Umbrella Insurance: What It Is and Why You Need It

June 21, 2015

umbrellaLawsuits are everywhere. What happens when you are found to be at fault in an accident, and a significant judgment is entered against you? A child dives head-first into the shallow end of your swimming pool, becomes paralyzed, and needs in-home medical care for the rest of his or her lifetime. Or, you accidentally rear-end a high-income executive, whose injuries prevent him or her from returning to work. Either of these situations could easily result in judgments or settlements that far exceed the limits of your primary home or auto insurance policies. Without additional coverage, your life savings could be wiped out with the stroke of a judge’s pen.

Typical liability insurance coverage is included as part of your home or auto policy to cover an injured person’s medical expenses, rehabilitation or lost wages due to negligence on your part. The liability coverage contained in your policy also cover expenses associated with your legal defense, should you find yourself on the receiving end of a lawsuit. Once all of these expenses are added together, the total may exceed the liability limits on the home or auto insurance policy. Once insurance coverage is exhausted, your personal assets could be seized to satisfy the judgment.

However, there is an affordable option that provides you with added liability protection. Umbrella insurance is a type of liability insurance policy that provides coverage above and beyond the standard limits of your primary home, auto or other liability insurance policies. The term “umbrella” refers to the manner in which these insurance policies shield your assets more broadly than the primary insurance coverage, by covering liability claims from all policies “underneath” it, such as your primary home or auto coverage.

With an umbrella insurance policy, you can add an addition $1 million to $5 million – or more – in liability coverage to defend you in negligence actions. The umbrella coverage kicks in when the liability limits on your primary policies has been exhausted. This additional liability insurance is often relatively inexpensive in comparison to the cost of the primary insurance policies and potential for loss if the unthinkable happens.

Generally, umbrella insurance is pure liability coverage over and above your regular policies. It is typically sold in million-dollar increments. These types of policies are also broader than traditional auto or home policies, affording coverage for claims typically excluded by primary insurance policies, such as claims for defamation, false arrest or invasion of privacy.

Top 3 Real Estate Tips for Small Businesses

June 10, 2015

real-estate-tipsThe only real estate transaction most small businesses engage in is to enter into a lease for commercial space. Whether you are considering office, manufacturing or retail space, the following three tips will help you navigate the negotiation process so you can avoid costly mistakes.

“Base Rent” is Not the Only Rent You Will Pay

Most prospective tenants focus their negotiation efforts on the “base rent,” the fixed monthly amount you will pay under the lease agreement. You may have negotiated a terrific deal on the base rent, but the transaction may not be the best value once other charges are factored in. For example, many commercial lease agreements are “triple net,” meaning that the tenant must also pay for insurance, taxes and other operating expenses. When negotiating “triple net,” ensure you aren’t being charged for expenses that do not benefit your space, and that you are paying an amount that is in proportion to the space you utilize in the building. Another provision to watch for is tenant’s responsibility to also pay a pro rata share of increases in real estate taxes. 

There’s No Such Thing as a “Form Lease”

Most commercial property owners and managers offer prospective tenants a pre-printed lease containing your name and various terms. They present these documents often with a rider, and adamantly explain that it is the landlord’s “typical form lease.” This, however, does not mean you cannot negotiate. Review every provision in the agreement, bearing in mind that all terms are open for discussion and negotiation. Pay particular attention to the specific needs of your business that are not addressed in the “form lease.”

Note the Notice Requirements

Your lease agreement may contain many provisions that require you to send notices to the landlord under various circumstances. For example, if you wish to renew or terminate your lease at the end of the term, you will likely owe a notice to the landlord to that effect, and it may be due much earlier than you think – sometimes up to a year or more. Prepare a summary of the key notice requirements contained in your lease agreement, along with the due dates, and add key dates to your calendar to ensure you comply with all notice requirements and do not forfeit any rights under your lease agreement.

Limited Liability Company (LLC): An Overview

May 19, 2015

llcThe limited liability company (LLC) is a hybrid type of business structure, offering business owners the best of both worlds: the simplicity of a sole proprietorship or partnership, with the liability protection of a corporation. A limited liability company consists of one or more owners (called “members”) who actively manage the company’s business affairs. LLCs are relatively simple to establish and operate, with minimal annual filing requirements in most jurisdictions.
The best form of business structure depends on many factors, and must be determined according to your particular business and overall goals:

Advantages

  • LLC members enjoy a limited liability, similar to that of a shareholder in a corporation. In general, your risk is limited to the amount of your investment in the limited liability company. Since none of the members will have personal liability and may not necessarily be required to personally perform any tasks of management, it is easier to attract investors to the limited liability company form of business than to a general partnership.
  • LLC members share in the profits and in the tax deductions of the limited liability company while limiting the potential financial risks.
  • LLCs offer a relatively flexible management structure. The business may be managed either by members or by managers. Thus, depending on needs or desires, the limited liability company can be a hands-on, owner-managed company, or a relatively hands-off operation for its members where hired managers actually operate the company.
  • Because the IRS treats the limited liability company as a pass-through entity, the profits and losses of the company pass directly to each member and are taxed only at the individual level (which may or may not be an advantage to you, depending on the profitability of the LLC and your personal income tax bracket).
  • Members of an LLC have flexibility in dividing the profits and losses. In a corporation or partnership, profits must be divided according to percentage of ownership. However, with an LLC, special allocations are permitted, so long as they have a “substantial economic effect” (e.g. they must be based upon legitimate economic circumstances, and may not be used to simply reduce one member’s tax liability).

Disadvantages

  • Limited liability companies are, generally, a more complex form of business operation than either the sole proprietorship or the general partnership. They are subject to more paperwork requirements than a simple partnership but less than a corporation. Annual filings typically include statement and nominal filing fee payable to the Secretary of State, informational returns to the IRS, and filing of a state tax return.
  • In certain jurisdictions, single member LLCs may not be afforded the same level of limited liability protection as that of an incorporated entity.

Also note that in many states, an LLC is prohibited from rendering “professional services” which can include companies providing services that require a license, registration or certification.   Such professionals typically have to establish a Professional LLC which does not offer limited liability for professional malpractice.

Should I Incorporate My Business?

March 17, 2015

incorporateThe primary advantages of operating as a corporation are liability protection and potential tax savings. Like any important decision, choosing whether to incorporate involves weighing the pros and cons of the various business structures and should only be done after careful research.

Once incorporated, the business becomes a separate legal entity, and assets of the corporation are separated from the owner’s personal finances. As a result, the owner’s personal assets generally can be shielded from creditors of the business.

To maintain this legal separation and avoid “piercing the corporate veil,” the corporation must observe certain formalities, including:

  • Keeping corporate assets and personal assets separate (no commingling of funds)
  • Holding shareholder and director meetings at least annually
  • Maintaining a corporate record book including bylaws, minutes of shareholder and director meetings, and shareholder records
  • Filing annual information statements with the Secretary of State
  • Filing a separate tax return for the corporation

Many business owners are concerned about “double taxation” of income that affects certain types of corporations known as “C-Corporations”.   Double taxation results when the C-corporation has profit at the end of the year that is distributed to the shareholders. That profit is taxed to the corporation, at the corporate tax rate, and then the dividends are taxable income to the shareholders on their personal tax returns. However, the corporate tax and dividend rates can be lower than the individual tax rate that a sole-proprietor would pay on a 1040 Schedule C, and a knowledgeable accountant or tax attorney may be able to advise on how to minimize the burden of double-taxation and indeed pay an effective tax rate which is lower than what a sole proprietor would pay.

For example, a small C-Corporation will likely have a shareholder who is also an employee. Paychecks to the shareholder/employee are, of course, tax deductible to the business. To the shareholder/employee, they are taxable income (as would be the case with a paycheck from any employer). A bonus could be paid to the shareholder/employee in order to lower the corporation’s taxable profit, eliminating the double-taxation. These calculations should be performed by a tax advisor, but shifting income from the corporation to the shareholder/employee (or not, depending on which has the lower tax rate) can be an effective way to lower your overall tax liability. In addition, there are certain advantages that are only available with a C-Corporation, such as full tax-deductibility of medical benefits for a shareholder/employee.

The S-Corporation avoids the double-taxation by offering a tax structure similar to the Limited Liability Company. A corporation with 100 or fewer shareholders can elect to be treated as an S-Corporation. If the corporation is profitable, the shareholder/employee must draw a reasonable salary (and pay employment tax on it), but then all remaining corporate profits flow through to the shareholder’s personal tax return (thereby avoiding the FICA tax on the portion of profits that is taken as a dividend).

An experienced attorney can help you decide which form of ownership is best for your business, help you establish the entity, and ensure the required formalities are observed.