California Business Lawyer Blog

A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties, most commonly a fiduciary and a principal. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person, in a position of vulnerability, justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.

" A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence." says California Business lawyer Steven C. Peck.

A fiduciary duty[is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.

In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became usable in common law courts.

When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher and that "the distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty" says California Business attorney Steven C. Peck.

Fiduciary relationships
The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legal--i.e., common law--owner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress his own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner.

Others, such as corporate directors, may be held to a fiduciary duty similar in some respects to that of a trustee. This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of his ward's property. A person in a sensitive position sometimes protects himself from possible conflict of interest charges by setting up a blind trust, placing his financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling.

Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these:

Trustee/beneficiary:
Conservators and legal guardians / wards
Agents, brokers and factors / principals:
Buyer agent (real estate broker) / buyer client
Confidential advisor including financial adviser and investment advisor / advisee or client
Lawyer/client:
Executors and administrators / legatees and heirs

Continue reading "The Confidence and Trust That Encompasses the Fiduciary Relationship" »

A standard form contract (sometimes referred to as an adhesion contract or boilerplate contract) is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners, such as when an individual is given a contract by the salesperson of a multinational corporation. The consumer is in no position to negotiate the standard terms of such contracts and the company's representative often does not have the autonomy to do so says California business attorney Steven C. Peck

There is some debate on a theoretical level whether, and to what extent, courts should enforce standard form contracts. On one hand, they undeniably fulfill an important efficiency role in society. Standard form contracting reduces transaction costs substantially by precluding the need for buyers and sellers of goods and services to negotiate the many details of a sale contract each time the product is sold. On the other hand, there is the potential for inefficient, and even unjust, terms to be accepted by those signing these contracts. Such terms might be seen as unjust if they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract says California Business attorney Steven C. Peck.

These terms often come in the form of, but are not limited to, forum selection clauses and mandatory arbitration clauses, which can limit or foreclose a party's access to the courts; and also liquidated damages clauses, which set a limit to the amount that can be recovered or require a party to pay a specific amount. They might be inefficient if they place the risk of a negative outcome, such as defective manufacturing, on the buyer who is not in the best position to take precautions. There are a number of reasons why such terms might be accepted:
Lengthy boilerplate terms are often in fine print and written in complicated legal language which often seems irrelevant. The prospect of a buyer finding any useful information from reading such terms is correspondingly low. Even if such information is discovered, the consumer is in no position to bargain as the contract is presented on a "take it or leave it" basis. Coupled with the often large amount of time needed to read the terms, the expected payoff from reading the contract is low and few people would be expected to read it.
Access to the full terms may be difficult or impossible before acceptance
Often the document being signed is not the full contract; the purchaser is told that the rest of the terms are in another location. This reduces the likelihood of the terms being read and in some situations, such as software license agreements, can only be read after they have been notionally accepted by purchasing the good and opening the box.
Boilerplate terms are not salient
The most important terms to purchasers of a good are generally the price and the quality, which are generally understood before the contract of adhesion is signed. Terms relating to events which have very small probabilities of occurring or which refer to particular statutes or legal rules do not seem important to the purchaser. This further lowers the chance of such terms being read and also means they are likely to be ignored even if they are read.
There may be social pressure to sign
Standard form contracts are signed at a point when the main details of the transaction have either been negotiated or explained. Social pressure to conclude the bargain at that point may come from a number of sources. The salesperson may imply that the purchaser is being unreasonable if they read or question the terms, saying that they are "just something the lawyers want us to do" or that they are wasting their time reading them. If the purchaser is at the front of a queue (for example at an airport car rental desk) there is additional pressure to sign quickly. Finally, if there has been negotiation over price or particular details, then concessions given by the salesperson may be seen as a gift which socially obliges the purchaser to respond by being co-operative and concluding the transaction.
Standard form contracts may exploit unequal power relations
If the good which is being sold using a contract of adhesion is one which is essential or very important for the purchaser to buy (such as a rental property or a needed medical item) then the purchaser might feel they have no choice but to accept the terms. This problem may be mitigated if there are many suppliers of the good who can potentially offer different terms.
Some contend that in a competitive market, consumers have the ability to shop around for the supplier who offers them the most favorable terms and are consequently able to avoid injustice. However, in the case of credit card contracts, for example, the consumer while having the ability to shop around may still have access to only form contracts with like terms and no opportunity for negotiation. Also, as noted, many people do not read or understand the terms so there might be very little incentive for a firm to offer favorable conditions as they would gain only a small amount of business from doing so. Even if this is the case, it is argued by some that only a small percentage of buyers need to actively read standard form contracts for it to be worthwhile for firms to offer better terms if that group is able to influence a larger number of people by affecting the firm's reputation.

Another factor which might mitigate the effects of competition on the content of contracts of adhesion is that, in practice, standard form contracts are usually drafted by lawyers instructed to construct them so as to minimize the firm's liability, not necessarily to implement managers' competitive decisions. Sometimes the contracts are written by an industry body and distributed to firms in that industry, increasing homogeneity of the contracts and reducing consumer's ability to shop around.

As a general rule, the common law treats standard form contracts as any other contract. Signature or some other objective manifestation of intent to be legally bound will bind the signor to the contract whether or not they read or understood the terms. The reality of standard form contracting, however, means that many common law jurisdictions have developed special rules with respect to them. In general, courts will interpret standard form contracts literally 'against the proffering person' but specific treatment varies between jurisdictions.

Continue reading "Adhesion Contracts Beware of the Take It or Leave It" »

Depositions are an important part of the legal process. A deposition is testimony taken under oath that is taken outside of a courtroom for discovery purposes. Depositions can be used to gather information about a case and the testimony gained during a deposition may be admissible in court during litigation. Depositions are allowed in state and federal cases. The Califoria rules for depositions are found in Section 2025.010 et seq. of the California Code of Civil Procedure.
What to Know Before Your Deposition
There are several important things to know before you are deposed including says California Business lawyer Steven C. Peck.:
You are Entitled to Notice: if you are represented by counsel then adequate written notice will be provided to your attorney. If you are unwilling to testify then you may be served with a subpoena compelling your compliance with the deposition request. Notice must be provided to all other parties to the lawsuit and include the name of the person to be deposed and the time and location of the deposition.
You will be Testifying Under Oath: that means that you may be tried for perjury if your testimony is not truthful about a material matter of the case.
You have the Right to be Represented by an Attorney: during your deposition.
What to Expect When You Enter a Deposition
Depositions are typically conducted in a conference room or other meeting place and not inside the courtroom. You should expect that, at a minimum, an attorney for each party to the case and a person authorized to take oaths who is known for deposition purposes as an officer. Your testimony will be recorded and often transcribed.
Your deposition will start with the officer stating for the record the officer's name and business address and the date, time and location of the deposition. Then the officer will ask you to take an oath, similar to the one that you take when testifying in court, to ensure that your testimony is truthful. The officer will also identify everyone in the room during the deposition.
After those preliminary matters have been satisfied, the party who requested the deposition will start asking you questions. Your attorney, or an attorney for another party to the lawsuit, has the right to make an objection to any questions asked of you. Generally, you will be required to answer the question despite the objection but your answer may be inadmissible in court if a judge finds the objection to be valid.
At the completion of the deposition, the officer will note the official end time of the deposition for the record. The federal rules limit each deposition to one seven hour day. The party taking the deposition must petition the court if more time is needed for the deposition.
Once the deposition transcript is complete, you will have thirty days to review and to make any necessary changes.
If you have received notice of a deposition then it is important to consult with your attorney prior to the day of the deposition. The California business attorneys at Steven Peck's Premier Legal (www.premierlegal.org) will help you prepare for the deposition and explain in more detail how depositions work.

Breach of contract is a legal concept in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance says California Business lawyer Steven C. Peck.

Minor breaches
A minor breach, a partial breach or an immaterial breach, occurs when the non-breaching party is unentitled to an order for performance of its obligations, but only to collect the actual amount of their damages. For example, suppose a homeowner hires a contractor to install new plumbing and insists that the pipes, which will ultimately be sealed behind the walls, be red. The contractor instead uses blue pipes that function just as well. Although the contractor breached the literal terms of the contract, the homeowner can only recover the amount of his damages. Generally, this means the difference in value between the red pipe and the blue pipe. Since the pipes are identical value, the difference is zero; therefore, there are no damages and the homeowner receives nothing.

Material breach
A material breach is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach. If the contractor in the above example had been instructed to use copper pipes, and instead used iron pipes which would not last as long as the copper pipes would have, the homeowner can recover the cost of actually correcting the breach - taking out the iron pipes and replacing them with copper pipes indicated California Business attorney Steven C. Peck.

The Restatement (Second) of Contracts lists the following criteria to determine whether a specific failure constitutes a breach:

In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

Fundamental breach
A fundamental breach (or repudiatory breach) is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract, in addition to entitling that party to sue for damages.

Anticipatory breach
A breach by anticipatory repudiation (or simply anticipatory breach) is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place).

Limits on Remedies and Damages
Typically, the judicial remedy for breach of contract is monetary damages. See damages. Where the failure to perform cannot be adequately redressed by money damage, the court may enter an equity decree awarding an injunction or specific performance.

The aggrieved person has a duty to mitigate or reduce damages by reasonable means. Liquidated Damages may be limited to a specific amount. In the United States, punitive damages are generally not awarded for breach of contract but may be awarded for other causes of action in a lawsuit. Limitation of Liability (Exculpatory) clauses. [Private agreement is permissible.] [Invalid when public interest is involved and there is willful conduct or gross negligence.

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced california business lawyer and visit us on-line at www.premierlegal.org.

Practical Guidelines
The following six practical guidelines that I provide will assist any individual in successfully revising a form contract, tailoring it, and turning it into a well-drafted, complete, and effective contract that meets a client's needs.

1. Think through the life of the contract under various fact patterns. First, hypothesize performance. What will happen, moment by moment, if the parties comply with all of the terms in a timely manner? Does the contract contain all of the necessary "rules" and details to assist the parties in knowing how to perform their duties? Most form contracts do not adequately set forth the steps necessary for the parties to understand what needs to be done to carry out their contractual obligations. Every contract should clearly answer these six questions: (1) who is obligated to perform; (2) what is the obligation; (3) by when must the obligation be performed; (4) where will the performance take place; (5) how is the obligation to be performed; and (6) if performance involves money or goods, how much?

Second, envision nonperformance and default. Ask yourself what if one or both parties fail to perform all or part of the contract--are the consequences of failure to perform stated in the agreement and closely linked to the performance required? The contract should protect the client by stating a remedy for the potential default of each obligation. Default provisions contained in most form contracts are rarely adequate and they generally do not comply with the parties' intentions; the remedy of the default provision is usually termination of the contract and for many breaches, the nondefaulting party still does not desire to terminate the contractual relationship. says california business lawyer Steven C. Peck.
Finally, consider the worse case scenario. Assume that the parties become hostile toward each other, seeking to undermine the other party at every opportunity. Will the contract provide sufficient guidance to govern the relationship? Will it provide sufficient guidance to a court interpreting the contract or imposing remedies, if necessary? California business attorney Steven C. Peck suggests that you contact an experienced california business lawyer to represent your interests in case of a "worst case scenario".

2. Clearly and consistently set forth the parties' rights and obligations. In its most basic sense, a contract sets forth the private law governing the parties' relationship. Therefore, it is vital that it clearly and precisely sets forth the parties' contractual obligations and rights. It is also very important that these duties and rights are consistently drafted throughout the contract. While there are several acceptable choices of language to use when drafting, the key is to be consistent throughout the agreement. Whenever a party has a mandatory contractual obligation, state that obligation with the word shall and never use the word shall to have any other meaning. Thus, you should be able to substitute "has the duty to" whenever you use the word shall. Since a mandatory contractual obligation is synonymous with a legal duty, a party's failure to perform that duty rises to the level of a breach and may result in an award of damages.

On the other hand, whenever a party does not undertake a legal obligation, but is entitled to exercise a right or privilege under the contract, state the authorization with the word may; you should be able to substitute "is authorized to" or "is entitled to" whenever you use the word may. The contract must clearly distinguish between a party's mandatory legal duty subject to breach, and his or her privilege to perform states Los Angeles business attorney Steven C. Peck. who may be contacted toll free at 1.866.999.9085 and on-line at www.premierlegal.org.

Finally, state conditions with the word must; you should be able to substitute "has to do X before Y will happen" whenever you use the word must. The key distinction between a mandatory duty and one that is conditional is that in the latter, the party's legal obligation to perform does not become mandatory unless and until the condition is met. In other words, the party's failure to perform that obligation results in a breach only if and when the condition has been met.

3. Understand every provision of the contract. One of the problems with using a form contract is that you were not the drafter of the document; thus, you may not understand every provision of the agreement, and not every provision in the form is relevant to the transaction at hand. When using a form agreement, never leave in a provision because you do not understand its purpose (do not assume it must be important or relevant), and never take out a provision simply because you do not understand its purpose. You must review each provision until you understand it completely. Only then can you decide whether to include, omit, or modify that provision.

4. Use recitals and definitions to reflect the parties' specific transaction. Although not part of the operative terms of the contract, recitals can effectively be used to state the parties' intentions or to provide relevant background information. Since the contract may eventually require interpretation by a court, it should include within its four corners all of the information that may be useful to explain the parties' contractual relationship, any past history, and the parties' intentions that may not be clear from the operative terms of the contract itself. For example, while courts are becoming increasingly hostile to contracts in which parties surrender fundamental rights, such as access to the court system, if the parties truly wish to waive their rights to a jury trial, they may do so. In these contracts, the waiver should be drafted so that it is clear and conspicuous, and the recitals should include some language regarding the parties' intent to waive their legal rights to a jury trial. However, drafters must be careful not to include any representations in the recitals that may have legal significance because the recitals are not part of the body of the agreement and, therefore, there may not be any legal remedies if the representations are, in fact, false says california business lawyer Steven C. Peck.
Additionally, the use of definitions enables the drafter to tailor the meanings of certain terms used in the contract to the subject transaction, and also can prevent inadvertent changes of language. Generally, if the word or phrase as used in the contract is intended to vary in any way from the standard dictionary definition of that word or phrase, or if the word or phrase does not have a standard dictionary definition, it should be defined within the contract. There are three basic types of definitions: (1) precise definitions, drafted using the word means; (2) enlarging definitions, drafted using the phrase "including but not limited to" after the definition, followed by illustrative examples; and (3) limiting definitions, drafted using the phrase "but does not include" after the definition, followed by the limitations of the definition. An example of each type of definition follows: (1) "Land" means the property located at 123 Smith Lane; (2) "Land" means the property located at 123 Smith Lane, including but not limited to the residential house, separate garage, and vacant barn; or (3) "Land" means the property located at 123 Smith Lane, but does not include the vacant barn.

The golden rule of contract drafting: never change your language unless you wish to change your meaning, and always change your language if you wish to change your meaning, ambiguity is not tolerated.

5. Use plain language. Contracts should be drafted with clarity and should be easy to read and understand by legal and lay audiences alike. Thus, omit legal jargon and unnecessary words, and eliminate wordy phrases from form contracts. Since the words of the document will govern the parties' relationship, rights, and legal duties, they should clearly communicate their meaning to the parties themselves, and not only to their counsel. As most practicing lawyers are aware, a majority of available form contracts fail to adhere to this advice. They are strewn with "whereas," "witnesseth," and "to wit"--all of which detract from the readability and comprehension of the contract. It is also important to check to see if your jurisdiction has a plain language law, mandating contracts to be written in a clear and coherent manner using words with common meanings; in fact, in some states, plain language laws dictate the number of syllables in the words and the number of words in each paragraph of the contract. Failure to follow the application of plain language laws may impact the enforceability of the contract.

6. Use proper grammar, a clear writing style, and logical organization. Contracts generally describe events that will take place in the future, but it is a continually speaking document and should be drafted in the present tense. Draft using the active voice. Ask who is obligated to do something or to refrain from doing something, and make the subject do the action. When drafters use the active voice, the identity of the actor is clear. This is vital so that the contract clearly and unequivocally expresses the parties' legal duties.

In addition, draft useful headings and organize the terms around those headings. Even if your form contract contains a boilerplate provision stating that the headings should not have any operative meaning, the fact is that those headings are read by the parties, their counsel, and possibly a court; therefore, make them work. Keep sentences short, where possible, or use tabulation for clarity. Be sure to connect modifying words to what they modify, i.e., in "the new house and car" phrase, is the car new too? Finally, use proper punctuation to avoid costly misinterpretation of the contract. For example, one legal dispute resulted in a finding that the contract could be terminated at any time with proper notice, contrary to one party's understanding that the contract had an initial five-year term. This ruling was based solely on the (mis)placement of a single comma, and saved the other party to the agreement an estimated $1 million by enabling it to terminate the contract within the first five years of the contract term.

In it simplest terms, a promissory note is a written promise to repay a loan or debt under specific terms - usually at a stated time, through a specified series of payments, or upon demand. indciates california business lawyer Steven C. Peck.

A promissory note will identify the parties, the amount of the obligation, some form of recitation of the consideration for the obligation (that is, what the debtor received in return for signing the note) and will usually include the terms of repayment, the interest rate which will apply (if any). It may also include an "acceleration clause" which will make the entire amount of the note due if a payment is missed.

Be careful when drafting a promissory note to consider state "usury" laws, the laws defining the maximum interest rate you are allowed to charge. There can be serious civil, and sometimes criminal, consequences for violating usury laws explains california business attorney Steven C. Peck.
Legal Terms
Promisor - A promisor is the person who makes a promise. In the context of a promissory note, the promisor is the person who is promising to repay the loan or obligation secured by the note.

Promisee - A promisee is a person to whom a promise is made. In the context of a promissory note, the promisee is the person who is entitled to receive payment for the loan or obligation secured by the note.

Obligor - An obligor is a person who binds oneself to another by contract or legal agreement. In the context of a promisory note, this is another owrd for "promisor".

Obligee - An obligee is a person to whom another is bound by contract or legal agreement. In the context of a promissory note, this is another word for "promisee".

Consideration - This is a legal term for the value received in return for entering into a contract. For a contract to be valid there must ordinarily be "mutual consideration" - value received by both parties to the contract. In the context of a promissory note, the promisor usually obtains consideration in the form of a loan, and the promisee receives consideration in the form of the promise to repay under the terms specified in the note.

Potential Pitfalls to Avoid
Security for the Loan - A promissory note is typically what is called an "unsecured" obligation. This means that in the event that the borrower declares bankruptcy, the debt secured by the note will only be repaid after all debts to "secured creditors" have been paid. Thus, if a loan is large it makes sense to get "security" for the loan - a lien or mortgage against real estate, recognition of the loan on the title to titled property (such as cars and certain boats), or even a "UCC filing" against business inventory for loans given to businesses. If you are lending money through an unsecured promissory note, a good rule of thumb is to never lend any more money than you are prepared to lose. If you are loaning a larger sum, consider consulting with a lawyer to make sure that your promissory note is bulletproof, and to determine how you might secure your note to ensure that you will eventually recover the balance of the loan says Los Angeles business lawyer Steven C. Peck.

Usury - The term "usury" refers to an unlawfully high interest rate. There can be significant consequences for entering into a "usurious" contract. For example, in some states any interest payment made on an usurious loan is applied to the principal balance of the loan - that is, the law transforms the loan into a "zero interest" loan. Most jurisdictions make usury a criminal offense if the rate is particularly high.

Please note that the mere fact that a bank or credit card company charges a particular interest rate does not mean that an individual can charge a similar rate. Many jurisdictions have different interest rate regulations for individuals than for banks or financial institutions. Individuals are often restricted to charging a lower rate of interest. Check your local laws before setting the interest rate for a promissory note.

Late Fees - As with interest rates, there may be limits which apply to any fees you can charge in the event of late payment. Check your local laws before setting the late fees for a promissory note.

Real Estate Loans
While a promissory note can provide the simplest mechanism to secure a debt, care should be taken if the note relates to a loan for the purchase or improvement of real estate. As such loans may be quite substantial, a mere promissory note may not provide the lender with adequate protection in the event that the promisor defaults.

If you are lending money to help somebody with a real estate transaction, you can usually file a mortgage or lien in order to secure the loan. The lien or mortgage is recorded as a public document, and gives any subsequent purchaser of the real estate notice of the obligation and the fact that it is secured by the real estate. Unless your lien or mortgage is discharged at the time the property is transfered, the new purchaser will take the property "subject to the lien". This provides you with protection in case the borrower goes bankrupt, or if the property is sold.

Continue reading "General Principles Attributable to Promissory Notes" »

Introduction
When starting a new business, one of the most important issues to consider is the "format" of the business. There are a wide variety of formats to choose from, and they range from the very basic to the extraordinarily complex. Each format has advantages and disadvantages in terms of simplicity, flexibility, cost (both to form and to operate), taxation issues, control, continuity of life, transferability of ownership, and liability protection. indicates California business lawyer Steven C. Peck.

This article is intended to provide an overview of the more common business formats, and to outline some key points to bear in mind when making your decision.

A Word About "Limited Liability"
First and foremost, there is no entity in the world that will protect you from your own wrongdoing. For example, if you are driving a vehicle and you negligently injure someone, your personal assets will be exposed to creditor claims whether you are doing business as a sole proprietorship, a limited partnership, a limited liability company, a corporation, or any other entity. Good business practice and asset preservation techniques dictate that you maintain an adequate level of insurance as additional protection against the kinds of claims for which you may be held personally liable.

Secondly, having limited liability does not mean you will not lose money; rather, it means you will not be personally liable for the debts of your business. For example, assume you form a limited liability company and invest $100,000 in it, and then the business is sued for $250,000.00 because of a breach of contract. If your business loses that suit you may lose your $100,000 investment, but absent fraud or other wrongful conduct on your part your personal assets not held in the business name will not be at risk.

Finally, it is important to understand that you can lose your limited liability protection in certain circumstances, such as if a court finds that you are using your business entity to defraud someone, or that you have not taken the appropriate steps to keep the business separate from your personal affairs. You will need to work closely with your lawyer and your tax professional to ensure that your limited liability protections are preserved to the maximum extent possible says california business attorney Steven C. Peck.
Sole Proprietorship
The simplest of all formats, a sole proprietorship is nothing more than one person going into business for himself. (The owner's spouse may work at a sole proprietorship as an employee, but if a husband and wife wish to operate the business together they must form a partnership or some other entity.) Because the business has no legal existence apart from its owner no particular formalities are required to form the business. (Note, though, that you may need to obtain certain licenses or permits, and to file an assumed name certificate if you are going to be doing business under any name other than your own.) Sole proprietorships do not pay franchise taxes, and earnings and losses are reported on your personal income tax return. Unfortunately, this format offers no liability protection whatsoever, so good insurance coverage is vital to protect your personal assets from business-related claims.

General Partnership
A partnership is formed when two or more people agree to jointly carry on a trade or business and share in the profits. Like a sole proprietorship no particular formalities are required to form the business, although a written partnership agreement is strongly recommended in order to minimize the risk of misunderstandings and disputes. General partnerships do not pay franchise taxes, and the partners each include their respective share of the partnership's profits and losses on their individual income tax returns. General partnerships do not offer any liability protection, which means that you can be held personally liable for the debts of the business and for the wrongful actions of your partners whether you participated in those actions or not.

Registered Limited Liability Partnership
A registered limited liability partnership (LLP) is a partnership that has "registered" with the Secretary of State to receive special liability protections. As explained above, each partner in a partnership ordinarily has full personal liability for the debts of the business and the acts of their partners. In a limited liability partnership, however, a partner is not individually liable for debts and obligations of the partnership arising from wrongful acts committed by another partner unless the first partner participated in or was aware of the wrongful act at the time it occurred. To maintain this protection, the partnership must file an annual registration with the Secretary of State along with a fee of $200 per partner. In addition, the partnership must maintain insurance or other security of at least $100,000 to cover the kinds of errors, omissions, negligence, incompetence, or malfeasance for which liability is limited.

Corporation
A corporation is a legal entity that has existence separate from its owners, which means that it can continue in operation even after the death of the owner. A corporation is formed by making the appropriate filing with the Secretary of State, and the business may not commence until the Secretary of State approves that filing. Certain formalities are strongly recommended, including the adoption of bylaws, issuing stock certificates, holding annual meetings of the directors and stockholders, and approval of written resolutions authorizing specific persons to act on behalf of the corporation. Corporations are required to pay franchise taxes and (except in the case of S-corporations) must pay income taxes on their earnings. In addition, the stockholders must pay income taxes on the dividends distributed by the corporation. Corporations do offer limited liability protection for the stockholders.

Once the entity of choice for all but the simplest of businesses, corporations are declining in popularity because other business formats offer better tax treatment while still providing limited liability.

S-Corporation
An S-Corporation isn't really a separate business format. Rather, it is a corporation that has elected to receive special tax treatment by the IRS. For that reason, the formalities associated with forming and operating an S-corporation are the same as with any other corporation, and S-corporations also provide limited liability protection to their shareholders. What makes S-corporations more compelling is that they avoid the double taxation that results when the corporation pays taxes on its earnings, and the stockholders pay taxes again on the dividends. Instead, the S-corporation's stockholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss (a feature called "pass-through taxation.") There are important restrictions, however, such as limitations on the number of stockholders, the types of entities that may be stockholders, stockholder residency, and classes of stock.

Limited Liability Company
One of the newest business formats, limited liability companies (LLCs) are rapidly growing in popularity, and for good reason. The process of forming an LLC is similar to that of forming a corporation. Like corporations, LLCs have continuity of life separate from their owners, offer limited liability protection to their owners, and must pay franchise taxes. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation with no restrictions on the number of the owners. Texas even allows single-owner LLCs, making them an excellent alternative to a sole proprietorship. LLCs offer an attractive balance of the most desirable features of the other business formats, and we expect them to become the de facto standard for small businesses in the near future.

Limited Partnership
A limited partnership is a special kind of partnership having one or more "general" partners and one or more "limited" partners. The partners may include other partnerships, limited partnerships, foreign limited partnerships, trusts, estates, corporations, persons acting as a trustee or executor, or other entities. To form a limited partnership, the partners must enter into a partnership agreement and file the certificate of limited partnership with the Secretary of State. Limited partnerships offer flow-through taxation and (currently) do not pay franchise taxes.

In a limited partnership, the "general" partner has all the management authority and full personal liability. In contrast, the "limited" partners have no management authority but enjoy limited liability. (Essentially, limited partners are "silent investors" and general partners run the business.) Because the general partner has full liability, it is common for an entity, such as an LLC, to serve as the general partner. If the limited partners own the general partner entity, they can have limited liability for themselves while still maintaining management authority of the limited partnership through their voting rights in the general partner.

When properly set up, limited partnerships offer excellent asset protection and may also be useful in reducing or eliminating federal estate taxes. However, because they typically involve two separate entities (the limited partnership itself and an LLC or other entity to serve as a general partner of the partnership) they tend to be the most complex and expensive formats to establish and maintain.

Continue reading "Contemplating the Business Format When Starting a New Business Enterprise" »

A limited liability company, or LLC, is a business entity that enjoys many of the advantages of being a corporation, including limited liability, while avoiding many of the more singificant burdens imposed on corporations, and while retaining many of the characteristics of unincorporated entities such as partnerships and sole proprietorships.

While the owners of a corporation are referenced as shareholders or stockholders, the owners of a limited liability company are often referenced as "members". It is possible for an LLC to be formed by a single individual, in which case it is usually referenced as a "single member LLC".

What Businesses Qualify?
Most businesses will qualify to form as LLC's. Banks and insurance companies do not qualify to form as LLC's.

Some states restrict professionals such as lawyers, accountants and doctors from forming as LLC's, or have a similar corporate form, the Professional Limited Liability Company (PLLC), for professional practices.

The LLC can be attractive to businesses which might otherwise form as S Corporations, but would either have too many shareholders to qualify, or wish to include owners who are not citizens or residents of the United States.

Limited Liability
Members of a limited liability company enjoy protection from individual liability similar to that afforded to corporate shareholders. That is to say, if a business is sued or is unable to pay its debts, the creditors can ordinarily only reach the LLC's assets and cannot reach the assets of the members. While in most states the law is not yet developed, some states permit an action to "pierce the corporate veil" of an LLC and reach the personal assets of members who have engaged in wrongful conduct. Whatever the state of the law in any givne jurisdiction, owners of an LLC should anticipate that if they use the LLC to advance their personal purposes or to perpetrate fraud, courts will hold them personally liable for the LLC's associated liabilities.

Also, individuals can be held responsible for their own negligence and misconduct, for actions intended to damage or defraud the LLC, and for debts of the LLC which they personally guaranteed.

Articles of Organization
When starting an LLC, you must prepare Articles of Organization, to be filed with the Secretary of State, along with a filing fee. Most states offer approved forms for completing and submitting articles of organization. Typically, the Articles of Organization include the name and address of the LLC, the names and addresses of the initial members (owners), and the name and address of the LLC's registered agent.

In some states, you must publish an announcement of the formation of your LLC, or the conversion of your existing business to an LLC, in a newspaper qualified to publish legal notices prior to filing your Articles of Organization with the state. You can usually find out if your local newspaper qualifies to publish your notice by inquiring with the state or with the paper itself.

LLC, the location of its principal office, the names and addresses of the LLC's owners and the name and address of the LLC's registered agent (a person or company that agrees to accept legal papers on behalf of the LLC

The Operating Agreement
When you starting an LLC, although generally not required by law, the members should create and approve an operating agreement for the LLC. The operating agreement governs the operation and management systems for the LLC, and can direct the manner in which profits are to be divided. It can also create procedures for the departure of LLC members, or the addition of new members, and the valuation of the LLC for purposes of buy-in or buy-out. It should also reflect the ownership interest of the members, their associated voting rights, and how profits are to be distributed among the owners.

Without an operating agreement, the basic operation of the LLC will be governed by state law, which may not be advantageous to the LLC or the business it conducts. Under typical state law, if a member of an LLC quits, the LLC ceases to exist. Many LLC's would prefer that their operations continue even if a member departs, and thus provide for that contingency in their operating agreements such that the LLC continues to operate with its remaining members.

Unlike corporations, LLC's are not required to hold annual meetings or prepare annual reports. An LLC may nonetheless find it beneficial to voluntarily hold regular meetings, or to provide in its operating agreement that meetings be held before certain actions deemed important by the LLC's members.

There are a variety of form operating agreements available in most states, which can be modified to suit the needs of the LLC and its members. It is helpful to have an attorney review the proposed final version of an LLC's operating agreement prior to its formal adoption.

Annual Fees
Some states require that LLC's pay an annual franchise tax or registration fee.

Taxation
The income of a limited liability company passes through to its members, who report the income on their personal tax returns. For tax purposes, a single member LLC is treated as a sole proprietorship, and a multiple member LLC is treated as a partnership. The LLC itself does not ordinarily pay taxes on its own behalf as a separate entity. An LLC will ordinarily be required to file an annual informational tax return with the IRS.

The income members earn remains subject to income and "self employment tax" (Medicare and Social Security contributions), and members are responsible to pay those taxes at the end of the year. Members who do not play a role in the management of the LLC, but simply receive a share of the profits by virtue of their ownership interest, may be exempt from paying self-employment taxes. In most cases, members will be required to make quarterly payments of their estimated tax liability, to both the state and to the federal government.

It is possible for an LLC to elect to be taxed in the same manner as a C Corporation, in which case the LLC pays taxes on its retained profits at the corporate tax rate. As this election will last for a minimum of five years, and as there may be tax consequences for switching back to pass-through taxation, careful consideration must be taken before exercising this option, including the possibility that the business would be better served by becoming a corporation.

You should discuss the manner in which your LLC will be taxed with a qualified financial professional.

Securities Law
For most LLC's, there are a relatively small number of owners of the LLC who also act as active participants in its management, and securities laws don't come into play. However, if an LLC intends to have owners who are not actively involved in the business, or sell ownership interests in order to raise capital, it may be required to follow certain procedures and registration requirements set forth in state and federal securities laws. Before engaging in that type of activity, it will benefit an LLC to obtain legal advice, and to try to qualify for any applicable exemptions to the securities laws.

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Continue reading "The Limited Liability Company or LLC: Questions and Answers" »

A corporation is a business entity created under state law, which stands as an independent legal "person" apart from its shareholders and directors. Accordingly, a corporation may enter into contracts, obtain loans, and pay taxes on its own behalf, and it continues to exist even after its founders or shareholders die or transfer their shares to others.

A corporation's owners or shareholders receive the benefit of limited liability for the obligations of the corporation, and are thus ordinarily shielded from the corporation's creditors even in the event that the corporation cannot pay its obligations.

Unless limited by state law or its own articles of incorporation, a corporation continues indefinitely. Ownership can be transferred through sale of stock, and the sale or transfer of a controlling interest in the corporation does not necessarily affect its management structure or operations.

Types of Corporation
Close Corporation - A "Close Corporation" or "Closely Held Corporation" is owned by a small group of shareholders, as defined by state law, usually not exceeding thirty to fifty individuals. The stock of a close corporation is not sold either on a stock exchange or "over the counter".

Public Corporation - A public corporation is a corporation whose shares are publicly traded, whether on a stock exchange or "over the counter".

C Corporation - A C Corporation is a standard business corporation, which pays tax under Subchapter C of the tax code.

S Corporation - An S Corporation is a corporation which has elected for its profits to be taxed in the manner of an unincorporated entity. Not all corporations can opt to become S Corporations.

Professional Corporation (PC) - A special type of corporation incorporated to perform professional services, such as the practice of law or medicine. (Historically, professionals were not permitted to incorporate. Now, many professional practices incorporate as PC's or LLC's.)

Limited Liability
Perhaps the biggest historic advantage of the corporate form is the extension of limited liablity to the corporation's officers, directors and shareholders. That is to say, if a business is sued or is unable to pay its debts, the creditors can ordinarily only reach the corporation's assets and cannot reach the assets of the shareholders. This protection against liability is referred to as the "coprorate veil". However, certain types of misconduct by a corporation or its officers may enable creditors or state tax authorities to "pierce the corporate veil" and reach the personal assets of those who engaged in the wrongful conduct. (Federal tax authorities may already bypass the corporate veil as a matter of law.) Also, individuals can be held responsible for their own negligence and misconduct, for actions intended to damage or defraud the corporation, and for corporate debts they personally guaranteed.

In recent decades, additional limited liablity entities have been created, such as the limited liability company (LLC), giving business owners a greater range of choices.

Articles of Incorporation
When you wish to form a corporation, the first step is to file "articles of incorporation" with the state in which you desire to incorporate, along with the required filing fee. Most states offer approved forms for completing and submitting articles of incorporation. Typically, states require the articles to include:

The name of the corporation;

The address of the corporation;

The identity of the corporation's "registered agent" (the person designated to receive service of process and certain important documents on behalf of the corporation); and possibly

The names of the directors of the corporation.

Getting Started
In addition to filing articles of incorporation, every new corporation must do the following:

Create a set of bylaws which govern its operation;

Hold an initial meeting of its board of directors; and

Issue stock to its shareholders.

Corporations are also expected to meet certain bookkeeping standards and to maintain their own bank accounts, and most businesses will benefit from consulting with an accountant in setting up appropriate accounting and record-keeping systems.

As they get started, most corporations will benefit from formulating a buy-sell agreement, to help guide the sale or transfer of shares by the initial set of shareholders, covering such issues as how the share value will be determined if a shareholder wishes to sell his interest, and what will happen if a shareholder dies, becomes disabled, or wishes to sell shares to a third party.

Who Does What?
Discussion of corporations usually involves mention of shareholders, directors, and officers:

Shareholders - A shareholder is the owner of shares in a corporation. Depending upon the nature of the shares, a shareholder may ordinarily participate in votes to select or remove directors, to amend the corporate bylaws or articles of incorporation, to merge or reorganize the corporation, or to dissolve the corporation or liquidate its assets.

Directors - A corporation's directors typically engage in action including the election of corporate officers, the issuance of stock, oversight and approval of major financial transactions, and approving compensation packages for executives and officers of the corporation. In many small corporations, most or all of the shareholders will also serve as directors.

Officers - The officers of a corporation oversee its daily operations and activities. Most states require that a corporation have a President (and possibly a Vice President), Secretary, and Treasurer. In simple terms, the President has authority to direct the business, the Secretary has authority over corporate records, and the Treasurer has authority over corporate finances. Most states permit a corporation to appoint one person to all three positions.

In a small corporation, the shareholders may also serve as directors and officers.

Annual Meetings & Reports
Among the obligations a corporation must meet on a continuing basis, a corporation is required to hold an annual meeting, keep minutes reflecting what occurred at the meeting, and to file an annual report and fee with the state in which it is incorporated. Failure to follow these steps can cause the corporation to lapse. While it may be possible to cure the lapse by filing late reports and payments, if it is not possible the shareholders may find themselves liable for the corporation's outstanding debts and obligations. Also, C Corporations must file annual tax returns.

Taxation
A C Corporation pays taxes on its corporate income, whereas the profits of an S Corporation pass through to the shareholders who report their share of the profits on their personal tax returns. Even if corporate income tax has been paid, any dividends paid by a corporation to its shareholders are also subject to taxation as income to the shareholder.

Securities Laws
As the number of shareholders to a corporation grow, the possibility arises that state and federal securities laws will apply to the corporation and its conduct. If shares are to be sold or distributed to more than a limited set of shareholders (usually about thirty-five shareholders), the corporation may have to register the sale with the securities authorities of the state and federal governments before it can issue the shares. Securities laws can also be implicated by issuance of stock options to employees. Corporations should take care to know how securities laws apply to their situation in advance of taking action which might implicate those laws.

Continue reading "The Corporation as a Business Entity: Types of Corporations" »

Differences Between Corporations and LLC's
Due to the comparative complexity of starting and managing a corporation, businesses should carefully consider whether their needs will be better served by forming as an limited liability company (LLC), or even as a partnership or sole proprietorship.

The LLC does not require annual meetings, and is generally simpler to create, own and operate. An LLC may also have greater flexibility in allocating business profits between its members than does a corporation says california business lawyer Steven C. Peck. If a C Corporation has profits, it must pay corporate income taxes on those profits, whereas the profits of an LLC pass through to its members who individually report their share of the profits on their own tax returns. (Like LLC's, S Corporations also have pass-through profits.)

Corporations have advantages over LLC's in the respect that they are able to issue stock, and possibly stock options, to key employees and investors. There may also be tax advantages associated with having the corporation retain some of its own profits, even with the payment of corporate income taxes, over having all of the annual profits distributed to the owners and investors indicates california business attorney Steven C. Peck.
For people who wish to pass their businesses or investments to their children, there are advantages and disadvantages to using the corporation or an LLC for purposes of estate planning and wealth transfer. Those issues should be discussed with a qualified estate planning professional prior to choosing a business form for that purpose.

Continue reading "Differences Between Corporations and Limited Liability Companies" »

Choose Your Business Entity
As you start a new business or expand an existing enterprise, you will benefit from considering your options for the legal structure of your business. It will usually be beneficial to seek advice from legal and financial professionals, in determining the form which will best serve your business and tax planning needs says California business lawyer Steven C. Peck.

The Sole Proprietorship
A sole proprietorship is the simplest form of business to start. Ordinarily, all you need to do is start operating as a business under your own name (or a fictitious name - a d/b/a) and Social Security number, obtain any required licenses or permits, and you're in business.

But there are some distinct disadvantages to operating as a sole proprietorship, which you should consider when determining if this business form is right for you. A sole proprietorship is subject to pass-through taxation, with profits declared on the owner's personal tax return. There is also no shield against liability, and a sole proprietor's personal assets can be reached to satisfy business debts or liabilities. By definition, a sole proprietorship has only one owner. If you have a business partner, you may be a partnership or choose a different business form, but you cannot operate as a sole proprietorship explains california business attorney Steven C. Peck.

The Partnership
The partnership is a business entity ordinarily comprised of two or more individuals, although under some circumstances a partnership will be formed between other business entities, or between individuals and a business entity. The partnership is relatively inexpensive and simple to create and maintain, but poses tax and liability issues which are similar to those of a sole proprietorship.

General Partnership - Most partnerships take the form of "general partnerships", where all partners have some management authority.

Limited Partnership - In a limited partnership, there are one or more "general partners" who direct the business of the partnership, and one or more "limited partners" who have no management role. The general partner may be another business entity, such as a corporation or LLC. This structure is often used for real estate transactions, where investors sign on as limited partners, and the general partner manages the property. Limited partners have little or no role in the management of the business, and in return for surrendering that authority their responsibility for business debts and liabilities is limited to the amount of their investment.

Limited Liability Partnership - The partners to a limited liability partnership are shielded against the debts and obligations of the partnership, and against liability for actions of their partners or employees in which they take no part and have no supervisory role. However, their personal assets may remain subject to other debts they have personally guaranteed, and for obligations or liabilities arising from their own conduct.

The Limited Liability Company
A limited liability company, or LLC, is a business entity that enjoys many of the advantages of being a corporation, including limited liability, while avoiding many of the more singificant burdens imposed on corporations, and while retaining many of the characteristics of unincorporated entities such as partnerships and sole proprietorships. By default, an LLC has pass-through taxation, with members declaring their share of profits as income on their personal tax returns. An LLC may opt to be taxed in the same manner as a C Corporation, in the event that it would benefit from being able to retain income and pay taxes on that income at the corporate tax rate.

The Corporation
A corporation is a business entity created under state law, which stands as an independent legal "person" apart from its shareholders and directors. Accordingly, a corporation may enter into contracts, obtain loans, and pay taxes on its own behalf, and it continues to exist even after its founders or shareholders die or transfer their shares to others. A corporation's owners or shareholders receive the benefit of limited liability for the obligations of the corporation, and are thus ordinarily shielded from the corporation's creditors even in the event that the corporation cannot pay its obligations. Unless limited by state law or its own articles of incorporation, a corporation continues indefinitely. Ownership can be transferred through sale of stock, and the sale or transfer of a controlling interest in the corporation does not necessarily affect its management structure or operations indicated Los Angeles business lawyer Steven C. Peck.

C Corporation - A C Corporation is a standard business corporation, which pays taxes on its profits at the corporate tax rate under Subchapter C of the tax code.

S Corporation - An S Corporation is a corporation which has elected for its profits to be taxed in the manner of an unincorporated entity. Not all corporations can opt to become S Corporations.

Professional Corporation (PC) - A special type of corporation incorporated to perform professional services, such as the practice of law or medicine. (Historically, professionals were not permitted to incorporate. Now, many professional practices incorporate as PC's or LLC's.)

Nonprofit Corporation - A nonprofit corporation obtains special treatment under state law, but is subject to restrictions as to its ownership and to what may be done with its profits at the end of the year. While a corporation must be a nonprofit in order to qualify for a federal tax exemption as a "501(C)(3)" charitable organization, the mere fact that a corporation is registered as a nonprofit does not mean that the corporation is a "charity" contributions to the corporation are automatically tax deductible.

Continue reading "Choosing the Business Structure of Your Enterprise" »

Relationships between manufacturers' representatives and suppliers are similar in many ways to a marriage. Before a contractual commitment, there is a courtship, a time during which both parties are able to examine their prospective partner during a variety of circumstances. If the attraction continues, both parties perform due diligence in order to ensure the absence of any nefarious dealings, both past and present. If a commitment is desired, both parties enter into a contractual relationship for the long-term. However, unlike a marriage, there is never a clause in a representative agreement that includes the words, "until death do us part." Representative relationships are expected to last only for a period during which both the rep and supplier reap benefit from the relationship. Once a partner can no longer foresee a benefit from the relationship, the partnership may be dissolved explains california business attorney Steven C. Peck.

During the early years of a representative relationship, little fears on both sides can become irritants that grow, fester, and hold back both parties from achieving greater success. What can be done to reduce the impact of otherwise minor fears? Both parties can build into the representative agreement protection that shields them from some of their greatest fears. Manufacturers' representatives often fear unjust termination by a supplier for whom they work diligently for several months or years with relatively little compensation. Suppliers often fear inability to terminate a rep whose performance has deteriorated. Both fears are real and can be addressed in the representative agreement in an equitable manner says california business lawyer Steven C. Peck.

If mutual success of the rep and the supplier is to be achieved, little fears on both sides must be dealt with in a manner that prohibits those fears from undermining performance. This paper addresses steps that can be taken to reduce fear on the part of both the manufacturers' representative and the supplier. By building protection into the representative agreement, two objectives can be accomplished: First, some natural fears can be either reduced or eliminated. By reducing the impact of some fears, performance of both the rep and the supplier can be enhanced. Second, when the time comes to dissolve the representative relationship, the same protections that were used to enhance performance can be used to unwind the relationship with less acrimony and legal action says Los Angles business attorney Steven C. Peck.

Well Written Agreements Reduce Fear
Suppliers have a natural fear of manufacturers' representatives. Simultaneously, manufacturers' representatives have a natural fear of suppliers. Any solution to this problem cannot be developed unless these natural fears are recognized. A solution, therefore, must identify some of the most obvious fears and work to minimize the impact of their realization. A manufacturers' representative might have a legitimate fear of being terminated if a small supplier becomes very successful and becomes acquired by a larger supplier. In most cases, the rep or the direct sales force of the surviving, (acquiring) supplier becomes the sales force of record and the rep of the smaller, (acquired) supplier is terminated. Termination is the result irrespective of performance.

Any manufacturer, large or small, may fear that the selected representative will not perform to expectations. If the gap between expectations and actual performance is too great, the manufacturer may need to change representation, but may feel trapped in a representative agreement that it feels cannot be changed easily or quickly. Well crafted representative agreements can relieve some of the fears of both reps and suppliers. We'll explore clauses that can be inserted to help protect both manufacturers' representatives and suppliers.

Protection for Manufacturers' Representatives
One common fear among manufacturers' representatives is that termination may come after months or years of hard work, but before significant commissions are generated. This a justifiable concern particularly where the supplier is relatively new and has no established customers. A rep must labor long and hard in order to create the first customers, designs and purchase orders. The world provides many examples whereby a small supplier signs up many reps that are required to provide several months of missionary work with customers before sales are realized. If the supplier provides a great product offering and executes well, its booming sales soon make it an attractive target of acquisition by a larger, more established competitor. During an acquisition, the sales organizations of the acquiring and acquired companies must be consolidated. Most often, the direct sales team or rep from the acquiring company survives, while the rep from the acquired supplier is terminated. Recognizing that history favors the reps of established suppliers, many reps are loath to adding start-up suppliers to their line card.

One solution that protects the manufacturers' representative for a small start-up supplier is the insertion of a clause that provides commissions beyond termination in the event of a change of ownership of the supplier. The rep may be offered six-to-twelve months of commissions after the effective date of termination if termination is the result of a change of ownership in the start-up supplier.

The mechanism calling for extended commissions is sometimes called a "double trigger." The term, "double trigger" is used in this case because two events must occur before the extra commissions are warranted: a) change of ownership, and b) termination of the representative agreement. If an acquisition occurs, but the rep is retained, there are no extended commissions. Similarly, if the rep is terminated, but there is no change of ownership, there are no extended commissions. When, however, termination occurs within weeks of a change of ownership, two conditions will have been "triggered" and the rep becomes entitled to extended commissions.

Inclusion of the "double trigger" clause removes the fear that reps might have when partnering with start-up suppliers. The expense of extended commissions become real to the start-up supplier only if it becomes very successful and simultaneously becomes acquired. The extended commissions can be easily justified and in addition, can be spread forward in time.

At first glance, extended commissions from a double trigger clause result to the benefit of the manufacturers' representative only. Upon deeper reflection, the start-up supplier benefits also. Without a double trigger clause, large and established rep organizations avoid start-up companies because of the risk that they represent. Without the clause, a start-up supplier might be forced to select a rep from among a group of smaller and less established rep organizations. Inclusion of a double trigger allows start-up suppliers to add powerful manufacturers' representatives to its sales team. Such an addition increases the suppliers' chances for success.

Continue reading "Contractual Relationships Between Manufacturer Representatives and Suppliers" »

In certain situations, it may be advantageous for a business to operate in California as a foreign LLC rather than as a domestic LLC. Because the laws of a foreign LLC's state mor organization will govern its organization and internal affairs and the liaibility of members and managers, a foreign LLC may offer benefits not available to members of a California LLC says California business attorney Steven C. Peck.

Examples of advantages are operation with one member, or an alternative standard for piercing the veil of protection from liability afforded members, California business lawyer Steven Peck states.
However, the foreign LLC must still regiater in California and is subject to the gross income fee. Additionally, forming an LLC in another state to conduct business in California may create new problems, such as the loss of the federal intrastate securities exemption.

Continue reading "California or Foreign LLC?" »

California provides a distinct and orderly process to sell real property
under a writ of execution. Code of Civil Procedure §§701.510, et. seq. This
method has a number of important safeguards for the debtor built in. These
include:
• Personal service of notice on the debtor;
• An opportunity for the debtor to respond;
• Title report or equivalent is obtained and reviewed;
• Fair Market Value and homestead exemptions are determined;
• Debtor given minimum 120 days from notice to sale; and
• Homestead Property must sell for at least 90% of determined Fair Market
Value.
Due to the strictures of this process, there are a number of reasons why a
judgment creditor might not obtain satisfaction in the end. Consider these
common issues:
• The execution method requires cash on sale or within 10 days and these
days, buyers with cash are looking for a better deal than 10% under fair
market value
• Buyers are not able to walk through and inspect the property before
buying resulting in a lower bid price, especially on questionable properties
• A mistake is made in the process, where the process must begin again
• The sale lacks the benefit of common open market sales like listings on
the Multiple Listing Service, aggressive marketing by a licensed real
estate agent, ability for buyers to obtain financing, inspections and repairs,
etc.
• The sheriff or levying officer has numerous responsibilities and cannot
devote any significant amount of time toward insuring completion of the
sale or other "special attention"
If you are in a situation where you have gone through an execution sale
without success or have a business or collection matter appointment of a receiver may well provide some satisfaction in your case.

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Continue reading "The Realities of Execution Sales in California" »

California provides a distinct and orderly process to sell real property
under a writ of execution. Code of Civil Procedure §§701.510, et. seq. This
method has a number of important safeguards for the debtor built in. These
include:
• Personal service of notice on the debtor;
• An opportunity for the debtor to respond;
• Title report or equivalent is obtained and reviewed;
• Fair Market Value and homestead exemptions are determined;
• Debtor given minimum 120 days from notice to sale; and
• Homestead Property must sell for at least 90% of determined Fair Market
Value.
Due to the strictures of this process, there are a number of reasons why a
judgment creditor might not obtain satisfaction in the end. Consider these
common issues:
• The execution method requires cash on sale or within 10 days and these
days, buyers with cash are looking for a better deal than 10% under fair
market value
• Buyers are not able to walk through and inspect the property before
buying resulting in a lower bid price, especially on questionable properties
• A mistake is made in the process, where the process must begin again
• The sale lacks the benefit of common open market sales like listings on
the Multiple Listing Service, aggressive marketing by a licensed real
estate agent, ability for buyers to obtain financing, inspections and repairs,
etc.
• The sheriff or levying officer has numerous responsibilities and cannot
devote any significant amount of time toward insuring completion of the
sale or other "special attention"
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Continue reading "Sale of Real Property Under a Writ of Execution" »

The statutory remedy of selling real property under a writ of execution
provides a strict but orderly process that a judgment creditor may follow toward
satisfaction of the judgment. However, judgment creditors may consider the
process to be too complex and the cost prohibitive in light of the nebulous results
attendant to the statutory procedure.
This article discusses use of a court appointed receiver to sell real
property as an alternative to the statutory execution sale. Using a court appointed
receiver to sell real property offers a number of distinct advantages over an
execution sale:
• There is a greater degree of certainty that the property will sell under an
order appointing a receiver-often in the same amount of time (or less) as
a creditor's first run through an execution sale (i.e., about five months);
• Once the receiver is appointed, he handles all of the procedures
necessary to complete the sale with very little effort needed from the
creditor; and
• The receiver can sell the property on the open market, through a real
estate agent, to realize the highest return possible.
Despite the obvious advantages, appointment of a receiver is considered
a "drastic remedy" and many courts will not grant an order to appoint a receiver
unless there are extenuating circumstances and "good cause", such as:
• A previous execution sale against the property was unsuccessful;
• The net amount expected from an execution sale will not satisfy the
judgment in full;
• Non-debtor third parties own an interest in the subject property;
• The property includes a resident business that is also subject to execution
against an interest of the judgment debtor;
• The judgment debtor stipulates to appointment of the receiver in order to
get the greatest value for the property applied toward the judgment; or
• A fraudulent transfer of the property has been made or threatened, or
there are other circumstances indicating fraud or dissipation of the asset.
In the most general terms, the moving party should be prepared to show:
• That the other less drastic remedies provided by statute are inadequate
AND that appointment of the receiver will substantially improve the
outcome; OR
• That the receiver is necessary to preserve the interests of all concerned,
particularly if outside third parties have an interest in the property or there
are "badges of fraud" present.

Continue reading "Use of a Court Appointed Receiver to Sell Real Property" »