Articles Posted in Partnerships

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llc.jpgLimited liability companies combine parts of both corporations and partnerships. Because they’re a hybrid, LLC’s can be more difficult to setup. One part of this process involves choosing a management structure to fit your specific LLC.

Single Member or Multiple Member LLC

The difference here is implied in the name. Single member LLC’s have only one owner, while multiple member LLC’s have at least two. Choosing one over the other typically comes down to financing. Starting a single member LLC comes with a higher level of risk as the profits and losses are reported on the individual’s tax return. However, as the sole owner, you don’t have the stress of running a company with another person.

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If you are an employer in San Jose, you are most likely aware that on January 1, 2014, the minimum wage increased to $10.15 per hour for your business; California’s minimum wage increase was to $9 per hour. In addition to new employment laws, there, there have been other new laws that affect businesses in 2014, such as the all new California limited liability company act. But one law actually applies to all business entities with an Employer Identification Number (“EIN”), including entities such as corporations, partnerships, limited liability companies, and even nonprofit organizations. As of January 1, 2014, any entity with an EIN must notify the IRS of a change of (1) a mailing address, (2) a business location or (3) the identity of a “responsible party.” A change in a company’s mailing address or business location is pretty clear, but the identity of a responsible party may not be so clear.

If you are not sure who the “responsible party” was initially, check the Form SS-4 application that was filed initially by the organization to obtain its EIN, and it will be the person or entity listed as responsible on that form. Then, look at the instructions to Form 8822-B to determine if your responsible party has changed. The instructions define a responsible party as “the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.” If the entity’s original responsible party at the time of filing the Form SS-4 is no longer affiliated with the organization or no longer fits that definition, then the entity must use Form 8822-B to let the IRS know.

Form 8822-B must be filed within 60 days of the change. If such a change occurred before January 1, 2014, and the entity has not previously notified the IRS in some other manner, Form 8822-B must be filed before March 1, 2014. If you no longer have a copy of the SS-4 Application or remember who was named as the “responsible party,” you may wish to file a Form 8822-B before March 1, 2014.

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It is that time of year again. Every year in the fourth quarter, businesses in San Jose and all over the United States are looking at the quickly approaching year-end and trying to figure out what they can do now before it is too late to save on taxes for 2013. This is especially true for small businesses, where every dollar of deduction is important because it hits the owner(s) directly in the pocketbook. My law firm is an LLP, so all items of profit and loss flow through to the partners. Therefore, this is the time of year that I look very carefully at how much money is available and what my law firm is going to need or want to buy in the next few months. Do we need a new copier? Do we want to upgrade our software? If so, let’s do it in December rather than January and get the deduction this year. With this in mind, here are a few things for business owners to consider before 2013 is over.

Purchase Equipment for Your Business

Make your equipment purchases before year-end. In 2013, up to $500,000 of both new and used assets purchased and actually put in use by December 31st can be expensed. This means you get a dollar for dollar deduction this year, without having to depreciate the asset over its useful life. This is really helpful for partners that want a deduction for every dollar spent so that they do not have taxable profits without available cash for distribution. But this benefit is limited. If you purchase and put in place more than $2,000,000 of assets during 2013, the $500,000 expense is phased out on a dollar for dollar basis. These limits will likely be even lower next year, so take advantage of them now.

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Small businesses dominate the U.S. economy. According to the U.S. Small Business Administration (SBA), 99% of all independent companies in the U.S. have less than 500 employees. As a small business attorney in San Jose, most of the time I am working with clients to form new businesses. However, as we all know, not all businesses succeed. Recently I was counseling a client with regard to the sale of her retail store. She had worked hard building the store into a business that could support her needs, but it was time to retire. Rather than going through the hassle of selling the business as a whole, she decided to simply sell the inventory to a competitor and shut the doors. However, shutting down a company can still be a hassle, and if you forget to do one thing it could result in a big liability later.

So, what does it take to shut down a small company? Here is just a short to-do list of the basic items common to most small businesses. This list does not take into account the added complexities of a business with multiple owners.

1. Talk to your accountant, attorney, financial advisor and any other professionals that may be able to assist you in a smooth closure of your business.

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In Silicon Valley, home to many large technology corporations and thousands of innovative startups, businesses need to move quickly to stay ahead of the competition. As a small business attorney in San Jose, I have formed countless of limited liability companies (LLCs), partnerships and corporations with the Delaware and California Secretaries of State over the years. And one of the first questions my eager small business clients ask me in our initial meetings is almost always, “How long will it take to form my company?”

For many years my answer was that we could have the filed Articles of Incorporation (for a Corporation), Articles of Organization (for an LLC), or Certificate of Partnership within about a week. When the California Secretary of State slowed down a few years ago, I had to tell clients that it could take as much as several weeks. However, in the last year or so the delays crept up to three months or more for the California Secretary of State to process and return a business filing.

Of course, California does provide a 24-hour expedited filing option, for an additional $350 over the usual filing fees. In my more cynical moments I have had to wonder whether it was the California budget crisis that was causing filing times to slow down because of lack of resources, or if the Secretary of State was purposefully taking longer to return routine filings in order to force virtually everyone to pay the “rush” fees.

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Every corporation, limited liability company and limited partnership, that either forms in California or registers to do business in California must pay an annual minimum franchise tax of $800. However, I just read an article in Spidell’s California Taxletter that really annoyed me (Volume 34.7, July 1, 2012, pages 75-76). The article, entitled “Midyear switch from S to C corporation means an extra $800” says that when a corporation files two short year returns for one calendar year, each return is subject to the $800 minimum tax even though the corporation is the same entity for civil law purposes. Because it is changing its tax status, it is two different entities for tax purposes and therefore must pay the minimum tax twice in one year. As a corporate and business attorney, I am sensitive to this issue since many of my clients are small businesses or partnerships in San Jose, Santa Clara and other parts of Silicon Valley, and every dollar counts when you are running a small business.

This could be an issue in many midyear circumstances, including:
• When an S corporation loses its S election
• When an LLC switches from single member to multiple member
• When an LLC switches from multiple member to single member
• When a limited partnership changes into a limited liability company
• When 50% of the ownership of a limited partnership or limited liability company changes hands
• When an LLC elects to be taxed as a corporation, or revokes such an election
• If an entity changes accounting periods resulting in two short-period returns

Although this may look reasonable on the surface of one tax return independently, when you look at both returns together this looks like double-dipping to me. If one entity has to file two tax returns for one calendar year, I think the entity should get credit in the second tax return for any minimum tax already paid for that entity for that year. However, with California’s ongoing budget crisis, I know this argument will fall on deaf ears. Therefore, I applaud Spidell’s California Taxletter for informing tax practitioners of this tax trap. I’m hoping California business owners, as well as out of state owners with businesses registered in California, will read this blog and avoid inadvertently paying double minimum taxes. As a California business lawyer, I will do what I can to structure deals for my clients to avoid this double tax.

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As a Silicon Valley business lawyer, I have many clients that are limited liability companies, partnerships, and corporations which own real property in California. It is common knowledge that when property changes hands in California, the property will be reassessed (unless an exception applies). However, people often forget that similar rules apply for business entities like corporations, partnerships and LLCs that own real property, when interests in the business entity change hands. As of January 1, 2012 there are some new rules and some higher penalties regarding reporting a change of ownership or control of real property in California. The required period for reporting has been extended from 45 to 90 days. The maximum penalty is now $5,000 for property eligible for the homeowners’ exemption and $20,000 for property not eligible for the homeowners’ exemption.

A change of ownership can happen in one of two ways:

1. Change in Control of a Legal Entity: If real property is owned by an entity and any person or entity gains control of that entity through direct or indirect ownership of more than 50% of the voting stock of a corporation or a majority interest in a partnership or LLC, the real property owned by that entity is considered to have undergone a change in ownership and must be reappraised.

2. Cumulative Transfers by Original Co-Owners: If real property is owned by an entity and over time voting stock or ownership interests representing more than 50% of the total interests are transferred by the original co-owners (in one or more transactions), the real property owned by that entity is considered to have undergone a change in ownership and must be reappraised.

There is no change of ownership when the direct or indirect proportional interests of the transferors and transferees do not change.

For legal entity transfers, the Form BOE-100-B Statement of Change in Control and Ownership of Legal Entities must be filed with the Board of Equalization in three circumstances. The personal or legal entity acquiring control of an entity must file when there is a change in control and the legal entity owned California real property on the date of the change. The entity must file when there is a change in control and it owns California real property. An entity must file upon request by the Board of Equalization. Source: Spidell’s California Taxletter, Volume 34.2, February 1, 2012

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Whether your company is a large manufacturer corporation in San Jose or a small service partnership in Los Gatos, you will eventually be forced to deal with terminating an employee. Terminations can be especially daunting because they are one of the most common reasons companies are sued. Therefore, whenever possible, it is important to plan and prepare for a termination before actually firing the employee.

I recently helped an LLC in Santa Clara set up a progressive discipline plan for their company in order to set up systems to assist management and employees before someone gets to the termination stage. Before an employee is fired, many companies use a form of progressive discipline when dealing with employee problems. Under progressive discipline an employee receives greater disciplinary measures when employment continues to be unsatisfactory. It is imperative that all disciplinary actions are documented in writing. If a system of progressive discipline is used, all managers should be trained on that system. If managers are not properly trained, a disgruntled employee may have a stronger claim for wrongful discharge than if the system had not been used at all. Whether a system of progressive discipline is used or not, it is critical that all disciplinary actions be documented.

If a termination is inevitable, you should have a plan in place before firing an employee. However, there are times when you must fire an employee immediately, without any prior planning, because he has done something that poses a threat to other employees, your company or your clients. Prior to termination, you should review any termination procedures in the employee handbook, to the extent they exist, to ensure that your company is following its own procedures. If you are worried about an employee making a claim against the company upon termination and you want to request the employee release the company from all claims, you should contact an attorney to assist you in preparing a severance agreement.

On termination, you must provide the former employee with the final paycheck including any accrued but unused PTO or vacation pay, a change of status notice, and the EDD pamphlet “For Your Benefit, California’s Programs for the Unemployed.” If the employee is a shareholder or option holder, you should review all applicable documents prior to the termination for notices or deadlines related to termination of employment. However, do not give the employee legal or tax advice regarding those documents or their rights.

When conducting a termination, conduct it in a neutral, private place such as a conference room. Have the final paycheck and change of status notice ready for the meeting. If you are offering a severance agreement, have that agreement prepared as well. Many employees will not sign the severance agreement immediately so be sure to give them the allotted time in the agreement to sign it and don’t give the employee any severance payments until the severance agreement has been signed, or 8 days later if the employee is over 40 and therefore subject to age discrimination rules.

You should always have two managers present during a firing. During the meeting, tell the employee within the first few minutes that he is being fired and tell the employee why he is being terminated. Although you do not need a reason to fire an at-will employee, you may not do so for the wrong reason (e.g. discrimination), so be careful in what you say. Also, if you say the termination is a result of restructuring, but the reason is really poor performance, the inconsistency may be used against you if the company is sued. Do not argue with the employee and do not be so complimentary that the employee wonders why he is being terminated. You are not required to give employees a written reason for termination. However, if you decide to, be sure that your legal counsel reviews those reasons. Avoid any reference to anything that could be considered evidence of discrimination, especially if you are terminating someone who is in a protected class. Always be courteous to the employee. You should also explain any benefits, such as COBRA, that the employee may receive. Have someone take notes during and after the termination to document the process and what was said at the meeting. Lastly, you should remind the employee of any continuing obligations to the company, such as confidentiality.

Once an employee has been terminated, be sure to get any company keys, cell phone or laptop that the employee had. Also be sure to change phone codes, computer passwords, alarm codes or other passwords that the employee may have had access to.

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In my San Jose law practice, I often meet with clients who tell me they want to form a certain type of entity, and then proceed to tell me some facts that actually disqualify them from that form of entity. Even worse is when the client tells me that some other advisor told them they should be that form of entity. Recently, I met with a Cupertino real estate investor who said his financial advisor told him he should form an LLP for his property (he was not eligible to be an LLP). In Silicon Valley, we have a lot of do-it-yourselfers who form their own company online and then regret their ill-informed choice of entity and have to pay an attorney a lot more to fix the problem than they would have paid to do it right in the first place.

Here are some basic facts about LPs, LLPs and LLCs in California to help you make a more knowledgeable initial decision.

LP: This stands for “Limited Partnership.” In a limited partnership, at least one partner must be a general partner, which means that partner will be personally responsible for any liabilities of the partnership, as well as partnership decisions. The limited partners are not responsible for partnership liabilities, but also do not have any say in the management of the partnership.

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Since 1995 only attorneys, architects and accountants were eligible to practice as a limited liability partnership in California. However, as of September 30, 2010 new rules now allow engineers and land surveyors to take advantage of the LLP form of entity as well.

Although the law currently only extends until January 1, 2016, this is still great news for engineers and land surveyors that may have wanted a liability protection entity for their businesses, but did not want to deal with the hassle of annual meetings and minutes required of a corporation. These businesses are not eligible to be limited liability companies (LLCs) because of the restriction in the LLC Act preventing any business that requires a license or certification under the Business and Professions Act to be an LLC in California.

Section 16306(c) of the California Corporations Code provides in part that: “… a partner in a registered limited liability partnership is not liable or accountable, directly or indirectly, including by way of indemnification, contribution, assessment, or otherwise, for debts, obligations, or liabilities of or chargeable to the partnership or another partner in the partnership, whether arising in tort, contract, or otherwise, that are incurred, created, or assumed by the partnership while the partnership is a registered limited liability partnership, by reason of being a partner or acting in the conduct of the business or activities of the partnership.”

This liability protection is a very important reason to operate your business through an LLP.

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