San Francisco Business Lawyer Blog

Businesses in heavily-regulated fields, particularly medical and dental practices, must pay close attention to compliance with local, state, and federal laws. Many businesses employ compliance officers (COs) with full-time responsibility for these issues. Failure to comply with various regulations may mean professional sanctions, fines, or even loss of licenses that force a business to close.

What is a Compliance Officer?

The CO's job is to ensure that the practice is complying with all applicable laws and regulations, and to monitor policies and procedures aimed at preventing violations or breaches before they occur. A CO should be an officer of the professional medical corporation that operates a medical or dental practice, and should report directly to the chief executive officer or the board of directors or managers.

How is a Compliance Officer Different from a General Counsel?

A company's general counsel (GC) primarily responds to problems, advises on legal obligations, and defends the company against claimants and regulators. The two positions can conflict with one another if they do not have clearly-defined roles. Where the GC is mostly reactive, the CO should be proactive by putting plans for regulatory compliance in place, keeping track of their success, and anticipating problems before they occur. To be effective, a CO should be separate from a GC, but on the same level within the company's hierarchy.

Continue reading "Compliance Officers for California Medical and Dental Practices" »

The California Secretary of State (SOS) made several changes to the procedures and fees for filing business entity formation documents, effective January 1, 2013. The new rules affect all business formation filings submitted to the SOS on or after that date, including Articles of Incorporation, Articles of Organization and foreign business entity registration documents. There are also changes to the procedures and fees for obtaining copies of filed documents. The SOS will reject any filings that are not in compliance with the new rules.

Address Requirements for California Businesses

Any documents used in the formation of a domestic business entity, including Articles of Incorporation for a corporation and Articles of Organization for a limited liability company (LLC), must include a valid street address and mailing address for the entity.

Address Requirements for Foreign Businesses

Foreign corporations, LLCs, and other foreign business entities registering to do business in California must provide both street and mailing addresses in their registration documents. "Foreign" means formed outside of California, and therefore may include business entities formed under the laws of another U.S. state.

Continue reading "New Requirements for Business Entity Filings in California in 2013" »

California enacted the Beverly-Killea Limited Liability Company Act in 1994, long after both it and the federal government had enacted the various statutes and regulations defining securities. The 1994 law added limited liability company (LLC) membership interests to the list of assets defined as "securities," but the status of membership interests in a California LLC under federal securities law has remained undefined. A recent federal court decision in the Southern District of California, Hardisty v. Moore, 2012 (S.D. Cal. Oct. 9, 2012), offers some guidance, as to whether a California LLC membership interest is a security under federal law, by applying the definition of a security set forth by the U.S. Supreme Court decades ago.

Brief Statement of Facts Hardisty v. Moore

The plaintiff, John Hardisty, owned a twenty-seven percent membership interest in Legacy Pointe, LLC, a company with the sole purpose of acquiring, developing, and selling a real estate project. Hardisty was the Chief Manager of Legacy Pointe and a member of Munson-Hardisty, LLC, the company serving as general contractor and builder on the project. Hardisty reportedly sought out the defendant, Hal Moore, as an investor for the project. Moore invested $1.5 million in Legacy Pointe in exchange for a fifty percent membership interest. Hardisty reportedly agreed to waive a builder's fee on the project in exchange for his twenty-seven percent membership interest as "sweat equity" in Legacy Pointe. Munson Hardisty, acting as builder received a ten percent membership interest in Legacy Pointe.

Continue reading "Membership Interest in LLC is Not a "Security" Under Federal Law When Member is Also a Manager - Hardisty v. Moore (S.D. Cal. Oct. 9, 2012)" »

As discussed in our last post Why Companies that Own Commercial Real Estate Should Hold Title to the Property in a Separate LLC, it is important to keep business and commercial property assets separate from one another to limit the risk of exposing all assets to each potential claim. The liabilities faced by a property owner differ significantly from those faced by a business owner and there is no need to expose all assets to liabilities arising from activities that can be legally separated.

Premises Versus Professional Liabilities

A reasonably effective shorthand for this concept is premises versus professional liability. Nearly all property owners face potential liability for boundary disputes, slip and fall accidents, other dangerous property conditions, environmental conditions such as mold, or inadequate security. Owners of real property also face administrative liabilities like property tax, zoning ordinances, or eminent domain. Business owners face potential professional liabilities and risks specific to their industry or profession including malpractice, product defects, or liabilities related to service or sales contracts.

Using separate entities to own your business and commercial property will keep premises and professional liabilities as separate as possible. This helps protect your business and commercial property from any claims or judgments against the other. Otherwise, real property held for business purposes could be seized to satisfy a judgment against the company. Likewise, your business assets could be affected if a property your business owns has a claim or judgment against it. The best way to prevent any cross-over of liabilities from your business and your commercial property is to maintain each in entities distinct from one another.

LLCs for Commercial Property Investors

An LLC created to hold commercial property protects all members from personal liability arising from claims against owners of the property. Owners of income-producing real estate prefer to operate under an LLC, compared to holding title as an individual because their personal assets, such as stock, bank accounts, vehicles, and other businesses are not at risk if an accident or other incident occurs on premises. Similarly, creditors of an individual member of the LLC cannot attach the assets owned by the LLC.

Tax Advantages

An LLC is the preferred entity for holding and managing real property because it provides certain tax advantages that are not available with a C-corporation or S-corporation. LLC's offer flexible tax treatment as a "flow through" entity. This means the LLC's members report their share of the income or losses on their individual tax returns, similar to a sole proprietorship or partnership.

In contrast, a C-corporation is subject to double taxation, and is taxed at both the corporate and personal level. While an S-corporation is not subject to double taxation, there are negative tax consequences when shareholders want to transfer, sell, or exchange property owned by the S-Corporation to another entity in the form of a 15% capital gains tax on the fair market value of the property minus its original cost. Furthermore, shareholders of the S-corporation must pay income tax on the profit from a transfer of the property to another entity.

A similar transfer or trade of property held by an LLC would not be subject to this income tax. Instead, a transfer or trade of property held by an LLC can be structured to be a tax-free transaction.

Continue reading "Limited Liability Protection and Tax Advantages of Holding Real Property in an LLC " »

Whether you are a professional practice or a small business owner, owning commercial property can be a great financial investment and sound decision for you and your business. Acquiring property for your business allows you, as a business owner, or professional, to avoid the long term costs and uncertainty of commercial leasing while benefiting from possible appreciation of the property. However, owning property also comes with a certain set of risks and liabilities that your business will not incur while leasing. Therefore, as a property owner and business owner, it is important to avoid the critical mistakes discussed below.

Creating an LLC to Hold Commercial Property

The preferred entity to hold commercial property in California and in many other states is a Limited Liability Company (LLC), which offers asset protection and certain tax advantages. Savvy business owners often own their company assets as an S-Corp or LLC, and then create a separate LLC to hold each commercial or investment property they acquire. If the business operates out of the commercial property, the LLC (holding the real property) becomes the landlord and leases space to the business. It is important that there in fact be a written lease agreement for FMV rent, with such rent paid by the business to the LLC. Without this structure in place, the limited liability protection strategy may not hold up when tested by creditors or claimants or upon an audit by the IRS.

Creating an LLC to hold commercial property is a relatively simple and cost effective procedure. As a flow through tax entity, the LLC will typically pay an annual fee of $800 to the State of California and no other income tax. An LLC generally requires less annual maintenance than a corporation, and has a flexible management structure without a board of directors and no officers. An experienced business attorney can help you properly form and maintain an LLC for the purposes of holding commercial real estate.

Continue reading "Why Companies that Own Commercial Real Estate Should Hold Title to the Property in a Separate LLC" »

The California Secretary of State's (SOS) office recently announced the California Business Connect Project, which will enable online access around the clock for business document filings, records requests, and other functions. The current system remains very low-tech, relying extensively on original paper records and consuming vast amounts of man-hours spent filing, copying, and retrieving documents. The SOS has selected a project manager, but is still accepting bids for various aspects of the project's development.

Background of the Current System

According to a feasibility study prepared by the SOS in 2011, the SOS's Business Programs Division (BPD) handles over two million documents every year. The Governor's Office of Economic Development, created to support job creation and "jump-start the economy," sent staff members to tour BPD's facilities in April 2010. The staffers were reportedly struck by the amount of paper and manual labor still required. BPD initiated the idea of automating its processing and filing systems, citing the archaic procedures and high risk of human error associated with its current system.

Aside from the manpower requirements and the general risk of human error, the feasibility study named two other causes for concern with BPD's current system:
1. The archaic filing systems often contain no backups. This means that the state only has a single copy of required legal documents for many California business entities. If a major disaster were to occur, many critical business records could simply be lost.
2. The amount of time needed to process and file new documents has created a massive backlog. In June 2010, the amount of time required to receive a response from the SOS could be as long as fifty-four days. Businesses have indicated that they would pay an extra fee to expedite filing, but an automated system that operates twenty-four hours a day could serve business' needs far better.

Continue reading "California Secretary of State Introduces New Online Filing System for Business Forms" »

As a San Francisco business attorney I frequently advise San Francisco Bay Area companies on business formation issues. In previous blog posts, I discussed sole proprietorships, partnerships and corporations. This post covers California limited liability companies (LLCs).

Limited Liability Companies

A limited liability company is a business entity that provides flexibility to its members by requiring fewer formalities than a corporation, the benefit of limited liability protection to its members, and a flow through tax structure.

Operations and Management

In order to form an LLC, business owners first must file "articles of organization" with the California Secretary of State before conducting business. While a corporation must hold annual meetings and keep accurate corporate minutes, LLCs are not required to do so. In addition, LLCs do not issue stock, however LLCs do issue membership interests. LLC members must enter into a verbal or written operating agreement. Although not required, a written operating agreement is recommended in order to memorialize the terms of agreement between the members and to guide management of the business.

An LLC has no board of directors and similar to a general partnership, members of an LLC have the right to participate in management of the LLC, unless the LLC's articles of organization and operating agreement provide that the LLC is to be managed by a manager or managers. As you can see, the LLC operating structure is much more flexible than a corporation and often is considered an advantage.

Limited Liability Protection

Barring limited exceptions or a piercing of the company veil, like the shareholders of a corporation, members of the LLC have limited liability for the debts and obligations of the LLC. This means that member liability for the acts of the business is restricted to the amount of each members' capital investment.

Taxation

An LLC offers flexible tax treatment as well. A single member LLC is taxed as a sole proprietorship. An LLC with more than one member will be taxed as a partnership. However, an LLC can elect to be taxed as a corporation. Members of an LLC that are taxed as a partnership can agree to share the profits and losses as they see fit and are not limited, as in the corporate structure, to a distribution of profits and losses based on a strict pro rata ownership percentage. The flow through tax structure of a partnership is often an attractive benefit for business owners and investors who elect to form an LLC.

As a "flow through" entity, an LLC does not pay federal income tax. California, however, does tax the LLC according to a gross receipts fee or $800, whichever is greater. In a high revenue business with low profits, the gross receipts tax may be higher than if the LLC elects to be taxed as an S corporation which has a 1.5% tax on corporate profits. Additionally, the S election also would eliminate the state self-employment tax, for which LLC members are typically responsible.

Furthermore, members of an LLC treated as a C corporation split profits and losses the same way that shareholders of a C corporation would. The LLC, electing tax treatment as a C corporation is subject to the greater of an 8.84 percent corporate state income tax rate or a minimum tax of $800 and in the event an S election is made, the LLC would be taxed at a rate of 1.5% of profits.

Due to the variety of factors involved in determining the optimal tax structure and the tax consequences, it is important to seek guidance from appropriate tax and legal advisers regarding your individual circumstances prior to finalizing the tax structure of an LLC or any entity choice.

Sources

State of California Franchise Tax Board, Limited Liability Company (LLC)

Selecting the Right Entity For Your Business and Considerations When Buying or Selling a Business

Continue reading "California Business Entity Choice Part 4: Should We Form A Limited Liability Company (LLC)?" »

Welcome to the San Francisco Business Lawyer Blog. Our goal is to bring you high quality, informative posts relevant to growing companies, established organizations, start-ups, and entrepreneurs. Here you will find topics of interest to business owners and professionals that include many frequently asked questions by our business clients, including business entity formation, corporations, LLCs, partnerships, commercial leases, trademark issues, contracts, business disputes and more. Stay tuned for regular updates and do not hesitate to contact us to offer your suggestions for future posts. If you like what we are doing, we welcome you to share postings, connect with us on social media and subscribe to our RSS feed, by clicking on the links above and at the right of your screen. To learn more about the Kabak Law Group, we invite you to watch the short video below.