Estate Planning

Estate Planning FAQ’s

Mr. Petros provide sophisticated and personal estate planning and probate services to all clients, regardless of the size of their holdings. Our experienced estate planning lawyers are committed to providing the individualized services and timely response and follow-up that are essential to meeting each client’s personal needs.

Whether you are younger or older, married or single, a parent or without children, you need to invest in an estate plan. There is a lot to be gained by you and your loved ones through estate planning; moreover, even more can be lost if you don’t.

Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death. An estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.

Estate planning is much more than having a will. Proper estate planning will avoid the chaos and wasted assets of an unplanned estate, enhance your sense of security, and provide a dimension of personal well-being to your loved ones.

Wills and trusts are common ways in which individuals dispose of their wealth. Trusts, unlike wills, have the benefit of avoiding probate, a lengthy and costly legal process that oversees the transfer of assets.

What is a trust?

Generally, a trust is a right in property (real or personal) which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust.

A trust is a form of property ownership. The person who sets up a trust is called the “grantor” or “settlor.” The trustee is the “legal” owner of the trust property, and her name is on any document of title. The beneficiary is the person who receives the benefits of ownership, such as the right to receive the income from the trust’s investments. A “living” or “inter vivos” trust is one that is set up and funded while the grantor is alive. Usually the grantor names his or her self as both trustee and beneficiary. In contrast, a trust which comes into being under the terms of a will, after the grantor’s death, is called a “testamentary” trust.

How does a trust avoid probate?

When an estate is conveyed through a Will, the probate court must validate the Will before its provisions can be executed. The probate process can require up to two years. Assets held in a Living Trust, however, are not subject to probate. The advantages of avoiding probate are several.

Expedited distribution: A Living Trust allows assets to be distributed to your heirs as quickly as your trust agreement instructs and the taxing authorities allow, without the additional delays of probate. Your spouse, for instance, could receive income to provide for living expenses immediately.

Expense reduction: The expenses of probate are completely avoided for all assets held in your Living Trust.

Privacy and confidentiality: When a Will is entered into probate, all of its provisions become a matter of public record. Since a Living Trust is a private arrangement, its terms are not made public at your death. Your assets and intentions are known only to your trustee and beneficiaries.

What is a will?

A will is a written statement directing who will wrap up your financial affairs, and who will receive your money and other property, when you die. The property left in your name at the time of your death is called your “estate.” The ones you name in your will to receive your property upon your death are called “legatees.” They may or may not also be your “legal heirs.”

The person named in your will to be in charge of your estate when you die is called the Executor. The job of the executor is to investigate what you own at the time of your death, make a list of all of your property, collect all of your property, care for your property until it is sold or passed on to the people you have selected to inherit it from you, pay your bills, file your final tax returns, and finish up any other financial business required of your “estate” after your death.

Once everything is done to wrap up your financial business, the remaining money or other property can be distributed to the legatees named in your will. Money and property held in joint tenancy ownership, such as a bank account or house, goes automatically to the surviving co-owners upon the death of one owner. Similarly, property held in trust, or in a payable-on-death account, goes automatically to the named beneficiary upon the death of the owner. Life insurance proceeds go automatically to the named beneficiary on the death of the insured person. These types of property are not affected by your will.

What does a will accomplish?

A carefully crafted will is your most reliable guarantee that distribution of your assets is conducted according to your wishes. In addition, your will:

Enables you, if your family includes minor children, to specify who will assume responsibility for their upbringing as well as the manner in which you wish them to be raised
Presents the most dependable way of communicating any special intentions you have (arrangements for the continuing care of pets, for example)

Provides the best means of indicating who should receive items and “keepsakes” that hold sentimental value

Do I need a will?

You may believe that you don’t need a will. Perhaps you assume that a will is unnecessary since states laws exist that, absent a will, govern the division and distribution of your assets after your death. Or, you may feel that the size of your estate doesn’t warrant a will.

What happens if I die without having a Will?

Not having a will means that you:
Surrender to the state all important decisions affecting the well-being and future security of your heirs.

Are at risk of having your property divided in a way that’s not to your liking.

Forego opportunities to reduce taxes through trust arrangements.

When should I review my existing Will?

Your will may be changed as often as you wish. If the change you desire is relatively simple, an amendment to the document, known as a codicil, is executed with the aid of an attorney. If you decide to write a new will altogether, the new document should specifically revoke all prior wills. (Remember that revoking a will automatically revokes its codicils, but revoking a codicil does not necessarily revoke a will.)

In addition, you should review your will when any of the following events occur:

A change in marital status
The birth of a child
A change in your state of residence
A significant change in the value or character of your assets
A change in intended beneficiaries
The death of a beneficiary
The death of a guardian, trustee, or personal representative named in your will
A change in tax laws affecting federal estate tax deductions and calculations
Once every five years

If you believe a change to your will is necessary you should consult an attorney who is familiar with the probate code. They will know how best to comply with various state requirements.

Real Estate

What exactly is commercial real estate?

Broadly defined, the term “commercial real estate” can be used to refer to any dealing with real property in a business context. It could involve leasing out office space, owning an apartment complex or selling real property along with and as part of the sale of a business. It might be industrial or agricultural property. It could even involve residential properties like apartment complexes or rental houses being held for business or income-producing purposes. It can even involve working with the government. Unless the property is a residence where the homeowner is living, you’re probably dealing with commercial real estate.

Are there really that many differences between a commercial real estate deal and buying a house?

While many of the concepts are the same, there can be huge differences between commercial and residential real estate. Commercial real estate transactions can be far more diverse and wide-ranging than selling homes. Any real estate deal has its share of risks, and problems can arise that you could never possibly foresee. In general, however, the risk and potential liability exposure that you face on a commercial real estate deal can be much greater than when you buy a house. Look at it from this perspective: by and large, we all have a pretty good idea of what goes on in a typical family home, but can you say the same thing about a piece of business property? Depending on the nature of the business, commercial property may have all kinds of liens and title problems. There may be greater concerns about hazardous materials or zoning issues. Also, there will always be questions about the suitability of the property’s location for your business needs.
Furthermore, in many instances, you aren’t afforded the same consumer protections on a commercial real estate deal that may be available when you purchase a residence. In some states, for example, residential homebuyers are given greater protections against abusive lending practices than are business owners. Likewise, there are mandatory disclosures required in residential real estate matters that may or may not be required in a commercial transaction.

What are some of the common pitfalls involving a real estate business deal?

Regardless of whether you’re buying a home or a piece of investment property, there will always be risks involved. Your goal should be to lessen these risks as much as you can. Examples of potential problems that oftentimes lead to legal disputes include:

Defects in title
Debt service and lender requirements
Mechanics liens
Zoning and land use problems
Market fluctuations
Hazardous waste and environmental contamination

Real property interests are usually conveyed by a deed. In order to track how property changes hands, every state has a public record system where real property deeds are recorded, becoming a part of the public record system for everyone to see. In theory, this is a great system for keeping track of who owns what, but deeds are sometimes not recorded. Sometimes people sell or transfer partial interests in property. Lenders make loans against properties and record mortgages or deeds of trust that become liens that are of public record. Easements given to cross over or use property may or may not be of record. A judgment against a person can be recorded and become a lien against any real property that person owns, even without his consent. All these things can become a lien against title. You may not be buying everything you though you were buying, because someone else may have a prior claim that you didn’t know about.

If you’re borrowing money to acquire a piece of real property, the lender is no doubt going to want security for the loan. While a personal guarantee may work if your net worth is substantial, a lender will usually want a mortgage or deed of trust against the property. This will give the lender the right to foreclose if you fail to comply with the terms and conditions of the loan. Beyond the repayment requirements, these terms and conditions can give rise to other concerns that could become a problem. For example, some lenders prohibit borrowers from taking out more loans on their property, which could stop you from getting more financing that your business may need down the road.

Often times, a commercial loan will also require that a business maintain a certain “net equity.” Pre-payment penalties are also common on real property loans. Also, many lenders on a big commercial real estate deal require that their legal fees and costs be paid by the borrower(s).

In a business context, contractors who do work on real property have a process called a “mechanics lien” that they can use to make sure that they get paid. This is a statutory lien that contractors, laborers and materialmen place on property when they’ve performed work or furnished materials in the erection or repair of a building or an improvement. They must generally give advance notice that they’re going to file the lien, and must then take action to enforce the lien within strict timelines if they aren’t paid. Ultimately a mechanic’s lien could be used to foreclose on property, so it can be a very powerful tool for a contractor, a laborer or a materialman.

A big concern for a business is to make sure not only that property used in the business is properly zoned, but also that the zoning of nearby or adjacent properties is not going to be a problem. Believe it or not, many people fail in new businesses because they don’t investigate the land use and zoning issues carefully enough. Even if you do your homework, issues can come up down the road if governmental agencies or neighbors try to change the zoning on your property to limit your use of it.

If you’re in the real estate business, changes in property values and other market fluctuations can have a profound effect on your operations. Rents can go up or down; tenancy rates can increase and decrease. Changing property values and market fluctuations can also affect any other type of business that owns property. With retail space, for example, a company that owns rather than leases a store location may decide to change locations to follow their customer base, only to find out that they can’t afford to move because of property values having dropped to the point that their business premises can’t be sold at the price they need. (In contrast, a lease may provide more flexibility because, at the end of the term, the business could simply pack up and move without having to worry about selling the premises.)

The biggest potential concerns to owning business property, though, are hazardous waste or environmental cleanup problems. Property owners are the ones who have primary responsibility for fixing such problems, even if the current property owner didn’t cause them. These problems may not be obvious or apparent to the naked eye, and could arise from anything ranging from an underground storage tank to an old garbage dump. If you’re in the chain of title to contaminated property (meaning that a some point you held an ownership interest in that property), you’re potentially responsible for paying for the clean up. The costs for an environmental cleanup operation can run into the millions of dollars.

Should I hire a real estate broker or a real estate lawyer?

The goal of every seller is to maximize profits, and every prospective buyer wants to get property as cheaply as possible. Having to pay a real estate commission or other professional fees as part of a real estate deal only works at odds with these goals. Consequently, many business people who are sophisticated when it comes to negotiating real estate deals may feel comfortable with doing a lot of the work themselves on commercial real estate deals. However, even sophisticated business people will still rely on professional advice when comes down to actually closing a deal, as the potential pitfalls can be so significant. The bottom line is that you should seriously consider hiring real estate professionals, and professional fees should be factored in as a cost to doing any commercial real estate deal.
There are many reasons why you should hire your own real estate broker (or an agent who may work for a broker). The broker or agent should have specific expertise in commercial real estate, and particularly in the area where you need it (for example, office space, retail space, industrial warehouse space, apartment complexes, agricultural land). Even if you’re just leasing property, a real estate broker may be invaluable. If he or she is good, an agent will go out and find property for you. The agent will also serve as an arm’s-length intermediary to negotiate on your behalf, which can be much more effective than you trying to negotiate the deal yourself. (Wouldn’t you love to have an agent representing your interests when you go buy a new car? It would help you to avoid high-pressure sales tactics, prevent you from making rash decisions and make it easier for you to say “no.” The same considerations apply here.)

Keep in mind, too, that real estate agents work on similar deals all the time, so presumably know what they are doing. Their knowledge and contacts can well be worth the cost of a commission. They can also help you with the paperwork, to make sure you don’t do something stupid when submitting an offer.

If you’re a buyer, it may really make no sense not to hire a broker when it would usually be at no extra cost to you. The seller usually pays the commission in most real estate deals. Most real estate agents agree to split the commissions on listed properties, though, so an agent has a real incentive to be involved in a deal even if he or she is not the listing agent. But a buyer can simply chose to work with the seller’s agent to close a deal. The seller’s agent usually won’t object if a written consent is signed. (Incredibly, this happens all the time and it only makes sense from the standpoint of the seller’s agent, who then gets to keep the whole commission!)

A multiple-listing arrangement is a “you scratch my back, I’ll scratch yours” sharing mechanism for real estate agents. They are mutually beneficial to buyers and sellers, as well, since the multiple listing of all properties on the market will inevitably help to bring buyers and sellers together. One of the conditions to an agent participating in such an arrangement is that commissions are shared when more than one agent is involved in a transaction.

Any reputable real estate agent would be more than happy to explain the process at greater length. The agent should also be willing to work with you as long as you understand that he or she would have to look to the seller’s agent for payment of a commission, if any is to be paid. This helps protect the buyer in the rare instances where there is no seller’s agent (for instance, a “property for sale by owner”) where the seller’s agent does not participate in a multiple-listing arrangement.

You shouldn’t hire a broker just because he or she is a relative, or because he or she is your best friend’s spouse. Instead, hire the best person you can find who has expertise in representing parties on real estate sales in the segment of the market where you are looking. Ask lots of people who they would recommend and why. Ask disinterested parties who are more likely to give you an informed answer (for example, escrow agents, lenders, contractors, real estate attorneys, and people who have recently bought or sold commercial property). Look in the newspaper advertisements to see who have been the highest producers in your segment of the real estate market. When somebody’s name comes up more than a few times, that person would be someone who you would want to contact.

If I hire a real estate broker, why do I need to hire a lawyer?

The benefit of competent legal advice on a real estate deal stands on its own. There are so many things that can go wrong on a real estate deal that you may very well end up kicking yourself mightily if you don’t hire an attorney to help you with the transaction. You may even end up hiring a lawyer on a lawsuit, which could end up be a lot more expensive. Real estate agents don’t usually get paid unless the deal closes (or unless you somehow become obligated to pay a commission by, for example, backing out of a deal or otherwise breaching your listing agreement). Aso, listing agreements will clearly state that real estate agents are not providing legal advice. So real estate agents are typically not going to worry about the “what if’s” of the legal details and are inclined to do whatever they can to push a deal to closure. This is not the case with an attorney working on an hourly basis, who’s going to get paid one way or the other. An attorney will be in a better position to provide you with essential legal advice and to do so with more impartiality than may be the case with your real estate agent.

Is an escrow always necessary?

Strictly speaking, no. Unless the parties contractually agree to it as part of their deal, there’s seldom a legal requirement that there be an escrow. Inevitably, though, an escrow is almost always a good idea. The escrow company ends up being an intermediary and a facilitator to the transaction. They can also handle most of the details and the paperwork, including escrow instructions, title reports, title insurance, recording deeds and other instruments, and disbursing funds.

How do I find out if I am getting good title?

In some states, there are lawyers who specialize in researching public records to determine the status of title to property. They’ll issue opinions or reports as to the condition to title. In other states, the job of researching title to property has become something that is almost universally done by title insurance companies. These companies have developed tools that they use to track public records and other resources to develop extensive databases on title to real property. They’re able to prepare title reports on property that are used to determine the status of title on real property transactions, and that are used as a basis for issuing title insurance.

What’s a preliminary title report and how much attention should I pay to it?

A preliminary title report is a document prepared on real property once an escrow is opened, but prior to closing. It provides all kinds of information about the property that’s essential for a buyer to see, such as how title is currently held and what kind of exceptions to title are currently of record (for example, easements, liens and encumbrances). The preliminary title report then becomes the final title report, on which title insurance is based. In addition to specific exceptions to title that will be listed on a title report, it’ll also list standard exclusions from coverage.

In virtually every real estate transaction, the buyer has the right to approve or object to the preliminary title report and back out of the deal unless the seller can provide clean title by eliminating certain exceptions to title prior to closing. But a buyer will only have a short period of time during which to act on the preliminary title report. So it’s extremely important for a buyer to carefully review a preliminary title report immediately and to take appropriate action if there are any unacceptable exceptions to title.

What’s title insurance and why is it necessary?

Title insurance is nothing more than an insurance policy that provides assurance to interested parties that there’s good and marketable title to the property being insured. However, this never means that title insurance guarantees perfect title. As with all insurance, there are a number of different types of policies and endorsements. There are also many exceptions to title, which all tie back into information in the preliminary title report. These include specific exceptions listed on the property to be insured, as well as standard exceptions.

One standard exception, for example, is that the insurance will only be provided for exceptions to title that are reflected by the public records. Unless a special endorsement is obtained (which costs more money), there’s no obligation on the insurance company to insure against defects in title that would have been apparent from surveying or otherwise physically inspecting the property.

There are also different types of policies. For example, it’s customary in most states for a seller to pay for standard coverage for the buyer that insures that the deed from the seller is conveying title that it purports to convey, subject to exceptions in the title report. If a buyer wants additional protection against third party claims such as mechanic’s liens, the buyer can purchase an owner’s policy. If a loan is involved, a lender’s policy can be issued that specifically insures the lender against title defects.

It’s not always necessary to get title insurance. In a transaction between related parties, for example, they may decide not to pay for it and take the risk of transferring property interests without purchasing title insurance. In a typical arm’s-length deal, though, it almost always makes sense to purchase title insurance. If a commercial loan is involved, the lender will require title insurance to protect its interest.

Are there different types of deeds, and why should I care?

The type of deed can make a big difference. In some states, the typical conveyance is a grant deed, which basically says the seller has an interest in the property and that it is being conveyed to the buyer, but not necessarily with any representations or warranties as to title. Other states have warranty deeds that go a step further to provide a warranty that the seller has good title to the interest being conveyed. All states have something like a quitclaim deed where a party is only signing over whatever interest that party has in the property, if any.

The bottom line is that you could take a deed from someone that means nothing. While this may amount to fraud on the part of the seller, who wants to have to sue someone to try to enforce your rights? Also, you may not even have a good case if, for example, you accepted a quit claim deed that says that you got only whatever interest the other party had, which may have been nothing. You can see the need to get competent legal advice.

Does it make any difference how I take title to commercial real property?

There are many issues that can arise with respect to how you take title to property, and especially so in a commercial context. If you take title as an individual, you may be exposing yourself to potential liability exposure that you might want to try to avoid or at least minimize. You take title through a business corporation, but doing this could be disaster from a tax standpoint point. Sometimes, there may be other alternatives such as forming a limited liability company that you would own and control that, in turn, could lease the property to your business entity.

If joint ownership is involved, you should clearly understand the differences between taking title as joint tenants, as tenants in common, as a partnership or as community property. You should also clearly understand your rights versus the rights of your co-owners. Each and all of these types of ownership have significant ownership implications and rights of survivorship.

It short, there are no universal rules of thumb with respect to how to take title. It’s always advisable to seek professional advice, including your lawyer and CPA, to assist you in making a smart decision.

Why is it necessary to have a separate real estate purchase contract, when escrow instructions usually seem to be enough?

Amazingly enough, it’s perhaps all too common for parties to close a commercial deal without having a formal real estate purchase contract in place. They can shake hands on a deal, show up at an escrow company and tell an escrow officer what they want to do. The escrow officer can then draft instructions for the parties to sign and they can proceed to close the deal. But it can become painfully clear that relying solely on escrow instructions is never the best way to do a deal. Among the things to take into account are:

Escrow instructions are prepared primarily for the benefit of the escrow holder and not any of the parties to the transaction. They typically contain language that tries to absolve the escrow company of any liability. If something goes wrong, it’s pretty hard to hold the escrow company responsible.

Conditions that may excuse performance by one party or the other aren’t likely to be spelled out clearly. A dispute is more likely to arise if problems come up with respect to a party’s performance.
The escrow instructions aren’t going to cover any side deals the parties contemplated handling outside of escrow.

The escrow holder isn’t going to provide any legal or tax advice to cover issues typically addressed in a real estate purchase contract.
Escrow instructions aren’t going to contain representations and warranties from the parties that would typically be addressed in a real estate purchase contract.

Escrow instructions won’t spell out the consequences if someone breaks the deal.

What should be in a real estate purchase contract?

Real estate purchase contracts can be extraordinarily simple but usually end up being very complex and lengthy documents, in order to try to address all the “what if’s” that are typically involved in a commercial real estate transaction. Points that would typically be covered include:

Recitals (background facts as to why the parties are doing the deal)
Description of the property
Sales price and terms of payment
Title and title insurance
Closing date
Escrow provisions
Conditions to closing
Representations and warranties
Environmental and hazardous waste provisions
Zoning and land use issues
Rights to inspection
1031 exchange provisions, if applicable
Liability insurance requirements
Indemnification and hold harmless provisions
Remedies if a party breaches
Rights to amend and modify
Term and termination
Rights to assignment or delegation of rights
Attorneys’ fees and costs
Arbitration rights, if any
Governing laws
Other standard provisions

In many instances, it’s possible to use standard form documents prepared by realtor associations that help to facilitate the drafting process. At a minimum, these standard form agreements can serve as effective checklists of issues you may want to address.

Does “as is” mean “as is”?

As between the parties, it may be. Even here, though, there may be laws that preclude a seller from completely passing the buck on certain issues such as environmental clean up and hazardous waste. Also, the law sometimes requires mandatory disclosure of defective conditions or other problems with property.

If I am buying real property for my business, do I need to get an environmental site assessment?

Some lenders may require an environmental site assessment, and there are certain situations where only makes sense to get one (such as when you’re buying a service station or a manufacturing business). Otherwise, though, the chance of there being any problem may seem remote and it may be tempting to pass on doing an expensive assessment. But you’re probably doing yourself a disservice if you don’t get one, as any problem that arises could result in catastrophic liability exposure for you even if you didn’t cause the problem.

There are also different types of environmental site assessments. A “Phase I,” for example, generally involves an inspection of the property and review of various records, but it doesn’t actually involve any boring or drilling, or the testing of soil or water samples. These activities are usually done during the course of a Phase II assessment, which can be quite expensive. It’s usually an option for a buyer to do a Phase I assessment and consider the results and recommendations of that process before deciding on whether to proceed further.

What’s a “1031 exchange”?

A “1031 exchange” refers to a method of deferring tax on the sale of an interest in real property allowed under section 1031 of the Internal Revenue Code. In brief, it allows a seller to defer tax on a gain that would otherwise be realized on a sale of property if the proceeds from the sale were reinvested in like-kind property. It’s quite common for a 1031 exchange to be involved in some manner in a commercial real estate transaction.

A seller must contractually arrange to convey his or her interest in the property being sold in exchange for receiving an interest in another piece of commercial property. If cash is involved, an escrow company or facilitator usually it, because treatment under section 1031 won’t be possible if the proceeds are paid to the seller even for an instant. In practice, however, the rules for a 1031 exchange can be quite complex and it is easy for a seller to run afoul with them. It’s always advisable to have competent legal counsel involved in the transaction.

Business Law

Business Formation FAQ’s

Corporations – General Considerations

A corporation is a separate legal entity that is distinct from the owners, also known as the shareholders. The primary benefit of a corporation is that the owners are not personally liable for the debts and liabilities of the corporation. The shareholders elect the board of directors to make major business decisions and oversee the general operations of the business. The directors then appoint officers to manage the day-to-day operations of the business. Unlike, a sole proprietorship or partnership, a corporation has a continuous life. It survives the death of its owners. It can also be easily transferred to new owners. The legal documentation of a corporations such as licenses and permits are held in the name of the corporation and not the owners and thus do not have to be transferred.

C Corporation

The traditional corporation is known as a C Corporation because it is taxed under Chapter C of the Internal Revenue Code. It is subject to two levels of taxation. The corporation pays taxes, as do the shareholders on the income passed to it by the corporation.

S Corporation

An S Corporation is a corporation that qualifies to be taxed under chapter S of the Internal Revenue Code. This type of company is not taxed at the corporate level. Its shareholders, instead, are taxed on income they receive. However, to receive this tax advantage, an S Corporation has restrictions that a C Corporation does not have. To qualify as an S corporation, the shareholders must elect to have subchapter S status. They must agree, and the corporation must meet the definition of a “small business corporation.” A corporation is a small business corporation if it has fewer then 75 shareholders and must be a domestic corporation. These shareholders must be individuals, estates or certain qualifying trusts. S corporations cannot have corporations, partnerships or LLCs as shareholders. Shareholders must also be U.S. citizens and residents. The corporation must only issue one class of stock.

Non-Profit Corporation

A non-profit corporation is a corporation that is carried out for a charitable, educational, religious, literary or scientific purpose. A non-profit corporation does not pay either state or federal taxes because the government deems the corporation’s actions to be for the betterment of society.

Limited Liability Company (LLC)

An LLC owner, otherwise known as “member”, enjoys limited liability protection in that they are generally not liable for the LLC’s debts and obligations. An owner can be held liable for the company debts only if he or she guarantees the obligation or if the owner is personally negligent. LLCs do not have to comply with corporate law and generally have fewer restrictions than a corporation has. An LLC also is free from many corporate formalities that govern a traditional corporation. LLCs do not have a board of directors or officers. LLCs do not have to hold shareholder meetings or keep records of any meetings. LLCs are run by the managers. Nonetheless, the members must have a written operating agreement to govern the affairs of the LLC. Interests in LLCs are not freely transferable like stock in a corporation. LLCs do not have a perpetual life. An LLC can be dissolved at the end of a stated period or when a member disassociates, unless the other members agree to continue the business.

Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. No paperwork has to be filed with government to create a sole proprietorship. However, a fictitious business name certificate may have to be file with the appropriate government entity. A sole proprietorship ends upon the death of the owner and does not have liability protection from creditors of the business.


There are generally two types of partnerships, general and limited. A general partnership usually involves two or more persons to carry out the business as co-owners. With a general partnership, the partners are liable for the debts of the business, and each partner is an agent of the partnership. With a limited partnership, there is general partner that manages the affairs of the business. The limited partner has limited liability and are liable only for the partnership debts and obligations to the extent of their contribution to the partnership. A limited partnership must file a certificate of limited partnership with the government A general partner has unlimited liability. Partnerships are not treated as separate entities for tax purposes. Under Chapter K of the Internal Revenue Code, partnerships gains and losses are accounted by the partners on their individual tax returns.

Registered Limited Liability Partnerships (LLP)

LLPs are partnerships in which partners, with some exceptions, are not liable for damages caused by tortious acts or misconduct by the other partners. Professional partnerships, such as law and accounting firms, often elect to become LLPs because of the additional liability protections this structure provides, while still being able to take an active role in managing the partnership. An LLP must be registered with the government.

Professional Corporation (PC)

This is a corporation for certain licensed professionals. The professions which are required to be professional corporations include: Accountants, Acupuncturists, Architects, Chiropractors, Clinical Social Workers, Dentists, Doctors, Lawyers, Marriage, Family & Child Counselors, Nurses, Optometrists, Pharmacists, Physical Therapists, Physicians’ Assistants, Psychiatrists, Psychologists, Shorthand reporters and Speech and language pathologists. A PC will provide limited liability for general business debts but not for the professional own malpractice. A PC may not engage in any business other than its profession.

Choosing A Business Entity

Selecting a business structure involves several important factors, and two of the most important factors are liability considerations and tax consequences.

Liability Concerns

If personal liability may be an issue, you should avoid being a sole proprietor or a general partner. Neither form provides personal protection from creditors. In addition, if you have personal debt or potential for personal creditors, your business assets will not be protected from those creditors. You will then want to choose a corporate or limited liability company format.

If personal liability is not a concern, you can avoid the possibility of double taxation and corporate formalities by opting for sole proprietorship or general partnership. Legally, these are the simplest business structures to operate. Nevertheless, one should still keep their personal and business affairs separate.

Tax Issues

A consideration in any selection is how your entity will be taxed. A traditional C Corporation will be taxed twice, once at the corporate level and once when distributions are made to the owners. This is called “double taxation” and you can avoid it by selecting a “pass through” business entity. A “pass through” entity allows the owner to receive the profits of the business without being taxed at the business level. There are three types of “pass through” business structures you can chose: a limited liability company, an S Corporation, and a partnership.

Do I Need a Business License?

If you are engaging in business, then you are required by local, state or federal law to be registered as a business. The type of business that you run determines what type of business license you need. Begin by checking with your city to find out what the business regulations are. If your city does not require a business license, your state likely will. Most small businesses are required to have only local business licenses. Larger businesses, businesses that deal nationwide and international companies, however, usually are required to have a greater level of licensing. Certain businesses need both city and state business licenses, such as food service businesses, contractors, dentists, barbers, attorneys and social workers. Check with your state to find out whether you are required to have a state business license to operate.

Do I Need a Seller’s Permit?

A seller’s permit is a license that grants you a tax ID for doing business and filing sales taxes within your city or county. If you are selling products or services to consumers within your state, then you need to collect sales tax, provided that sales tax is collected in your state. You will typically apply for a seller’s permit through your county clerk’s office by giving some basic information about you and your business. The seller’s permit is a piece of paper with a tax identification number that you will use when filing and submitting sales taxes every year.

Do I Need a DBA?

If you are doing business under any name other than your own, then you need a DBA, or Doing Business As, license, also called a Fictitious Name license. This license makes it public knowledge that you are engaging in business under a name that is not your own. You can typically apply for a DBA when applying for a seller’s permit or business license, and a small fee is typically required to register.

SBA Loans

Information Regarding the SBA 504 Loan Program

What is a CDC?
A CDC is a Certified Development Company chartered by the U.S. Small Business Administration to administer the SBA’s 504 loan program.

How much can I finance?
There is a limit to how much the SBA can finance. Depending upon your type of business the SBA can finance up to $5.5 million. Keep in mind that is only the SBA’s portion.

How does the 504 benefit a bank?
The 504 reduces exposure on a project to 50%.

Can I borrow the down payment?
Yes, assuming it meets the following criteria. If the borrowed funds are collateralized by a lien on the project property it must be subordinate to the SBA’s loan. The borrowed loan cannot be paid back at a faster rate than the SBA’s portion and if the borrowed contribution is collateralized by assets other than the project property, the borrower must demonstrate repayment of the loan for its contribution from the cash flow of the business or other sources.

How does the 504 benefit a borrower?
The 504 requires a smaller down payment than conventional forms of financing to help preserve working capital. Secondary collateral is rarely required and pricing is typically below market since exposure is reduced on the bank portion.

Can I obtain a loan if I declared bankruptcy?
Generally speaking it depends on how recent the bankruptcy was. Typically lenders require several years of current payment history before they will extend credit of this size. If the bankruptcy is several years old and repayment history is clean since your chances are greater.

How does the SBA define a small business?
A tangible net worth of $15 million or less and an average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years of $5 million or less.

What types of properties does the SBA consider single purpose?
Amusement parks, bowling alleys, car wash properties, cemeteries, clubhouses, cold storage facilities where more than 50% of the total square footage is equipped for refrigeration, dormitories, farms including dairy facilities, gas stations, golf courses, hospitals including (surgery centers, urgent care centers, and other health or medical facilities), hotels and motels, marinas, mines, museums, nursing homes, oil wells, quarries including gravel pits, railroads, sanitary landfills, service centers (e.g. oil and lube, brake or transmission centers) with pits and in ground lifts, sports arenas, swimming pools, tennis clubs, theaters, and wineries.

Who is required to guaranty an SBA loan?
Any owners of 20% or more are required to guaranty. This includes owners of the operating company and the borrowing entity.

What fees does the SBA charge?
Below is a breakdown of the fees the SBA charges.

SBA Guaranty Fee (0.5%)
Underwriting Fee (0.4%)
Funding Fee (0.25%)
CDC Processing Fee (1.5%)
Eligible Closing Costs

What are other costs I might incur when getting a loan?
Depending upon the type of property and it’s current/prior uses you might need to purchase an environmental investigation. Typically all projects will have appraisal, escrow and title costs.

How long does it take to get a loan?
It depends on a number of different factors but assuming all of the necessary documentation is submitted the SBA can approve a loan anywhere between 1-3 days. We typically recommend at least a 30 day escrow to allow for sufficient time, however, it can be done in less time.

Is there a prepayment penalty on the SBA’s portion?
Yes. The duration of the prepayment period depends on the term of the loan. The most common option is the 20 year debenture which carries a 10 year prepayment penalty. The amount of the penalty depends on the debenture rate assigned to the loan. For instance if the debenture rate for your loan is 2.5% it would decline 10% every year for 10 years. After 10 years there is no prepayment penalty.

Can I make additional payments to buy down the principal balance? Unfortunately you cannot. The SBA’s 504 product is funded by investors purchasing bonds, which limits that flexibility. Typically we advise that additional payments be made to the loan in the senior position if the option exists.

How is the SBA’s interest rate calculated?
Each month our funding mechanism starts with the yield on the 10 year treasury. A spread is added to that yield to sell the current debenture pool and that gives us the debenture rate. The fees are then added to come up with the effective rate over the term.

When is my interest rate fixed?
The SBA portion of your loan will fix the month the debenture is sold. Pricing typically occurs the first Tuesday of each month and sale occurs toward the middle of the month. Once the rate is determined your Loan Officer will be in contact with you to let you know what the rate is and what the payment amount will be.

Is the SBA portion assumable?
Yes. If the party assuming the loan is equal to or greater in terms of financial strength it is fully assumable.

Will the SBA allow me to refinance my first?
Yes. The general rule of thumb is that the SBA will subordinate to a new first if the borrower stands to benefit. Examples would be extending the term or lowering the interest rate. The SBA will not allow you to refinance the prepayment penalty on the existing first and points on the new loan. They also do not allow cash out subordinations unless it’s used to enhance their collateral or be used to acquire other fixed assets used for business purposes.