Disclosure Obligations in an AL Home Sale

In Alabama, unlike many other states in the country, they have a rule called caveat emptor for the sale of used residential property applies. Caveat emptor means “let the buyer beware” in Latin, which implies that the seller does not have any actual duty to inform the buyer of issues with the property’s physical condition during the sale. Like those across the United States, home sellers in Alabama must follow federal regulations on lead paint disclosures.


Alabama Caveat Emptor Rule: Exceptions


The caveat emptor rule in Alabama has three exceptions, where sellers are legally duty-bound to disclose property condition issues to the buyer:


  1. There exists a fiduciary relationship between the buyer and seller
  2. The seller is aware that the home may pose a medical or safety risk to the buyer, and
  3. The buyer directly asks the seller questions on specific defects


In the above cases, the seller is legally responsible for disclosing those defects they are personally aware of.


Fiduciary Duty


Fiduciary duty refers to the legal responsibility to act in the best interest of another party, such as if the seller was the buyer’s medical doctor or lawyer. It will be considered a breach of fiduciary duty if the seller is the buyer’s physician and knows that the buyer has an allergy to cedar yet fails to disclose that the house contains cedar cabinets.


Alabama’s health and safety guidelines require residential property sellers to inform potential home buyers of defects that may pose a direct danger to the buyer’s safety or health. For instance, it would be a health and safety defect if a seller is aware that the property has lead paint or asbestos. These types of situations necessitate the seller notifying any potential buyers of lead paint or asbestos in the property.


Finally, if a buyer asks a direct question about a defect, the seller must respond honestly and reveal known defects, under Alabama law. If the buyer, say, asks about pest infestations on the property and the home seller does not mention the termite eradication treatment undertaken last year, it would breach the law. The seller should not conceal the truth or lie to the potential buyer, as doing so will only make matters worse later.


A seller who does not disclose known material defects to a potential buyer may be held responsible for damages. If a buyer finds a defect that the seller did not disclose, they can sue the seller for negligence, suppression of material facts, or fraud.


However, Alabama law may not consider the mere inability to reveal a known defect enough to hold a seller accountable for damages. The buyer would need to prove that the seller was aware that the defect posed a direct threat to their safety or health, which can be quite challenging to establish, depending on the specific situation.


Reduction in Seller’s Risk through Complete Disclosure


Alabama law does not necessitate that sellers provide a comprehensive list of flaws to potential buyers, but smart sellers will reveal material defects as a risk-management technique. Completing a property disclosure form and giving it to the buyer at the time of the sale is one way to reduce risk.


The disclosure form aims to help both buyers and sellers understand facets of properties that may warrant attention, such as safety, environmental, health, mechanical, structural, or other potential issues. In general, the disclosure form is quite detailed and requires information on aspects such as the roof, boundaries, plumbing, and air conditioning and heating systems, among others.


Most real estate agents in Alabama attach a filled-out disclosure form as an exhibit to the sale and purchase agreement. The Alabama Association of Realtors has created this disclosure form. The real estate agent will usually give the seller the disclosure form to fill out and sign when the seller lists the property with the agent.


The real estate agent of the seller will then present a copy of the disclosure to any prospective buyer who seeks more information regarding the property before the purchase. If you are selling your residential property on your own, you may be able to locate a comprehensive disclosure form online or at your neighborhood library.


A seller in Alabama is not legally required to complete the disclosure form, but providing a potential buyer with a completed form, or a similar disclosure document, is an effective way to ensure that you are making all mandatory legal disclosures.


Consult an Experienced Alabama Real Estate Lawyer


At the law offices of Davis, Bingham, Hudson, & Buckner, P.C., our skilled lawyers have numerous years of experience in real estate law. We can offer you guidance on all facets of selling or purchasing residential real estate. There are diverse real estate transactions, and our firm has the resources and experience to ensure a successful closing and satisfied clients. To schedule a consultation with a seasoned real estate attorney, call today at (334) 821-1908.


Is a Short Sale a Good Option for Me?

When it’s the signing day for a new home, no homeowner anticipates that they will ever face a foreclosure. However, an unforeseen number of homeowners undergo the anguishing process of losing their homes due to the depressed economy and real estate market crisis. Foreclosure can be a distressing, prolonged, and unsettling process, and one that can seriously affect the homeowner’s assets, credit, and savings.


But some homeowners may have another option. A short sale refers to a transaction where the bank allows homeowners who are unable to make payments on their home to sell the property for less than the amount that they are obliged to return to the bank.


In such cases, the borrower works with an agent and puts the home up for sale, usually at a significant discount. The premise is that if the homeowner can sell the property, the bank will be able to recoup most of the amount that the borrower owes.


In a short sale, the borrower is not absolved from the debt they owe with the initial mortgage. However, it is undoubtedly a better option than hard foreclosure.


Peace of Mind with a Short Sale


The buyer and the seller experience a whirlwind of activity in any real estate transaction. The very nature of such transactions is stressful. But they do not compare to the tension that a homeowner undergoes with a foreclosure. It can be quite disconcerting to face a substantial credit hit, the prolonged legal process, and the stigma associated with a foreclosure.


In terms of the seller’s credit, short sales are not entirely free of risk. Also, they will not fully mitigate the financial implications of the homeowner’s inability to pay for a residential property that they bought. However, short sales represent an opportunity for homeowners to avoid legal repercussions and the time-consuming, arduous foreclosure process.


Homeowners will find themselves in a more favorable position with short sales as well as experience a reduction in their financial obligations and the opportunity to redeem their credit to a certain extent. A short sale is a “silver lining” to homeowners and provides them with a new avenue to begin rebuilding their financial situation.


Offers Homeowners More Control


A tense and challenging process starts for a homeowner once foreclosure proceedings commence. The mailbox is inundated with demand letters and perplexing documents, besides a constant barrage of exchanges with the legal team of the lender ensue.


A short sale will still involve negotiations, documents, and meetings for the homeowner to navigate. However, the process works more like a conventional sale rather than a stressful and litigious foreclosure proceeding.


Real estate transactions are stressful by nature. But with a short sale, the homeowner is able to play a more meaningful role in the process and mainly deals with the bank, real estate agent, and buyer. Summarily, a short sale is more favorable for the homeowner, rather than being at the mercy of a bank’s legal team during foreclosure proceedings.


Financial Benefits for the Homeowner


The US Congress Joint Economic Committee reports that the average legal expense to a homeowner undergoing a foreclosure is approximately $7,500. Besides this expense, the homeowner may also incur additional costs that can pile up during the time-consuming process of foreclosure.


And financially, this may just be the tip of the iceberg for homeowners. In case the homeowner cannot afford payments, the foreclosure could create a financial predicament where bankruptcy is the only option available. Filing for bankruptcy represents grave credit implications for the borrowers as well as expenses for the lender.


Preventing an Impending Foreclosure


A homeowner faces several distressing consequences with a foreclosure. Also, it hurts the lender and the real estate market at large. The homeowner’s credit is compromised, which can make it challenging, at times, even impossible, to borrow funds for another property, vehicle, or major purchase.


In almost all cases of foreclosure, banks lose money. The lender receives a lower price for the property at an auction as well as incurs the additional cost of assigning resources to administer the foreclosure process.


Protection for Your Credit


It is better from a lender’s standpoint to recover a part of a mortgage loan rather than incur a total loss. For this reason, banks will generally settle for a short sale instead of proceeding with a foreclosure. A short sale financially benefits both the lender and borrower compared to a foreclosure.


Helps Avoid Scams


It is disheartening enough to face foreclosure on your home. To add insult to injury, there are unscrupulous opportunists waiting in wake for a chance to prey on helpless, stressed homeowners.


The process of a short sale is quite similar to a traditional sale. Therefore, the homeowner will be acquainted with the professionals they engage with. This is almost certain to eliminate the chances of a conman becoming involved in the process.


Contact a Skilled Real Estate Lawyer


If you are a distressed homeowner facing foreclosure and contemplating selling your property in a short sale, it is best to work with an experienced real estate lawyer to guide you through the process.


The dedicated real estate attorneys at Davis, Bingham, Hudson, Buckner, P.C., will offer you robust legal counsel about your liability after the sale and ensure that you have a complete understanding of the short sale documents. For a detailed consultation, speak to a skilled lawyer at (334) 821-6335 today.


What Is Airbnb’s Impact on Housing in Auburn?

A quick search on Airbnb for a short-term rental in Auburn returns over 300 results in Auburn and surrounding areas. In the city of Auburn itself, there are more than 150 active Airbnb hosts.

While Airbnb may be a lucrative opportunity for many homeowners, as well as a convenient rental option for visitors to the city, it’s important to consider how Airbnb has impacted the housing market.

Airbnbs Drive the Economy in Alabama

According to a 2018 article published in The Auburn Villager, during the 2018 graduation weekend in Auburn, Auburn residents earned approximately $42,100 through Airbnb rentals. And if that sounds like a lot, consider that the following year, in 2019, hosts earned more than double that – $103,000. And in 2017, the state of Alabama collected approximately $1 million from Airbnb (paid by about 4,500 guests) in the form of a lodging tax booked for each rental. 

Earning income by renting one’s property is certainly a draw. Indeed, Auburn City Councilman Brett Smith explains that short-term rentals like Airbnb can have a beneficial economic impact, allowing low-income property owners an opportunity to increase their financial revenue.

Airbnb and the Rental and Housing Markets

While making money off of an Airbnb or another short-term rental option may seem fairly innocuous, and even beneficial for individual residents and the economy at large, research shows that when the number of Airbnb listings in a city increases, so does the average price of rent.

As reported in the Harvard Business Review, one of the reasons for this trend is fairly easy to understand: with an opportunity to make more money in the form of short-term rentals, many landlords may start converting their properties from long-term rentals to short-term ones, therefore results in a dearth of available long-term housing, driving prices up. Similarly, many landlords are also taking their homes out of the for-sale market and transitioning into short-term rentals instead.

In order to pair this conclusion with some real data, consider that a one percent increase in Airbnb rentals in a city is associated with a .018 percent increase in rental rates and a .026 percent increase in house prices. This may seem like a small effect at first; however, note that Airbnb’s average year-over-year growth is approximately 44 percent. In other words, about one-fifth of the average annual increase in rent prices across the country and one-seventh of the average annual increase in home prices can be attributed to Airbnb growth.

The Housing Market in Auburn

Airbnb has increased in Auburn in recent years. Remember, in 2019, the amount of money made through short-term rentals in Auburn was over $103,000 – just two years previously, in 2017, the amount was only $17,700. As Airbnb becomes more popular in the city, home values continue to increase.

A Zillow Market Report shows that in January of 2015, the average home value in Auburn was about $212,000. By January of 2018, that amount had increased to $238,000, and today, the average value of a home in Auburn is $261,000. Zillow predicts an additional 5.1 percent increase over the next 12 months, bringing the average home value to $279,000 by September 2020. (Note that while the median home value is in the $260,000 range, the median price of homes currently listed for sale is $319,000.)

With a housing market that’s been described as “warm,” now’s a relatively good time to sell in Auburn. However, many who may have been positioned to sell their home may be considering Airbnb rental instead as a way to increase revenue.

What’s the Best Way to Regulate Airbnb in Auburn?

Cities around the world are struggling with how to regulate Airbnbs and other short-term rentals in a way that is fair to all – short-term rentals generate income for property owners, but also limit the housing supply and drive up the price of living for locals. In Auburn, regulations have been proposed to introduce a zoning overlay that distinguishes between short-term non-primary rentals and homestays, defines short-term rentals of stays of 30 days or fewer, limits non-owner occupied rentals to 240 days per year, and requires rental operators to maintain a zoning certificate. Limiting the number of homes that can be added to the short-term rental market may be another option.

Learn More About Auburn Residential Real Estate from an Experienced Attorney

If you have questions about the legalities of residential real estate in Auburn and how to protect yourself, working with an experienced real estate attorney can offer straightforward, accurate answers. Whether you’re in the market to purchase or sell, our skilled Auburn real estate lawyers at the offices of Davis, Bingham, Hudson & Buckner, P.C. is here to serve you. Reach out to us today at (334) 821-1908, online, or stop by our office today to learn more.

What is the Alabama Homestead Exemption?

If you own property in Alabama and meet some other requirements, you may be eligible for a Homestead Exemption. This exemption gives you a break on your property taxes, but it isn’t automatic. You’ll need to determine what you qualify for and then apply for it.

Alabama’s Property Taxes

The property tax year in Alabama runs from October 1 through September 30, and property owners pay taxes a year in arrears, meaning you’re charged for the year that just ended. Your property taxes are due on Oct. 1, and the bill is sent to the owner of record for the property on Oct. 1 of the prior year.

If you purchased a property during the past year, you would be responsible for paying the bill, even if it doesn’t have your name on it. It is also your responsibility to pay the bill even if one isn’t mailed to you.

This all sounds fairly confusing, but one thing that is simple is saving money on your property taxes if you meet certain requirements. Anyone who is eligible should apply for the Homestead Exemption.

Types of Homestead Exemptions in Alabama

According to Alabama law, there are four different types of Homestead Exemptions. You should apply for the one that gives you the most benefits provided you meet the qualifications. The basic requirements for all four of these exemptions are as follows:

The homeowner must be a citizen of Alabama that owns and occupies a single-family residence, including manufactured homes. It must be your primary residence, and the property is not used for other purposes, such as a business.

Homestead Exemption 1 is equal to $4,000 of the assessed value in state taxes as well as $2,000 of the assessed value for county taxes.

Homestead Exemption 2 is available if the homeowner is legally blind (“20/200”) or ages 65 or older with a $12,000 or lower annual adjusted gross income as reflected on their most recent State Income Tax Return. It is also available (regardless of age) if you are retired due to permanent and total disability. The exemption is equal to all state and county taxes up to $5,000 in assessed value. If claiming this based on disability, proof must be submitted.

Homestead Exemption 3 is available if the homeowners are ages 65 or older with $12,000 or less in combined taxable income on their latest Federal Income Tax Return. It also applies if you are retired due to permanent and total disability. This exempts you from all ad valorem taxes, and you must prove disability.

Homestead Exemption 4 is available if the homeowners are ages 65 or older with $12,000 or more in combined taxable income on their latest Federal Income Tax Return and $12,000 or higher annual adjusted gross income as reflected on their most recent State Income Tax Return. You would receive an exemption equal to $2,000 of the assessed value in county taxes and the state portion of ad valorem taxes.

Exemption applications must be made by December 31 and any Exemptions granted based on age or disability must be granted annually.

What Does Alabama Mean by “Residential Property”?

According to the Alabama Code, “residential property” is real property used by its owner exclusively as a single-family dwelling. Having your home qualify as “residential property” is essential to getting the lowest property tax rate.

Some of the things that the state uses as a “test” for this qualification include:

  • The homeowner pays all utilities at the property as of Oct. 1;
  • The homeowner or an immediate family member were the only ones living at the property, and it was not used to produce income;
  • The homeowner was maintaining the property as of Oct. 1;
  • The homeowner lived at the property or stayed there overnight; and
  • A Homestead Exemption was filed for the property.

Speak with a Qualified Alabama Real Estate Attorney

While the basic Homestead Exemption might seem straightforward enough, there are enough nuances to these different laws to make things confusing. Anyone who wants or needs to apply for Homestead Exemptions 2-4 could certainly run into some roadblocks. Likewise, a governing body might want to argue that your home doesn’t meet the definition of a “residential property.”

If you run into difficulty with your Homestead Exemption, have questions about a real estate matter, or need the assistance of an experienced Alabama real estate attorney, contact the law offices of Davis, Bingham, Hudson & Buckner, P.C., to learn more about how we can help.

For a consultation with one of our qualified real estate attorneys, call us at 334-821-1908, reach out to us online, or stop into our Auburn office today.

Can I Appeal My Property Tax Bill in Alabama?

Owning property has many benefits, including the potential ability to make money over time and sell your property at an increased value. But being a property owner also has certain obligations, including the duty of paying property taxes on an annual basis.

The following reviews everything you need to know about property taxes in Alabama, including how property taxes are determined, when they’re due, and what you should know about appealing a property tax bill in our state. For help navigating the process, please reach out to our experienced property tax lawyers at the law offices of Davis, Bingham, Hudson & Buckner, P.C. 

How Is a Property Tax Value Determined?

Property taxes in Alabama are determined based on a property’s assessed value. The assessed value of a property is determined by the appraisal value and the property classification, which is the assessment rate. There are a few important terms that you’ll need to know when considering how property tax is determined:

  • Millage rate. The millage rate, according to the Alabama Department of Revenue, is the tax rate (set by county commissions and other taxing agencies where you live) expressed in decimal form. 1000 mills are equivalent to $1.
  • Exemptions. You may have exemptions that reduce the amount that you owe, resulting in your adjusted tax bill. One common exemption, for example, is the homestead exemption.
  • Property classification. There are four classes of properties in Alabama: Class I, Class II, Class III, and Class IV. For example, private automobiles are Class IV properties, whereas residential manufactured homes are Class III properties.

If your property tax amount goes up, it’s for one of two reasons. First, a tax rate increase (millage increase) could lead to an increased tax bill, or, second, if your property has increased in its appraised value, then your property tax bill will increase, too. Note that those who are disabled, blind, or over 65 years of age do not have to pay state property taxes, but may still owe county property taxes.

Can I Appeal My Property Tax Bill in Alabama?

Property taxes are due by October 1; by January 1, a person who has not yet paid their property taxes will be considered delinquent. That being said, when you receive your property tax bill in the mail, you maintain the right to appeal the property tax bill if you do not agree with it.

If you do not agree with the value of your property (and therefore believe that your bill is inflated based on the reported appraised value), you maintain the right to appeal per Alabama Code. This process entails:

Note that in filing your written appeal, you must include a detailed statement of the reason as to why you are filing the appeal/why you don’t agree with the assessment, as well as a copy of the final assessment. It is strongly recommended to consult with an experienced attorney who can assist you in this process.

What happens if I still don’t agree?

If, after the county appraiser reviews your valuation, you still do not agree with the value for which your property has been appraised, the next step is to schedule a hearing before the Board of Equalization (BOE). During the hearing, you will be provided with time to present evidence and information supporting your claim. The BOE will then issue its finding. If you disagree with the BOE finding, you once again maintain the right to appeal, this time to the Circuit Court of the county where your property is located. Again, this appeal must be filed within 30 days of receiving the decision from the BOE post-hearing.

Our Lawyers Can Help

Appealing a property tax assessment on your own is not easy, and requires not just insight and experience in property tax law and the appeals process, but also knowledge of how assessments and appraisals are made. Working with a real estate lawyer who is familiar in property tax law is one of the best ways to improve the chances of your appeal being successful.

To learn more about how to appeal a property tax bill in Alabama and what your rights are as a property taxpayer, please call the office of Davis, Bingham, Hudson & Buckner, P.C. today for a consultation at (334) 821-1908. You can also send us a message online or visit our Auburn location in person. 

Suing for Unpaid Rent After Evicting a Tenant

Alabama has laws in place that protect both landlords and tenants. If you are a landlord and your tenant failed to uphold the terms of a lease or doesn’t pay rent, you can start the eviction process. Depending on the circumstances, the process could vary, but in most cases, you have the right to sue for unpaid rent if you are unable to collect it from the tenant.  

The Eviction Process in Alabama

Generally, landlords must have legal cause to evict a tenant. Not liking them or deciding that you want to use the property for something else won’t suffice. Some acceptable reasons include lying on a rental application, violation of lease terms, and failure to pay rent.

To terminate a lease, the landlord generally needs to give a seven-day written notice to the tenant. Tenants then have that period to pay any past due rent, take care of other violations, or vacate the property. But when a tenant still owes the landlord money, what’s the next step?

Tenants with Leases and Unpaid Rent

A tenant “breaks a lease” when they move out before the lease term is up, whether or not they’ve notified the landlord of their intent to vacate. It makes sense to sue a tenant in this situation, particularly when there is a lot of time left on the lease.

By leaving before a fixed-term lease has expired, that tenant is liable for rent for the remainder of the lease term. While the landlord has a duty to attempt to find a new tenant, they may still be able to collect the difference between the rent due, less the security deposit held, the cost to re-rent the unit, and the new rent collected.

When the landlord has evicted a tenant that has a lease, this changes the equation. That same landlord can no longer sue for the remaining amount of the lease because they’ve chosen to terminate the agreement. Instead, they can sue for unpaid rent and any damage the tenant may have caused in small claims court. It might make sense to go down this road if the security deposit won’t cover what is due (factoring in cleaning fees and other expenses).

Month-to-Month Tenants and Unpaid Rent

The situation is similar with a month-to-month tenant. Ideally, these tenants provide the required notice (usually 30 days) of intent to vacate the property and pay rent for that period. If they don’t pay rent or if a month-to-month tenant is evicted, there are several options.

The first is to use the security deposit to cover unpaid rent. Security deposits can be used to cover damage to the property as well as any unpaid rent. But, if a significant amount of damage was done or the rent due is more than the balance held, you can sue for the difference.

Landlords Suing Co-Tenants for Unpaid Rent

When you have two or more people renting a property together with both being listed on the lease, these are co-tenants. Each co-tenant has the same responsibilities and rights under the lease agreement.

If you must evict co-tenants that have back rent due, you can sue either one or both of them for what you are owed. This is because all tenants are financially responsible for money due regardless of any agreements amongst themselves. How they hold each other responsible later is between them.

Potential Tenant Defenses for Unpaid Rent

Often, a tenant that has been evicted and then sued for unpaid rent won’t bother to show up in court. If this happens, you’ll be able to state your case and potentially win by default as long as the scenario is credible.

Sometimes, the tenant will make an appearance but has no valid defense for not paying the past due rent. Maybe they are hoping for leniency by the other parties or would like an installment plan. The courts will generally rule in favor of the landlord in these cases as well.

There are some cases in which the tenant comes to a court hearing with defenses prepared. The most common among these is that the unit was uninhabitable according to state standards. Alabama law requires that a landlord make the premises “fit and habitable,” and failure to do this is potential grounds to break a lease.

For success in defending against unpaid rent, tenants must present proof of their claims, such as an environment that threatened their health and safety. Likewise, landlords should come prepared to these hearings with documentation that includes signed rental agreements and the period of unpaid rent that is due.

Speak with a Qualified Alabama Real Estate Attorney

Landlord-tenant disputes can be emotional and complex. If your evicted tenant still owes you money, you have legal remedies, but getting them to pay can be challenging.

The experienced real estate attorneys at Davis, Bingham, Hudson & Buckner, P.C. have successfully resolved these types of issues for clients throughout the Auburn and surrounding area. We are an established real estate and transactional law firm that has been delivering results for clients since 1978.

Contact our office today at (334) 821-1908 for a consultation to discuss your case.

What Type of Business Structure is the Best for my Business?

When you are forming a new business, there are numerous tasks that need to be completed.  Raising capital, hiring staff, developing a marketing strategy, and putting in countless long days in the beginning to bring the business from zero to profitability, just to name a few. But before you begin operations, one of the most important things you need to figure out is your entity structure.

The legal entity you choose for your business will have a major impact on your liability exposure, how you conduct operations, taxes, and many other areas. Each business structure has its own advantages and disadvantages, and the best type of entity for your business will depend heavily on unique factors such as the industry you are in, the size of your company, how many owners you have, and your long-term objectives. The key is to determine which entity structure contains the attributes necessary to best help your business accomplish its goals.

There are five main business entity structures that are recognized by the IRS. Here is a look at each one of them:

Sole Proprietorships

A sole proprietorship is the simplest and most basic type of business entity. This is a common choice for solo entrepreneurs who are just starting out, have very few or no employees, and have limited interaction with vendors, suppliers, and subcontractors. In many cases, sole proprietorships are operated from a home office, and there is no business that they are renting or leasing. A sole proprietorship is easy to start because there is no separate legal entity to form. Essentially, all you need is a business bank account and the required licensing and you are in business. The major downside is that the profits and losses for the business are included on your personal tax return, and the owner is personally liable for any debts and lawsuits against the business.


A general partnership can also be started without forming a separate legal entity. This type of business structure may be suited for a small business with two or more owners that is just starting out and, like a sole proprietorship, the business has few or no employees and other complex arrangements. With the general partnership, owners are also exposed to personal liability that may result from the business. This can be more problematic than with sole proprietors, because you may be on the hook for the potential negligence or misconduct of one of the other partners. 

Limited Liability Companies (LLCs)

One way to address the concern about liability exposure within a business is to form a limited liability company (LLC). An LLC is a hybrid structure that allows owners, partners, and shareholders to limit their personal liability while enjoying the flexibility and potential tax benefits an LLC has to offer. LLCs have fewer formal requirements than corporations, but members can choose to be taxed as a sole proprietorship or a corporation. This makes them a popular choice for all types of small businesses.

S Corporations

A Subchapter S corporation, commonly known as an “S Corp”, is a corporation that must have been created in, and be based in the United States. Ownership is limited to a maximum of 100 shareholders, and shareholders must be private U.S. citizens, very specific types of trusts and estates, or certain types of exempt organizations, such as a qualified pension plan. The main advantage with an S Corp is that business income and losses “pass through” directly to shareholders without first having to pay corporate tax on the money. This allows an S corporation to enjoy the same limited liability for its shareholders has a C corporation, but without the double taxation. The main drawback to an S Corp, aside from the ownership restrictions, is that it can only issue common stock. The inability to issue preferred stock can make it more difficult to attract investors if the business needs to raise capital.

C Corporations

A C corporation is the most complex type of business structure, with limited liability and very few restrictions on ownership. A C Corp can have an unlimited number of shareholders, and the shareholders may be other individuals, corporations, trusts, foreign citizens or entities, and virtually any other type of individual or legal entity. You are also allowed to issue any type of stock, such as cumulative, convertible, callable, and other forms of preferred stock in order to lure investors and for other purposes. As we touched on in the discussion about S corporations, the main drawback with a C Corp is the fact that corporate profits are taxed twice; once at the corporate tax rate, and again at the dividend tax rate when they are received by shareholders as dividends.

What Type of Business Structure is Best for You?

As you can see, there is a lot to consider when deciding which legal entity to structure your business under. While it is possible to change business structures later on, this can be costly and complicated, depending on your circumstances at the time you decide to change. This is why it is much better to choose the business entity that best fits your needs from the outset.

At the offices of Davis, Bingham, Hudson & Buckner, P.C., we have over four decades of experience assisting clients with business entity formation and all other types of business legal matters in Alabama. We can thoroughly examine the specifics of your business, and your needs and future goals to help you choose the right entity structure from the start. Call our office at 334-821-1908 to schedule a consultation. You may also send us a message through our online contact form.

What Things Need to be Considered before Buying an Existing Business?

If you are an aspiring entrepreneur who has always wanted to own and operate your own business, buying an existing business can be a good option. There are many advantages to purchasing a business that has already been established. One of the most important being that they have already done all the initial startup legwork to make the business operational. Beyond that, an existing business has an established reputation in the marketplace, and a brand that people recognize.

Though purchasing an existing business offers many potential benefits, you need to make sure to pick the right one based on your passion, skills, and budget. This may very well be the largest investment you have ever made, so you don’t want to jump in to any random business that may be for sale. It is important to perform some due diligence to determine whether or not you are likely to be successful with it.

There are many things that need to be looked at before buying an existing business. Here are 7 important questions to ask the current owner/seller or their agent:

Why is the owner selling?

In many cases, a business that is for sale will already have a published reason for why they are selling. However, it is useful to ask the seller this question again. There are certainly many legitimate reasons for selling a business; e.g., retirement, health reasons, moving out of the area, and many others. Mainly, you want to confirm that they are selling for one of these types of reasons, and not because the business is in decline and they are trying to get out.

How did the seller determine the asking price?

It is important to find out how the seller arrived at their asking price. Hopefully, it was not some arbitrary figure based on how much they needed to retire on or something similar. There are three common business valuation methods:

  • Asset Based: The value of all the assets the business owns.
  • Income Based: The net revenue the business generates each year, typically using a multiplier of 2X to 3X.
  • Market Value: What similar businesses are selling for in the area.

The seller may have used one of these or a combination of these with more weight given to one or the other. The right valuation method depends largely on the type of business, and the industry it is in.

What skills are needed to successfully operate this business?

This is one of the most important considerations when buying an existing business. It requires a buyer to take an honest look at their skillset and find out if they really have what it takes to successfully run this existing business. A business may be profitable today, but if it is not run properly, it may not be profitable tomorrow. Speak with the owner about what skills are necessary to get into this business and be sure you possess those skills (or someone close to you possesses them) before you decide to move forward.

What are the greatest challenges the business is facing, and what are its greatest growth opportunities in the marketplace?

There are two parts to this question, a more negative side and a positive side. You need to find out what challenges the business currently faces against their competition, and what will be required to overcome these challenges. You should also ask about opportunities the owner believes are available to grow the business in the future.

Is the seller willing to finance all or part of the purchase?

One of the downsides of purchasing an existing business versus starting a business from scratch is that it will typically cost far more to purchase a business that is already established. This could make it challenging to obtain financing through traditional sources, such as the local bank. Sellers can help with this dilemma by offering to finance part or all of the transaction. If you are searching for financing options, be sure to ask the seller if they are willing to do this for you.

Is the seller willing to stay on as a consultant or employee to help during the transition period?

Along the same lines of the last question, you might need some help (at least in the beginning) as you transition into owning and operating your own business. You might also need some assistance with the current employees and clientele. Keeping the seller in some capacity can help address these issues. Find out if your seller is willing to stay on in some type of role.

What legal contracts does the business have? And are there any unresolved legal issues you should be aware of?

As a buyer, you need to know what legal contracts you will be obligated by. One common example is the lease for your location. There may be other contracts with vendors for certain products and services over certain periods of time. You also want to find out if there is any pending litigation against the business or any other unresolved legal issues.

The Importance of Working with Skilled Legal Counsel

Purchasing a business is a major investment that involves many complications and numerous potential pitfalls. If legal mistakes are made during the purchase process or after you take over operations, you could end up with severe consequences; even the possibility of facing civil and or criminal charges depending on the situation. To ensure that you are legally protected from start to finish, it is best to work with an experienced business attorney. At the law offices of Davis, Bingham, Hudson & Buckner, P.C., we have extensive experience helping business owners in Alabama with all types of legal issues, and we work closely with our clients to help them successfully navigate the legalities of owning and operating a business. For a consultation with one of our attorneys, call our office today at 334-821-1908. You may also send us a message through our online contact form.