Business Law

Thursday, August 11, 2016

1031's Are A Hot Area

 The most common question I am getting these days is about 1031 Exchanges.  Apparently many people became real estate investors during the downturn and now face the reality of paying some substantial taxes.  In many of these situations they have come into the property in a not purely investment or business manner (which is necessary for a 1031 exchange - see below from IRS) and are looking for a way to convert to an investment property prior to the exchange. 

In general this is a fact based determination.  The best course of action is to meet with your legal and tax advisors well in advance and develop a plan.
Read more . . .

Saturday, March 19, 2016

The right way to lend money to family and friends


    While I could give you many first hand accounts of why you probably should never lend money to family and friends I will assume that you have already decided to do so and cannot be talked out of it.

    The first thing you should do is have a serious discussion about why they need to borrow from you.  You will find that it is usually because they cannot get money from anywhere else, or the price of borrowing is just too high.  Does this raise red flags for you?  If you still think they are credit worthy, this conversation should at least start the negotiation / discussion of an appropriate interest rate (it should be high - but if you go above 10% in California you could have a usury problem).

    As alternative you may want to try to find another way to help.  Maybe you can lease a car or truck for them.  If they are starting a business maybe you can help them finance a critical piece of equipment (and then it reverts to you if the business fails or they cannot make payments).

    If you are still going to lend you need to critically discuss their ability to repay the loan and the timeframe.  Discuss cash flows and priorities.  In my experience, an interest only is not a practical solution because it just pushes the problem further down the road and will lead to tension between you and your family member / friend, something we all want to avoid.  Therefore substantial principal reduction needs to be part of the loan, as well as a reasonable exit point where you will be repaid in full.

     Finally, the loan needs to be secured.  That means a Deed of Trust if the security is going to be real property or a UCC Financing Statement or pledge agreement if it is personal property.      

Saturday, March 12, 2016

The Start-Up Formula Becomes Standardized

I was listening to the YC attorneys last night on Wharton School radio and they really summed up in simple terms where my advice has been trending for many years now.  In terms of the entity you use a Delaware C Corp, and, keep the initial financing and structure simple so you can focus on growing your business.

              Why a C Corp?  A C Corp is the only practical vehicle if you are planning to add numerous future shareholders, or ever go public.  S Corps and LLC's are great for businesses that have steady operations and a set number of shareholders and can provide some great tax benefits in the right situations.  However, no sophisticated investor wants to wade into your LLC Operating Agreement or deal with the tax issues lurking in your S Corp.  Bottom line - you will end up reorganizing your business if you do anything other than a C Corp.

              Why Delaware?  Pretty much because that’s what everyone expects.  Delaware is the jurisdiction of the vast majority of the important corporations in the U.S.  Therefore, virtually all corporate attorneys have at least some familiarity with its laws and rules, which are also generally very pro-business.  Delaware has a Court system in which business issues are more easily addressed than say, the Superior Court in downtown Los Angeles or San Francisco (ever been there?  Not a good place to do business).  And it is just easy to set up a corporation in Delaware and to keep it going.

              Simplicity and deferred decisions are the best way to handle initial investors.  Founders can spend so much time debating the capital structure and how much equity to give early investors but really everyone should be focused on growing the business and achieving the important milestones that will get the business to the next level.  Using convertible notes or they SAFE agreements promoted by YC provides a simple way to avoid those time consuming, and often emotionally difficult, decisions.  Read more about it here:

PS - A California Corp. or LLC can be OK if you are going to be operating solely in California and do not expect to engage in multiple rounds of fundraising.

The Tonkovich Law Firm assists clients with Estate Planning, Wills, Trusts, Durable Powers of Attorney, Conservatorship and Contested Probate Procedures and Business and Real Estate Litigation in Irvine, CA as well as El Toro, Aliso Viejo, Lake Forest, Laguna Hills, Tustin, Newport Beach, Santa Ana, Newport Coast, Ladera Ranch, Foothill Ranch, Mission Viejo, Laguna Woods, Corona Del Mar, Silverado, Orange, Laguna Beach, Rancho Santa Margarita amd Fountain Valley in Orange County.

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