Tax Treatment Considerations When Selecting Your Entity

David A. Zobel

By David A. Zobel



With contribution from Patrick J. Murphy

Part 3 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

With tax season upon us, we thought it particularly appropriate to outline the basics of how the entities outlined in Part Two are generally taxed on their profits and losses.

Limited Partnerships

Income, expenses, and losses of limited partnerships pass through the entity to the partners and are reported on their respective individual tax returns according to their proportionate interest in the partnership. The partnership pays no income tax itself, but is required to file an annual informational tax return.

Corporations

Corporations that have not made an election to be taxed under subchapter S of the Internal Revenue Code, on the other hand, do not have such “pass through” status and are required to pay their own taxes on profits. As such, they are required to file their own tax returns separately from their shareholders. Because of this additional layer of tax, shareholders end up being taxed twice on income – once initially on the corporation’s profit and then again when dividends are distributed.

Limited Liability Companies

Limited liability companies are not taxed themselves and profits and losses pass through to their members. Members report profits and losses on their individual returns in the same manner as the limited partnerships above. Although the limited liability company itself is not taxed, it is still required to file an informational return. Continue reading »

What Types of Legal Entities are Available?

David A. Zobel

By David A. Zobel



Authored by David A. Zobel with contribution from Patrick J. Murphy

Part 2 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

Several types of legal entities are available to operate your real estate venture. The entity type most appropriate for your business will vary depending on factors such as the number of owners, desired tax treatment, and management preference. Below we’ll outline several of the more commonly utilized types of entities available: limited partnerships, corporations, and limited liability companies.

Limited Partnerships

One commonly used entity is the limited partnership (LP). To explain how a limited partnership operates, it is first necessary to describe what constitutes a regular or general partnership.

A general partnership is typically defined as a business where two or more people share ownership and management. This type of partnership does not require a special filing with the Secretary of State and is generally presumed when two individuals go into business together. In a general partnership, each partner is expected to contribute to the business and management decisions are made together by the partners. Profits and losses are split equally between the partners in the absence of a written agreement. General partnerships do not have personal liability protections — each partner is personally liable for the debts and liabilities of the business.

An LP alters a general partnership in management and liability. LPs have a general partner and a number of limited partners. Management of the LP is vested in the general partner, who remains personally liable for all debt and liabilities of the business. The limited partners do not manage the day-to-day affairs of the company, but their liability is typically capped at the amount of their investment in the partnership. This entity type can be useful when silent investors are present. LPs can only be created through filings with the Secretary of State. Continue reading »

Aging Account Receivables? A Few Tips to Help You Finally Get Paid

David A. Zobel

By David A. Zobel



If you are in the business of selling something, whether it is materials, labor, services, or all of the above, chances are at some point your company will run into a situation where one or more of your customers fails to pay a bill.

Depending on industry custom or specific arrangement with a customer, an invoice may go unpaid for 30 or 60 days without much concern. However, when an invoice goes unpaid more than 90 or 120 days without agreement or explanation, the likelihood of payment of that invoice steadily decreases with time.

Aging account receivables result from a whole host of reasons. There are also varying responses to the problem. Here are a few tips to help address aging account receivables and hopefully help you get paid.

  1. Don’t Procrastinate – Deal with the Problem

One of the most common responses I’ve seen to aging account receivables is for the client to simply ignore the problem – even during the client’s own financial hardships. This will not fix the problem and will only make it worse. From a legal perspective, keep in mind that the remedies available to you for collection are governed by deadlines and time limits – some of which, like mechanics lien rights, can expire just a few months after your last delivery or work for the customer.

Acting quickly on unpaid invoices will help ensure you are able to take advantage of all available rights under the law or your agreement. From a practical perspective, you will also want to keep in mind the old saying “Out of sight, out of mind.” Keeping an invoice or statement in front of your customer will help keep the issue current and also convey to the customer you are committed to seeking payment. Continue reading »

Do I Need a Legal Entity?

David A. Zobel

By David A. Zobel



Part 1 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

A common statement we’ve heard from folks considering getting into real estate leasing (or investing for that matter) is that they need or want “a LLC,” but far fewer seem to know exactly why. While there are certainly other valid reasons for choosing to operate your business through a legal entity, the primary basis for using one is asset protection.

Consider this: If you buy stock and the price plummets to zero, you’re typically out only the cost of your investment. Real estate investment, on the other hand, operates differently and may not necessarily end at zero or the cost of your investment, but can extend beyond to reach your personal home, bank account, and day-to-day finances. Proper use of a legal entity can help insulate you from that risk and ensure a bad investment does not turn into your financial ruin. The following scenarios help exemplify the importance of using a legal entity:

Scenario 1: Direct or Individual Ownership and Operation

John takes $50,000 from his savings and buys a condo in his personal name. He then enters into a lease with Bob, as landlord and tenant respectively, in his personal name. Within the first month of the tenancy, Bob falls down the stairs and is injured (ideally John would have insurance in place to cover such an incident, but let’s assume he doesn’t in this example). Bob racks up $75,000 in medical bills. Bob believes his injuries resulted from a defective condition at the condo and sues John, his landlord and owner of the condo, personally. Bob wins and obtains a judgment against John, personally, in the amount of $75,000. John refuses to pay the judgment and Bob begins collection efforts against John. Continue reading »

Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

David A. Zobel

By David A. Zobel



For many folks, the thought of extra income from leasing commercial or residential real estate is quite attractive and straightforward:

  1. Buy property,
  2. Get tenant, and
  3. Collect rent.

As many brokers and managers in the industry will tell you, it doesn’t always work out that way. Real estate leasing is a risky business. There are countless ways for your business to fail and end up not as a benefit to, but drain on your finances. Continue reading »

Is Your Property Insured Against a Riot?

David A. Zobel

By David A. Zobel



The current unrest facing the St. Louis metropolitan region carries with it the elevated risk of damage and/or destruction of both real and personal property. While everyone intends and hopes their insurance policies cover all eventualities that may arise, the truth of the matter is that not all eventualities are covered by insurance.

Unfortunately, it is generally only after something truly unexpected happens that policies are reviewed and tested for actual coverage. At that moment, it may be too late to both prepare for the event and/or adjust coverage.

As a result, it may be wise now to pull out your current auto, homeowners, renters, commercial or other similar policies to review each policy’s specific language.

One of the coverage limitations to consider are so-called “force majeure” clauses. “Force majeure” is a contractual term that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise, often making their performance under the contract impractical or impossible. Examples of these circumstances can include earthquakes, war, strikes, epidemics, acts of God, and riots. Continue reading »

Missouri Changes Its No-Oral-Credit Agreement Disclaimer Language Requirements for Lenders

David A. Zobel

By David A. Zobel



Missouri has once again amended its credit agreement statute of frauds to limit the ability of borrowers and guarantors to assert claims against lenders and the parties’ written credit agreement based upon oral promises or commitments.  Specifically, Senate Bill 100, effective late 2013, extends Missouri’s prohibitions to reach not only oral, but now also unexecuted agreements or commitments to loan money, extend credit, or to forebear from enforcing repayment of a debt if the parties’ credit agreement contains certain disclaimer language as provided in the statute.

Extending the prohibition specifically to unexecuted agreements between the parties became necessary after Mo. Rev. Stat. 432.047 was limited by the Missouri Court of Appeals in its Bailey v. Hawthorne Bank decision.  In that case the Court of Appeals broadly construed several different bank documents, including a bank loan summary which was never delivered to the borrower, to find a “credit agreement” as that term is used in the statute. Continue reading »

Condo Association Embezzlement Case Demonstrates Need for System of Financial Checks and Balances

David A. Zobel

By David A. Zobel



A St. Louis bookkeeper recently pled guilty to wire fraud for embezzling more than $70,000 from his condominium association. His scheme spanned more than two years and involved more than 50 unauthorized wire transfers from the association’s financial accounts to the bookkeeper’s own personal bank accounts.  Unfortunately for condominium and homeowner associations, this type of activity is all too common and demonstrates the critical need for associations to prepare and implement systems of financial checks and balances.

What each association’s system should entail to sufficiently reduce the risk of improper financial activity (while also recognizing the need for effective and responsive management) will vary from association to association depending on several factors, including association size, level of involvement from the homeowners, and governing rules. However, many effective systems begin with distributing financial supervision and actions between several individuals. This practice includes: Continue reading »

New Illinois Recording Law Designed to Combat Fraudulent Filings Likely to Have Immediate Impact on Title Insurance Industry

David A. Zobel

By David A. Zobel



Illinois recorder of deeds offices are now authorized to implement fraud referral and review processes to detect and address fraudulent recorded instruments in their counties with the recent passage of Illinois House Bill 2832 (55 ILCS 5/3-5010.5).

The new law identifies 19 separate indications of potential fraud, but county recorders are each free to create a unique detection system for their county. Under these systems, once the recorder reasonably determines an instrument to be “fraudulent, unlawfully altered, or intended to unlawfully cloud or transfer the title of any real estate property,” the law affords the recorder two distinct courses of action.

First, recorder personnel may, at their own discretion, notify law enforcement officials, including the Department of Financial and Professional regulation, of the suspected fraud and request assistance for further review and potential criminal investigation.

Second, the recorder may, upon notice and confirmation of the potential fraud with the last owner of record, flag and refer the instrument to a local administrative law judge for hearing. If that judge determines the instrument to be legitimate, a judgment stating so would then be recorded along with the original instrument. However, if determined to be fraudulent, a judgment stating “that the document in question has been found to be fraudulent and shall not be considered to affect the chain of title of the property in any way” would then be recorded with the original instrument. No documents, regardless of legitimacy, would be “unrecorded” or struck from the county records.

Like many new laws, this new recording law is not without controversy. Proponents praise the law as an expedited and cost-effective alternative to filing a lawsuit to clear a victim’s title. However, critics complain the law unconstitutionally expands the powers of county recorders and may lead to unforeseen consequences in the recovering real estate industry.

While the ultimate effect (and constitutionality) of the new law remains to be seen, the law will almost certainly have an immediate impact on Illinois title companies. In some cases, it may lead to longer and more expensive administrative review and closing periods as title companies may be reluctant to insure any title during an active review/referral process. However, in others, the law’s finality in determining the legitimacy of unusual instruments in a chain of title may lead to decreased risks borne by title companies and thus decreased costs borne by the consumer.

Either way, the new law’s application and effect will certainly need to be considered by companies seeking to insure title in Illinois.

Posted by Attorney David A. Zobel. Zobel primarily represents individuals and corporations in the defense of civil litigation, including contract, negligence, and real estate matters. In addition to his court room work, Zobel assists in advising clients on contract and employment issues and regarding issues arising under the Sunshine Law.

 

Legislative Update: Missouri & Illinois Address Issue of Employer Requests for Employee/Job Applicant Social Media Account Information (Part 2 – Missouri)

David A. Zobel

By David A. Zobel



Legislation addressing the question of the extent to which an employer may request an employee’s social media account information has been introduced or is pending in 36 states with seven already enacting legislation in 2013.

As a follow-up to the discussion of Illinois’ recent legislative efforts, let’s look at Missouri’s legislative efforts.

Unfortunately, at this time the Missouri Legislature has not enacted any legislation to clarify the question of whether an employer may lawfully request or require employees or job applicants provide that employer with their social media account login information. Although the 2013 legislation session recently ended without a bill being passed in both houses, one bill, Senate Committee Substitute / Senate Bill 164, which would have created “The Password Privacy Protection Act,” passed in the Senate and fell just one vote shy of passage in the House. This bill’s partial success likely indicates the direction Missouri will ultimately take.

Like the Illinois legislation, SCS/SB164 began with a general ban of the practice of requesting or requiring the disclosure of account information. Specifically, the bill read:

Subject to the exceptions provided in subsection 4 of this section, an employer shall not request or require an employee or applicant to disclose any user name, password, or other authentication means for accessing any personal online account or personal online service.

The exceptions include and relate to:

(1)   Any electronic communications device supplied by or paid for in whole or in part by the employer;

(2)   Any accounts or services provided by the employer;

(3)   Any account or services the employee uses for business purposes; or

(4)   Any accounts or services used as a result of the employee’s employment relationship with the employer.

The bill also included several anti-retaliation provisions and a provision barring employees from transferring “an employer’s proprietary or confidential information or financial data to an employee’s personal online account” or service without employer authorization (i.e., barring an employee from posting trade secrets on Facebook without permission).

Like its Illinois counterpart, SCS/SB164 sought to clarify what it was not intended to do as well. It specifically stated, in part, that it should not be construed to prevent an employer from restricting or prohibiting an employee’s access to certain websites while using devices paid for by the employer, monitoring electronic data stored on an electronic communications device paid for by the employer (or such data that is traveling through or stored on an employer’s network), or restricting an employer’s review of public domain information.

While the bill sought to remedy one perceived problem, it may have actually emphasized another. The bill’s exception for employer-paid devices and interpretation not to prevent monitoring of data stored on such devices or flowing across employer’s networks leaves open the issue of the extent to which an employer may obtain an employee’s social media account information, or any information such as bank or health information, stored on the employer-paid device. Hopefully this potential loophole will be addressed when the Missouri Legislature reconvenes in the next session.

Although SCS/SB164 demonstrates what form a successful bill on this topic might take, SCS/SB164 has not been passed by the Missouri Legislature or signed into law. Therefore, the question remains unsettled in Missouri at this time.

Posted by Attorney David A. Zobel. Zobel primarily represents individuals and corporations in the defense of civil litigation, including contract, negligence, and real estate matters. In addition to his court room work, Zobel assists in advising clients on contract and employment issues and regarding issues arising under the Sunshine Law.