Why Operating Agreements are Critical

Why Operating Agreements are Critical

  • March 31, 2016

While Operating Agreements may not be required in many states, most, if not all, authorize the use of Operating Agreements for limited liability companies (LLCs).

Why are Operating Agreements so critical? Because they help to define the rights, obligations and relationships between all those involved in the LLC. As I often tell clients – every partnership is a great one…until it’s not. And when it stops being great, or the parties want to go in different directions, having an agreement that can guide a resolution or decision making authority is key.

Members, managers and the company can generally agree to operate the LLC in any manner they want so long as it is in compliance with applicable law. While Operating Agreements can cover a myriad of issues there are generally five areas that most members and managers will turn to for guidance, and therefore are areas that are worthy of careful consideration when entering into an Operating Agreement.

1. Manager Authority: This section will set forth what decisions the manager of the LLC can make without member input. This might be all day to day decisions, but not major decisions or some variation of that.

2. Member Decisions: The extent to which the members have a vote on certain LLC business can be minimal or broad. Often members will want to retain the right to vote on new managers, the ability of the LLC to borrower money, dissolution of the LLC or amendments to the Operating Agreement.

3. Duties: Most states provide a statutory framework for certain duties that managers may owe to the company and/or members. These usually include certain fiduciary duties and duties of care. These duties can often be expanded or narrowed by agreement of the parties in an Operating Agreement.

4. Allocations and Distributions: Operating Agreements can specify how the company will allocate and distribute profits and losses to the members. Members have the flexibility to create preferred returns, allocations of profit and loss that are different that ownership interests and many other structures for the allocation and distribution of profits.

5. Transfer of Membership Interests: How, when and if members can sell their interest or otherwise withdraw from the LLC is very important. The Operating Agreement can provide for very restrictive transfer and withdrawal rights or very liberal transfer rights. It is important that members understand any limitations on their ability to sell their interest or otherwise withdraw from the LLC.

Operating Agreements can cover many issues. The five noted above are some of the key issues that we find are often important to clients. The flexibility of the LLC structure and Operating Agreement provisions are what make LLCs a very attractive entity structure for many people. Incline Law Group, LLP can assist you with preparing an Operating Agreement as well as the formation of an LLC in Nevada or California.

How Should I/We Hold Title to My/Our Property?

  • March 10, 2016

How Should I/We Hold Title to My/Our Property?

When you get to the closing on your new home, the escrow company will often ask, “How do you want to hold title?” The answer to this question may depend on a number of factors, such as whether you are married, whether you are purchasing the property with someone else or whether you have a trust for your estate. There may be other factors such as whether this is a property intended for investment or whether you are purchasing in the name of a corporation or LLC.

But for most individuals, the most common options are fairly straight forward. It should be noted that the discussion below is not exhaustive and that there may be other forms of vesting that could be of benefit in your specific circumstances.  Similarly,Holding Property Titles not all states are community property states and for those that are, the existence and terms of pre or post-nuptial agreements are critical to vesting decisions. Vesting is the way we describe how the title to the property is held – with different forms of vesting comes different rights and obligations of joints owners that are not discussed here. It is important that you consult with an attorney to determine the best form of vesting for your circumstances.

This post is broken up into 4 parts which are intended to cover the most common forms of vesting in the four most common circumstances: Part I) if you have a trust; Part II) if you are purchasing property in your name only; Part III) if you are unmarried and purchasing with another person; and Part IV) if you are married. As a bonus, since we are talking about title(s), if you can name the artists for each of these songs titles, please post your answers!

Part I: A Matter of Trust

Generally if you have a trust, and the property is intended as your primary residence, you will likely title it in the name of the trustee of your trust. This is true whether you are single or married and often if you are purchasing with someone else to whom you are not married. You should always consult with your estate planning attorney when transferring property into or out of your trust.

Part II: All the Single Ladies

If you are purchasing property as an unmarried person and in your name only, the vesting is pretty much just that, as an individual (you may see this written as a an unmarried woman/man or single woman/man which is a coded reference to whether you are divorced or never married – if you object to this, as I do, you can simply request that title be vested in your name as an individual).

If you are married, but you are purchasing the property as your separate property, the title will generally read just that: Jane Smith, a married woman as her sole and separate property. In community property states, in order for your spouse to disclaim any community property interest in the property s/he may be required to sign a Quit Claim or Interposal Deed.

Part III: Our House

If you are purchasing property with another person that is not your spouse, you really have two choices:  “joint tenants” or “tenants in common”. With joint tenancy, each owner has an undivided equal interest in the property. More importantly, joint tenancy comes with an automatic right of survivorship. This means that when one joint tenant/owner dies, his/her interest automatically transfers to the remaining owner(s). If one of the joint tenants transfers her/his ownership interest during their lifetime, this can destroy the joint tenancy and convert the ownership to tenancy in common.

More than one owner can also own property as tenants in common. In this case, each owner will own a percentage of an undivided interest in the property i.e. the ownership interest does not have to be equal. With joint tenancy there is no right of survivorship and when one joint tenant dies the interest is freely transferable to the decedent’s heirs. In Nevada, if the type of vesting is not specified, our statutes provide that the default vesting is tenancy in common.

Part IV: Love and Marriage

Married couples can also hold property as joint tenants or tenants in common.  However, both California and Nevada have the option for married couples to hold property as “community property” or “community property with right of survivorship”. The community property with right of survivorship vesting carries two very important benefits, namely the automatic right of survivorship when one spouse dies and a tax benefit known as a “step up in basis”.

What this means is, when one spouse dies, the surviving spouse gets the benefit of a readjustment of the tax basis in the property up to the current value. This is important if, say, a married couple purchased the house in 1970 for $100,000. At the time of the death of the first spouse in 2016, the house is valued at $700,000. The surviving spouse elects to sell and downsize, without the step up in basis the surviving spouse could be subject to capital gains tax on the difference between the original basis of $100,000 and the new value of $700,000. If the property was vested as community property with right of survivorship, the surviving spouse would get the tax benefit of the step up in basis.

If a married couple holds title simply as community property (without the right of survivorship), they can take advantage of the step up in basis, but the transfer of title to the surviving spouse will not be automatic and may require probate.

As noted above, there are many ways for individuals to hold title to real property.  This post only discuses a few of the most common. Because there are tax and legal consequences to how title is held, it is important that you consult with an attorney to help you sort out the best approach for your needs. And do keep in mind that you can always change the vesting after close of escrow!

A Bright Line Rule on “Date of Separation”

  • March 3, 2016

The “date of separation” is a pivotal issue in many California divorce cases. This date signifies the end of the community estate. It is used to determine everything from the characterization of community and separate property assets and debts to

The date of separation signifies the end of the community estate.

The date of separation signifies the end of the community estate.

determination of the length of the parties’ marriage to determination of the length required for the payment of spousal support. It also develops a date to utilize for the calculation of the entitlement to reimbursements for payment of community expenses. It is an extremely important question and is often one of the most hotly contested issues in California divorce cases.

For the past 65 years, there has been much to argue about on this issue in any particular case. Determination had been determined largely on the interplay of various intentions, communications, facts and circumstances, unique to each case. Parties who lived under the same roof could still be “separated” under the prior case law just as parties who have lived in separate homes, sometimes for years, could still be deemed not to have separated. The determination in each case was unique to the facts and circumstances of each case and the flexibility provided for fairness.

Not anymore. The California Supreme Court just radically changed the landscape surrounding this issue. In re Marriage of Davis (2015) 61 Cal.4th 846 established a public policy bright-line rule requiring two people to actually cease living under the same roof in order to be considered living “separate and apart”.  While the intention may be to simplify things and give clarity to a confusing issue, it may likely have the opposite result.

People at the end of their marriages feel trapped in many directions and are facing a great deal of uncertainty. A bright line rule on an issue with such importance may prove to be quite limiting in a time that already feels very hopeless.  At first blush, having a clear rule may avoid the “he said, she said” that confounds lawyers and judges, making their jobs easier. However, it can only create more confusion and stress for family law litigants or those contemplating a divorce.  How will this rule impact parties who cannot afford to move out, especially with young children?  In order to file a Dissolution (e.g. divorce) in the State of California, the Petitioner must allege the date of separation. Do we now require that a person must move out of the home before filing for divorce?

I can’t even begin to imagine the strangulation effect this will have on stay at home mothers or disabled spouses who do not have the means to move out and must petition the court for the funds to do so. The time period between the decision one makes to leave his or her spouse and the time the Court first makes interim orders to protect the parties can already seem like an eternity. I have no doubt that the Davis decision will only add further complexity and stress during this period of transition and may create problems in its practical application to the realities of contemporary families.

Incline Law Group’s Family Law attorneys can help you navigate the application of this bright line rule and related issues.