There are five circumstances in which a distribution of property other than cash to an LLC member can trigger gain recognition for the LLC or an LLC member. A distribution of ‘marketable securities’ to an LLC member can trigger one of the five circumstances where a member or LLC must recognize gain on a distribution of assets to a member.

In general, distributions of property other than cash from an LLC taxed as a partnership are tax-free to the members. This feature of an LLC is one reason why a business operating as an LLC may choose to be taxed as a partnership rather than a corporation.

‘Marketable securities’ are financial instruments and foreign currencies that are actively traded on a public securities market. IRC Section 731(c) treats the distribution of marketable securities to an LLC member as a distribution of cash to the member in an amount equal to the fair market value of the securities.

Upon a distribution of marketable securities to an LLC member, the member will recognize gain equal to the amount the deemed cash received exceeds the member’s tax basis in their LLC membership interest.

Recently, due to the COVID-19 pandemic, many parties to a commercial contract have been unable to perform their contractual duties and obligations under the contract. As a result, they desire to terminate the contract or the contractual relationship.

If a party to a contract is unable to perform a required obligation under a contract there may be specific terms included in the contract directly addressing the failure to perform. These terms may excuse one or more of the parties from the required performance or may be invoked to terminate the contract.

One contract clause or term to look for in a contract which may terminate the contract without breaching the contract for non-performance is a ‘force majeure’ clause. This clause operates to terminate a contract, or excuse a party’s non-performance of a contract, upon certain defined events. These events generally include ‘acts of God’ such as a war, terror attack, hurricane, earthquake or other similar type of catastrophic event that is beyond the direct control of a party and which adversely affects that party’s ability to perform the contract.

A force majeure clause is only enforceable if the event described was ‘unforeseeable’ by the parties when they entered into the contract, and it’s scope and breadth is limited to only the specific events listed in the force majeure clause in the contract.

For example, the word ‘pandemic’ is required to be recited in the force majeure clause in the contract if a party is relying on the force majeure clause to terminate the contract during the recent COVID-19 pandemic. Also, the parties must not have foreseen or known about the COVID-19 pandemic when they entered into the contract. If the parties entered into the contract after the start of the COVID-19 pandemic, or during the pandemic, or at a time when they reasonably should have known about the pandemic, the force majeure clause is then unenforceable in relation to the COVID-19 pandemic.

Also, a force majeure clause is not enforceable unless it is ‘impossible’ for the party invoking the clause to perform as required under the contract. If there is any possibility of performance of the contract (even a very remote possibility), the force majeure clause will not excuse non-performance by the invoking party or will not serve to terminate the contractual relationship.

Due to the very limited circumstances in which a force majeure clause will excuse a party’s non-performance of their contractual duties or terminate a contract, the invoking party must give notice to the affected party under the contract as soon as possible after the force majeure event occurs. This notice will generally be met with a response from the affected party questioning the forseeability of the force majeure event and whether the performance of the contract duties are truly impossible.

Invoking a force majeure clause to terminate a contract is an inherently factual question which will be decided by the specific facts and circumstances surrounding the transaction and the parties to each contract. Invoking a force majeure clause may require a third-party decision maker such as a mediator, arbitrator or judge to determine if the terms of the force majeure clause are applicable to the situation.

Unless the facts of the situation clearly and specifically match the force majeure requirements in the contract, and the other requirements to enforce a force majeure clause under state laws are not in dispute between the contracting parties, invoking a force majeure clause to terminate a contract may not be the most effective or economical method to terminate the contract during the current COVID-19 pandemic.

There are five circumstances in which a distribution of property other than cash to a member can trigger gain recognition to a member or LLC. A ‘disguised exchange’ transaction can trigger one of the five circumstances where a member or LLC must recognize gain on a distribution of assets to a member.

In general, distributions of property other than cash from an LLC taxed as a partnership are tax-free to the members. This feature of an LLC is one reason why a business operating as an LLC may choose to be taxed as a partnership rather than a corporation.

‘Disguised exchange’ transactions occur between members of an LLC when (1) a member contributes property to the LLC with a built in gain and that same property is distributed to a different member; or (2) a member contributes property with a built in gain to an LLC and the same member receives a distribution of different non-cash property from the LLC within 7 years of the initial property contribution.

IRC Section 704(c) and 737 prevent disguised exchange transactions between LLC members. Pursuant to Section 704(c), when a member contributes property to an LLC with a tax basis different from its fair market value the contributing member will be allocated the unrealized gain or loss upon the sale of the property. If the same property is distributed to another LLC member within 7 years of the initial property contribution, instead of being sold, Section 704 requires the contributing member be allocated the gain equal to the lesser of the remaining Section 704(c) gain that would be allocated to the partner if the property had been sold or the excess of the fair market value of the property over its tax basis.

IRC Section 737 prevents a disguised exchange transaction by requiring a member to recognize gain if an LLC member contributes non-cash property to an LLC that has a value in excess of the member’s basis, then receives a distribution of other property not contributed by that member within 7 years of the initial property contribution. The amount of gain will be the lesser of the remaining 704(c) gain and the excess of the fair market value of the distributed property over the adjusted basis of the receiving member’s membership interest.

The U.S. trademark registration process has several important steps. The first step is for the applicant to conduct a search of all current registered trademarks using the U.S. Patent and Trademark Office (USPTO) trademark registration database.

The search usually consists of reviewing all registered trademarks which contain words, symbols or designs similar or identical to the words, symbols or designs used in the proposed trademark. The USPTO can refuse registration for proposed trademarks which are confusingly similar to a registered trademark.

The USPTO manages an extensive online database containing descriptions, examples, images and registration details for all U.S registered trademarks. Searches can be performed for specific designs, words or phrases. The online database can be found here: https://www.uspto.gov/trademarks-application-process/search-trademark-database

For example, an applicant can search for all registered trademarks containing a ‘moon shape’ and all registered trademarks containing the word ‘moon’. The goal of the trademark search is to provide the applicant with an idea of whether or not the proposed trademark is confusingly similar to a previously registered trademark and if the proposed trademark infringes on any previously registered trademarks.

If the proposed trademark is found to be similar to a registered trademark, there is a possibility the proposed trademark will not be accepted for registration with the USPTO due to the similarity with a previously registered trademark. The applicant can challenge a similarity ruling by the USPTO through the court system.

However, this can be a very long and expensive fight, so it is generally a better idea to create a new design for a proposed trademark rather than contest the USPTO decision. The trademark search process can help determine if the trademark will need revision prior to filing the trademark application with the USPTO to avoid similarity with previously registered trademarks.

Even if a thorough search is performed prior to filing the trademark application, and it does not appear that the trademark would infringe upon any existing registered trademarks, it is still possible the USPTO will find the trademark to be confusingly similar to other registered trademarks.

After the trademark application is filed with the USPTO, the USPTO performs its own trademark search to determine by separate review if the proposed trademark infringes a registered trademark. The USPTO has access to pending applications as well as registered applications. Pending applications also include applications pending the grant of a trademark to a third party to determine if such mark infringes on a pending trademark registration. Such access allows the USPTO to search more filings and registrations than the individual business can.

For this reason, the USPTO often finds similar trademarks which the business does not find doing its own trademark search. Accordingly, the initial search by the business owner of registered trademarks may not reveal the same information that is available to the USPTO. This can cause confusion to business owners who believe a search has been completed on their proposed trademark and no conflicting trademarks were discovered.

How can I avoid paying self-employment and Social Security taxes on money I earn?

You can’t. You can consider forming an S-corporation, and pay yourself a reasonable wage, which is taxed as regular employment income. With an S-corporation, you can take the rest of your net profits out of the company as dividends, which are free of employment taxes (and the double-dividend taxation that happens to C-corporations). But, be careful! If you are grossly underpaying wages to yourself in order to take more money out of the company as dividends, you might run into trouble with the IRS.

If I pay personal expenses out of my business bank account, should I count the money used as part of my personal income, or can I write these expenses off?

You would include the money in your personal income. You would not be able to claim the amounts as business expenses. Only business related expenses can be deducted from your business income. It is recommended to avoid mixing your business and personal bank accounts to ensure business and personal expenses are paid from the correct bank account. Not mixing the bank accounts also allows for easier record keeping to comply with state laws and for the annual preparation of income tax returns.