A limited liability company (LLC) is a relatively new legal invention. It is often chosen by entrepreneurs and businesses over a corporate entity, particularly when there are a small number of investors. LLCs offer more flexibility in how the burdens and benefits are shared by members.  Occasionally, LLCs are adapted to overcome solve lesser problems. Here are three examples:

Sporting Event Entity.  My wife and I are Angels baseball fans and have had season tickets since the first World Series win of the club. As with most sports teams, the longer you hold the seats, the better your seat choices will be the following year. However, baseball clubs usually do not allow ticket holders to assign or transfer their season ticket rights to another person.  You have to continue to buy the tickets each season to preserve your right to the same seats. If you don’t buy the tickets your priority is lost. However, consider the season ticket holder that is a business – say an LLC. An LLC is a separate, fictitious, legal entity. However, unlike a natural person, an LLC has owners. So, if an LLC was formed by faithful sports fans that purchased tickets for prime location seats, a later change in the ownership of the LLC would not change the owner of the tickets. A premium seat could be effectively transferred from one group of avid sports fans to another – or rather, a membership in an entity that has a premium seat. 

Virtual Sale of Low Assessed Property.  The same principle applies to residential and commercial property owned by LLCs. A sale of real estate usually triggers a reassessment of the value of the property for property tax purposes. However, if a membership in an LLC is sold, the real estate owned by the LLC is not reassessed. The sale of an interest in an LLC that owns real estate could be worth more than the sale of the real estate! The new LLC owner could occupy the house or commercial property and have all the benefits of a property owner. 

Avoiding Sales Tax.  Selling a large ticket item such as an airplane, a yacht, an executive motor home, or a classic car usually triggers a sales or use tax. The tax could be significant. However, if an LLC is the owner of the personal property, a sale of an LLC membership does not trigger sales tax. This is particularly helpful where there are several members that have partnered to make the original purchase. When one of the original group wants to sell his interest, the sale would be of his LLC interest, not the interest in the specific property that would require the payment of sales tax.    

Cautions: None of these scenarios works if you already own the sports tickets or the real estate or the “big ticket item” personally. A transfer of real estate from an individual or individuals to an LLC would be an actual sale of real estate and would trigger the tax reassessment. The sale to the LLC from the individuals of a “big ticket item” would generally require the payment of sales tax. If you recently purchased the property, or if the reassessment of the property would be a positive event (i.e., the value has subsided significantly), then you may have an opportunity. Similarly, an attempted sale of the right to season tickets to another would just put you back in the sun of the stadium’s center field.  It takes some advance planning to have these kinds of structures in place when the original purchase is made.

You should consider the minimum cost and tax to have an LLC in the first place. So a benefit analysis has to be made with something of sufficient value. Other income tax consequences should also be explored.  However, setting up structures like these could be translated to other situations, where transferability is otherwise restricted. An attorney should be consulted who will read the “small print” and give you an opinion before committing in this way.  If done properly, entrepreneurial planning and sophistication could result in tax savings or allow you to have a different view – one behind Home Plate with a transferable value.

Do you think that the use of an LLC in this way is irresponsible or just savvy?  Let us know what you think with a comment on this blog.

 Warning: This article is intended to discuss general concepts and ideas and should not be viewed as legal advice for your specific situation. Always consult and rely upon your attorney and your tax advisors before implementing a strategy for your personal or business situation. 

Are you subject to the Disposal Rule?  We have a rule in our home that artichoke leaves do not  go into the garbage disposal – a rule born out of my efforts to unclog a drain one too many times. However, this Disposal Rule deals with how sensitive consumer information is destroyed.    

● What Is The Disposal Rule?

This Rule mandates what common sense requires.  In simple terms, it says, “If you use consumer reports, don’t allow the very personal information in them to be accessible to anyone else.”  The Rule requires disposal practices that are reasonable and appropriate to prevent the unauthorized access to – or use of – information in a consumer report.

● Does The Rule Apply To You? 

If you use or consult consumer reports, this Rule applies to you.  Large or small organizations are included.  Some examples would include consumer reporting companies; lenders; insurers; employers; landlords; government agencies; mortgage brokers, car dealers; attorneys; private investigators; debt collectors.  As an individual, if you pull a consumer report on prospective home employees (nannies, housekeepers or contractors) you are also subject to this Rule.

If you don’t refer to or use information from consumer reports, you are not subject to this law.  However, it is common sense that sensitive, financial or personal information should be destroyed when you are finished with the information.    

● What is a Consumer Report?

The Fair Credit Reporting Act defines a “consumer report” as information obtained from a consumer reporting company that is used – or expected to be used – in establishing a consumer’s eligibility for credit, employment, or insurance, among other purposes. Therefore, credit reports, credit scores, reports businesses or individuals receive with information relating to employment background, check writing history, insurance claims, residential or tenant history, or medical history are all “consumer reports.”

● What Should You Do? 

Adopt a complying policy and make sure you and your employees follow it. Your plan could include burning, pulverizing or shredding hard copies of the information and/or destruction of electronic files or other media so the information cannot be retrieved or reconstructed.  If your business delegates the destruction task to a document destruction firm, check the company out and make sure you understand their procedures and policies and try to find out if they are certified by a trade organization.   

Consult your attorney for more information or to make sure your policies comply with the law. Also, the Disposal Rule was published by the Federal Trade Commission and is available at www.ftc.gov/os/2004/11/041118disposalfrn.pdf.  The Federal Trade Commission has also issued a new publication, “New Rule Seeks to Protect Privacy by Requiring Proper Disposal of Sensitive Consumer Information,” that can be found at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt152.shtm.  

That’s the new Disposal Rule – it’s not just for artichokes any more.

If you have turned your primary residence into a rental, a second home or a vacation home and are planning to sell it, you should be aware of a new law that changes how capital gains are calculated beginning January 1, 2009.   

The Current Law.  Currently, the law excludes up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a primary residence. The sale of a home qualifies for this exclusion if the home was the primary residence of the tax payer for at least two of the five years ending on the date of sale or exchange. The exclusion applies even if the home was originally purchased as a second home.   

The New Law.  Rethink your strategy because on January 1, 2009, the rules will change.  President Bush signed The Housing and Economic Recovery Act of 2008 (H.R. 3221) on July 30, 2008. The tax law name of this same law is The Housing Assistance Tax Act of 2008.  This law will generate tax revenue by reducing the home sale exclusion, but also has a generous transition component.   The law does not allow a taxpayer to claim exclusion for any period of time after December 31, 2008, in which the home is not the main home of the taxpayer. The available exclusion is apportioned in the ratio that the period the home was the primary residence (qualifying use) bears to the period of ownership after December 31, 2008.  Any nonqualifying use that occurred prior to January 1, 2009 is ignored. The maximum excludable amount remains at $250,000 or $500,000, depending on your marital status.   

An Example.  If a homeowner purchased a house in 2009 for their main home, turned it into a rental property in 2012 and sold it 2014, the property would not have been used as a primary residence for 2 years of the five years it was owned (or 40% unqualified use). Under these circumstances, 40% of the gain realized from the sale would be subject to capital gains tax. The remaining 60% of the gain would be excluded up to the maximum amount allowed.  

Temporary Absences.  Being absent from the property for temporary periods of time that are not greater than two years will not threaten the status of a home as a primary residence. A home can still be the primary residence of the taxpayer when he/she is absent because of a change in employment, health conditions or other unforeseeable circumstances. 

Time Remains To Do Tax Planning.  Because the new law uses a test period of January 1, 2009 to the date of sale, the highest tax advantage is gained by using the home entirely as a primary residence during this period of time. Taxpayers who are planning to sell a vacation home, a second home or a rental home, may want to discuss with their tax advisors whether to move into the home on or before January 1, 2009, to accumulate as much qualifying use as possible before the home is sold. There is still time to do some planning to gain a tax benefit from this change. 

This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance.  Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

Ironically, change is constant in so many aspects of life.  The economy is frenetically unpredictable. The political power and policy of the USA is shifting and morphing.  Entire industries are being redefined, retooled or relocated within the territory of the globe.  For some, it is an unsettling and disturbing situation.  However, for the entrepreneur, it is a perfect wave of opportunity.  Change is the sinew of entrepreneurial muscle.  The litmus test for being an entrepreneur is being able to identify change and exploit it, regardless of the direction or nature of the change.   

With this many opportunities awaiting your business, it is a great time to take inventory of your resources and make a plan.  Have you noticed that it is November?  Creating a strategic plan now for 2009 would just be smart.  Last January I wrote a blog post entitled Planning Your Success In 2008 in which I discussed the traditional “SMART” formula of annual goal setting used so widely.  However, a strategic plan is different.  It is more than goal setting.  Carter McNamara, MBA, Ph.D, of Authenticity Consulting, LLC, explains that “. . . strategic planning determines where an organization is going over the next year or more, how it’s going to get there and how it’ll know if it got there or not. The focus of a strategic plan is usually on the entire organization, while the focus of a business plan is usually on a particular product, service or program.”  Dr. Carter McNamara defines and explains how to strategically plan consistent with the personality of your business and management team.  He describes five different approaches to strategic planning (goal-based, issue-based, organic, scenario and “appreciative inquiry”).  His guidebook and articles can be found on the website of the Free Management Library, This resource is a real find for the entrepreneur or manager wanting to avoid just giving lip service to planning for this next year.   

Your Company’s Employment Agreement May Now Be Illegal.   Many employers try to protect their business by requiring their employees to agree not to compete for a specified time if they leave the company. However, employee noncompetition agreements are now invalid in California. Last week the California Supreme Court in the case of Edwards vs. Arthur Anderson, LLP, reaffirmed that employers may not require an employee to agree to a limited restriction (i.e., no contact or solicitation of the company’s client for a specified time). The Court held that with only a couple of exceptions, noncompetition agreements are illegal in California. If an employer terminates employment because of a refusal of an employee to sign a noncompetition agreement, the employer may be liable to an employee for wrongful termination damages. 

What To Do.   Have your attorney review and revise or amend your employment contracts and employee handbook if necessary.   

Exceptions.   There are only two circumstances in which noncompetition agreements may be enforced in California now: (1) in partnership agreements or (2) in agreements selling an ownership interest in a business. Additionally, employers can require agreements that protect their trade secrets and confidential information, but they are not able to restrict competition by former employees.   

We at Martinez Law Group want our clients to be up to date and protected. If your company values personal service and can use our level of expertise, contact us. We would be pleased to serve you and advance your business objectives. 

In a couple of weeks California’s “hands free” cell phone law becomes effective.  On July 1, 2008 police officers will begin to issue tickets to drivers who use cell phones that are not operated “hands free.” For businesses, and especially companies employing young people, putting a policy in place that requires employees to follow the new law is important, and now urgent.   

The Law. Sections 23123 and 23124 of the California Vehicle Code prohibit drivers from using a wireless telephone while operating a motor vehicle unless the driver uses a telephone that is designed and configured to be “hands free.”  Drivers who violate the law will face a $20 fine for the first violation and a $50 fine for each time thereafter. There are some exceptions to the law that include drivers using their cell phone in an emergency, in some types of commercial trucks or farm vehicles, and drivers of emergency service vehicles  The law also forbids young people under age 18 from using any mobile device (including a pager or texting phone) while driving.  California joins a handful of Eastern States in adopting a “hands free” cell phone law. These new laws respond to the growing use of cell phones by drivers and accidents involving drivers distracted when using a cell phone.  

The Risk To Employers. If an employee violates a safety law when involved in an accident on the job, they and their employer may be held negligent, even if they are otherwise driving well. This principle is referred to as negligence per se. Lawyers use the principle of negligence per se as a shortcut to establish liability in law suits to win damages for people injured in accidents. The cell phone law is a safety law specifically designed to eliminate distractions and prevent accidents. Depending on the extent of the injuries, this financial risk to an employer could be very substantial. If the cited employee driver has violated the cell phone law before, significant punitive damages may also apply. After July 1 of this year, we are probably going to see negligence per se used more frequently in personal injury cases when a driver was using a cell phone.     

What Employers Can Do. Adopt a policy and/or amend your employee handbook to require strict compliance with the new “hands free” cell phone law by all employees. Many businesses may instruct their employees not to use cell phones while driving and to let incoming calls go to voicemail to be returned outside of the car in a safe area. If your business issues cell phones to its employees, or necessarily requires the use of a cell phone by its employees, make sure that the cell phones can be used “hands free.” Note that a cell phone that has a speaker phone function will not necessarily comply with the law.  Employers who hire employees under age 18 should prohibit their use of a cell phone in a car. The policy should be acknowledged by employees in writing and enforced by the company.   A more detailed article that discusses the impact of this new law on individuals and  businesses may be found on ezinearticles.com, entitled California’s New Cell Phone Law - What Drivers and Employers Need To Know.  

When helpful new technology emerges, it frequently has baggage. California is dealing with the realization that the convenience and increased ability to do business “in route” and stay connected socially, has the baggage of creating a distracted driver and perhaps has made our highways not as safe as before.  This is a predictable response, but with baggage for business as well. Promptly and strategically responding to this new business risk can make your business not only less exposed to liability, but can demonstrate the good citizen that businesses can be in society.    

A strong brand contributes greatly to a company’s success. Generic company names invite confusion in the marketplace and can mask their identity. Strong company names not only identify their products or services, but are marketing tools, vision reminders and communicate the personality of the company.  Branding is about being distinctive. It is an effective way to differentiate your product or service from all others and be recognized easily in your market. Strong branding names usually contain one of three types of words: 

•   Invented Words. These are not existing words, but embryonic words designed to become the description of your product or service. You distinguish your company the most if you use an invented word in your company name. Xerox^® and Kleenex^® are classic examples of company names that were invented words.
• Unrelated Words.  These are actual words – nouns, verbs, adjectives. However, when a company’s name is a word whose natural meaning is unrelated to the product or service of the business, it can be a powerful brand. Apple^®, Dove^®, Google^® and Yahoo^® are company names using actual words whose meaning is unrelated to the company’s product or service. Perhaps this type of name is memorable in the same way that a joke is memorable. Surprise is at the core of an effective joke. To call a computer an apple or a chocolate bar a bird, or an Internet search engine a number or a vocal exclamation creates a memorable surprise – a strong brand.
• Proper Nouns. This category may remind some of junior high school grammar lessons, but no sentence outlining is required to get this concept. Certain products and services have reputations that are built around established family or personal names. Disney^®, Ford^® and Hershey^® are all company names that contain the name of their founders. Their reputation and product identification is personal. How enduring a brand will be when the individual is no longer around is dependent on the success of the team associated with the individual. Dynasty and heritage bring strength to these kinds of company names.    

 In today’s economy, entrepreneurs with business acumen choose company names capable of being strong brands.  Laura Lake, a marketing columnist for About.com, outlines an intelligent way to develop an effective company name in her article, Learn How To Develop A “Winning” Business Name. A reputable marketing firm can also guide you in choosing a company name that will be a strong brand.   Start strong. Choose the name of your new company deliberately. Choose a strong brand for your company.

 Legal/technology services firm partner Robert J. Scott said today, “There are two types of companies: those that have been audited [for software violations] and those that will be.” Scott sees the trend. In the last year, the Business Software Alliance, the main copyright enforcement watchdog for Microsoft Corp, Adobe systems and Symantec, reaped $13 million in software violation settlements, almost 90% of which came from small businesses.   

Here are five things a small business owner can do to reduce the risk of being hit with a software violation claim:

Now is a popular time for small business entrepreneurs to cast vision and set objectives into the new year.  For a long time, managers have been using the goal setting formula known as SMART (Smart, Measureable, Achievable, Realistic, Timely) to set their annual goals. Ray Silverstein is a sales columnist for Entrepreneur.com.  In his article, A Guide to Goal Setting, Silverstein explains what SMART goal setting is and how it works.  

Also this month, blogger Mark Horstman has posted a 3-part podcast entitled How to Set Annual Goals.  Horstman hosts the blog, Manager Tools. In an innovative and fresh look at SMART goal setting, Horstman claims that the seasoned formula is “intellectually flawed” and generally not applied properly in the workplace. Mark Horstman suggests an alternate method, which he predictably calls MT goal setting. 

For small business entrepreneurs, the important thing about annual vision casting and annual goal setting is to do it. It is valuable time spent if the business’ vision and goals are used as “filters” for the choices that are made throughout the new year. 

Whatever method used, having a clear vision of the purpose of the company is essential for both setting meaningful goals and maintaining the momentum of success throughout the year. When Starbucks Chairman Howard Schultz recently reassumed the CEO position of Starbucks, a “back to basics” statement was released by the new Chairman Craig Weatherup. He said that Schultz’ purpose was “ . . .  to relentlessly focus the entire organization on the customer.” Meeting the needs of the customer is the fundamental purpose of every business.

As restated by Starbucks’ management, the fundamental purpose of a business is a good beginning point for vision casting and goal setting. Asking how the business’ product or service meets the need of the customer brings focus to the process. 

Have a very successful business year in 2008 – just as you planned.

Headlines in the The Wall Street Journal  describe the shriveling of US and global economies almost every day. Heralding persistent economic decline could discourage small business owners.               

The November 2007 survey of Discovery Small Business Watch  concluded that  “Economic confidence among small business owners declined for the fourth straight month in November, as increased pessimism over the U.S. economy dragged down indicators of relative stability.”   

However, the Discovery survey also said that small business owners were experiencing less cash flow issues over the last three months. When I remember that Peter Drucker considered cash flow more important than profit, better small business cash flow is a huge encouragement.   

So why does the Discovery Small Business Watch survey show a decline in entrepreneurial confidence when small business owners are improving their cash flow situation?

Small business owner Tim Wilburne, of Virginia-based TW Controls debunks Discovery’s survey, saying: “So they found 1000 small businesses with 5 or fewer employees that had time to take a survey? Some weeks I can hardly find the time to even talk to people I know, much less take a survey. It sounds to me like these businesses aren’t putting forth the effort to be successful.” Tim noticed no data about small business owners who refused to spend their time taking the survey.

I like Tim’s attitude. I bet Peter Drucker would too. Professor Drucker explained that “the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”     

Even in the face of the “doom and gloom” reports and surveys, small business owners show themselves to be entrepreneurs when they respond to change and exploit it as an opportunity. 

What opportunities can you exploit from the economic changes that are happening in your markets?