Archive for the 'Consumer' Category

Is an S Corporation or an LLC Right for Your Business?

The question we get asked most often by new business owners is “Should I form an S corporation or a limited liability company?”  Just what are the differences between an S corporation[1] and a California LLC?  There are advantages and disadvantages to both, so the decision as to which one is best for your new business will depend on your individual circumstances and goals:

Owner Liability

The main advantage of both types of entities is the degree of protection that each provides to its owners.  If the business is properly run, and all legal and financial corporate formalities are carefully observed, then the owners are insulated from liability for business taxes, torts, and debts. This protection is probably the main advantage that both LLCs and S corporations have over partnerships, associations, and sole proprietorships.[2]

Type of Business

Almost any type of business can form an S corporation. Banks, insurance companies, and foreign corporations are types of businesses that cannot elect to be taxed as an S corporation, and there are certain restrictions on the type and number of shareholders that the corporation can have (see below.)

Generally, California licensed professionals (attorneys, accountants, architects, doctors, and so forth) are not eligible to form LLCs.   Some licensed businesses, such as locksmiths and hair salons, can operate as LLCs.  State law has recently relaxed this restriction, now leaving the decision up to the individual governmental regulating agencies.   Licensed contractors are now for the first time permitted to form LLCs, and other licensed professions may follow suit in the future.

Ownership.

LLC owners (members) can be any individual or entity, and an LLC can have any number of members. 

S corporation owners (shareholders) are limited to natural persons (none of which can be non-resident aliens), estates, tax-exempt organizations, and certain trusts.  An S corporation must have no more than 100 shareholders, and all of the shareholders must consent to the S election.   

Either type of entity can have only one owner.

Management

California corporations are required to have at least a president, secretary, treasurer, and a director (or more directors, depending on the number of shareholders.)  The shareholders elect the directors, and the directors in turn elect the officers.  The officers of the corporation are responsible for the day to day operations of the company business and answer to the directors and the shareholders. 

LLCs can be managed either by manager(s), or by one, some, or all of the member(s).  There is no requirement that an LLC have officers, but LLCs are not prohibited from electing them, either. 

Maintenance

California Corporations Code requires that shareholders hold meetings at least once a year, and most bylaws require periodic director meetings and that meeting minutes must be kept. The law does waive the meeting requirement if issues normally covered at the meetings are consented to by written consent. 

There are no legal requirements for LLC members and/or mangers to have regular meetings or that meeting minutes be kept. It is recommended, however, that multi-member and manager-managed LLCs have periodic meetings to promote smooth and proper operation of the business.

Profits and Losses

Profits and losses are distributed to corporate shareholders based on the number of shares held by each. 

LLC members, however, can agree to distribute profits and losses on a basis other than percentage of ownership, taking into account such factors as the number of hours or level or expertise that each member contributes to the LLC business.

Taxes

S corporations are “pass-through” entities, meaning that the income is taxed only once as it is distributed to the owners. 

The same holds true for LLCs.  A single member LLC is treated as a “disregarded entity” in which the income is reported and taxed on the member’s personal income tax returns, and a multi-member LLC is taxed in the same manner as partnership income is taxed.  An LLC can elect to be taxed as a corporation, but this is not common.

In an S-corporation, only the salaries paid to officers and employees are subject to self-employment taxes. 

Members of  LLCs, however, are subject to self-employment taxes on both salaries and profits.  If the owners of the business do not intend to take a salary and there will be no employees, such as when the LLC is formed just to hold title to real estate, then this is not an issue.

Many business owners like the flexibility and ease of maintenance of an LLC.   Others prefer the checks and balances found in the more structured management of a corporation; or need an S corporation because they want to attract investors in the corporation; or they must form an S corporation because of the nature of their business.  The wrong choice may cost you in time, money and grief, so the decision should not be made without first consulting your attorney and your accountant.  If you are interested in forming or converting[3] your business to an LLC or S corporation, please feel free to contact your attorney to discuss your options.



[1] There are significant differences between “S” corporations (“Small” corporations) and  “C” corporations.  For example, if you will be seeking investors and will have a large number of shareholders, and/or will be offering more than one class of stock, then the corporation would not be eligible for S corporation status. A C corporation is subject to double taxation (i.e. profits are taxed to the corporation, then are taxed again when distributed as income to the shareholders) but the profits of an S corporation are only taxed once as the income is distributed to the shareholders.  Banks and insurance companies and foreign corporations cannot be S corporations

[2] Although members and shareholders are protected from company liabilities, their ownership interests are not protected from personal liabilities.  California law does not permit owner protection against charging orders.   In practice, a successful claimant against an owner personally would be entitled to receive only distributions of company profits, but not voting rights or management rights.  It is uncommon for a judgment debtor to obtain and subsequently enforce a lien against the ownership interest itself.

 [3] If you already have an LLC or S corporation, it is possible to convert to the other type of entity; and it may be to your advantage to do so.

Trademarks Take On New Importance in Internet Era…Even for Snack Foods?

Under the headline “Trademarks Take On New Importance in Internet Era,” the New York Times today reports on a trademark dispute between snack food behemoth Frito-Lay and a serial entrepreneur over the registrability of the mark PRETZEL CRISPS.  The headline is a bit misleading, as one would expect this article to discuss the reasons why trademarks are more important in this age of Internet search rather than a dispute involving off-line snack food brands.  Regardless, this article warrants a discussion of fundamental principles of trademark law.

The first question courts will always ask in a dispute involving a trademark is whether the name a party seeks to protect is in fact entitled to such protection under the law.  There are five categories of trademarks according to their protectability: (1) generic; (2) descriptive; (3) suggestive; (4) arbitrary; and (5) fanciful. KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 408 F.3d 596, 602 (9th Cir. 2005). “The latter three categories are deemed inherently distinctive and are automatically entitled to protection because they naturally ‘serve[ ] to identify a particular source of a product . . . .’ ” Id. (quoting Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 768 (1992)). Descriptive marks “define a particular characteristic of the product in a way that does not require any exercise of the imagination.” Surfvivor Media, Inc. v. Survivor Productions, 406 F.3d 625, 632 (9th Cir. 2005). A descriptive mark can receive trademark protection if it has acquired distinctiveness by establishing “secondary meaning” in the marketplace. Filipino Yellow Pages, Inc. v. Asian Journal Publ’ns, Inc., 198 F.3d 1143, 1147 (9th Cir. 1999). “Generic marks give the general name of the product; they embrace an entire class of products.” Kendall-Jackson Winery, Ltd. v. E. & J. Gallo Winery, 150 F.3d 1042, 1047 n.8 (9th Cir. 1998). “Generic marks are not capable of receiving protection because they identify the product, rather than the product’s source.” KP Permanent Make-Up, 408 F.3d at 602.

In the PRETZEL CRISPS dispute cited in the NY Times article, Frito-Lay seeks to cancel a trademark registration in the U.S. supplementary register and oppose trademark applications that were conditionally approved by the U.S. Patent and Trademark Office for registration in the primary register.  The trademark applicant Princeton Vanguard, LLC (“Applicant”) seeks registration of its mark in connection with “pretzel crackers.”   Last year, Frito Lay filed a motion for summary judgment requesting the Trademark Trial and Appeals Board (“TTAB”) to rule that, as a matter of law, the trademark PRETZEL CRISPS is generic for “pretzel crackers” and is therefore not entitled to registration.

To prove its claim that the trademark is generic, Frito-Lay must show that the mark refers to the class, genus or category of goods on which it is used.  In other words, it must show that that terms “pretzel crisps” that compose the mark refers to the goods “pretzel crackers.” While this might be the case in the United Kingdom, I am not aware of the term crisps being used specifically to describe the genus of goods synonymous with crackers or chips in the United States.  The Applicant provided substantial evidence, including expert surveys, to support its position that American consumers did not view the mark as referring to the genus of pretzel cracker products.  The Board agreed with the Applicant and denied Frito-Lay’s motion.  This decision leaves the trial of this case primarily on the issue of whether the mark has “secondary meaning.”

To determine whether a descriptive mark has secondary meaning, a finder of fact considers: “(1) whether actual purchasers of the product bearing the claimed trademark associate the trademark with the producer, (2) the degree and manner of advertising under the claimed trademark, (3) the length and manner of use of the claimed trademark, and (4) whether use of the claimed trademark has been exclusive.” Levi Strauss, 778 F.2d at 1358 (quoting Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1015 (9th Cir. 1985)) (alteration omitted).  While the Applicant has provided a preview of its “secondary meaning” case when it opposed Frito-Lay’s summary judgment motion, the substantive case has not yet apparently been submitted to the Board.

While the PREZEL CRISP case is not ground breaking trademark precedent, the parties recently engaged in discovery disputes over the unresolved scope and duties of providing “electronically stored information” or ESI, a topic ripe for a separate blog post.

 

 

Patrick E. Guevara is a senior associate and represents small and mid-sized businesses and entrepreneurs in the Tri-Valley, the Greater San Francisco Bay Area, and the Central Valley in the areas of intellectual property, trademarks, copyrights, employment, real estate, and immigration.

 

California Participated in the Multi-Billion Dollar Settlement Over Wrongful Foreclosures

In a press release today, California Attorney General Kamala Harris announced California’s participation in a nationwide settlement with the top five mortgage banks (Bank of America, Wells Fargo, Chase, CitiBank, and Ally) over wrongful foreclosures, robo-signing, and other mortgage servicing misconduct.

Calfornia’s settlement is valued at $18 billion.  Unlike past mortgage crisis relief programs, the five banks have purportedly agreed to make principal reductions for California homeowners of at least $12 billion total.   AG Harris also noted that the California settlement is unique from “the larger multistate agreement, which is enforceable in a federal court in Washington, D.C.,” in that the AG can enforce the settlement agreement in California state court.  Also, the settlement does not include mortgage loans owned by the government sponsored enterprises (“GSEs”) Freddie Mac and Fannie Mae, which make up around 60% of residential mortgages nationwide.

AG Harris also took this opportunity to announce that she will propose “a comprehensive legislative agenda to protect homeowners in the mortgage market…including a single point of contact for mortgage-holders and an end to the unfair and confusing system of dual-track foreclosures.”  These proposals are very relevant to the foreclosure cases I have recently worked on.

In a case before a federal court in San Francisco entitled Sohal v. Freddie Mac, we recently defeated the banks’ motion to dismiss.  The primary issue was whether the foreclosing party, which sold the mortgage to Freddie Mac and merely acted as a servicer, had the standing and authority to foreclose on the property.  Freddie Mac and Fannie Mae do not service loans so the point of contact of the loans they own are the servicers, who also typically originated the mortgage.  While there have been numerous problems in dealing with the servicer, I don’t think a single point of contact will resolve the problem.  The problem lies in the tangled web of  “back-end” contracts from the securitization of the mortgages.  Servicers do not make the actual decisions.  They have to obtain consent from the “investors.”  Any proposed legislation should, instead, focus on properly define the roles, rights, and obligations of all parties in the transaction, including the originator, the servicer, the fictional “nominee” MERS, and the “investors.”

We also have a wrongful foreclosure action in state court involving dual-track.  It’s not necessarily confusing.  However, from the borrower’s point of view, it is certainly unfair that the lender can sue for foreclosure and at the same time go forward with a non-judicial foreclosure sale.  The primary advantage for the lender (in addition to forcing the borrower to incur additional attorneys fees to deal with both proceedings) is that the lender can request the Court to appoint a receiver to collect rents if there is an assignment of rents.  California’s nearly century old non-judicial foreclosure scheme was intended by the legislature to provide a streamlined process while balancing the interests of both the lender and borrower.  The trend has been and continues to be in favor of lenders.  Courts are unlikely to reverse this trend, so ultimately it will be up to legislative action to re-balance California’s foreclosure scheme.  With the public backlash and the revitalized momentum of the recent settlements, foreclosure law should have very interesting year or two.

UNLICENCED CONTRACTORS IN CALIFORNIA

California requires that all contractors, including specialty contractors such as fencing, roofing, tiling, painting, solar, landscaping, and insulation contractors, be licensed by the Contractor State License Board (“CSLB”).  Specifically, “It is illegal for an unlicensed person to perform contracting work on any project valued at $500 or more in labor and materials. Continue reading ‘UNLICENCED CONTRACTORS IN CALIFORNIA’



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