September 2019: Ask A Lawyer: Kameron Kramer

QUESTION: My partner and I have talked about starting a food truck business for years. He’s ready to move forward with our concept, but I am concerned it might be too complicated and risky. Is starting a food truck business more complicated than it’s worth?

ANSWER: When it comes to opening a food truck, planning is key, because a variety of unique legal issues must be addressed long before purchasing the truck itself. One of the first tasks is determining which type of business structure best suits the needs of the food truck business (e.g., sole proprietorship, LLC, or corporation). This determination is based on the number of investors, liability, financial requirements, and tax implications, so it is crucial to obtain legal advice to weigh the options before registering with the state.

Next comes licensing and permitting. Your business model will dictate what vehicle licensing requirements apply. For example, if you plan to drive your food truck across the state for festivals, you may need to obtain commercial licenses for the vehicle and the drivers. All food truck businesses must obtain health department certifications, food handler permits, and liquor licenses if alcohol will be served. Additionally, many cities require a separate permit to operate the food truck itself. This can be difficult to obtain if the number of available permits is capped. If the food truck is mobile, zoning laws may prohibit operating the truck in certain areas of the city. Importantly, some cities require food to be prepared at certified commissaries and then transported to the truck, as opposed to preparing food in the truck itself. Planning for the licenses and permits will save headaches down the road and prevent dreaded delays.

Finally, you should consult an attorney with expertise in trademarks at the early stages of brainstorming the name and logo for your food truck. Brand identity is one of the most valuable assets of any food truck, so it is crucial to ensure the brand is eligible to be registered in the first place. The attorney can then help you file the application. Additional support in answering this question was provided by Rachel Wisniewski, a second year law student at UNM School of Law.

QUESTION: I own rental properties. They are in my name. However, I have been told by my accountant that I should form a holding company to house them in. Is this really necessary? It seems like just another reason for the accountant to charge me for more work. Honestly, what’s the big deal? I have homeowner’s insurance and the rental properties combined are worth maybe $500,000 on a good day. Besides that, I have had one renter (who is a recluse and just wants to be left alone) for 10+ years and the other one is one of my friend’s kids. Neither one of them is likely to harass me or shake me down for anything.

ANSWER:If you ask an attorney, we will pretty much always recommend an LLC to hold a rental property as it can protect your personal assets by forming a liability shield. Since the LLC would own the property, any lawsuits relating to the rental property would only affect the assets of the LLC, and not your personal assets, although exceptions can occur. The relative cost of an LLC, along with the ease of operation, is such that it is worth it. Some property people are opposed to attorneys and think that homeowner’s insurance is enough, and usually it is. But, my job as an attorney is to foresee the worst possible scenarios and try to protect for those outcomes.

Forming an LLC, especially in New Mexico, is relatively quick, easy, and inexpensive. And it can be done anonymously, with L4SB’s Anonymous LLC. Once the LLC is formed, the property would be transferred to the LLC, or if this is a new purchase, the LLC would be the party purchasing the property. If you are transferring the title of property to an LLC, you also need to transfer the mortgage. You should contact your lender before doing anything as there could be a due on sale clause that would require the full amount of the mortgage to be paid upon a transfer. But oftentimes lenders are fine with mortgagees transferring title to an LLC that is owned by the original mortgagee. The lender could require re-financing though, so it is very important to speak with your lender before doing any kind of transfer. Assuming you are good to go on the title and mortgage transfer, the LLC is formed, and the property is formally transferred to the LLC. If you have any existing leases with tenants, they need to be updated with the new LLC as the landlord. Failing to do this step could negate all your work. Now that you have your property in the LLC and are renting under the LLC, how is handled for tax purposes? This is another benefit with the LLC – your tax treatment. It’s important to speak with an attorney who is both knowledgeable in business formations and taxes, as you can probably take advantage of the tax treatment of the LLC. Most likely your LLC will be taxed as a pass-through tax entity, meaning the income and capital gains from the LLC pass directly to you as the owner. The taxes are then paid by you as an individual, as the LLC does not pay any taxes. Additionally, the rental income and appreciation value are exempt from tax penalties, and the mortgage interest rate may also be deducted.

Forming an LLC to hold and rent your property is well worth the time and money to do so. But still always get the proper insurance. You can never be overprotected!