LIMITED LIABILITY COMPANIES--THE BEST OF ALL WORLDS?
By: Alderman & AldermanA limited liability company (LLC) is a business structure that combines some of the best features of sole proprietorships, partnerships and corporations. LLC owners, like their counterparts for partnerships or sole proprietorships, report profits or losses on their personal income tax returns. Like a corporation, however, the owners of an LLC have "limited liability," that is, they are shielded from personal liability for debts and claims arising from the business. Limited LiabilityThe limited liability for LLC owners is not absolute. Owners still can be held liable if they (1) personally and directly injure someone; (2) personally guarantee a loan or business debt on which the LLC defaults; (3) fail to deposit taxes withheld from employees' wages; (4) intentionally commit a fraudulent or illegal act that harms the company or someone else; or (5) treat the LLC as an extension of their personal affairs rather than as a separate legal entity. The last exception to limited liability is the most significant. It carries the potential for complete removal of the protections for individual owners. If the line between LLC business and personal business becomes too blurred, a court could find that a true LLC does not exist, leaving the owners personally liable for their actions. OwnershipMost states allow a single individual to be the sole owner of an LLC. An LLC makes the most sense in circumstances where there is a concern about personal exposure to lawsuits stemming from operation of the business. Most laws prohibit establishment of an LLC in the banking, trust, and insurance fields. Unlike corporations, LLCs can carry on their business without holding regular ownership or management meetings. Of course, formal meetings backed up by written minutes still may be advisable to document important decisions, such as a change in membership or a major expenditure. FormationSetting up an LLC is relatively simple. Articles of organization must be filed with the appropriate state office, usually the Secretary of State. The articles of organization include the name and principal office for the LLC, the names and addresses of its owners, and the name and address of the person or company that agrees to accept legal papers on behalf of the LLC. Even if it is not legally required, the owners should prepare an operating agreement that spells out the owners' rights and responsibilities. The absence of an operating agreement will mean that state statutes will govern the operation of the LLC by default. An operating agreement acts as a guide for resolving common issues that an LLC will face, and thereby helps to avert misunderstandings between the owners. It also underscores the authenticity of the LLC itself, which can be helpful when a judge is deciding whether the owners are protected from personal liability. A standard operating agreement includes the members' percentage interests in the business; the members' rights and responsibilities; the members' voting power; allocation of profits and losses; how the LLC will be managed; rules for holding meetings and taking votes; and "buy-sell" provisions that control what happens when a member wants to sell his interest, becomes disabled, or dies. Although it is frequently overlooked when an LLC is created, a buy-sell agreement is important as a sort of "premarital agreement" among the owners. The buy-sell provisions can clarify and ease the transition when the inevitable changes come to the members of the LLC. TaxesSince an LLC is not considered separate from its owners for tax purposes, the LLC pays no income taxes itself. Like a partnership or sole proprietorship, an LLC is a "pass-through entity." Each owner pays taxes on a share of profits, or deducts a share of losses, on a personal tax return. The IRS regards each member as a self-employed business owner, not an employee of the LLC. There is no tax withholding, and owners must estimate taxes owed for the year, then make quarterly payments to the IRS. ConversionBy converting to the LLC business structure, sole proprietors and partnerships can gain the protection afforded to LLC owners without changing the way their business income is taxed. Conversion usually can be accomplished either by filling out a simple form or filing regular articles of organization. Federal and state employer identification numbers will have to be transferred to the name of the new LLC, as will such items as sales tax permits, business licenses, and professional licenses or permits. The process for creating an LLC is streamlined and free of highly technical considerations. However, there is an important place for professional advice concerning such matters as choosing an LLC over other business structures, preparing or reviewing the operating agreement, and setting up accounting systems. Attorneys at Alderman regularly assist clients the areas of business formation, business transactins, business restructurings, creditors rights, environmental law, land use, zoning and complex litigation.
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ADA AND SMALL BUSINESSES
By: Alderman & AldermanThe Americans with Disabilities Act (ADA) prohibits disability discrimination in employment for employers with 15 or more employees. The prohibition is far-reaching and covers hiring, firing, and everything in between, such as promotions, benefits, and harassment in the workplace. The smallest of businesses are not affected by the ADA because of the 15-employee threshold for coverage. The ADA does apply, however, to many of the roughly 25 million small businesses in the nation.
Who Is Protected?The ADA protects three categories of individuals: those with a physical or mental impairment that substantially limits one or more major life activities (like sitting, standing, or sleeping); those with a record of such an impairment, such as a person who had debilitating cancer but is now in remission; and those who are regarded by employers as having such an impairment, even though the individuals otherwise are not so impaired as to be "disabled" under the ADA. Regardless of the category, the ADA protects only persons who are qualified, that is, they meet job-related requirements and can perform essential functions for the job, with or without a reasonable accommodation.
HiringWhile an employer can ask an applicant a wide range of questions concerning job qualifications, the ADA does not allow medical examinations or questions about disability until the employer has made the applicant a conditional job offer. An exception is recognized for questions directed to an apparently disabled applicant about whether a reasonable accommodation will be required.
After a job offer is made, an employer can ask any disability-related questions and require medical examinations, so long as these requirements apply to everyone in the same job category. For example, if, during a medical examination required of all employees in a job involving the use of dangerous machinery, it is revealed that an applicant has frequent and unpredictable seizures, the employer can withdraw a job offer to that individual.
Medical InformationOnce a person is on the job, the ADA allows required medical examinations or questions about a disability only where there is a reasonable belief, based on objective evidence, that a particular employee will not be able to perform essential job functions or will pose a direct threat because of a medical condition. As an example, if a normally reliable employee has told her employer that a new medication she takes makes her lethargic, and she begins to make many mistakes, the employer can ask her how long the medication can be expected to affect job performance.
Reasonable AccommodationThe ADA differs from most other employment discrimination laws in imposing an accommodation duty on employers. If a disabled person needs a reasonable accommodation in order to apply for, or perform, a job, the employer generally must provide it unless to do so would create an undue hardship. An undue hardship means significant difficulty or expense, based on an employer's resources and operations.
Most accommodations are not expensive or burdensome. A diabetic employee may need regular breaks to eat properly and monitor blood sugar and insulin levels, or a blind employee may need someone to read information posted on a bulletin board. If more than one accommodation will work, the employer may take the option that is less costly or easier to provide.
In addition to the undue hardship defense, an employer need not provide an accommodation which:
* assists an individual off the job;
* removes or alters the essential functions of a job;
* lowers production or performance standards; or
* excuses violations of rules on good conduct.
Helpful HandbookThe Equal Employment Opportunity Commission, which is charged with enforcement of the ADA, has issued a new handbook to help small businesses comply with the ADA. The handbook provides many examples of factual situations with which small businesses could be confronted. The ADA primer can be accessed online at www.eeoc.gov. Attorneys at Alderman regularly assist clients the areas of business formation, business transactins, business restructurings, creditors rights, environmental law, land use, zoning and complex litigation.
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JOINT BANK ACCOUNTS
By: Alderman & AldermanAn elderly doctor and his daughter opened a joint bank account, the money in which would go to the surviving account holder if the other one died. Nine years later, when the doctor was in declining health, his wife asked to be added to the account so that she could pay bills. Based on the signatures of the doctor and his wife, but not the daughter, the bank added the wife to the account. Over a one-month period, the wife then wrote many checks on the account, totalling over $100,000. The biggest check, for $75,000, was written, cashed, and deposited to the wife's own account on the very day her husband died.
The daughter sued the bank, claiming it was liable to her for recognizing a new party to the joint account without the consent of all parties to the account. A state supreme court sided with the bank. First, the documents that comprised the contract between the bank and the account holders included a statement that each owner was the agent of any other owners for purposes of endorsements, deposits, withdrawals, and conducting business for the account. This language was broad enough to give the doctor power to add his wife as a new party to the account without his daughter's knowledge or consent. Second, a statute on joint accounts similarly made each party to an account the agent for other account holders, although the statute was silent on the method for adding a new party to an account. The bank had not breached its contract when it recognized the doctor's wife as a new party to the account based solely on the doctor's signature.
This decision highlights the pitfalls that can accompany joint bank accounts. Allowing each party to a joint account to exercise full authority over the account is flexible and convenient, but the cost of these advantages is loss of control. The exposure to this risk is widespread, as joint account contracts typically have language like that used in the case of the doctor and his daughter. Alternative methods for managing money make it more difficult for any individual to raid accounts to the detriment of co-owners. These include powers of attorney, revocable living trusts, and "agency" or "convenience" accounts that resemble general powers of attorney but are confined to specific bank accounts. Advice of legal counsel should be sought before deciding which of these or other options is most appropriate in a specific situation. Attorneys at Alderman regularly assist clients in the formation and operation of business entities, including limited liability companies.
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LIABILITY FOR INDEPENDENT CONTRACTORS
By: Alderman & AldermanA manufacturing company contracted with a security firm to provide a security guard. The guard shot and killed an individual who was trespassing, but not for criminal purposes, on company property, after the person had obeyed the guard's order to lie on the ground. The company argued that it could not be held liable for the negligent acts of an independent contractor, but a state supreme court ruled otherwise. The court agreed that the security firm and its guard were independent contractors. The manufacturing company's downfall was an exception to the rule of no liability for acts of independent contractors. If the work to be performed is inherently dangerous, the work can be delegated to an independent contractor, but the duty to use reasonable care cannot be avoided by the employer. Work is inherently dangerous when it involves a foreseeable risk of physical harm to others and requires special precautions. In the case of the trigger-happy security guard, who was armed and instructed to "deter" thieves and vandals, dangerous confrontations between the guard and persons entering the property were contemplated. In the context of such danger, the independent contractor status of the guard became a mere legal technicality that did not shield the manufacturing company from liability.
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LONG-ARM JURISDICTION FALLS SHORT
By: Alderman & AldermanRobert found just the excavator he wanted advertised on an Internet auction site. Before making the successful bid, he contacted the seller through e-mail and received assurances from her that the product was in good condition. Robert then traveled to the seller's home, which was several states away, and bought the excavator. When the equipment did not perform as expected and the seller did not respond to Robert's request for a partial refund, Robert sued the seller in his home state. Robert's lawsuit failed because the seller was not subject to the jurisdiction of the courts in Robert's home state. For a nonresident to bring herself within the reach of a state's "long-arm" jurisdiction, she must purposefully have benefited from the privilege of doing business in that state. Perhaps the seller could have foreseen that residents of any state might bid on the excavator, but that was insufficient to bring her into the courts in Robert's state. She had no control over who would ultimately be the winning bidder, nor could she exclude bidders from particular jurisdictions. Also weighing against subjecting the seller to litigation was the isolated nature of the transaction and the fact that she was not a commercial seller and was using a third party's site. A different result might have been achieved against a business that used its own website to advertise itself and make transactions across state lines
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ONLINE BANKING
By: Alderman & AldermanBanks that rely on the Internet and other low-cost ways to provide service, as opposed to "bricks and mortar" branch offices, can save on expenses and pass the savings along to customers in higher returns on deposits and lower interest rates on loans. Online banking also gives customers the convenience of being able to monitor their accounts and complete transactions around the clock, without waiting for mailed statements or being limited by office hours. The flip side of online banking is that, if a problem arises, you cannot sit down face-to-face with someone from the bank to resolve it. There is also a premium on doing research to check out the legitimacy of an unfamiliar and remote institution before you entrust it with your money and private information. A good place to start is the "About Us" section of a bank's website, which should at least give basic contact information. If it does not, that in itself should raise suspicions. Other warning signs include names or websites that are only slightly different from those of well-known institutions and rates of return that are far out of line with what other banks are offering. It is a good idea to confirm that an institution is federally insured by contacting the Federal Deposit Insurance Corporation or searching its "Institution Directory" at www3.fdic.gov/idasp. Like any bank customer, users of online banking institutions are well-advised to safeguard private identification information, keep good records, and monitor transactions and balances regularly. Online banking customers also have the protection of federal laws such as the Equal Credit Opportunity Act, the Truth in Lending Act, and the Truth in Savings Act. Those who decide to do their banking solely in front of a computer screen especially should know about the Electronic Fund Transfer Act, which deals with consumer rights involving electronic banking transactions.
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OWNERS OF SUBDIVISION PROPERTIES HAVE GREATER DEVELOPMENT OPPORTUNITIESBy
Linda AldermanAppellate Court Decision May Change Zoning LawsZoning laws related to subdivision properties could be substantially changed after the state of Connecticut court of appeal's decision of Poirier v. Town of Wilton Zoning Board of Appeals, allowing owners of subdivision properties to make significant modifications to their homes that otherwise wouldn't have been allowable.In Poirer, a Wilton couple sought a building permit to add a garage and breezeway to their home that was built in 1954 as part of a 38-lot subdivision. The planning and zoning commission denied their request because the addition would have exceeded the lot coverage limitations allowed under the current zoning regulations. They appealed, arguing that the commission had to apply the zoning regulations that were in effect in 1954, which would have allowed the building permit, and could not apply the current zoning regulations that had been modified to restrict the lot coverage limitations. In support of their argument, the Poiriers cited C.G.S. § 8-26a(b), which provides that "when a change is adopted in the zoning regulations . . . no lot or lots shown on a subdivision plan for residential property, which has been approved, prior to the effective date of such change shall be required to conform to such change." Wilton attorneys argued that other state laws restricted the Poiriers from getting a building permit. The superior court upheld the town's denial, but the appellate court reversed unanimously. The appellate court held that 8-26a(b) placed a "sweeping statutory restriction" on a town's ability to regulate land use once it has approved a subdivision plan and that the statute forever prohibits the application of new subdivision or zoning regulations to all subdivisions once they are approved. It further stated that by enacting the statute, "the legislature has clearly made a policy decision that once the division of the land and proposed lot layout has been reviewed by the municipality through its planning commission the subdivision does not have to be reviewed again, and that the subdivision lots are not affected by subsequently enacted zoning regulations." The court's holding, therefore, is that owners of approved subdivision lots had a vested right to build in accordance with the zoning regulations in effect at the time of the subdivision approval.The effects of Poirier will be numerous and far reaching. First, and most importantly, zoning commissions will no longer be able to apply just one set of zoning regulations -- each application related to a subdivision will be subject only to the (usually much less stringent) laws that were on the books at the time the subdivision was created. Not only will this create a bureaucratic nightmare for zoning commissions, zoning boards of appeal and courts alike, but houses built next to each other but built upon different subdivisions could be subject to different regulations, undermining the goal of uniform zoning. For example, if a developer wants to build larger homes than are allowed by current lot coverage restrictions he can purchase subdivision lots that were approved prior to the passage of those restrictions, raze the current structures and then build those larger homes. Poirier will, therefore, probably have the impact of increasing the value of homes located in older subdivisions in towns where there are stringent lot coverage limitations. For example over the past decade, Greenwich has been inundated with applications for the construction of "McMansions", which some residents say ruin Greenwich's character. This year the Greenwich Planning and Zoning Commission approved regulations meant to limit house size uniformly throughout the town by reducing bulk-control measures such as floor area ratio. Poirier could have the effect of allowing owners and/or developers in Greenwich to circumvent those regulations in subdivisions that were formed prior to the passage of those new regulations.Attorney Alderman regularly represents landowners, operators, and other impacted parties in matters related to Environmental Law, Wetlands, Land Use or Zoning.
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TOXIC MOLD: ENGINEERS, BUILDERS, CONTRACTORS AND LANDLORDS BEWAREBy
Linda Alderman Over the past few years allegations of damage arising from the presence of toxic mold in buildings have resulted in the filing of hundreds of law suits for property damage and/or personal injury. Plaintiffs, many of whom are seriously ill, are suing building owners, property managers, architects, contractors and commercial and personal lines insurers for millions of dollars -- and winning. What Is Toxic Mold?Molds are fungi that grow when damp conditions are present. Some mold spores are relatively benign, while others are believed to cause health problems for humans. Mold spores that cause an adverse health reaction are referred to as "toxic." The effect on humans will depend on the type of mold, the metabolic byproduct of the mold, the extent of the contact and length of exposure, as well as the individual susceptibility of the person exposed. The overwhelming majority of molds are harmless, but exposure to several types of mold has been associated with the potential for adverse health effects. When a mold produces mycotoxins (a poisonous substance produced by a fungus) it becomes dangerous to those who are exposed to it through ingestion (eating or inhalation) or through skin contact. The causal relationship between exposure to mold and human health is being actively studied in the medical community at this time, however, research does exist that suggests that toxigenic molds can cause problems with the vascular, digestive, nervous, urinary and reproductive systems of the human body. Symptoms include headaches, rashes, lung disease, and cognitive memory loss. As of this writing there are no federal or state regulations that establish standards for exposure to "toxic" mold, nor are there federal or state standards for mold abatement. Toxic Mold LitigationThe increase of toxic mold cases may be related to the manner in which buildings have been constructed. For newer buildings, the same insulation that prevents drafts also may prevent airborne chemicals and moisture from venting. This increased moisture buildup can create a breeding ground for mold and other bacteria. In older buildings deterioration of building materials may allow moisture to accumulate in places where mold spores and other bacteria can grow. Litigation related to toxic mold has resulted in a number of large damage awards. In two separate cases, courthouses in Florida were evacuated as a result of toxic mold. The damage award for the remediation and costs for the Polk County Courthouse was approximately $100 million dollars. In the case involving Martin County, the county was awarded $11.5 million in damages plus $2.9 million in interest. In Texas the builders of a private home contaminated with toxic mold were ordered to pay damages of $32.1 million in June 2001. The $32.1 million award represents $6.2 million for replacement of the home and contents, $5 million for mental anguish, $12 million in punitive damages and $8.9 million for legal fees. In 1999, a Delaware jury found the owner of an apartment complex liable for $1 million in damages to three tenants for medical expenses, permanent impairment and pain and suffering associated with exposure to various mycotoxins, bacteria, fungi and other toxins while living in that apartment complex. A homeowners group in California sued builders and contractors alleging property damage and bodily injury due to mold contamination and the matter settled for $1.3 million. Implications to the Insurance IndustryThe insurance industry is bracing itself. Some courts have held that the pollution exclusion does not apply to mold claims because it is not the traditional type of "pollutant" for which the exclusion was drafted to cover. In one case the insurer argued that the pollution exclusion was broad enough to include a home environment contaminated with mold. In rejecting that argument the court stated that because the injuries were caused by exposure to mold that grew from water vapor trapped in the walls, that "no contaminants were released, but rather formed over time as a result of environmental conditions." One court held that even where there was a mold exclusion in a homeowner's policy that it was inapplicable because the mold growth occurred as a result of a leaking roof. Some courts, however, have analogized mold contamination to lead paint flaking in holding that it falls within the plain language of the pollution exclusion since it disperses into the air, like lead flakes from paint. Other courts have stated that a pollution exclusion should not apply to substances that are commonly found in the environment. Personal injury and property damage claims related to mold exposure are increasing at lightening speed. Engineers, developers, landlords, contractors, subcontractors, architects, property owners and managers, insurers and others need to quickly evaluate how they can proactively manage the risk associated with potential future claims of mold infestation. Attorney Alderman regularly represents land owners, operators, and other impacted parties in matters related to Environmental Law, Wetlands, Land Use or Zoning.
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