Business Transactions Law Firm
How Should You Read Fine Prints of a Contract?
1. READ AND UNDERSTAND THE ESSENTIAL TERMS
In every contract, it behooves us to understand the terms and conditions most important to our deal. Generally, we need to understand:
A. Payment Structure
- How much will you have to pay eventually?
- How much is your interest and whether that is fixed or variable? Then if variable, when and how does it change and by how much?
- How many days of Grace Period do you have?
- How much is your minimum payment?
- How much, if any, collateral is required?
- How early could you pay off the loan or get out of the contract, and if there are any penalties for doing so?
- How does the default process work? What happens if you default and if there is any way for you to mitigate the damage?
B. Collection Costs and Expenses
You need to know:
- Who pays for legal fees?
- Who is responsible for such costs?
- Who could be sued, is it you personally or just your business?
2. AVOID AMBIGUOUS LANGUAGE
You should avoid or at least understand ambiguous language that could mean different things. Here is a list of phrases you should carefully understand and even avoid:
- Up to
- As Low As
These phrases could mean different things to different people in different circumstances. For instance, 0% financing for 12 months could turn into 26% financing if you miss one of your payments or your credit score changes. This could still happen, even in light of the new laws that went into effect in February.
3. AVOID SIGNING A CONTRACT UNTIL YOU UNDERSTAND IT
The most important point to always keep in mind is that you should never sign any kind of contract until you understand your rights and obligations. Undoubtedly, knowing what we are getting into makes it easier for us to get out.
Fundamentals of Loan Contracts: A Look At SOME Important Provisions
Wednesday, July 4, 2012 by Doron F. Eghbali
Perusing a loan agreement could be burdensome and seem unfathomable. Fine prints and rather multiple long provisions with rarefied jargon could be a nightmare for the unsophisticated and unprofessional. As such, it might make sense to look at some of the provisions which could pose the most imminent potent perils to the borrower. In this article, we attempt to explore SOME of the salient provisions of a loan document in some detail.
1. ALLOCATION OF PAYMENTS PROVISION
It is often customary and really hard to change the provision discussing allocation of payments. Such provision often provide that loan payments are allocated based on the following formula: First, the loan payment is applied to the interest due and then the remaining is applied to the principal.
This provision is extremely important since the more principal remains the more interest accrues. In other words, if the loan payment would first apply to principal, the amount of principal would go down and as a consequence the less interest will be paid over time. But, in most usual circumstances, as reiterated above, the loan payment will first reduce the interest to the amount agreed to by the parties on an APR basis and then, if any, the loan payment applies to the principal and reduces the principal. Undoubtedly, this sequence of allocation is favorable to the lender and not the borrower.
2. LATE CHARGES PROVISION
There are a few salient points with respect to late charges provision in a loan agreement:
- Late Charges Applied To Any Unpaid Portion: It is often the case that if borrower by a certain date does not pay the ENTIRE loan payment due, the borrower incurres a late charge. Thus, the late charge might apply if borrower did not pay the entire amount due or hypothetically a dollar less. This rather draconian measure could be mitigated through negotiation and compromise.
- Administrative Costs Could Be Tacked to Late Charges: On top of Late Charges, there could be usually Administrative Costs related to collecting AND accounting for that particular installment.
3. INTEREST ON UNPAID INTEREST
One of the other draconian provisions of a loan agreement pertains to the interest charged on the interest portion of the loan payment already due and delinquent. Often, the loan agreement provides that the interest on this amount is higher than the rate charged to calculate loan installments. It is possible that if the interest portion of the installment has not adequately been paid, a larger interest has to be paid through compounding of the interest i.e. the higher interest rate is charged on both the principal and the accrued interest thus resulting in a much higher loan payment.
4. ACCELERATION CLAUSE
Often, loan payments provide for Acceleration clauses. Acceleration clauses are synonymous with their function. If the borrower DEFAULTS on the installment payment, then the entire loan payment PLUS interest become DUE immediately (accelerated) at lender’s option.
5. BALLOON PAYMENT
Balloon payments are synonymous with the name i.e. a loan payment arrangement in which the borrower makes relatively smaller amounts during the term of the loan mostly interest payments and then when the loan is due – unless it is refinanced – the borrower has to make one huge payment (balloon payment). Such loan arrangements could be devastating to the Borrower unless the Borrower could secure financing prior to the end of the loan term. If financing is not secured and the due date arrives, then the Borrower will be in serious trouble.
Nonetheless, there could be some other arrangements negotiated to mitigate such eventuality.
This article NEITHER supplants NOR supplements the breadth and depth of such rarefied topic. In fact, this article ONLY provides a rather rudimentary synopsis of such esoteric subject matter.
How to Look For Businesses Insurance With Prudence and Caution
Saturday, December 10, 2011 by Doron F. Eghbali
Despite the importance of having insurance in today’s volatile risky business environment, having insurance does not literally translate into adequate applicable coverage. In other words, the business may be paying for some type of insurance; nonetheless, such coverage may not be needed, sufficient or both. Therefore, the salient inquiry is how to select business insurance reasonably adequate and applicable to the risks the business might be encountering in a foreseeable future. In this article, we explore some of the salient factors businesses should be familiar with when making a decision to select the insurance they really need.
FIRST PARTY OR THIRD PARTY INSURANCE
Fundamentally, there are two types of insurance policies.
A) FIRST PARTY INSURANCE
If the insurance policy only covers the losses incurred by the insured and not by third parties, then by definition, such insurance is first party. In first party insurance policies, the coverage could also extend to losses incurred by business or property by unforeseen events. Examples of first policy insurance include but not limited to: homeowner’s insurance covering the residential dwelling and its contents; automobile insurance for uninsured and underinsured motorist; and title insurance.
First-party policies could be either an “All-RisK” policies or “Enumerated” policies. All-Risk policies insure against all losses except expressly excluded under the policy. On the other hand, Enumerated policies ONLY insure against some risks as listed in the policy such as earthquake, flood or wind.
B) THIRD-PARTY INSURANCE
Third-Party insurance covers losses incurred by third parties for which the insured may be liable. The examples of third-party insurance include but not limited to: Commercial General Liability insurance with coverage for personal injury, bodily injury, personal damage, advertising and contractual liability AND Errors and Omission’s or Professional Liability insurance.
PRIMARY LEVEL POLICY
Primary Level Policy is the first line of coverage in an insurance policy. Generally, Primary Level Policies contain two distinct duties: 1) Duty to indemnify the insured against losses incurred as a result of assessments and settlements. 2) Duty to defend or reimburse the insured against lawsuits brought by third parties.
It is extremely important to note some primary level policies may not contain the duty to defend.
Furthermore, the insured should be extra careful in how the defense fess are paid. In fact, depending upon the policy, the defense fees could be paid in addition to the policy or could deplete the policy to the extent the defense costs are paid.
UMBRELLA AND EXCESS POLICIES
This might be prudent for businesses to purchase “excess” or Umbrella” policies depending upon if the risks undertaken by the business exceeds the Primary Level Policy.
A) UMBRELLA POLICIES
Generally, Umbrella Policies increase the amount of insurance far beyond the primary level and expand the coverage to encompass occurrences or losses the primary coverage would not cover.
The insured should be careful since Umbrella Policies are triggered, generally, when the Primary level policies exclude or do not cover the occurrence after payment of any deductibles, if applicable.
B) EXCESS POLICIES
Excess policies are used interchangeably with Umbrella Policies, yet Excess Policies are not synonymous with Umbrella policies. Excess policies provide similar coverage as a Primary Level Policy with the exception of providing higher limits after exhaustion of the Primary Level Policy.
The insured should be careful about Excess Policies since they do not have similarly the provisions and coverage as laid out in the Primary Level Policy. This creates a gap in coverage since the Primary Level Policy may include coverage but the Excess Policy may not have such coverage.
OCCURRENCE-BASED POLICIES VS. CLAIMS MADE POLICIES
A) OCCURRENCE – BASED POLICIES
Occurrence-based policies cover injury or losses incurred during the period of coverage even though such injury or loss is reported after the policy is no longer in effect or expired.
Generally, Occurrence-Based Policies require the insured to notify the insurance company of the reporting of such loss or injury “as soon as practicable” or “promptly”. If the insured under Occurrence-Based policies fails to properly notify the insurance company of receipt of such loss or injury, under most insurance policies, the insurance MAY deny coverage to the insured.
B) CLAIMS-BASED POLICIES
In contrast to occurrence-based policies, claims-based policies only cover injury or loss incurred during the period of policy. In fact, claims-based policies provide certainty to underwriters as they can build their reserves from the premiums and know they would not be liable for any other occurrences if reported outside the policy period.
Nonetheless, under SOME claims-based policies, the policy does not cover unless the claim has both bee made AND reported IN WRITING during the policy period.
ERRORS AND OMISSIONS OR PROFESSIONAL LIABILITY INSURANCE
Errors and Omissions or Professional Liability insurance or Malpractice Insurance, generally, protects the insured against acts, omissions or errors of a professional company or person providing such professional service. Such insurance is available to professions such as lawyers, doctors, engineers or professional companies such as entertainment companies.
Errors and Omissions insurance, usually, covers “all sums” the insured becomes legally liable while rendering the professional services. Nonetheless, Error’s and Omissions insurance excludes coverage for dishonest or malicious acts. Such insurance could be both claims-based or occurrence-based. Nonetheless, most Errors and Omissions insurance policies are claims based.
This article NEITHER supplants NOR supplements the breadth or depth of such esoteric topic. In fact, this article only provides a rather rudimentary synopsis of such expansive esoteric subject matter.
S Corporations v. Payroll Taxes: A Balance of Salary and Distributions
Friday, January 28, 2011 by Doron F. Eghbali
A recent tax case won by the IRS has closed a loophole employed by S corporations to circumvent paying payroll taxes by characterizing their wages as distributions. This ruling might have serious repercussions in the business world, especially for S corporations. Let us, to some extent, explore the ruling and dissect it.
SOME BACKGROUND ON S CORPORATIONS
S Corporations are often a popular business option for private firms with less than 100 shareholders and one class of stock, among other esoteric requirements. S corporations enjoy pass through taxation. In other words, S Corporations pass profits and losses to shareholders who pay taxes on such disbursements at their own individual tax rates thus avoiding paying taxation at corporate level. Please, note this is a very simplistic account of taxation of S Corporations.
In addition, S corporations enjoy another tax benefit. Money can be taken out of S Corporations as both compensation and dividends. While compensation is subject to employment taxes (i.e. social security and Medicare), distribution as dividends are generally not subject to such taxes.
SOME FACTS OF THE RECENT TAX CASE (David E. Watson P.C. v. US)
In this case, David E. Watson P.C. v. US, Mr. Watson formed an accounting corporation and elected it to be taxed as an S Corporation. Mr. Watson was the sole shareholder, officer, director, employee and officer of such S Corporation. The S Corporation set Mr. Watson’s salary at $24,000 for each of 2002 and 2003. In addition, for each of 2002 and 2003, Mr. Watson received distributions far higher than the salary, $203,651 and $175,470 respectively. In 2007, the IRS assessed the s Corporation taxes, penalties and interest. The IRS reasoned some of the distributions made to Mr. Watson should be re-characterized as salary and subject to employment taxes.
SOME REASONING BEHIND THE DECISION
The S Corporation sought to dismiss the case contending that the S Corporation clearly INTENDED to pay Mr. Watson salary of $24,000 and INTENDED to pay distributions after payment of all expenses based on the amount of cash on hand. The IRS responded such position by the S Corporation is undermined by both case law and revenue rulings. The IRS contended the S Corporation’s intent to characterize the earnings as distributions and not salary was irrelevant. The salient point was whether such distributions were “for remunerations for services rendered.” The IRS contended an S Corporation cannot avoid paying employment taxes by characterizing large portions of profits as distribution rather than salary especially when salary is unreasonably low.
SALIENT LESSON LEARNED
As this recent case illustrates, S Corporations cannot set their salary unreasonably low and reap the profits through far higher distributions without paying taxes.