Four end-of-year business compliance activities

Dear Alex:

The end of the calendar year is coming fast. Are there any legal compliance steps for my business that I should take to wind up 2016 and be ready for 2017?

It’s hard to believe that we’re already in the second week of November — I am always surprised by how fast the time between Thanksgiving and New Year’s Day passes.

Legal compliance activities can seem like a mystery, but in most instances they are fairly straight forward. Here are some important annual compliance measures that businesses should be aware of:

File your statement of information with the Secretary of State

This document serves as an update to the state of California concerning who the owners and executives of your company are.

Corporations are required to file this document annually, while Limited Liability Companies (LLCs) need to file only every other year.

There are late penalties for failing to file, and your due date is based on your entity’s filing date. E-filing is available online at the Secretary of State’s website.

Conduct an annual meeting

Your formation documents (corporate bylaws or LLC operating agreement) will give instruction on how to properly conduct an annual meeting of the company owners and company management.

The meeting can be as simple as affirming and approving the activities of the previous year, or if necessary, as complex as developing long-term planning strategies and discussing significant financial or structural changes to the business.

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This also provides a great opportunity for everyone to check in with one another on how things are progressing with the business.

Take minutes, write them down, add a copy of the minutes to your company’s minute book, and provide attendees and absentees with copies.

Employee evaluations

If you have not performed annual evaluations of your employees, while the holiday season may not be an ideal time to conduct those evaluations you may want to take use the milestone of the New Year to schedule performance evaluations.

Performance evaluation meetings are also an opportune time to award end-of-year bonuses, if your company offers those incentives.

Incorporate or form an LLC

Many sole proprietors or partnerships wonder when to form a limited liability entity.

The end of the year, and specifically the last two weeks of December, is an excellent time to form your new business entity.

If you form your entity too far in advance of the end of the year, you will owe franchise taxes to the State of California for the current year as well as the next year, but by waiting until the very end of the year, franchise taxes will not be assessed for the current year.

If you commence business operations under the new entity as of the first day of the New Year, you may save money by only operating as one entity type during the year, which means you should only have one tax return to file for the year.

If you wait, you may have to file two tax returns, which is an additional cost for your business.

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 November 8th, 2016. You can read it on the Register's website here: "Four end-of-year business compliance activities"

Can landlord reject sublease?

Dear Alex:

I own a nail salon in a small retail shopping center.

Last year, we planned to expand our operation by opening a retail boutique in the space next door to our nail salon. We signed a lease for the space next door, but our plans didn’t work out and now the additional space is vacant.

We want to sublease that space to a masseuse, but our landlord won’t approve of the sublease. Can the landlord do that?

Many small businesses change their growth plans over time, and it is common for businesses to extend their overhead costs in anticipation of growth.

It is also common for plans to change. Many times, a business will never experience the growth that they anticipate, and will have to reduce overhead expenses to remain viable.

It is understandable that your nail salon would have difficulty supporting a vacant retail space next door, and it is reasonable that you would want to reduce your expenses by subleasing that space to another tenant.

Almost all modern commercial leases contain provisions regarding the tenant’s rights or restrictions on subleasing. If the lease permits subleasing at all, it is usually only permitted with the landlord’s prior consent, which may be withheld in the landlord’s discretion.

Many times, a tenant who wishes to sublease their space will propose a potential sub-tenant to the landlord, and become upset when the landlord rejects that sub-tenant.

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However, your landlord must consider many factors when approving a potential sub-tenant. You as the original tenant will become the “sub-landlord,” so you should also consider these factors, because your business will most likely have to guarantee the performance of the new sub-tenant under the sublease.

If the sub-tenant fails to pay the rent, you may be liable to pay for their default.

The potential sub-tenant must satisfy the landlord’s credit requirements.

A small business without much capital and without a long history of successful operations may be too risky of a tenant in the landlord’s opinion; in addition to the possibility of the tenant’s failure to pay the rent on time, the eviction process is time consuming and costly.

Those expenses are concerns of the landlord, and as the potential sub-landlord, they should be concerns of your business as well.

Tenant mix is also a significant concern of landlords, particularly in retail centers. The landlord may have granted exclusivity to other tenants on certain business types.

You wouldn’t want the landlord to allow another nail salon to move in next door, and other tenants may not want competing uses in the center either. Additionally, certain use types may be less desirable for family-oriented shopping centers.

For example, a landlord would probably not want a tobacco store to open next door to an ice cream parlor and toy store. Massage providers are a use type that landlords are historically cautious of permitting.

For all of those reasons and others, your proposed sublessee may not be a good fit for the space, and depending upon your lease terms, it is likely within the landlord’s discretion to reject the proposed sublessee.

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 October 25th, 2016. You can read it on the Register's website here: "Can landlord reject sublease?"

Three ways your corporation might not protect you

Dear Alex:

I am the owner of a small interior decorating business with three employees.

When I began business in 2010 I formed a corporation to protect myself.

Recently, one of my employees accidentally bumped a client’s house with our work truck and caused damage to the building. The client has threatened to sue me personally.

Can they do that?

One of the first calls you should make when there is an incident of loss and damage should be to your insurance carrier. If you have sufficient insurance, this type of matter is most commonly resolved through the insurance carrier.

However, if you have gaps in coverage or have reached your policy limits, you or your business will be on the hook. If you accept that there was fault and there will be money damages in your case, your business will be exposed to that liability.

The question of whether your personal assets may also be exposed to these damages depends on the facts of the case and how you have operated your company in the past.

Often, people believe that once they form a limited-liability entity like a corporation, they do not need to take further steps to protect themselves personally from the business’s liabilities.

That assumption is often incorrect, and every business owner operating through a corporation should be aware that a business’s limited liability protection does have limitations.

When those limits are reached, a court can hold the shareholders (the owners) personally liable for business debts, which is known as “piercing the veil” of limited liability.

Here are three common ways limited liability protection of a corporation can be pierced:

Commingling of assets

“Commingling” occurs when the owner combines his business assets with his personal assets. This can happen in many ways, such as if the business owner keeps his business income in the same bank account as his personal bank account, or owner pays personal debts with corporate funds.

Not observing corporate formalities

A corporation must appoint officers, hold annual board and shareholder meetings, keep annual minutes, and file annual documents with the California Secretary of State. Failing to do so could disrupt the liability protection of the company.

Undercapitalization

Undercapitalization essentially means that the business does not have enough money or assets to cover its reasonably foreseeable liabilities. The adequacy of a corporation’s capital is determined on a case-by-case basis and depends on the type of business being conducted.

Fortunately, by keeping business assets separate from personal assets, properly documenting adherence to corporate formalities, as well as adequately capitalizing the business, a prudent owner can avoid these pitfalls and maintain the limited liability protection of their personal assets that a corporation offers.

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 October 11th, 2016. You can read it on the Register's website here: "Three ways you corporation might not protect you"

Tips when buying a business

Dear Alex:

I am in negotiation to buy a printing business in Sonoma County.

I have never bought a business before, so I don’t know what legal issues to look out for before I finalize the purchase.

Any tips?

When you buy an existing business, you should know all of the potential rewards and liabilities that will come along with the business.

The process of weighing these factors and evaluating a business prior to completing the purchase is called “due diligence.”

During due diligence, a review of profit and loss statements, prior years’ books and records and a physical inspection of the assets are first steps.

A Uniform Commercial Code (UCC) lien search on the assets of the business should also be conducted and may be done through the California Secretary of State’s office.

There will be obvious assets and liabilities, like equipment and accounts payable, but there may also exist liabilities that are harder to identify and quantify.

These difficult to identify risks are of significant concern to business buyers.

Long-term contracts can be great sources of value or great sources of liability, depending upon their terms.

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A long-term lease for below market rent may help the company be profitable for many years in the future, however a long-term lease recently executed and signed at full market rent may be a significant operating cost of the business which makes profitability difficult.

Similarly, long-term client contracts must also be carefully scrutinized.

Long-term contracts may result in stable streams of reliable revenue, but if the terms are difficult to satisfy, long-term contracts may just as easily create a monthly struggle to produce product at a profitable rate.

There may also be liabilities that are unknown or unknowable at the time of the sale.

There could be potential lawsuits which have not yet been filed against the business. For example, the present owner may not know that a prior customer was injured by a product of the business and has been working with an attorney to file a lawsuit.

For this reason, many business purchasers will attempt acquire only specific assets of the business — not the entire business entity — and form a new business entity that will then utilize and implement the assets of the old business.

Business sellers generally want to sell the whole business, from soup to nuts, including any pending liabilities. It is always a point of negotiation.

Generally speaking, the market for business sales is fairly illiquid, there are not usually many qualified buyers looking for a particular type of business, and serious buyers will have strong bargaining power.

These are only a handful of common due diligence considerations.

The due diligence process can seem painstakingly slow, but can save a buyer from making a costly mistake, or identify additional value in a business or asset purchase of which the buyer was not previously aware.

Take your time and maintain communication with the sellers during due diligence to reduce your risk exposure as much as possible.

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 September 27th, 2016. You can read it on the Register's website here: "Tips when buying a business"

Access to legal aid for low-income individuals

For many people, the notion of paying an attorney $500 or $1,000 for assistance with a small legal dispute can put the notion of hiring legal representation fully out of reach.

While paying an attorney is a common way to obtain representation and enforce or protect a person’s rights under the law, there are several resources available for low- to no-income individuals in need of assistance.

The first resource one might turn to is the Napa County Superior Court itself. For smaller cases, such as those between neighbors or contract disputes, in which the claimed damages do not exceed $10,000, Small Claims Court is often the best choice of venue.

Small Claims Court is located within the Napa County Superior Court, and offers an even playing field for all parties in a dispute. Attorneys are not permitted to represent parties in Small Claims Court, which prevents an individual without courtroom experience from the risk of facing a seasoned trial attorney representing the opposing side.

To get your case before the Small Claims Court, or into any civil court venue, there are documents that must be filed and service requirements that must be met. These procedures are often unfamiliar to individuals.

The Napa County Superior Court’s self-help and family law facilitator’s desk offers assistance in completing forms, answering questions regarding procedures, identifying appropriate procedures, and general guidance through the legal process.

Although the self-help desk and family law facilitator’s office does not give legal advice and does not create an attorney-client relationship, their guidance and the information they provide is often all a person needs to properly prepare and serve the basic documents required to start or defend against common lawsuits.

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In filing with the court, there are also fees associated with filings. The Napa County Superior Court, and other courts, have the ability to waive filing fees that may otherwise be in the hundreds of dollars, for individuals with financial hardship.

The Judicial Branch of the State of California also offers significant resources online for individuals to research and prepare their cases, at courts.ca.gov/selfhelp.htm that may be accessed for free at the Napa County Library.

In some instances, self-help and small claims are inadequate for the nature of the dispute or the individual person’s specific situation.

In those cases, there is a nonprofit organization in Napa County that is specifically intended to offer assistance to individuals with income hardships or other hardship conditions that make access to justice otherwise difficult or impossible.

Bay Area Legal Aid, sometimes called BayLegal (formerly Legal Aid Napa Valley), provides low-income individuals with free civil legal assistance, which may include legal advice and legal representation. Their services range from consumer law to health care access.

The Napa County office of Bay Area Legal Aid is located at 575 Lincoln Avenue, Suite 210, Napa, CA 94559 or 707- 259-0579.

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 September 13th, 2016. You can read it on the Register's website here: "Access to legal aid for low-income individuals"

Friends need advice about rental property investment

Dear Alex:

A good friend and I want to buy a house together to rent out as investment property, but we want to make sure that we are legally set up the right way.

What do we need to do?

There are two primary fields to consider:

1. How will title to the house be held

2. How should you organize your business partnership?

While these areas are separate legal issues, they overlap.

The most common way for investors to take title together is as “tenants in common.”

Tenants in common means that you each own a proportional, interest in the property, but it is an undivided proportion.

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For example, if you each own 50 percent of the house, the ownership rights of the property aren’t split in half, where one person owns and controls the north half and one person owns and controls the south half.

Instead, each person owns a one-half interest in the whole thing, and you share ownership and control over the entire property. There are default rules in the law for owning a property as tenants in common which govern what happens when the property requires repairs or improvements, decision-making authority, and other factors which you may not have considered.

You may use a written Tenancy In Common Agreement, to more specifically describe the intended rights and obligations of the co-owners. Upon death of an owner, that person’s ownership interest will pass on to their heirs or devisees according to their estate planning instructions or by operation of law.

A tenancy in common agreement is useful among separate owners who are not necessarily doing business together, but if you intend to continue to purchase properties with this person, another common arrangement is to form a Limited Liability Company (LLC), and for the LLC itself to own and hold title to the property.

The owners each own their agreed upon proportion of the LLC, and therefore own that proportion of the assets held inside the LLC. By structuring your investment this way, the liabilities associated with the property will be contained to the LLC due to the liability protections offered by that business structure.

Your operational rules may be governed by the Operating Agreement of the LLC, much like the Tenancy In Common Agreement would outline the operating rules for tenants in common. It is generally unwise to use a corporation for real estate holdings, because corporations are subject to tax treatments which are different from LLCs and which are not favorable to real estate investment.

In each case, your lender will have specific requirements for you to consider in order to be approved for a loan, and your property insurance provider will need to be informed that the property is intended to be used for investment as a rental.

Both tenancy in common interests and LLC membership interests can be contributed to a trust for estate planning purposes.

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 30th, 2016. You can read it on the Register's website here: "Friends need advice about rental property investment"