The Advantages and Disadvantages of Business Entities
July 30, 2010 at 12:21 pm | Posted in Business Law, Franchise Law | Leave a commentThe decision as to which entity is best for your business should only be made after obtaining advice from an attorney and tax advisor. The information below is for information purposes only and is not to be construed as legal advice. Please consult your attorney and/or tax advisor prior to taking any action.
Owning your own business is a rewarding and potentially lucrative endeavor. The freedom and sense of accomplishment of being self-employed is unmatched. However, business ownership can be a serious financial risk if you are not adequately protected. If your business is sued or if you are having financial difficulty, your personal assets such as your home, retirement, and savings may be at risk. Operating your business as a corporation or limited liability company can significantly decrease your personal exposure.
Creating a business entity is essential to the success of your business. There are legal and tax advantages to operating your business under a corporation or an LLC. The primary function of the LLC or corporation is to separate your business liabilities from your personal assets. It is essential for a business owner to protect his or her personal assets from the creditors of his or her business.
In general, there are four different ways to organize your business: sole proprietorship or d/b/a, partnership (limited or general), corporation and limited liability company. There are many advantages and disadvantages to each type of entity and the best choice depends largely on your personal, business, tax and financial situations.
Below is a brief description of the four major types of business form. There are legal and tax intricacies that extend beyond the scope of this article. The decision of which business form is best for your situation should be reached only after consultation with an attorney and an accountant.
A sole proprietorship or a d/b/a provides you with minimal legal and tax advantages. These types of business “forms” merely provide you with a business name. There is no protection for your personal assets and all income and losses are reported on your personal tax return. The LLC and corporation can be substantial financial investments. The advantage of the sole proprietorship is that the start up costs are minimal. However, by setting up a business this way, a business owner is putting his or her assets at risk of being attached by creditors.
A partnership is an agreement between two or more individuals with the common goal of operating a business (or some other type of joint venture). There are two types of partnerships: a general partnership and a limited partnership.
A general partnership does not necessarily have to be in writing. This type of partnership provides no limited liability protection for its partners and profits and losses are shared equally unless otherwise specified in a partnership agreement. We strongly recommend that you have a detailed partnership agreement and seek the advice of an attorney when entering into a partnership of any kind.
A limited partnership is a partnership that must be filed with the Secretary of State in the state(s) in which you operate your business. It is a partnership between at least one limited partner (who receives limited liability protection) and at least one general partner (who receives no liability protection).
Corporations and LLC’s provide limited liability protection by separating ownership from control. Both types of entities must be filed with the Secretary of State’s Office and require certain formalities (such as annual reports, votes and meetings) to be adhered to.
The major differences between the two types of entities are the method of taxation, degree of formalities and the nature of the ownership interests.
An LLC tends to be more flexible than a corporation from both a legal and tax perspective. The LLC combines the limited liability protection of the corporation with the flexibility and tax advantages of the partnership. The LLC is owned by members according to their percentage interest. Most of the corporation’s guidelines are codified in state laws. The structure of the LLC allows the members more flexibility as far as the ownership structure, the division of profits and losses and the management of the business (note that owners of a corporation can have some flexibility with the corporate guidelines if the corporation is set up properly).
The corporation separates ownership from control: the corporation is owned by the shareholders via shares of stock and it is controlled by a board of directors. There are two types of corporations: the C Corporation and the S Corporation. The C Corporation is the default tax treatment/classification given to corporations filed with the Secretary of State. The earnings of this type of entity are taxed both at the corporate and shareholder level.
The S Corporation allows the shareholders of the corporation to avoid this double taxation. The earnings of the S Corporation are passed through to the shareholders. The S Corporation can be more cumbersome than the C Corporation or the LLC: there are many requirements for the S Corporation that must be met in order to achieve the pass through status. You should consult with your tax advisor or attorney before making this election to ensure that your corporation would qualify under the Tax Code.
In sum, the LLC and the corporation afford their owners with limited liability; the sole proprietorship and partnership do not. A business entity of some type is strongly recommended if you are operating any type of business even if you are doing so out of your home. Different businesses carry different types and levels of liability. Every business owner has a unique tax situation. It is extremely important that you consult with an attorney and tax advisor as to which type of entity best suits your needs prior to starting your business.
Homebuyer Frequently Asked Questions
April 26, 2010 at 8:57 pm | Posted in Purchasing a New Home in Massachusetts, Real Estate Law in Massachusetts, Uncategorized | Leave a commentHome Buyer’s FAQ’s
This document is provided for your information. It does not constitute legal advice from Sigman Law Office, P.C. to you. Legal advice is provided only after an engagement letter is signed by you and us.
Q. Do I need a realtor?
A. Not technically. BUT you will lose out on many years of experience and a vast database of properties. A realtor has access to properties that you likely would not be able to find on your own. Plus a realtor knows the business and can help negotiate on your behalf. The best part is that most of the time the seller pays for the realtor!
Q. How do I know how much a house is actually worth?
A. There are three different types of real estate valuation. First, there is market value. This is what someone will pay for a house on the open market. Second, there is the actual appraised value of the house. In order to obtain an actual appraisal of the value of a home, you must hire a professional real estate appraiser. Your lender will require you to have your house appraised before approving your loan. This is what a house is worth based on a multitude of factors including market value and the value of the land and building. Finally, the town or city where the property is located will have a different value based on their criteria upon which they will apply the local tax rate. Typically, the best indicator of the value of a house is the market value or the opinion of an experienced realtor. A realtor will compare the house that you are interested in with other, similar houses in the same general area.
Q. What is the process for purchasing a home?
A. Purchasing a new home can be a long and complicated process. It begins with searching for properties. When you find a house that meets all of your criteria you will put an offer in on the house. The seller will then decide whether to accept, reject or make a counter offer. During this negotiation period, you should have the property inspected by a professional home inspector. The home inspector will point out the flaws in the property and make recommendations on how to address them. Once the offer is accepted and you and the seller agree on a price and terms, you begin negotiating the contract or purchase and sale agreement. All of the terms of the transaction are put into this document. After the signing of the purchase and sale agreement, the next step is getting together all the paperwork necessary satisfy your lender, purchasing homeowner’s insurance, and making arrangements for the closing. Once the closing is completed the seller will give you the keys and the documents are recorded. When your deed is on record at the registry of deeds in the county where the house is located, title passes and you own the house.
Q. How long does the process take?
A. Once you have put an offer in on a house you can expect about 45 to 60 days before the closing. After the offer is accepted, it takes about 10 days to sign a purchase and sale agreement. From the P & S signing to the closing is about 20- 30 days provided that there are no significant title or other issues that would cause the closing to be delayed. However, if you are purchasing a property that is bank owned or a short sale, expect additional time.
Q. I have put an offer in on a house, what does that mean?
A. Many sellers and buyers believe that the offer is merely a formality creating very few binding obligations. This cannot be further from the truth. An offer to purchase real estate may be construed as a binding contract between the parties if certain legal requirements are met. As a buyer you are legally bound to begin negotiations towards creating a contract with the seller. This contract is called a purchase and sale agreement (or P & S). While it is possible for a buyer or a seller to get out of an offer to purchase once it is signed and the deposit is handed over, this should not be relied. There is a large amount of case law creating an enormous grey area as to when a buyer or seller can escape the offer to purchase. Before putting in an offer on a property it is essential to consult with a real estate attorney.
Q. When does an offer expire?
A. The offer specifies a time frame during which the P & S negotiations are to take place. If no agreement is reached and no extensions are made, the offer will expire. As a buyer, you may be able to get your deposit back if, prior to the expiration, you revoke your offer.
Q. I have put in an offer and the seller has handed me a purchase and sale agreement and asked me to sign it. Should I sign it immediately? Will my offer expire if I don’t sign it?
A. NO. The seller or seller’s attorney of realtor will often present a P & S to the buyer shortly after putting in an offer. If you have not yet retained an attorney to act on your behalf, it is extremely important that you do so at this point. There are many confusing and misunderstood issues and idiosyncrasies involved in purchasing a home, of which most people are not aware. It is imperative that you obtain counsel prior to signing this document.
Q. I am preapproved for a mortgage through a mortgage broker. Does that mean that my financing is all set?
A. NO. A pre-approval is merely a preliminary statement of your ability to borrow. There are many factors that go into a final approval for a mortgage before a lender will give you financing. The ability to borrow and the capacity to afford a mortgage payment are two completely different things. You mortgage broker should discuss this with you and let you know your financing options so you can decide how much you should offer the seller for the house.
Q. What is radon and should I be concerned about it?
A. Radon is a naturally occurring, radioactive gas. It generally exists where there is bedrock. Radon can enter the home through a small crack in the foundation or even through soil or well water. The EPA suggests that a level or radon under 4.0 pCi/l is safe. You should have your home tested for radon by your home inspector. If the test results yield a level over the suggested safe limit, then you should negotiate with the seller to install a remediation system. Please refer to the EPA’s website, http://www.epa.gov/radon/, for more information on radon.
Q. The seller stated that he “thought” that the roof was in good shape. Should I take her at her word?
A. No. Although some statements regarding the condition of the property are considered warranties and are actionable if they are later found to be false, a buyer should ALWAYS hire a professional home inspector to evaluate the condition of the property. Be sure to take note of whatever the seller and especially the seller’s real estate broker (if any) states regarding the condition of the property. A statement of opinion or belief is probably not a warranty. However, if the seller has knowledge of a serious defect in the property that he/she (or his or her broker) fails to disclose or intentionally misrepresents that fact, then this may be held against the seller at a later date. The bottom line: GET A HOME INSPECTION and review it with your attorney and realtor prior to entering into the purchase and sale agreement.
Q. I hear a lot about closing costs. What are they?
A. Closing costs typically include lender fees, attorney fees, points and filing fees. Some of these costs are paid in advance (i.e. appraisal or credit report). The term closing costs as it is often used does not include items such as prepaid interest, escrows, taxes, insurance or other expenses that you may be required to pay at the closing. You should budget for closing costs to be approximately 2-3% of the price of the house. You will be required to come to the closing with a check for the amount of closing costs over and above the amount you borrowed plus the deposit and any seller credits. This number will only be available to you within 48 hours of the closing and in some cases within a few hours. Your mortgage broker should provide you with a good faith estimate which discloses the closing costs and other items so you will have an estimate of what you should be bringing to closing.
Q. What are escrows?
A. Some lenders require that as part of your monthly mortgage payment you pay 1/12 of the cost of the real estate taxes and homeowner’s insurance. Lenders generally collect between 2 and 5 months’ worth of taxes and insurance at the closing as a cushion in order to make the next payment. Even if you have prepaid your homeowner’s insurance, the lender will collect escrows in order to pay your insurance premium for the following year.
Q. What happens if my loan is sold to another lender?
A. Basically, the only thing that will happen is that you will pay a different entity each month. The basic terms of your loan (principal and interest, interest rate, escrows, etc.) will remain the same.
Q. What is mortgage insurance?
A. Mortgage insurance is an insurance policy that protects the lender in case you default on your mortgage payments. You are not locked into mortgage insurance for the life of the loan. Eventually, the lender will take a second look at your financial situation and make a decision whether to continue to charge you.
Q. What is Title Insurance and do I need it?
A. There are two types of title insurance: lender’s and owner’s. Lender’s title insurance insures the lender’s interest in your property for some defects in title that happen prior to your purchase. For example, if the person selling you the property did not actually own the property, then title insurance would insure the lender’s interest up to the original loan amount. When you close on your loan, whether it is a purchase or a refinance, the lender will almost always require that you purchase title insurance for their interest in the property (i.e. for the amount you are borrowing). This does not protect your interest in the property at all. On the other hand, owner’s title insurance would defend your right to title in court, pay to resolve any title issues and/or pay you for your losses if necessary. You should consult with an attorney regarding owner’s title insurance prior to closing.
If there is a question that you have that was not addressed in this posting, please feel free to post a question. One of our attorneys will answer the question for you or feel free to visit our website at www.sigmanlaw.us for more information.
Massachusetts Condominium Fees
April 23, 2010 at 6:57 pm | Posted in Real Estate Law in Massachusetts | Leave a commentThe current state of our economy is such that people are losing jobs and having trouble paying their obligations. Foreclosures and mortgage delinquencies are on the rise. Often, when a condominium owner is in financial trouble one of the first items they stop paying is the monthly condominium fee.
Failure to pay condominium fees has widespread implications on the all of the other unit owners. If the budget becomes deficient, the association could begin to experience financial difficulties. Also, if a sufficient number of the unit owners (usually about 30%) are behind on their fees, it can affect the marketability of the units that are up to date with their fees. When another unit owner goes to sell their unit, potential buyers and their lenders will scrutinize the budget and can deny financing on the basis of an insufficient budget.
What can an association do to protect itself and the other unit owners when there are units who are not paying their condominium fees?
Massachusetts law provides condominium associations with special protections when it comes to collecting condominium fees. Massachusetts law recognizes the unique nature of condominiums. If one unit owner stops paying, it has implications for the remaining unit owners.
The statute allows the association to collect delinquent fees, costs and attorney’s fees if a unit owner is more than 60 days overdue. If an association has a unit owner who has missed two months’ payments, the first thing that they should do is consult with an attorney familiar with condominium collections
The attorney will then embark on the statutory collections process. The first step in the process is to send letters to the unit owner and their mortgagee(s) stating the amount owed and notifying them of the commencement of the collections process.
If the lender and the unit owner do not respond, the association files a lawsuit and a lien on the title to the unit. Usually, if the lender has not responded by this point, they will contact the association’s attorney to arrange for payment.
Massachusetts Law further provides that an association can place a lien on the unit for up to 6 months of delinquent fees, costs and attorney’s fees. This lien, if the proper procedure is followed, has priority over any mortgages on the property. Most lenders will pay the amount owed to the association, including attorney’s fees and costs, and then go after the unit owner for reimbursement.
Franchise: The 411 on FDDs
January 20, 2010 at 2:42 am | Posted in Franchise Law | Leave a commentConsidering the purchase of a franchise? Congratulations! You’re about to enter a thriving business arena that will give you the opportunity and freedom to be your own boss. But you aren’t there just yet – there is lots of paperwork to get through, starting with the Franchisor’s Franchise Disclosure Document (the FDD), formerly the Uniform Franchise Offering Circular (UFOC).
So, what is the FDD? In short, it’s a document required by the FTC that a Franchisor must present to a potential franchisee in a specific format. In other words, it’s a brochure – a very long, and let’s admit it – often dull, brochure.
All FDDs must contain 23 Items, presented in the same order. Each item must include information, prescribed by the FTC, about the franchise business, the corporate officers, any bankruptcy and litigation history, fees, training, and so on. By requiring this formulaic presentation, a potential franchisee should be able to make a side-by-side comparison of the relevant information about each franchise she is considering.
Every franchisor must update its FDD annually, within a set period after the close of its fiscal year. The date of the FDD must be included on the cover page. Financial statements included with the FDD must be updated, with the most recent report being no more than a year old. If you receive a FDD that is more than one year old, request an updated copy.
The FDD and the information contained therein are not a part of the franchise agreement. Typically, a copy of the franchise agreement is included with the FDD as an exhibit. Also included as part of the FDD, often as exhibits, are financial statements, the table of contents of the business operating manual, and additional agreements, which will vary from one franchise to another (such electronic transfer authorizations, leases and assignments of leases, personal guarantees, and software license agreements).
Do not rely solely on the information contained in the FDD to inform your decision about whether or not to pursue a franchise opportunity. There are other steps that anyone interested in a franchise opportunity must take as part of a full and informed investigation. Professionals who can assist in this due diligence include financial advisors, CPA’s, attorneys and franchise consultants.
While the FDD repeatedly refers to sections within the franchise agreement, it is important to understand that the FDD is not the “Cliff’s Notes” version of the franchise agreement. You need to read the agreement in its entirety, to ensure that you understand both the franchisor’s and your rights and obligations under the agreement. Though it sounds self-serving, it is important that you have an attorney review the FDD and franchise agreement before you sign it.
Have a question or an agreement that you need reviewed? For more information, visit www.Sigmanlaw.us/franchise_attorney.html or email the author at Lisa@Sigmanlaw.us.
Why you need Owner’s Title Insurance when purchasing a property
January 14, 2010 at 6:57 pm | Posted in Owner's Title Insurance, Purchasing a New Home in Massachusetts, Real Estate Law in Massachusetts | Leave a commentWhen you buy a new home, how can you be sure that there are no problems with the title? The truth is that sometimes you cannot. However, there are steps you can take to limit the risk of title problems that can affect your use and enjoyment of the property as well as expose you to potential financial losses.
There are two main components to limiting your risk of title problems when you buy a new home. First, when you buy a home your attorney or title company will hire a title examiner to search the public land records. Second, you can purchase Owner’s Title Insurance.
A title search will determine the chain of ownership of a property, whether there are any issues or interruptions in that chain, whether there are any outstanding liens or encumbrances on the property, and whether there are any other apparent issues that need to be resolved prior to the sale of a property.
Massachusetts law and customs require that a title examiner perform a 50 year search of the public records. Common title problems are: mistakes in registry records or improperly indexed documents, forged deeds, errors on deeds, improperly or un-discharged mortgages, mistakes in examining public records, and undisclosed heirs. These problems are real and do occur often.
If there are any apparent problems, the attorney or title company closing the loan will fix them. But what if something that was not apparent in a title search at the time of the purchase surfaces after you purchase a property? These latent defects in title can cost you time, money and potentially the right to use and occupy the home.
Title Insurance insures exactly this situation. It will help protect the insured’s right to title in the property, defend that right and, if necessary, compensate you for your losses.
There are two types of title insurance. First, there is Lender’s Title Insurance. Lender’s Title Insurance protects the lender’s right to title (i.e. a mortgagor’s right to first lien position on the property) and is required for most mortgages and loans encumbering real property. The premium amount is based upon the amount of the loan. This type of insurance only protects the lender’s interest in the property NOT the homeowner’s. If there is a defect in title that arises after a homeowner purchases a home, this title insurance policy may allow the lender to recover its costs in defending its right to title or in some cases recover the amount of the mortgage. The Lender’s Title Insurance does not protect the home owner’s interest and carries no benefits for the home owner.
The second type of title insurance is Owner’s Title Insurance. This type of policy protects the homeowner’s interest in the property. The premium amount is based upon the purchase price of the home. It is a one time fee that protects the homeowner for as long as they own the property. If a problem arises, the title insurance company will pay to defend your right to title or to fix the problem. If the problem cannot be fixed, the title insurance company will pay any monetary losses incurred by the homeowner.
As with any type of insurance there are exceptions to coverage. You should check with a title insurance agent before purchasing a policy and if you are purchasing real estate you should consult with a real estate attorney before putting in an offer.
For more information about title insurance, real estate law, purchasing a home in Massachusetts or the author of this blog, please visit us at www.sigmanlaw.us.
Attorney Eric Sigman
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