• Limited Liability Companies
• Real Estate
• Estate Planning
• Elder Care
• ADA Update
• Commercial Leases

Before 1990, only two states allowed the formation of limited liability companies (LLCs). By the middle of 1996, legislation authorizing businesses to be created and operated as LLCs was in place in all 50 states and the District of Columbia. The appeal of an LLC is based on its status as a hybrid between a partnership and a corporation, the more traditional business forms. An LLC combines the most advantageous characteristics of each of the older entities. 

Limited Liability 

Like shareholders of a corporation, the owners (called "members") of an LLC generally have liability that is limited to the amount of money they have invested. Unless the documents under which the LLC is formed provide otherwise, a member or manager will not have personal liability for the debts of the LLC. 

Tax Treatment 

For income tax purposes, the earnings of an LLC usually are treated like earnings of a partnership or a sole proprietorship. This means that income, losses, and other tax attributes are "passed through" to the LLC members. An advantage of this is that the earnings are taxed only once, when they are received by the members. Corporate income is taxed when earned by the corporation, and again when it is distributed as dividends to the shareholders. 

Previously, the classification of an LLC for purposes of federal taxes depended on an examination of whether the LLC had any of several corporate characteristics. On January 1, 1997, the Internal Revenue Service issued new regulations that are simpler and give more flexibility to members of an LLC. On IRS Form 8832, the members of most domestic LLCs can choose the entity's tax classification. 

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Management 

An LLC resembles a general partnership in the flexibility of its management structure and ownership. In most cases, members of an LLC are free to set up an organizational structure on which they agree. An LLC can follow the corporate model by using a manager or managers and leaving members out of day-to-day management of the business. Without managers, members of an LLC, much like partners in a general partnership, have a direct say in the company's decisionmaking. 

The governing document for an LLC is called the "articles of organization." Most state laws make member management the rule by default if managers are not chosen in the articles of organization. Similarly, unless the articles reflect that an LLC is a term company and state the duration of that term, the company will be at will. An at-will LLC can be dissolved more easily than a term company and its members can demand payment of the value of their interests at any time. Members of a term company usually must wait until the term expires to obtain the value of their interests. 

State Statutes Control 

While the LLC is now universally available, procedural and substantive requirements are controlled by statutes that can vary considerably from state to state. Such statutes often give the answers to some important questions, such as: 

(1) May a company be formed and operated by only one owner? 

(2) May a company be formed for purposes other than to make a profit? 

(3) Who has the authority to bind the company and what are the limits of that authority? 

(4) Do the owners have the right to sue a company and other owners in their own right, as well as on behalf of the company? 

(5) May partnerships be converted to LLCs and may LLCs merge with other business organizations? 

Notwithstanding the advantages of an LLC, getting one up and running entails more paperwork than an ordinary partnership. The articles of organization must be carefully prepared and filed with the state, and various fees must be paid. Therefore, anyone considering the creation of an LLC should seek competent legal, business, and tax advice before proceeding. 

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Barry and Sandra hired a contractor to build their "dream-come-true house." The home was specifically designed and structurally engineered for the couple. The contractor promised a turnkey operation in which he would use his own framing crew and would closely oversee his workers. Barry, Sandra, and their baby girl moved into the house six weeks later than the deadline they had given the contractor. While such a delay is not unusual, in hindsight it may have been an omen of future disappointments. In very little time, the dream house turned into a nightmare. 

With the first rain, the house leaked heavily from every conceivable location. Walls became saturated and three inches of standing water accumulated in the living room. The contractor's efforts over a period of a few months to find the source of the leaks and repair them were not only ineffective, but they made the house more unlivable as workers used sledge hammers and jackhammers to cut holes in walls and ceilings. 

Fearing the worst, Barry and Sandra hired another contractor and a structural engineer to inspect their home. They discovered that the leaks were only the tip of the iceberg. Among other problems, load-bearing walls were improperly installed, turrets on the roof were beginning to fall, three decks were in danger of collapsing, and a foundation that needed to support 12,000 pounds was built to support only 2,000 pounds. When Barry and Sandra sued the contractor, their expert witness testified that instead of describing the deficiencies in the house, it almost would be easier to list what was not wrong with it. 

In most cases, a contract for construction of a house affects only property or financial interests. In the event of a breach of the contract, damages for emotional distress, as distinct from repair costs, are the exception, not the rule. In Barry's and Sandra's case, they recovered damages not only for emotional distress but also for physical pain and suffering and lost earnings suffered by Barry. He was so distraught over the condition of the house that the excessive stress led to a permanent heart condition, with attendant ailments that forced him to cut back on his duties at work. 

Two key findings by the court led it to the award of such damages. First, the contractor's failure to build the home in a workmanlike manner caused the mental anguish. Second, such negligence created a threat of physical injury to Barry and Sandra because the defects in the house could cause it, or parts of it, to collapse. 
 

There soon will be two million Americans living in over 15,000 nursing homes, and the aging of the baby boomers is likely to keep these numbers rising. With its inconsistent record of providing adequate care and treatment to residents, the nursing home industry has been subjected to legislation at the federal and state levels that sets minimum standards. 

The most significant of these laws is found in the Medicare and Medicaid sections of the federal Code. While the problem was national in scope and therefore prompted federal legislation, Congress also has required each of the states to enact a Bill of Resident Rights with protections that are at least as strong as those in the federal statutes. 

In light of how financially dependent nursing homes are on federal reimbursement through Medicare and Medicaid, Congress used possible loss of Medicare and Medicaid certification as a "big stick" to prompt compliance by covered facilities. Federal or state officials also have a range of lesser sanctions to use against violators, including civil money penalties and appointment of temporary management to assure the health and safety of residents. Wronged residents or their relatives may have common-law remedies available to them for tort or breach of contract, but these depend on state law and whether a court would find that they are preempted by the extensive federal regulatory structure that has been created. 

The federal statutes are lengthy and detailed. Advice of legal counsel is necessary to insure that all of the rights of a particular resident are being safeguarded. The rights cover a wide range, including such things as freedom to choose a physician, freedom from abuse and restraints, privacy, confidentiality of medical and personal records, prompt resolution of grievances, reasonable accommodation of individual needs and preferences, equal access to quality care, evenhanded treatment of Medicare and Medicaid recipients, and many other rights relating to the daily living and treatment aspects of elder care facilities and the attendant caregivers. 

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For years, Dennis, a technical designer for a telephone company, suffered from depression and anxiety-related disorders, including a nervous breakdown. After taking disability leave made necessary by a relapse, he returned to work and was assigned to work closely with a partner on a project. From the start, the two had trouble working together, which steadily increased the stress level for Dennis. 

When meetings with the co-worker and then with supervisors failed to resolve the problems, Dennis asked to be transferred to a position with different co-workers and lower stress. Without the change, he maintained that he would "pop." No action was taken on the request and soon Dennis went out on a disability leave from which he never returned. 

Dennis sued his former employer under the Americans with Disabilities Act (ADA). He argued that he had a mental disability and that the telephone company did not meet its obligation under the ADA to make reasonable accommodations that allow a disabled individual to perform the essential functions of a job. Federal trial and appellate courts agreed that Dennis had no case. 

There are limits to what employers can be required to do to create a situation in which a disabled person can perform a job. Dennis's request to be transferred away from individuals causing him "prolonged and inordinate stress" exceeded those limits. The employer could hope for no more than temporary compliance as Dennis's stress levels changed, often because of variables out of the employer's control. 

There also was tremendous potential for abuse of such a vague standard. The proposed accommodation would entail heavy administrative burdens as supervisors would be required to consider the anxiety-producing effects on Dennis of virtually every decision affecting him in some way. Unlike more practical and limited accommodations that have been required by the courts, the request by Dennis went beyond simply equalizing opportunities available to the disabled. Instead, it sought to interfere with one of an employer's most basic prerogatives--the right to decide with whom an employee will work to accomplish a task. 
 

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A pizza restaurant entered into a written lease for retail space. Its president signed the lease. At the same time, he signed a guaranty agreement that was incorporated in the lease by reference. He signed his name to the guaranty, followed by the word "President." The guaranty imposed obligations on a party designated in the body of the agreement only as the "guarantor" or the "undersigned." 

The restaurant went bankrupt and the landlord looked to the president personally to make good on the tenant's obligations under the law. The president claimed no liability on the ground that he signed only in his capacity as an officer of the company, as was indicated by his adding the word "President" after his signature. A state supreme court ruled in favor of the landlord. 

Generally, if the guaranty itself contains clear language binding or not binding the person who signs it, additional descriptive language after the signature will not affect that personal liability or lack thereof. If the agreement itself is unclear on the point, as happened in the case before the court, the words following the signature may create an ambiguity that allows the court to consider matters outside the "four corners" of the guaranty in resolving the issue. 

Any commercial agreement must be given a commercially reasonable construction. In the court's view, the only reasonable interpretation of the guaranty was that the president was personally obligated as a guarantor. First, any ambiguity was created by the president with his addition of the word "President," and ambiguities as a rule are resolved against the party who drafted the language. Second, the only reasonable interpretation of the guaranty was that the president, as an individual, was the guarantor. If the signature was only in a representative capacity, the restaurant effectively would have been both tenant and guarantor, rendering the guaranty provisions absurd. A business cannot be a guarantor of its own obligations. 

Aside from its legal analysis, the court observed that the whole issue could have been avoided by careful attention to the language of the guaranty itself and better communication between the parties. If the president did not intend to expose himself to personal liability, he should have said so orally and, more importantly, in clear language in the body of the agreement. 

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There are several ways of reducing estate tax liability through the use of gifts. For instance, if the owner of property that is expected to appreciate in value gives such property away during his lifetime, the appreciation that occurs subsequent to the gift will escape taxation. Of course, an outright gift of property will result in the owner's loss both of control of the property and of any benefit to be derived from it. Those who wish to avoid these negative aspects of gift giving should consider transfers in trust, where the grantor retains a beneficial interest. There are several possibilities, including three outlined below. 

Grantor Retained Income Trusts (GRITs) 

The grantor retained income trust, or GRIT, was popular in the 1980s. Although its usefulness in its basic form has been undermined by law, its mechanics provide an understanding of the types of retained interest trusts that are currently useful. 

A GRIT is an irrevocable trust to which the grantor transfers the property in question, reserving an income interest for himself. The grantor's income interest, and thus the trust, terminates at the end of a fixed period or at the grantor's death, if his death occurs earlier. 

The idea is to select a period of years that will give the grantor's income interest a substantial value but which is a period that the grantor will outlive. The gift tax will be payable only on the value of the remainder interest (the difference between the full value of the property and the grantor's income interest). Appreciation of the asset's value will thus escape taxation. If the grantor survives the period of the trust, his income rights will terminate and the remaindermen will take full title. If the grantor dies before the trust's termination, at least a portion of the asset will be included in the grantor's estate for federal estate tax purposes and the advantage of the GRIT will be reduced. 

The usefulness of the standard GRIT was largely eliminated by legislation that provided that where the beneficiary is a member of the grantor's family (spouse, ancestor, or lineal descendant), if the value retained by the grantor is not a "qualified interest," the retained interest will be valued at zero. The result is that there will be no reduction from the property's full value for purposes of calculating the gift tax and thus no tax advantage in establishing the trust. 

Qualified Interest--GRATS and GRUTS 

The rule that destroyed the usefulness of a GRIT involving family members does not apply where the grantor retains a qualified interest. A grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT) can produce such a qualified interest. 

A GRAT is an irrevocable trust that provides that the grantor is to receive, at least annually, a sum equal to a fixed percentage of the value of the assets originally placed in the trust for a stated period of time or until the grantor's death, if it occurs sooner. The payment to the grantor of a percentage of the trust assets establishes the arrangement as an annuity. 

Where the trust is a GRUT, the only difference from the GRAT is that the amount to be paid to the grantor at least annually, the unitrust amount, is a fixed percentage of the value of the trust's assets as valued annually during the trust's term. Thus, the unitrust amount to be received by the grantor is most likely going to be different each year, as opposed to the annuity payment in a GRAT, which is a fixed amount. 

Except for the annuity feature of the GRAT and the unitrust feature of the GRUT, these qualified trusts are indistinguishable from a GRIT, and the discussion above explaining the tax savings potentially yielded by a GRIT is equally applicable to a GRAT and to a GRUT. 

The foregoing sets forth the basic rules and concepts concerning GRITS, GRATS, and GRUTS, with no attempt to touch on technical requirements and variations. These trusts are certainly not for everyone, and, given the fact that they do involve irrevocable transfers, there should be careful planning with the help of a qualified professional before deciding to use such an estate planning device. 

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