing requirements in the state.
  • Wisconsin: See Minnesota and North Dakota. Something’s in the water in the upper-Midwest.

Can’t I Just Set Up a Series LLC in One of These States and Use It to Own Property Elsewhere?

Because the Series LLC is so new (in legal terms), there is very little developed case law about how the structure will be treated in states without a Series LLC structure.  Because of this uncertainty, we do not recommend clients use a Baby LLC to own property in a non-Series LLC state.

What’s the Bottom Line?

The Series LLC can be a great option in order to get the limited liability protection of multiple LLC’s without the need to file and renew multiple full-blown LLC’s with the state.  However, the Series LLC is a complex beast and we suggest consulting with a knowledgeable attorney before taking the plunge.

Estate Planning: Recent Questions from our Clients

October 1, 2016 Estate Planning, Real Estate, Retirement Planning Comments Off on Estate Planning: Recent Questions from our Clients

In my experience, estate planning is one of the most important, and simultaneously least understood, areas of the law. Perhaps this is because none of us ever see how our own estate plan (or lack thereof) plays out after we are gone. Maybe it’s because there’s just a certain amount of mystery associated with death. Or it might be because people just don’t want to deal with death or the consequences thereof. Whatever it is, there just seem to be a lot of myths and half-truths circulating around this area of the law, and when clients actually get started with their estate plans, they tend to have a lot of questions.

At KKOS, the first line of defense on many of those questions is our fantastic estate planning paralegal, Julie Deck. Julie and I came up with a list of some of the most frequently asked estate planning questions, and I will answer them below:

Do I need a will if I have a trust?

The answer to this is a pretty emphatic YES! In a comprehensive estate plan, the trust is definitely going to be the star player. The trust is where you name beneficiaries as divide up assets owned by the trust. If you have done your estate plan correctly, you have “funded” the trust with the vast majority of your assets – things like real estate, interests in LLC’s and corporations, bank and brokerage accounts, and beneficiary designations for retirement accounts and life insurance policies.

However, the trust only deals with assets it owns. If for some reason you fail to “fund” the trust with the correct assets, then your will kicks in to deal with these assets. When you have a trust, your will will essentially say “distribute my assets as my trust directs,” but having the will in place is crucial to make sure the decisions you make in your trust are honored. If you have a trust, but no will, and you die with assets titled in your own name, then those assets may end up being distributed according to your state’s intestacy laws – instead of how your trust directs.

The will is also where you designate a guardian for your minor children and/or adult children with special needs. This makes sense because the trust only deals with assets it owns – and it doesn’t own your kids! Making this guardian designation is an absolutely crucial step for parents. Without a will, the question of who will be your children’s guardian is left to the courts, and I have personally seen the bitterness that can ensue when in-laws fight over who is supposed to watch after the children left behind when parents die.

Can a beneficiary of my trust also be my Successor Trustee when I die?

Absolutely, although it certainly isn’t required. This is actually usually what people choose to do. They typically name all their children as equal trust beneficiaries, and then designate one or more of those children as the Successor Trustee(s). However, this can open up the Successor Trustee to claims of bias or conflict of interest – especially in highly emotional situations or situations where the beneficiaries don’t necessarily get along. To avoid claims of bias, someone who is both a beneficiary and a trustee may want to take measures to safeguard his position. Such steps include: choosing an estate planning attorney to mediate or oversee the process, using fair methods for dividing unassigned personal property with emotional value, and involving an impartial appraiser if real property is involved. If an individual feels he cannot impartially act in both positions, an independent third-party can always be appointed to serve as trustee.

How do my assets actually get into my trust?

This is a very important question, because as I mentioned above, your trust only deals with assets it owns. If the trust doesn’t own any assets, then it’s really nothing more than a very expensive paperweight. Some people seem to think that assets magically get poured into the trust upon execution. Obviously, that isn’t the case. Different assets are transferred into a trust in different ways. Here is how the most common trust assets make their way into a trust:

  • Real Estate – must be deeded into the name of the trust by executing and recording a deed.
  • Corporation, LLC, and Partnership Interests – a formal stock, membership interest, or partnership interest agreement is executed and kept in the corporate book of the company involved.
  • Bank and Brokerage Accounts – you can speak with the financial institution(s) where you hold your accounts and they will help you execute documents to change ownership of those accounts into the name of the trust.
  • Retirement Accounts – the trust doesn’t actually become the owner of any retirement account during your lifetime. However, it can be named as a death beneficiary of any such accounts. You can make the necessary changes by requesting a beneficiary designation form from your account administrator.
  • Life Insurance Policies – you can name the trust as a beneficiary on life insurance policies as well.

How do I know the trustee I select isn’t just going to do whatever they want with my assets after I die?

You don’t know for sure! This is why it is very important to select responsible and trustworthy people to serve as trustees. It can also be a reason to select co-trustees who are required to act together. This ensures there are always two sets of eyes on every transaction. Another option is to name a third-party trust company, attorney, or accountant to serve as trustee (of course, these people will also charge for their time in acting as a trustee). Additionally, trustees are bound by a fiduciary duty to execute the trust as you direct. If they fail to do so, they can be sued by the beneficiaries, and the penalties can be steep.

In summary, these are just a few of the most common questions we get when helping clients with their estate plans. There are many others, and you may have specific questions that may not pertain to anyone else’s situation. That is why it is so important to get a knowledgeable estate planning attorney involved when you are making these important decisions.