Tuesday, October 15, 2013

Thank you for visiting our blogsite today.  Below is our question of the week, followed by our article of the month.  For more information about real estate, click on our real estate tab above.  If you have a question concerning construction law, real estate, business law or estate planning and would like to speak to Shaun directly, please contact him at our San Diego local office (619) 293-7937 or send email to shaun.bosslaw@sbcglobal.net.

Visit our website at: www.sandiegolegalfirm.com.

I bought a property by myself 4 years ago. Now I want to make a joint tenancy with my brother. Would CA law bar this move?

I own a 100% interest in an investment property that I bought 4 yrs ago. I want to make a joint tenancy with my brother. I heard that if we did not acquire our interests at the same time, which we have not, then we cannot form a joint tenancy. Is this true?

You can deed the property to the both of you and create a joint tenancy, which requires the "unities" of time, title, interest and possession. You don't indicate whether you are selling or gifting the interest. There may be an increase in the secured property taxes if you are selling the interest and the value of the one-half interest being transferred is greater than it was at the time you acquired the property.          

This answer does not constitute legal advice, nor does it create an attorney/client relationship. If you are seeking legal advice upon which you intend to rely, you should hire competent counsel familiar with this area of the law in your locale.


Business owners should carefully consider the form of entity chosen to operate their businesses.  Typically, businesses are operated in one of the following forms:

·         Sole proprietorships

·         General or limited partnerships

·         Corporations (including Subchapter "S" corporations)

·         Limited liability companies


Liability Issues

Sole proprietorships and general partnerships do not afford business owners any protection of their personal estates (i.e., homes, automobiles, bank accounts and stock or investment portfolios) from claims of business creditors.  General partners in limited partnerships fall into the same category.  While limited partners in limited partnerships are afforded protection from business creditors, in order to be afforded that protection, limited partners must take a reduced role in the management of the business.

While some risks of doing business can be mitigated by a general business liability insurance policy with adequate policy limits, such policies typically only protect business owners from tort liability and do not protect business owners from contract claims of vendors or customers.  Policy premiums for more comprehensive insurance coverage are also typically quite high.

The answer for many business owners may be the creation and proper maintenance of a limited liability entity which serves to protect the personal estates of its shareholders or members from liability to business creditors. 

Until the advent of limited liability companies, corporations were the vehicle almost exclusively used by businesses to insulate the estates of their owners from liability to business creditors.


Corporate Taxation

As an attractive tax benefit, many small business corporations make a tax election that the entity be taxed as a proprietorship or partnership for income tax purposes (a Subchapter "S" corporation election).  There are certain limitations on Subchapter "S" corporations which may disqualify that form of entity from consideration, as follows:

·         The corporation must be a calendar year taxpayer rather than electing an alternative fiscal year.

·         The corporation may issue only one class of stock which limits flexibility in its capital structure and prohibit varying voting rights among shareholders. 

·         A Subchapter "S" corporation, unlike a corporation which does not elect Subchapter "S" status, may "pass through" profits and losses to the shareholders and pays no corporate income tax, which may be a very desirable objective from an income taxation standpoint. 

·         If the corporation does not make a Subchapter "S" election, it is considered a "C" corporation.  While "C" corporations are taxed on profits at the corporate level and again on "dividends" at the shareholder level, the tax on corporate profits may be mitigated through the use of reasonable officer compensation and bonuses.  "C" corporations may elect fiscal years other than a calendar year and can issue more than one class of stock and, thus, have greater flexibility in determining corporate capital structure and shareholder voting rights.

Corporate Formalities
In order for a corporation to be properly formed and maintained, the corporation must do the following: #File Articles of Incorporation

·         Adopt corporate Bylaws

·         Conduct regular meetings of the shareholders and Board of Directors and create minutes of those meetings

·         Open a corporate bank account 

·         Issue stock and advise the California Department of Corporations that stock is being issued

·         File annual information statements with the California Secretary of State identifying the officers, directors and principal place of business ($25 fee) 

·         File annual federal and state income tax returns

·         Pay an annual "franchise tax" (state income tax deposit) to the California Franchise Tax Board (currently $800) toward the payment of California state corporate income taxes (NOTE:  Subchapter "S" corporations must pay the franchise tax even though the corporation is not subject to income tax at the corporate level.)

·         The cost of incorporating either a Subchapter "S" or "C" corporation is approximately $2,000, which includes all filing fees paid to the California Secretary of State and California Department of Corporations and includes an initial $800 franchise tax deposit paid to the California Franchise Tax Board.  This deposit is in the nature of a "security deposit" and does not constitute the state income tax deposit for the first year of corporate operations.


Limited Liability Companies ("LLCs")

For the last 20 years California businesses have been able to operate as limited liability companies.  Limited liability companies share the limited liability protection of corporations and also afford the entity "pass-through" tax treatment similar to Subchapter "S" corporations.  Limited liability companies offer greater flexibility in relation to the capital structure and voting rights of the "members", features which are not available to a Subchapter "S" corporation.  Limited liability companies must be a calendar year taxpayers, similar to Subchapter "S" corporations.  Certain partnership tax rules also apply to limited liability companies which may benefit the entity and which are unavailable to Subchapter "S" corporations.

Like Subchapter "S" corporation, a limited liability company must have at least one member (the equivalent of a corporate "shareholder").  "Passive loss" taxation rules are more restrictive than passive loss rules applicable to shareholders of a Subchapter "S" corporation.  The cost of creating and maintaining a limited liability company may be marginally greater than the cost of creating and maintaining a corporation, depending upon the complexity of the entity's capital structure and the management provisions contained in its "operating agreement".
In order for a limited liability company to be properly formed and maintained, the "LLC" must do the following: 

·         File Articles of Organization (Form LLC-1)  #Adopt an operating agreement 

·         Open an LLC bank account 

·         File annual Statements of Information with the California Secretary of State identifying the Members, Managers and principal place of business (Form LLC-12) ($20)

·         File annual federal and state income tax returns 

·         Pay an franchise tax to the California Franchise Tax Board (currently $800).

NOTE:  For limited liability companies with substantial revenues, California imposes a tax on net income based on a sliding scale, which could result in additional fees in excess of the minimum franchise tax of $800.



 There may be significant benefits to forming a limited liability entity for your business.  Generally, these benefits outweigh the cost of forming and maintaining the entity.  If you would like additional information or have questions concerning the matters addressed in this memorandum, please contact us.  In the event you conclude that a limited liability entity does not suit your purposes, we also form general and limited partnerships.

Based on information which you furnish that is specific to your business, we will be able to give you more detailed information and advice concerning the suitability of these entities for use in your business.  Please contact us if you have questions or wish to schedule a free thirty-minute consultation.

Shaun Boss, APC
306 Upas Street
San Diego, CA 92103
(619) 293-7937
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Shaun K. Boss, APC's legal practice is limited exclusively to representation of clients in the state and federal courts of California, USA. While the firm represents clients from other states and countries in transactional matters, in the event this communication does not conform to the laws and regulations of any state or country in which it may be received, the firm will not accept legal representation based on this communication from a person or entity located in such a state or country. If you have questions regarding this site, please contact us at shaun.bosslaw@sbcglobal.net.