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Why You Might Want Your Newport Beach Business Lawyer to Create Multiple LLCs for Your Properties

Tuesday, September 27th, 2011

As a business lawyer in Newport Beach, I find that it often makes sense to advise clients to create multiple LLCs when they own more than one investment property. While it might seem more convenient to simply set up one LLC for all of your properties, you can maximize your asset protection by putting each into its own limited liability company. This LLC should not include any business activity that is not directly related to that particular investment property.

The point of creating an LLC in the first place is to protect your personal assets in the event that your insurance cannot cover damages relating to the investment property. Business and corporate lawyers have long advised this approach. It keeps the landlord or property owner from being personally liable when a tenant sues for damages or creditors are looking for payment for various other reasons. The LLC is attached to the property, but not to the landlord’s personal home, vehicles, and life savings.

By creating separate LLCs for each property, you limit liability to that one company. If something goes wrong with one property, a lawsuit will not be able to draw from the others. On the other hand, if four properties are held in one LLC and something happens with one, a lawsuit can go after the equity and assets of the other three. Creditors are only able to seek compensation for the individual LLC and will not have access to funds from the others.

For example, if you have $100,000 equity and assets in each of four properties and are sued over one, there is $400,000 available to settle that suit. If each property had its own LLC, then only $100,000 would be available, saving you considerably.

While there is a cost associated with forming additional LLCs, it is minimal compared to what most property owners stand to lose by overlooking this option. We can help you with this process here in California so that you’re fully in compliance with all applicable laws. Many property owners look at it in the same way as they do insurance, knowing that it provides considerable asset protection.

By taking the extra step to have your business lawyer create an LLC each time you invest in a property, you are protecting your future earnings and personal assets.

Tags: business lawyer in newport beach
Posted in California Business Planning | No Comments »

OC Business Attorney Talks Estate Planning and Business Succession

Friday, June 10th, 2011

Most people hear the words “Estate Planning” and automatically think about wills, trusts, tax issues, and probate. As an OC business attorney, I can tell you that the reality is that estate planning is about much more than just figuring out how to pass on your hard-earned assets. We’ve written a lot about the ways that estate planning benefits families. Today we’re going to talk about the broad principles of estate planning and focus on applying them to one particular segment of the population, business owners. The concepts are relevant to all estate planning, however, so keep reading even if you’re not a business owner right now.

What is a Business?

In a very broad sense, a business is something that delivers value to customers in exchange for enough revenue to make operations worthwhile. People and businesses are very similar in that both spend their time acquiring assets.

Business entities are even more similar to people. A business entity has its own legal existence. That just means that business entities can enter contracts, buy and sell goods, sue and be sued, and do just about anything else that a person can do.

The similarities end, however, when the discussion turns to continuity. A business entity, unlike a person, can exist perpetually. Sure, businesses can be wound up and their existence terminated, but they can and often do outlive their founders. The result is that business entities themselves do not need to make or have estate plans. People do, because people cannot live perpetually.

The Living Trust Solution

The irony, of course, is that businesses are owned by people. Without a plan in place for what will happen in the event of death, all assets owned by individuals, whether businesses, cash, stocks, or real estate, may become subject to the court system. In the case of assets like cash, being subjected to probate simply means that attorney fees will eat up a big part of the estate.

In the case of a business, the probate process can very well mean a total loss. That’s because probate takes a long time, and if there is no succession plan in place, then a business may not be able to operate lawfully and may have to be wound up.

It goes without saying that if you own a profitable business, you want to pass it along to those who matter most in your life. A living trust is the perfect mechanism for people, business owners and non-business owners alike to pass on their assets without involving the court system, at a significant cost savings, and with a high degree of privacy.

In the case of business owners, there are some specific benefits to using a living trust:

The ability to pass ownership of your business without the need for court involvement, so that operations never skip a beat.

The ability to specify a succession plan in accordance with your business’s governing documents (e.g. operation agreement or partnership agreement).

Tailoring living trusts is a big part of our legal practice. We are here to serve your needs and provide a customized solution to your estate and succession planning needs, so that you never have to worry about what will happen to your loved ones, your assets, or your business in a worst case scenario.

Call us today to schedule your Family Wealth Planning Session, and learn how we can create a trust that meets your needs. Our Family Wealth Planning Session normally runs $750, but the first two people to mention this article will receive a complete planning session with me at no charge. Call today and mention this article.

Tags: estate planning, oc business attorney, probate
Posted in California Business Planning, California Probate, Orange County Estate Planning | No Comments »

Using a Limited Liability Company (LLC) to Transfer a Family Business

Thursday, March 31st, 2011

Most of us have at least one client who has a family-owned or closely held business that is a major part of their estate, yet they have done nothing to plan for the succession of that business. Business exit/succession planning can be challenging because of the tax issues, family dynamics and egos. But it can also be very rewarding. As we help our clients solve these issues, we develop a closer relationship with them, and we begin to build a relationship with the next generation. This planning also strengthens our professional relationships, as we must work together with other professionals to bring about the best results for our mutual clients.

In this issue of The Wealth Counselor, we will examine a case study that uses a Limited Liability Company (LLC) in the transfer of a family business to the next generation.

Case Study Facts
Frank (age 62) is married to Betty (age 58). Frank has an older son, Tom, from a previous marriage who is active in Frank’s business. Betty has a daughter, Susan, from her previous marriage. Together they have a son, Charlie, who is a minor. Betty, Susan and Charlie are not involved in Frank’s business.

Frank owns 100% of an S-corporation. It has a fair market value of $10 million and generates very good cash flow. Frank and Betty have significant other assets, including a home and investments. They own some jointly and Frank brought some into the marriage – they are held in his individual name. Their $5 million lifetime gift/estate/GSTT exemptions are fully available.

Consequences of No Planning
If Frank does nothing, according to the probate laws of the state in which they live, Betty will receive 50% of Frank’s estate including the business; his son Tom will receive 25% of Frank’s estate including the business; and Charlie will receive 25% of Frank’s estate including the business. Because Charlie is a minor, Betty will control his share until he is 18. So, in effect, Betty will control 75% of the business if Frank dies intestate. Susan, Betty’s daughter, will receive nothing.

Planning Objectives
Frank would like to ensure that ownership of the business will go to his son Tom, and Tom would like the security of knowing that one day the business will be his. Tom does not have the cash to buy the business. Frank would also like to control the timing of the transfer of the business and he would like to treat his stepdaughter and younger son fairly. He is concerned about maintaining enough cash flow to support himself and Betty now, and providing for Betty if he dies first. And he would like to minimize estate taxes.

Recommended Plan
Phase 1: Reorganize and Recapitalize the S-Corporation
In a tax-free reorganization, the S-corporation is converted to an LLC that is taxed as an S-corporation. The LLC is organized under the laws of a “charging order only” state. Frank’s ownership is changed from 100% voting shares in the corporation to 1% voting and 99% non-voting memberships in the LLC. Frank still effectively owns and controls 100% of the business, but now it is comprised of 10 LLC membership units (1%) that are voting units and 990 (99%) that are non-voting units.

Phase 2: Create Dynasty Trusts
Frank next establishes three irrevocable trusts, one for each child, in a jurisdiction that permits perpetual trusts. The trusts (irrevocable grantor trusts, aka intentionally defective grantor trusts) are disregarded by the IRS for income tax purposes, but not for estate and gift tax purposes. (Alternatively, one trust with three separate shares can be established.) The trusts are also designed to own life insurance on Frank’s life.

Frank makes an initial gift of $600,000 to each trust. These are taxable gifts that must be reported on Form 709, but no gift tax will be due because it will be applied to Frank’s and Betty’s lifetime gift tax exclusions. $600,000 of their generation skipping transfer tax (GSTT) exclusions will also be allocated to each trust, giving each a zero inclusion ratio – so that it is not subject to GSTT in the future.

The trustee of Susan’s and Charlie’s trusts uses their initial gifts to purchase life insurance policies on Frank and/or Betty, providing substantial assets upon Frank’s or their deaths.

Phase 3: Tom’s Trust Buys All Non-Voting Units with an Installment Note
A business valuation is performed to determine the fair market value of Frank’s business. As part of this process a qualified valuator first values the assets the business owns (real estate, equipment, good will, inventory, etc.). The valuator then determines whether and to what extent the value of the assets should be adjusted due to lack of control, liquidity and marketability.

When these valuation adjustments are applied to non-voting interests in an LLC, the fair market value is often depressed by a significant amount when compared to the fair market value of the entire business: in this hypothetical case, 40%. In other words, the non-voting units will each have a value of $6,000, making the total value of the 990 non-voting units $5,940,000. Alternatively, voting units will have a premium value to reflect the control value. In this hypothetical case, the voting units have an appraised value of $12,000 per unit, making the total value of the 10 voting units $120,000.

Tom’s dynasty trust buys Frank’s 990 non-voting units for $5,940,000 using a 20-year installment note, payable annually. Based on the current IRS published interest rates, the trust will pay Frank $447,197 every year for 20 years. The note is adequately secured by the LLC units and the $600,000 of other assets in Tom’s trust. The cash flow from 99% of the business is more than sufficient to cover the note payments.

Planning Tip: The installment note should be handled just like an installment sale to a non-family member or a loan from a bank. A pledge or security agreement should be signed, required taxes should be paid, required filings should be made, etc. A fully documented paper trail should exist for the transaction and the payments made on the note.

Why Reorganize the Corporation to an LLC?
Corporate stock is freely transferable, making it very easy for a judgment creditor to foreclose on corporate stock and become a shareholder. In most states, the percentage required for shareholder voting to liquidate a corporation is less than 100%, generally ranging from 51% to 80%. If a judgment creditor forecloses on enough shares of stock to allow the creditor to liquidate the corporation, the creditor would be able to seize the assets of the corporation to satisfy the claim.

Alternatively, LLC interests are usually not transferable without the consent of all members. Due to this limitation on transferability, an LLC offers much greater asset protection from creditors. Many states limit a creditor’s remedy to a “charging order” on distributions to LLC members. (Only when a distribution is made will it go to the creditor; when the claim has been repaid, the charging order is stopped.) The creditor can never become a substitute member, and will only become an assignee with no ability to vote on admission of new members or the liquidation of the LLC. In most states, it takes a 100% vote of all members to liquidate an LLC. Because a creditor can never become a member, it can never vote on liquidation of the LLC.

Outcome of the Planning
Frank owns the 10 voting units, giving him 100% control of the business and 1% of the equity. Tom’s dynasty trust owns 990 non-voting units, giving Tom no control over the business and 99% of the equity. Tom’s trust also has $600,000 in cash that Frank gifted to it as seed capital. This cash is invested, and the income tax attributes of income, gains and losses are passed through to Frank to be reported on his tax return, as is the income, gains and losses attributable to Tom’s trust’s 99% ownership in the business.

Income Tax Reporting
As long as Frank is deemed the owner of Tom’s dynasty trust for purposes of reporting trust income, the dynasty trust does not have to file a Form 1041 fiduciary income tax return. A corporate income tax return (1120S and K-1) is filed for the business and Frank reports the trust’s income on his tax return.

Income Tax Effect of Sale of Units
Because Frank is the deemed owner of the trust for income tax purposes, the sale of the LLC units to Tom’s trust is a non-recognition event; i.e., a sale by Frank to himself. No gain or loss is recognized on the sale. No interest income is recognized on the installment note payments and no interest deduction is allowed to the trust.

Planning Tip: Include a “toggle” provision to turn each dynasty trust’s grantor status off or on as needed, so that the income being taxed to Frank can be stopped if that should become undesirable later. Consider giving this power to a trust protector.

Pass Through Dynasty Trust Income
Income from the LLC will be allocated to the unit holders based on their ownership percentages. Let’s assume the business has $500,000 in net income. Frank owns 10 voting units, equal to 1% of the equity, so he will be allocated $5,000 on the 1120S as K-1 income. Tom’s dynasty trust owns 990 non-voting units, which is equal to 99% of the equity. So Frank, on behalf of the trust, will also be allocated $495,000 on the 1120S as K-1 income.

Because the dynasty trusts are grantor trusts for income tax purposes, Frank must pay the income tax on all their income, including the S-corporation income that is allocated to Tom’s trust. But that is what he was doing before the sale, so he is paying the same income tax before and after.

Planning Tip: Frank’s payment of income taxes in dynasty trust income is not an additional gift to the trusts, so every year he is effectively transferring additional estate assets to the trusts for the children without additional transfer tax.

How the Dynasty Trust Makes the Required Note Payments
In this case study, we assume that the LLC will have $500,000 per year of cash flow to distribute to the unit holders. Tom’s dynasty trust will receive a cash distribution of $495,000 ($500,000 times 99% = $495,000). At the end of the first year, it will have $1,095,000 in cash ($495,000 from the LLC plus $600,000 that Frank gifted to it as seed capital). The trustee uses this money to pay the $447,197 note payment to Frank.

Planning Tip: If the business does not make enough income to pay the note, the payment can be deferred until the business recovers or the term or interest rate of the note can be adjusted.

Results after One Year
At the end of the first year, the note has been reduced to $5,745,847 and Tom’s trust has a cash balance of $647,803. This cash can be invested and saved, distributed to Tom (gift tax-free), or used to buy and pay for a life insurance policy on Frank’s life.

Frank has received $5,000 from the LLC and $447,197 from the note payment for a total of $452,197 in income. He pays income taxes on the full $500,000 of S-corporation income. If, after all deductions, he has a 25% effective income tax rate, he would pay $125,000 in income taxes, leaving him with $327,197 in income to support his and Betty’s lifestyle.

Planning Tip: A higher income tax rate means less net income, but the client can also receive additional (reasonable) compensation as an LLC manager or as a Director. If he needs less income, his salary can be reduced, but ensure that it is not so much that he loses benefits.

When Frank Dies
Frank and Betty also establish estate plans, so the assets in Frank’s estate will pass as planned, not according to the state’s default rules.

If Frank and Betty have consumed or gifted the net after-tax proceeds of each note payment from Tom’s dynasty trust, only the unpaid balance of the note will be included in the value of his taxable estate. Tom’s dynasty trust is GSTT exempt, so its assets will never be subject to estate, gift or GST taxes. Frank’s estate plan leaves the 10 voting units to Tom’s dynasty trust, giving Tom 100% ownership of the business. The dynasty trusts for Susan and Charlie are also GSTT exempt, and the life insurance proceeds will be exempt from probate and income, estate and GST taxes. Betty will continue to receive the remaining note payments for her support.

Estate Tax Results
Frank has removed 0.99 x $10,000,000 + 3 x $600,000 = $11,700,000 of appreciating assets from the value of his gross estate that, at his death, would have been subject to estate taxes. He and Betty have used $1,800,000 of their lifetime gift/estate/GST exemptions. (Remember, unless Congress acts before the end of 2012, the top estate tax rate in 2013 is scheduled to go back to 55% with a $1 million exemption.)

Frank has received an asset (the $5,940,000 note) that, in his estate, may have a discounted value due to lack of marketability, etc., and that will not appreciate; in fact, the note is depreciating because the principal will decrease over the 20-year term.

If Frank does not accumulate the note payments, at the end of the note term he will have completely removed the $10,600,000 and all future appreciation from his gross estate without making a taxable gift other than the initial $600,000 seed capital gifts to the dynasty trusts.

The trust assets are not subject to generation-skipping transfer tax, will be protected from creditors, and will not be included in the children’s or grandchildren’s or great-grandchildren’s gross estates at their deaths.

Objectives Met
All of Frank’s objectives have been met. His son Tom will receive the business without having to buy it, and Frank can control the timing of the business transfer. He was able to provide for his other children and his wife, and he saved substantial estate taxes.

Conclusion
While this kind of planning can be complicated, the above example demonstrates that the rewards are many. We have the opportunity to help our clients solve their problems, strengthen family relationships, save money and have peace of mind. At the same time, we have the opportunity to strengthen our relationships with clients, their children and the other planning professionals with whom we collaborate. This type of planning is truly a win-win opportunity.

Tags: california llc
Posted in California Business Planning | No Comments »

The Family Business Succession Plan – An Important Piece of the Orange County Estate Planning Puzzle

Wednesday, March 30th, 2011

Do you own a family business?

If so, you have plenty of company. More than 90% of U.S. businesses are family businesses. Out of the Fortune 500, 150 are family businesses.

Now, would you like to hear some really startling statistics?

Only 30% of family businesses will survive into the family’s second generation, 12% to the third generation and only 4% last to the fourth generation.

Scary statistics, aren’t they?

All the blood, sweat and tears you put into building the family business…just gone.

Wondering how this happens?

The number one reason is lack of family business succession planning with a qualified Orange County estate planning attorney.

You can probably avoid many of the problems that can take your family business under with sound estate planning that takes family business succession plans into account.

Here are a few things you need to think about:

What Happens When You Give Up Control?

Plan your retirement around not having income from the business. That will keep your financial well-being separate from that of the business and it will be easier for you to turn over control of the company you built. It will make the company and you much healthier financially. Talk to your Orange County estate planning attorney and plan your retirement now so that you are no longer dependent upon the company for income when you retire.

Who Takes Over?

Does your entire family work in the business? Have you groomed one of your children to take over? How do the other siblings feel about that? Consider what will happen if you leave one child in charge of the business and others in charge of assets the company relies on. This can bring old childhood resentments to the forefront if siblings feel that one has been favored over the others. If all your assets are tied together and there is no harmony between the various controlling parties, your company and your family could be destroyed.

Have You Planned for a Management Transition?

Once you retire to play golf in Florida, who will manage the company? Will management consist wholly of family members or do you have employees in key positions who can take over? Have you discussed the possible management structure with your family? Make planning a smooth management transition a part of your estate planning process. The two are not totally separate processes if you own a family business.

How Do You Handle the Transfer of Assets?

This is an integral part of your estate plan and your family business succession plan. Will the transfer of assets take place with lifetime sales/gifts/transfers or will the ownership of the company be transferred only upon your death. You need to ensure that you have enough liquid assets left for you and your spouse to live on in retirement without putting the company into bankruptcy.

Many families just don’t want to deal with these issues. But dealing with issues as complex as these in a moment of crisis when you die or are rendered unable to make decisions by some illness or injury can mean disaster for your company. Taking them into account while everyone is able to focus on what is and isn’t important, and looking at the big picture for the survival of your family business, will make everyone’s life easier. A little painful introspection and thoughtful planning now will allow even your great- grandchildren to enjoy the fruits of your labor.

Call our Orange County estate planning office to schedule your Family Wealth Planning Session today. Our Family Wealth Planning Session is normally $750, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge. Call today and mention this article.

Tags: business succession plan, orange county estate planning attorney, orange county family business
Posted in California Business Planning, Orange County Estate Planning | No Comments »

Orange County Business Attorney Says, “Ready…Set…File Your Taxes!”

Monday, February 28th, 2011

By: Darlynn Morgan, Orange County Business Attorney

It’s that time of year again…

Time to get all your ducks in a row to report your income to Uncle Sam…

When you’re trying to take care of a family and run a business, the last thing you want to think about is getting all the paperwork together to deal with the Internal Revenue Service.

But if you get yourself and your paperwork organized early on, it will make tax time a little less frantic.

Here are a few tips to make getting organized a little easier:

1. Keep Up With Your Income AND Your Expenses

When was the last time you balanced your checkbook? Chances are, if you’re banking online, you haven’t done it in a long time. And that makes it much easier to lose track of what’s coming in and going out. Invest in a software package now, like Quicken, that will help you keep an eye on your finances, run reports as you need them so you can see what’s going on with your money, and pull everything together painlessly when you have to turn it over to your accountant for tax time.

2. Organize Your Expenses by Category

Yes, this can be time consuming in the beginning but it will pay huge dividends in the long run. And be specific. If you use your car for business, categorizing gas and maintenance as Vehicle Expenses (including mileage) will be much easier to prove up (with the proper receipts) than just lumping them all together under a Miscellaneous category. If you’re not sure how to categorize all your expenses, talk to a tax professional for guidance. It’s better to start your system the right way.

3. Have a Home Office?

If you’re working from the dining room table and the dining room is not used exclusively for your business, it will be hard to take a portion of your mortgage as a deduction for office space. Set up your home office so that the space you use is used only for your business. Keep track of all purchases made for business, from computers and accessories to office supplies. Again, ask a tax professional how to do this so that you maximize your possible deduction.

And, just in case you didn’t know, any business related phone calls you make from home are deductible. When you get your bill each month, go through it and highlight the business calls. At the end of the year, add up all the calls and there’s your deduction.

4. Pay Your Estimated Taxes On Time

You should be paying your estimated taxes quarterly. If you don’t pay them quarterly, you could be looking at a penalty of 4% of the amount you actually owe. While it may be hard to calculate this amount accurately, an easy way to estimate is to pay 25% of the amount you owed last year. Try to be as accurate as possible to avoid overpayment.

5. Watch Your Profit and Loss

Do you have a profit and loss statement for last year? If so, take a look at it. Did you control expenses? Did you get credit for every possible deduction? Did you go out of your way to keep your paying customers happy? Keeping an eye on where your money is coming from and where it’s going is vital to running a successful business. See where you fell down last year and make sure you don’t repeat the same mistakes this year.

Having this data in hand when you see your accountant to prepare your taxes (and plan for the next year) will make both your lives easier.

If you’ve done these five things, you should be well on your way to a relatively painless tax season.

Still not sure you have everything together for tax time?

Want to make sure you’re maximizing your deductions and doing everything you can to control your expenses?

Talk to us. We can help.

Call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit to make sure you’re taking advantage of every tax break and staying on top of all legislation that affects your business. Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.

Tags: orange county business attorney, tax planning
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Newport Beach Business Attorney Asks, “Are Fees Robbing Your 401(k)?”

Friday, February 18th, 2011

By Darlynn Morgan, Newport Beach Business Attorney

You’re a smart money manager…

You’re planning well for retirement…

You put the most you possibly can in your retirement accounts, including a 401(k)…

Then you get your statement and find that you’re being robbed blind by outrageous fees.

And what’s even worse, you were never given access to information that would tell you what those fees are.

The good news – that’s about to change.

In October 2010, a new rule issued by the Department of Labor will require 401(k) plans to not only disclose their fees up front but also explain them.

The bad news is that this rule is an improvement but it’s not perfect. You’ll be told how much you pay in overall expenses but you may not be told how much of that goes to investment management fees as opposed to administrative costs.

What You Can Expect

Once a year, your 401(k) plan will send you a breakdown of the annual operating expenses for each one of the investment options they offer. The breakdown will show the expenses as a percentage of the assets and a dollar amount per thousand dollars invested. They will also provide sales fees and any other charges associated with each investment option.

You’ll receive a quarterly statement showing your 401(k) plan’s expenses for administrative costs such as accounting and record keeping.

The statement you receive will only show the fees deducted from your account. Some 401(k) plans will take administrative costs directly from your balance while others use a portion of your investment expenses to cover some of the administrative side.

One thing to note – any indirect fees for administrative costs won’t have to be broken out, so chances are they won’t be. For example, if you see a charge of $250 on your account, you won’t know exactly how those fees were spent (i.e., legal fees, accounting costs, etc.)

The Benefit of Disclosure

Knowing what you’re being charged gives you the opportunity to compare funds. Take a look at the fees for each of the investment options your 401(k) plan offers. Balance those fees against their historic returns and see if the higher paying funds are really a better deal for you.

Even though you don’t get a full, line item disclosure of what the administrative costs were for your particular plan, you still have a breakdown of what the investment management fees vs. administrative costs are. This should give you the information you need to pressure your 401(k) plan to keep costs down.

One way to do that is to encourage competition. Compare your plan to other plans and see how your administrative and investment fees stack up. If there’s a better deal out there, make sure your Human Resources department knows it. They can use that information when it comes time to negotiate with your plan provider.

Would you like a second opinion about your 401(k) investments?

Want to make sure you’re making the right investment choices and structuring your retirement to optimize savings?

It’s all part of getting your legal and financial house in order. We can help by making sure you get connected to the right advisory team.

Call us to schedule your Family Wealth Planning Session today. Our Family Wealth Planning Session is normally $750, but this month I’ve made space for the next two people who mention this article to have a complete planning session with me at no charge. Call today and mention this article.

Tags: newport beach business attorney
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California Business Attorney Discusses Six Money Mistakes Young Parents Make

Wednesday, February 9th, 2011

As a California business attorney, I know it’s hard to go from handling your money as a single person to handling money as a couple…

When you add children to the mix, it gets even tougher…

Birthday parties, karate lessons, family vacations…

All the things we want our children to have can put a pinch on the family budget.

If you have a young family, you need to be smart about your finances to make sure your family is taken care of.

Here are six common mistakes young families make when it comes to money. How many apply to you?

1. Too Much Debt

Most people see debt as a way of life. But if you want your children to have a sound future, do whatever you can to avoid carrying excess debt. Pay off those credit card balances as quickly as possible, or at least make sure that if you do use debt, you are still living within your means. Forego a new car every 4 or 5 years.

2. No Budget

Say the word “budget” and many young parents will just laugh and say, “Who can afford to budget?” The real question is who can afford not to. A budget is nothing more than a smart plan for how you spend your money. If you don’t plan, it’s too easy to go on binge shopping sprees or pick up that little something extra at the grocery store that you really don’t need. Budgets help curb impulse buying.

And when you’re sitting down to do your budget, be honest. Most young couples underestimate their expenses by 20%.

3. No Retirement Savings

Retirement may seem like it’s a lifetime away when you’re raising your children but it will be upon you before you know it. First, get out of debt and save some money for emergencies. Then do everything you can to put money away for retirement. If your employer matches your 401(k) contributions, you need to contribute as much as possible. Forget about saving for a new car until you’ve maxed out your 401(k) contribution.

4. No Insurance

As young parents, a term life insurance policy is probably all you need. Term life is less expensive than whole life insurance. Talk to a reputable insurance agent about how much you need and the best policy for your family.

5. Not Saving for Education

The cost of a college education has gone through the roof. Now, just imagine what it will be like when your 3-year-old is ready for college. Some estimates are that in 18 years, a four year private college education will cost more than $300,000.

After you’ve put money away in an emergency fund, cleared your debt and maxed out your 401(k), your next savings goal should be your children’s education fund.

6. No Emergency Savings

By now, you’ve probably noticed that we’ve mentioned emergency savings several times. That’s because so many young couples don’t think about planning for emergencies. It’s tough to put extra money away “just in case” when you’re raising a family. Every penny seems to be spoken for.

But you need to have three to six months’ salary set aside for emergencies. Put a little away every time you possibly can. Don’t let the numbers daunt you. Just set it aside in an account and leave it there. With today’s job market, having those emergency funds is more important than ever.

You may be thinking that right now it’s all you can do to just take care of your children. But planning ahead for your family’s welfare is the greatest gift you will ever give them.

As a California business attorney, I can help you plan.

Get started by giving our Newport Beach office a call at 949-260-1400. When you call, ask to schedule a Family Wealth Planning Session. Our fee for this session is normally $750 but we’ll waive that if you mention this article. Call today!

Tags: california business attorney
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Business Lawyer in California Asks, “Could Divorce Wreck Your Business?”

Tuesday, February 8th, 2011

By Darlynn Morgan, Business Lawyer in California

Approximately 40% of marriages in America end in divorce…

Yet, when we start a business, how many of us really think ahead to what a potential divorce could do to our business?

As a business attorney in California, I’ll say that divorce can have many of the same ill effects on your business that your death or disability would have.

The best way to avoid these consequences is to plan ahead.

Here are a few things to think about:

1. Do You Live in a Community Property or Common Law State?

State law usually determines the rights and obligations you have in divorce settlements. Community property states usually require that all property of the marriage be divided equally. Common law states allow the court to supervise an equitable division of property. Some things to think about are whether or not the property in question was purchased, received as a gift or as an inheritance. The court will also look at whether both spouses made contributions to acquire or increase the value of the property, in this case, your business.

2. Who Owns the Business?

If you own a business and you are about to divorce, you need to talk to a good business lawyer as well as a divorce attorney. In order to figure out how your business interest may be divided, you need to determine who actually owns the business and what contributions were made by the non-owner spouse. If you are joint owners of the business, you need to decide how you will proceed (i.e., whether you will buy your partner out, sell the business outright, etc.)

3. Determining the Value

Obviously, one of the first orders of business will be to establish a value for your business interest. In most cases, you will need an accredited appraiser. This can be costly so be prepared.

Sometimes it can be difficult for both spouses to agree on a value for the business. The one who wants to keep the business will want a low value; the one who wants to be bought out will, of course, want a higher value.

4. Plan Ahead

Prenuptial agreements aren’t for pessimists; they’re for pragmatists. If you own a business and you’re planning to marry, one of the smartest things you can do is discuss a prenuptial agreement with your future spouse. Even if you opt not to go the prenuptial route, you should at least have a post-nuptial agreement in place that spells out whether or not your future partner has any right to the business in the event of divorce. If your partner won’t fully release any rights to your business, the agreement should at least determine how the business will be valued, set out a buy-sell agreement for the business, etc.

5. Taxes, Stocks and Retirement Assets

After you’ve established how much your business is worth, you need to include your business lawyer or accountant in any further discussions about how the property is to be divided. There can be significant tax penalties if the property or assets are not transferred correctly.

If you have an IRA and have to transfer part of it to a former spouse as part of a divorce settlement, it’s a non-taxable transaction.

Ending a marriage can be difficult. When you have a business to consider, the difficulty is only magnified. To minimize the impact on your business, you need to plan ahead.

As a business attorney in California, I can help you plan.

Tags: business lawyer in california, california community property, common law state
Posted in California Business Planning | No Comments »

Newport Beach Business Attorney Offers Money Savings Tips for Your Small Business

Monday, February 7th, 2011

By: Darlynn Morgan, Newport Beach Business Attorney

January is a great time to take a look at how your small business spends money.

And as long as you’re looking at how you spend it, you might as well look at how to preserve some.

Those small saving steps can add up to serious cash over the course of the next twelve months.

Here are some tips on how your small business can easily save substantial money over the coming year:

1. Negotiate

In case you hadn’t noticed, the days of feeling a sense of pride in paying more for anything are gone. The price for virtually everything your small business uses is negotiable. So negotiate. Try to get the best price possible on goods and services you need to operate. Sometimes, all you have to do is ask to get a price break. Offer to pay early in exchange for a discount. You’ll not only save money but you’ll build a healthy credit history, too.

2. Take a Look at Subscriptions or Fees You Pay Every Month

Look at all your monthly expenses. Even the smallest fee that you pay every single month can add up over the course of a year. If you subscribe to a service or periodical and it automatically goes on your business credit card, make sure you’re still using it. If not, cancel it. If it’s something you plan to use over the course of the year, contact them and ask if you can get a discount for an annual membership. Take a look at those credit card statements and make sure that you’re actually using everything you’re being billed for.

3. Think About Your Taxes Now

January is not too early to think about your taxes. Call your accountant now and talk about solid tax strategies for 2011. New legislation has made some changes to how small businesses will be paying their taxes so make sure you’re taking advantage of any and all breaks you may be entitled to.

4. Plan Your Expenses

You probably already have a few big purchases in mind for your business. Put all your planned purchases into a spreadsheet now, including when you plan to buy them and how much you intend to spend. Just the act of putting it all in black and white can help you get a handle on your cash flow for the coming year. And it will help you shop around and make sure you’re getting the best deal possible before you spend the money.

5. Set the Stage for Saving

Your employees will follow your lead. Sit down with them now and remind them of the tight budget you’re working with and make sure they know you’ll be watching expenditures. Put the focus on informed frugality. There’s no harm in asking for discounts when you’re making even the most routine purchases. Encourage your staff to think about the bottom line. It will not only help your business, in the long run it will help them, too.

Now is a great time to get professional help in reviewing the financial health of your business and making adjustments where they need to be made.

We can help. Call me, your Newport Beach business attorney today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month, we will waive that fee. Call (949) 260-1400 to get started.

Tags: newport beach business attorney
Posted in California Business Planning, California Estate Tax Lawyer | No Comments »

Newport Beach Tax Attorney Warns, “The Tax Man Cometh”

Friday, January 28th, 2011

I know as a Newport Beach Tax Attorney, right now, tax returns are probably the furthest thing from your mind…

With all the celebrating and gift giving, the last thing you want to think about is filing your taxes.

Unfortunately, we all know that once January 2nd rolls around, tax season for small business owners will be here before we can finish the chorus of “Auld Lang Sein”…

And if you have any tax questions, now is the time to ask them – before the insanity of tax season officially begins and it’s easier to get an audience with Queen Elizabeth than to get your accountant on the phone.

In an effort to get you thinking about what you need to pull together for your taxes, here is a list of some of the top questions the IRS receives from small business owners.

You may have some of the same concerns:

1. If a married couple owns a business together, can the business be classified as a sole proprietorship or does it have to be a partnership?

In order to be a sole proprietorship, the business would have to be owned by either the husband or the wife, but not both. The other spouse would work for the business as an employee.

However, if the couple files a joint tax return, they can elect to conduct the business as a joint venture. In order to qualify as a joint venture, they both have to participate materially in the venture and they must divide the items of income, gain, loss, deduction, credit and expenses according to each of their interests in the joint venture.

2. What’s the difference between a W-2 and a Form 1099-MISC?

Both of these forms are information returns. W-2’s are used by employers to report wages, tips, and other compensation paid to the employee as well as any deductions for Social Security. A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business that is not an employee. This form is provided both to the person paid and to the IRS.

3. How do I know if a person is an employee or an independent contractor?

This is a tricky question, but ultimately it’s based on who has the right to control how, when, and where the person performs the services they’re paid for. It has nothing to do with how the person is paid, how often the person is paid, or whether they work full or part-time. The three things to consider when making this determination are: behavioral control, financial control, and the relationship between the parties.

4. Does my corporation or partnership have to file a tax return if we had no income for the year?

A domestic partnership has to file an income tax return unless it neither receives gross income or pays or incurs any amount treated as a deduction or credit for federal tax purposes.

A domestic corporation has to file an income tax return regardless of whether it received taxable income or not.

5. Am I liable if my employees receive tips and don’t report them to me?

As an employer, you have a liability to withhold and pay Social Security and Medicare tax on your employees’ reported tips to the extent that wages or other employee funds are available.

Employees who receive tips as part of their compensation are required to report their cash tips to their employers at least monthly if they receive $20 or more in the month. If the employee does not report the tips to you, it places you at risk of possible assessment of the employer’s share of the Social Security and Medicare taxes on the unreported tips.

If your business is a large restaurant or beverage establishment (i.e., you have more than 10 employees on a typical day and food and beverages are consumed on your premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee’s W-2 at the end of the year.

6. I have a small company, do I need a tax ID number?

If you are a sole proprietor, don’t have any employees and you don’t file any excise or pension tax returns, you don’t need a tax ID number. You can use your social security number. However, if you are not a sole proprietor and you do have employees, you need to have a tax ID number. It’s easy to obtain and you can do it all online.

7. If I pay personal expenses out of my business bank account, do I count the money as part of my income or can I write off these expenses?

Include the money in your income. You would not write off these amounts as expenses. Only those expenses directly related to your business can be deducted from your income as business expenses. The IRS recommends against mixing business and personal accounts as it makes it much easier to keep good, clean records.

8. Are there limits on what I can deduct for meals while traveling on business?

Meal expenses are only deductible if your trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Instead of keeping records, you can use a standard meal allowance. The amount allowed varies according to where and when you travel. The deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

We hope this list has made you think about any possible questions you have for your tax professional. Now is the time to ask, before the tax season insanity begins. Knowing the answers to your questions ahead of time will make it much easier to pull the proper information together and make filing your tax returns easier for everyone involved.

If you’re an independent entrepreneur or you’re considering taking the leap to business ownership, call me, your neighborhood Newport Beach tax attorney today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. As your personal legal advisors we will help you make sure you’re on solid footing with your paperwork before it gets to the IRS. Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.

Tags: 1099-misc, newport beach tax attorney, w-2
Posted in California Business Planning, California Estate Tax Lawyer | No Comments »

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