I got a California LLC and trust or will online. That protects my assets and will save my home, right?…Wrong

People often misunderstand the different common tools used and how they all fit together when it comes to asset protection and estate planning, as well as business structures and succession planning, not to mention, tax planning and insurance coverage.

These are all very complex legal and financial issues that often mix, combine, and cross-over from one area to another. You can go online, get templates or find document preparation companies that can give you a standard form will, living trust, corporate formation, or limited liability company (LLC) formation document. True, that may be better than nothing, but is that really an effective way to deal with some of the most important issues of our lives, and those which most of us don’t want to think about…”What will happen to my stuff when I die and how can I keep as much of what I accumulate during my lifetime?”

Let’s look at a common example, a living trust (often called a family trust) can save your kids time and money in having to put your estate through the legal probate process in court when you die. In California, in most cases, the assets owned by someone when they die with or without a will are “probated” in court. This is the way to administer the terms of the will or state law on distribution of assets; however, state law provides automatic legal fees and certain costs, often simply based upon the value of the assets without deducting the debts owed. That can mean thousands or tens of thousands of dollars in costs for a so-called “simple” estate with one home worth $500,000. People use a written agreement, called a living trust, that tells a trustee what to do with their assets when they die and can help avoid having to go to court to probate the will. This saves time and money and keeps who gets what private, instead of becoming part of a court record somewhere.

In this example, people go online and get a trust then set it aside thinking everything is taken care of. There are so many more complex issues, even with a relatively small estate. If you own a home or car, simply transferring the asset into the trust only provides for who gets that asset when you die. It does not protect that asset from the reaches of creditors. With the ridiculous amount of lawsuits in the United States (over 30 million lawsuits filed per year in the US), all it takes is someone getting hurt at your home or in a car accident that your insurance company decides not to cover, or the suit awards more money to the plaintiff than your insurance covers, and suddenly all of your assets are in jeopardy. The trust in that case is simply an estate planning or asset transfer vehicle to give things to your kids to avoid probate. It was not planned as a protection from creditors who could foreclose on the home after your insurance company goes out of business (AIG almost went out of business & many insurance companies fail every year).

When it comes to businesses, forming a LLC or corporation is often a useful way to structure the business and separate the business from your personal affairs. It typically provides limited liability to protect your personal assets from the business’ creditors; however, if a lawyer can show that the LLC is really the same as your own personal business and not a separate entity, the LLC protection goes away. Also, if a creditor gets a judgment against you that you can’t pay, the creditor is going to go after your ownership interest in the LLC. Suddenly, the creditor owns your LLC or holds a lien against its assets or revenue. That could basically shut your company down. Even if you figure you can just file a bankruptcy to wipe out the debt, there are many types of debts that cannot be eliminated in bankruptcy and the court looks to your current income and assets to see what you can pay creditors.

Another interesting case, you forgot to disclose something on your insurance or bank credit application. Your insurance pays a claim or you take out a large sum on credit and the insurance company or bank find out about the forgotten disclosure (or outright lie). Suddenly the bank or insurance company are suing you for fraud and their money back, which cannot be discharged, even in bankruptcy. Many of the recent homeowners who have been up in arms about the wrongs the banks did with the foreclosure mess may not realize that they likely signed loan applications on stated income saying they made a certain amount of money that was exaggerated. The bank relied upon their representation of how much they made to determine they were credit worthy. The bank could sue the homeowner for fraud.

This is not to say you should do nothing. You can still setup a living trust for estate planning purposes or form a LLC to structure your business, but there are other tax planning and asset protection tools that can be used to avoid losing your home or business to some plaintiff’s lawyer.


Solid financial planning for the future involves more than figuring out who gets your stuff when you’re gone and how much you should spend each month or put in your 401k. A good financial plan for your future looks at all aspects of your life to consider: cash flow, budgeting (estate conservation), retirement, credit, estate plan, asset protection, business succession plan, business protection and structure, taxation, insurance coverage, and overall risk management. Many people wait until its too late and their lives are turned upside down. Even if you don’t have much or are young, consider talking to a financial planner who can cover all the legal, financial, business, insurance, and tax issues to plan today for all your tomorrows.  


Schedule a Free Initial Consultation to discuss your tomorrow:
714-704-4828
Chris Barsness, Esq. MBA, Senior Associate
Barth Calderon, LLP
OrangeCountyBusinessLaw.Us

SEC Adopts New Dodd-Frank Proxy Disclosure RE: Compensation Committees & Corporate Governance Proxy Disclosures

On June 20, 2012, the U.S. Securities and Exchange Commission adopted new and amended rule 10C to the 34 Act and amended Rule 407 under Regulation S-K (See Text & Rule under 17 CFR PARTS 229 and 240). This was required to be implemented pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Rule 10C-1 directs the national securities exchanges to establish listing standards that, among other things, require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be “independent,” as defined. The securities exchanges must use the following criteria in determining “independence” of the compensation committee members:


“(1) Independence. (i) Each member of the compensation committee must be a
member of the board of directors of the listed issuer, and must otherwise be independent.
(ii) Independence requirements. In determining independence requirements for
members of compensation committees, the national securities exchanges and national securities associations shall consider relevant factors, including, but not limited to:


(A) The source of compensation of a member of the board of directors of an issuer,
including any consulting, advisory or other compensatory fee paid by the issuer to such member of the board of directors; and


(B) Whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.
(iii) Exemptions from the independence requirements. (A) The listing of equity securities of the following categories of listed issuers is not subject to the requirements of paragraph (b)(1) of this section:


(1) Limited partnerships;
(2) Companies in bankruptcy proceedings;
(3) Open-end management investment companies registered under the Investment
Company Act of 1940; and
(4) Any foreign private issuer that discloses in its annual report the reasons that the
foreign private issuer does not have an independent compensation committee.”

The committee in its role as a committee of the board may retain, in its discretion, compensation consultants and legal counsel; however, they are not required to follow the recommendations of the consultant, advisor, or attorney. They are also required to perform an independent review of the amounts paid to and relationship of any hired advisor to look for conflicts of interest. The requirements will essentially be implemented and policed by the listing agency, but the requirements do not apply to smaller reporting companies.

Under amended Rule 407, the following was added to corporate governance proxy disclosures: “With regard to any compensation consultant identified in response to Item 407(e)(3)(iii) whose work has raised any conflict of interest, disclose the nature of the conflict and how the conflict is being addressed.”

The new rules will be effective 30 days after their publication in the Federal Register and listing agencies have 90 days to implement them into their listing standards. Issuers will be required to comply with the new disclosure and proxy rules for annual shareholder meetings with director elections on or after January 1, 2013.

Corporate Startup Lawyer Expands Orange County Business Law Services

Chris Barsness, Esq. MBA has joined with Barth Calderon, LLP to provide high quality, cost-effective legal and finance services for individuals and businesses of all sizes throughout California.

Mr. Barsness has practiced law for over 10 years and will continue to provide legal and business counsel for a wide array of clients, from founders, start-ups, entrepreneurs, to emerging growth companies, and publicly traded micro to mid-cap companies.  His practice will focus on start-up issues, small business and individual finance, asset protection (including protection of intellectual property), corporate transactions, securities law compliance, contracts, real estate, and bankruptcy.

Barth Calderon, LLP is headquartered in Orange County.  They are known both locally and nationally as a premier provider of legal services designed to protect the assets of individual, family and business clients.  They recognize sound financial planning can provide individuals and businesses with the freedom to pursue goals and the ability to honor commitments. They approach the practice of law with this in mind. Every legal matter they handle is analyzed from a financial planning perspective. This provides a practical approach for clients confronting legal issues.


Mr. Barsness will continue representing Silicon Valley and Los Angeles tech, startup, and emerging growth companies, in addition to this expansion further into Southern California.


Mr. Barsness writes various articles and provides informational resources for clients on his blogs:


SiliconValleyStartupAttorney.com/blog


OrangeCountyBusinessLaw.Us


More information about Barth Calderon, LLP can be found at:
Barth Calderon, LLP  |  333 City Blvd. West, Suite 2050  |  Orange, CA 92868  |  (714) 704-4828


BarthAttorneys.com


Shortlink to this article:  bizla.ws/LgYeWt

Private Placement Memorandum (PPM) Templates- Why To Beware DIY, Discount or Free Forms

A common issue faced by entrepreneurs, founders, start-ups, and other small businesses is how to get documents when they need to raise money for their venture or enter into various agreements, hire employees, or protect their intellectual property. The cash strapped individuals often look to discount or free services online to help them do things like obtain sample templates, incorporate, or get other form documents they can use. There are definitely times you can use these sample form templates or online services and there is a link to some document / forms websites, term sheet resources, and sample financing documents on my Top Startup Resources page. There are private placement memorandum (commonly referred to as PPM) templates online that can give a starting point and I go over what a PPM is, why you need one, and what should be in one on this page.

When it comes to do it yourself legal services, you can save money by doing certain things yourself. Most lawyers don’t create a contract or other document from scratch in most cases, they have sample forms they have used in the past or they get samples through practice guides or other attorneys. The service you are paying for with the attorney is to tailor the form to your specific needs; however, the additional invaluable service is their guidance and recommendations for other things that you need to consider. For example, if your friend offers to loan your newly formed corporation money, you may find a sample loan or promissory note template and just use that. However, you may not know about state and federal laws that you could violate by putting in improper terms or failing to file the required securities exemption filings. This can affect the future of your business and you could end up having to refund the money paid or may be prohibited from offering or selling any security in the future (this includes most forms of raising money, whether loan or sale of stock). Another example is the online incorporation services that people use. The founder may not realize that simply filing incorporation papers with the secretary of state. There are securities law exemption filings usually required and failure to comply with record keeping, corporate governance, and corporate procedures can result in the founder having personal liability for the corporation’s debts or other obligations. The founders suddenly find themselves losing the limited liability protections of the corporation and may even have to file a personal bankruptcy to avoid the liability.

A PPM template could be used, but the disclosure of risks, securities law compliance, and other issues are those things that need to be changed to fit the specifics of the transaction taking place. In addition, laws change over time and vary by state, so a template may have been fine in one state in 2001, but you have no idea if what you are getting really is the most up to date and local form you could use. An example is the change recently made by the US Securities and Exchange Commission to the definition of an “accredited investor” which can affect qualifying for securities law exemptions and certain parts of a PPM or the host of related documents (which use usually don’t get with discount DIY services). You can read about the change to accredited investor here.

In addition, I go over some of the common issues and questions faced by new companies on this page.

So with this brief warning, use forms, templates and discount services at your own risk, but at least call an attorney to see if you can get some free guidance to understand all the potential issues or steps you need to take.