Are You Working With People You Can Trust?

March 16, 2013,

Having a real estate agent can make transactions easier. People often use an agent to do the research for them. Agents can take your goals and limitations for a property and create a list of properties that you are likely to be interested in. This can save you a lot of time in your search for the perfect property. Unfortunately, a real estate agent, like anyone else, can also take advantage of you.

Jennifer and Guy Worthington found themselves in this situation and chose to sue their realtor, Thomas Polander ("Polander"). The Worthingtons sued their realtor for four real estate transactions, in which they believe their realtor intentionally gave them incorrect information so he would receive a commission. In the first and second transactions, the Worthingtons bought two investment homes from Polander and trusted him to find a tenant for each home. In both transactions, the tenants Polander chose ultimately could not make the monthly payments and had to be evicted from the properties. In the third property transaction, the Worthingtons bought property through Polander which they could not afford to maintain, under the promise that Polander would find a tenant to rent it out and take over the payments. Polander was unable to find a tenant which caused the Worthingtons to lose the property through foreclosure. In the final property sale, Polander claimed he was selling the Worthington property but after the paperwork was signed the Worthingtons were not given the title to the property; instead it went to a nonprofit, Fresh Start Foundation, which was controlled by Polander. In each transaction the Worthingtons lost money due to their trust in Polander as a real estate agent.

At first the case was brought to arbitration. The arbitrator found for the Worthingtons on all four transactions. The arbitrator found that Polander was in a position where his opinion was trusted and taken at face value and that he did not maintain expectations. After winning the case, the Worthingtons found out that Polander was unable to pay the damages.

The Worthingtons then filed an application with the Department of Real Estate ("DRE"). The DRE has a recovery account which is used to make payments in unsatisfied judgments. However, the DRE only makes payments in the case of fraud. The Commissioner of the DRE reviewed the facts of the case and the previous arbitrator's decision. The Commissioner found that the arbitrator only found fraud as the basis of the Worthingtons fourth property sale, therefore the Commissioner would only allow payment pay for the damages from that transaction.

The Worthingtons then brought the case to trial court in an attempt to appeal the DRE's findings. After reviewing the previous cases, the trial court found that fraud was an underlying issue in all but the third property sale. Therefore, it overturned the findings by the Commissioner for the first and second sale, which allowed the Worthingtons to receive more money from the recovery account. The case was once again appealed to an appellate court, and the appellate court agreed with the trial court.

Litigation can be long and complicated and the appeals process is not always clear. Arbitration and state agency hearings are lesser known ways to get a case resolved, and in some cases are a requirement for getting your case heard. This can be a term in a contract or a general law in a statute that you may not know about. An attorney can help you bring your best case forward in any forum. If you have a real estate issue and are in the the Sacramento area, call our experienced Sacramento business attorney.

See Related Posts:
Background Checks for New Start-Up Employees
Who Is Responsible for Property Damage Under a Commercial Lease?

What Happens to the Property in a Failed Real Estate Transaction?

March 9, 2013,

Contracts are cancelled all of the time. While it is not ideal, it is important know the potential outcomes for a breached real estate contract. Real estate contracts are different from other types of contracts because all pieces of real estate are treated as unique. This means if you were attempting to purchase real estate and the court finds that the seller breached the contract, instead of monetary compensation for the breach you can ask for the contract to be enforced and the sale completed.

Take the case of Troy Shadian, co-owner of Real Estate Analytics, LLC ("REA"). REA attempted to purchased investment property from Theodore Tee Vallas ("Vallas"). Vallas's father handled aspects of the Vallas properties except for signing contracts. REA negotiated with Vallas's father and when a deal was formed, Vallas signed the agreement. REA and Vallas agreed to an escrow date but REA asked to move it on two occasions. The first time, the contract was amended to take the new escrow date into account. The second time, the date was only agreed to orally by Vallas's father. In the time leading up to the third escrow date they regularly met and the father behaved as though the escrow extension was ok. Two weeks before escrow was supposed to close, Vallas's father contacted everyone involved and cancelled escrow and the entire contract. This led REA to sue Vallas in superior court for specific performance of the real estate contract.

To obtain specific performance after a breach of contract, a plaintiff must generally show: (1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. Under California law, there is a presumption that a monetary damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts routinely grant a plaintiff's request for specific performance. In some cases the presumption is conclusive, but in the case of commercial real estate there is a rare possibility that damages are acceptable. But it is the responsibility of the defendant to prove it.

The superior court found that because the plaintiff intended to use the property for investment purposes, monetary damages was enough. REA appeal the case and the appeals court overturned the superior court's findings. The appeals court found that the property was unique not only because of its physical attributes and location, but also because of its investment potential and the reasonableness of the agreed-upon contract price. Also, the appellate court found that the superior court did not get enough evidence from Vallas proving that money would be an adequate remedy.

All of these matters are quite complicated and having an attorney on your side can make the process easier to navigate. If you have a real estate issue and are in the the Sacramento area, call our experienced Sacramento business attorney.

Related Links:
Commercial Real Estate -- Letters of Intent
Questions to Ask Your Startup Attorney

Who Is Responsible for Property Damage Under a Commercial Lease?

February 27, 2013,

If you run a small business, such as a retail store or restaurant, it's important to understand all terms of your California commercial lease. Do not treat a commercial lease like you would an apartment rental agreement. For one thing, you have to consider issues of liability that might arise if your inventory or equipment become damaged.

Consider the case of Linda Xiang, owner of Geolin Trading, Inc., in El Monte, California, which leased commercial warehouse space from Kenny Luc. Just over two years into the lease, a sprinkler system installed in the warehouse went off after coming into contact with a rolling door. Geolin employees were unable to shut off the sprinklers, and the resulting flood destroyed over $422,000 worth of inventory. Geolin and Xiang then sued Luc for negligence and breach of contract.

Before this incident there had been no reported problems with the warehouse's sprinklers. And in fact, Luc had the system inspected at his own expense about a year before the flood took place. After the flood, Geolin hired its own inspector, who offered a professional opinion that (1) the sprinkler should have been further away from the door that hit it and (2) the sprinkler valves should have been accessible to Geolin employees to prevent flood damage.

Commercial Leases vs. Breach of Contract and Negligence
The lease between Geolin and Luc contained two key passages. The first said that by taking over the premises, Geolin acknowledged the warehouse was in "good order and repair" and that it was Geolin's responsibility, not Luc's, to make any necessary repairs. This includes any repairs to the sprinklers. The second key clause said Luc was not responsible for any damage to Geolin's property that might occur on the premises. Based on these two provisions, a trial court ruled for Luc on summary judgment and dismissed Geolin's lawsuit. justice.jpg

On appeal, a three-judge panel of the California Court of Appeals agreed that Luc could not be held liable for breach of contract. California law generally only holds a landlord responsible for dangerous conditions that cause personal injury, not damage to property. For example, if the warehouse itself was physically damaged or deteriorated to the point where a Geolin employee suffered a physical injury, the landlord might be responsible no matter what the lease provides. But when it comes to personal property like business inventory, California law leaves it up the landlord and commercial tenant to work those issues out for themselves.

Even the lease, however, does not shield a landlord from damage arising from negligence. In this case, the Court of Appeals said there were still questions to be resolved about Luc's conduct. Specifically, whether he was negligent in not moving the sprinkler further away from the door and in not providing Geolin with ready access to the shutoff valve. Thus, the case may go to trial on Geolin's negligence claim, but not on breach of contract.

Protect Your Property
The above case--which should not be considered a statement of binding law--illustrates just one potential pitfall of commercial leasing. These are complex transactions that require the services of an experienced Sacramento business attorney. Whether you're a small business owner looking to protect her personal property or a landlord seeking to avoid costly litigation, it's essential to engage a competent attorney before entering into any commercial leasing arrangement.

Related Links:
Extending a Commercial Lease in California
What Should your Commercial Lease Include?

New Patent Laws May Affect Startups

February 24, 2013,

files.jpgThis year is set to be a banner one for anyone interest in intellectual property and related issues--including many start ups. That is because on March 16th, the U.S. will switch to a "first to file" system pursuant to the America Invents Act (AIA). This will apply to all patent applications filed on or after that start date.

As discussed in a helpful TechCrunch primer on the situation, this is a change from our current "first to invent" system. In the old system while filing was obviously important, rules made it more likely that one who invented something first, even if they didn't file first, to ultimately obtain the patent.

New Law
What does this mean? Essentially, the idea is straightforward: the first inventor to file a patent application for an invention will be awarded the patent. This is the case regardless of whether another actually invented the item first. In other words, filing in a timely manner because much more important than ever before.

Importantly, there is one exception to this general rule built into the law. The "first to file" concept does not apply where an inventor makes a public disclosure of his invention before the first patent application is filed. The public disclosure itself does not end the matter. To take advantage of this exception the inventor must still file a patent application within one year from the date of the disclosure.

This exception is incredibly important, because it is intended to act as a limit on "patent trolls." In other words, even though filing increases in importance, it still may not be possible for outsider to swoop in and steal a patent, just because they beat an actual inventor to the office. So long as the inventor made some public disclosure--a press release, even a blog post--then they still may be protected so long as they file within a year.

Therefore, it may be easiest for business start-ups concerned with how this law might affect them to consider that there is basically two paths to "win the patent race." The primary method, as implied in the law, is to be the first to file a patent application. The second is the be the first to publicly disclose the invention. But even then, it is not necessarily that simple. That is because even if you file first, it won't matter if someone made a public disclosure within a year. Alternatively, even if you make a public disclosure, it won't matter is another had already filed by time you disclosed.

While the general change to a "first to file" system may seem logical, it will undoubtedly have significant changes on how the process works. For one thing, it will make it critical for many companies--particularly those in competitive sectors--to file as early as possible

Secure Legal Help
Needless to say all intellectual property issues are quite complex, and with laws changing frequently, it is impossible for any business, including start-ups to navigate these complex waters on their own. For help on any number of legal issues affecting start-ups in our area, please contact the Sacramento business attorney at our firm for tailored guidance.

Continue reading "New Patent Laws May Affect Startups" »

Questions to Ask Your Startup Attorney

February 13, 2013,

A helpful post from Venture Beat recently touched on what all start-up owners should consider when choosing a business lawyer for their operation. Of course, choosing an attorney is a personal matter and at the very least you must be able to see yourself interacting with this person on a frequent basis. If you do not hit it off or simply cannot envision working well with the attorney, no matter what their background, you should look elsewhere.

business2.jpgBut so long as you can hold a conversation with the legal professional and can envision a working relationship, what else matters? The article asks some questions worth considering.

Who will actually be working on your legal matter?
You may have a great conversation with one person only to learn later that someone hidden in a cubicle is actually doing most of your legal work. There are a wide range of firms and organizational structures. From the outset, you should talk with the actual person who will be providing advice and handling the actual legal matter for your company. There are too many high-quality legal professionals to not have direct contact with your attorney.

How do fees work?
It is cliche to state that fees shouldn't be the main concern. And it is well known that picking any service for the price alone can lead to bare bones quality. But at the same time, it is naive not to assume that price does not matter. Of course it matters, and as a startup it is critical to get good value for every dollar spent, including on legal fees.

There is no right or wrong answer to fee arrangements except to say that they should be transparent. Understand from the beginning how things will work and exactly what services will be provided. Clarifying at the outset may prevent significant complications down the road.

Has the attorney worked with other start ups before?
Legal experience matters. While the lowest fees can likely be secured by the youngest attorneys, there is a lot to say for paying for past success. Like any profession, there are incredibly diverse skill sets between attorneys working in different areas. That might even mean different skills between those working with early-stage startups as compared to more "mature" companies. A lawyer who has worked with those in a similar position to your business is a tremendous asset. As the VB article suggests: "Look for a lawyer that understands the inception-to-launch process."

Do they understand your industry?
This one is a little more specific than others, but it is certainly helpful if the attorney actually understands the specific of your industry--or at least is familiar with the basics. Legal principles as they relate to businesses generally apply to all, no matter what the industry. But that does not mean that any business attorney is fine. If they can relate to the specifics of your needs, then the more tailored legal help you will receive.

For help on any of these issues in the Sacramento area, please consider contacting our start up attorney today.

Continue reading "Questions to Ask Your Startup Attorney" »

Background Checks for New Start-Up Employees

February 10, 2013,

The prime objective of a start-up is to get work done quickly. In doing that, most of the time they do not execute an appropriate background verification and criminal check before hiring the resources. This could be extremely hazardous and might lead to various legal issues. This acts as a blemish to the reputation of the company and might lead to a cancellation of the business license. But at the same time, companies must be incredibly careful about how they go about this process.handcuffs.jpg

Understanding the Law
Perhaps most importantly, local companies should be aware that the Equal Employment Opportunity Commission recently released guidance on businesses using arrest and conviction records in the hiring process. This is a common practice, and many startups may have assumptions about how the law does or does not apply to these matters. At the very least it is critical to be aware of the basics of the law and how they might apply to you.

For example, per the new EEOC guidance, an employer may be treading on thing ice when a criminal background check treats an employee differently due to his or her protected status. This may occur mistakenly, and there may be situations where a protected group is screened out because of the criminal background check regardless of the business necessity.

It gets even more complex. For example, the EEOC guidelines make clear that arrests and convictions are different and must be treated as such. To be clear, an applicant may be denied because the conduct underlying their arrest make them unfit for the position. But a mere arrest, without a conviction, should not be relied upon as strongly. There may not be a black and white rule that always works, and startups should be careful about how they approach the issue. Alternatively, if an applicant was convicted of any crime, it may be a more acceptable reason to deny employment. But even then, it is best practices to have individual assessments, even among those who were convicted previously. Ensuring that the specifics of any applicant are considered in every case is an important way to assure that the law is followed and you are not setting yourself up for potential legal challenge down the road.

What about Credit Checks?

Beyond one's criminal background, there are also clear rules regarding use of credit checks to determine possible employment. Per the Fair Credit Reporting Act an employer must make a written disclose, in writing, that the background check may include in-depth information about his or her "character, general reputation, personal characteristics, mode of living, criminal history, driving history and work history." On top of that the employer must also be timely in their actions--disclosing the intention to obtain the report within three days. Of course, it also goes without saying that employers must be vigilant about protecting an applicant's personal information against unauthorized access or use.

Act Prudently to Protect Your Business
The above offers only a cursory look at the issues related to background checks for employment purposes. It is intended only to reinforce the idea that employers must be careful about how they use background checks, when they do so, and why. In all cases, employers should discuss the matter with a business attorney before taking any actions so that no improper information is included in the background check. Limiting the information available will help ensure that no improper information is considered during the hiring process.

Legal Issues for Start-Ups to Avoid

February 3, 2013,

If you scour the web for information on "tips for start-ups" you will find an endless number of bullet points, lists, and helpful summaries. Interestingly, in the majority cases the items most often messed up, done poorly, or forgotten about relate to legal matters. For example, as a Venture Beat post discussed recently, many different legal matters are continually botched by those with great ideas and the best of intentions.

Perhaps it should not be surprising that many start-ups make legal mistakes, because most focus is on the product or service about which they are passionate. Many of the administrative and organizational details get short shrift. Add the fact that many startups seek to cut corners and avoid paying for professional help, and it is easy to see how so many legal errors are made. But it remains critical for all those hoping to make it in the long-term to get serious about avoiding the most common legal pitfalls. For example, some of the obvious ones discussed in the VB post include...

Lean About "Due Diligence"
Even something as simple as picking a name may come with legal ramifications. For example, many a business has chosen an identity only to discover later that ***oops*** its already taken. If any steps had already been made with the names, this errors requires starting over and potentially wasting time and money. In the worst cases--when the problem is not identified until later--it may actually result in a lawsuit.

The lesson: do your due diligence and research ahead of time. There are online databases to examine this information and ensure you get off on the right foot.

Choosing the Wrong Entity Structure
Besides a name, one of the most important early decisions is figuring out the entity structure to operate as. Mountains have been written about the different options and the reasons to chose one or the other. But the decision is so important that it is worth reiterating. As previously mentioned, there are several common entity structures, including sole proprietorships, partnerships, Limited Liability Corporations and C-Corporations.

Each entity has strengths and weaknesses, but in most cases it comes down to taxation and liability protection. Sole proprietorships and partnerships come with single taxation but little liability protection. If there is a risk of any sort of liability--and in virtually all cases there is--then it might be worthwhile to give serious thought to more sophisticated arrangements.

The C-corporation, which is the most common corporate entity, is the old-fashioned structure for the largest entities. While it comes with liability protection, it also means that the income is taxed twice--once on the corporate level and once on the individual level.

The Limited Liability Corporation (LLC) is a hybrid of the Corporation and partnership, and the seemingly "best of both worlds" that it offers makes it attractive to many. LLCs are relatively new, and as such, there is less certainty with some of the more complex legal issues involved. However, the fact that they may offer single taxation as well as liability protection means all startups should at least speak with a legal professional and determine if it makes sense for them.

Mixing Funds
If your start up moves beyond the sole proprietorship or partnership phase, then it is critical to understand the basic protocols to ensure the "entity" and your person are separate. Most notably, do not co-mingle business assets with your own. "Co-mingling" may lead to claims that the business entity protection does not apply. Usually you only discover this when you are actually facing liability--the exact moment when you have much to lose.

Playing Fast and Loose with Intellectual Property
Copyrighting, trademarking, or patenting your work is not something only for those in a select few business. These legal principles apply to many different start ups, even those who might not assume so from the outset. It is impossible to get into too much detail about intellectual property rules here, but the bottom line is: talk to a professional about it. Leaving it to chance or pushing it off the deal with later is a recipe for disaster.

The above list is just the tip of the iceberg as it relates to basic start up mistakes. Don't let your ideas and enthusiasm wither because of legal malfunctions. In our area, contact a Sacramento start-up attorney today to learn more.

Key Discussion Points for Founder's Agreements

January 26, 2013,

Starting a new business is an incredibly exciting adventure. While there are countless different issues that need to be handled beforehand, there is one area that is often neglected: delineating the relationship between different founders. In the rush to advance the business itself, there may be cut corners as it relates to ensuring those involved in a venture have safe, secure legal understandings between one another. 5351289407_f6b5e459f3_m.jpg

For this reason, founders of a start-up enterprise must be vigilant about memorializing various items in a Founder's Agreement. This is an absolutely critical initial step that should obviously be created in conjunction with a legal professional.

What is included in a Founder's Agreement?

Capital Structure
Perhaps most notably, the "initial capital structure" of the company needs to be settled upon right away. Potential shares must be allocated equitably based on initial contributions. This is not necessarily as easy a calculation as it sounds. While in hypotheticals it always breaks down evenly by percentage contributed, it is often difficult to determine projected contributions. For example, while one founder may provide more capital initially, the team could be under the assumption that all will ultimately contribute equally. This might counsel toward equitable distribution of shares. But everything in equal pieces is not the only option, and alternatives might be worked out depending on expectations. All of this must be determined on top of items likes buyback rights, restrictions on share transfers and so forth.

Ensuring Long-Term Commitment
One issue that commonly comes up in these agreements relates to essentially enforcing long-term commitment by the founders via forced "vesting." In other words, if a founder holds unvested shares, they are only earned over time. If for whatever reason those shares are not earned, then are bought back. By voluntarily having founders' share subject to vesting, the founders are incentivized to remain connected for their own maximum benefit.

This is a somewhat complex aspect to Founders Agreements, but in general, it should be noted that there are different ways to handle vesting issues. The vesting can be based on a specific time or a specific business achievement or "milestone." Determining what is right for your business depends on the founders specific concerns. If commitment for the long-haul is desired, then a time based system might be appropriate (usually a period of years). However, if the business is suited for achieving very clear objectives, then it might make sense to base the scheme on achieving some notable goal. In fact, a combination of time-based vesting and performance-based vesting might best meet your needs.

Don't Go It Alone
Figuring out these issues from the outset it one of the most important things that any new startup will encounter. It is important not to cut corners but instead focus on getting the legal help you need to do it right. In the Sacramento area, please contact the our business attorney for the guidance you need.

Commercial Real Estate -- Letters of Intent

January 20, 2013,

Dealing with the many different aspects of a commercial real estate contract can be an incredibly stressful and time consuming process. In many cases it requires several rounds of negations. If sticking points cannot be sorted out, then that time and energy might even be wasted. That is why Letters of Intent (LOI) are often desired by both buyers and sellers. These letters essentially formalize negotiations and streamline discussion so that it is more likely that a favorable understanding will be reached in as efficient a manner as possible.

What Exactly is a Letter of Intent?
contract.jpgIt is critical to have legal help when working on these letters. A legal professional will explain how he LOI should include the following:

***Set the Table: The letters should indicate what terms or issues are agreed upon (settled) and what still needs to be worked out.

***Promise of Good Faith: Next, the the LOI should explain that both parties agree to operate in good faith--and confirm that they are bound to do so. This gives the agreement at least some force. It does not mean that either party is automatically "locked in." Instead, it is just a confirmation that the terms of the transaction left to be negotiated will be analyzed reasonably, without ulterior intentions to scuttle the deal. Determining when good faith is or is not present is a difficult process, but an attorney can explain how it might apply on a case by case basis. This is one of the more important parts of the LOI. In fact, there is generally an implied covenant to negotiate in good-faith, but the clause is usually included as confirmation.

***When to End: Finally the LOI should indicate a specific time when the negotiations may be canceled.

Other Considerations

Letters of Intent are somewhat difficult for many to get their head around, because they seem to be an agreement to keep negotiating. But even though they may not settle anything for good, they are critical pieces to the puzzle of commercial real estate negotiations.

Many of the specifics that will go into these letters above and beyond the outline issued discussed above, hinge of many different case-specific details. For example, you must consider whether the space is a "hot commodity" or if many other offers are likely to be on the table. Similarly, do you have a history of working with the party? How much faith can you place in their commitments? Do you have other arrangements with the party such that this negotiation is just one aspect of your relationship?

As will all legal issues, in our area it is essential to have the aid of an experienced Sacramento commercial real estate legal professional to advocate for your interests. Please feel free to contact our office to see how we can help.

Equal Opportunity Employment Guide for California Businesses

January 4, 2013,

Countless studies show that a more diversified workplace can lead to increased productivity, creativity, and employee satisfaction. Prudent California small business owners know that productive, creative, and satisfied employees are essential to a profitable business venture. However, many small business owners are unaware that efforts to create a diversified workplace are not just desirable; they are the law of the land. The best way to understand equal opportunity employment laws is to consult a Sacramento business attorney for an overview of what you, as the employer, can and cannot

There are a host of federal laws in place that aim to reduce discrimination in the workplace. The preeminent law that applies to every employer in every industry is Title VII of the Civil Rights Act of 1964. Under this law, an employer may not discriminate on the basis of race, color, religion, sex, or national origin. Another is the Equal Pay Act of 1963, which prohibits sex-based wage discrimination for men and women who perform substantially similar work. Age discrimination is prohibited under the Age Discrimination in Employment Act, which aims to protect workers who are 40 years of age or older. Finally, the Americans with Disabilities Act of 1990 states that no qualified individual with a disability shall face discrimination in employment.

Compliance with these discrimination laws is governed by the United States Equal Employment Opportunity Commission. According to the EEOC, it is illegal to discriminate in any of the following aspects of employment:

• hiring and firing;
• compensation, assignment, or classification of employees;
• transfer, promotion, layoff, or recall;
• job advertisements;
• recruitment;
• testing;
• use of company facilities;
• training and apprenticeship programs;
• fringe benefits;
• pay, retirement plans, and disability leave; or
• other terms and conditions of employment.

The EEOC also ensures protections against:

• harassment on the basis of race, color, religion, sex, national origin, disability, genetic information, or age;
• retaliation against an individual for filing a charge of discrimination, participating in an investigation, or opposing discriminatory practices;
• employment decisions based on stereotypes or assumptions about the abilities, traits, or performance of individuals of a certain sex, race, age, religion, or ethnic group, or individuals with disabilities, or based on myths or assumptions about an individual's genetic information; and
• denying employment opportunities to a person because of marriage to, or association with, an individual of a particular race, religion, national origin, or an individual with a disability. Title VII also prohibits discrimination because of participation in schools or places of worship associated with a particular racial, ethnic, or religious group.

It is important to note that this is by no means an exhaustive list of the equal opportunity laws that may apply to your business. In fact, California frequently enacts its own local variations and additions to these federal laws. In order to navigate the equal opportunity employment waters, it is best to have a guide. Your California business lawyer can be that guide.

See related blog posts
Drafting a Personnel Policy for Your Sacramento Business
Are My Workers Employees or Independent Contractors?

The Legal Implications of Closing Your California Business

December 28, 2012,

It's a dreaded reality that some business owners may have to face. In fact, in some areas of the California, it's a reality that a firm majority of new businesses have to face. We're talking about the prospect of closing. And whether you're making the decision to close the business because it isn't bringing in the profit you had hoped, or whether you're planning to retire with no one to take up the reigns, closure of the business has several serious legal implications.closed.jpg

First and foremost, you will need to break the news to your employees. Depending on the structure of the business, those employees may be entitled to severance pay, temporary health insurance benefits, and notice of the date of their final paycheck. Regardless of the time of year in which you close, your employees will need to be provided with W-2 forms for whatever portion of the fiscal year they worked. The bad news is best delivered sooner than later so that employees can begin the job search process as soon as possible.

Another legal implication has to do with existing contracts. If, for example, a failing restaurant has an existing contract with a food supplier for fresh vegetables each week, the company operating the restaurant still has the obligation to adhere to the terms of the contract for the duration of the contract period. Contracts are legally binding promises that usually do not expire just because one of the parties becomes insolvent. An experienced California small business attorney can help renegotiate contract terms in this situation so that you're not paying for deliveries of fresh vegetables well beyond your closing date.

In the case of a retail store, existing inventory may become a huge issue. Retail stores that close typically announce an inventory liquidation sale to raise money to pay off their creditors. The idea is to quickly turn items that would be useless to creditors into cash and to apply the proceeds of the sale toward the outstanding debts. Liquidation, in some cases, may prevent the business owner from having to declare bankruptcy.

Finally, you may want to consult an attorney to help officially dissolve the business entity. The charter documents that you filed with the State declaring your intent to operate under a certain legal entity structure may also have specific procedures to follow in winding up the business. Similarly, the State may have its own procedures for declaring the termination of the entity's existence. Proper dissolution of the business is a step that should not be taken lightly, as it can have a tremendous impact on your personal legal exposure on any existing or forthcoming legal claims.

Your business closure is sure to be a stressful and emotionally trying process. The best way to cope is to let a legal professional handle some of the more complicated tasks and ensure that your business and legal obligations have been met in accordance with California law. That way, you can focus on building your new financial future.

See related blog posts
Business Licensing in Sacramento
Selling Your Business in Sacramento

California LLCs: Member-Managed vs. Manager-Managed

December 20, 2012,

We have written several posts in the past about some strategic choices faced by a person or persons who are establishing a limited liability company. These include important considerations such as the method of taxation, the manner in which the constituent members are paid, and the things to be addressed in the company charter or operating agreement. There is one choice, however, that some LLC novices neglect to consider until the choice is laid before them by a California business lawyer: Should the limited liability company be managed by its constituent members, or should it appoint people for the express purpose of handling the managerial duties?4774087006_f73cd99ea1.jpg

The short answer is the same frustrating answer that business clients will often hear from attorneys: "It depends." What does it depend on exactly? More often than not, it depends on the size of the company (the number of members), the aptitude of the individual members to perform managerial tasks, and, distinctly, the desire of an individual member to perform managerial tasks.

For most LLCs, the size of the company is the chief deciding factor. The vast majority of LLCs are comprised of one or two members. Many others are comprised of only a handful of members. When the company size is so small in terms of membership, the individual members are more likely to want a stake in the management of the company. The classic case is that of a small business. Suppose two best friends open a restaurant. Both friends are almost always going to want a stake in the management and direction of the company (such as organizational structure, addition and subtraction of members, or acquisition of company assets) as well as in the day-to-day operations of the business (e.g. employees, recipes, menus, advertising). Although there are two distinct categories of company operations, a team of two members is likely to want to be involved in both.

When the number of members climbs, so too does the likelihood that managerial and non-managerial duties will be delegated amongst the membership. Imagine an LLC comprised of ten members. Not only might it be overly cumbersome for all ten members to have a share of the managerial role, but some of the members may only want an investment stake in the company. These members want their stake in the company to produce profit, but they may not have the aptitude or desire for making management decisions. In this type of situation, it is important that the charter or operating agreement be specific as to the roles of each constituent member, delegating managerial authority only to those want it and can handle it.

An experienced California business attorney should be able to interpret the goals of your LLC and recommend an organizational structure that places managerial duties in the hands of as many or as few people as business needs dictate. The same attorney should be able to craft a charter or operating agreement that effectively communicates the managerial structure to the State, the public, and the company members.

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Safe Workplaces Lessen Legal Exposure in California

December 14, 2012,

Any California small business attorney would tell you that a small business owner should make workplace safety a top priority. It is not only morally right to care for the safety of your employees and customers, but the time and energy a small business owner invests in workplace safety can reap dividends in the form of avoided litigation, better employee productivity, and enhanced reputation with customers.caution.jpg

Many business owners are familiar with the Occupational Health and Safety Administration (OSHA) and its guidelines for a safe workplace based on the type of business you are operating. These guidelines are a good starting point for workplace safety, but it is important to remember that complying with the bear minimum standard does not necessarily safe your business money in the long term. The following are some ways in which you, the business owner, can take personal responsibility for the safety of your workplace and lessen your legal exposure at the same time.

First and foremost, remind yourself to conduct frequent visual inspections of the areas in which your employees and customers are most likely to occupy. In addition to the aesthetic properties of the areas you are inspecting, ask yourself, "Am I observing something on my premises that could remotely result in a lawsuit?" If you see some kind of defect or hazard, be proactive in remedying the problem. If you have to delegate the work to someone else, be specific about what is wrong and exactly how you would like it to be fixed, as opposed to saying, "Take care of it."

On a similar note, make sure that your business has sufficient lighting within and around it. Good lighting allows your employees and customers to navigate your premises without difficulty and to avoid any potential hazards that may arise. Make no mistake: hazardous conditions will arise from time to time on your property. But the degree to which an employee or customer can identify the hazard and avoid it can go a long way toward limiting your legal exposure. And, as a side effect, good lighting makes your business a less optimal target for crime. In some cases, business owners have been held liable for the occurrence of crimes on their premises because the employee or customer was able to prove that the business owner was negligent in deterring crime. Don't be that owner.

Be mindful of ergonomics. If your employees are required to lift and place heavy objects for extended periods, be sure that those employees have the aid of the proper tools, machinery, and safety equipment. If your employees sit at a computer for extended periods, be sure they have comfortable chairs and that they take periodic breaks in which they walk around. If your employees stand for extended periods (like in a store or restaurant setting) provide them with a stool or chair for the less busy times of day. Provide employee training on these issues where appropriate.

Believe it or not, a California small business lawyer can be a valuable preventative tool when it comes to workplace lawsuits. If you think your business might benefit from an attorney's perspective on workplace safety issues, consider contacting one for a consultation.

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How to Protect Your Business's Name

December 6, 2012,

What's in a name? In many cases, it's everything. It's how you connect with your customers and how those customers draw a mental link to the quality of the goods and services you provide. No, we're not talking about your business's reputation or "goodwill" in the community. It's much more tangible than that. We're talking about physically protecting the trade name you selected for your business.2194396197_4c87e6e50f.jpg

Why is it so important for you to have the exclusive rights to the business name? It's important because it distinguishes you from your competitors. It's important because your business trade name may bear the family name (or perhaps your own name), meaning that your business and personal reputations in the community are indistinguishable. It's important because your business may be a clever play on words, or a phrase that customers associate with something historic, cultural, or even sport-related. When someone speaks of your business, people need to instantly recognize that what the person is talking about is your exact operation at your exact location.

The best initial step to protecting a business name is to hire a Sacramento small business attorney to incorporate your business. Your attorney can help you determine if your desired name already exists, or is too similar to another one already existing. The attorney can help you choose the best entity type for liability protection and tax purposes. Yet even with all of these precautions, new businesses will always emerge, and some of them might even threaten your livelihood by choosing a business name that's too similar to your own.

If that is the case, your Sacramento business lawyer can provide another valuable function. The best way to keep another business from operating under a name that could confuse your customers is to have your attorney draft a cease-and-desist letter. A typical cease-and-desist letter explains that your business has been incorporated under the laws of the state in which you operate. It explains that a similar business using the same (or substantially similar) name within a reasonably close geographic area constitutes an infringement on the fair operation of your business. These letters typically conclude with a date by which the offending business must change its name to be in compliance with your intellectual property rights, and the legal remedies you may pursue if they do not comply. These remedies typically include an injunction (a court order to do something or refrain from doing something) and/or a claim for money damages.

In the event that your competitor wants to bring a legal challenge as to your exclusive rights to the business name, your Sacramento business attorney can also be your legal representative in the litigation. A skilled attorney will be able to persuade the court that your competitor's use of your business name could confuse potential customers and drive away a portion of your sales. And if need be, your attorney can point you to a capable patent and trademark specialist so that you can add an extra layer of protection to your livelihood.

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Tax Consequences of Creating an S-Corp Versus an LLC

November 27, 2012,

Many Sacramento small business owners, when establishing their business for the first time, are confronted with an important decision: Should their business be organized as an S-Corporation or as a Limited Liability Company? The choice can have a tremendous impact on the manner and extent to which the business and its owner are taxed. For this reason, most novice business owners rightfully contact a Sacramento small business attorney for better understanding of how the type of business entity can affect taxation.1820231187_43f260616b.jpg

In many respects, there is little difference between the characteristics of an S-Corporation and a Limited Liability Company. Both entity types are created at the state level by filing various incorporation papers and maintaining certain regulatory filings. Both entity types legally differentiate their owner from the business itself. Both business entity types offer limited liability protection so that the owner can segregate his or her personal assets from the business's assets. This often makes the prospect of litigation far less onerous and terrifying.

The main difference between an S-Corp and a Limited Liability Company, however, is the way the Internal Revenue Service chooses to collect taxes from their owners and employees. In an LLC, the IRS does not tax the earnings of the entity itself, but rather the earnings that the member accumulates through the LLC. A sole LLC owner, therefore, would pay a self-employment tax rate on his or her own personal tax returns.

By contrast, an S-Corp is taxed in its own right by the IRS. The S-Corp itself files a business tax return. Then, instead of dispersing a member's share of income like in an LLC, the S-Corp has to pay its owner (and employees) a "reasonable salary." From this reasonable salary, the IRS computes the owner's (or employee's) personal income tax liability.

The problem with this setup is the vagueness of "reasonable salary." It roughly means a salary that is commensurate with a person of one's same ability in the same industry and geographic area. Computing this figure is easier said than done, and can have huge tax consequences. If the salary paid out to the person from the S-Corp is too low, an IRS auditor might conclude that the person is trying to evade taxes by keeping most of the assets within the business. This person may be trying to appear more impoverished than he or she really is in order to pay a lower tax rate, and it may be interpreted as tax fraud. On the flip side, if the salary paid out to the person from the S-Corp is too high, that person may be shouldering a heavier tax burden than similarly skilled people in the same industry and geographic area.

If you are having trouble deciding whether to incorporate as an LLC or an S-Corp, a Sacramento business lawyer can give a more extensive explanation of the pros and cons. Similarly, if you are having trouble determining a "reasonable salary" under the S-Corp designation, the same attorney can help nail down a figure that is acceptable to you and to the IRS.

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