New 2014 California LLC Rules May Impact You

Effective January 1, 2014, if you conduct business through a California limited liability company(“LLC”), the LLC will be subject to a new set of laws called the California Revised Uniform
Limited Liability Company Act, or RULLCA.

This new law will completely replace current law and will apply to all LLCs formed in California, including those formed prior to January 1, 2014.

While much of the new law is similar to current law, significant changes include:

• Clarifying fiduciary duties and identifying when those duties may be altered or eliminated in an operating agreement;

• Defining conditions for dissociation of a member from an LLC, including when a member may withdraw from an LLC and the resulting impact on the member and the LLC;

• Enacting new provisions governing LLC capitalization;

• Changing the priority between the operating agreement and the LLC’s articles of organization when a conflict exists between the documents;

• Establishing limitations and restrictions with regard to the indemnification of members and managers from liability for money damages arising from a breach of duty, and;

• Providing a more detailed set of default rules that will go into effect when an operating agreement is silent.

What Should You Do?

To avoid unwanted consequences, the operating agreements of existing California LLCs should be reviewed as soon as practicable and, ideally, before January 2014, to identify any provisions that may (i) not be in compliance with the new law; (ii) need to be clarified or changed to eliminate ambiguity as a result of the new law taking effect; or(iii) raise issues wherein alternatives to the new law should be considered.
Further, any inconsistencies between the operating agreement and the LLC’s articles of organization should be assessed and resolved.

Give our office a call if you have any questions or concerns regarding your LLC.

Law Offices of Daniel H. Alexander, PLC / www.dalexander.com / (800) 530-4529

Advantages of Incorporating (Series #3 out of 7) - Tax Savings

Advantages of Incorporating (Series #3 out of 7)- Tax Savings.

When you incorporate there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. By incorporating you create a separate and distinct legal entity.

Because of this, there are many transactions that you can structure between you and your corporation to save big money on taxes. For instance, if you own a building, you can rent office facilities to your corporation and claim depreciation and other deductions for it and your corporation can then claim the rental expense. Not with a sole proprietor or a partner in a partnership.

Also, after paying yourself a reasonable salary, your corporation can then pay dividends to you, which is taxed at a capital gains rate (approximately 15%). Compared to the self employment tax and regular income tax that a sole proprietor or a partner in a partnership pays which is usually 30% to 40%. Therefore, in the above example, the corporation saved the shareholder at least 15% in taxes.

These are just a few example. Give Attorney Daniel Alexander a call at (800) 530-4529 or check out our webpage at www.dalexander.com for additional information

Does the "due on sale" clause in a Mortgage apply to a transfer to a relative from a trust or through Probate?

I have heard a lot of misinformation regarding the treatment of mortgages at the death of a loved one.  Some people think they will have to qualify for the loan in order to keep the mortgage and house, or that there is a "due on death" clause and the mortgage is due at the death of the loved one, or that the "due on sale" clause applies in this situation.

All the above are false.

There are several exceptions to the "due on sale" clause which can be found in The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8). 

The term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent. 

Some people call this an acceleration clause where the loan is accelerated and becomes due immediately.

One exception in the Garn St. Germain Act is that the "due on sale" clause will not apply to: a transfer to a relative resulting from the death of a borrower.

(e.g. – a transfer from a trust or in probate to a relative, such as a spouse or child)

So this means that the mortgage company cannot call the loan, cannot start foreclosure, etc. just because the property is being transferred to a relative in a trust or probate process. 

You as the relative receiving the property can either continue to keep making the required payments or you can ask the bank to add you on to the loan / assume the loan and then continue to make payments.

Now this does not mean you do not have to pay the mortgage payment.  Of course you have to make the mortgage payment.  If you don't then they can foreclose on the property.

Remember, be sure to get good advice from a attorney that practices Estate Planning and Probate!

For more information contact Attorney Daniel H. Alexander at (800) 530-4529 or review other articles on our website - www.dalexander.com or see the blog http://www.dalexander.com/node/88

This does not constitute legal advice.  Talk to an attorney in person or on the phone.

Advantages of Incorporating (Series #2 out of 7)

2.- Easier to Transfer / Sell. Corporations are generally much easier to transfer / sell and are usually more attractive to buyers than either a sole proprietorship or partnership.

One of the reason for this is because a new buyer will not be personally liable for any wrongdoings on the part of the previous owners. The liability stops with the corporation if the corporation is properly set up and run.

If someone buys a sole proprietorship, for example, the new owner can be held personally liable for any mistakes or illegalities on the part of the prior owner…even if the new owner had NOTHING to do with the situation! This is usually NOT the case with a corporation.

Further, many corporation owners (shareholders)do Estate Tax planning and succession planning through corporations buy gifting shares to children, or giving children or key employees stock as an incentive to continue with the business.

The transfer or sale of a corporation involves the transfer or sale of stock and generally does not require re-titling of assest, contracts, etc. that are in the corporations name. With sole proprietorships it is much more difficult since all assets of a sole proprietorship are in the owners name.
For more information give our office a call at (800) 530-4529, or check out further information on our website - www.dalexander.com

Advantages of Incorporating (Series #1 out of 7)

#1.- Asset Protection. If you operate as a sole proprietor or partnership, there is virtually unlimited personal liability for business debts or lawsuits.

In other words should you go out of business or be a defendant in a lawsuit, your personal assets such as homes, investments, bank accounts, vehicles, etc. are up for grabs by the creditor's of the company.
This is generally NOT the case when you incorporate. When you incorporate you are only responsible for your investment in the corporation or another way of saying it, they can only get what the corporation owns. The limited liability feature of a corporation, while not a guarantee, is DEFINITELY one of the most attractive reasons for incorporating.
For those of you that have already incorporated, be aware that many lenders require you to personally guarantee a loan. By doing this you are basically taking the liability outside the corporation and the Corporation and you personally are liable for the debt. Obviously try to avoid signing personal guarantees.
There are also a few things a business owner can do to limit the reach of a personal guaranty. Here are some ideas:

a. Have Multiple Options

When looking to borrow, have multiple options. Some banks and other financial institutions, and some trade creditors, may be willing to limit the reach of a personal guaranty when competing for your business.

b. Limit the Exposure by Spreading Amongst Business Partners

You may want to ask the lender to limit your exposure under a personal guaranty to your percentage interest in the company. So, for example, if you have three owners and you each own 33.33% interest in the company, ask your lender to limit your liability under a personal guaranty to one-third of any claimed amount. Some lenders will accommodate such a request.

c. Spouse as Business Partner

Consider whether you want to include your spouse as a co-owner of your business. Banks and other lenders typically want all those with an ownership interest in the business to sign a personal guaranty when the business takes out a loan. (Some banks will waive the personal guaranty requirement if the business partner owns 20% or less in the company.) While there are many factors to consider, limiting a spouse’s exposure to business debts is an important goal.

d. Limit the Length of the Personal Guaranty

If you will be reducing the amount of the loan over time, you may want to ask your lender to consider limiting the personal guaranty to the first two or three years of the loan with the thought that your real estate or other assets which secure the loan will, at that point, provide adequate protection for repayment to the lender.

e. Avoid Self Renewing or Blanket Personal Guarantees

Often, when working with suppliers, a business owner may sign a personal guaranty at the start of the relationship without realizing that this personal guaranty will continue indefinitely or renew automatically. I recently reviewed a 12 year old guaranty which a trade creditor was asserting as a basis for personal liability. You may want to put a sunset date on a personal guaranty or negotiate with the trade creditor to eliminate or limit the reach of the personal guaranty after you have established yourself as a reliable borrower.
Personal guarantees are a reality with doing business. However, if presented with a guaranty, attempt to limit its scope and impact by requesting reasonable limitations.

Find out more at www.dalexander.com

A loved one dies and leaves behind a home and a mortgage.

A loved one dies and leaves behind a home and a mortgage.

A common question I get from clients in this situation is:  Will I have to qualify to assume the loan and keep the house?

The Garn-St. Germain Depository Institutions Act of 1982 allows relatives inheriting mortgaged homes to take over or assume their mortgage if you choose. Under this Act, you will not need to refinance mortgage or even assume it. Normally you or the representative of the estate would notify the mortgage lender that you are inheriting your relative’s home, will be living in it, and will be making the mortgage payments. When the estate or trust closes and is distributed the property would then be put into your name by way of a deed or if through probate, by a court order recorded with the County Recorder.

Keep in mind that you must continue to make the mortgage payments; otherwise, the lender can pursue foreclosure. Also property taxes and insurance must be paid and that the home may come with property liens attached to it. 

Further, prior to assuming the loan, if the house is “upside down” and it has conventional purchase money, non-recourse mortgage, then you or the estate representative could decide that it would be best to let the house go back to the bank.  In this situation you and the estate would not be personally liable for the debt nor would you be responsible for the deficiency amount that the bank did not receive in a foreclosure.

However, keep in mind that if there is an equity line of credit or some type of other debt lien against the house, that those debts might survive the foreclosure and the estate might be responsible for paying them.  Consult an attorney.

Also, on another note regarding the Garn-St. Germain Depository Institutions Act, an important consumer change that came along with the Act was to allow anyone to place real estate in their own trust without triggering the due-on-sale clause that allows lenders to foreclose on a current loan upon transfer to another.

This greatly facilitates the use of trusts to pass property to heirs and minors. The bill states "... a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property[.]” (The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8)

For more information contact the Law Offices of Daniel H. Alexander, PLC, (800) 530-4529  www.dalexander.com

Thanks to Congress Self Employment Taxes Exceed 15% in 2013

The first payday of 2013 for most Americans won’t be as small as it could have been, but as those paydays come in the weeks ahead, make no mistake, those paychecks will be getting smaller. Every working American will see their take-home pay cut by the 2 percent increase in Social Security payments.

While Congress approved a deal not to raise income tax rates on Americans making under $400,000 (for couples $450,000), the agreement did not extend the employee payroll tax cut that has been law for the past two years or for the self employment tax.

Instead, every worker or self employed person will see the portion of their paychecks going toward Social Security go up 2 %, returning to the same percentage it was prior to 2011. A 2% increase doesn’t sound like much, but what they don’t tell you is the total self-employment tax (social security,  Medicare, Obama care, etc. ) is 15%.

For the self employed, had they been Incorporated (a Corporation) they could have avoided most of this tax (Corporations do not pay self employment taxes).

So if you want to reduce your taxes, gain liability protection, and look profession, call my office and discuss incorporating now. Visit us at www.dalexander.com
 
Law Offices of Daniel H. Alexander, PLC


Daniel H. Alexander, Attorney