Proper LLC Tax Election May Save Money

There are many factors that a business owner must consider when deciding whether to establish an LLC or a corporation.  (See YouTube video at: https://www.youtube.com/watch?v=_o2bPSaQRbI).  While both LLCs and corporations provide equivalent liability protection, LLCs have grown in popularity over the last decade, primarily due to the ease with which they can be organized.  In addition, unlike C-corporations, LLCs are not required to pay a separate corporate tax. 

Many business owners do not realize that an LLC can be taxed in a few different ways. In order to maximize the tax benefits of establishing an LLC, the business owner should choose the correct tax election in consultation with an experienced tax consultant.  This article is a basic summary of the different ways in which an LLC can elect to be taxed. This article is only an outline and any tax election decision should be made in consultation with an experienced tax consultant.

If the LLC does not make any tax election, then by default, a single member LLC will be treated as a “disregarded entity” for federal tax purposes, and a multi-member LLC will be classified as a “partnership” for federal tax purposes.  In such event, the LLC is not considered to be the “employer” of the member(s), and the member(s) are not considered to be “employees” of the LLC.  In lieu of the FICA payroll taxes that employees and employers of other business entities are required to pay, the members pay self-employment taxes pursuant to SECA in addition to their regular income taxes.

The LLC may avoid the default tax treatment described above if it timely chooses to be taxed as a C-corporation or as a Sub-S corporation.  (See http://www.irs.gov/publications/p3402/ar02.html).  While it does not usually make sense for an LLC to elect to be taxed as a C-corporation, since such election destroys one of the principle reasons for establishing the LLC (i.e. the avoidance of the corporate tax), it might make sense for the LLC to elect to be taxed as a Sub-S corporation.  The primary reason is that if the LLC elects to be taxed as a Sub-S corporation, then the members can be treated as employees of the LLC and pay themselves “reasonable compensation” as W2 wages subject to FICA payroll taxes (in lieu of SECA taxes).  The members can also pay themselves any remaining company profits as distributions.  In many cases, the SECA tax rate is higher than the FICA tax rate, and thus the members may save on taxes by establishing the employer/employee relationship. In addition, in most cases, the excess distributions from a Sub-S corporation to the members are not subject to FICA taxes or SECA taxes, and the members need only pay regular income taxes on such income.  Of course, the IRS carefully scrutinizers the tax treatment of sub-S corporations in order to prevent tax avoidance, and the sub-S election is not appropriate for all business owners.   

Another tax consideration for the business owner to consider is how the income, deductions, gains, losses and tax credits will be allocated to the members of a multi-member LLC.  The operating agreement of the LLC should specify this allocation.  (See YouTube video at: https://www.youtube.com/watch?v=DiLfBzKNAeM)  While the IRS gives the LLC flexibility for such allocation, it also imposes limitations to prevent an LLC from allocating disproportionate losses to high income earners for the purpose of offsetting income from outside sources.  A Sub-S corporation is required to allocate these items consistent with ownership percentages. The members are required to have a basis in the entity in order to deduct losses currently.

In order to maximize the tax benefits of establishing an LLC, the business owner should consult with an experienced tax consultant regarding tax elections and the tax provisions of the LC's operating agreement.  Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed.

For assistance in organizing an LLC, contact Gross & Romanick at 703-273-1400, or contact Edward Gross directly at law@gross.com. 

This article was edited by Thomas G. Jenkins, CPA, of Thomas Jenkins and Company, P.C., whose office is located in Camp Springs, Maryland.  Thomas G. Jenkins may be contacted directly at 301-423-4474.

Terrorist Attacks and Landlord Liability

This article briefly discusses the responsibility of commercial property owners for the safety of tenants and building invitees in the event of a terrorist attack.

If a person injured as a result of a terrorist attack at the owner’s property sues the landlord, we expect that the Courts will rely on the general body of “premises liability” case law to decide the lawsuit.  The very general rule espoused by the majority of Courts in the United States is that commercial property owners do not have a duty to protect tenants and invitees from the criminal acts of third parties.  The general exception to the rule is that if imminent harm is foreseeable to the owner, and the owner does not take reasonable steps to warn or protect tenants and invitees of the harm, the owner can be held liable.

These general principles were espoused in the case of Jane Doe v. Dominion Bank of Washington (U.S. Court of Appeals for the District of Columbia), where the Court stated as follows: “A commercial landlord must exercise reasonable care to protect tenants from foreseeable criminal conduct occurring in common areas under the landlord’s control”. The Court further stated that: “D.C. law imposes a heightened standard of foreseeability on plaintiffs seeking to hold a landlord liable for injuries resulting from a criminal act.”  In that case, a rape victim was allowed to proceed with her case because the court found deficient building security in a building where numerous assaults and crimes had taken place. Similarly, in Thompson v. Skate America, the Supreme Court of Virginia allowed the plaintiff to proceed with his case against the owner of a skating rink based on the allegation that the owner failed to protect invitees from the criminal acts of an individual that the owner knew was a menace to patrons of the skating rink (and had been ejected from the rink on prior occasions). 

Given the fact that large-scale terrorist attacks by their very nature are not predictable, we do not expect that commercial property owners will be held liable for injuries and property losses to tenants and invitees just because the injuries/losses occur on the owner’s property (although every case is different and will be decided on its own merits).  Rather, individuals and families will need to look to insurance companies, government funds and charitable organizations for compensation, as was the case in the wake of the 9/11 attacks (See http://www.rand.org/pubs/research_briefs/RB9087/index1.html). 

This raises the question:  What should commercial property owners do to limit potential liability? The first thing the owner can do is review its insurance policies to determine whether the owner is covered from terrorist attacks.  Many policies specifically exclude terrorism.  The second thing the owner should do is review its emergency preparedness plan for the building with its property managers and tenants. The plan should not address terrorism specifically, but rather, should provide general guidance to property managers and tenants regarding notification and evacuation in the event of an emergency or other imminent harm to the building or its occupants (including terrorist attacks). The existence of such a plan and the adherence to the plan in the event of an emergency could improve the landlord’s position if the landlord is sued for negligence following a terrorist attack.  Finally, the landlord may want to consult with a security firm regarding the building’s exposure to criminal activity and determine whether simple measures could be installed to deter such activity (such as installing cameras or additional locks).

In short, taking action to specifically prevent terrorist acts may in many cases be counterproductive and is not required by law, but planning for general emergencies (including terrorist acts) may limit the property owner’s exposure to liability.

Ebola Virus: Guidance for Commercial Landlords

With the  number of individuals positively diagnosed with the Ebola virus disease on the rise in the United States, commercial landlords are understandably concerned about their responsibilities and their potential liability to tenants, invitees and employees.  Common questions include the following: Could a person that contracts the disease at the landlord’s property sue the landlord for damages?  Could the landlord be forced to tear down its property if the disease is spread on site, as was the case for the Reston facility described in The Hot Zone: A Terrifying True Story (the best-selling 1994 non-fiction thriller by Richard Preston)?

This article attempts to provide commercial landlords with some basic guidance for Ebola-related matters.  Past crisis situations such as the 9/11 attacks and outbreaks of legionnaire’s disease are instructive to landlords.

What action should a landlord take now to reduce potential liability to tenants?

First, contact your insurance carrier. Determine if your existing policy provides coverage for the decontamination, loss of income and potential liability to tenants in the event property is closed for a period of time as a result of a possible Ebola contamination. Some policies exempt claims caused by or related to Ebola.  Here is a link to an article that discusses concerns a landlord may want to raise with its own insurance carrier:

http://www.aon.com/ebola-response/attachments/Property_and_Ebola_Coverage_Considerations-102014.pdf

 

Second, you should review your general emergency preparedness plan with your property manager.  If you do not have an emergency preparedness plan, you should consider adopting one.  The plan need not (and should not) specifically address Ebola disease; but rather, should generally address how the property manager should respond in the event of an emergency with respect to notification of tenants and evacuation of the property.

Unlike mold, radon or pest controls, there is no reasonable method by which the landlord can prevent a person infected with Ebola from entering the Premises.  There are no laws or regulations requiring landlords to take action with respect to Ebola disease. Accordingly, the landlord should not assume any responsibility in that regard, as it could only increase the landlord’s potential liability should Ebola disease be transmitted on the landlord’s property.  

The New Jersey case of Vellucci v. Allstate Insurance Company, New Jersey, Appellate Division, May 23, 2013, is instructive for how a court would probably treat a landlord in an Ebola case.  In that case, the plaintiff contracted Legionnaire’s disease from the water in the men’s bathroom and later died.  In the suit against the landlord, the court found that the landlord “did not test the water for contaminants” until after the plaintiff contracted the disease.  The plaintiff argued that the landlord had an affirmative duty to test the water at the premises.  The trial court disagreed and dismissed the plaintiff’s claim, which dismissal was confirmed on appeal. The N.J. Court of Appeals stated in its ruling that “Plaintiff did not present any rational basis to impose a duty on [the landlord] to foresee the advent of the Legionella bacteria in the building’s water system. There is no statutory or regulatory scheme imposing a duty on owners and managers of commercial office building to take affirmative action to detect the presence of Legionella.”  And, it further stated that “[t]here are no industry standards that require [the landlord] to have done anything more than what it did in response to the salient facts of this case. Once relevant information concerning decedent’s illness was brought to its attention, [the landlord] took appropriate measures to investigate the matter and ascertain what needed to be done to prevent a recurrence.”  (Also see Flaherty v. Legum & Norman Realty, 2007 U.S. District Court for the Eastern District of Virginia – wrongful death suit by occupant who died of legionnaire’s disease was dismissed by the court for plaintiff’s inability to prove standard of care required by property management company)

We can expect that, if an individual is diagnosed with Ebola disease and exposes the property and the tenants to potential risk, the government authorities will inform the landlord of the situation. Only then will the landlord have a duty to take effective action as discussed below.

Here is a link to an Ebola Crisis Communication Plan: http://www.aon.com/ebola-response/attachments/Ebola-Communication_Checklist.pdf

 

Are there actions that a landlord should take to lessen potential liability to its own employees?

A landlord, like any employer, should avoid providing medical advice to an employee.  Landlords should encourage but not demand that its employees speak with their own doctors about their questions and concerns.  Landlord can also refer employees to the Center for Disease Control (CDC) information page on Ebola (http://www.cdc.gov/vhf/ebola/).

In most cases, if an employee is infected with Ebola disease, the employee will be covered by health insurance and worker’s compensation insurance.  The landlord’s principal concern may actually be protecting the confidentiality of the employee’s medical records, which duty may conflict with the landlord’s obligation to protect other employees and the occupants of the property.  The medical facility that diagnoses the disease will undoubtedly report the finding to the CDC, and the government may determine what should be done with respect to the employee and the property. 

If a person with Ebola disease did enter the property, what should the landlord do?

If someone diagnosed with Ebola enters a building, the landlord should immediately contact the Centers for Disease Control, the local Department of Public Health, its lawyer and its insurance carrier.  We know that in Texas the local government disinfected the residential premises of the infected individual and paid for the operation. In New York, the bowling alley visited by an infected doctor was shut down for a period of time. 

Closing the building raises some tricky legal issues.  On the one hand, keeping the building open leaves the landlord vulnerable to a lawsuit if someone who enters the property does in fact contract Ebola disease. On the other hand, closing the building could render the landlord responsible for the loss of business incurred by tenants who are forced to close. Although decisions will have to be made on a case-by-case basis depending on the particular circumstances in consultation with the landlord’s lawyers, the landlord should probably not close the building absent instructions from the federal, state or local authorities that the building must be closed.  Landlords should review their standard leases to determine if there is a waiver of liability under these circumstances. 

Conclusion

Although it is counterintuitive and contrary to the “must do something” nature of most property owners and managers, from a liability perspective, it is probably best to take no preemptive action with respect to Ebola.  Historically, courts have been reluctant to hold property owners responsible for third-party activities on their properties unless the landlord has clear notice of imminent danger.  In the event that the property is visited by an individual with the Ebola disease, the landlord should notify the governmental authorities and follow their instructions in consultation with their lawyers.

Can you scalp your Washington Nationals playoff tickets?

Can you scalp your Washington Nationals playoff tickets?

The good news is that once again, the Washington Nationals have made it to the MLB Playoffs!  The bad news is that they have their backs against the wall down 2-1 in the Division Series against the Giants.  However, if they manage to fight back and win the next game, they return to Washington with the home field advantage and tickets to the remaining games will be hot!  Whenever one of the local professional sports teams reaches the post-season, tickets to the home playoff games are all but certain to be a hot commodity on the resale market. This raises the question: is it illegal to resell tickets purchased from the team online for profit? 

The answer to this question is unclear to many, for good reason. If you have ever walked the streets surrounding Nationals Park before a game, then you may recall the police proclaiming through their bullhorns that it is illegal to resell tickets and that violators will be arrested. You may have also looked at the fine print on your ticket, which reads as follows:

“NO RESALE OF A TICKET IS PERMITTED VIA THE INTERNET OR ANY OTHER INTERACTIVE MEDIA, EXCEPT THROUGH THE OFFICIAL WEBSITE OF THE WASHINGTON NATIONALS OR SITES AUTHORIZED BY THE WASHINGTON NATIONALS.  THIS TICKET MUST NOT BE RESOLD OR OFFERED FOR RESALE IN A MANNER PROHIBITED BY ANY FEDERAL, STATE OR LOCAL LAW OR REGULATIONS. UNLAWFUL RESALE OR ATTEMPTED RESALE IS GROUNDS FOR REVOCATION AND CANCELLATION WITHOUT COMPENSATION”.

This is certainly enough to deter a cautious person from attempting to resell tickets on the Internet.  At the same time, if you have ever tried to buy a ticket online for a Nationals game, then you know there is a thriving online resale market through websites such as StubHub, where thousands of tickets are bought and sold for each game.  Could thousands of people be breaking the law? The short answer is that for individuals residing in Virginia, Maryland or Washington, D.C., no, the act of reselling tickets online is not illegal.

There is no federal law that directly regulates the act of online ticket reselling, although federal laws do generally regulate the manner in which electronic devices can be used to engage in online commerce (mainly, to prevent fraud).  Ticket reselling is regulated at the state level, and in some cases, at the local government level. The penalties for reselling tickets in violation of the applicable regulations differ from jurisdiction to jurisdiction, and range from small civil fines to possible jail time. In the majority of states, the laws applicable to ticket reselling are out-of-date and were enacted prior to the proliferation of online reselling.

In Virginia, ticket reselling is weakly regulated by the Commonwealth. The Commonwealth defers regulatory authority to local government per Virginia Code § 15.2-969, which provides as follows:

Any locality may provide, by ordinance, that it is unlawful for any person, firm or corporation to resell for profit any ticket for admission to any sporting event, theatrical production, lecture, motion picture or any other event open to the public for which tickets are ordinarily sold, except in the case of religious, charitable, or educational organizations where all or a portion of the admission price reverts to the sponsoring group and the resale for profit of such ticket is authorized by the sponsor of the event and the manager or owner of the facility in which the event is being held. Such ordinance may provide that violators thereof are guilty of a Class 3 misdemeanor. This section shall not apply to any resale of a ticket that occurs on the Internet.

Some localities, including the City of Richmond, have incorporated this language into their local ordinances (See Richmond Code of Ordinance, § 66-2, Scalping of Tickets to Public Events).  Note, however, that the Virginia Code statute expressly excludes ticket resale on the Internet from the statute.  Accordingly, in effect, the local ordinances are only applicable to hand-to-hand cash deals (i.e. traditional ticket “scalping”).       

The State of Maryland does not regulate ticket reselling, other than boxing tickets. Local government does have the ability to regulate ticket scalping, as was the case for many years in the City of Baltimore.  However, the Baltimore City ordinance prohibiting the sale of tickets for more than face value was repealed in 2013 in the wake of a lawsuit filed by a consumer against Ticketmaster for charging excess service charges (See Bourgeois v. Live Nation Entertainment, Inc., et al.).  What the future holds for ticket scalpers in Baltimore remains to be seen, but there is little doubt that Orioles playoff tickets will be “scalped” during postseason play.

In Washington, D.C., the legality of ticket scalping is also in flux. A long-standing statute prohibited the sale of tickets on sidewalks, streets and public spaces, thereby explaining the police and their bullhorns.  However, the statute was (perhaps, inadvertently) omitted from the D.C. Municipal Code in October of 2013.  Emergency legislation was submitted to the D.C. Council in 2014 to reinstate the statute.  All signs indicate that the sale of tickets in public spaces will remain prohibited in the District, but the author of this article was unable to confirm the status of that legislation. Regardless, the online resale of tickets in Washington D.C. is not addressed by the prior statute. 

Accordingly, in Virginia, Maryland and Washington D.C., the act of selling event tickets through online retailers is not, in and of itself, an illegal act. This is not the case in states like New Jersey where ticket resellers are required to obtain a broker’s license or face criminal liability.     

That said, reselling tickets online also presents the question of civil liability. Like the Washington Nationals (see above), most teams and venues write on the face of the ticket that the ticket cannot be resold.  While the primary goal of the team/venue is to deter online fraud and to keep ticket prices reasonable for “true fans” that want to attend the games, arguably, the team/venue is also creating a contract with the original buyer. If the original buyer breaches that contract by reselling the ticket, the team/venue can theoretically cancel the ticket and seek additional damages.  

While such cancellation seems unlikely for major professional sporting events, many artistic performers and small venues actively oppose ticket reselling and do make efforts to enforce the “contract” created by the ticket.  For example, some venues condition entry into the event upon the production of either photo identification that matches the name on the ticket, or the credit card that was used to purchase tickets.    

To summarize, in Virginia, Maryland and Washington, D.C., there is nothing illegal about reselling your tickets online, provided that you do not engage in any fraudulent activity prohibited by other laws.  Furthermore, while the team is very unlikely to take any civil action against you for violating the “contract” created by the ticket, in theory, it could. The reality is that no major professional sports team in the United States wants to roll back the clock and reignite the fight against online ticket sales.  Rather, the teams, including the Nationals, are finding ways to participate in the secondary market by partnering with ticket brokers and adopting dynamic pricing models that track consumer demand.

This article is not intended to replace the advice of legal counsel.