For the last year or so, I've been warning my clients that the Federal Trade Commission is becoming more involved in regulating online commerce, specifically in terms of disclosures relating to online content. In particular, I've been telling companies that the FTC is likely to implement new guidelines that will bring blogs, Internet forums, message boards, word-of-mouth marketing, social media marketing, social commerce, and other forms of electronic and viral marketing in line with fair advertising practices that have not been updated in more than 25 years.
Well, earlier today, in a highly anticipated move, the FTC did just that. By a vote of 4-0, the Commission has approved new rules requiring bloggers and social media users to disclose payments they receive from companies for reviewing their products. The rules, which go into effect Dec. 1, give clear guidance to advertisers on how to keep their endorsement and testimonial ads in line with the FTC Act (warning: link takes you to a pdf file, not a Web page).
Under the revised rules, advertisements that feature a consumer and convey his or her experience with a product or service as "typical" when that is clearly not the case, will be required to disclose the results that consumers can generally expect. In contrast to the 1980 version of these same rules--which allowed advertisers to describe unusual results in a testimonial, as long as they included a disclaimer such as "results not typical"--the revised rules no longer contain a safe harbor around that issue.
The revised rules also add new examples to illustrate the long standing principle that "material connections" (i.e., payments or free products) between advertisers and endorsers (i.e., bloggers and other online influencers lurking in social media channels like Facebook, Twitter, MySpace, etc.) must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other "word-of-mouth" marketers. The revised rules specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. So, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service, or face a stiff fine from the FTC (which may be as much as $11,000 per incident).
"Companies that sponsor blogs or pay bloggers to cover events -- an emerging trend in branded entertainment -- could face increased legal risk when held accountable for the statements of their bloggers," says Anthony DiResta, general counsel for the Word of Mouth Marketing Association. "A compliance program for brands that outlines policies and practices for selecting, hiring, and monitoring of agents or representatives is essential."
Celebrity endorsers also are addressed in the revised rules. While the 1980 version of the rules did not explicitly state that endorsers--as well as advertisers--could be liable under the FTC Act for statements they make in an endorsement, the revised rules reflect FTC case law and clearly state that both advertisers and endorsers may be liable for false or unsubstantiated claims made in an endorsement--or for failure to disclose material connections between the advertiser and endorsers.
The revised rules also make it clear that celebrities have a duty to disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media.
By operating with integrity, your company builds a loyal and trusting community and avoids the negative press and legal issues that could result from any failure to disclose word-of-mouth advertising that has been bought and paid for. And, by keeping your social media real, you can generate positive word-of-mouth without having to sponsor or pay reviewers and risking a possible penalty or lawsuit.
Posted by Entrepreneur.com. For more information on this topic, visit http://www.jurislawgroup.com/
Monday, October 5, 2009
Wednesday, September 30, 2009
Sometimes it Takes a Village to Fund a Company - Entrepreneurs Get Creative with Sourcing Funds
Plenty of entrepreneurs are turning to their communities for support in these tricky times. As the recession wreaks havoc on America's economy, finding the money to launch, expand or even just sustain a small business is often a struggle. In the second quarter of 2009, venture capital funds raised the smallest amount since the third quarter of 2003, according to the National Venture Capital Association in Arlington, Va. Banks continue to pull credit lines and credit cards from many small businesses. Even proprietors who are willing to extract capital from their homes -- often their biggest personal asset - can't always do so, because the declining housing market has left so many homeowners underwater.
But entrepreneurs are resourceful, and as the economic crisis forces them to seek new sources of capital, a growing number appear to be finding money in their own backyards. After all, local customers have a personal incentive to invest in their favorite businesses. And while no one is officially tracking the trend, anecdotal evidence suggests that the practice is growing.
John Halko was halfway through renovating an expanded space for Comfort, his mostly organic eatery in Hastings-on-Hudson, N.Y., when the credit crisis hit. His source of funding -- a home-equity line -- ran out, so he applied for a loan at a local bank. He was turned down.
Halko wasn't ready to throw in the dish towel. His solution? The modern equivalent of an old-fashioned barn raising. Instead of soliciting neighbors to lift timbers, he asked them to open their wallets. For every $500 they purchased in "Comfort Dollars," his patrons received a $600 credit toward meals at the restaurant. As the community rallied around Comfort, Halko says, "it gave us hope." He raised $25,000 in six months, and the new, larger space - now called Comfort Lounge -- opened for business in May.
Visit http://www.jurislawgroup.com/ for more on this topic and http://money.cnn.com/2009/09/08/smallbusiness/barnraising_a_business.fsb/index.htm?section=money_smbusiness for the remainder of the article.
But entrepreneurs are resourceful, and as the economic crisis forces them to seek new sources of capital, a growing number appear to be finding money in their own backyards. After all, local customers have a personal incentive to invest in their favorite businesses. And while no one is officially tracking the trend, anecdotal evidence suggests that the practice is growing.
John Halko was halfway through renovating an expanded space for Comfort, his mostly organic eatery in Hastings-on-Hudson, N.Y., when the credit crisis hit. His source of funding -- a home-equity line -- ran out, so he applied for a loan at a local bank. He was turned down.
Halko wasn't ready to throw in the dish towel. His solution? The modern equivalent of an old-fashioned barn raising. Instead of soliciting neighbors to lift timbers, he asked them to open their wallets. For every $500 they purchased in "Comfort Dollars," his patrons received a $600 credit toward meals at the restaurant. As the community rallied around Comfort, Halko says, "it gave us hope." He raised $25,000 in six months, and the new, larger space - now called Comfort Lounge -- opened for business in May.
Visit http://www.jurislawgroup.com/ for more on this topic and http://money.cnn.com/2009/09/08/smallbusiness/barnraising_a_business.fsb/index.htm?section=money_smbusiness for the remainder of the article.
Tuesday, September 29, 2009
What is your Idea Worth? -- Matchmaking for Companies
A federally funded online service helps small manufacturers find inventors with new technologies - and estimate their worth.
Process Equipment Co. had a fine history of innovation. Founded in 1946 by Emmert Studebaker, a member of the famous car-making family, PECo sold laser welders and other specialized equipment to GM and other manufacturers. That brought in dependable revenues of $40 million a year.
But demand for PECo's products dropped as GM declined, and last year the Tipp City, Ohio-based firm was forced to lay off a third of its employees. More cuts would come unless PECo could figure out how to adapt its machines to other industries.
Hiring a research firm to do the job would cost $100,000 -- way out of PECo's price range. Now, for just $2,000, PECo can turn to the USA National Innovation Marketplace. In May the Department of Commerce's Manufacturing Extension Partnership teamed up with entrepreneur Doug Hall to offer the service to small businesses. Hosted at Hall's Web site, Planet Eureka, the marketplace matches inventors with manufacturers.
It's too soon to say whether such matchmaking will work in the small company world. But the National Innovation Marketplace has no shortage of ideas waiting to be picked up. Among them: a food packaging film made from edible soy protein, said to help protect ready-to-eat food from dangerous bacteria; a drug designed to prevent and cure osteoporosis in a single dose (the research predicts that commercialization will take up to 10 years); and a "supersaver dream sander" that eliminates dust when sanding drywall.
Visit www.jurislawgroup.com for related content and http://money.cnn.com/2009/09/09/smallbusiness/innovation_marketplace.fsb/index.htm?postversion=2009091013 for the full story.
Process Equipment Co. had a fine history of innovation. Founded in 1946 by Emmert Studebaker, a member of the famous car-making family, PECo sold laser welders and other specialized equipment to GM and other manufacturers. That brought in dependable revenues of $40 million a year.
But demand for PECo's products dropped as GM declined, and last year the Tipp City, Ohio-based firm was forced to lay off a third of its employees. More cuts would come unless PECo could figure out how to adapt its machines to other industries.
Hiring a research firm to do the job would cost $100,000 -- way out of PECo's price range. Now, for just $2,000, PECo can turn to the USA National Innovation Marketplace. In May the Department of Commerce's Manufacturing Extension Partnership teamed up with entrepreneur Doug Hall to offer the service to small businesses. Hosted at Hall's Web site, Planet Eureka, the marketplace matches inventors with manufacturers.
It's too soon to say whether such matchmaking will work in the small company world. But the National Innovation Marketplace has no shortage of ideas waiting to be picked up. Among them: a food packaging film made from edible soy protein, said to help protect ready-to-eat food from dangerous bacteria; a drug designed to prevent and cure osteoporosis in a single dose (the research predicts that commercialization will take up to 10 years); and a "supersaver dream sander" that eliminates dust when sanding drywall.
Visit www.jurislawgroup.com for related content and http://money.cnn.com/2009/09/09/smallbusiness/innovation_marketplace.fsb/index.htm?postversion=2009091013 for the full story.
Wednesday, August 19, 2009
Wells Fargo Sued Over Home Equity Lines of Credit
Hopefully this will give back some breathing room to some well-deserved entrepreneurs.
NEW YORK (AP) - The banking unit of Wells Fargo & Co. is facing a lawsuit claiming it illegally reduced the size of customers' home equity lines of credit.
The suit, which was filed in Illinois, claims Wells Fargo failed to accurately assess the value of customers' houses before deciding to cut the size of their credit lines. San Francisco-based Wells Fargo is being accused of using unreliable computer models that wrongly valued home prices too low to justify cutting the size of customers' loans.
Home equity lines of credit are similar to credit cards in that a customer has a credit limit and can continue to borrow money until the limit is reached. Once a portion is paid off, it again becomes accessible to borrow. But, home equity lines of credit are backed by a borrower's property, whereas credit cares are unsecured.
Michael Hickman, who filed the lawsuit on behalf of himself and is seeking class action status for it, claims Wells Fargo also did not provide proper notice that the bank was reducing the size of the credit lines.
The bank's notice for reducing the lines also did not specifically provide a new estimated value for the property or the method used to determine the houses value. Hickman's lawsuit said that information was needed so a customer could challenge the change in the credit limit and try and reinstate the previous limit.
Wells Fargo responded in a statement, "we are confident in our fair and responsible lending practices, including how we determine home equity credit limits available to customers depending on the amount of equity in their home. Our controls are based on contractual and regulatory guidelines and include a fair appeals process.
"While we are beginning to review the lawsuit, from what we have read so far, it appears to mischaracterize credit controls designed to sustain homeownership."
Hickman is being represented by KamberEdelson LLC, a Chicago-based law firm, which is also representing clients that have filed similar suits against JPMorgan Chase & Co. and Citigroup Inc.
Nearly all banks have been hit hard by mounting loan losses tied to residential real estate over the past two years. Reducing lines of credit can limit exposure to the struggling sector.
Wells Fargo set aside $5.09 billion to cover loan losses, which includes potential losses on home equity lines of credit, during the second quarter. It set aside $3.01 billion during the same quarter last year.
The bank was one of hundreds of financial firms that received bailout money from the government last fall amid the mushrooming credit crisis. Wells Fargo received $25 billion as part of the Troubled Asset Relief Program, and has yet to repay the loan.
Jay Edelson, a managing partner at KamberEdelson, said systematically cutting home equity lines of credit runs opposite of the goals of the bailout program, which was supposed to improve consumers' access to credit.
Wells Fargo's had average total loans of $833.9 billion during the second quarter, compared with $855.6 billion in the first quarter. When it announced second-quarter earnings last month, Wells Fargo said the decline in total loans was a reflection of actions taken to reduce the size of high-risk loan portfolios and came amid moderating demand for new loans.
However, Wells Fargo did ramp up lending in certain areas. It originated $129 billion in mortgages in the second quarter, compared with $101 billion during the previous quarter.
By STEPHEN BERNARD
NEW YORK (AP) - The banking unit of Wells Fargo & Co. is facing a lawsuit claiming it illegally reduced the size of customers' home equity lines of credit.
The suit, which was filed in Illinois, claims Wells Fargo failed to accurately assess the value of customers' houses before deciding to cut the size of their credit lines. San Francisco-based Wells Fargo is being accused of using unreliable computer models that wrongly valued home prices too low to justify cutting the size of customers' loans.
Home equity lines of credit are similar to credit cards in that a customer has a credit limit and can continue to borrow money until the limit is reached. Once a portion is paid off, it again becomes accessible to borrow. But, home equity lines of credit are backed by a borrower's property, whereas credit cares are unsecured.
Michael Hickman, who filed the lawsuit on behalf of himself and is seeking class action status for it, claims Wells Fargo also did not provide proper notice that the bank was reducing the size of the credit lines.
The bank's notice for reducing the lines also did not specifically provide a new estimated value for the property or the method used to determine the houses value. Hickman's lawsuit said that information was needed so a customer could challenge the change in the credit limit and try and reinstate the previous limit.
Wells Fargo responded in a statement, "we are confident in our fair and responsible lending practices, including how we determine home equity credit limits available to customers depending on the amount of equity in their home. Our controls are based on contractual and regulatory guidelines and include a fair appeals process.
"While we are beginning to review the lawsuit, from what we have read so far, it appears to mischaracterize credit controls designed to sustain homeownership."
Hickman is being represented by KamberEdelson LLC, a Chicago-based law firm, which is also representing clients that have filed similar suits against JPMorgan Chase & Co. and Citigroup Inc.
Nearly all banks have been hit hard by mounting loan losses tied to residential real estate over the past two years. Reducing lines of credit can limit exposure to the struggling sector.
Wells Fargo set aside $5.09 billion to cover loan losses, which includes potential losses on home equity lines of credit, during the second quarter. It set aside $3.01 billion during the same quarter last year.
The bank was one of hundreds of financial firms that received bailout money from the government last fall amid the mushrooming credit crisis. Wells Fargo received $25 billion as part of the Troubled Asset Relief Program, and has yet to repay the loan.
Jay Edelson, a managing partner at KamberEdelson, said systematically cutting home equity lines of credit runs opposite of the goals of the bailout program, which was supposed to improve consumers' access to credit.
Wells Fargo's had average total loans of $833.9 billion during the second quarter, compared with $855.6 billion in the first quarter. When it announced second-quarter earnings last month, Wells Fargo said the decline in total loans was a reflection of actions taken to reduce the size of high-risk loan portfolios and came amid moderating demand for new loans.
However, Wells Fargo did ramp up lending in certain areas. It originated $129 billion in mortgages in the second quarter, compared with $101 billion during the previous quarter.
By STEPHEN BERNARD
Monday, August 3, 2009
ARTICLE: SUGGESTED REVISIONS TO THE AIR STANDARD LEASE FORM
Anyone involved in commercial real estate in California is undoubtedly familiar with the American Industrial Real Estate Association (“AIR”) standard lease forms. The ease and affordability of the AIR lease forms have garnered them immense popularity in California for both landlords and tenants alike. Generally, however, the parties merely fill in and sign the standard form while making little, if any, changes to the language of the lease.
So long as everything runs smoothly, landlords and tenants are perfectly happy with this arrangement. However, those parties that have engaged in lease disputes have quickly realized that the standardized lease form often fails to favorably address many of their specific needs. This is why, prior to using a standard AIR lease form, all parties to a lease should thoughtfully assess their interests and attempt to negotiate appropriate revisions.
Although other articles have offered suggestions regarding items to negotiate in the AIR lease, we have attempted to present our own suggested revisions in a clear and concise format with special attention paid to the individual needs of the landlord and tenant.
PROVISION ONE- COMMENCEMENT DATE:
One of the first potential problem areas in the standard lease form is the “commencement date” section. Specifically, Paragraph 3.3, “Delay in Possession,” states that there is no penalty for the landlord for late delivery of the premises as long as the landlord delivers the premises to the tenant within 60 days from the agreed upon commencement date. The tenant’s only remedy is to terminate the lease within the 60-day period. The section also states that if the premises are not delivered within 120 days of the commencement date, the remedy is automatic termination of the lease.
The commencement date paragraphs can pose many problems for both parties. One problem may occur if a dispute arises about construction delays for tenant improvements to the premises. These problems are intensified if the landlord is responsible for the work because the landlord has complete control of the situation.
One more point of interest is how the commencement date is defined. Many times, it is defined as the time at which the landlord reaches “substantial completion” of the tenant improvements. This simply means that the landlord has finished sufficient work so that the tenant may move in and conduct business.
If you are the Tenant:
The situation is further exacerbated because tenants are often in a precarious situation when moving into new premises. They may be moving out of an old rental on a specific date, or have time sensitive arrangements for purchasing and moving furniture or hiring employees. Because of this vulnerable position, a significant delay can pose huge problems for tenants.
Thus, it is important for the tenant to negotiate the commencement date and 60-day delay provision. The tenant may attempt to negotiate for no delay, however most landlords will insist on some delay, even if less than 60 days. Actively negotiating the 60-day period will encourage the landlord to provide the tenant with timely access because the landlord does not want to spend time and money adapting the premises to the tenant’s requests only to eventually lose the tenant.
The tenant should also attempt to require the landlord to pay the tenant’s damages if the landlord delays delivery of the premises. Such revisions might include the landlord agreeing to pay damages for any holdover rent paid by the tenant as a result of the delay.
When the commencement date is defined as “substantial completion,” the tenant must insist that paragraph 3.3 be modified. Without revision, paragraph 3.3 only gives the tenant the right to terminate if the landlord fails to deliver possession of the premises within 60 days of substantial completion. With no modification to paragraph 3.3, the landlord could indefinitely delay completion of the work without any repercussions because the tenant’s 60-day right to terminate only begins after substantial completion. Thus, the landlord will only violate paragraph 3.3 if the landlord substantially completes the work and then fails to deliver possession. Thus, to protect itself, a tenant should negotiate a fixed date by which the landlord must deliver the premises or give the tenant the right to terminate.
If you are the Landlord:
The commencement date paragraphs may also pose problems for landlords. If the commencement date is based on substantial completion, and the tenant is responsible for completion of the work, the same problems may apply. To avoid this, the landlord might insist on shifting the construction delay risks to the tenant. A landlord could attempt to assign the commencement date to either a fixed date or the date the tenant opens for business, whichever comes first, whether or not the tenant completes the construction. This might prevent the tenant from continually delaying commencement of the lease.
PROVISION TWO - COMPLYING WITH APPLICABLE LAWS:
So long as everything runs smoothly, landlords and tenants are perfectly happy with this arrangement. However, those parties that have engaged in lease disputes have quickly realized that the standardized lease form often fails to favorably address many of their specific needs. This is why, prior to using a standard AIR lease form, all parties to a lease should thoughtfully assess their interests and attempt to negotiate appropriate revisions.
Although other articles have offered suggestions regarding items to negotiate in the AIR lease, we have attempted to present our own suggested revisions in a clear and concise format with special attention paid to the individual needs of the landlord and tenant.
PROVISION ONE- COMMENCEMENT DATE:
One of the first potential problem areas in the standard lease form is the “commencement date” section. Specifically, Paragraph 3.3, “Delay in Possession,” states that there is no penalty for the landlord for late delivery of the premises as long as the landlord delivers the premises to the tenant within 60 days from the agreed upon commencement date. The tenant’s only remedy is to terminate the lease within the 60-day period. The section also states that if the premises are not delivered within 120 days of the commencement date, the remedy is automatic termination of the lease.
The commencement date paragraphs can pose many problems for both parties. One problem may occur if a dispute arises about construction delays for tenant improvements to the premises. These problems are intensified if the landlord is responsible for the work because the landlord has complete control of the situation.
One more point of interest is how the commencement date is defined. Many times, it is defined as the time at which the landlord reaches “substantial completion” of the tenant improvements. This simply means that the landlord has finished sufficient work so that the tenant may move in and conduct business.
If you are the Tenant:
The situation is further exacerbated because tenants are often in a precarious situation when moving into new premises. They may be moving out of an old rental on a specific date, or have time sensitive arrangements for purchasing and moving furniture or hiring employees. Because of this vulnerable position, a significant delay can pose huge problems for tenants.
Thus, it is important for the tenant to negotiate the commencement date and 60-day delay provision. The tenant may attempt to negotiate for no delay, however most landlords will insist on some delay, even if less than 60 days. Actively negotiating the 60-day period will encourage the landlord to provide the tenant with timely access because the landlord does not want to spend time and money adapting the premises to the tenant’s requests only to eventually lose the tenant.
The tenant should also attempt to require the landlord to pay the tenant’s damages if the landlord delays delivery of the premises. Such revisions might include the landlord agreeing to pay damages for any holdover rent paid by the tenant as a result of the delay.
When the commencement date is defined as “substantial completion,” the tenant must insist that paragraph 3.3 be modified. Without revision, paragraph 3.3 only gives the tenant the right to terminate if the landlord fails to deliver possession of the premises within 60 days of substantial completion. With no modification to paragraph 3.3, the landlord could indefinitely delay completion of the work without any repercussions because the tenant’s 60-day right to terminate only begins after substantial completion. Thus, the landlord will only violate paragraph 3.3 if the landlord substantially completes the work and then fails to deliver possession. Thus, to protect itself, a tenant should negotiate a fixed date by which the landlord must deliver the premises or give the tenant the right to terminate.
If you are the Landlord:
The commencement date paragraphs may also pose problems for landlords. If the commencement date is based on substantial completion, and the tenant is responsible for completion of the work, the same problems may apply. To avoid this, the landlord might insist on shifting the construction delay risks to the tenant. A landlord could attempt to assign the commencement date to either a fixed date or the date the tenant opens for business, whichever comes first, whether or not the tenant completes the construction. This might prevent the tenant from continually delaying commencement of the lease.
PROVISION TWO - COMPLYING WITH APPLICABLE LAWS:
From a simple reading of the lease, it is often difficult to ascertain which party is responsible for complying with applicable laws (or “requirements”). The lease contains a maze of confusing disclaimers that may or may not be relevant in determining responsibility. Ultimately, the decision of who is responsible for complying with applicable laws may only be determined after examining two cases decided by the California Supreme Court in 1994. These cases, Brown v. Green, 8 Cal. 4th 812 (1994), and Hadian v. Schwartz, 8 Cal. 4th 836 (1994), outline the relevant factors that a court will consider in making such a decision.
In Brown and Hadian, the California Supreme Court held that despite the language in the AIR lease specifically placing the responsibility of complying with applicable laws on the tenant, a landlord may still be responsible for repair costs. In both cases, the court disregarded the clear and unambiguous language in the AIR lease form. Instead, the court applied a six-factor test for the tenant’s obligation to repair. The factors are as follows: 1) the relationship of the cost of the curative action to the rent reserved, 2) the length of the term and the time for the cost to be amortized 3) the relationship of the benefit to the tenant to that of the reversioner (i.e., the landlord), 4) whether the curative action is structural or nonstructural, 5) the degree to which the tenant’s enjoyment of the premises will be interfered with while the curative action is being undertaken, and 6) the likelihood that the parties contemplated the application of particular law or order involved.
The reasoning in Hadian suggests that if the lease is a net lease, then it may be held that the parties intended for the tenant to share in such repair costs. However, neither landlords nor tenants should assume that merely allocating the risk to one party in the lease will control which party will bear the risk. This will only be determined after examining the facts in light of the six-factor test.
If you are the Tenant:
Although the six-factor test is ultimately determinative, the language in the lease may be a relevant factor in determining the outcome. Thus, the parties should make sure the terms of the lease meet their desires and expectations.
A tenant should attempt to revise any language stating that the tenant bear the cost to repair or comply with laws if compliance is mandated after the landlord’s six-month warranty period expires. This is especially true in shorter leases where the majority of the benefit of compliance will go to the landlord. Additionally, a tenant should reject language that gives the landlord the right to terminate the lease if compliance is caused by factors outside the tenant’s use.
The tenant should also protect against language stating that the tenant will lose its lease for something that the landlord will be required to fix even after the tenant leaves. The tenant may want to revise the amortization period to cover the “useful life” of the item rather than the AIR form’s 12-year period. Finally, tenants should try to delete paragraph 49 or at least modify it to state that the landlord must warrant that the premises currently complies with disability laws or will comply by the commencement date.
PROVSION THREE - AUDIT RIGHTS:
Paragraph 4.2 of the AIR office lease form should also be examined closely. This paragraph includes a nonexclusive list of operating expenses that the landlord may charge the tenant and also lays out a few exclusions. Most parties assume that since the list is nonexclusive, further items may be charged to the tenant.
The AIR standard lease does not grant the tenant a right to audit the landlord’s books and records regarding operating expenses. However, while California case law does not give a tenant an implied right to audit, it is generally believed that a tenant may compel an audit during discovery after commencement of a lawsuit.
If you are the Tenant:
Many attorneys for tenants choose to include a list of exclusions from operating expenses in an attempt to clarify what expenses the tenant is paying. The tenant should examine this paragraph closely to make sure that the landlord does not use operating expenses as a source of profit.
If you are the Landlord:
The landlord should make sure that it keeps the inclusions and exclusions consistent in its leases. This way the landlord can avoid accounting confusion from differing leases. The attorney for the landlord should also be aware of any substantive exclusions added to the lease by the tenant that were not part of the original deal.
For Landlords and Tenants:
Because the AIR lease does not grant the tenant a right to audit the landlord’s books, it is beneficial for both the tenant and landlord to include some language about the tenant’s audit rights in the lease. Such additions should include the time and means of requesting and performing the audit, the qualifications of the individual performing the audit, the party that pays for the audit and if the tenant shall be reimbursed for audit costs if there is an error, and issues of confidentiality.
PROVISION FOUR - ASSIGNMENTS AND SUBLETTING:
Assignment and subletting are addressed in paragraph 12, Assignment and Subletting, and paragraph 36, Consent. As is, these sections state that the tenant has the right to assign or sublet to a third party as long as it receives the landlord’s reasonable consent. Although these sections are rather equal, each party may raise certain objections.
If you are the Tenant:
The tenant may notice that the standard lease does not allow the tenant to transfer to an affiliate without the landlord’s consent. If an assignment or sublet results in profits for the tenant, tenants will want to exclude transfer costs such as broker commissions, improvement allowances, downtime, legal fees, etc.
If you are the Landlord:
The landlord may notice that the standard lease does not address recapture rights that give the landlord the right to terminate the lease if the tenant attempts to assign or sublet. However, there is a separate addendum that addresses limited recapture rights. Most landlords will attempt to revise this section to make it unlimited. There is no issue of unreasonableness here, as the California Supreme Court has held that a recapture clause in a commercial lease is enforceable and is not subject to a reasonableness requirement. Carma Developers, Inc. v. Marathon Development California, Inc., 2 Cal. 4th 374 (1992).
If the landlord does not add the recapture addendum, the AIR standard lease will not address situations where the tenant transfers for a profit or how the profit is treated. How profits are split should absolutely be defined by the parties.
The landlord should make sure that the tenant is not attempting to define profit in a manner that avoids paying the landlord its fair share.
The landlord should also address the situation in which the tenant accuses the landlord of improperly withholding consent to a transfer. Paragraph 12.1(e) states that a tenant may recover compensatory damages from the landlord in addition to obtaining injunctive relief. The landlord should include language stating that the tenant must seek a court injunction requiring the landlord to consent rather than sue for damages. Also, the landlord will want to delete the portion of paragraph 12.1(e) regarding compensatory damages.
PROVISION FIVE - SECURITY DEPOSIT:
If you are the Landlord:
Paragraph 5 outlines the situations in which the security deposit may be used by the landlord. This section must be revised by the landlord. In 250 L.L.C. v. PhotoPoint Corp., 131 Cal.App.4th 703 (2005), a California court held that under Civil Code §1950.7, the landlord may not retain the security deposit to cover damages for future rent owed under the lease. However, the court did state that in commercial leases, a tenant can waive §1950.7. Such a waiver would allow the landlord to apply the security deposits toward future rent. Thus, the landlord should add an express waiver of §1950.7 or any similar provision of law.
PROVISION SIX - REMOVAL AND SURRENDER:
Paragraph 7.5(b) of the standard form lease states that the landlord may require the tenant to remove alterations and utility installations so long as the landlord gives notice between 30 and 90 days before the end of the lease.
If you are the Tenant:
In response, tenants may want to add language forcing the landlord to give tenants notice of the need for removal of alterations and utility installations before the tenant makes them. The benefit of such language is that, before construction, the tenant can determine the costs of removal at the end of the lease and decide whether the improvements are worthwhile.
PROVISION SEVEN - DAMAGE OR DESTRUCTION:
For Landlords and Tenants:
Paragraph 9 of the standard lease gives the landlord the right to terminate the lease if damage costs exceed six months’ rent. This number is not based on any tangible factors and is not traditionally found in other leases. Therefore, depending on the specifics of the lease, the parties may want to alter this section to better suit their specific agreement.
PROVISION EIGHT - LIMITATION OF LIABILITY:
If you are the Tenant:
Paragraph 20 states that the tenant must only look to the project for fulfillment of any liability of the landlord regarding the lease. A tenant should attempt to eliminate this provision. However, if the landlord is not willing to delete this language, the tenant and its attorney should attempt to revise the section. The tenant should attempt to include language clarifying that the tenant can also look to the rents, issues, profits, proceeds, and other income from the project regardless if the receiver is the landlord or other. The tenant should also clarify that paragraph 20 has no effect on the tenant’s rights to withhold or offset rents.
PROVISION NINE - NONDISTURBANCE AND ATTORNMENT:
Under paragraph 30.3, the tenant’s subordination of the lease is subject to the receipt of a nondisturbance agreement regarding security devices that the landlord becomes a party to after the lease is executed. The lease however, does not cover security devices that the landlord enters into before the execution of the lease.
Furthermore, paragraph 30.2 of the lease states that a party that takes over the interest of the landlord after a foreclosure will not be liable to the tenant for the previous landlord’s acts or omissions. Additionally, the new landlord will not be subject to any offsets or defenses which the tenant might have against the old landlord. Even though this is a standard provision in most leases, it puts the tenant in a difficult situation if the landlord fails to pay the tenant improvement allowance or construct the tenant improvements.
If you are the Tenant:
The tenant should request that the landlord get a nondisturbance agreement from a lender to protect against termination of the lease upon foreclosure. This may be hard for the landlord to get, but the tenant should request it anyway.
PROVISION TEN - WAIVER OF JURY TRIAL:
Paragraph 47 of the AIR lease requires both the tenant and landlord to waive their rights to a jury trial in any action or proceeding concerning the property or arising out of the lease. This provision may be irrelevant however, because in Grafton Partners LP v. Superior Court, 36 Cal. 4th 944 (2005), the California Supreme Court held that predispute contractual waivers are not enforceable in California.
For Landlords and Tenants:
Because such agreements may not be enforceable in California, a landlord or tenant who wants to avoid a jury trial should include a separate provision in the lease requiring either judicial reference or arbitration.
PROVISION ELEVEN - ELIMINATE BROKER BENEFITS:
One interesting aspect of the AIR standard lease form is the information pertaining to brokers. Because the AIR lease form was drafted and funded by brokers, there is language in the lease that specifically benefits brokers but provides nothing for landlords or tenants. These provisions include Paragraphs 2.4, Acknowledgments; 15.1 – 15.2, Broker Fees; and 25, Disclosures Regarding the Nature of Real Estate Agency Relationship. Most of these provisions have nothing to do with the relationship of the landlord and tenant and should not be included in the lease. Such arrangements should be handled in a separate agreement between the landlord and the broker. Most attorneys will simply advise their clients to erase these provisions.
Although the AIR Standard Lease Form is an effective tool in facilitating efficient and straightforward real estate transactions, it often does not adequately address one or both parties’ specific needs. We hope that this article will serve as a valuable asset in assisting both landlords and tenants in negotiating a more appropriate and beneficial use of the AIR Standard Lease Form.
For more information, please contact the author directly at pjavaheri@jurislawgroup.com, or visit the Juris Law Group at www.jurislawgroup.com
The purpose of this article is to assist in dissemination of information that may be helpful to real property investors, and no representation is made about the accuracy of the information. By reading this article, you understand that this information is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This publication should not be used as a substitute for competent legal advice from a licensed attorney in your state. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, any tax information contained in this site was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed on this site.
Tuesday, June 30, 2009
HOLDING REAL ESTATE IN CALIFORNIA: Benefits of a LLC and a Trust
Owning investment properties can produce big rewards, but also big problems. This is why it is important to hold title to your property in the most beneficial way. A smart investor should consider using both a LLC and a trust to adequately protect himself and his property.
Countless individuals invest in real estate every day. Some dream of becoming the next real estate mogul, while others simply wish to supplement their salary with additional income. Whatever your motivations, owning investment properties can produce big rewards, but also big problems. This is why it is important to hold title to your property in the most beneficial way. The internet is saturated with various posts and articles touting the most effective techniques to manage your property. It can often be a daunting task weeding through the mass of information in an attempt to discern what advice is reliable and what advice can get you into trouble. Our goal here is to provide a succinct and clear summary of the safest and most important strategies for holding investment property in California. We hope the result will be a valuable starting point in considering the best ways to both protect you as the owner/landlord from liability and also guarantee the best treatment of your assets.
The Risks of Owning Real Estate
As stated above, while property can be a valuable investment, there are also significant risks. One of the biggest risks is lawsuits. From common slip and falls, to environmental contamination, landlords and owners are easily exposed to legal judgments. Landlords have also been successfully sued by victims of crimes -- such as robberies, rape, and even murder -- that occur on their property on the theory that the landlord provided inadequate security.
Options for Holding Real Estate
Faced with the risk of lawsuits, it is crucial that you do not own investment real property in your own name. (The only real property you should hold in your own name is your primary residence.) Thankfully, there are several ways in which an individual can hold property other than in his/her own name. These include as a corporation, limited partnership, limited liability company (“LLC”), trust, and many others.
While there are many options, when it comes to real estate investment, LLCs are the preferred entity by most investors, attorneys and accountants.
For many reasons, few investors hold investment real estate in C corporations. A corporation protects the shareholders from personal liability, but the double taxation of dividends and the inability to have "paper losses" from depreciation flow through to owners make a C corporation inappropriate for real estate investments.
In the past, partnerships and limited partnerships were the entities of choice for real estate investors. Limited partners were protected from personal liability while also being able to take passed through tax losses (subject to IRS rules--you'll need an accountant or attorney to sort out the issues of at-risk limitations and so on) from the property. However, the biggest downfall with limited partnerships was that someone had to be the general partner and expose himself to unlimited personal liability.
Many small real estate investors also hold property in a trust. While a living trust is important for protecting the owner’s privacy and provides valuable estate planning treatment, the trust provides nothing in the area of protection from liability. However, although a trust provides no liability protection, it should not be overlooked, as it can easily be paired with an LLC.
Benefits of a LLC
LLCs appear to be the best of all worlds for holding investment real estate. Unlike limited partnerships, LLCs do not require a general partner who is exposed to liability. Instead, all LLC owners -- called members -- have complete limited liability protection. LLCs are also superior to C corporations because LLCs avoid the double taxation of corporations, yet retain complete limited liability for all members. Furthermore, LLC’s are rather cheap and easy to form.
One LLC or Multiple LLCs?
For owners of multiple properties, the question arises whether to hold all properties under one LLC, or to create a new LLC for each additional property. For several reasons, it is generally advisable to have one LLC for each property.First, having a separate LLC own each separate property prevents "spillover" liability from one property to another. Suppose you have two properties worth $500,000 and they're held in the same LLC. If a tenant is injured at property 1, and wins a $750,000 judgment, he will be able to put a lien on both properties for the entire $750,000 even though property 2 had nothing to do with the plaintiff's injury.
On the other hand, if each property had its own LLC, then the creditor could only put a lien on the property where the plaintiff was injured (assuming that they cannot pierce the corporate veil).
Additionally, many banks and lenders require separate LLCs for each property. They want the property they're lending against to be "bankruptcy remote". This means that the lender doesn't want a problem at a separate property to jeopardize their security interest in the property that they're lending on.
Benefits of a Trust
As stated above, an LLC may be used concurrently with a trust to provide the best protection and estate treatment for your property. There are many types of trusts, but the revocable living trust is probably the most common and useful for holding title to real estate. The major benefit from holding property in a trust is that the property avoids probate after your death. As many are aware, probate is a court-supervised process for transferring assets to the beneficiaries listed in one's will. The advantages of avoiding probate are numerous. Distribution of property held in a living trust can be much faster than probate, assets in a living trust can be more easily accessible to the beneficiaries of the trust, and the cost of distributing assets held in a living trust is often less than going through probate. [Note: One should also be aware of other ways to avoid probate. For instance, property held in joint tenancy w/ a right of survivorship automatically avoids probate whether or not the property is in the living trust. Consult an estate planning attorney for more advice regarding probate matters.]
Use Both an LLC and a Trust
Because an LLC and a trust both provide significant benefits to the owner of real property, a smart investor should consider using both a LLC and a trust to adequately protect himself and his property. Utilizing both a trust and a LLC creates the best combination of liability protection and favorable estate planning. To accomplish this, the owner should hold the investment property in a single member LLC, with the living trust as the sole member of the LLC. Here, the trust is the owner of the company and holds all of the interests of the LLC. This form of ownership gives you an added layer of protection from the LLC as well as the additional estate planning benefits of a trust.
Costs
For the most part, the costs of forming and maintaining an LLC and trust are rather minimal. For an average LLC, the costs are simply nominal filing fees and an $800 per/yr fee to the state of CA. While simple incorporations may be done on your own, it is strongly advised that you seek the advice of a knowledgeable attorney so that no mistakes are made. The same may be said for forming a trust. A little money now is worth the price of avoiding big problems in the future.
The CA LLC Fee
While the costs of forming a LLC are generally small, there are additional fees that may be imposed on LLCs in California depending on gross profits. The California Revenue and Taxation Code Section 17942(a) includes an additional fee on LLCs if total gross income (i.e. rent) exceeds $250,000. “Total gross income” refers to gross revenues (not profits). Under this Tax Code Section, the amount of the fee is determined as follows:
1. $0 for LLCs with total gross income of less than $250,000;
2. $900 for LLCs with total gross income of at least $250,000 but less than $500,000;
3. $2,500 for LLCs with total gross income of at least $500,000 but less than $1,000,000;
4. $6,000 for LLCs with total gross income of at least $1,000,000 but less than $5,000,000;
5. $11,790 for LLCs with total gross income of $5,000,000 or more.
Although the fee is relatively small, one must consider that the fee is assessed against gross revenues, not profits. This means that the fee is due whether or not your property is profitable. For a property with high revenues but narrow profit margins, the fee would reflect a higher portion of the property’s profitability than it would on a property that is highly profitable. For example, a company that owns an office building with revenues from rent totaling $1 mil, but a mortgage of $995,000, would actually operate at a loss after the $6,000 fee was imposed. Furthermore, the fee would be particularly irksome for those companies that foresee incurring losses in their early stages of development.
A Possible Strategy if Gross Receipts Exceed $250,000
For the vast majority of investors, the CA LLC fee should not dissuade you from forming an LLC. If, however, the impact is severely detrimental, there are several potential solutions that may be explored. A competent attorney or accountant may be able to work with you to avoid this fee. One method may be to form a Limited Partnership. The partnership should be set up with an LLC as the General Partner (assuming liability) and the owner(s) of the property as the limited partner(s). By forming a limited partnership with an LLC acting as the general partner, the landlord can likely avoid the higher fee imposed on an LLC while still protecting his/her personal liability. While this may be a possible solution, it is strongly recommended that you consult with an attorney or accountant regarding the best course of action.
While there are indeed risks associated with real estate, with intelligent decision-making and thoughtful preparation, real property can be a valuable investment. The first step though, is to make sure that you have adequately protected yourself and your property. We hope that this article helps property owners begin to discover the various ways in which one may hold investment property, as well as the protections and benefits provided by such ownership.
For more information, please contact the author directly at zshine@jurislawgroup.com, or visit the Juris Law Group at www.jurislawgroup.com
The purpose of this article is to assist in dissemination of information that may be helpful to real property investors, and no representation is made about the accuracy of the information.
By reading this article, you understand that this information is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This publication should not be used as a substitute for competent legal advice from a licensed attorney in your state.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, any tax information contained in this site was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed on this site.
Countless individuals invest in real estate every day. Some dream of becoming the next real estate mogul, while others simply wish to supplement their salary with additional income. Whatever your motivations, owning investment properties can produce big rewards, but also big problems. This is why it is important to hold title to your property in the most beneficial way. The internet is saturated with various posts and articles touting the most effective techniques to manage your property. It can often be a daunting task weeding through the mass of information in an attempt to discern what advice is reliable and what advice can get you into trouble. Our goal here is to provide a succinct and clear summary of the safest and most important strategies for holding investment property in California. We hope the result will be a valuable starting point in considering the best ways to both protect you as the owner/landlord from liability and also guarantee the best treatment of your assets.
The Risks of Owning Real Estate
As stated above, while property can be a valuable investment, there are also significant risks. One of the biggest risks is lawsuits. From common slip and falls, to environmental contamination, landlords and owners are easily exposed to legal judgments. Landlords have also been successfully sued by victims of crimes -- such as robberies, rape, and even murder -- that occur on their property on the theory that the landlord provided inadequate security.
Options for Holding Real Estate
Faced with the risk of lawsuits, it is crucial that you do not own investment real property in your own name. (The only real property you should hold in your own name is your primary residence.) Thankfully, there are several ways in which an individual can hold property other than in his/her own name. These include as a corporation, limited partnership, limited liability company (“LLC”), trust, and many others.
While there are many options, when it comes to real estate investment, LLCs are the preferred entity by most investors, attorneys and accountants.
For many reasons, few investors hold investment real estate in C corporations. A corporation protects the shareholders from personal liability, but the double taxation of dividends and the inability to have "paper losses" from depreciation flow through to owners make a C corporation inappropriate for real estate investments.
In the past, partnerships and limited partnerships were the entities of choice for real estate investors. Limited partners were protected from personal liability while also being able to take passed through tax losses (subject to IRS rules--you'll need an accountant or attorney to sort out the issues of at-risk limitations and so on) from the property. However, the biggest downfall with limited partnerships was that someone had to be the general partner and expose himself to unlimited personal liability.
Many small real estate investors also hold property in a trust. While a living trust is important for protecting the owner’s privacy and provides valuable estate planning treatment, the trust provides nothing in the area of protection from liability. However, although a trust provides no liability protection, it should not be overlooked, as it can easily be paired with an LLC.
Benefits of a LLC
LLCs appear to be the best of all worlds for holding investment real estate. Unlike limited partnerships, LLCs do not require a general partner who is exposed to liability. Instead, all LLC owners -- called members -- have complete limited liability protection. LLCs are also superior to C corporations because LLCs avoid the double taxation of corporations, yet retain complete limited liability for all members. Furthermore, LLC’s are rather cheap and easy to form.
One LLC or Multiple LLCs?
For owners of multiple properties, the question arises whether to hold all properties under one LLC, or to create a new LLC for each additional property. For several reasons, it is generally advisable to have one LLC for each property.First, having a separate LLC own each separate property prevents "spillover" liability from one property to another. Suppose you have two properties worth $500,000 and they're held in the same LLC. If a tenant is injured at property 1, and wins a $750,000 judgment, he will be able to put a lien on both properties for the entire $750,000 even though property 2 had nothing to do with the plaintiff's injury.
On the other hand, if each property had its own LLC, then the creditor could only put a lien on the property where the plaintiff was injured (assuming that they cannot pierce the corporate veil).
Additionally, many banks and lenders require separate LLCs for each property. They want the property they're lending against to be "bankruptcy remote". This means that the lender doesn't want a problem at a separate property to jeopardize their security interest in the property that they're lending on.
Benefits of a Trust
As stated above, an LLC may be used concurrently with a trust to provide the best protection and estate treatment for your property. There are many types of trusts, but the revocable living trust is probably the most common and useful for holding title to real estate. The major benefit from holding property in a trust is that the property avoids probate after your death. As many are aware, probate is a court-supervised process for transferring assets to the beneficiaries listed in one's will. The advantages of avoiding probate are numerous. Distribution of property held in a living trust can be much faster than probate, assets in a living trust can be more easily accessible to the beneficiaries of the trust, and the cost of distributing assets held in a living trust is often less than going through probate. [Note: One should also be aware of other ways to avoid probate. For instance, property held in joint tenancy w/ a right of survivorship automatically avoids probate whether or not the property is in the living trust. Consult an estate planning attorney for more advice regarding probate matters.]
Use Both an LLC and a Trust
Because an LLC and a trust both provide significant benefits to the owner of real property, a smart investor should consider using both a LLC and a trust to adequately protect himself and his property. Utilizing both a trust and a LLC creates the best combination of liability protection and favorable estate planning. To accomplish this, the owner should hold the investment property in a single member LLC, with the living trust as the sole member of the LLC. Here, the trust is the owner of the company and holds all of the interests of the LLC. This form of ownership gives you an added layer of protection from the LLC as well as the additional estate planning benefits of a trust.
Costs
For the most part, the costs of forming and maintaining an LLC and trust are rather minimal. For an average LLC, the costs are simply nominal filing fees and an $800 per/yr fee to the state of CA. While simple incorporations may be done on your own, it is strongly advised that you seek the advice of a knowledgeable attorney so that no mistakes are made. The same may be said for forming a trust. A little money now is worth the price of avoiding big problems in the future.
The CA LLC Fee
While the costs of forming a LLC are generally small, there are additional fees that may be imposed on LLCs in California depending on gross profits. The California Revenue and Taxation Code Section 17942(a) includes an additional fee on LLCs if total gross income (i.e. rent) exceeds $250,000. “Total gross income” refers to gross revenues (not profits). Under this Tax Code Section, the amount of the fee is determined as follows:
1. $0 for LLCs with total gross income of less than $250,000;
2. $900 for LLCs with total gross income of at least $250,000 but less than $500,000;
3. $2,500 for LLCs with total gross income of at least $500,000 but less than $1,000,000;
4. $6,000 for LLCs with total gross income of at least $1,000,000 but less than $5,000,000;
5. $11,790 for LLCs with total gross income of $5,000,000 or more.
Although the fee is relatively small, one must consider that the fee is assessed against gross revenues, not profits. This means that the fee is due whether or not your property is profitable. For a property with high revenues but narrow profit margins, the fee would reflect a higher portion of the property’s profitability than it would on a property that is highly profitable. For example, a company that owns an office building with revenues from rent totaling $1 mil, but a mortgage of $995,000, would actually operate at a loss after the $6,000 fee was imposed. Furthermore, the fee would be particularly irksome for those companies that foresee incurring losses in their early stages of development.
A Possible Strategy if Gross Receipts Exceed $250,000
For the vast majority of investors, the CA LLC fee should not dissuade you from forming an LLC. If, however, the impact is severely detrimental, there are several potential solutions that may be explored. A competent attorney or accountant may be able to work with you to avoid this fee. One method may be to form a Limited Partnership. The partnership should be set up with an LLC as the General Partner (assuming liability) and the owner(s) of the property as the limited partner(s). By forming a limited partnership with an LLC acting as the general partner, the landlord can likely avoid the higher fee imposed on an LLC while still protecting his/her personal liability. While this may be a possible solution, it is strongly recommended that you consult with an attorney or accountant regarding the best course of action.
While there are indeed risks associated with real estate, with intelligent decision-making and thoughtful preparation, real property can be a valuable investment. The first step though, is to make sure that you have adequately protected yourself and your property. We hope that this article helps property owners begin to discover the various ways in which one may hold investment property, as well as the protections and benefits provided by such ownership.
For more information, please contact the author directly at zshine@jurislawgroup.com, or visit the Juris Law Group at www.jurislawgroup.com
The purpose of this article is to assist in dissemination of information that may be helpful to real property investors, and no representation is made about the accuracy of the information.
By reading this article, you understand that this information is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. This publication should not be used as a substitute for competent legal advice from a licensed attorney in your state.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, any tax information contained in this site was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed on this site.
Negotiating the Best Office Lease for Your Business
Office space is one of the largest expenses a growing company incurs. Negotiating the best lease possible can save your company enough to hire a few more employees or to launch a marketing campaign. No lease is standard, however, so here are some suggestions to help you become a little more lease-savvy in order to negotiate a favorable office lease.
Permitted use of the premises. An office lease typically has a section that sets forth the permitted uses of the leased space. It is to your advantage to make this clause as broad as possible, because your business may diversify or you may want to sublease space to another business.
Term of the lease. Landlords are typically willing to make concessions for longer-term leases. A company's needs may change, however, so try to negotiate a shorter-term lease with renewal options.
Rent escalations. Fixed rent over longer-term leases is relatively rare. Sometimes, landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange that a CPI rent increase does not kick in for at least two years. Then, try to get a cap on the amount of each year's increase. If you have to live with a rent escalation clause, consider a predetermined fixed amount.
Common area maintenance, HVAC, and operating costs. Take into account operating costs that the landlord may pass on to a business. If the landlord is charging separately for these services, try to negotiate a fixed fee or cap on the amount.
Tenant improvements. New space may need some improvements or alterations. Most form leases provide that the tenant can't make any alterations or improvements without the landlord's consent. Businesses should ask for a clause that says they can make alterations or improvements with the landlord's consent and that consent won't be unreasonably withheld or delayed.
Repairs, improvements and replacements. Be aware of a clause that says that at the end of the lease premises must be returned in their original condition.
Assignment and subletting. Companies should negotiate enough flexibility in the assignment and subletting clause to allow for mergers, reorganizations, and share ownership changes.
Option to renew. Try to get the option to renew your rent at a fixed predetermined price, not based on a "fair market" price.
Right of first offer or first refusal for additional space. A right of first offer obligates your landlord to present any space that becomes available in the building to you first before marketing it to third parties. A right of first refusal on space obligates the landlord to bring you any deals he is willing to sign with third parties for space in the building and allow you to match the deal and preempt the third party. See Option to Expand Under Office Leases for more information.
Ultimately, if a prospective landlord is difficult to deal with during lease negotiations or makes unreasonable requests, you might want to consider leasing office space elsewhere. Also, have a good real estate broker and lawyer at your disposal, and do not sign anything without having them review the terms in advance.
For a complete overview on the topic, see the Step-by-Step Guide to Finding Office Space.
Permitted use of the premises. An office lease typically has a section that sets forth the permitted uses of the leased space. It is to your advantage to make this clause as broad as possible, because your business may diversify or you may want to sublease space to another business.
Term of the lease. Landlords are typically willing to make concessions for longer-term leases. A company's needs may change, however, so try to negotiate a shorter-term lease with renewal options.
Rent escalations. Fixed rent over longer-term leases is relatively rare. Sometimes, landlords insist on annual increases based on the percentage increases in the Consumer Price Index (CPI). If your landlord insists on rent escalations, try to arrange that a CPI rent increase does not kick in for at least two years. Then, try to get a cap on the amount of each year's increase. If you have to live with a rent escalation clause, consider a predetermined fixed amount.
Common area maintenance, HVAC, and operating costs. Take into account operating costs that the landlord may pass on to a business. If the landlord is charging separately for these services, try to negotiate a fixed fee or cap on the amount.
Tenant improvements. New space may need some improvements or alterations. Most form leases provide that the tenant can't make any alterations or improvements without the landlord's consent. Businesses should ask for a clause that says they can make alterations or improvements with the landlord's consent and that consent won't be unreasonably withheld or delayed.
Repairs, improvements and replacements. Be aware of a clause that says that at the end of the lease premises must be returned in their original condition.
Assignment and subletting. Companies should negotiate enough flexibility in the assignment and subletting clause to allow for mergers, reorganizations, and share ownership changes.
Option to renew. Try to get the option to renew your rent at a fixed predetermined price, not based on a "fair market" price.
Right of first offer or first refusal for additional space. A right of first offer obligates your landlord to present any space that becomes available in the building to you first before marketing it to third parties. A right of first refusal on space obligates the landlord to bring you any deals he is willing to sign with third parties for space in the building and allow you to match the deal and preempt the third party. See Option to Expand Under Office Leases for more information.
Ultimately, if a prospective landlord is difficult to deal with during lease negotiations or makes unreasonable requests, you might want to consider leasing office space elsewhere. Also, have a good real estate broker and lawyer at your disposal, and do not sign anything without having them review the terms in advance.
For a complete overview on the topic, see the Step-by-Step Guide to Finding Office Space.
Tuesday, June 23, 2009
Beat the IRS in Tax Court with a Petition
When you decide to take on a legal battle with the IRS, you are asking for a fight in one of the toughest forums in the country. By following six rules, however, you will increase the chances that you can.
(MONEY Magazine) – In January 1990, Nader E. Soliman, a Germantown, Md. anesthesiologist, was on his way to making tax history. After a five-year dispute with the Internal Revenue Service over his 1983 income tax return, he scored an upset victory when the United States Tax Court ruled that he could deduct $5,017 in home- office expenses, even though he spent most of his time on the job at three hospitals. But, though Soliman won, the IRS wouldn't quit. Fearing that thousands of taxpayers would claim the same coveted write-off, the IRS appealed the case to the Supreme Court, where it finally won last January. As Dr. Soliman learned, challenging the IRS in Tax Court over an alleged tax deficiency can be a struggle: On average over the past six years, the court decided just 10% of cases in favor of taxpayers and issued split decisions 37% of the time. The IRS won the rest. The agency prevails so often because in Tax Court you bear the burden of proof. Yes, as unfair as it seems, the IRS is presumed correct when it issues a deficiency notice that you choose to challenge. The only way you can win is to prove to one of the 41 Tax Court judges that the IRS was wrong. Nonetheless, the 69-year-old Tax Court can be a helpful ally when the IRS demands taxes you don't owe, as victors Mary and Ed Gee of Foster City, Calif. (see pages 116 and 117) and University of Michigan accounting professor James Reece (pictured below) will gladly attest. Despite its name, the Tax Court is independent of the IRS and, unlike the equally independent U.S. District Court and the U.S. Court of Claims -- the other federal courts where tax cases are heard -- you can go to Tax Court without paying the disputed tax in advance. Furthermore, the Tax Court will come to you; judges travel to 79 locations around the country to hear tax disputes. However, before you decide to take on the IRS, read this article carefully. It will show you how you can improve your chances in court by following six simple rules, culled from interviews with more than 40 tax lawyers and preparers, former IRS officials, Tax Court judges and taxpayers who have faced them, and from watching several cases in action:
RULE 1: Don't be cowed by the IRS. Your ticket to court is an official IRS Notice of Deficiency, in which the government outlines the back taxes and penalties it says you owe and informs you of your right to petition the Tax Court within 90 days if you want to fight back without paying up first. Last year the IRS issued more than 1.6 million deficiency notices to taxpayers who had disagreed with the results of an audit or hadn't resolved a computer- generated demand for more taxes. If you have legitimate grounds to contest the tax, you can turn to the Tax Court. File the petition quickly (cost: $60; the address is on your deficiency notice) and by registered mail, so you will have a receipt to prove that it was sent during the 90-day window. If you're not fully confident about the merits of your case, get a second opinion from your tax pro while you're waiting for the petition papers to arrive. Expect to pay about $100 to $225 for an hour's consultation.
RULE 2: Don't pay more for Tax Court counsel than necessary. A tax lawyer or one of the handful of certified public accountants or enrolled agents admitted to practice before the court can give you an estimate of your case's potential cost up front. In general, a quick settlement without a trial might run $1,500 to $2,000, but fees for representation in a full-blown trial can easily exceed $15,000. Take heart: You can probably navigate Tax Court without a lawyer if the alleged deficiency is $10,000 or less for each year at issue. Reason: With such relatively low sums at stake, you can elect on your petition to have your case heard as a small case, the Tax Court equivalent of a small-claims court proceeding. Indeed, each year about a third of the 30,000 Tax Court petitioners opt for small-case status. About 90% are settled before the judge weighs in, but again taxpayers win roughly only 10% of the cases that go to trial. In a small case, your petition comes as a simple preprinted form. You just fill in the blanks. Moreover, if the IRS doesn't settle the case beforehand, you won't be held to arcane rules of evidence in the relatively informal trial. Instead, the judge will accept most any documents or testimony you think is relevant and will often help you develop your case by eliciting facts. Thanks to these procedures, most small-case taxpayers are able to complete their own petitions -- perhaps with behind-the-scenes coaching from a tax pro -- and represent themselves in court. Small-case Tax Court is especially appropriate when you have facts that can be readily explained, such as the business nature of your entertainment expenses or the types of repairs you made to a rental property. If your case turns on a complicated point of law, however, you will probably need to hire a lawyer or C.P.A. or an enrolled agent admitted to practice in Tax Court. If you can't afford the fees but live near one of the 14 Tax Court-approved legal clinics, you can seek free legal advice from law students who work under the supervision of a professor who has been admitted to practice before the court. Larger cases follow all the formal rules of courtroom practice and procedure. They are generally no place for an amateur. Says Lapsley W. Hamblen Jr., chief judge of the Tax Court: "Unlike in small cases, the judge in a regular case exercises less discretion to bend the rules of evidence to help out a taxpayer. So it's preferable to have counsel." If you're determined to go it alone, however, read the Rules of Practice and Procedure -- United States Tax Court ($9.50 from the court; 400 Second St. N.W., Washington, D.C. 20217), a dense, 174-page manual. If possible, get help preparing for your case from a seasoned tax pro.
RULE 3: Go for a settlement. When you send your petition to the Tax Court, a clerk forwards it to the IRS, where it is automatically routed either to one of its 1,350 appeals officers for a possible settlement or -- if you already tried settling after your audit -- to one of 950 attorneys who must prepare the case for trial. Even IRS lawyers settle disputes, however. Indeed, with some 30,000 Tax Court petitions filed each year and a backlog of more than 40,000, "it's imperative that the IRS settle, since it simply doesn't have the resources to try all the cases," says Peter K. Scott, director for IRS policies and practice at the accounting firm Coopers & Lybrand in Washington, D.C. and former IRS deputy chief counsel. Roughly 80% of Tax Court petitions are settled, with an average reduction in 1992 of 57% in cases with proposed deficiencies below $100,000. If your petition is sent to the local IRS appeals office, you'll get a call or letter asking you to visit to discuss your case. You can attend or let your accountant, enrolled agent or lawyer represent you. Let your adviser decide: Many pros want to handle the conference alone because issues can often be broached more dispassionately in your absence. Whether you go or send in a clone, don't skip the appeals conference. Unlike auditors, IRS appeals officers take into account the hazards of litigation when considering your case. "The IRS doesn't want to risk an unfavorable decision in court that might encourage other taxpayers to exploit the tax law's ambiguity," says Frederick W. Daily, a San Francisco tax attorney and author of Stand Up to the IRS (Nolo, $19.95). "So if the IRS thinks you have a chance of winning, it will often try to settle." The cases the IRS is likeliest to settle are ones in which the facts are in dispute. Take Barbara Wolfe, 55, of Keyport, N.J. In 1988, she received a deficiency notice for $116,857, five years of taxes and penalties on income that the IRS said her husband, who worked on oil pipelines, had failed to report. The notice went to Wolfe because neither she nor the IRS could locate her husband, from whom she had been separated since 1986. In her Tax Court petition, Wolfe claimed she was an "innocent spouse," a designation that absolves one spouse of taxes allegedly incurred by the other, if the first spouse can prove that he or she had no way of knowing about the understatement. One fact in her favor: Wolfe's husband had worked out of the country for two of the five years in dispute. The day before the case was set for trial in 1991, the IRS' lawyer offered to knock off two years' worth of the tax and all penalties, reducing the bill by 65%, to $39,910. Wolfe accepted. "I wanted to fight on," she says. "But when I considered the cost of going to court and the possibility of losing, it wasn't worth the risk."
RULE 4: Be cooperative in pretrial preparation. Before a judge hears your case, you and the IRS attorney must agree to as many facts as possible and present them to the court in writing. You must also swap the evidence that each side plans to offer. If you don't cooperate, you run the risk of angering the judge and could face restrictions in court on the evidence you can present. "Many taxpayers feel mistreated by the IRS and carry their ill will over to the court system," says Tax Court chief special trial judge Peter Panuthos. "They only end up compromising their own cases."
RULE 5: Present the strongest argument you can, through detailed documentation and credible testimony. As in an audit, your best records are receipts, canceled checks, invoices or an original diary to verify your expenditures. If your record keeping became sloppy because of an illness, get a letter from your doctor attesting to the affliction. Your oral testimony is crucial too. Woody Rowland, a former IRS attorney now in private practice in San Rafael, Calif., once tried a Tax Court case for the IRS involving a woman who raised breeding horses. The IRS had disallowed her losses of some $75,000, claiming that the business was a hobby. "Her losses were so great for so many years that it was hard to believe she was in it as a business," says Rowland. Surprise! "At the trial, the woman explained what it was like to stay up all night with the mares when they were foaling and how much time and effort the horses required. I knew I had lost as soon as I heard her."
RULE 6: Know when to shut up. In both small and regular cases, you may be questioned under oath by the IRS attorney. Be businesslike and polite, but don't volunteer any information. "The biggest mistake people make is rambling on," says David M. Sokolow, a Washington, D.C. tax attorney. "They inadvertently say things that muddle the issue or undermine their case." In Tax Court, as in life, sometimes mum's the word.
By TERESA TRITCH September 1, 1993
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Wednesday, June 17, 2009
Economy is Predicted to Recover in a Few Months, on MY Birthday.
Good news from the 2009 Chapman University Economic Forecast: Expect the recovery to begin in the next few months. During an event held this morning in Orange County, Calif., Chapman University president James Doti and Esmael Adibi, director of the A. Gary Anderson Center for Economic Research, presented an update of the 2009 Forecast to an audience of approximately 800 business and community leaders.
They reaffirmed the predictions first given in December 2008, and pointed to signs that the economy is on its way up. On the plus side, the banking sector is "almost out of the woods," stocks have rebounded, consumer confidence is finally rising and housing remains affordable. And most likely, the recovery won't be W-shaped, which would be the case if the stimulus was the only thing supporting a turnaround.
But, Doti cautioned, even if a recovery is imminent, it will be a "mild" one, due to flagging levels of consumer spending (caused in part by higher savings rates) and sorry unemployment numbers that won't reverse until 2010.Adibi focused on the impact of housing prices and jobs. Although he noted that consumers are "very gloomy," he said the brunt of the recessionary forces will hit in the second quarter of 2009, and year-over-year change in GDP would go from -4.1 percent at the end of 2008 to +2.8 percent by the end of 2009.
He boldly added details to the predictions, stating his belief that the recovery would begin in September 2009. "It's actually going to start on September 8, 2009," he joked. "My birthday."
Article courtesy of Entrepeneur.com Daily Dose. To view the entire report, click here http://www.chapman.edu/argyros/asbecenters/acer/publications.asp
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They reaffirmed the predictions first given in December 2008, and pointed to signs that the economy is on its way up. On the plus side, the banking sector is "almost out of the woods," stocks have rebounded, consumer confidence is finally rising and housing remains affordable. And most likely, the recovery won't be W-shaped, which would be the case if the stimulus was the only thing supporting a turnaround.
But, Doti cautioned, even if a recovery is imminent, it will be a "mild" one, due to flagging levels of consumer spending (caused in part by higher savings rates) and sorry unemployment numbers that won't reverse until 2010.Adibi focused on the impact of housing prices and jobs. Although he noted that consumers are "very gloomy," he said the brunt of the recessionary forces will hit in the second quarter of 2009, and year-over-year change in GDP would go from -4.1 percent at the end of 2008 to +2.8 percent by the end of 2009.
He boldly added details to the predictions, stating his belief that the recovery would begin in September 2009. "It's actually going to start on September 8, 2009," he joked. "My birthday."
Article courtesy of Entrepeneur.com Daily Dose. To view the entire report, click here http://www.chapman.edu/argyros/asbecenters/acer/publications.asp
Tuesday, June 16, 2009
Listing of Future Corporate Downsizings - Layoffs and Closures
See what's happening in the world with a report on company closures and layoffs.See, Read and React as an entrepeneur would.
http://www.costar.com/News/Article.aspx?id=596074E827CC0FB7AA898737A842D2A7&ref=1&src=rss#num4
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Monday, June 15, 2009
A Brand Called You. CEO of Me Inc.
Big companies understand the importance of brands. Today, in the Age of the Individual, you have to be your own brand. Here's what it takes to be the CEO of Me Inc.
It's a new brand world.
That cross-trainer you're wearing -- one look at the distinctive swoosh on the side tells everyone who's got you branded. That coffee travel mug you're carrying -- ah, you're a Starbucks woman! Your T-shirt with the distinctive Champion "C" on the sleeve, the blue jeans with the prominent Levi's rivets, the watch with the hey-this-certifies-I-made-it icon on the face, your fountain pen with the maker's symbol crafted into the end ...
You're branded, branded, branded, branded.
It's time for me -- and you -- to take a lesson from the big brands, a lesson that's true for anyone who's interested in what it takes to stand out and prosper in the new world of work.
Regardless of age, regardless of position, regardless of the business we happen to be in, all of us need to understand the importance of branding. We are CEOs of our own companies: Me Inc. To be in business today, our most important job is to be head marketer for the brand called You.
It's that simple -- and that hard. And that inescapable.
Behemoth companies may take turns buying each other or acquiring every hot startup that catches their eye -- mergers in 1996 set records. Hollywood may be interested in only blockbusters and book publishers may want to put out only guaranteed best-sellers. But don't be fooled by all the frenzy at the humongous end of the size spectrum.
The real action is at the other end: the main chance is becoming a free agent in an economy of free agents, looking to have the best season you can imagine in your field, looking to do your best work and chalk up a remarkable track record, and looking to establish your own micro equivalent of the Nike swoosh. Because if you do, you'll not only reach out toward every opportunity within arm's (or laptop's) length, you'll not only make a noteworthy contribution to your team's success -- you'll also put yourself in a great bargaining position for next season's free-agency market.
The good news -- and it is largely good news -- is that everyone has a chance to stand out. Everyone has a chance to learn, improve, and build up their skills. Everyone has a chance to be a brand worthy of remark.
To read the rest of the article, go to http://www.fastcompany.com/magazine/10/brandyou.html
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Friday, June 12, 2009
Why a Living Trust May Be Right for You
The popularity of the living trust has soared in recent years as more and more people discover its signficant estate planning benefits. Like a last will and testament, a living trust allows you to designate beneficiaries for your assets. But unlike a last will, a living trust is not subject to probate court. As an added benefit, a living trust keeps the details of your estate private. Here are just a few reasons why a living trust may be right for you.
It Pays To Avoid Probate Court
Probate is the legal process through which your property is distributed to your beneficiaries. During probate, the court system must determine the validity of your will, appraise and inventory all of the assets in your estate, pay any outstanding debts, and then distribute whatever is left according to the instructions in your last will. Probate is often expensive, complicated and time-consuming. In many cases, probate can take up to 3 years to complete and take as much as 20% of your estate's total value. This means your loved ones could wind up waiting a long time to receive their inheritance.
How Does a Living Trust Work?
When you create a living trust, you are establishing a separate legal entity to hold whatever property or valuables you choose to place inside. In fact, one of the benefits of a living trust is that it allows you to gather all of your significant property (bank accounts, stock certificates, real estates, etc.) into one convenient "container" or imaginary "safe." It's an easy way to track all of your assets and manage them as a single unit.
As the creator or "grantor" of the trust, you retain complete control over your assets by appointing yourself as the trust's initial trustee. You can do whatever you wish with the property in the trust--this includes transferring assets into or out of the trust.
A living trust can be amended or revoked at any time.
How Property is Transferred
Upon your death, the person you assigned to succeed you as trustee (the successor trustee) takes over management of the trust and sees that all of your gifts are distributed to your beneficiaries. Your successor trustee may not change the trust, which becomes irrevocable at the time of your death. In other words, you can revise your trust while you're alive, but it cannot be changed after you're gone.
Potential Tax Savings
While most living trusts are created for the purpose of avoiding probate, you may also benefit from savings in certain kinds of estate taxes. An AB living trust, for example, can offer significant tax savings for a married couple with a combined estate value that is greater than the applicable federal estate tax exemption amount.
A word about Pour-over Wills
Many living trusts include what's known as a pour-over will. A pour-over will transfers or "pours" into your trust any assets not already owned by your trust at the time of death. This includes property such as checking accounts, cars and other personal items. Many pour-over wills also include provisions to name guardians for minor children and specify funereal and other last wishes.
Minor Children as Beneficiaries
If you plan on naming minor children as beneficiaries in your living trust, you may want to consider designating a trusted adult to manage your beneficiaries' property until they are old enough to manage it themselves. This includes any beneficiary under the age of eighteen, or any beneficiary you feel is not yet sufficiently mature to handle his or her inheritance responsibly.
Planning For the Future
One of the goals of good estate planning is to ensure the financial security of your loved ones. While nothing can replace your presence in their lives, with the right estate planning tools, you can continue to care for them even after you're gone. A living trust can help by ensuring that your gifts go directly to the people you love--quickly, privately, and without the delays and expense of probate.
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It Pays To Avoid Probate Court
Probate is the legal process through which your property is distributed to your beneficiaries. During probate, the court system must determine the validity of your will, appraise and inventory all of the assets in your estate, pay any outstanding debts, and then distribute whatever is left according to the instructions in your last will. Probate is often expensive, complicated and time-consuming. In many cases, probate can take up to 3 years to complete and take as much as 20% of your estate's total value. This means your loved ones could wind up waiting a long time to receive their inheritance.
How Does a Living Trust Work?
When you create a living trust, you are establishing a separate legal entity to hold whatever property or valuables you choose to place inside. In fact, one of the benefits of a living trust is that it allows you to gather all of your significant property (bank accounts, stock certificates, real estates, etc.) into one convenient "container" or imaginary "safe." It's an easy way to track all of your assets and manage them as a single unit.
As the creator or "grantor" of the trust, you retain complete control over your assets by appointing yourself as the trust's initial trustee. You can do whatever you wish with the property in the trust--this includes transferring assets into or out of the trust.
A living trust can be amended or revoked at any time.
How Property is Transferred
Upon your death, the person you assigned to succeed you as trustee (the successor trustee) takes over management of the trust and sees that all of your gifts are distributed to your beneficiaries. Your successor trustee may not change the trust, which becomes irrevocable at the time of your death. In other words, you can revise your trust while you're alive, but it cannot be changed after you're gone.
Potential Tax Savings
While most living trusts are created for the purpose of avoiding probate, you may also benefit from savings in certain kinds of estate taxes. An AB living trust, for example, can offer significant tax savings for a married couple with a combined estate value that is greater than the applicable federal estate tax exemption amount.
A word about Pour-over Wills
Many living trusts include what's known as a pour-over will. A pour-over will transfers or "pours" into your trust any assets not already owned by your trust at the time of death. This includes property such as checking accounts, cars and other personal items. Many pour-over wills also include provisions to name guardians for minor children and specify funereal and other last wishes.
Minor Children as Beneficiaries
If you plan on naming minor children as beneficiaries in your living trust, you may want to consider designating a trusted adult to manage your beneficiaries' property until they are old enough to manage it themselves. This includes any beneficiary under the age of eighteen, or any beneficiary you feel is not yet sufficiently mature to handle his or her inheritance responsibly.
Planning For the Future
One of the goals of good estate planning is to ensure the financial security of your loved ones. While nothing can replace your presence in their lives, with the right estate planning tools, you can continue to care for them even after you're gone. A living trust can help by ensuring that your gifts go directly to the people you love--quickly, privately, and without the delays and expense of probate.
Tax-Saving Tips for the Small Business Owner – Brilliant Deductions
The tax season is over, so let's plan ahead for the next one. Each new year, as April 15th looms on the horizon, millions of Americans comb their records, gather receipts, a nd struggle to estimate the value of the second-hand clothes they donated to their local charity, all in the name of the cherished income tax deduction. For them, tax planning is a once a year event. Not so for the savvy business owner.
Smart business owners know they reap tremendous benefits when they give tax planning a year round focus. Obviously, the more tax deductions a business legitimately takes, the lower its taxable profit. The added bonus, though, is that a business owner's personal expenses often can be converted to deductible business expenses. What kind of personal expenses qualify? Consider the following:
Retirement Plans
Millions of self-employed individuals and business owners qualify for government-recognized retirement plans such as Keogh plans and SEP-IRA's. Each year, they can put money into a plan toward retirement or investment goals and receive a tax deduction in the amount of the contribution. Funding a retirement account in this fashion from your business' otherwise taxable profit is a "no-brainer" and in some cases, the retirement plan can be funded as late as the extended due date of your tax return (i.e. several months into the following year).
Automobile Costs
Automobile costs associated with the operation of a business (except for routine commuting) also are deductible. Businesses have two choices in this regard: keep accurate, detailed records of actual expenses as support for the claimed annual deduction, or use the IRS approved mileage reimbursement rate. If a vehicle is used for both business and pleasure, expenses relating to business still are deductible. Are you in the market for a newer vehicle? Why not lease a vehicle. Leasing often will produce an even higher deduction.
Business Travel
Business travel provides another opportunity for deductions. Business travel expenses including airfare, lodging, phone calls and faxes while traveling, hotel laundry service, and more may be deducted. In addition, when it comes to travel, business owners often mix business with pleasure. That's fine. As long as the primary purpose of the trip is business, the expenses are deductible. You can even take the family. Just limit your deduction to your share of the family's expenses.
Business Entertainment
Business entertaining is a proven client attraction and retention device. It is logical then that businesses are allowed to deduct a portion of their expenses relating to entertaining present and prospective customers (e.g. treating a client to a meal in a restaurant or providing tickets to a theater production). Currently, one-half of a business' entertainment costs may be deducted as long as "business" is discussed before, during, or after the entertainment event. As a practical matter, it helps to keep all receipts and make a note of the specific business purpose and client you entertained. Gifts to business associates or clients (up to a specified amount) also are deductible.
Education Expenses
As long as the subject matter relates to the owner's business and helps the owner maintain or improve his or her business skills, owners may also deduct education expenses, such as fees associated with seminars, classes, and conferences. Costs associated with magazines, books, audiotapes, and videotapes necessary to the business also are deductible, as are professional association and licensing fees. Education must be related to your current business, however. Costs relating to an educational program designed to help you land a new job are not deductible.
Charitable Contributions
Charitable contributions offer another opportunity for tax deductions. Partnerships, limited liability companies (LLC's), and Subchapter S corporations that make charitable contributions often can pass the deductions relating to such contributions through to their respective business owners. In addition to outright charitable contributions, businesses should keep a list of items they give away, along with the cost of the items. Many "give aways" are eligible for deductions, too.
Business Insurance
The cost of business related insurance (including liability, malpractice, business overhead, and workers' compensation insurance) is deductible. In addition, business owners with home offices often may deduct a portion of their homeowners insurance as a legitimate business expense. Self-employed individuals may deduct their health insurance premiums. It is important to note that disability insurance is not deductible at this point in time.
Many business owners use credit to finance their business purchases. When they do, the interest and related charges (including credit card annual fees) are fully tax-deductible. This is true even if the financing vehicle is a personal loan. As long as the loan proceeds are put into the business, the interest expense is deductible.
Office Supplies & Expenses
A whole host of miscellaneous office supplies and expenses are deductible. Paperclips, postage, even the money kept in the petty cash box are deductible. Is caffeine a mainstay in your working life? Costs relating to coffee and beverage services are deductible. Do you need office equipment? Consider whether it is smarter to buy or rent. The rules relating to deductions for purchased equipment vary, but equipment rental costs are fully deductible.
Lastly, don't forget that the fees paid lawyers and consultants are deductible. The fees of lawyers, accountants, bookkeepers and other professionals are considered a cost of doing business. Smart business owners know the value of seeking (and paying for) such expert advice. Excellent advisers help produce excellent business results.
So what are you waiting for? Organize those receipts. But whatever you do, ask your accountant just how many of these deductions you can take advantage of in your business. After all, the accountant's fees are deductible!
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, any tax information contained in this site was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed on this site.
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Smart business owners know they reap tremendous benefits when they give tax planning a year round focus. Obviously, the more tax deductions a business legitimately takes, the lower its taxable profit. The added bonus, though, is that a business owner's personal expenses often can be converted to deductible business expenses. What kind of personal expenses qualify? Consider the following:
Retirement Plans
Millions of self-employed individuals and business owners qualify for government-recognized retirement plans such as Keogh plans and SEP-IRA's. Each year, they can put money into a plan toward retirement or investment goals and receive a tax deduction in the amount of the contribution. Funding a retirement account in this fashion from your business' otherwise taxable profit is a "no-brainer" and in some cases, the retirement plan can be funded as late as the extended due date of your tax return (i.e. several months into the following year).
Automobile Costs
Automobile costs associated with the operation of a business (except for routine commuting) also are deductible. Businesses have two choices in this regard: keep accurate, detailed records of actual expenses as support for the claimed annual deduction, or use the IRS approved mileage reimbursement rate. If a vehicle is used for both business and pleasure, expenses relating to business still are deductible. Are you in the market for a newer vehicle? Why not lease a vehicle. Leasing often will produce an even higher deduction.
Business Travel
Business travel provides another opportunity for deductions. Business travel expenses including airfare, lodging, phone calls and faxes while traveling, hotel laundry service, and more may be deducted. In addition, when it comes to travel, business owners often mix business with pleasure. That's fine. As long as the primary purpose of the trip is business, the expenses are deductible. You can even take the family. Just limit your deduction to your share of the family's expenses.
Business Entertainment
Business entertaining is a proven client attraction and retention device. It is logical then that businesses are allowed to deduct a portion of their expenses relating to entertaining present and prospective customers (e.g. treating a client to a meal in a restaurant or providing tickets to a theater production). Currently, one-half of a business' entertainment costs may be deducted as long as "business" is discussed before, during, or after the entertainment event. As a practical matter, it helps to keep all receipts and make a note of the specific business purpose and client you entertained. Gifts to business associates or clients (up to a specified amount) also are deductible.
Education Expenses
As long as the subject matter relates to the owner's business and helps the owner maintain or improve his or her business skills, owners may also deduct education expenses, such as fees associated with seminars, classes, and conferences. Costs associated with magazines, books, audiotapes, and videotapes necessary to the business also are deductible, as are professional association and licensing fees. Education must be related to your current business, however. Costs relating to an educational program designed to help you land a new job are not deductible.
Charitable Contributions
Charitable contributions offer another opportunity for tax deductions. Partnerships, limited liability companies (LLC's), and Subchapter S corporations that make charitable contributions often can pass the deductions relating to such contributions through to their respective business owners. In addition to outright charitable contributions, businesses should keep a list of items they give away, along with the cost of the items. Many "give aways" are eligible for deductions, too.
Business Insurance
The cost of business related insurance (including liability, malpractice, business overhead, and workers' compensation insurance) is deductible. In addition, business owners with home offices often may deduct a portion of their homeowners insurance as a legitimate business expense. Self-employed individuals may deduct their health insurance premiums. It is important to note that disability insurance is not deductible at this point in time.
Many business owners use credit to finance their business purchases. When they do, the interest and related charges (including credit card annual fees) are fully tax-deductible. This is true even if the financing vehicle is a personal loan. As long as the loan proceeds are put into the business, the interest expense is deductible.
Office Supplies & Expenses
A whole host of miscellaneous office supplies and expenses are deductible. Paperclips, postage, even the money kept in the petty cash box are deductible. Is caffeine a mainstay in your working life? Costs relating to coffee and beverage services are deductible. Do you need office equipment? Consider whether it is smarter to buy or rent. The rules relating to deductions for purchased equipment vary, but equipment rental costs are fully deductible.
Lastly, don't forget that the fees paid lawyers and consultants are deductible. The fees of lawyers, accountants, bookkeepers and other professionals are considered a cost of doing business. Smart business owners know the value of seeking (and paying for) such expert advice. Excellent advisers help produce excellent business results.
So what are you waiting for? Organize those receipts. But whatever you do, ask your accountant just how many of these deductions you can take advantage of in your business. After all, the accountant's fees are deductible!
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, any tax information contained in this site was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under federal, state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed on this site.
Thursday, June 11, 2009
What Entity Is Right For Real Estate? Single or Multiple LLCs.
Image by thinkpanama via Flickr
Real Estate Ownership--A Risky Business
Holding a piece of commercial or residential property that you're renting, is very risky from the perspective of lawsuits. There are many potential sources of legal liability for the owner. From common slip and falls, to environmental contamination, landlords and owners are exposed to legal judgments. Landlords have been successfully sued by victims of crimes--such as robberies, rape, and even murder--that occur on their property on the theory that the landlord provided inadequate security.
Therefore, it is crucial that you do not own investment real property in your own name. The only real property you should hold in your own name is your primary residence. You need to have an entity with limited liability hold your property.
What Entity Is Right For Real Estate?
For many reasons, few investors hold investment real estate in C corporations. Double taxation of dividends and the inability to have "paper losses" from depreciation flow through to owners are two of the most important reasons.
Before LLCs gained popularity in the 90s, limited partnerships and partnerships were the entities of choice for real estate investment. Limited partners were protected from personal liability while also being able to take passed through tax losses (subject to IRS rules--you'll need an accountant or attorney to sort out the issues of at-risk limitations and so on) from the property. The biggest downfall with limited partnerships was that someone had to be the general partner and expose themselves to unlimited personal liability.
LLCs don't require a general partner. All LLC owners--called members--have complete limited liability protection. LLCs avoid the double taxation of corporations, and have complete limited liability for all members. For holding investment real estate, the LLC is the best of all worlds when it comes to business entities.
Multiple Entities For Multiple Properties
Now that you're convinced you should use an LLC to hold your real estate, the next question is how many properties per LLC should you have. Should you create one LLC and hold all your property under it, or should you create a new LLC for each property?
There are several reasons why you should consider having multiple LLCs--one for each property.First, having multiple entities prevents "spillover" liability from one property to another. Suppose you have two properties worth $500,000 and they're held in the same LLC. If a tenant is injured at property 1, and wins a $750,000 judgment, he will be able to put a lien on BOTH properties for the entire $750,000. Even though property 2 had nothing to do with the plaintiff's injury, the plaintiff would still be able to attack that property.
On the other hand, if each property had its own LLC, then your creditor could only put a lien on the property where she was injured (assuming that they cannot pierce the corporate veil).
Many banks and lenders require separate LLCs for each property. They want the property they're lending against to be "bankruptcy remote". What this means is that the lender doesn't want a problem at a separate property to jeopardize their security interest in the property that they're lending on. If they are lending money to you to buy the building on 123 Main Street, they only want exposure to risks from 123 Main Street, and not from a bunch of other properties that you own elsewhere. Therefore, lenders often insist on a new entity for the property they are lending on.
Multiple LLCs For A Single Property
You can also use multiple LLCs for a single property. In this case, you would have one LLC own title to the property, while a separate LLC managed the property--i.e. handled repairs, collected rent, paid taxes, etc. For example, if you owned the building at 123 Main Street, you could form an LLC called 123 Main Street Partners, LLC and a second entity to manage the property called Main Street Management, LLC.
You should discuss the use of multiple entities for real estate investment with your attorney or accountant. The use of multiple entities can have tax consequences that are favorable or unfavorable depending on the details of the arrangement--and only an attorney or accountant working with you can arrange the details properly.
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Wednesday, June 10, 2009
Kiva, the World's First Micro-Lending Website for Entrepreneurs
Kiva is the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs around the globe.
The people you see on Kiva's site are real individuals in need of funding - not marketing material. When you browse entrepreneurs' profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.
Kiva partners with existing expert microfinance institutions. In doing so, we gain access to outstanding entrepreneurs from impoverished communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entrepreneur on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently.
Kiva provides a data-rich, transparent lending platform. We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and are waiting for socially-minded individuals like you to lend them money.
www.kiva.org
The people you see on Kiva's site are real individuals in need of funding - not marketing material. When you browse entrepreneurs' profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.
Kiva partners with existing expert microfinance institutions. In doing so, we gain access to outstanding entrepreneurs from impoverished communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entrepreneur on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently.
Kiva provides a data-rich, transparent lending platform. We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and are waiting for socially-minded individuals like you to lend them money.
www.kiva.org
What is Important in a Confidentiality Agreement or Non-Disclosure Agreement (NDA)?
There are various factors to consider when reviewing or drafting a confidentiality or non-disclosure agreement (NDA). Obviously, your perspective on the agreement depends on whether you are primarily disclosing or receiving confidential information. The following points should be kept in mind:
Need for an agreement. Entering into an NDA increases the risk that the recipient may face charges of trade secret misappropriation if it develops similar information in the future or inadvertently discloses or uses the information. This is the primary reason that VCs will not enter into NDAs.
Mutual versus one-way. Some agreements only cover disclosure of confidential information by one party. Other agreements are mutual and cover disclosures by both parties. Generally speaking, mutual agreements are less likely to have provisions that are one-sided.
Non-disclosure and non-use. There are two important restrictions in an NDA. The non-disclosure provision prevents the recipient from disclosing the confidential information to third parties. The non-use provision prevents the recipient from using the information other than for a specified purpose. Occasionally, an NDA may not have a non-use provision. This would allow the receiving party to use the information for its own purposes as long as it did not disclose the information
Definition of confidential information. The discloser will want a broad definition of confidential information and may also want third party confidential information to be deemed confidential. The receiver will want to narrow the definition of confidential information in order to avoid being “tainted” by the information. The definition can be narrowed by (i) limiting it to information disclosed in writing (or oral disclosures reduced to writing within a certain time frame), (ii) specifically marking the information confidential, (iii) specifying the information that is deemed confidential or (iv) specifying the dates of disclosure. The discloser will want to avoid some of the limitations because of the possibility or inadvertent disclosure or over-marking information as confidential, which may impair the ability to enforce the agreement with respect to genuine trade secrets.
Exceptions to confidential information. The recipient will want broad exceptions to the definition of confidential information. Typical exceptions to the definition of confidential information include (i) information publicly known or in the public domain prior to the time of disclosure, (ii) information publicly known and made generally available after disclosure through no action or inaction of the recipient, (ii) information already in the possession of recipient, without confidentiality restrictions, (iv) information obtained by the receiver from a third party without a breach of confidentiality, and (v) information independently developed by the recipient. The discloser will try to limit the exceptions or add qualifiers such as the discloser must prove the exception with contemporaneous written records. Please note that the typical exception for information required to be disclosed by law should be an exception to the duty to not disclose, as opposed to an exception from the definition of confidential information (which would allow the recipient to disclose the information to anyone).
Residual information. The recipient will want to include a clause that allows the recipient to use the discloser’s information that is retained in its employees’ memory. The recipient will want to avoid being “tainted” by receiving the information. This is often strongly rejected by the discloser. In the event the residuals clause is included, the discloser may try to limit it to (i) use of general skills and knowledge, (ii) information retained in the unaided memory of employees after a certain amount of time after access to the confidential information, and (iii) explicitly noting that the discloser is not granting any license to the recipient.
Permitted disclosures. The discloser will want to limit disclosures to employees and contractors on a need to know basis with similar non-disclosure obligations. In addition, if disclosure is required by law, the discloser will want the recipient to notify the discloser in advance and provide the opportunity to obtain a protective order or otherwise maintain the confidentiality of the information.
Term. NDAs commonly have terms of three to five years. The period of time depends the strategic value of the information to the discloser and how quickly the information may become obsolete.
Need for an agreement. Entering into an NDA increases the risk that the recipient may face charges of trade secret misappropriation if it develops similar information in the future or inadvertently discloses or uses the information. This is the primary reason that VCs will not enter into NDAs.
Mutual versus one-way. Some agreements only cover disclosure of confidential information by one party. Other agreements are mutual and cover disclosures by both parties. Generally speaking, mutual agreements are less likely to have provisions that are one-sided.
Non-disclosure and non-use. There are two important restrictions in an NDA. The non-disclosure provision prevents the recipient from disclosing the confidential information to third parties. The non-use provision prevents the recipient from using the information other than for a specified purpose. Occasionally, an NDA may not have a non-use provision. This would allow the receiving party to use the information for its own purposes as long as it did not disclose the information
Definition of confidential information. The discloser will want a broad definition of confidential information and may also want third party confidential information to be deemed confidential. The receiver will want to narrow the definition of confidential information in order to avoid being “tainted” by the information. The definition can be narrowed by (i) limiting it to information disclosed in writing (or oral disclosures reduced to writing within a certain time frame), (ii) specifically marking the information confidential, (iii) specifying the information that is deemed confidential or (iv) specifying the dates of disclosure. The discloser will want to avoid some of the limitations because of the possibility or inadvertent disclosure or over-marking information as confidential, which may impair the ability to enforce the agreement with respect to genuine trade secrets.
Exceptions to confidential information. The recipient will want broad exceptions to the definition of confidential information. Typical exceptions to the definition of confidential information include (i) information publicly known or in the public domain prior to the time of disclosure, (ii) information publicly known and made generally available after disclosure through no action or inaction of the recipient, (ii) information already in the possession of recipient, without confidentiality restrictions, (iv) information obtained by the receiver from a third party without a breach of confidentiality, and (v) information independently developed by the recipient. The discloser will try to limit the exceptions or add qualifiers such as the discloser must prove the exception with contemporaneous written records. Please note that the typical exception for information required to be disclosed by law should be an exception to the duty to not disclose, as opposed to an exception from the definition of confidential information (which would allow the recipient to disclose the information to anyone).
Residual information. The recipient will want to include a clause that allows the recipient to use the discloser’s information that is retained in its employees’ memory. The recipient will want to avoid being “tainted” by receiving the information. This is often strongly rejected by the discloser. In the event the residuals clause is included, the discloser may try to limit it to (i) use of general skills and knowledge, (ii) information retained in the unaided memory of employees after a certain amount of time after access to the confidential information, and (iii) explicitly noting that the discloser is not granting any license to the recipient.
Permitted disclosures. The discloser will want to limit disclosures to employees and contractors on a need to know basis with similar non-disclosure obligations. In addition, if disclosure is required by law, the discloser will want the recipient to notify the discloser in advance and provide the opportunity to obtain a protective order or otherwise maintain the confidentiality of the information.
Term. NDAs commonly have terms of three to five years. The period of time depends the strategic value of the information to the discloser and how quickly the information may become obsolete.
What trademark and other legal issues are involved in selecting a company name?
Among the most important tasks in the founding of a new company are the development and clearance of a company name. There are two very different sets of legal issues, and a host of business issues, involved in the process.
Legal Issues
One set of legal issues concerns availability of the name under state law relating to entity names. In the case of corporations or limited partnerships, this involves checking with the Secretary of State of the states where they are formed and where they must “qualify” to do business (usually where they have offices or resident employees or a sales force).
The Secretary of State checks the state records to ensure that there is no other corporation or limited partnership with an identical or closely similar name; if one is found, the new name is generally not permitted. This happens even if the two companies are in vastly different lines of commerce; the sheer similarity of the name bars the second name. (On some occasions, consent of the earlier company or a relatively minor alteration of the name, such as “ULTIGRA, INC.” to “ULTIGRA SOFTWARE, INC.,” may increase the chances that the state will allow the new name.)
The second set of legal issues concerns trademark law. The Secretary of State’s approval of a business name does not grant trademark rights or authorize a company to use a particular business name in commercial activities. (Nor does registration of a corresponding domain name result in any significant legal rights.) A company may have incorporated under a name but find itself liable for trademark infringement or dilution — with potential risks of an injunction, disgorgement of profits, payment of damages, and more — for use of the name.
Trademark infringement occurs when a person or company uses a name or mark in a way that causes a likelihood of confusion with another person or company with respect to source, sponsorship, or affiliation of products, services, or commercial activities. Thus, “McCoffee” may infringe upon the marks of McDonald’s Corporation by leading the public to believe that “McCoffee” is a product or an affiliated company of McDonald’s. A company also may be liable for trademark dilution by using the famous mark of another company even if there is no competitive overlap or likelihood of confusion. For example, the name “Pentium Petroleum Corporation” may well dilute the PENTIUM trademark of Intel Corporation. It therefore is important to assess the potential trademark law risks of a name before adopting it as a company name.
The fact that a company still has a low public profile, or does not yet have products on the market and does not yet have a website, does not immunize it from challenges. Some companies have been sued for allegedly causing confusion through their financing activities or for use of a pre-release code name for a new product.
Some companies, in a rush to form a company, devise names in a hurry and do not clear them for trademark purposes. Often, they consider the name a “place holder” until a later time when they can invest the money and effort to attend to a new name. This creates a number of risks. First, there is the risk of liability. Second, management may “fall in love” with the placeholder name and become unwilling to give it up later. Third, the company may develop goodwill under the placeholder name that will be lost upon a name change. Fourth, the company may incur significant legal and administrative costs when it later undergoes a name change.
Legal Assessment
Legal assessment of a business name involves several steps.
We check the availability of the name with the Secretary of State for the relevant states; if the name is available with the Secretary of State, we reserve it pending an in-depth search. The Secretary of State availability check and reservation require only nominal fees.
We also perform searches of trademark databases in-house using on-line services or other research materials. The purpose of the searches is to determine whether a name is so likely to be unavailable that a more comprehensive search would be wasteful. A preliminary screening search is not sufficient diligence to assess the real issues in adoption of the name.
After the screening search, we obtain an in-depth trademark search from an outside search company. It examines federal and state trademark registers and a large number of sources of unofficial information about company and product names in relevant fields. We obtain an extra copy of the search report for our client and expect it to review the report carefully for potential conflicts; we then discuss our assessment with the client.
Once a company is comfortable with the level of risk of its chosen name, it is important to find ways to protect the name. If the name will be used on products, or in connection with the advertising or promotion of services, it often is a good idea to file an application for federal registration of the name based on the company’s intent to use the mark. This will help establish rights to the name; more importantly, it gives early notice to others who might otherwise overlook the company’s name when they do searches to develop their own names.
Legal Issues
One set of legal issues concerns availability of the name under state law relating to entity names. In the case of corporations or limited partnerships, this involves checking with the Secretary of State of the states where they are formed and where they must “qualify” to do business (usually where they have offices or resident employees or a sales force).
The Secretary of State checks the state records to ensure that there is no other corporation or limited partnership with an identical or closely similar name; if one is found, the new name is generally not permitted. This happens even if the two companies are in vastly different lines of commerce; the sheer similarity of the name bars the second name. (On some occasions, consent of the earlier company or a relatively minor alteration of the name, such as “ULTIGRA, INC.” to “ULTIGRA SOFTWARE, INC.,” may increase the chances that the state will allow the new name.)
The second set of legal issues concerns trademark law. The Secretary of State’s approval of a business name does not grant trademark rights or authorize a company to use a particular business name in commercial activities. (Nor does registration of a corresponding domain name result in any significant legal rights.) A company may have incorporated under a name but find itself liable for trademark infringement or dilution — with potential risks of an injunction, disgorgement of profits, payment of damages, and more — for use of the name.
Trademark infringement occurs when a person or company uses a name or mark in a way that causes a likelihood of confusion with another person or company with respect to source, sponsorship, or affiliation of products, services, or commercial activities. Thus, “McCoffee” may infringe upon the marks of McDonald’s Corporation by leading the public to believe that “McCoffee” is a product or an affiliated company of McDonald’s. A company also may be liable for trademark dilution by using the famous mark of another company even if there is no competitive overlap or likelihood of confusion. For example, the name “Pentium Petroleum Corporation” may well dilute the PENTIUM trademark of Intel Corporation. It therefore is important to assess the potential trademark law risks of a name before adopting it as a company name.
The fact that a company still has a low public profile, or does not yet have products on the market and does not yet have a website, does not immunize it from challenges. Some companies have been sued for allegedly causing confusion through their financing activities or for use of a pre-release code name for a new product.
Some companies, in a rush to form a company, devise names in a hurry and do not clear them for trademark purposes. Often, they consider the name a “place holder” until a later time when they can invest the money and effort to attend to a new name. This creates a number of risks. First, there is the risk of liability. Second, management may “fall in love” with the placeholder name and become unwilling to give it up later. Third, the company may develop goodwill under the placeholder name that will be lost upon a name change. Fourth, the company may incur significant legal and administrative costs when it later undergoes a name change.
Legal Assessment
Legal assessment of a business name involves several steps.
We check the availability of the name with the Secretary of State for the relevant states; if the name is available with the Secretary of State, we reserve it pending an in-depth search. The Secretary of State availability check and reservation require only nominal fees.
We also perform searches of trademark databases in-house using on-line services or other research materials. The purpose of the searches is to determine whether a name is so likely to be unavailable that a more comprehensive search would be wasteful. A preliminary screening search is not sufficient diligence to assess the real issues in adoption of the name.
After the screening search, we obtain an in-depth trademark search from an outside search company. It examines federal and state trademark registers and a large number of sources of unofficial information about company and product names in relevant fields. We obtain an extra copy of the search report for our client and expect it to review the report carefully for potential conflicts; we then discuss our assessment with the client.
Once a company is comfortable with the level of risk of its chosen name, it is important to find ways to protect the name. If the name will be used on products, or in connection with the advertising or promotion of services, it often is a good idea to file an application for federal registration of the name based on the company’s intent to use the mark. This will help establish rights to the name; more importantly, it gives early notice to others who might otherwise overlook the company’s name when they do searches to develop their own names.
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