October 2011 Archives

October 17, 2011

Litigation Should Be Your Company's Last Resort

Like any metropolis, San Diego has a diverse business climate requiring constant interaction amongst retailers, service providers, customers, guests, invitees, tenants and landlords, suppliers, manufacturers, contractors, government agencies, insurers, law firms, and accountants. This level of interaction naturally breeds conflict especially when multiplied by the large number of business, consumer and professional transactions occurring every day in San Diego County. Conflict resolution occurs routinely and the vast majority of conflicts are resolved amongst the parties without the need for lawyers. In fact most conflict is resolved before anyone recognizes that a conflict has even arisen. People naturally look to solve problems as quickly and efficiently as possible so that they can move on to more important matters. Whether a simple cashier error or a complex misunderstanding regarding the terms of a contract, most conflicts are resolved within the first few hours. Of those that are not resolved quickly, most are worked out informally by the parties in a reasonable timeframe and without the need of a San Diego litigation attorney.

705366_construction.jpgUnfortunately, the law of averages guarantees that some business conflicts will not be resolved without resort to the legal system. When conflicts reach this level, business owners rely on the court system to provide them access to a just resolution. The problem of course is that access to a just resolution isn't free and even in those circumstances where there seems little doubt about who is in the right, litigation outcomes are far from predictable. In fact, in most cases litigation is drawn out, expensive, emotionally draining and ultimately unsatisfying. This does not mean that access to justice is a myth. However, opting to resolve business disputes via litigation requires a cost benefit analysis similar to any other business decision. Even the most deserving cases may not be economical to pursue. Litigation costs and attorneys fees often exceed the value of the case to the litigants. In those cases, informal resolution becomes imperative. The alternative is to right off the loss rather than accept greater losses associated with long drawn out litigation.

Whatever the cost benefit analysis, resorting to litigation should be your last resort. Why? Because as stated above, litigation outcomes are unpredictable no matter how righteous a claim is. Assume for instance that a contractor is owed $225,000 for work completed on a construction project. There is little doubt from the contractor's perspective that it is owed for the work completed. Nonetheless, the developer, a private individual, has questioned the quality of the workmanship and is refusing to pay until major repairs are completed. Assume further that the developer is being unreasonable. The contractor knows that the developer is out of money and is making excuses to avoid payment. The case is simple enough. The developer should pay for the work done. If the developer cannot afford to pay, a lien can be taken against the property to protect the contractor's interest.

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October 16, 2011

Why the California Limited Liability Company Is Right for Investment Properties

Ownership of investment property in San Diego can be a rewarding venture.  However, as with all investments, a return is never guaranteed.  It's important to evaluate the property's value up front factoring in: the property's relative worth compared to alternatives; the market value of rental income in the geographic area for similar properties; the property's potential for appreciation; management costs; and potential liability and tax implications.  This article focuses on the choice of business entity that best protects investors from liability and negative tax implications.  Whether or not you already own investment property or are considering purchasing investment property, choosing how to structure your ownership is crucial.  Consultation with an experienced San Diego business lawyer and a real estate professional are the best ways to maximize your personal protection.  

545784_lovely_little_cottage_3.jpgThere is a reason the prevailing wisdom favors the Limited Liability Company ("LLC") as the best form of ownership in California for investment properties.  California LLCs are relatively flexible business entities that have proven particularly beneficial when it comes to ownership of investment properties.  First, LLCs allow for pass through taxation avoiding the double taxation associated with C-Corporations (C-Corporations are taxed first on their profits and taxed again on the profits shareholders receive as dividends).  Second, like most formal business entities, LLCs provide personal protection from the liabilities associated with an investment property.  A member's personal assets are protected from claims against the LLC.  Personal ownership in an investment property or ownership as a partnership leaves the owners vulnerable to liability for accidents that occur on the property.  Liabilities are often extensive and can exceed insurance policy limits, particularly where permanent injury or death is involved.  

S-Corporations are a tempting alternative to the LLC, and in some business contexts the S-Corporation may make sense.  In addition to liability protection, qualifying corporations that make an S-Corporation election with the Internal Revenue Service also benefit from pass-through taxation.  However, S-Corporations lack the flexibility that LLCs offer.  To maintain S-Corporation status, corporations must be domestic, have only one class of stock, distribute profits and losses in proportion to each shareholder's ownership interest and cannot have more than 100 shareholders who are natural persons and U.S. citizens.  LLCs, on the other hand, allow for unequal allocation of income, deductions and losses.  Members can choose how profits are allocated regardless of each member's contribution or level of management responsibility.  This is especially convenient for family owned investment properties or where one owner will be more actively involved in the management of the property.  Members of an LLC can also be a corporation or other LLC.  In addition, if an S-Corporation transfers property to another entity or sells a property to another entity in exchange for another property, it immediately incurs a capital gains tax.  These transactions, if done properly, can be tax free for LLCs.

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