Do I need to form an LLC?

Dear Alex:

I am starting a blog and podcast to talk about sports.

I haven’t started publishing any material yet, and do not expect to generate any revenue from these activities. A friend of mine told me that I should form an LLC in case I get sued for defamation.

What do you think?

It sounds like you are starting a great hobby. At this stage, it is probably too early to worry about forming a business entity.

In the future, an LLC might be a good idea. While it goes without saying that I hope you don’t say anything that would constitute defamation, here are three more reasons why you probably don’t need a business entity:

First, your risk is very low at this stage.

If you have readership and podcast subscribers, the number of subscribers is probably very small. Even if you accidentally defamed a famous sports star, there is almost no risk that the individual would find out or care. Even if the person did find out, there is not likely to be any measurable harm to that sports star.

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An LLC costs $800 per year in state franchise taxes, as well as initial costs of formation. Due to your very low-risk exposure, the annual cost of the entity does not appear to be worth the protection that it might offer you.

Second, while an LLC is an effective business entity type for insulating the individual owners against liability of the business, your activities at this point have no business purpose.

The business’s liability protection would probably fail if you were sued, leaving you personally exposed. With no revenue or chance of revenue, the only assets of the entity will be the money that you contribute, and all of the activities conducted through the entity will be drawn off of those personal funds. Any expenses of the LLC will serve no real business purpose.

This means all spending of the LLC would be for your personal use of LLC’s assets. Spending entity assets on personal activities may be called “commingling” of funds, and commingling of funds is one method of “piercing the corporate veil,” which is a legal term for holding the owners of a business liable for activities conducted by the business.

The third reason is that you can always be held accountable for your own negligence.

If the LLC did make money, the main activity driving the revenue would be your own personal commentary in the blog and radio. If you were negligent and accidentally committed defamation on a podcast or blog posting, that writing would be a personal act of negligence that the LLC may not protect you against.

As your hobby grows in subscribers and you start to gain paid sponsorships, then you might want to revisit the idea of forming an LLC or other limited liability entity from which to conduct your activities.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on August 16th, 2016. You can read it on the Register's website here: "Do I need to form an LLC?"

Gross negligence vs. negligence — what's the difference?

Dear Alex:

Our business was recently presented with a contract that required the other party to indemnify, defend, and hold us harmless from their acts of gross negligence.

Our attorney suggested we change this requirement to apply to all acts of negligence, not just “gross negligence.”

They seem almost the same, so why is this such a big deal?

Allocations of liability are some of the most highly negotiated provisions of a contract. Common points of contention are the risks of liability from a party’s negligence or gross negligence.

When you are asked to sign a contract in which the other party says that they will “indemnify, defend, and hold harmless,” that means they are promising to protect you from the costs of certain events that might occur.

They are promising to pay for your out-of-pocket losses that arise if the subject event occurs (indemnify), they will pay for your attorneys’ fees or provide you with an attorney to defend your position against lawsuit if the subject event occurs (defend), and they will not sue you or seek reimbursement from you if they are required to pay damages to someone else when the subject event occurs (hold harmless).

Frequently, all three of these protections come as a package in the indemnification section of the contract, but not always.

The negligence or gross negligence of a party are often the subject events that trigger the other party’s promise to indemnify, defend, and hold harmless.

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Negligence and gross negligence sound very similar, but they are actually very different things. Negligence is the failure to exercise reasonable care, which is by nature accidental and inadvertent.

Gross negligence, however, results when the person exercises so little care in their actions that it could be presumed that the person was indifferent to the consequences.

For example, if you operate a bungee jumping company, it would be negligent if you forgot to inspect the condition of the cord before someone used it to jump.

If a person was injured because the cord was frayed and broke, damages from that injury might be the result of your negligent failure to inspect and discover the inadequate condition of the cord.

On the other hand, if you remembered to examine the bungee cord, you discovered that the cord was badly damaged but you still allowed a person to jump on the damaged cord, their subsequent injury could be the result of your gross negligence. In that situation, you knew of the risk and acted with indifference to the likelihood of injury.

As you can imagine, events of negligence, or “ordinary negligence,” are more common than gross negligence.

Losses from ordinary negligence are more likely to occur than losses from gross negligence. In your case, your attorney wants you to be protected as broadly as possible, so she wants you to be protected against ordinary negligence.

At the same time, the other party, who is offering the protection, does not want to expose themselves to too many risks, so they only want to offer protection against acts of gross negligence and reduce their potential financial exposure.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on August 2nd, 2016. You can read it on the Register's website here: "Gross negligence vs. negligence — what's the difference?"

Three areas of law every business owner should learn

When you sit down and think about it, laws invade almost every part of our lives.

Under the auspices of social order and the greater good, it is largely accepted that laws are a necessity in our complex culture. This is as true in our private lives as it is in our business activities.

In private day-to-day life, most of the laws that impact our activities are either so widely known that they are second nature, or are based in common sense and ingrained in us from birth.

In business, however, the laws governing business activities are usually not widely known among the populous, nor are they usually based in common sense. As a business person it is important to take the time and study up on some of the most impactful areas of law that affect your business.

Spending some time educating yourself before issues arise can save you a lot of time and money in preventing trouble down the line.

Here are three of the most important areas of law of which business owners should have a basic understanding:

1. Employment Law.

If you have any employees at all – even just one – this subject is critical to your business.

A mistake in calculating overtime, vacation hours or paid time off can quickly and quietly result in a huge backlog of wages owed to your employee. Furthermore, the penalties that the Division of Labor Standards Enforcement levies for unpaid wages often exceeds the cost of the wages themselves, in the thousands of dollars.

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On top of wage and hour issues, the Affordable Care Act is very complex, not intuitive, and can also result in debilitating penalties to the unwary businessperson.

2. Contracts.

One of the biggest risks to your business arising out of contract law is your assumption that you know very much about contract law.

People assume they know about contracts because the concept seems simple: Write down the terms of the deal, both parties sign, and the contract is done. What else is there to know?

In practice, there is a lot to know.

Beyond the basic terms of the deal, the “boilerplate” is often far more significant in the implications it creates than the terms of price, delivery, timing, etc. Allocation of risk and liability, arbitration and venue provisions, and indemnification provisions can each have a greater financial impact on the parties than the mere failure to pay or perform the basic terms of the contract.

3. Tax.

Uncle Sam, the state of California, and the local municipality each take a chunk.

How much is owed to which agency can surprise even the most sophisticated businesspeople. Once a mistake is made, not only can it be costly, but while your employee or a party with whom you conduct business may work something out, the government is usually not as willing to concede or make accommodations for you.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on July 19th, 2016. You can read it on the Register's website here: "Three areas of law every business owner should learn"

When temperature and taxation meet

Dear Alex:

My wife and I own a sandwich shop where we sell hot and cold sandwiches. Because of our small size, all of our sales are to-go.

We are confused about sales taxes – we thought food sold to-go was not subject to sales tax, but someone just informed us that we might have to collect sales tax on our to-go sandwiches.

Should we be collecting the sales tax?

Tax laws are complicated, and the rules on food sales taxes can be confusing.

The law treats food types differently based upon where the food will be consumed, the temperature of the food, and those rules can differ even more, depending upon the temperature of the condiments sold with the food.

Sandwiches can be even trickier than other foods, because you might sell one cold sandwich and one hot sandwich to the same customer at the same time, and only a portion of that customer’s order would be subject to sales tax.

Many business owners think that sales tax applies only to food products sold for consumption on the seller’s premises, while orders to-go are not subject to sales tax.

What business owners may not know is that even food sold to-go can be subject to sales tax, because the temperature at which the food items are sold can make the difference between a taxable and non-taxable sale.

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Sales tax applies to all to-go food products served hot and hot merely means that the food is intended to be sold above room temperature, regardless of cooking method.

Under the law, food is still considered hot even if it was initially warm for sale but has cooled down by the time it is sold. Tax also applies if you sell a cold food product with a hot dip or condiment, like a French dip sandwich in hot au jus.

Interestingly, no sales tax applies to the sale of to-go food sold at a cold temperature, but which is intended to eventually be eaten warm, if the customers heat up the food themselves.

This is true even if the appliance which the customer uses to heat the product is located on your business’s premises.

A common example of this would be the cold burritos sold at convenience stores, where a microwave is provided for the customers’ use.

Many of your take-out sandwiches are probably not subject to sales tax, because they are sold cold, for consumption off-premises; however, if you are selling hot paninis or French dip sandwiches with warm au jus, you may find yourself in a taxable situation.

For small businesses, understanding the effect that retail food’s temperature has on its taxability is critical to complying with its sales tax reporting and payment requirements.

Doing so correctly can help reduce the chance that your business will experience an unexpected and potentially devastating tax liability.

This column was co-authored by Matthew Stevens, JD, LLM, EA, an associate attorney with Myers & Associates, LLP, who practices tax law.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on June 21st, 2016. You can read it on the Register's website here: "When temperature and taxation meet"