Tax Treatment Considerations When Selecting Your Entity

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?

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 »

New EEOC Rules Complicate Task of Designing a Compliant Employer Wellness Program

In 2016, after years of twists and turns, backs and forths, the Equal Employment Opportunity Commission (EEOC) issued final rules that went into effect in January 2017 and apply to all employer group health insurance plans that offer wellness programs.

The final rules follow the EEOC’s 2015 publication of two rules under the Americans with Disabilities Act (ADA) and Genetic Information Non-Discrimination Act (GINA) to address whether an employer offering an incentive to employees to provide health information would effectively render the program “involuntary” and consequently discriminating under the ADA.

In October 2016 AARP filed a challenge arguing that the requirements were arbitrary and capricious under the Administrative Procedures Act (APA) as having incentives that render the disclosure of GINA- and ADA-protected information involuntary and disclosure in violation of law. That challenge was rejected in the District Court of the District of Columbia, which ruled the information required by the regulations is not public disclosure and employers are statutorily forbidden from using it to discriminate against employees.

Categories of Employer Wellness Programs

Employer wellness programs generally fall into two categories: participatory programs and health-contingent programs. Participatory programs offer financial incentive for employee participation, but do not require the employee to satisfy any health-related condition to receive the incentive. Examples of this program include reimbursing for gym memberships and offering health education classes.

On the other hand, health-contingent programs generally require the employee to satisfy a health-related standard to obtain a reward. Within the category of health-contingent programs, there are two sub-groups:  activity-only programs and outcome-based programs. Activity-only programs require the employee to participate, but not to attain or maintain a specific health outcome.  Examples of activity-only programs include rewards for high step-counts and dieting. Outcome-based programs require the employee to attain a specific health goal, such as quitting smoking or lowering one’s body mass index (BMI).

Requirements for Health-Contingent Programs Under the ACA, GINA, and ADA Challenged by AARP

Prior to the new EEOC rules, employers sponsoring wellness programs were required to comply with the Affordable Care Act (ACA), ADA and GINA. Continue reading »

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

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?

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

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 »

What to Do When You Are Served with a Lawsuit

For many individuals and businesses, being served with a lawsuit is an uncommon, or possibly even a once-in-a-lifetime, situation. Litigation can be stressful and being served with a lawsuit is often surprising as well.  However, in all situations when you or your business is served with a lawsuit, there are three simple, basic steps to best preserve your rights and protect yourself from the outset.

1. Make Some Quick Notes

Often, as a result of the frustration or surprise associated with being served with a lawsuit, most people don’t pay attention to the details of how they were served. These details can be very important. There are specific rules and procedures about proper service of lawsuits, depending on the type of lawsuit and the court.

Take a few minutes to jot down notes related to the service. Specifically, identify the date and time of service, the manner of service including whether a sheriff or process server handed you papers or if the lawsuit was received by first-class or certified mail, and the recipient of those papers. These may be important facts for your attorney to know in determining whether or not service was proper and if you should contest service as a result.

Also, don’t assume that service is improper without getting legal advice. In some instances, service by mail or serving papers on your 16 year old son or daughter when you are not home can be proper service. Continue reading »

Lien Stripping in Bankruptcy after Caulkett

Under the Bankruptcy Code, “lien stripping” allows a debtor to void a property lien “[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.” Lien stripping is based on the concept that a second claim must actually be secured by collateral of sufficient value to equal or exceed the amount of the secured claim. Section 506(a) of the Bankruptcy Code provides that claims which are only partially secured, or “underwater,” are to be split into two claims – one fully secured and one fully unsecured.

In 1992, the U.S. Supreme Court addressed an important question about lien stripping in Dewsnup v. Timm (1992). In Dewsnup, a Chapter 7 debtor sought to strip the unsecured portion of an underwater lien on her residence under Section 506(d). Specifically, the debtor wanted to reduce her debt of approximately $120,000 to $39,000, the value of the collateral securing her debt at that time. Relying on the statutory definition of “allowed secured claim” in Section 506(a), the debtor argued that her creditor’s claim was “secured only to the extent of the judicially determined value of the real property on which the lien [wa]s fixed.”

The Court rejected this argument, relying on policy considerations and pre-Code practice. The Court concluded that if a claim has been “allowed” under Section 502 and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of Section 506(d). As such, the Court held that the debtor could not strip down the creditor’s lien to the value of the property because the creditor’s claim was secured by a lien and had been fully allowed under Section 502.

The Dewsnup Court defined the term “secured claim” in Section 506(d) as a claim supported by a security interest in property, irrespective of whether the value of the property would be sufficient to cover the claim.  Under this definition, lien stripping is limited to “voiding a lien whenever a claim secured by the lien itself has not been allowed.” Dewsnup has been widely criticized as being contrary to the plain language of Section 506(a). Continue reading »

Missouri Finally Has a New Statute Governing Receivers and Receiverships

As most commercial attorneys in Missouri know, the previous Missouri statute governing receiverships, which was enacted in 1939 and consisted primarily of one sentence, provided very little guidance to attorneys, judges, or the parties involved.  Missouri’s new receivership statute solves that problem.  Effective August 28, 2016, and consisting of some 34 sections, the Missouri Commercial Receivership Act now provides guidance regarding the appointment of a receiver, the powers of a receiver, the rights and duties of the parties, and claim and distribution procedures.

A petition to appoint a receiver is now an independent cause of action.  It does not need to be merely an “add on” request to some other claim the creditor has against the debtor.  Receiverships can be instituted in order to dissolve an entity, enforce a lien, enforce a judgment, and other specific purposes, as well as any other situations in which the court may find a receivership appropriate.

Commencing a receivership is also a useful new way to resolve an ownership dispute or allow a majority shareholder to challenge a misbehaving management without destroying the business.

One of the most important improvements in Missouri’s receivership process is the requirement of notice to debtors.  Continue reading »

The Intersection of HIPAA and Cloud Storage

Our ever-evolving technological society is raising new questions about how to reconcile complex health data protection laws with cloud storage.  Storage of data in the “cloud” allows users to store, maintain, and manage data remotely on the internet.  Its advantages include accessibility of the cloud-stored data from any location via the internet, emergency back-up capacity, and even cost savings.  An online search for HIPAA-compliant cloud storage companies reveals that there is no shortage of companies who advertise their “HIPAA-compliant cloud services.”  It is important to remember that working with a company who claims their cloud storage “is HIPAA compliant,” does not excuse you from meeting HIPAA requirements.  Due diligence is required when selecting such a company and entering into appropriate contractual arrangements with the companies.

The Department of Health and Human Services’ Office for Civil Rights (“OCR”) is responsible for overseeing protection of sensitive health data under the Health Insurance Portability and Accountability Act, as amended (“HIPAA”). OCR issued guidance on October 6, 2016, explaining how to safeguard electronic health information protected by HIPAA in today’s widespread cloud networking environment.

HIPAA applies to “covered entities,” and this article will focus on one such covered entity, the health care provider.  Most health care providers do not perform all of their health care functions by themselves and instead often use a range of services offered by others, called “business associates” under HIPAA.  Health care providers are permitted to disclose protected health information (“PHI”) to these business associates (“BA”) as long as they obtain satisfactory assurances that the BA will use the information only for the purposes for which it was engaged by the health care provider, will safeguard the information from misuse, and will help the health care provider comply with some of the health care provider’s duties under HIPAA, through the execution of business associate agreements.

Continue reading »