A handshake is good for an introduction, but it's a lousy way to do business.
Your average lawyer will shudder in horror if you mention the idea of a verbal agreement. The reason is simple: A verbal agreement may save you some hassle and expense up front, but if trouble brews (and it usually does!), you will repay those savings (both the hassle and the expense) many times over.
The well-written contract doesn't just set forth the terms of the deal; it will also address contingencies that may arise as the business moves forward. What if one of the parties dies? What if the business fails? What if the business succeeds beyond expectations? What if one of the parties wants to retire or sell their interest?
The well-written contract is built upon the fundamental question 'what if?' The contract must achieve the purpose intended under the anticipated situation, but it must also 'work' if things don't go quite the way either party expected. This is the reason lawyers will think of situations that may arise and consider the outcome of the situation under the contract. Experienced lawyers will have an idea of the type of situations that may arise, but will still discuss with their clients the possible contingencies to get a better idea what purposes the contract may serve.
When discussing contingencies with a client, I often discover that they had not yet thought about these issues. The resulting discussion and enhancements to the contract can bring the client a sense of satisfaction that the i's have been dotted.
So, what do you do when the other side to your deal says "you don't need a lawyer; my word is my bond"? I think you have two choices: Either try to explain the benefits to both sides of a well-written contract or run for the hills.
Tuesday, November 18, 2008
Tuesday, November 11, 2008
Demand Letters
A 'demand letter' may be an inexpensive way to resolve a matter or it may just be another stepping stone on the way to litigation.
Clients frequently approach me to write demand letters for them. In a typical scenario, the client has a contract with another person and the other person has failed to live up to their part of the bargain. The client may not want to jump directly into the world of litigation (which is understandable), so a demand letter may help.
A demand letter is essentially a letter from an attorney that makes a demand on someone to do something. The letter sets forth the facts of the case, the particular complaint (how the contract was violated) and the legal principles involved. Although any client can write a letter to another person making such a demand, the involvement of the attorney can make a difference - showing the other person that the client is serious about the matter and willing to involve the attorney to resolve the matter.
In the breach of contract example, I might write a letter to the other person who defaulted under the contract and demand, on behalf of the client, that the other person pay the client a specific sum. The letter may instead demand the other person to take a particular action, as required by the contract or as suggested by the client as a means for a settlement. The client provides the direction, letting me know what demand they want me to make on their behalf.
My preferred approach is to prepare a draft letter and give it to the client to review. This gives the client the opportunity to correct factual mistakes and confirm that they want the letter to be sent. Once the letter is finalized, I sign it and send it certified mail (and, often, facsimile as well). I usually include a deadline in the demand letter by which the other person must act.
In my experience, demand letters 'work' more than half of the time - but they are certainly not universally effective. Some people will receive a demand letter and will respond quickly to avoid further legal process. On the other hand, some people will ignore a demand letter entirely and wait for the lawsuit to be filed. It's not always easy to tell which type of person you are dealing with (and people will surprise you!).
Obviously, the demand letter approach holds the most benefit when the other person is willing to negotiate a settlement and avoid litigation. Such a settlement greatly reduces the costs, time involvement and hassles of the parties. This can be a real win-win for all involved.
Clients frequently approach me to write demand letters for them. In a typical scenario, the client has a contract with another person and the other person has failed to live up to their part of the bargain. The client may not want to jump directly into the world of litigation (which is understandable), so a demand letter may help.
A demand letter is essentially a letter from an attorney that makes a demand on someone to do something. The letter sets forth the facts of the case, the particular complaint (how the contract was violated) and the legal principles involved. Although any client can write a letter to another person making such a demand, the involvement of the attorney can make a difference - showing the other person that the client is serious about the matter and willing to involve the attorney to resolve the matter.
In the breach of contract example, I might write a letter to the other person who defaulted under the contract and demand, on behalf of the client, that the other person pay the client a specific sum. The letter may instead demand the other person to take a particular action, as required by the contract or as suggested by the client as a means for a settlement. The client provides the direction, letting me know what demand they want me to make on their behalf.
My preferred approach is to prepare a draft letter and give it to the client to review. This gives the client the opportunity to correct factual mistakes and confirm that they want the letter to be sent. Once the letter is finalized, I sign it and send it certified mail (and, often, facsimile as well). I usually include a deadline in the demand letter by which the other person must act.
In my experience, demand letters 'work' more than half of the time - but they are certainly not universally effective. Some people will receive a demand letter and will respond quickly to avoid further legal process. On the other hand, some people will ignore a demand letter entirely and wait for the lawsuit to be filed. It's not always easy to tell which type of person you are dealing with (and people will surprise you!).
Obviously, the demand letter approach holds the most benefit when the other person is willing to negotiate a settlement and avoid litigation. Such a settlement greatly reduces the costs, time involvement and hassles of the parties. This can be a real win-win for all involved.
Thursday, November 6, 2008
Future Changes in Federal Tax Laws
As has been discussed before in this blog, federal law imposes a 'death tax' on the estates of decedents, generally referred to as the federal estate tax. In addition, the IRS collects a federal gift tax, which is imposed on gifts made during a person's lifetime.
Happily, there are a variety of exemptions and deductions to reduce these taxes; as a result, most people never pay any estate or gift tax at all. For example, there is an unlimited marital deduction from both taxes, so that gifts between spouses are not taxed. Charitable gifts are also generally deductible.
The federal estate tax also allows for a $2 million exemption from the tax. This means I can leave up to $2 million in my estate to anyone without an estate tax obligation. (Coupled with the unlimited marital deduction, I could leave $100 million to my wife and $2 million to my children and no estate tax would be payable!)
The federal gift tax allows for a $12,000 annual exclusion. This allows me to give $12,000 this year to everyone in Naples, Florida without paying any federal gift tax. In addition, each of us has a $1 million gift tax exemption. So, if I give my daughter a home worth $500,000, I don't have to pay any federal gift taxes on that gift.
Please note: The $1 exemption is cumulative during your lifetime, not per person per year like the $12,000 annual exclusion. Also, the IRS requires a report be filed to notify the IRS when we use a portion of our gift tax exemption amount.
That's the situation today. What does the future hold?
The federal estate tax exemption amount will increase to $3.5 million on January 1, 2009, in accordance with the laws on the books today. Even better, the entire federal estate tax is scheduled to be repealed on January 1, 2010. Don't get too excited, however; the repeal is for only one year. On January 1, 2011, the estate tax is scheduled to return with a much-reduced $1,000,000 exemption amount. The gift tax exemption amount is frozen at $1 million for the foreseeable future.
These future changes are by no means certain. Congress can (and often does) change the exemption amounts with the proverbial stroke of a pen. So what will happen?
President-Elect Barack Obama campaigned on a promise to hold the estate tax exemption amount at $3.5 million. It appears that Obama will enjoy solid majorities in both houses of Congress for at least two years. Accordingly, he should have little difficulty in keeping his promise (particularly given that Republicans would certainly not push for a lower exemption amount). Of course, this begs the question whether he will want to keep this promise.
It is likely that Congress will act in this area some time during 2009 because Democrats are reportedly not happy with the idea of a complete repeal of the estate tax in 2010. So, you can expect to hear debate on tax issues in general, and estate and gift tax exemption amounts in particular, next year.
Happily, there are a variety of exemptions and deductions to reduce these taxes; as a result, most people never pay any estate or gift tax at all. For example, there is an unlimited marital deduction from both taxes, so that gifts between spouses are not taxed. Charitable gifts are also generally deductible.
The federal estate tax also allows for a $2 million exemption from the tax. This means I can leave up to $2 million in my estate to anyone without an estate tax obligation. (Coupled with the unlimited marital deduction, I could leave $100 million to my wife and $2 million to my children and no estate tax would be payable!)
The federal gift tax allows for a $12,000 annual exclusion. This allows me to give $12,000 this year to everyone in Naples, Florida without paying any federal gift tax. In addition, each of us has a $1 million gift tax exemption. So, if I give my daughter a home worth $500,000, I don't have to pay any federal gift taxes on that gift.
Please note: The $1 exemption is cumulative during your lifetime, not per person per year like the $12,000 annual exclusion. Also, the IRS requires a report be filed to notify the IRS when we use a portion of our gift tax exemption amount.
That's the situation today. What does the future hold?
The federal estate tax exemption amount will increase to $3.5 million on January 1, 2009, in accordance with the laws on the books today. Even better, the entire federal estate tax is scheduled to be repealed on January 1, 2010. Don't get too excited, however; the repeal is for only one year. On January 1, 2011, the estate tax is scheduled to return with a much-reduced $1,000,000 exemption amount. The gift tax exemption amount is frozen at $1 million for the foreseeable future.
These future changes are by no means certain. Congress can (and often does) change the exemption amounts with the proverbial stroke of a pen. So what will happen?
President-Elect Barack Obama campaigned on a promise to hold the estate tax exemption amount at $3.5 million. It appears that Obama will enjoy solid majorities in both houses of Congress for at least two years. Accordingly, he should have little difficulty in keeping his promise (particularly given that Republicans would certainly not push for a lower exemption amount). Of course, this begs the question whether he will want to keep this promise.
It is likely that Congress will act in this area some time during 2009 because Democrats are reportedly not happy with the idea of a complete repeal of the estate tax in 2010. So, you can expect to hear debate on tax issues in general, and estate and gift tax exemption amounts in particular, next year.
Tuesday, November 4, 2008
The Best of Both Worlds
A question I receive with some frequency is whether to form a new company as an LLC or an S corporation.
I like this question for two reasons: First, it shows people have already done some homework. They understand some of the basic issues to be addressed when setting up a new company. Second, it allows me to give them a really fun answer.
The answer? Do both!
Here's the reason: The term 'LLC' (or 'limited liability company') is a STATE law designation given to the type of entity formed. Same with 'corporation' or 'limited partnership'. On the other hand, the term 'S corporation' is a FEDERAL tax term given to an entity that has been recognized by the IRS for a particular type of tax treatment.
So, form the new company as an LLC, then file the necessary paperwork (IRS Form 2553) to obtain IRS recognition that your LLC is to be taxed for federal income taxes as an S corporation. This treatment may not be the best approach for every new business, but it does make a lot of sense for many new businesses.
Fun answer, huh?
I like this question for two reasons: First, it shows people have already done some homework. They understand some of the basic issues to be addressed when setting up a new company. Second, it allows me to give them a really fun answer.
The answer? Do both!
Here's the reason: The term 'LLC' (or 'limited liability company') is a STATE law designation given to the type of entity formed. Same with 'corporation' or 'limited partnership'. On the other hand, the term 'S corporation' is a FEDERAL tax term given to an entity that has been recognized by the IRS for a particular type of tax treatment.
So, form the new company as an LLC, then file the necessary paperwork (IRS Form 2553) to obtain IRS recognition that your LLC is to be taxed for federal income taxes as an S corporation. This treatment may not be the best approach for every new business, but it does make a lot of sense for many new businesses.
Fun answer, huh?
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