Question:   “We formed an LLC a few years ago, but haven’t done anything with it.  We do own properties and a business, but nothing is titled in the name of the LLC.  There are several family members involved and our tax returns are a mess.  Any advice on what we should be doing?”

Matt’s Answer:   “Yes, I advise you to gather all your deeds, financial records and company records, and sit down with your business or real estate attorney, your CPA and your insurance agent.  I have reviewed your company records, and can see that you’ve done essentially no planning.  We need to develop a plan for you.  You need an asset protection plan that includes some training and education on how to operate your LLC.  You need to get better insurance on your properties, your business and the LLC members.  You need to fix your company record book, which includes the drafting and completion of an Operating Agreement.  And, that Operating Agreement should contain buy-sell provisions to address what I call the “Big D’s-” death, disability, marital divorce, dissolution of the entity, and disinterest by one or more members.  You also need to fix certain accounting and tax irregularities, which flow from your failure to devise a plan.

Your meeting with your attorney should last one hour to two hours, and should include training and instruction on how to operate this business.  Yes, it is a business.  “Real Estate Investing” is a misnomer.  It should be called “Real Estate Management” or “Real Estate Business.”  You should apply basic business principles to your real estate business.   Although I cannot explain in great detail here everything you need to do to correct the shortcomings of your operation, I can assure you that it is a fairly routine matter for an experienced real estate and business attorney.  This is not difficult to correct, but you need to consult with professionals and implement a plan.  Do not believe everything you’ve read in a book, on the Internet or in a seminar manual.  And do not expect your CPA or insurance agent to fix your legal matters, as each of these three professionals has his or her own expertise and field of licensed competency.  Go see all three- an attorney, a CPA and an insurance agent- and get your house in order as soon as possible.  Within thirty days, you should have your real estate business matters in order.”

A reader recently asked me this:  “Can I PERSONALLY receive payments for services rendered through my S-corporation without jeopardizing my “corporate veil” or “corporate shield?” 

The corporate veil insults owners and officers of a limited liability entity personally from liability risks of a business.

The answer to the reader’s question is yes, as long as this reader follows the corporate formalities I teach my clients and as long as he doesn’t commit one of the “7 Deadly Corporate Sins.”  I listed the seven or eight (depending on how you count them) things you should avoid in order to buttress your corporate structure and not have your “corporate veil” pierced.    Indiana corporations and Indiana LLC’s are governed by these rules, and I have generally described Indiana case law and the Indiana Code in these blogs.  I give more guidance on this important topic in these other blogs:

http://www.askmattonline.com/uncategorized/piercing-the-corporate-veilshield/

http://www.askmattonline.com/asset-protection/what-is-the-corporate-veil-or-shield/

As to the question asked by my reader, he is going to receive checks in his personal name for work done through his S-corporation.  The contract at issue is in writing and is between his S-corporation and another company.  That’s a very good thing for my client, as it helps to distinguish him from the S-corporation he owns.  For reasons not important here, the payments will be mailed as checks to my reader but made payable to him personally.  I advised him to deposit the check in his S-corporation’s checking account and to treat the payments as if the payment had gone straight to the S-corporation and not to him personally.

By taking these steps, he will not violate any of the “7 Deadly Corporate Sins” and will avoid the “co-mingling” issue.  The payments rightfully belong to his S-corporation, not him personally.  So, he is merely depositing payments in the bank account of the rightful owner- his S-corporation.  He is actually doing something positive to separate his personal affairs from his business affairs, which buttresses his corporate protection and limited liability.  A court should look favorably on what he is doing, if this ever became an issue.

By the way, there is no significance to the fact that this reader owns an S-corporation, as opposed to a C-corporation.  I did mention the “S” election status of this particular corporation to make the point the even S-corporations are obligated to follow the rules I described in this and the related blogs.  The tax status of an entity should not impact the manner in which the corporate veil is preserved and protected.  The same is true for LLC’s, although the formalities for LLC’s are different than they are for corporations.  Otherwise, the same rules apply to LLC’s and corporations.

A good small business attorney will help you structure your business affairs in a way that limits your personal risks and protects your personal assets.  If you need an Indiana attorney, make sure you hire a lawyer who understands Indiana business law.

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Matthew A. Griffith is an attorney, business performance coach, mentor and entrepreneur.  He coaches, advises and guides business owners, entrepreneurs, inventors, property managers, investors and real estate professionals.  Matt has nearly two decades of experience helping businesses grow.

Question:     

“Matt, we have one of your old leases that contains a waiver of implied warranty of habitability.  Is that still good law or can we delete that section?”

Matt’s Answer:       

 Leave that provision in your lease.

The law concerning the implied warranty of habitability has changed over the years and the state of the law is a bit confusing.  In a technical sense, there is no implied warranty of habitability in Indiana rental property law.  An implied warranty is a contractual concept.  The theory is that the courts through common law or a legislative body such as the Indiana General Assembly can impose upon the parties certain contractual terms.  A warranty of habitability implies that the landlord guarantees that a house is habitable.  If a rental unit is not habitable, the tenant is incapable of living in the property.  Under those conditions, the tenant can terminate the lease under what is referred to as a “constructive eviction.”  Again, in theory, the landlord has breached a basic contract provision to provide a safe and habitable home.  In reality, very few rental properties are uninhabitable. 

Over the years, the Indiana General Assembly and even the courts have added duties to a landlord.  While those duties have never been classified as a warranty of habitability, the effect is essentially the same. 

Back in 1992, the Indiana Court of Appeals issued a well-reasoned opinion called Zimmerman v. Moore.  In Zimmerman, the court rejected the existence of an implied warranty of habitability except in those cases where a local housing code established such a warranty.  The court did a great job of explaining the law of warranties for new houses versus older homes, and compared homes to other forms of property governed by other rules.  In the end, the court held that tenants are adequately protected by traditional tort law, which does pose certain duties on a landlord.  Then, in 1999, the Indiana Supreme Court held, in a case called Johnson v. Scandia Associates, that the implied warranty of habitability can arise under certain circumstances.  The Supreme Court stated: “Plainly, a warranty of habitability, whether in the sale or lease of residential dwellings, has developed in the common law of Indiana, and its roots are in the law of contract.”  The Court then established a vague rule of law suggesting that the warranty might arise by the lease agreement, by the conduct of the landlord and tenant or by local law.

So, now we have to look both at contract law, legislation and traditional tort law as it applies to landlords in order to determine liability risks.  In the end, most liability risks will be defined by statute and tort law concepts.

Under traditional tort law, a landlord can be held liable for known defects that the landlord has a duty to repair and fails to repair.  The theory is that a landlord can and should repair defects to a property that are brought to the landlord’s attention.  Accordingly, if a tenant is aware of a dangerous condition in the property and the landlord is unaware, the landlord would have no duty to make the repair.  If the tenant notifies the landlord and the landlord fails to make the repair in a reasonable amount of time, then the landlord could be held liable. 

Similarly, where there is a hidden defect or concealed danger known by the landlord and kept hidden from the tenant, the landlord could be held liable.  However, what about defects unknown to the landlord and the tenant?  Obviously, a landlord cannot make a repair unless the landlord knows the repair is required.  Unknown by both the landlord and the tenant, the tenant bears the risk, because the tenant is in possession and control of the property and is in a better position to know about defects.  This becomes even more so under the new laws restricting a landlord’s ability to make random inspections without notice.  The tenant has more rights to possess and control the rental property today than ever before, which should transfer more responsibility from landlords to tenants. 

It is important to understand local law as well as state law.  While not technically an implied warranty of habitability, be aware of these state law requirements:

A landlord shall do the following:

(1) Deliver the rental premises to a tenant in compliance with the rental agreement, and in a safe, clean, and habitable condition.
(2) Comply with all health and housing codes applicable to the rental premises.
(3) Make all reasonable efforts to keep common areas of a rental premises in a clean and proper condition.
(4) Provide and maintain the following items in a rental premises in good and safe working condition, if provided on the premises at the time the rental agreement is entered into:

(A) Electrical systems.

(B) Plumbing systems sufficient to accommodate a reasonable supply of hot and cold running water at all times.

(C) Sanitary systems.

(D) Heating, ventilating, and air conditioning systems. A heating system must be sufficient to adequately supply heat at all times.

(E) Elevators, if provided.

(F) Appliances supplied as an inducement to the rental agreement.

In a sense, the law is even more complicated today than prior to the 1992, and 1999 court cases.  The waiver you have in my old lease form provides a certain buffer, in the event the courts start creating the implied warranty of habitability.  The impact of that warranty could well exceed current tort law concepts.  The warranty is contract law, while current landlord duties are rooted mostly in tort law.  So, the waiver I wrote might prevent certain claims rooted in contract law.  Said more plainly, the waiver could only help you, not harm you.  Leave the waiver in place.  However, supplement the waiver with other important waivers concerning tort law concepts.

 If you have questions or concerns about the topics covered in this article, your business structure, business planning or your real estate investments in general, please feel to contact this author for a consultation.

Rule #1-   Don’t try to trademark your logo, business name, tag line, etc. without professional help.

I see people screw up their trademarks on a regular basis.  Trademark law is not as complex as patent law, but it is not easy for most law persons.  Don’t be cheap.  Get professional help.

Rule #2-   Your lawyer may not be the right lawyer for your trademark needs.

About 25% of my trademark cases come from clients who first hired a lawyer who knew nothing about trademark law, and then they came to me for help.  If another lawyer files a trademark improperly, I have to charge the client more to fix the trademark application than I would have charged to do the entire filing from the beginning myself.  It is always more and harder work for me to fix another lawyer’s mistakes, than it is for me to do the job right the first time.

Rule #3-  Decide on an I.P. strategy sooner than later.

Not all logo’s, company names, tag lines, etc. should be trademarked.  Or, state trademarks might be enough, and there is no need for a federal mark.  If you use a good trademark lawyer, he or she will discuss strategy with you first.  If your trademark lawyer hasn’t engaged in cost-benefit analysis of various strategies with you, fire that lawyer and find a better one.

Rule #4-  Protect your trademarks.

Once you get a trademark or service mark, protect that investment.  Indicate ownership of your business name with an ® if it is registered as a federal trademark, a ™ if it is an unregistered trademark and a ^SM if it is an unregistered service mark.

Rule #5-  Understand that trademarks are not the only ways to protect your I.P.

*  If you plan on incorporating, register your name with your state’s secretary of state.

*  Common law rights can be just as powerful as statutory trademarks.

*  Federal law protects certain domain names from Cyber Squatters.

*  Copyrights are different than trademarks.  Learn when to use which set of protections.

*  First in time often equates to first in right.   So, be able to prove "first-use" by keeping records that document the date you began using your business name.

*  If you do business abroad, you should also register your business name there.

*  If you go over state lines, you better see a trademark lawyer about your needs, rights and risks.  Everything changes when you do business over state lines.   Remember the Internet enables you to do business anywhere at any time- day or night!

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Matthew A. Griffith is a business and real estate attorney, entrepreneur, business success coach and investor.  He guides small business owners, management teams, inventors and investors to profitability using both time-tested and innovative business ideas, methods, tools and techniques.  For a consultation, contact him via email-  griffith@indiana-attorneys.com

Introduction by Matthew A. Griffith, Esq.

Below is a guest blog by Dan Lacy with Dynasty Business Building- http://dynastybuilder.com/home.  Dan is, in a sense, a competitor of mine, in that we both help businesses and their owners avoid risks, maximize opportunities and grow businesses into profitable enterprises through business coaching and plan development.  Nonetheless, I have to give credit where credit is due.  The blog post below may be the best written summary I have ever read on the benefits of business planning.  I can help more clients do more good and avoid more losses through simple planning than can be accomplished through any other business technique or function.  In fact, I use business planning as a tool to reduce legal liability risks, as well as to increase profitability.  Yet, most small to medium sized business do virtually no planning.  Or, they create a plan but fail to implement it.  Hopefully, Dan’s summary in this blog post will encourage a few business owners to start taking planning seriously.  I hope this helps at least one of you.  And thank you Dan Lacy.  Good stuff.

Planning Today – Surviving Tomorrow

GUEST BLOG BY DAN LACY

Dan@dynastybuilder.com. 

In the first and second chapters of the book of Numbers in the Old Testament, we find a detailed description of the Israelite campsite during their wilderness trek.  To the casual reader an outline of the particulars of encampment might seem to be irrelevant minutiae.  What is actually presented, however, is a brilliant model for effectively managing the activities of a large organization.  Moses and Aaron were responsible for governing almost a million people.  By adhering to a carefully structured plan for day-to-day concerns they were able to prepare for long term problems and issues more efficiently.

Of course, what was true for the ancient Israelites is also true today.  Planning is the key for any business owner who wishes to build a company that has a solid foundation for future growth and development.  Yet, less than 15% of small business owners surveyed admit that they are doing an adequate job of planning for the future of their business.  In fact, managers rarely fall short of their real potential for lack of technical competence.  Of all the organizations and businesses I have consulted in the last 30 years, the one principle cause for failure is the inability or unwillingness of the executive staff to logically and consistently plan for the allocation of limited resources – labor, money and time – toward all the viable opportunities that exist. 

While strategic planning is an integral part of maintaining the growth cycle of a large corporation it is even more critical to smaller organizations because they, typically, lack the resources necessary to absorb the cost of mistakes, errors in judgment, or failure to foresee change.  The planning process allows management to evaluate the future where they want to be and how to get there.  It helps them establish goals and then gives them a performance standard by which to measure themselves.  Better yet, planning allows them a process to identify and resolve problems before they become crises.

Before gathering your staff together – either formally or informally – to begin the planning process for the future growth and development of your company, it’s important to understand exactly what this vital activity will accomplish:

            1. Planning formulates the future.  The planning process allows the people in your organization to anticipate and, therefore, shape the future.

            2. Planning motivates people.  Everyone wants to have a part in determining their future.  The greater the feeling of ownership each individual has in determining the objectives of the organization, the more committed they will be to making sure those objectives will be achieved.

            3. Planning establishes the organizational structure of a company.  The planning process will clarify what structural issues need to be resolved in a company.  This will determine what organizational model needs to be implemented to address these issues.

            4. Planning directs delegation.  The key to effective delegation is understanding what assets and liabilities a company has in terms of its human resources.  By determining who is best suited to handle a particular role, the entire organization should be able to live up to its maximum potential. (Tim Collins – Good To Great).

            5. Planning promotes communications.  The planning process affects each division of a company, including the finance, marketing, sales and operations divisions.  Thus, for each area of a company to achieve their respective goals, they must cooperate and communicate with divisions that they normally don’t communicate with.

            6. Planning fosters the process of monitoring.  The planning process establishes standards or goals that an organization must achieve to accomplish their overall objectives.  Without a monitoring system, management will not be able to assess how well these goals are being achieved.

Planning is essential for the survival of the company.  If the organization does not have the time or manpower to do adequate planning, then the company should utilize outside resources to help them set, monitor and achieve their goals.  Time spent on planning is time well spent and money spent on planning is money well spent when the plan is utilized.