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FAQ

 

1. What is a Will and why should I have one?

A Will is a legal document that allows you to determine how you want your property to pass. If you do not have a Will, your property will pass to your heirs according to California law. A Will also allows you to nominate an executor to manage the assets of your estate, nominate a legal guardian to care for and provide for minor children, and allocate or apportion estate taxes.

 

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2. If I have a Will, will I avoid probate?

No. In fact, having a Will assures that your estate will pass through probate. Probate is necessary to ensure that a Will is valid so your assets can pass to loved ones named in the Will.

 

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3. Can I pass all of my assets using a Will?

No. Although a Will can pass most of your assets, assets such as life insurance proceeds, retirement benefits, joint accounts, jointly held realty, assets held in a living trust, and your spouse’s one-half community property interest in any assets cannot be passed using a Will.

 

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4. What different types of Wills can I have?

In California, a deceased person can have a handwritten (Holographic) Will, a Statutory Will or a Will prepared by an attorney. A Holographic Will must be in the maker’s handwriting and must conform to the laws in California recognizing use of handwritten Wills. A Statutory Will is a form Will authorized by California and is created by filling in blanks. A Will prepared by an attorney is a Will that is prepared under the advice of an attorney, who usually oversees the execution.

 

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5. If I want to change my Will in the future, can I?

Yes. Anyone can amend his or her Will by use of a Codicil (an amendment to a Will) or by destroying a previous Will and executing a new one. However, it is advisable to seek the advice of an attorney when changing a Will. A Will that is not correctly amended could cause confusion after death and, often, leads to contests by disgruntled heirs.

 

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6. What is probate?

Probate is a court-supervised process that oversees the administration of a deceased person’s estate. Its purpose is to assure that a deceased person’s debts are paid, the beneficiaries described in the Will ascertained, the executor’s or administrator’s actions are monitored, income and estate taxes are paid, and the assets of the estate are distributed according to the deceased person’s Will. Court supervision is the biggest advantage to probate. It allows for a measure of accountability when disputes are anticipated. The disadvantages of probate are that the process is public, the costs and expenses are usually greater than if an estate were administered through a living trust, and the process could take a year or more to complete.

 

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7. Can probate be avoided?

Yes. Certain property will not have to pass through probate before it can be distributed. They include jointly held property (joint bank accounts, real estate held as joint tenants, etc.), community property (unless one spouse Wills away his or her one-half interest in the community property), small estates (in California estates valued at less than $100,000 can pass by way of a signed affidavit according to the probate code), life insurance proceeds (as long as they are not payable to the estate of a deceased person), IRA’s, 401K’s, retirement accounts, and property passing to a surviving spouse (California allows property to pass to a surviving spouse through a streamlined process called a spousal property petition), and assets held in a living trust.

 

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8. What is a living trust?

A revocable living trust, also known as an revocable inter-vivos trust, is a legal document that allows you to direct how you want your assets to be distributed when you die while allowing you to maintain control of those assets during your lifetime. When a living trust is combined with a comprehensive estate plan, some of the benefits it can provide are the care of disabled and handicapped children (special needs trust), the prevention of taxation of life insurance proceeds (irrevocable life insurance trust), the private administration of a deceased person’s estate after death, the nomination of a successor by the deceased person to manage estate assets in the event the deceased person becomes incapacitated, the benefit of directing how estate assets are to be distributed at death and to whom, the benefit of allowing married couples to take full advantage of their lifetime exemptions to reduce or eliminate Estate Taxes, the option to pass property with limitations established by the deceased person, the option to establish educational funds for children, the option to distribute property to children in trust for the benefit of grandchildren, for the purpose of avoiding the Estate and Gift Tax at the death of the children, to the extent authorized under the generation skipping transfer tax rules, and the benefit of avoiding probate. An estate planning attorney can help you plan and select the appropriate options tailored to your estate planning needs.

 

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9. Are there any disadvantages to having a living trust?

In some cases, yes. A living trust is not subject to court supervision. As a result, a trustee may be able to take advantage of the trust to a greater extent than if the court is supervising the actions of the trustee. In addition, a living trust is generally more expensive than a standard Will, although the difference in cost is nominal when compared to the alternatives of probate and Estate Taxes. A living trust may not be extremely helpful if one is a young single individual without kids and little or no assets. However, one must keep in mind that assets accumulate over time and circumstances change for people. A living trust may also still be important in directing how a deceased person is to be cared for in the event of incapacity or disability. Finally, certain individuals (real estate developers) find there dealings with third parties (banks, title companies, etc.) in connection with real estate may be difficult when title to property is owned by a trust.

 

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10. If I have a living trust, do I still need a Will?

Yes. A Will directs how a deceased person’s assets are to be distributed. When a living trust is created, it must be funded. Funding occurs when assets are transferred into the trust at the time of creation. What could happen is that future assets acquired by an individual or couple are left out of the trust. Having a “pour over Will” directs that any assets held in your name be transferred at your death to your living trust. These assets will have to pass through probate, but distribution will be according to the terms of the trust.  A Will also permits a deceased person to nominate a guardian to care for and provide for minor children.

 

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11. Can I avoid Estate Taxes if I have a living trust?

Merely having a living trust does not mean that you will not be subjected to Estate Taxes. A living trust is a tool that can allow married couples, by effectively planning their estates, to prevent wasting one of their lifetime exemptions to reduce or eliminate Estate Taxes. Each spouse can leave an unlimited amount tax-free to a surviving spouse who is a U.S. Citizen. This is called the marital deduction. Use of the marital deduction will merely defer Estate Taxes. For example, assume that Amy and Brian are married in California with a two-million ($2,000,000) dollar community property estate. When Amy dies, her one-half interest in the estate ($1,000,000) will pass tax-free to Brian as a marital deduction provided that Brian is a qualified U.S. Citizen. Brian would then be the owner of a $2,000,000 estate. However, if Brian were to die in 2002, his lifetime exemption would be $1,000,000, meaning his estate would be reduced by $1,000,000 for purposes of computing the Estate Tax. This would leave $1,000,000 subject to Estate Taxes, which would amount to approximately $435,000. If Amy and Brian had engaged in proper estate planning, they could have used a revocable AB Living Trust to eliminate any Estate Taxes. The AB Living Trust works like this. When established, the trust is funded with $2,000,000 and both Amy and Brian are named as trustees and manage the assets for their benefit. At Amy’s death, the trust splits into two separate trusts, Trust A and Trust B. Each trust would have $1,000,000 in it. Amy’s exemption would reduce the assets in Trust A by $1,000,000, leaving no Estate Taxes due. Brian can live off of the income from Trust A until his death. When he dies, Brian’s lifetime exemption of $1,000,000 will reduce the assets of Trust B to zero, leaving no Estate Taxes due.

 

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12. What are Estate Taxes?

The Estate Tax is a Federal Transfer Tax. Congress allows each of us to pass a certain amount of assets tax-free during our lifetime. This is known as the lifetime exemption. Currently, each individual can pass $1,000,000 tax-free in the form of lifetime gifts or at death. Any amount transferred in excess of this amount is subject to either a Gift or Estate Tax. This exemption will increase for Estate Taxes (but not for Gift Taxes) to $1,500,000 in 2004 and 2005, $2,000,000 in 2006-2008, $3,500,000 in 2009, and is repealed in 2010, when the Estate Tax is abolished. In 2011, Congress can reinstate the Estate Tax. The Gift Tax rates for will gradually be reduced until it reaches 34% in 2010. Each individual can give away $11,000 annually to anyone, without having the gift reduce the lifetime exemption. In 2002, the Estate Tax rate starts at 41% and increases to a peak of 50%.

 

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13. What is included in my estate for purposes of determining Estate Taxes?

Almost everything you own will be included in your estate to determine Estate Taxes. This includes one’s home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from life insurance policies payable to or owned by the estate. These items are reduced by one’s debts at death, expenses of administration of the estate (such as executor, legal, and accounting fees), certain medical expenses, funeral expenses, marital and charitable deductions and certain losses. The value of the estate after deductions is subject to the Estate Tax to the extent it exceeds the exemption amount established by Congress at the time of death.

 

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14. How can I remove assets from my estate without being subject to estate or gift taxes?

You can give up to $11,000 annually to anyone you want tax-free. So, if you and your spouse each give $11,000 to your three children and two grandchildren, you can give away $110,000 annually. This is a great way to reduce the size of your estate. Other ways to reduce your estate include use of the Irrevocable Life Insurance Trust, the Qualified Personal Residence Trust, the Grantor Retained Annuity Trust and Grantor Retained Unitrust, the Family Limited Partnership, and the Charitable Remainder Trust.

 

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15. What is an Irrevocable Life Insurance Trust?

You can also establish an irrevocable life insurance trust to remove your life insurance from your estate. The irrevocable life insurance trust becomes the owner of your life insurance policy. However, you must live at least three years after the transfer. At death, the life insurance proceeds will not be in your estate. You can name the irrevocable life insurance trust as the beneficiary of the policy. When you pass away, the life insurance proceeds will be paid according to the instructions of the irrevocable life insurance trust (i.e. to your spouse, children, etc).

 

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16. What is a Qualified Personal Residence Trust?

You can establish a Qualified Personal Residence Trust to transfer your home out of your estate. This works by transferring your home into a trust for an established time period for the benefit of your children. You can continue to live at your home. When the period has expired, the home is transferred to your children and is not included in your estate. If you pass away before expiration of the period established in the trust, your home is included in your estate. At the time of the transfer, the value of your home will be discounted for gift tax purposes since your children will not receive the home until some future period. The discounted value of the home will be used to determine the gift, allowing you to maximize your lifetime exemption.

 

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17. What is a Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)?

You can establish a GRAT or GRUT assets such as a stock, a business, real estate, etc., for a fixed number of years while still retaining the income. If you do not live until the set period expires, the asset is included in your estate. After the set period expires, the asset is passed to your children at a discounted value since they would not be receiving the asset until some future period. This enables you to remove investment assets from your estate while allowing you to retain the income for a fixed period.

 

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18. What is a Family Limited Partnership?

You can reduce your estate by transferring a family-owned business, real estate, stock, etc., to your children by establishing a Family Limited Partnership (FLP). The benefit of a FLP is that you and your spouse can maintain control over your assets as the general partners. Each of your children can be given limited partnership shares, which can be given annually to make use of the $11,000 annual gift exemption. The FLP allows both spouses to retain control no matter how much of the assets are transferred to the children. In fact, as limited partners, the children cannot sell or transfer their shares without the parents’ approval. As for the examples above, the shares of the limited partnership are discounted since there is no market for them.

 

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19. What is a Charitable Remainder Trust?

You can reduce your estate by transferring establishing a Charitable Remainder Trust. By doing so, you can reduce your estate and while donating to a charity of your choice. The Charitable Remainder Trust is useful for appreciated assets (stocks, real estate, etc). The asset is transferred to an irrevocable trust, removing it from your estate and providing you with a charitable income tax deduction. The trust then sells the asset at the fair market value, but is not required to pay capital gains tax. You retain a lifetime income stream from the trust that is higher than you would otherwise receive since the principal is not reduced by capital gains tax. At your death, your favorite charity receives the assets.

 

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20. What is the Generation Skipping Transfer Tax (GST)?

The GST is an additional transfer tax that applies when a transfer “skips” a generation. An example of when this might occur is when parents leave part of their estate to grandchildren. In the past, wealthy grandparents made use of trusts that left a life income to their children. On the death of their children, the trust would leave a life income to the grandchildren. On the death of the grandchildren, the principal would then be distributed to great grandchildren, avoiding Estate Taxes at the prior “skips” in generations. This allowed for the accumulation of wealth and appreciation of assets. Congress then added the GST to impose a transfer tax for individuals bypassing their children’s generation. For 2002, the GST is at a 50% tax rate. The GST is in addition to the Estate Tax, which is also taxed at a 50% rate in 2002. The good news is that in 2002, each individual is allowed a $1,100,000 GST exemption, which can be used with a revocable living trust to allow a husband and wife to take full advantage of their combined $2,200,000 GST exemption while reducing or eliminating Estate Taxes with the trust.

 

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 REAL ESTATE

 REAL ESTATE OPTIONS / LOAN MODIFICATIONS


Reinstatement (Cure): The easiest way to cure a delinquency is to pay the lender everything is owed. This includes missed payments, any late fees associated with these payments, and any other fees which the lender charges as a result of your delinquency. The reinstatement period varies from state to state. In California you have the legal right to reinstate your loan up until 5 business days prior to the trustee's sale.

 

Repayment Plan: This is a written agreement between you and the lender to help you make up missed payments. Generally these agreements require higher payments than the regular monthly mortgage amount for a short period of time, until the loan is brought up-to-date. You must not agree to a payment plan you cannot honor; but you must be willing to pay what you can realistically afford. If you fail to meet the terms of this agreement, you will probably receive no additional help from the lender.

 

Modification: A loan modification involves changing one or more terms of a mortgage. Modifications can be considered to reduce the interest rate of the mortgage, change the mortgage product (from an adjustable rate to a fixed rate, for example), extend the term of the mortgage or capitalize delinquent payments.

 

Forbearance Agreement: The lender will allow you a period of time (3 to 6 months generally) during which to make either lower payments or no payments at all. Unless the loan term is extended, later payments generally will have to be higher than the original monthly mortgage payments until the loan is up-to-date again. Special Forbearance: (Applicable to FHA-insured loans only) The lender may allow partial payments for up to 18 months to allow the borrower to get back on track. The lender may also offer ""partial claim"", or advance funds, to help you become current. Refinance: This will usually not be an option if you are seriously delinquent on the current mortgage (more than 3 payments late). If you are current, however, and there is equity in the property, this might be an option.

 

Second Mortgage (Equity Loan): Possible even if you are seriously delinquent if there is enough equity in your home. Not generally feasible when you are having trouble making first mortgage payments - a higher interest rate and another payment would only be compounding the problem. May be used to eliminate consumer debt.

 

Bankruptcy: While this may seem to be the most unpleasant option, it may allow you to save the property. A Chapter 13 bankruptcy may help you save your home from foreclosure if all other options have failed. You will need to consult a bankruptcy attorney. Legal advice is always recommended prior to filing.

 

Foreclosure: You may decide not to, or may not be able to, make any more payments. When this happens, the lender will foreclose and take your home. The amount of time this takes varies from state to state. In California, this process takes approximately 4 months from the recording of the Notice of Default (see Foreclosure Timeline for California).

 

NOTE: Some states allow the lender a deficiency judgment for the difference in value between the mortgage balance and any loss the lender might suffer where property values have declined. In California there is no deficiency judgment allowed on foreclosure of purchase money mortgages (the one you use to buy your home) but there may be deficiency judgments on refinanced home loans, VA loans, or junior lien loans (2nd mortgages). Deficiency judgments are very rare.

 

Deed in Lieu of Foreclosure: This option, which must be done with the lender''s permission, means you deed your home back to the lender. This saves the lender money and time and you avoid having a foreclosure on your credit report. Short Sale (Pre-Foreclosure Sale for FHA-insured loans): In this case you will petition the lender to allow you to sell the house at its current market value which is less than the loan balance. If the lender agrees, you can enlist the aid of a realtor and try to sell your home even though the purchase price will be less than the outstanding balance. A lender may agree to a short sale because if the property is foreclosed upon, the lender will have to sell the house anyway. With a short sale, you save the lender time and foreclosure expenses by finding someone who wants to buy your house.

 

Credit Considerations: Your choice of how to handle your delinquency may affect your credit report. A foreclosure will remain on your credit report for 7 years. If you choose to let your home go back to the lender through foreclosure, you should keep accurate records of your attempts to resolve the problem. Assuming the rest of your credit is good, you should be able to buy another home in 2 years. If you choose deed-in-lieu or short sale, negotiate with the lender to re-age your credit report to remove the derogatory information and bring your account current. We strongly urge you to seek the advise of your accountant. KLKLAW GROUP, P.C. does not give tax advice.

 

NOTE: Be sure to consult a tax specialist to discuss the tax implications of whatever option you pursue. In foreclosure, there are usually no tax implications other than possible capital gains if you have owned a home before and have rolled your gain into the property being foreclosed. When you use a deed-in-lieu or short sale and there is negative equity, you may be responsible for ordinary income taxes on the amount of the debt that the lender forgives (difference between your mortgage balance and the value of your home). Please check with your tax specialist.

 

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 FAQ - BUSINESS PLANNING

 What is a business lawyer?

A "business lawyer" or "business attorney" generally refers to a lawyer who represents business entities of all types. These include corporations, LLCs, general partnerships, limited partnerships, sole proprietorships, associations, organizations and joint ventures. Typically business lawyers also represent individuals who act in a business capacity (owners, proprietors, principals, managers, partners, directors, officers, controlling shareholders, entrepreneurs). Some business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). When we use the term "business lawyer" we think of all three of the above. We represent companies, owners, entrepreneurs, individuals in a business capacity and other individuals who have relationships with business entities. Definitions of related terms: The terms "corporate attorney" or "corporate lawyer" can refer to a business lawyer, or a business lawyer who primarily works for corporations.

 

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 Do I need a business lawyer & can I afford one?

If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is yes. A business lawyer can advise you of the applicable laws and help you comply with them. A business lawyer can help steer you away from future disputes and lawsuits. A business lawyer can help protect your tangible and intangible assets. A business lawyer can help you negotiate more favorable business transactions. Having a business lawyer can project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance. Unlike some larger firms, we value our role as a business attorney and counsel to start-ups and small businesses. We realize that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. We are sensitive to that concern and actively work with you to control legal costs. We believe it is in both our interests to discuss the scope of work and the costs involved before we provide any legal services. We can provide estimates or fixed pricing plans so that your company has greater cost certainty.

 

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 When should I seek a business lawyer?

 You should seek a business lawyer if you or your company is . . .

  • organizing a new business. It has been my experience that those who rely on do-it-yourself incorporation kits to save a few bucks overlook and fail to understand the application of the various laws that a business entity must observe and the fix can often be many more times than the initial cost that would be spent in hiring an attorney to organize the business. If you form a corporation or a limited liability company (LLC), you must make sure that you properly capitalize the company, observe legal formalities and properly execute documents and agreements. Otherwise the liability protection offered by the corporation or LLC could be lifted and you can be held personally liable for claims against the corporation or LLC. This is often referred to as "piercing the corporate veil." A company must also ensure that it complies with certain legal requirements or it may become suspended. If you go to the California Secretary of State's website and search companies, you will find a surprising number of suspended companies. If your company enters into agreements as a suspended company, the agreements are voidable (which can allow the other parties to simply void the agreement, at their option). We can help you decide on the type of business entity that is best suited for your company. We can also prepare and file the organizational documents for the business (articles of incorporation or organization; bylaws, partnership or operating agreements; incorporator / organizational certificates, minutes of initial board of directors or managers meeting; minutes of initial shareholder's meeting). We can also provide information about business licenses and assist you in obtaining tax IDs. We can also issue share certificates, with proper legends. Since our attorneys are very experienced with this process, we can do so at a very reasonable cost.

  • hiring your first employees. Many employee disputes and lawsuits occur because companies fail to clearly define the employment relationship with the employee from the outset. Companies that fail to have employees sign invention assignment and non disclosure agreements risk future claims on its intellectual property. Companies that accept money from employees without proper documentation risk future ownership claims. Companies who fail to pay wages on a timely basis or breach applicable employment laws are subject to serious consequences. We can prepare employment agreements, invention assignment agreements, and non-disclosure agreements. We can advise you with respect to common traps that lead to expensive employee disputes regarding intellectual property ownership and equity ownership. We can also help you in the event of a later employee termination.

  • offering or issuing stock, options, warrants or convertible notes. The offer and issuance of stock, options, warrants, convertible notes and other types of securities are heavily regulated by both state and federal securities laws. The registration of stock and security offerings and preparation of the disclosure documents can be a timely and expensive proposition. Legal compliance is complex and the consequences can be severe. The company and its directors, officers and advisors may be held liable for losses incurred by the shareholders or security holders if securities laws are violated. Even worse, those who violate certain anti-fraud statutes can be subject to criminal penalties. We can advise you as to the applicable securities laws. We can typically structure the offering so that the Company can qualify for an exemption to registration. We also can help prepare or review the disclosure documents that accompany the offering.

  • planning to create and develop new products and services. It is important to protect the ownership of all of the company's creative work and intellectual property including inventions, patents, trade secrets, trademarks and copyrights. We can help you take steps to protect your creative works and, in the case of patents and inventions, we can assist you in securing a competent patent attorney.

  • launching new products and services to your customers or clients. When you sell a product or render services, you are in a position to set or initiate the terms of the underlying contract. Surprisingly, companies do not always take advantage of this fact. We can prepare product, sales, service or service level agreements that you can present to your customers or clients. We can draft these agreements to address your specific products and services and with language that best protects your interests.

  • entering into third party prepared contracts. Leases, supplier agreements, distribution agreements and other contracts drafted by third parties are often one sided in the other party's favor (e.g. escape clauses, disclaimers, penalties, provisions shifting liability to you). We can review your third party contracts, look for problem areas and prepare appropriate contractual amendments or addendums.

  • seeking to resolve internal disputes. Disputes among co-owners, partners, shareholders, directors, officers and key employees can tear a company apart, if left unresolved. We can advise you regarding your legal options and suggest practical ways to help resolve disputes and differences within the company. We can help communicate (and if necessary, negotiate or mediate) an acceptable resolution.

  • acquiring another business. Acquiring a business entails a morass of business, tax and legal issues. We can help structure an acquisition in the most suitable manner, conduct due diligence on the business to look for unforeseen liabilities and risks, negotiate the terms of and document the transaction. We can provide assistance in securing key personnel, valuable intellectual property and the assignment of the acquired business's contracts. We will also help you comply with all the regulatory and contractual requirements necessary to close the transaction including the preparation of a legal opinion.

  • selling your company. Selling a company entails a morass of business, tax and legal issues and affects shareholders, employees and customers. We can advise you on your duties to your shareholders, employees and customers and can help you structure the transaction and negotiate terms most favorable to you. We can also provide advice with respect to tax consequences, restricted stock transferability, earn-out provisions, employee contracts and non-compete provisions. We will also help you comply with all the regulatory and contractual requirements necessary to close the transaction including the preparation of a legal opinion.

  • seeking to continue the business upon the departure of a key person. In small businesses, the loss of a key person can be devastating. Death, disability, illness, retirement, voluntary departure or involuntary termination can lead to the sudden departure of a key person. Without a succession plan in place, the company's own survival may be in jeopardy. We can help advise you as to how best to address these contingencies. We can prepare a buy sell agreement, a shareholders agreement or an employment agreement to address your specific concerns.

 

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 6 REASONS “Why Should I Get Incorporated?”

 Asset Protection

It’s not just about running your business, it is about running your business right. Business is risky, but you can reduce the risks by incorporating. For example, it doesn’t matter if you work out of your house, buy investment property, start a restaurant, retail store or construction company, take on a profession or provide consulting services. Remember, a properly structured corporation provides a shield between your personal assets and the activities of the business.

 

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 Tax Savings

One advantage of structuring a corporation correctly is the increased tax benefits associated with being incorporated. By law, corporations are entitled to many tax deductions that are not available to individuals, sole proprietorships or partnerships. Those tax benefits could save you thousands of dollars annually. A properly structured corporation can protect your personal assets, reduce your taxes and provide a universe of pre-taxed “fringe benefits” such as retirement plans, deferred compensation, annuities, life insurance and medical reimbursement plans.

 

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 Increased Privacy

California has no requirement that the names of shareholders (owners) be filed with the State. California requires only 1 person to be a Shareholder (owner), Director, President, Secretary, and Treasurer. Corporations can provide privacy, anonymity and secrecy not available to sole proprietorships or partnerships.

 

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 Credit and Capital

Over time, it may be possible that your corporation could carry its own credit rating, making it possible for your corporation to raise capital and secure credit with financial institutions, and better rates with your business partners. To enhance your chances of obtaining a higher business credit rating, separate your personal credit from your business credit. This means that you want your business to be structured as a corporation or an LLC, NOT as a sole proprietorship or partnership where you and your business are one in the same. It is best to separate business and personal credit as soon as possible. It’s also important to do most of your business with companies that will report to the major credit reporting agencies. (Source: Dunn & Bradstreet, Business Credit Reporting Agency)

 

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 Flexible Benefits

The benefits of incorporating aren’t just for big business; they’re for SMART BUSINESSES. Incorporating allows small, even a one-person business to experience the full benefits corporations provide.

 

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 Credibility

When you do business showing an “INC” or “LLC” behind the company name it provides a level of credibility. It shows you are substantial and no one knows how big your organization is. It could be just you, or a 100 people in your company.

 

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 WHAT IS A SOLE PROPRIETORSHIP?

A person opening up his or her own business can choose simply to form a sole proprietorship. This is the most basic form of business where the owner generally needs only to register with the local municipality and the county. Sole proprietorships offer the cheapest form of business as the State levies no additional taxes on the business as opposed to a limited liability company or corporation. The business also offers no changes to filing taxes as all of the revenue earned by the business flows directly to the owner and is taxed as income to the owner. For individuals who want to operate a small business, a sole proprietorship offers the best option to serve his or her needs.

 

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 WHAT IS A PARTNERSHIP AND LIMITED PARTNERSHIP?

Partnerships offer the same basic principles of the sole proprietorship. The major difference between the sole proprietorship and the partnership is that the partnership involves more than one person. A group of individuals forming a partnership should enter into a partnership agreement. Partnerships do have more specific regulations prescribed by the California Uniform Partnership Act passed in 1994 and amended in 1996. Partners may also choose to file the partnership with the State.

Limited Partnerships (“LP”) offer more protection than a basic partnership. In a LP, partners have two categories: general partners and limited partners. General partners bear full responsibility for all activities of the business, including daily operations, similar to the liability under a standard partnership. Limited partners only have liability up to the extent of their interest in the business. Limited partners, however, cannot engage themselves in the daily activities and can only perform services specific to their limited involvement in the business. To form a LP, general partners must register the business with the State of California

 

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 WHAT IS A LIMITED LIABILITY COMPANY?

The current trend for businesses not needing to issue stock and form a corporation is to create a Limited Liability Company (“LLC”). The LLC most notably offers its owner protection from personal liability and can be created by a sole business owner. People, however, over estimate the protection the LLC initially offers. When a person first forms the LLC, any contract, loan, or real estate agreement will often require collateral to guarantee the obligation. Overtime, the owner can separate him or herself from these agreements and have the LLC accept full responsibility for the obligations.

The LLC will also need to obtain insurance to protect against tortuous acts depending on the scope of the business. It also does not shield against fraud. In the early stages of the business, the LLC doesn’t offer substantial protection one might envision because the insurance will cover most major issues, lenders will require personal responsibility, and the business cannot protect against intentional misuse. If a person wants to open up a small home business, or a low revenue business to help with tax write offs, an LLC may not be an ideal choice for the business. The LLC, however, offers several clear advantages to larger solely owned businesses, partnerships, and LPs by offering individual protection when the business has sufficient collateral.

To form an LLC, a person need only file the articles of incorporation with the State of California and pay all necessary fees. The business should also consider getting a fictitious business name in the county where domiciled to prevent other businesses from opening as a DBA under the same name.

 

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 WHAT IS A LIMITED LIABILITY PARTNERSHIP?

Any profession requiring a license cannot form an LLC in California. These typically include doctors, lawyers, and accountants. The state has instead permitted licensed individuals to form Limited Liability Partnerships (“LLP”). The LLP acts as a hybrid LP and LLC. Unlike the LP, the LLP need not have a general partner. Each partner, instead, individually has protection from any claims against the business. Unlike the LLC, the LLP must have two or more members. To form an LLP, the partners will need to file with the State of California and pay all necessary filing fees.

 

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 WHAT ARE CORPORATIONS?

Corporations continue to offer the best solution for large capital enterprises. Start up companies who have investors will want to establish a corporation to offer shares as collateral for investments. Corporations also ensure future investment opportunities through the issuance of stocks and bonds. If the intention of the individuals or partners is to develop a high risk or quickly generate large volume of revenue, the corporation option provides the most flexibility and best option for all of the involved parties.

Incorporation of the business will depend upon the goals of those forming the business. If the business will not generate substantial revenue initially, the parties should consider choosing and alternative other than a corporation to limit tax liability. If the parties decide to form a corporation under these circumstances, they are better served by filing in their own state. When individuals form a corporation out of state, they still must pay taxes to their state for operating a “foreign corporation.” A foreign corporation means a business incorporated in a state other than where a majority of the business occurs.

In high revenue or high-risk corporations, traditional options of filing in Delaware, Nevada, or Wyoming, become viable options. Depending on the state of choice, each offer different benefits depending on the needs of the corporation.

Individuals or groups considering opening a corporation should also determine whether or not to form a “S-Corp” or “C-Corp.” S-Corporations, often referred to as “S-Corps,” have been outdated mostly with the use of LLCs. The S-Corp allows for the structure and benefits of a corporation but permit flow through taxation. S-Corps also have limitations as to how much revenue they can generate and who can hold an interest. Because of the benefits of LLCs and limitations placed on S-Corps, on most occasions, individuals or groups should considering entering into an LLC prior to a S-Corp.

C-Corporations, C-Corps, are the most commonly envisioned traditional corporation. The C-Corp holds its own revenue and disperses payments either as salaries or dividends. As a traditional corporation, the C-Corp allows immense flexibility with governance, issuance of stock, and ability to raise capital. C-Corps also have greater flexibility than other business entities to open subsidiary businesses. Because of the flexibility, ability to raise capital, and protection, the C-Corp remains a often used for larger or rapidly growing businesses. Opening either an S-Corp or C-Corp require registering with a state, drafting articles of incorporations and by laws, and complying with local regulations. To learn more, contact a local attorney and accountant who can better advise as to the implications and benefits.

 

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