If you discover a tax problem—whether it be a mistake on a return or a late payment—do not drag your feet.  You will almost always be better off if you work to correct the problem instead of waiting for the IRS or state taxing authorities to come to you.

A case I recently helped resolve vividly illustrates this principle. The taxpayer (we will call him George) made a good faith mistake while completing his own tax return. Unfortunately, this caused him to underreport his income by over $100,000. Because of the unusual financial issues that he faced that year, he did not recognize the mistake when he signed his return.

The IRS eventually caught the mistake. George candidly admitted that he owed the additional taxes, and tried to work out a payment plan that he could afford. After several months of fruitless negotiation with the IRS, he asked me to get involved. By that time, substantial penalties had accrued and were continuing to pile up.

Georgia made the same mistake on his California income tax return, but the California Franchise Tax Board had not yet noticed. The legal issues on George’s state and federal returns were almost identical.  In both cases, George had valid arguments that his penalties should be removed (“abated” in tax lingo) and that he should be given an affordable payment plan to pay the taxes he owed.  I made these arguments to both agencies on George’s behalf.

What actually happened says a lot about the benefits of being proactive. The California Franchise Tax Board abated George’s penalties and accepted a very reasonable payment plan without argument. However, the IRS was much less cooperative. By the time I got involved, George’s case was firmly ensconced in the bowels of the IRS bureaucracy. Each IRS agent I spoke with said that he or she could not abate George’s penalties or accept a reasonable payment plan, and George’s case was shuffled from department to department with bureaucratic skill. Finally, approximately one year later, we were able to get most of what we wanted by appealing George’s case to the IRS Appeals office (an independent division of the IRS with the authority to settle tax controversies).

Why did it turn out to be so much less time consuming, stressful, and expensive for George to resolve his California tax issue than his federal tax issue?  In my opinion, timing was everything.  George voluntarily reported the problem to the FTB, and came forward with a viable solution before they had to start the enforcement process.  Through no fault of his own, he did not do so with the IRS.  What makes this especially striking is the fact that the California Franchise Tax Board has a reputation for being much more difficult than the IRS to deal with.  In general, it pays to be proactive.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

You may be a partner…and not even realize it.  If so, get ready for some unintended consequences…

Many business owners and investors are surprised to learn that in the eyes of the law, they are partners in a partnership.  Maybe the word “partner” simply has picked up too many uses—think “domestic partner,” “tennis partner,” or “partner in crime.”  For whatever reason, many people forget that yes, it means something in business law as well.

Here are some commonly-overlooked aspects of partnership law:

• You can be a partner without intending to be.  Under the laws of California, “the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”
• Each partner is personally liable for all partnership liabilities, including liabilities caused entirely by employees and by other partners.
• Each partner owes a fiduciary duty of care and a fiduciary duty of loyalty to the other partners.  This means (for example) that he or she cannot compete with the partnership, take on a business opportunity in the same field without first offering it to the partnership, or try to “freeze out” another partner.
• Each partner has an equal right to manage and control the partnership.  In other words, each partner has full authority to hire and fire, sign contracts, and make payments to further the business of the partnership.
• There are always tax consequences.  Under federal tax law, partnerships do not pay their own taxes.  Instead, each partner reports his or her share of partnership gain or loss on his or her personal tax return, even if no money was distributed.  This can come as a rude and costly surprise.

In partnerships, as in other aspects of life, knowledge is power.  Some business owners find that the default rules of partnership law suit them just fine.  Others decide that they want to change one or more of these rules, particularly if they are uncomfortable with the personal liability that goes with being a partner.  In most cases, it is relatively easy to convert a partnership into a corporation or LLC.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

]]> http://eastbaybusinesslawyer.com/3812/partnerships-a-lesson-in-the-law-of-unintended-consequences/feed 0 http://eastbaybusinesslawyer.com/3802/do-i-really-need-a-trust-my-estate-is-worth-much-less-than-5-million http://eastbaybusinesslawyer.com/3802/do-i-really-need-a-trust-my-estate-is-worth-much-less-than-5-million#comments Tue, 09 Apr 2013 17:09:47 +0000 deanne http://eastbaybusinesslawyer.com/?p=3802

As anyone who followed the “fiscal cliff” debate a few months ago knows, the compromise that emerged includes important changes to the estate tax.  In the future, each individual can pass on up to $5.25 million to his or her heirs without paying any estate tax and each married couple can bequeath up to $10.5 million free of estate tax.  Note: because these numbers are indexed to inflation, they will grow each year.

Even better, a married couple can take full advantage of the $10.5 million exemption without having to set up a trust to do so. Because of these estate tax changes, far fewer people need to worry about planning for the estate tax.  But for many people—including many of those who no longer need to be concerned about estate taxes—a revocable trust, sometimes called a “living trust”, is still a good idea in order to avoid probate, provide for family who cannot handle money or to ensure your blended family is properly taken care of.

Avoiding Probate. 

Probate is the court process for transferring a deceased person’s assets to his or her heirs.  The process typically takes 12-18 months, is a matter of public record and can be quite costly.  To avoid this, a revocable trust usually works best.

Providing for Children and for Family Members who Cannot Handle Money. 

Many people want to provide for a family member who is not in a position to manage a large gift.  For example, the person may be a minor child, have creditor problems, have a mental disability, or simply be a poor money manager.  Usually, the best approach in these situations is to set up a trust for the person receiving the bequest.  This will allow the trustee, which is typically a bank, professional fiduciary, or trusted family member, to manage the money for the person and make distributions as needed.

This kind of trust can be set up either in a will or in a revocable trust.  Because the drafting costs are usually comparable, it generally makes sense to use a living trust in these situations in order to avoid probate.

Providing for a Blended Family.

A revocable trust can also be beneficial for a married couple who each have children from prior relationships.  Often, each spouse will want to be sure that the other spouse is provided for during his or her lifetime.  However, each spouse will also want to be sure that any remaining assets go to his or her own children, and are not diverted to stepchildren.

This kind of trust can also be set up either in a will or in a revocable trust.  Because the drafting costs are usually comparable, it generally makes sense to use a living trust in these situations in order to avoid probate.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

January, 2012, found the online retailer Zappos.com admitting to a gargantuan data security break affecting about 24 million of its customers. Plaintiff class action attorneys promptly filed numerous lawsuits.  In response, Zappos invoked the arbitration clause in their Terms of Use agreement in an attempt to smother the bad publicity and resulting damages.  In re Zappos.com Inc., Customer Data Security Breach Litigation, 2012 WL 4466660 (D. Nev. Sept. 27, 2012).

Like many e-commerce sites, Zappos.com’s Terms of Use was accessible by means of a hyperlink at the bottom of each page.  Users were not required to click “I accept” when setting up an account or making a purchase (i.e., a “click-wrap” agreement).  Instead, users were supposed to locate and click on the hyperlink to the Terms of Use that purportedly governed their relationship with Zappos.  (This type of setup is sometimes referred to as a “browse-wrap” agreement.)  The hyperlink to the Terms of Use was not prominently displayed.

This arrangement was weighed in the balance and found wanting.  By the stroke of a pen, District Judge James denied Zappos the right to send their goof-up to arbitration (and thus save themselves a lot of money, further embarrassment and a massive headache) because Zappos’ customers never agreed the Terms of Use in the first place.  In the judge’s words:

“A court cannot compel a party to arbitrate where that party has not previously agreed to arbitrate…. A party cannot assent to terms of which is has no knowledge or constructive notice, and a highly inconspicuous hyper link buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.”

The Zappos case illustrates the dangers of relying on a “browse-wrap” Terms of Use.  In a dispute, the site owner may have an uphill battle proving that the users had notice of the Terms of Use.  In the case of Zappos, the fact that each page had a link to the Terms of Use was not enough, because “The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use.”  More succinctly, the Terms of Use were not prominently displayed, and the user was never directed to view them.

A better agreement is the click-wrap agreement. This agreement requires that your customer, the user, take some sort of action to confirm their agreement to your terms. For example, a user who clicks on a button that clearly states that that the user is agreeing to be bound by your terms of use.  So is a user who manually checks a box that indicates agreement. Properly constructed click-wrap agreements have been favorably held up by the courts and are an effective means to legally protect your online business.

This issue is far from over, but it’s a cautionary tale for all of us who have websites that contain browse-through agreements.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

The mantra, “defer, defer, defer”, made popular by your business economics professor is generally a good rule to follow. However, this isn’t the mantra you should be chanting to yourself for the remainder of 2012. Rather, the new mantra should be to “accelerate, claim and accelerate some more”.

Ringing in the New Year will hopefully not find you feverishly writing your New Year’s Resolution that begins, “be aware about this year’s tax implications and manage your business and personal finances accordingly”!

Come 1.1.2013, income tax rates will rise exponentially, barring any negotiated compromise. Also, January 1^st marks the Affordable Care Act’s new Medicare tax of 3.8% on unearned income for those who make more than $250,000, married filing jointly, and $200,000, for those single filing. Worth noting is that trading income will be liable to the new Medicare tax.

So, what should you be doing right now? Biting your nails with angst? No! Remember the new mantra, “accelerate and claim and accelerate some more”. If you own a C-Corp it is likely it will make sense to pay yourself the qualifying dividends from your company’s retained earnings. This will take advantage of the low 15% 2012 tax rate and avoid the astronomical 39.6%2013 tax rate. Finally, you should review whether selling your investments that have unrealized gains before 12.31.2012 makes economic sense.

Deferring your expenses probably would be the wrong call to make. Itemized deductions seem to be on the chopping block, both by Romney, many Democratic plans as well as most states. The 2012 itemized deduction rule should be, if you see a deduction, take it!

Of course the election results will further hone the New Year’s trajectory. These are just a few tips on ways to stay informed and savvy in the meantime.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

Clearly the attraction and lucrativeness of mobile-friendly websites is not going away. In fact, it can easily be argued that mobile-friendliness is a key ingredient for any flourishing business. The question now becomes; how can you as a Small Business Owner harness that untapped market and draw paying customers to your business?

Here are a few key features to keep in mind for your mobile-friendly website conversion.

• Instant Accessibility is one of the most important features on mobile-friendly websites. All your potential customer, who is waiting in the drive-in line at McDonald’s, has to do is tap the “call” button and their mobile device will do the rest.
• Create a unique mobile website URL. This will make using your mobile site easier and will also link back to your full website.
• Simplify and prioritize your content. Customers on the go aren’t looking to read a full website thesis while they’re standing in line at Starbucks. They’re looking for targeted information.
• Minimize the amount of manipulation needed. Remember your customer has a small mobile screen. The less poking, squeezing, maximizing and minimizing the better. These additional manipulations can lead to frustration and cause your potential customer to “bounce” back to shop for a more easily navigated website.
• Finally, keep your data size for your mobile-friendly website small. The larger and more complex the files, the slower the downloading for your potential customer. Customers on mobile devices have seconds, not minutes, in which they’re trying to accomplish something. If your potential customer has reached the order window at their local Taco Bell and your site is still downloading chances are they’ll decide to redirect their search to another business.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

Google recently commissioned research firms Sterling Research and SmithGeiger to poll over 1000 adults on their opinions and thoughts on their mobile web experience. These statistics unearthed some enlightening data that further supports the mobile web’s wide open vista that has been largely untapped by small business owners.

First, the statistics. A shocking 96% of those surveyed confirmed that they’ve encountered mobile-unfriendly sites while a staggering 75% say they prefer a mobile-friendly site and 67% are more likely to buy something on your business’ website when they visit a mobile-friendly address.

But what do these numbers mean for you as a small business owner? A few more statistics seem to flesh out a strong take-home message for small business owners. A whopping 50% of users who LIKE your business would use you less often if your website isn’t mobile friendly! These same clients whom you’ve wowed with your website, your products/services and your customer service will, half of the time, return to the world wide web in search of a business that holistically meets their traditional website needs and their on the go mobile-friendly demands.

The frustration that is inherent in non-mobile-friendly websites carries over into a user’s opinion of your business in general. Simple things like having to minimize or maximize the font size; having way too much information on a given page and finally your email and phone number contact information being difficult to locate and activate on your website just name a few of the frustrations users experience when trying to access your non-mobile-friendly business’ website from their mobile device.

Part two of this blog will give some suggestions on ways to make your mobile-friendly website the most pleasurable experience possible for your potential clients.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

Nevada corporations and Nevada limited liability companies are often marketed as the superior choice for the discerning business owner. I have nothing against these Nevada business entities– they are every bit as good as their California counterparts. However, they are not a money saver for the owners of California businesses.

California charges a high price for business owners who want to protect themselves from liability. Each year, a California Corporation or LLC must pay an $800 franchise tax, on top of any other income taxes or fees that may apply. Like many other states, Nevada charges less than California for the privilege of forming a Corporation or LLC under its laws.

Because of this, it is commonly thought that the California business owner can save several hundred dollars a year by forming a Nevada business entity. In most cases, nothing could be further from the truth. Like most states, California requires any business that maintains an ongoing presence within the state to “qualify” with the California Secretary of State. Of course, a “foreign” Corporation (i. e., one formed in a state other than California) is required to pay California’s $800 per year franchise tax for the privilege of qualifying. Instead of saving money, the California business owner will actually pay more by incorporating in Nevada: Nevada’s annual franchise tax plus California’s.

There can be valid reasons for a California business to incorporate under the laws of another state. However, saving money is not one of them.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

The short answer is yes. Insurance is essential to protect you against the types of liabilities that the corporation does not cover. Insurance is also vital for covering the costs of litigation, even for lawsuits that you win or that your corporation covers.

Many people believe that by forming a corporation or limited liability company, they have acquired a “get out of jail free” card that will absolve them from all future liabilities. This is a common misconception. It would be more accurate to say that the Corporation or LLC protects its owners against two types of liabilities: (1) contract liabilities, and (2) the “indirect liabilities” that automatically flow to the owner of the business.

A contract liability is straightforward enough. It is a liability that relates to the breach of a contract or agreement. So long as your corporation or LLC signs all of your business contracts, it will protect you from the contract liabilities that you may encounter in your business.

So far so good. But what, you may say, are these “indirect liabilities” that my Corporation or LLC is supposed to protect me from? More importantly, what doesn’t my Corporation or LLC protect me from?

One could write a whole book on these issues. (Indeed, many have.) The takeaway message is that a Corporation or LLC will not protect a business owner from liability for his or her own actions—i.e., “direct liabilities.” For example, let’s say that general contractor forms a Corporation to own and operate his business. While on the job, he drops a hammer on a visitor’s head. Under the law, the fact that the general contractor happens to have a Corporation does not matter. If he was personally at fault, he is still personally liable. Hopefully, he has insurance!

The Corporation comes into play in situations where the business owner is not personally responsible, but would be held liable anyway under the usual legal principles. For example, an employer is liable for the actions of his or her employees in the course of their employment, even if the employer was not personally involved in all. A Corporation or LLC can shield the business owner by serving as the employer. This is true of other situations involving indirect liability (often referred to as “vicarious liability” in legalese), such as the liability of one partner in a general partnership for the other partner’s actions.

The takeaway message is that corporation or limited liability company can be an excellent way for a business owner to minimize his or her personal liability. But insurance is still a vital piece of the puzzle.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

In the last segment of our series on S-corporations and limited liability companies, we introduced S-corporations and reviewed the overall similarity in how S-corps and LLCs are taxed.  In this segment, we will discuss some of the crucial differences between these business entities.

One of the most important distinctions between an S-corp and an LLC involves ownership.  In general, an S-corporation may have only shareholders who are: (1) individuals who are U.S. citizens; (2) resident aliens; (3) certain types of trusts; and (4) other S-corporations.

Crucially, a corporation can lose its S-election if it acquires a shareholder who does not fall within one of these categories. For example, if a shareholder who is a US citizen sells or gives his or her shares to the limited liability company, the corporation will automatically lose its S election status. This can have very negative tax consequences, as it automatically subjects the corporation to the high tax rates that apply to C corporations.

If your company will have any owners who are not within one of the categories described above, and you want to be taxed on a pass-through basis, you will need to choose an LLC. For example, if one of your investors is a foreign national, or wants to hold his interest through an LLC holding company, an S corporation is out of the question.

However, there may also be situations where an S-corporation is out of the question. In California, an LLC is not available to most businesses that must have a professional license. For example, an attorney, physician, account, or engineer may not use an LLC. This leaves the S-corporation as the only alternative for California professional seeking the protection of corporate entity and pass-through taxation.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com or call him at 925-327-1019.

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