January 2013 Archives

January 28, 2013

Avoiding California's $800.00 Minimum Franchise Tax for the Newly Formed LLCs that Haven't Transacted Business

It is common for entrepreneurs to get excited about new business ventures.  They often move forward with forming a formal business entity such as a California Limited Liability Company ("LLC") believing that all of the elements of success are in place.  They hire a San Diego business lawyer to set up their LLC and file Articles of Organization with the California Secretary of State.  Sometimes, however, unanticipated changes or barriers stop the fledgling business in its tracks (partners back out, expected funding falls through or needed capital  equipment becomes unavailable).  Suddenly, the organizers of the LLC find themselves faced with the task of dissolving the company and aren't sure what steps to take.  Some will simply ignore the situation assuming that no steps are necessary given that the company hasn't conducted any business - no income is generated so no taxes are due.  This may or may not be true depending on the circumstances.  California LLCs are subject to a minimum franchise tax of $800.00.  This is true whether or not the LLC generates revenue.  Presently, it does not appear that the California Franchise Tax Board is interested in pursuing individuals for an LLC's taxes so the organizers are not held personally liable in most cases.  Nonetheless, it makes sense to formally cancel or dissolve an LLC to ensure that any taxes due are paid and no outstanding obligations or liabilities come back to haunt organizers.  

1270512_boardwalk_paseo_entablado_3.jpgNewly formed LLCs may formally cancel the LLC and avoid California's minimum franchise tax if the following requirements are met:

1.    A Form LLC-4/8 Certificate of Cancellation is filed within 12 months from the date the Articles of Organization were filed with the California Secretary of State;

2.    The LLC has no debts or liabilities;

3.    The known assets of the LLC have been distributed to persons entitled thereto, or no assets have been acquired;

4.    The final tax return or a final annual tax return has been or will be filed with the Franchise Tax Board;

5.    The LLC has not conducted any business from the time of filing the Articles of Organization;

6.    A majority of the managers or members, or if there are no managers or members, the person or a majority of the persons who signed the Articles of Organization, voted to dissolve the LLC; and

7.    all investments received from investors for membership interests have been returned to those investors.

This is good news for those that have recently formed an LLC and want to dissolve before transacting any business.  The LLC-4/8 Certificate of Cancellation is relatively simple to fill out and file.  However, it is important not to forget to timely file a final tax return.  Consult with a San Diego business lawyer to ensure that your LLC is properly canceled or dissolved.
January 26, 2013

Realities of Pursuing Breach of Contract Actions

Contractual disputes are a regular part of doing business but this fact is rarely recognized by business owners.  This is because the vast majority of disputes are resolved informally before attorney involvement becomes necessary.  Every time discounts are offered because of delayed delivery or because a product is defective, every time a partner agrees to sell his interest in a business because the partners want to take the business in different directions or every time a commercial lease is renegotiated because of a problem between the landlord and tenant, contractual disputes are resolved.  The list of examples is endless.  The lesson is that most business owners are reasonable and seek efficient solutions to problems and in fact reach efficient solutions.  This is because experienced business owners understand that litigation is time consuming, emotionally draining, risky and expensive.  The purpose of this article is not to dissect the legal elements of a breach of contract cause of action.  Rather, its purpose is to provide some guidance to business owners faced with a breach of contract while simultaneously conveying some of the pitfalls inherent to contract litigation.  

961189_angel_bandw.jpgIt is common for business owners to call their attorneys abruptly with a passionate plea for justice relating in great detail just how badly they have been wronged.  Attorneys listen of course because they know it's good for their clients to vent.  However, attorneys are internally sizing up the practical realities of the case.  Attorneys ask themselves very simple questions.  What are the damages (how much money is involved)?  Playing devil's advocate, what will the other side claim?  Is this situation specifically addressed in the contract?  How much will it cost my client to fight this battle?  In fact some lawyers make it even simpler.  They only want to know what the damages are.   If the damages are small, then it is likely that their client will have to spend more money litigating the case than they can win - assuming they can and will win.  Unfortunately, even the most practical business owners sometimes find themselves faced with a breach of contract that cannot be worked out despite significant efforts.    

While every situation is different and consultation with a business litigation attorney is best, the following serves as a helpful guide in deciding how to proceed when a contractual dispute arises:

1.    Determine how much money is involved.  If it is less than $10,000, pursuing a small claims action in California is probably your best bet.  However, even small claims actions require some commitment from the business owner.  If the damages are a couple of hundred dollars, it's probably better to send letters and continue to pursue the matter informally.  The "I am not going away" tactic is often successful.  If the amount is greater than $10,000 but below $25,000, consider consulting with a lawyer about an aggressive letter and phone call campaign.  This can be done for a relatively low cost and is often successful.  Depending on the circumstances, this tactic can be extended into filing a civil complaint for breach of contract.  The purpose is to put pressure on the other side hoping that it brings them to the negotiating table.  If it doesn't, you can instruct your attorney to dismiss the case before it costs you more than $25,000 in attorney fees and litigation costs.  Ultimately, the advice you receive will depend on the strength of your case.  

2.    Forget about Punitive Damages and Contingency Fee Agreements.  It is only in extraordinary cases where independent torts exist (fraud, physical harm, etc) that punitive damages are awarded.  If the actual damages are high and the case involves egregious actions you will certainly want to discuss the potential for punitive damages with an attorney.  If litigation is pursued in high damage cases, attorneys will plead numerous causes of action seeking all potential relief.  However, most business disputes do not rise to this level and even if punitive damages are sought, they are rarely awarded in disputes between businesses.  It might be different of course if you were harmed by Microsoft and can show egregious action but this is not the typical scenario that is the subject of this article.  The same is true regarding contingency cases.  Attorneys will rarely handle business disputes on a contingency basis.  If they do, it's because the case is extremely valuable and the facts are so one-sided that they have high confidence in winning and collecting.  It cannot be stressed enough that these types of scenarios are rare.  It doesn't hurt to consult with several lawyers, but it is better not to expect that a lawyer or law firm will assume the risk for you.

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January 14, 2013

Tenant's Options After Landlord Breach of Commercial Lease

Under California law, a commercial tenant's options when a landlord fails to perform under a lease are generally limited by the terms of the commercial lease.  San Diego businesses often find themselves without a practical legal remedy because the terms they originally agreed to prevent them from withholding rent or terminating the lease.  Tenant's are forced in these circumstances to seek a remedy through litigation which is of course costly and time consuming.  

1188945_into_the_hell_hole.jpgThose tenants that entered into leases without review or who were unable to negotiate better terms often find themselves dealing with landlord breaches.  Some withhold rent immediately not realizing that they might be held in breach of contract.   Others just abandon the premises and end up getting sued afterward.  Whether or not a commercial tenant can do these things for the most part depends upon the actual terms of the lease.  Is it silent as to landlord's defaults?  Does it allow the tenant to make needed repairs and then deduct the cost from rent (repair and deduct)?  Or does it have specific language limiting the tenant's remedies to court action.  For instance, a lease clause might state, "in no event shall the tenant have the right to terminate this lease as a result of landlord's default and tenant's remedy shall be limited to damages and/or an injunction."  

The best way to avoid this peril is to negotiate better terms in the first place.  However, negotiating better terms is dependent on a party's bargaining power.  In most cases, San Diego businesses have little bargaining power because they are new or unknown entities.  In addition, competing businesses are willing to enter into a lease with the landlord under any terms, leaving the more savvy entrepreneurs a difficult tight rope to walk.  Many landlords approach lease negotiation from a "take it or leave it" perspective. This does not mean that San Diego businesses have absolutely no bargaining power, but landlords typically stand strong when it comes to limiting a tenant's remedies.  Nonetheless, a prospective tenant should never shy away from negotiation better lease terms no matter how limited their bargaining power.  Every landlord is different, and the issues that are important to one landlord may not be as important to another.

Ideally, those tenants currently facing landlord defaults which cannot be resolved through informal discussions will consult a commercial lease lawyer.  Of course, paying for an attorney is not always practical.  In such cases, the first step is to review the operative lease and its amendments carefully.  Look for language that limits, or relates to in any way, tenant's remedies upon landlord breaches including language limiting the tenant's ability to terminate the lease, seek consequential damages, seek declaratory relief, withhold rent or any other limitations on tenant's remedies.  Once the tenant has gained a basic understanding of its limitations, it can determine whether seeking legal assistance is necessary.  If there are limitations, consulting a commercial lease lawyer is highly recommended.

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