6 Critical Steps for Avoiding Business Litigation Liability

Set up an LLC. The State of Texas provides for the creation of limited liability companies (LLCs), and for the registering and operation in-state of LLCs created in other jurisdictions. Properly operated, and absent fraud and willfully bad behavior, the LLC shields its Members from liability and judgments. Those who obtain judgments against an LLC Member have to file a charging order with the court to try and obtain payment on the judgment, and the charging order only applies to LLC distributions to that Member. If there are no such distributions, for instance, if the LLC is putting its profits back into the company, then the judgment holder is out of luck. Additionally, where someone holds multiple investment properties or other separate assets, they can place each of those assets into a separate series of a Texas series LLC, and each series is protected from any liabilities of other series.

Make sure you have an operating agreement. Many people create their companies online, and get a Certificate of Formation, but never create an operating agreement (or Bylaws or Articles) for their entity. But if you don’t have an operating agreement, the State of Texas has one for you in its Business Operations Code, and you may not like its one-size-fits-all provisions. So be sure and create an operating agreement when you form your LLC or other form of company. An attorney can do this for you for a relatively small fee, and tailor it to reflect your wishes, including a succession plan. The operating agreement is an enforceable contract, and if you end up in litigation, wouldn’t you rather be enforcing a contract that you had designed in your favor to reflect how you want to operate your business and where you want the profits to go, rather than enforcing a generic contract provided by the Code?

Include emergency management provisions. Especially where you have a single-Member LLC or one with very few Members, situations can arise where no member is able to operate the company at a critical time.  For example, say a coronavirus pandemic has stranded one Member on a quarantined cruise ship with poor access to internet or cell service, and the other Member is in ICU following a car wreck, and the LLC has no other employees: who is going to finish the work on the big branding project for the Fortune 500 company by the deadline? Make sure your operating agreement provides for Substitute Members in the event of an emergency. The agreement can also provide for who obtains your Member interest, or its financial value as an assignee, in the event of your incapacity or your exit from this worldly stage on to the next great adventure.

Always file your franchise tax report, taxes, & Public Information Report every year. The State of Texas places yearly filing requirements on companies registered in the State. For example, for an LLC, you will need to file an annual public information report updating your most basic structural information for the public database, an annual franchise tax report, and pay any franchise taxes due. If you fail to make these annual filings in a timely way, your LLC falls into tax and/or administrative forfeiture status, and you lose the limited liability protection that an LLC offer. The Members become personally liable on company obligations. And if you are involved in litigation, it is the time period during which the subject of the litigation arose that governs. So if that is when your LLC was out of status, you are personally liable. The State also requires that you keep your registered agent name and address current.

Document changes to your company structure or other important aspects of the company.  Any material changes to company Members/partners/shareholders, management, procedures, or assets) should be documented and the documentation should be kept with your other business records. If you have bought out a Member of the LLC via handshake and an exchange of cash or maybe IP or other capital, and failed to document it in any way, you don’t want that allegedly former Member successfully suing you for a share of the company and its profits because all of the company paperwork still says that there are the two Members with equal rights in the company. Also be sure to document amendments to procedures, actions taken by unanimous written consent, and acquisitions or divestments or property. The documents can be fairly simple, so long as they are clear, and are signed. An attorney can help you in documenting company actions.

Read your contracts and abide by them. Operating agreements and other contracts are enforceable. If you don’t understand a contract you are asked to sign, don’t sign it; or if some of its provisions seem sketchy to you, they probably are. An attorney can help you review the contract and pinpoint concerns and red flags before you sign. You or your attorney can negotiate more favorable terms. Don’t do anything by oral agreement; any verbal understandings you think you have won’t help you when it comes time to litigate and the written contract is presented. Many people don’t take contracts seriously and think the long provisions in the contract don’t apply to them, and then they are surprised when they lose a court case and are ordered to pay tens of thousands or more in a judgment. Don’t let that person be you. Get attorney help when you need before you sign a contract.

By Jen Green, Burch Law

5 Tips for navigating the SBA PPP Loan Process

NOTE: This information is changing on a daily basis, please contact us with the most recent information.

Everyone is feeling pain during the Covid-19 shutdown, including previously solid businesses, and their employees, that are having to close or stop work indefinitely in the face of increasingly draconian measures to stop the virus from spreading. To help ease the pain, the government has allotted $350 billion for the Payroll Protection Program as part of its $2 trillion stimulus bill. So, if you are a small business owner, what can you do to get your share?  See below:

  1. Know whether you are eligible to apply:

The PPP loans generally are available for small businesses with 500 or less employees, including sole proprietorships, independent contractors, nonprofits, tribal businesses, and in some cases, businesses like hospitality and restaurant businesses with more then 500 employees in aggregate, but less than 500 at each location (see the SBA rules at the link provided below). Independent contractors and the self-employed must wait until April 10, 2020 to apply. Otherwise, applications are already being taken, but the application process is off to a rocky start, as both lenders and applicants don’t understand the rules yet, and the rules are still being tweaked, with other relief programs, not necessarily for small business though, coming down the pipeline. Under the PPP, you need to have had employees on the payroll by 2/15/2020, and they must be rehired by 6/30/2020 if you let them go due to the economic shutdown. You can read eligibility rules and other detailed information regarding the PPP guidelines on the Small Business Administration (SBA)’s website.

  1. Understand the lenders’ lending rules:

The most important thing to know is that the lenders are operating under a “Know your Customer” rule following the debacle of the 2008 downturn after which many of them were held liable for loans to fraudulent applicants. The lenders, for the most part, have posted rules on their websites. Bank of America, for instance, is requiring applicants to have had a loan with their bank by 2-15-2020; and Chase is requiring applicants to have had a business checking account with them by 2-15-2020. Wells Fargo has already exhausted the available loan funds unavailable under the regulatory cap imposed on the bank due to past irregularities. If you fit the “Know your Customer” criteria and met 2-15-2020 deadlines, you can apply at any federally insured depository bank, credit union, participating Farm Credit System institution, or SBA7(a) lender that “knows” you. And more lenders are applying and being approved as you are reading this article, up to 150 per hour, as per a treasury department briefing to bankers on April 6th. Applicants have until June 30, 2020 to apply, and loans are being processed on a 1st come, 1st served basis. To date, while many applications, for tens of billions of dollars in value, have already been submitted, not very many have been approved, as applicants did not meet the “Know your Customer” criterion. But that said, it still is a good idea to get your application documentation together and apply as soon as possible.

  1. Be able to document your application:

A link to the application itself is provided below. To support your application, you will need to provide proof of your employee headcount average for 2019 and your average monthly payroll costs in 2019, or if you are a new business, you will need to provide that for January and February 2020. You won’t have to put up collateral or a personal guarantee for the loan, but there are criminal penalties for fraud. If your application is successful, you should receive the equivalent of 2.5 months of your average payroll expense in 2019, or if you are a new business, your average payroll expense for January and February 2020(through 2/25/2020). See more about the application form and its documentation requirements on the SBA website and lender websites.

  1. Apply your loan proceeds properly to receive loan forgiveness:

You can use the proceeds of your loan on business overhead costs like payroll, rent, utilities, and mortgage interest, and the loan will be forgiven, without you having to pay income tax on the forgiven amount, if you apply at least 75% of the proceeds to payroll costs within 8 weeks after receiving the loan, and maintain your employee headcount without cutting their pay. Remember, only the interest part of a mortgage payment will be forgiven, so you need to apply your loan proceeds wisely.

  1. Document your use of loan proceeds and present them to your lender for loan forgiveness:

8 weeks after you receive your loan, you will need to prove to your lender your expenses and how you spent the loan proceeds, so maintaining good documentation of this is essential (and may already be part of your ongoing business practice). Even if you find that you really need to pay the business’s mortgage, and not just the interest, with your loan amount, and you can’t meet the loan forgiveness criteria, all is not necessarily lost. The interest that will be charged on the loan is only 1%, and repayment is deferred for 6 months.

Other relief for small business owners, besides the new PP loans, is available through disaster assistance, and enhanced debt relief in other SBA loan programs. Right now, we are all in the same boat basically during the economic shutdown, and it is important to seek widely for all the available forms of relief that might help.  A PPP loan is a good start though.

By Jen Green, Burch Law

BUSINESS CHANGES IN THE TIME OF COVID-19

Don’t let the coronapocalypse get you down: the future belongs to those who can adapt and see the needs and opportunities ahead

These are interesting times. As we have been bemoaning the lack of toilet paper and the ability to visit our favorite restaurants, the gaps in our technology, infrastructure, and general ways of life have been revealing themselves. Additionally, we can see what is really important in our lives, and what is just gravy. For those who can see the ways to fill those gaps, their fortune awaits.

If you are a business owner, you have perhaps been realizing how you could save the huge overhead cost of rents paid to your landlord, and use those monies in better ways than paying for space you don’t really need. Vast swaths of the business landscape have (finally!) been discovering that we can work from home quite efficiently. And the working from home is more civilized, keeps employees happier, and saves commute time that can be better spent on other tasks.

Zoom and LogMeIn have suddenly become essential tools for everyone, but they also show that there are great opportunities for those who can create more such tools, so that we aren’t all dependent on 1 or 2 currently overloaded systems. Skype has stepped up with a Meet Now application for instance. And we would need innovative new marketing systems with a wide reach that could get the word out about such useful new products.

There is an opportunity for innovation in trucking and logistics, the delivery-end crux of our national supply chain. Industry players with the ability at a moment’s notice to change their routes, and quickly make short-term contracts with new vendors and buyers to cope with a crisis or a break in the chain, could divert supplies piling up in warehouses or production facilities to where they are most needed. This would apply to air freight too.

Another thing we see tis the need for more local production. No one should be completely dependent on extra-national suppliers for any essentials of their economy. The future is probably going to see more pandemics rather than less, and now is a good time to build for such contingencies. Similarly, no economy should be dependent on the need to export the bulk of its production elsewhere. Because sometimes, as China recently discovered, you won’t be able to produce or to export.

Efficient hydroponics and greenhouses could supply local produce in a time of crisis. Lab-grown meats could be a game-changer, but probably like many of you, I am not sure I am ready to go for that yet, even though it is probably cleaner than traditional meats.

There is a wider need for inexpensive, efficient generators, and new fuel sources. We are all too dependent on the larger energy grids and supply chains. One of the few good things about the current crisis is that the price of gas has been going down. But that can change, as we have all seen. Widely available and economically accessible methods of transport not dependent on oil and gas (or electricity generated by it) would be a game-changer.

Cultural venues are offering free virtual tours and concerts. You can travel and vacation without the hassle and without even leaving home. Audible has some free audio book offerings. The Dallas Arboretum has a wonderful aerial drone tour with a lovely musical soundtrack. It’s all great! For those of us who previously did not have computers or internet at home, it has been the time to change that. Builders of in-home shelters and storage facilities may be seeing a boom in business. Apparently, gun sales certainly have soared. Prepping has gone mainstream.

There are also immediate opportunities: payment systems are scrambling to climb on board the helicopter-money train and be a middle-man delivery system (no doubt for a fine fee) that helps bring your stimulus check to you.

Traditional lenders are in some cases balking at lending under the emergency small-business loan program that is part of the $2 trillion stimulus package. The guidelines are not clear, and their underwriters simply do not have enough time to reasonably digest the vast quantities of information that are part of the loan application. And some lenders were liable after the 2008 stimulus, when loans weren’t paid back, or they found they had lent to fraudulent entities. There is always a lot of opportunity for fraud in any government program, and that comes from the top all the way down. If you are a business owner applying for the program, you may have noticed the invasive information grab: you need to supply all your payroll records, lease information, costs and revenues and so on. There is some opportunity for loan forgiveness of the federally-backed loans, if you use the money to pay your employees. And new lenders are being approved as we write this.

If everyone broke their lease that now sees that they are trapped in an unnecessary and highly expensive lease contract, with an unreasonable landlord who grants no break on rent in these times when no money is coming in, what would happen? Does that landlord have the time, money, and legal staff to sue everyone for breach of contract? Is this an opportunity for landlord-side attorneys to find new, lucrative employment? Or would everyone be forced to adapt to a better way of doing things? So much of brick-and-mortar really is mostly obsolete in these times, and empty malls could be better turned into apartment or townhome communities or entertainment venues. Particularly for commercial landlords, this might be a good time to grant some temporary rent forgiveness, until tenants are able to bring in money again to pay you. If you are known as the more decent and reasonable commercial landlord, surely businesses looking for a place to rent would know that you are the one to come to? Otherwise, businesses that suddenly see less value in renting the premises may go elsewhere as soon as possible,

Also obsolete are paper newspapers. The waste of ink and paper is unconscionable.

But I digress. Anyway, it is a new world. We need to adapt. And always keep plenty of toilet paper on hand.

by Jen Green, Burch Law

 

APOSTILLES

by Jen Green, Burch Law

You may never have heard of apostilles; and to be fair, you may never need one. But if you do need one or more apostilles, time is usually of the essence, international transactions are pending, and you need someone familiar with the apostille process to help you obtain them in a timely manner.

When you have a transaction that crosses international borders, for example: if you are opening a business office abroad, buying property overseas, or inheriting an estate outside of the U.S., you may need various documents with apostilles to document the authenticity of the document or the identity of the signatory.

An apostille basically is a form of document authentication established by treaty that can be used in nations that participate in the Hague Convention of 1961. The Apostille Treaty (or Apostille Convention) is an international treaty that came out of the Hague Convention on Private International Law. Various nations signed on at different times and under different conditions, so you need to know the apostille requirements for the country that will receive your document with its apostille. This variety makes the process fun.

There are several types of apostille authentications that you can obtain in Texas: recordable documents issued by a Texas officer such as a County Clerk, for instance – you will need to submit the original or a certified copy to the Texas Authentications Unit in Austin; non-recordable documents that are notarized by a Texas Notary Public – you will submit the original document with an original, notarized signature; copies (such as of a passport photo page) that are verified by the signatory/person making the copy and notarized by a Texas Notary Public; requests relating to child adoption; and Texas corporations documents on file with the Texas Secretary of State that can be authenticated by the Texas Secretary of State corporations unit. Some of the apostille requests require different request forms from the standard request, and all require payment of fees and specification for the apostille agency of the nation to which you will send the apostilled documents.

In Texas, the turnaround time for receiving your apostilled document back is relatively quick compared to most government processes, but you want to make sure that you have submitted your documents in a form that the agency can validly authenticate and apostille, along with the proper request and fee payment, or your much-needed apostilles may be delayed for failure to follow the specific requirements of convention and treaty.

So if you find yourself in need of one or more apostilles, contact us. We have experience in obtaining apostilles and in formatting documents and requests to comport with treaty and convention requirements. Let us help you navigate the maze of cross-border document authentications.

Rental Properties & LLCs: How to Protect your Investment

by Jen Green, Burch Law

You may be one of the many people contemplating how to expand your investment and income possibilities. In an era of uncertain economic outlook and roller coaster returns in the stock market, many people are turning to real property as the more certain investment. Whether it is flipping houses or acquiring rental properties, real property represents to many people a solid investment offering real returns in an age of unreal and insubstantial wealth offerings, like derivatives. Unlike less tangible assets, you can insure your real property against most worst-case scenarios.

However, real property can also be a real target for lawsuits, frivolous or genuine, so you want to shield yourself and your assets from liability exposure as much as you can. Slip and fall incidents, landlord-tenant disputes, breach of contract, all kinds of issues and unexpected situations are out there waiting to complicate your life.

One way to shield yourself from unnecessary liability exposure in Texas is the limited liability company (LLC). The traditional LLC is a favorite of real estate investors. And the LLC is a flexible vehicle that generally allows you to register your LLC in other states, as a foreign entity, when you find your business and opportunities expanding. The flexibility is one of things investors and business owners love about the LLC. It has pass-through tax treatment, you can easily you’re your entity and customize your operating structure as needed in your LLC Agreement, and decrease your personal and asset exposure to liability, all in a user-friendly package.

For an investor with numerous properties, there is even an additional level of protection that you can find: the Texas Series LLC. The ancestor of the Texas Series LLC evolved in Delaware, initially as a vehicle to allow different classes of mutual funds to be treated as a single whole for SEC filing purposes. And the Texas LLC for real property investments also allows you to have different classes of property located in different series of a single LLC. The entire Series LLC is taxed as a single entity, but the separate series can engage in their own contracts and business transactions. The annual corporate filings with eth Texas Secretary of State are also for the single, overall Series LLC; no separate filings are required from the individual series within it. Whether you choose to have separate bank accounts for each series, or account for them separately within a single account, depends upon the complexity of their transactions and your own (or your accountant’s) love of detail. Single entity tax and filing treatment can streamline operations for those who plan well.

If you have rental properties, you could hold each one in a separate series of your Series LLC. You could obtain assumed names (d/b/a names) for each to make it easier to interface with your market. You could have single family residences, duplexes, and other types of rental properties in separate series. If you are fortunate enough to have multiple properties with vastly different tax treatments (farm/agricultural, urban commercial, and residential rentals), you may want to set up separate Series LLCs for each tax type of property, since your overall Series LLC(s) will (each) get treated as a single entity for tax purposes. Word to the Wise: creating complex tax headaches for the tax man could create tax headaches for you too.

And to keep your liability shield in place, you must clearly account for the transactions of each separate series, even if it is all within one bank account, so that anyone looking at the account can tell which income, expense, and other transactions relate to which individual series. Mixing and muddling the accounting loses you the protection of your Series LLC, so don’t skimp on record-keeping.

There are several ways to structure your LLC or Series LLC that we could discuss with you. You might prefer a single traditional LLC for its simplicity. Or you may prefer to have a traditional LLC conducting all of the business operations while a Series LLC acts as a holding company for the assets. You may prefer to own the LLC directly as Managing Member or have one entity own another. You can throw in trusts and additional structures too as additional layers of shielding from liability, but the more you add, the more you must keep track of, and you may find the complexity adding time and expense to your operations. The LLC’s flexibility ensures that you should be able to find a structure that works best for you and your investment goals, with the level of protection you need from liability.

And if someone has a slip-and-fall, for example, at one of your properties and obtains a judgment, they can only collect against the series that contains the property at which they allegedly fell. They cannot collect against any of the other series within that Series LLC or against the Series LLC itself. Or against you personally. They are limited to that one series asset. Note: when you are transferring properties in and out of your business(es), especially if you will be holding it for a long term, ensure you transfer them into an individual series, and not just into the name of the overall Series LLC. That missed property is a sitting duck for collections of judgment – it doesn’t have the extra shielding that slipping it into its individual series affords. If someone wants to assault your business battlements, make them work for it.

Let us help you build your fortress LLC as you build your business. Texas is a business and property-friendly state, and that’s the goal behind the extra liability protection in a Texas Series LLC – to tend your assets so that they are there to help your business grow and conquer.

Cover Your Assets – Investment Planning with the Texas Series LLC

 

by Jen Green, Burch Law

Since 2009, Texas has offered a wonderful tool for investors, particularly those with multiple assets: the Texas Series LLC. With the traditional LLC, which already offered a fair amount of shielding from personal liability, investors enjoyed the benefits of pass-through taxation and informal management structures. With the Series LLC, the investor continues to enjoy those benefits and also gains the benefit of an additional level of shielding. For example, if you owned 10 pieces of real property, placed in Series 1 through 10 of your “RE LLC”, and someone won a judgment against Series 4, they could only collect that judgment from Series 4, not from any of the other series or from RE LLC. RE LLC could for the most part place its assets beyond judgment creditors’ reach, in that it would not enter into contracts or business dealings with other parties, being primarily the holding company for the various Series. And if those Series contained rental properties, for example, you might want to make your property management company a different LLC altogether, perhaps a traditional stand-alone LLC just for the purpose of managing those entities, keeping the assets’ ownership and management activities related to them separate.

You might think that the Series LLC sounds too complex or time-consuming to deal with, but Texas has made it a fairly user-friendly vehicle. Forming a Series LLC is straightforward (easier, in my opinion, than amending a traditional LLC to a series LLC). In filing your Certificate of Formation with the Texas Secretary of State, there is some additional language you need to add to your Certificate filing, which is set forth in the governing statute, that puts people on notice that your LLC is a Series LLC. In effect, it puts people on notice that they are going to have to work extra hard if they want to come after your assets, potentially eliminating frivolous lawsuits and nuisance “slip and fall” type suits in the bud. And you don’t have to already have multiple assets when you form the Series LLC: it will function as a traditional LLC just fine until you are ready to make the leap and start adding series of assets.

One thing to remember when forming your LLC, whether traditional or Series, Texas requires that the LLC file a Public Information Report and pay a relatively paltry franchise tax each year. Yet despite the tiny cost of this tax relative to the sizable protection your LLC could provide your assets, it always surprises me how many LLCs go into “forfeiture” status for failure to pay the franchise tax. But it is not just the LLC which is forfeit, it is also your protection from personal liability for debts, liabilities, and judgments of or against the LLC. Make a recurring calendar entry to remind yourself about this if you have to; you don’t want your shrewd foresight in forming the LLC to go for naught.

The additional duties involved in operating a Series LLC as opposed to a traditional LLC are basically:

  • Titling your properties or investments in the name of the individual Series and deeding them back out in the name of that Series; and
  • Keeping records of revenues, expenses and activities related to each Series separate for record-keeping purposes. This is very important! If you comingle these items for the various Series, you have lost the Series’ extra layer of liability protection. Think of it in terms of Texas community property law: when spouses comingle their separate property, they convert it to community property. Similarly, when Series LLC operators comingle transactions of their separate Series under a single record-keeping designation, they convert the series to a traditional LLC, where the pool of commingled assets can be reached more easily by creditors. Commingling Series’ transactions makes it easy to pierce the corporate veil and defeats the purpose of creating a Series LLC in the first place.

The Series LLC is treated as a single legal entity; technically, the individual Series which it comprises are not separate legal entities, even though they can largely behave as such in their business dealings. You can even obtain separate EIN numbers for each Series if you wish, though in most circumstances that would simply add unnecessary complexity. You also do not need separate bank accounts for each Series; one bank account for the entire LLC will do, so long as you notate transactions for the specific series to which they belong. For instance: January rental payment received-Series 1-$1600; HVAC repairs-Series 3-$2000, etc.

For ease of transaction tracking and record-keeping, you may want to limit the number of Series held within a single LLC to a dozen or less. You will also want to keep in separate LLCS investments with very different tax or debt structures or liability issues or exposure (for example, as mentioned previously, keep management/activity separate from assets). For instance, if you own several residential rental properties, several commercial rental properties, and several parcels of land for development, you might keep each of those asset bundles in three separate Series LLCs.

Texas is a very business-friendly environment compared to most other U.S. states, and the Series LLC is another tool Texas offers to help make your business and investment activities a little easier. If you have questions about how the Series LLC can work for you, give us a call. We can help you make the Texas Series LLC and its extra layer of liability protection happen!