June 2009 Archives

June 22, 2009

Struggling San Diego Commercial Leasing Market Presents Business Opportunities

As the San Diego commercial leasing market continues to struggle, opportunities abound for young and growing businesses to obtain favorable leasing terms. With the abundance of "For Lease" signs reminding folks of the current recession, commercial property owners are anxious to fill space and are willing to negotiate to do so. 

Leasing Opportunities3.jpgBusinesses and commercial property owners alike would do well to look ahead, and consult with their business attorney regarding their options.  Whether the economy has bottomed out is a question that will remain unanswered for some time.  However, it appears that the economy is in that soft zone somewhere in the bottom of the trough and there isn't much room left to bottom out on. Fear of a depression with bread lines extending around the corners of major metropolises stifles productivity and investment. Such fear is almost certainly unwarranted. These are the moments that entrepreneurs seize! They don't seek to weather the worst case scenario. They see opportunities and commercial property owners benefit from their aggressiveness. So does the economy.
 
A strong relationship between the commercial property owner and tenant is itself a valuable asset. The property owner benefits from successful business tenants. They are long term reliable tenants that pay their rent on time and, depending on the lease, pay additional monies based on profits or sales. The business benefits immeasurably from positioning itself in the right location in the right community with a structure that has the right physical properties, and from favorable lease terms. Working closely with their attorneys to draft mutually beneficial lease terms provides much needed security to both the landlord and tenant. Each side should take a hard look at their short and long term business goals, their immediate needs, and the unique fit between them. Most importantly, they shouldn't be afraid to step out of the box and look to creative lease terms that benefit both sides. Property owners are presently more willing to entertain new and innovative proposals even with existing tenants.

Finding that "it" location for a new or growing business is priceless. Filling space for the commercial property owner is just as important. Whether you are a new or existing business or the owner of commercial property, an aggressive approach to finding the right match will help you over this economic hump and might just be the start of a thriving or rejuvenated business.


June 15, 2009

California Corporations - The Importance of Maintaining Corporate Formalities

Maintaining corporate formalities is critical for California businesses that have elected to incorporate. Often small business owners wrestle with the decision to incorporate and after considerable deliberation opt for incorporation largely because they seek to limit personal liability. When a corporation is properly maintained, stock holders are generally not liable for the debts and other liabilities of the corporation.

Corporate formalities 6.jpgUnfortunately, too often new small business owners burdened with the day to day operations of bringing a new business on line fail to heed their attorney's advice regarding corporate formalities and let them slip by the wayside. Others resort to self-help incorporation tools to reduce costs and simply fail to appreciate the importance of maintaining corporate formalities. More importantly, these young entrepreneurs move forward believing they have formed legitimate corporations and are therefore protected from personal liability. By commingling assets, using corporate assets for personal use, failing to adequately capitalize the corporation to meet current and anticipated debts, failing to hold annual meetings and keep written records (minutes), and/or failing to properly document corporate actions, the new corporation starts to look more like the alter ego of the new business owner and less like a corporation.  

This is not to say that young corporations must do everything perfectly.  Courts are unlikely to sanction piercing the corporate veil for minor technicalities.  When making the "piercing the corporate veil" decision, courts look to the totality of circumstances including whether there was fraud or other circumstances that would make insulation from liability unfair to a creditor.  The problem for the young corporation and its stock holders is that creditors are quick to take advantage of whatever technical violations they learn of.  The attempt to pierce the corporate veil itself creates a significant hardship for the targeted shareholder/owner of the corporation.  To avoid any risk, the best precaution young corporations can take is to diligently comply with all corporate formalities.

June 10, 2009

What Is Self-Employment Tax and Why Do San Diego Businesses Have To Pay It?

When starting a new business, San Diego's entrepreneurs are often confronted with a myriad of business and legal issues that they didn't anticipate when originally formulating their business plan. As they consider overhead, business formation, taxes, the need for an attorney and accountant and other expenses, somewhere along the line they learn they have to pay a self-employment tax. While some business owners are familiar with the concept - others ask, "Why do I have to pay this?"

Self Employment Tax_1093369_business_shadow.jpgSo what is the self-employment tax? The new business owner will be comforted to know that the self-employment tax is not a tax paid only by the self-employed. Rather, the self-employment tax is the social security and Medicare tax that everyone pays. Those employed by others see these taxes withheld from their paycheck and in most cases without realizing that their employer is also paying a portion. The self-employed individual, on the other hand, must pay the entire amount. Essentially, your employer alter ego is paying the portion of your social security and Medicare taxes that would otherwise be covered by your employer in the conventional employer/employee relationship.

In the United States, an individual is considered self-employed for tax purposes if that individual operates a business as a sole proprietor, a partner in a partnership (including general partners in LLCs), or an independent contractor. The social security and Medicare taxes (the self-employment taxes) typically withheld from most wage earners are the equivalent of the combined contributions of the employer and employee under the FICA (Federal Insurance Contributions Act) tax structure. Under the FICA tax structure, employees and employers make equal contributions to both Social Security and Medicare. As stated, the self-employed individual pays the entire amount to Social Security and Medicare. Currently, self-employment tax in the United States is 15.3%. This rate consists of two parts: 12.4% for social security (capped after the first $106,800) and 2.9% for Medicare.

Having to pay the self-employed tax can be disconcerting. However, there are some advantages. Namely, the self-employed individual can deduct up to half of their self-employment tax from their adjusted gross income. Perhaps in the future, tax laws will be amended to further encourage entrepreneurs by reducing the self-employment tax. Until then, it must be considered part of the cost of doing business.
June 4, 2009

Billable Hours - San Diego Businesses Should Ask How Much Is Too Much?

San Diego businesses should be asking themselves how the "billable hour" law firm culture affects their bottom line. A recent article about a patent holder's defense of a patent infringement action focused on the business's desire not to cave into the demands of what it believed was a patent pirate despite the knowledge in advance that the legal fees would exceed the $400,000 licensing fee sought. Although the battle itself was inspiring, one can't help but be awed by the last paragraph telling the story of the corporation's victory and it's new battle to recover over one million dollars in attorneys' fees.

One million dollars in attorneys' fees! Presumably, this is independent of costs necessary to defend the case. A sole practitioner has to shake his head at the staggering amount. Even experienced litigators prosecuting or defending multimillion dollar cases involving multiple parties and hundreds of attorney hours have to wonder. Law firms will undoubtedly counter that their rates are competitive and that a patent infringement case can easily reach into the 1000 hour range or higher. This is is not unheard of.  Five weeks of deposition, five weeks in a document review, law and motion practice, other discovery and a six week trial can easily exceed 1000 hours.  A six week trial with multiple attorneys working on the case could alone involve more than 500 attorney hours.  Undoubtedly, the stakes are high and corporations are willing to pay big dollars for the right legal representation.  Some may feel there is no substitute for the big firm experience.  But one million dollars?

Billable 1.jpgEach case is different of course and will have varying levels of complexity.  At the heart of this discussion rests two key components: efficiency and incentive.  The two components are interdependent.  Law firms typically hire young associates who are first and foremost expected to bill a minimum number of hours per year (billable hours).  The "billable hour" is the benchmark by which their performance is rated.  They are most often raw inexperienced  practitioners with little or no practical understanding of the complexities of the cases assigned to them, the procedural time lines important to litigation or the ultimate evidentiary effect of their decisions.  Combine this inexperience with the "billable hour" and you have a recipe for inefficiency.  Inexperience or not, minimizing attorneys' fees for the client and maximizing billable hours in the real world are mutually exclusive.
 

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