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.

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.

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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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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• A Slight Upgrade in 1st-Quarter G.D.P. (nytimes.com)

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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A Brand Called You. CEO of Me Inc.

The Brand Called You By: Tom Peters

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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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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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.

What Entity Is Right For Real Estate? Single or Multiple LLCs.

Image by thinkpanama via Flickr

When it comes to real estate investment, LLCs are the preferred entity by most investors, attorneys and accountants. Here is a short introduction to why LLCs are preferred and some ways to utilize the LLC in your real estate investment endeavors.

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.

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

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.

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.

20 Must-Read Blogs for Online Entrepreneurs

One of the most important parts of being an online entrepreneur is maintaining an intellectual edge. Those who work and start businesses on the web are always learning, always watching other businesses, and always looking for new sources of information.

The goal of this list is to provide that — 20 useful, thought-provoking, and potentially lucrative sources of news and ideas. Each of these blogs are run by leading individuals and companies, and together they can help form a cornerstone of learning in your daily schedule.

Not all of these blogs are about entrepreneurship, or even business, but all of them are well-written and definitely worth looking at.

http://freelancefolder.com/20-must-read-blogs-for-online-entrepreneurs/

7 Ways to Be Credit-Stupid with your FICO Score

Remember the good old days, way back in 2006, when the streets were paved with credit-gold as far as the eye could see and credit cards rained from the sky? Even the credit-destitute were treated like kings by the credit card companies and courted with lavish offers of unlimited credit.
Here in the future, the world has changed. Banks claim they want to lend money, but really they'd prefer to buy other banks with government money.

Credit issuers aren't sure they want to lend money to people who need to borrow it, a situation somewhat analogous to the Groucho Marx axiom, "I don't want to belong to any club that will accept me as a member."

And woe betide those who ask for loans with glaring blemishes on their credit reports. An unpaid collection is apt to be regarded like a cockroach in the consommé.

These days, wrecking your ability to get credit is about as easy as blowing over a house of credit cards.

http://finance.yahoo.com/banking-budgeting/article/107154/7-Ways-to-Be-a-Dolt-About-Credit

How to Change Visitors to your Website Into Customers.

Your search engine marketing efforts are no doubt doing a great job of getting visitors to your site, but turning these visitors into paying customers is a whole other story.

You need to ensure your website is in tip-top shape to make it as easy as possible for visitors to purchase your products or services.

I recently stumbled upon a new blog “Conversation Marketing” which has a great article called “32 Tips to Make Online Customers Love You”.

I have pulled out some tips to share with you. Don’t worry; I haven’t included all 32 tips here. If you would like to check out all the tips, see the full link below.

1. Make sure your site loads in 3-4 seconds or less on a standard broadband connection. Your customers will thank you!
2. Use large type. Some of us aren’t as young as we used to be.
3. Make stuff easy to find. Clear product links, sensible categories and a good search engine on your site will all help.
4. Be secure. Your customers won’t thank you for security, but they’ll sure curse you if you let someone make off with their credit card info.
5. Forget about cool. Just because you love the idea of a Flash-based slide show using the best page-turning techniques 2002 had to offer doesn’t mean your customers will.
6. Offer ways to stay connected. Let folks sign up for an e-mail newsletter or subscribe to a latest news feed. Let them find you on Twitter. You’d be surprised how many folks appreciate that sort of thing.
7. Write scannable content. Use bullets and the like to break up the page. Have no more than 14 words on a line. Don’t make folks read 10-line paragraphs, because they won’t.
8. Have a friendly 404 page. Help customers find what they need, even if they did get your page URL wrong. Use a friendly 404 page, not the hideous default page that your server delivers.

For the full article, link http://www.conversationmarketing.com/2009/05/32-tips-ecommerce-love.htm

Key Steps to Getting Clients (Of Any Kind)

To be successful at getting clients you need to implement the follow steps:

1. Time Management. Schedule your day and week to include your business development.
2. The “Who”. Who you are and what is important to you? Who you enjoy working with?
3. The “What”. What is your business? What has life prepared you for (education, experience, etc)? What do you want your business to become?
4. Your Niche. What is your Niche and how are you different from your competitors?
5. Research the words and phrases clients use to find YOU.
6. Use your Research to PULL clients to you.
7. Create your Website in a way that gets your visitors to take the ACTION you want.
8. Write Compelling Copywriting that motivates potential clients.
9. The “How”. Identifying the best marketing strategies and tactics for your business.
10. Package your Revenue Streams in ways that get your clients to buy.
11. Implement Marketing Metrics so you know what is working.

Marketing should be measurable. You should have easy ways to track what is getting you clients and what is not. You should know what each marketing tactic costs, and how much income it brings in.

Marketing should be simple. You should have easy to follow steps that you can repeat over and over again. If you have to recreate the wheel each time it becomes too hard.

Marketing should to be fun. Yes, you heard me right. Fun! Once your marketing efforts are systematic and successful (i.e. getting clients and bringing in more income), marketing your site will be fun and exciting.

Jennifer Davey is a Small Business Coach and Marketing Strategist. Jennifer coaches small businesses, self employed professionals, and solopreneurs in strategies for getting clients and making more income. Jennifer can help you implement a successful and easy to repeat marketing program that will attract clients. Contact Jennifer and set up a time discuss your struggles with getting clients and making more income. http://jjscoaching.com/contact OR grab your copy of Jennifer's FREE report " What You Need to Know To Be Successful at Getting Clients", visit http://jjscoaching.com/free-marketing-tips/

Win an IT Business Startup Package - Deadline is July 31st.

Win an IT Business Package from Cobweb worth over £1400. It's a great package for start up businesses or businesses with up to 10 users. It's easy and free to enter - simply register your details and click submit.

The Prize The IT Business Package consists of Hosted Exchange email, online Web Hosting and CobwebHR consultancy support. The competition package is up to 10 users and for a 12 month period. After the 12 months there is no requirement to continue using our service, unless you choose to do so.

How to enter! Simply enter here http://www.cobweb.com/IT_business_package.aspx The closing date for this competition is 31st July 2009. All correct entries will be put into a draw and the lucky winner will be selected randomly and announced after this close date. Prize draw terms and conditions - http://www.cobweb.com/pdf/Terms%20and%20conditions%20for%20competition.pdf

Office Depot to Recognize 500 of the "Best and Smartest Small Businesses in the Country"

Office Depot launched its "Small Business Self-Bailout Plan" today. As part of the program, the office supplies and services provider created the Survival of the Smartest website for business owners who need support during "The Great Recession."Some reasons to check it out:

- Articles and columns from Steve Strauss, a renowned small-business expert and author.
- Weekly videos featuring products and services designed for small business.
- A free resource center with news and information.
- Smart tips and strategies for everything from greening your office to computer networking.

Last week, Strauss spoke with Entrepreneur.com about the new site, which he thinks will be helpful to entrepreneurs who need to do a lot on their own, including, it seems, a self-bailout. "Survival of the Smartest is very interactive, very web 2.0," he said. "It's not just another dry, read-an-article kind of website. It's designed and intended for small-business owners, so I think they're going to find it very useful."

There's $1 million worth of prize money involved, too.The Office Depot Adopt a Small Business contest will recognize 500 of the "best and smartest small businesses in the country" and award the winners a total of $1 million. To enter, send in a two-minute video of what you are doing to be smart in this economy.

Entries are accepted through July 31. And even if you aren't selected, the winning videos will be posted online, so you pick up some additional strategies that may work for you. Now that's some stimulus.

Credit Card Reform Provides No Relief for Small Business Cardholders

Credit-card reform doesn't apply to small business cards, which more companies are relying on as loans have dried up

Joseph Rosmann thought he was a model small business credit card customer. A 65-year-old general contractor in Bellevue, Wash., Rosmann typically charges between $2,000 and $4,000 in expenses each month on his Chase card. He carries a balance of between $7,000 and $8,000 as he waits for clients to pay, and he makes well over the minimum payment each month. His six-year-old high-end renovation business continues to grow despite the soft housing market, and he expects to bring home $70,000 in net income this year on revenues above $150,000.
So Rosmann was surprised—and angry—when he got a notice in the mail from Chase (JPM) May 27 saying his interest rate would increase from 12.24% to 15.24% on his existing balance and all future purchases, starting with his next billing cycle. The notice said that the change is "in response to market conditions and to maintain profitability on your account." Rosmann must close his account, the only credit card his business has, by June 22 if he wants to opt out of the rate increase.

The sweeping credit-card reform law President Obama signed May 22 is intended to protect most cardholders from practices like changing terms on short notice and retroactive rate hikes. But when the law takes effect in February, business cardholders like Rosmann won't get the same relief. That's because the Credit Card Accountability Responsibility & Disclosure Act doesn't apply to small business cards, which companies increasingly rely on in lieu of traditional financing. About 11% of all Visa (V) and MasterCard (MA) purchases are now made with small business credit cards, up from 3% a decade ago, according to David Robertson, publisher of the credit-card industry newsletter The Nilson Report—and that doesn't count volume by American Express (AXP), one of the largest players in the small business segment.

"A Good Step Forward"
Attempts in both houses of Congress to explicitly include businesses with fewer than 50 employees failed, but the law did order the Federal Reserve to examine the use of credit cards by small businesses and recommend protections to Congress within the next year. Todd McCracken, president of the National Small Business Assn., which has long advocated stricter rules for credit card lenders, calls the law "a good step forward" but hopes regulators will extend the rules to commercial cards.

Still, many small business owners use personal cards for business purposes. They'll see an end to retroactive rate hikes and double-cycle billing (calculating interest and fees based on the balance going back two months, even if earlier charges have already been paid off). Credit-card companies will have to send bills at least 21 days before they're due, give 45 days' notice before rate increases (rather than the current 15), and 30 days' notice before closing an account. In addition, card companies won't be able to raise rates in the first year after a cardholder opens the account.

While the new protections will help borrowers in the long run, some business owners fear that credit-card companies' response to the new law will make things even worse.
"Almost all small business and consumer card accounts will be adjusted near-term to permit issuers to charge higher fees," The Nilson Report's Robertson says in an e-mail.

No Rhyme or Reason
Chase spokesman Paul Hartwick wouldn't comment directly on whether Chase's rate hike is in response to the new credit-card law. "We constantly evaluate the risks and costs of funding credit-card loans. We are also evaluating changes required due to pending regulations," Hartwick says in an e-mailed statement. "When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions, and the costs to us of making loans… We recognize some customers may be affected by these changes for the first time and, as always, we are working hard to provide consumers impacted by these changes with alternatives."

Rosmann, who was a senior partner at accounting firm Coopers & Lybrand (now PricewaterhouseCoopers) before starting his home construction firm, is steamed. "This is an effort to quickly bump up profitability in a line of business where they may be having some challenges. [They're] not taking a hard look at the risk associated with the clients," he says. "Everybody just becomes a number." Some issuers, facing bigger losses on small business credit cards than they expected, are clamping down on borrowers indiscriminately. Advanta (ADVNA), a Spring House (Pa.) credit-card company that deals exclusively with small business cards, announced on May 11 that it would close all of its more than 1 million small business accounts after reporting a $76 million loss in the first quarter. Many account holders didn't hear until days before their cards were to be shut down on May 30.

Karen Lehr, a human-resources consultant in Gainesville, Va., got an e-mail May 26 notifying her that her Advanta card would be closed four days later. At first she thought the message was a hoax. A satisfied Advanta customer for six years, Lehr said she used the card for convenience and always paid the balance each month. Now, she's scrambling to switch services like her cell phone that are billed automatically over to her personal card. "I was appalled by having only four days' notice that my company's credit line is being pulled, through no fault of my own," Lehr says.

Small Biz is Vulnerable
In theory, the credit-card reform law would protect borrowers like Lehr and Rosmann by giving them more notice before account changes and barring retroactive rate hikes. But unless lawmakers expand the rules to cover small business cards, small business cardholders remain vulnerable to practices that card companies won't be able to use on consumers. Rosmann says the banks will just drive away good customers: "They are alienating people like myself, and it just makes no bloody sense," he says.