Coronavirus and Its Legal Impact on Businesses

Coronavirus and Its Legal Impact on Businesses

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The COVID-19 pandemic is an unprecedented global event that none of us could have imagined just a month or two ago. The state of California has never ordered a complete lockdown to combat a public health emergency. Many other states have followed suit, and the federal government also has implemented social distancing guidelines that are likely to be in place for the foreseeable future.

If you are a California business owner, there is no doubt that your business and your personal life has been impacted in some way by the coronavirus pandemic. Restaurants, bars, nightclubs, schools, and all other businesses and organizations that facilitate the gathering of people have been shut down. This could mean the inability to do business, difficulty paying rent or vendors, the lack of need for supplies from various vendors, and a variety of other problems.

If your business has contractual obligations, you may have unexpectedly found that you are unable to perform such obligations because of the coronavirus outbreak. The impact of COVD-19 on businesses is resulting in contract disputes across the state.

Does the Force Majeure Doctrine Apply to Nonperformance of Contracts related to the Coronavirus?

Force majeure is a legal doctrine that protects parties from events that would be considered outside of a normal business risk. If a contract has a force majeure clause that specifies unusual risks that would excuse a party’s nonperformance, then that clause can be invoked when an event occurs that is covered within the contract.

The problem is that many contracts do not have a specific force majeure clause. If they do, it may cover events like earthquakes, fires, and mudslides, but it may be silent on a major viral outbreak. So, what can a business do if its contract does not specifically cover an event like the COVID-19 pandemic?

There are other legal doctrines that are separate but related to force majeure that could possibly excuse a party’s nonperformance. For example, California courts have held that an “impossibility” or “frustration of purpose” defense could be valid if there is an event that is:

  • Unforeseeable
  • Outside of the parties’ control
  • Renders performance of the contract impossible or impractical

It is very important to note that, because the COVD-19 outbreak is an unprecedented event, we do not yet know how the courts will apply force majeure and similar doctrines to contract disputes that result from this pandemic. Every business is unique, every contract is different, and there is specific language within each contract that needs to be examined carefully.

If you are facing a contract dispute that is related to COVID-19, it is best to have an experienced business contract attorney review your situation. At Garmo & Garmo, we can analyze your contract and advise you on the best legal strategy to deal with a nonperformance issue caused by the current pandemic.

The most desired result for all parties involved with these unfortunate contractual disputes is compromise, without the need for litigation. We all know that this is an unforeseen circumstance, and we can help you negotiate with the other party (or parties) to reach an amicable resolution. However, if contract litigation is unavoidable, we are ready and able to advocate aggressively for your rights and interests in court.

Reach out to us today at (619) 441-2500 or message us online for a free consultation. In keeping with California and federal guidelines, we are currently holding virtual consultations in compliance with the state’s stay at home order.

Does your Business Interruption Insurance cover the Coronavirus Pandemic?

Another area where contract language will be important is with a business’ commercial insurance policy. Most businesses have business interruption or business disruption insurance, either as a standalone policy or as part of a more comprehensive insurance package. Your policy may include coverage for a business slowdown or shutdown due to various events, such as earthquakes, fires, floods, and other “acts of God.” However, many policies exclude coverage for viral pandemics or do not include language that addresses this event.

Every policy is unique, and the language of each must be reviewed carefully to determine if the business has coverage for losses due to the COVID-19 pandemic. Your insurer may be obligated to cover you for losses caused by the pandemic, but it is also important to document and present your claim properly in order to ensure that it gets paid.

If you have a California business insurance policy and you are unsure if you are covered losses related to COVID-19, Garmo & Garmo can answer any questions you may have and provide a brief insurance policy review at no charge. Give us a call or fill out our online contact form to begin the conversation. We are all in this together, and we are here to help you during this difficult time.

selling a business in san diego county

Important Steps to Take when Selling a Business

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Selling a business is a complicated and detailed process. Business sales involve months of careful planning and preparation, and there are numerous steps that must be taken in order to guide the process toward a successful conclusion. Here are some of the most important steps owners need to take as they execute their exit strategy:

  1. Decide who You are Selling the Business To

Business sales can take many forms. Maybe you are thinking about selling the company to a group of employees or some members of your own family. Or maybe you are looking to sell to a larger competitor, an outside investment group, or an outside individual buyer. There are numerous possibilities, and there are countless ways a sale can be structured. It is important to decide well ahead of time which type of buyer you are looking to attract, how you want the sale to be structured, and what your level of involvement will be in the company (if any) after the sale is completed.

  • Determine an Acceptable Price

Once you know what type of transaction you are focusing on, you need to decide how much you are willing to accept to sell your business. This should be within a reasonable valuation range that is set based on an independent valuation. An evaluation specialist can help you determine a realistic value for your company using various methodologies; which may include the liquidation value of your assets, a multiple of your net earnings, the purchase price of comparable businesses in your area (if available), or a combination of these. The valuation method that is used will depend largely on the type of business you have and the industry you are in.

  • Organize your Financial Information and Other Important Records

Organize your financial records in a way that makes it easy for prospective buyers to find the information they are looking for. Namely, buyers will want to know the business’s previous earnings from recent years and their current trajectory – whether earnings are trending up or down. This will give buyers a good idea of the company’s future earning capabilities.

Along these same lines, you’ll want to make it as easy as possible for buyers to do their due diligence. Be sure all of the company’s documents and records are properly organized and filed in a way that is easy to access. You should also have all of your documentation reviewed by an experienced business lawyer to help ensure that everything is in order and nothing is missing or out of place.

  • Take Steps to Enhance the Value of your Business

As you prepare to put the business up for sale, look for opportunities to enhance its value and make it more attractive for prospective buyers. Some ways this could be accomplished may include reducing expenses, streamlining processes, upgrading technology to increase efficiency, and implementing more effective marketing strategies.

  • Target and Qualify your Prospective Buyers

You will need to develop a strategy to locate the largest possible pool of qualified potential buyers. This strategy will vary depending on who your target market is. For example, if this is employee buyout or a sale to other family members, you will not need to do any additional marketing. On the other hand, if you are looking for an outside buyer or investment group, you will need to figure out the most effective and cost-efficient way to locate these prospects. This may require the assistance of an outside professional if you are not comfortable doing this on your own.

Once you have begun marketing your business for sale, you will need to have a process in place to qualify potential buyers, filter out those that are not a good fit, and move forward with those who might be a good fit. To accomplish this, you will need a comprehensive list of appropriate questions to ask prospects during the screening process. Over time, you should end up with some qualified buyers. Some will want to move on to the next steps in the process, while others will decide to drop out. This should eventually culminate with at least one prospect who wants to buy your business.

  • Negotiate and Close the Deal

When you and a buyer (or group of buyers) have moved to the final stage, it is time to negotiate and close the deal. This is where step two will prove to be very helpful as you will know exactly what bottom-line price you are willing to ultimately settle for. During the negotiation and closing processes, your business attorney will handle most of the heavy lifting. Your attorney will negotiate with the buyer’s legal counsel, draft all of the pertinent documents, and take other important steps to help ensure that the sale closes smoothly and seamlessly.

Selling a Business in Southern California? Contact the Skilled and Knowledgeable Attorneys at Garmo and Garmo, LLP

The business sales process is complicated, and it can be very confusing – especially for owners who have never been through it before. There are many potential pitfalls that could trip you up, and it is important to have strong legal counsel by your side to help ensure that your best interests are fully protected throughout the process. If your business is located in San Diego or anywhere in Southern California, contact Garmo and Garmo, LLP for legal assistance. Call our office today at 619-441-2500 or message us online to schedule a free initial consultation with one of our attorneys.

business law in san diego county

What are the Main Differences between a Corporation and an LLC?

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There is a lot of planning and thought that goes into starting a business. And before you open up for operations, one of the most important decisions you will have to make is which type of entity you want to create. Many business owners narrow the decision down to two options; a corporation or a limited liability company (LLC). Both entities provide advantages for businesses, but there are some drawbacks to be aware of as well.

Before discussing the differences, it is important to note is that there is one major similarity between corporations and LLCs; they both provide owners with limited liability protection for their personal assets. Without limited liability protection, your personal assets would be at risk, and these assets could be used to repay debts that may be incurred from your business being sued or going into bankruptcy. Sole proprietorships and standard partnerships do not enjoy this type of protection.

Here is a detailed look at some of the primary differences between a corporation and an LLC:

Ownership

Corporations and LLCs have different ownership structures. A corporation is owned by shareholders (also referred to as stockholders), and ownership is in direct proportion to how many shares of stock an individual owns. An LLC is owned by one or more individuals, referred to as “members”. The main difference is that an LLC has more flexibility on how it can distribute its ownership stake. For example, an LLC could distribute profits to all members equally, even if they did not all invest the same amount of capital into the company. LLCs can also be owned by other corporations, foreign individuals, or any type of trust.

Corporations are often a good choice for startups that are looking to raise capital from outside investors. This can be done more smoothly through stock offerings. Corporations are also separate legal entities, which means they do not die when one or more of their owners dies. A corporation exists in perpetuity unless/until its owners decide to dissolve it.

Management

The management structure of an LLC is less formal and more flexible than that of a corporation. An LLC can be run by a member/owner or a manager who has no stake in the company. It is entirely up to the owners/members how the company will be managed. Corporations have a much stricter and more formal management structure. There must be a Board of Directors that are elected by the shareholders to oversee the management of the corporation, and corporate officers are appointed to handle day-to-day business operations. Although shareholders own the corporation, they are not involved in its decision-making, except to elect directors. Shareholders are, however, allowed to serve as directors or officers of the corporation.

Taxes

Another area where corporations and LLCs differ significantly is with taxes. Once again, LLCs have far greater flexibility in this area. By default, an LLC is taxed as a “pass through” entity, meaning that profits and losses are reported on the individual tax returns of the owners/members, not at the business level. In California, LLCs are required to pay an $800 annual tax to the California Franchise Tax Board (CFTB). If annual gross revenues exceed $250,000, an additional fee is added based on the LLC’s income from California sources.

An LLC can also choose a different tax treatment. If it is a single member LLC, the owner can be taxed as a sole proprietorship, which would mean filing a Schedule C form with their personal tax return. An LLC could also be taxed as a C corporation or S corporation. This could allow members to take advantage of the tax benefits of either of these options while retaining the flexibility of the LLC entity structure.

As mentioned earlier, corporations are separate legal entities, and therefore they are taxed separately from their shareholders. Corporate profits are currently subject to a 21% federal tax rate, along with an 8.84% California state tax rate. After these taxes are paid, the remaining profits are distributed as dividends to shareholders, where they are taxed again. This is commonly referred to as “double taxation”, and it is one of the most unpopular aspects of the corporate tax structure.

In smaller corporations, owners/shareholders can get around the double taxation issue by paying themselves a salary with all the profits, thus leaving nothing left over to be taxed at the corporate level. This becomes much more difficult, however, when profits go beyond the point where you can justify using all of them to pay an owner’s salary.

Another option for a corporation to avoid double taxation is to become an S corporation. S corps are “pass through” entities like LLCs, and profits flow through to shareholders as dividends without being taxed at the corporate level. To qualify as an S corporation, however, an entity must have fewer than 100 shareholders and meet some other strict requirements.

Not Sure which Entity to Form for your Business? Contact Garmo and Garmo, LLP for Assistance

Choosing the right entity structure is crucial for the success of any business, and it is important to get this right from the outset. Although you can change an entity structure later on, it could be much more complicated to do this once you are already in business, and it could result in some unintended consequences.

To know for sure whether your business should be a corporation or an LLC, it is best to consult with an experienced business lawyer. If you are starting a business in San Diego or anywhere in Southern California, contact Garmo and Garmo, LLP for legal guidance. We will meet with you to discuss the type of business you are starting, your goals and objectives, and explain the differences between an LLC and a corporation.

Call our office today at 619-441-2500 or message us online to schedule a consultation with one of our attorneys.

how to buy a business

7 Important Considerations when Buying a Business

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If you have a business in mind that you want to buy, you will need to perform your due diligence before going through with the purchase. Owning a business can be the fulfillment of a lifelong dream, but if you get into the wrong business, this dream can turn into a nightmare.

Before you agree to buy a business, there are several important questions that need to be answered. Here are seven of them:

  1. How is the Business being Valued?

You will want to make sure you are paying a fair price for the business, and that you are not overpaying. But determining the true value of the business is not always as straightforward as it seems. Businesses are generally valued based on several factors, the most important being:

  • Income/Revenue: The value of some businesses is based on a multiplier of annual net revenue. For example, if the average yearly net revenue in recent years has been $250,000, its value might be three times that amount, or $750,000. These figures should always be verified by an accountant.
  • Market Value: The value that comparable business in the area have sold for recently.
  • Asset Value: The value of the assets owned by the business (such as real estate, equipment, vehicles, etc.) minus their liabilities.

These factors are usually given a certain weight by a business appraiser, and one factor may be more important than the others based on the type of business you are looking at. For example, if a business owns expensive real estate (such as an office building or factory), that will be an important part of the valuation. On the other hand, if the business leases a commercial space and only has some computers and equipment, then asset value will be far less important.

  • What is the Seller’s Motive?

It is very important to know the reason why the seller is getting out of the business. If the business is going smoothly and earning good profits, then it is not likely that an owner will want to sell; unless they are retiring, have a health issue, need to move out of the area to take care of a sick relative or another personal reason, or they have another good reason they want to give it up. Ask clarifying questions of the owner to determine exactly why they are selling, and to ensure that it is not to get rid of a problem.

  • Will the Seller Remain in the Business?

Somewhat related to the previous question, is the current owner willing to stay on for at least a little while to help ensure a smoother transition for you? Another important thing to consider here is that, in many instances, the owner is the face of the business. The owner often has a personal relationship with important customers and clients, as well as with employees. This is why it is usually in your best interests for the current owner to remain in the business. You might even want to go a step further and propose to make the sale at least partially contingent on how well the business does in the near future. This would provide financial incentive for the owner to help you succeed.

  • Will Key Employees Stay with the Business?

Employees are critical to the success of a business. When you are looking at becoming the new owner, you need to know that, at the very least, the key employees are on board. Find out about each employee, what their role is in the business, and whether or not they will be staying on. And of course, treat your new employees well and do everything you can to help them transition to new ownership.

  • Are there any Outstanding Tax or Legal Issues?

This is a big one. Some businesses appear to be healthy on the surface, but there are underlying issues that present a threat to their stability. Among these include any pending litigation the business may be involved with. Another area to check out is whether or not the owner is current on their payroll and other business taxes. And do not just take their word for it, ask for a “clearance letter” from the state taxing authority. Finally, be sure that the business has all the required permits to operate and is in compliance with all governing laws and regulations.

  • Is the Business Healthy and Does it Have Strong Growth Potential?

Numbers can be deceiving. Just because the business has generated net revenue during the previous few years, this does not necessarily mean this will continue. You need to take a close look at which way the business is trending (upward or downward), the level of competition it is facing, the health of the industry as a whole, and similar factors. You should also take a good honest look at your own skillset to determine if you have the skills (as well as the passion) to effectively replace the current owner and keep the business running successfully.

  • Does the Business Have the Appropriate Entity Structure?

The type of business entity you are getting into is very important, because entities have various tax and legal obligations, and there are advantages and disadvantages with each. Also, depending on the type of entity the business is under, it may be much better to purchase only the assets of the business rather than the entity itself. Doing this could provide certain tax advantages, and it could also help shield you from liability if the business owes any money the owner does not tell you about.

Need Help with a Business Purchase? Contact the Experienced Attorneys at Garmo and Garmo, LLP

Purchasing a business to a major undertaking, and even with a small business, you will need a lawyer to help you navigate all the complexities involved and ensure that your best interests are fully protected throughout the process. If you are looking at buying a business in San Diego or anywhere in Southern California, get in touch with the seasoned business attorneys at Garmo and Garmo, LLP. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a consultation.

when business goes to family court

What Happens when a California Business Ends up in Family Court?

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Owning and operating a business can take up a lot of your time and energy. And in some cases, this can put a major strain on your personal life. Over the years, we have seen numerous high-profile cases of business owners who end up getting divorced. The largest divorce settlement in U.S. history happened recently when Amazon founder Jeff Bezos agreed to give a 4% stake in the company he founded to his wife Mackenzie. Her share was valued (at the time of the divorce) at $35 billion.

Businesses both large and small frequently end up becoming part of a divorce proceeding, and when this happens, things can get complicated, and they can become very contentious. In a lot of cases, only one of the spouses is heavily involved in the business, and many businesses have outside partners as well. 

How do you divide marital assets in a fair and equitable manner while preserving the viability of a business and at the same time preserving delicate family relationships? This is a question many divorcing spouses have had to grapple with.

California Divorce Laws

California is a “community property” state. This means that assets and debts that were acquired during the marriage are considered to be equally owned by both spouses. There are a few exceptions to this, such as gifts and inheritances one of the spouses receives, but a business that was started after the couple was married is not one of these exceptions.

Even if just one of the spouses went into business after the marriage and the other spouse never had anything to do with it, the business still belongs equally to both spouses. The same rule would still apply if the business has outside partners. For example, if one spouse owns 25% of the business with three outside partners owning equal shares, in theory, the other spouse would be entitled to own 12.5% of the company as part of the divorce settlement.

In practice, things do not usually work out this way. If one of the spouses is not involved in the business, they will most likely want compensation for their interest in it rather than retaining ownership. And this is what often complicates matters.

If a spouse is to be compensated for their interest in a business, it must first be determined what that interest is worth. And since there are multiple ways to value a business, this can become a major point of contention. 

For example, the spouse who is involved in the business may want to use “fair market value” – what an outside party would pay for the business based on comparable business sales.  However, the other spouse may want to factor in “goodwill”, or the reasonable expectation that the business will grow in value in the future based on its established reputation and position in the marketplace.

Once an agreeable price is finally determined, the spouse that retains the business must figure out a way to compensate the other spouse. If the couple has other valuable assets, such as real estate properties, stock investments, etc., the spouse who is selling their share of the business could be compensated by receiving a larger interest in the other outstanding assets.  If there are no such assets available, then another arrangement must be made; such as a lump sum payment or installment payments over time. It may also be necessary to finance this purchase if there is no liquid capital available.

It should be noted that even businesses that were started before a couple was married could still end up in family court. This would happen if the business grew and gained significant value during the marriage.

For example, let’s say you started a dental practice in San Diego a couple years before you were married. At the time of the wedding, the practice was worth $150,000. You were married for 10 years, and during that time, you added some new dentists, opened up another office, and took on a couple of partners. Now, your practice is worth $2 million dollars. In this scenario, the vast majority of the equity you own in your practice would likely be considered community property.

How to Prevent Major Trouble When a Business Ends Up in Family Court

If you own a business in California, it is a good idea to prepare for worst-case scenarios, such as a divorce or death.  While you may not be able to keep your business from being part of a divorce, you can take steps to minimize the damage this may cause:

  • Use a Prenuptial Agreement: If you are bringing the business into the marriage, ask your fiancé to sign a prenuptial agreement stating that the business (or your share of it) is not part of community property. If you started the business after you are married and you are still on good terms with your spouse, you may want to consider a postnuptial agreement. Postnuptial agreements are not generally seen as favorably by the courts, but if they are signed well in advance of any separation or divorce, they should still be helpful in providing some guidance on asset division if a divorce proceeding ever arises.
  • Create a Buy-Sell Agreement: This is an agreement that is often used between business partners to spell out the specific terms and conditions in which changes of ownership can occur. For example, a buy-sell agreement can limit your spouse’s right to own part of the business, and it could also give the other owners the right to buy your spouse’s interest at a price that is reasonable and predetermined.
  • Do Not Comingle Your Finances: It is always best to keep the finances between your business and your personal life separated. As much as possible, do not use funds from your business to purchase personal items or cover personal expenses, and vice versa. The more commingled your finances become, the harder it will be to untangle everything later on.

Need Help with Business or Family Law Matters in Southern California? Call Garmo and Garmo, LLP for Assistance

When business owners get divorced, it can become a messy situation. If you are facing these circumstances, you need attorneys who have an in-depth understanding not only with family law, but business law as well. If you are in San Diego, El Cajon, or anywhere in Southern California, call Garmo and Garmo, LLP at 619-441-2500 or message us online to schedule a confidential consultation with one of our attorneys. 

buy sell agreement

Does your Business need a Buy-Sell Agreement?

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With any business that has multiple owners, there is always a chance that one of the owners will leave someday, either by choice or necessity. Sometimes, this scenario results from heated disputes between the owners, while at other times, circumstances might make it necessary for a change in ownership. To adequately prepare for these scenarios, it is best for a business with more than one owner to create a buy-sell agreement from the start.

What is a Buy-Sell Agreement?

Also known as a “buyout agreement”, a buy-sell agreement is a contract between the owners spelling out the terms and conditions by which an owner is allowed to sell his/her interest in the business. This type of agreement can address various aspects of a business ownership sale, such as:

  • Whether or not a departing owner must be bought out;
  • Who is allowed to buy the shares of a departing owner;
  • The price that will be paid, or the method that will be used to value the interests, of an owner that is selling;
  • Other terms and conditions of a future sale;
  • What specific circumstances will trigger an ownership buyout.

Events that can be Covered in a Buy-Sell Agreement

There are numerous events that can be spelled out in the contract that could trigger the terms and conditions of a buy-sell agreement:

An Owner’s Desire to Sell His or Her Interests Because of a Dispute

As mentioned earlier, there are times when business owners do not see eye to eye. And after all attempts to resolve their disagreements have been exhausted, a new owner may feel they have no choice but to leave the company. When this situation occurs, the other owners may want to have the right of first refusal, giving them the option to buy out the departing owner’s interests before this owner can entertain offers from outside parties.

An Attractive Offer from an Outside Party

There are instances when one of the owners is approached by someone from the outside who wants to buy their interest in the business. Similarly to the previous scenario, the other owners may want the first right to buy the interests of an owner who wants to sell. At the very least, the parties to the agreement will probably want some type of vetting process in place for which they can screen potential new owners and approve or deny their right to buy into the company.

A Divorce Settlement

Divorces that involve business owners can get messy. This is especially true in California, because we are a community property state. This means that all property and earnings that were acquired during the marriage are considered to be equally owned by both spouses. So, if one of the owners gets a divorce, there is a good chance that the ex-spouse will become a part owner of the company. Understandably, this may not be acceptable to the other owners. With a strong buy-sell agreement in place, you can avoid this scenario by requiring the ex-spouse to sell their newly acquired interest in the business back to the current owners.

An Owner having Personal Financial Trouble

If one of the owners is struggling financially and facing bankruptcy, this could threaten the future of the business. In some cases, the bankruptcy trustee might even order the sale of the business to help satisfy a part owner’s outstanding personal debts. A buy-sell agreement can state that, before any owner files for bankruptcy, they must notify the other owners, and such a notification could also constitute an automatic offer to buy out the financially troubled owner.  This protects the business from getting caught up in a messy bankruptcy proceeding.

An Owner’s Retirement

Most business owners plan to retire someday. But retirement time is not likely to be the same for each business partner. When the time comes for one of the owners to retire, it is in everyone’s best interest to ensure a smooth transition. With a buy-sell agreement, the other owners could be given the right to purchase to retiring owner’s interests at a specified valuation and perhaps with terms and conditions such as a small down payment and a payment plan.

The Death or Disability of an Owner

Life happens, and unexpected events can happen to any one of us. Two very unfortunate circumstances that should be addressed in a buy-sell agreement are an owner’s death or their long-term disability. Losing a key member of a business can sometimes be death blow, but with proper planning, this does not have to be the case. Buy-sell agreements are often combined with insurance policies that can provide the other owners with the funds to buy the shares of one of the owners in the event of a worst-case scenario.

Work with a Seasoned San Diego Business Lawyer

Any California business that has more than one owner should have a buy-sell agreement in place to help protect the business when adverse circumstances arise between the owners.  And because each business is unique, the language within these agreements needs to be very precise and tailored to the business’s specific needs.

If your business is located in San Diego or anywhere in Southern California, call Garmo and Garmo, LLP for strong legal guidance. We can work with you to craft a buyout agreement that effectively addresses all known eventualities. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.

how to avoid business litigation

What are the Best Ways to Avoid Business Litigation?

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The last thing any business wants is to end up in litigation. Lawsuits are lengthy, stressful, and distracting. And while an established business may be able to weather the storm of a costly and protracted court battle, for a business that is fairly new, a lawsuit can threaten their continued existence. In either case, businesses should do everything possible to avoid litigation.

Any business attorney will tell you that the best way to avoid litigation is to make sure you never wind up in there in the first place. Although there is no way this can be guaranteed, there are several proactive steps you can take to minimize the chances of becoming embroiled in an expensive court battle:

Create the Right Entity Structure

From the outset, it is important to structure your business correctly to protect your important assets. For example, sole proprietorships or informal partnerships may be the simplest entity structures you can use to get into business. However, once you have a real business and not just a sideline hobby, you should seriously consider an LLC, Subchapter S Corporation or even a C Corporation (if you are planning to seek investors or go public). You may also want to consider setting up multiple entities to protect various assets, such as intellectual property (IP) and real estate.

Cover your Business Relationships with Written Agreements

One of the most common mistakes new business owners make is failing to create written agreements to govern their business relationships. In your personal life, you may be used to making oral or handshake agreements with people you trust, based on nothing more than the belief that the other person will honor their end of the agreement. Unfortunately, business in the 21st Century does not work this way. While an oral business agreement may be enforceable in theory, in practice, it is very hard to prove that an agreement exists unless it is put in writing.

Have all Your Written Agreements Drafted or Reviewed by a Business Lawyer

You should create written agreements for everything related to your business; such as the relationship between business partners, employees, vendors you do business with, and in many cases, clients. These agreements should be clear and understandable, and ideally, they should be drafted by a business attorney. Boilerplate contracts like those that you find on the internet are often confusing, and they usually fail to adequately address the specific terms and conditions that should be covered in your agreement. Make a small investment now to have a lawyer prepare you agreements – this could save you untold dollars down the road. And if you are being asked to sign an agreement that has already been prepared, at the very least, have the agreement reviewed by your lawyer first.

Consider Alternative Dispute Resolution (ADR) Clauses in Your Contracts

Since it is not in anyone’s best interest for a dispute to end up in litigation, it most often makes sense to add a clause to your contracts spelling out an alternative method for resolving a dispute. The two most popular forms of alternative dispute resolution (ADR) are binding arbitration and mediation. The main difference between these two is that with binding arbitration, the arbitrator decides how the dispute is resolved. Mediation, on the other hand, is a voluntary process in which all participants must agree on a resolution for it to be binding.  Speak with your lawyer about the pros and cons of various forms of ADR, so you can decide which one is best for your business.

Obtain the Right Types of Insurance

We live in an increasingly litigious society, and many businesses do not have the proper insurance to cover the various liabilities they are exposed to. General business liability and commercial property insurance are basic policies most business owners need, but they may not be enough. You may need product liability insurance if you are selling a product to consumers or businesses, or you may need professional liability insurance if you provide a professional service. If you take payments from customers or clients in a way in which you keep their personal information in some type of database, you should probably also have data breach insurance. Cyber criminals are everywhere, and even the federal government and some of the best-known companies have been hacked in recent years. It only makes sense for you to protect yourself from the same type of risk (if necessary).

Keep Thorough Records

Many disputes can be headed off with good record keeping. For example, when a disagreement arises, you should be able to refer to the written contract that governs this situation. You should also be able to refer to other pieces of information, such as e-mail correspondence, records of telephone conversations, and other types of communication. By keeping meticulous records (preferably in both electronic and paper form), you can often defuse a major conflict before it erupts.

Involved in Business Litigation? Speak with an Experienced San Diego Business Attorney

Even if you follow all the best practices, litigation is sometimes unavoidable. Whether you are being sued by another party or you have no choice but to pursue litigation yourself, you will need strong legal counsel by your side advocating forcefully to protect your interests. When you are faced with litigation, the best result is to resolve the case outside of court and without the need to go to trial.That said, you will need to be prepared to go to trial if the other side is not willing to be reasonable.

At Garmo and Garmo, LLP we work closely with businesses of all types and sizes in San Diego and throughout Southern California. Our extensive experience in this area of the law allows us to thoroughly examine all angles and work toward developing the most practical, effective, and cost-efficient legal solution. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.

save on business taxes in California

What is the Best Business Structure to Save on Taxes?

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When starting a business, what you pay in taxes is one of the most important considerations. This is especially true in California, where state taxes are among the highest in the country. Choosing the right entity structure can help minimize your tax liability, but this is not a “one size fits all” proposition. 

There are tax advantages and disadvantages to each entity structure, and the right entity for you will depend on the type, size, and other specifics about your business. Here is a closer look at the tax implications for the various business entities:

Sole Proprietorship

A sole proprietorship is the easiest way to go into business for yourself, and this a popular choice among freelancers and independent contractors. There is no additional paperwork to file and no entity that needs to be set up to go into business is a sole proprietor, and as far as the IRS is concerned, all of the assets, liabilities, and income of the business are considered to belong directly to the business owner. This also means that a sole proprietor would not have to pay the additional taxes and fees California charges for other entity structures (more on this later).

The top income tax rate for a sole proprietor is 29.6% if they qualify for a “pass through” deduction. If the sole proprietor exceeds the income threshold for the “pass through” deduction, they may be better off setting up a formal entity. One of the biggest drawbacks for sole proprietors is having to pay self-employment taxes in addition to regular income taxes. Essentially, this means you are paying double what an employee would pay for Social Security and Medicare.

General Partnership

A general partnership is similar to a sole proprietorship, except that the business is owned by two or more individuals. Again, there is no additional paperwork to file and no entity to set up, and all business income is passed through to the owners and taxed at their individual rate. And as with a sole proprietorship, owners of a general partnership do not have to pay additional California corporate taxes and fees, but the owners do have to pay self-employment taxes.

S Corporation

An S corporation and is an entity that is often set up by small to medium-sized businesses largely for tax purposes. Like a sole proprietorship or general partnership, an S corporation is a “pass through” entity where net income flows directly to the business owners and is taxed as personal income. One of the primary tax advantages of an S corporation is the ability for owners to receive dividends, which are taxed at a different rate and not subject to self-employment taxes. However, in California, an S corporation must pay a franchise tax of 1.5% of net income, and their minimum franchise tax is $800 annually, even if there is no net income at all.

C Corporation

A C corporation is a traditional corporate structure typically used by larger businesses and for startups who plan to go public in the future. One of the biggest tax advantages for a C corporation is the new 21% federal corporate income tax rate that went into effect in 2018. The primary drawback is the potential for “double taxation”, in other words, net income from the business can be taxed at both the corporate and personal levels. In California, the state corporate tax rate is 8.84% or an alternative minimum tax (AMT) rate of 6.65% if there is no net taxable income.

Limited Liability Company (LLC)

An LLC is one of the most flexible entities from a tax standpoint. LLC owners (known as “members”) can choose to be taxed as a sole proprietor, partnership, S corporation, or C corporation. An LLC is a “pass through” entity, and members report profits and losses on their personal federal income tax returns. However, California charges LLCs with a minimum $800 tax, along with a franchise tax that is calculated using a complicated formula that is based on gross income.

Speak with an Experienced San Diego Business Lawyer

Determining the best business structure to save on taxes can be complicated, and this will always depend on the specific circumstances and needs of your business. The best place to start is to speak with a seasoned business attorney to discuss your options.

At Garmo and Garmo, LLP we provide comprehensive guidance on business entity formation and all other types of business legal matters in San Diego and throughout Southern California. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.

Business Succession Planning Presentation

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As a business owner or investor, it is important to ask yourself “What am I going to do with my business? Do I have an exit plan?” Business succession planning is a customized process where an owner or investor can maximize their return and minimize the tax liability when the business is transferred or sold. In addition, it is important to ensure your business is protected while you are operating. Join the business attorneys of Garmo & Garmo, LLP, as they will discuss and answer the questions below:

  • What am I going to do with my business?
  • Do I have a plan?
  • Entity Structure
  • Buy-sell Agreements
  • Am I set up for a sale?
  • Do I have a strategy to transition my business to my kids?
  • Do I understand 1031 exchange rules and requirements?

If you are interested in attending this free presentation, please contact our office at 619-441-2500 to speak with a team member.

Commercial Real Estate Acquisitions Presentation

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Join Garmo & Garmo, LLP, as our real estate attorneys and guests discuss important issues that arise during the commercial real estate acquisition process. This presentation will include a discussion of the following topics and questions:

  • Locating a Property
  • Due Diligence
  • Commercial Financing
  • Protecting Your Commercial Real Estate
  • Management
  • Exit Strategies

If you are interested in attending this free presentation, please contact our office at 619-441-2500 to speak with a team member.