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Dec 19
The Basics of Taxation for Various Business Forms

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When choosing your business entity, many factors will influence your decision: the nature and size of the business, your comfort with liability exposure and what your financial capacity and goals are. One of the considerations in choosing your business structure is your potential tax liability. The tax burden posed by each of the structures described below may be one of the most important factors in organizing your business.

Sole proprietorships. As a sole proprietor, you will be directly taxed on business income and may be able to take deductions in certain circumstances. In a sole proprietorship, income, gains, and losses are all reported on the business owner's personal federal and state tax returns.  There is no distinction under the law between the owner and the business.

Partnerships.  If you operate any business venture with one or more persons, you will, by default, be taxed as a partnership. Like a sole proprietorship, income, gains, and losses must be reported on the individual federal and state tax returns of each partner. The partnership itself is not taxed as a separate entity, and there is also no legal distinction between the business and its owners.

Limited liability companies (LLC). For a number of reasons, most business owners choose an LLC or corporate structure to operate their businesses. An LLC with one member reports income and expenses in the same manner as a sole proprietor. An LLC with multiple members reports its income and expenses like a partnership unless it elects taxation as a corporation.  Thus, an LLC does not have to be treated as a distinct taxable entity for federal and state income reporting unless its owners so choose.  LLC members are also granted limited liability for the debts of the company, which makes an LLC an attractive option for many businesses.

S and C corporations. Unlike the other business forms, corporations can be treated as separate entities for tax purposes. Specifically, C corporations are not pass-through entities. A C corporation pays taxes on its income and can take any deduction it is entitled to according to IRS rules.  The shareholders of a C corporation pay separate taxes on the dividends they receive from corporate profits. In contrast, an S corporation enjoys pass-through taxation like a sole proprietorship or partnership.  It is not an independent taxable entity. Shareholders in an S corporation must report their portion of income and expenses on their personal tax returns, but avoid double taxation.

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.​



Dec 16
Converting Your Business to a Different Structure

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Over time a business may need to alter its structure to conform to different needs or an evolving business environment.  In some cases, you may decide that a different structure offers certain advantages that will be beneficial to the growth of your business. The business structure you choose will determine several key features of your operations including regulatory requirements, liability protection and taxation matters. 

A business that elects to form a limited liability company (LLC) has certain administrative and financial obligations. As an LLC, the business is required to draft and submit articles of formation and an operating agreement.  LLCs must also elect their management structure, namely choosing between either a member-managed or manager-managed LLC.  Whether it will be taxed as a partnership or a corporation is another important consideration for LLCs. One of the greatest benefits of LLC status is the personal limited liability protection afforded to its members.   

If a business converts from a corporation to an LLC in California, it can take advantage of the streamlined procedure known as statutory conversion. This process allows a business to change its structure automatically to an LLC by filing a document with the Secretary of State. This process concurrently transfers the corporate assets and liabilities into the LLC. A business owner can avoid numerous administrative filings and actions, including dissolving the corporation separately, by employing this process.  

Alternatively, a business may choose to convert from an LLC to a corporation to obtain more capital by attracting new investors and revenue sources. The process of transforming an LLC into a corporation in California entails several simple administrative actions. First, LLC members or owners must vote to approve the conversion. This includes authorizing the terms of the business conversion, the content of the formation documents and the process of conversion of ownership rights. Then the LLC must file articles of incorporation with a statement of conversion that conforms to specific requirements under the California Corporations Code.  The articles must be filed with the Secretary of State. The business must also modify its classification with the IRS to ensure proper tax status.  

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.




Dec 14
Dissolving a Corporation in California

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When you have decided that it is time to dissolve your corporation, there are a number of steps to take to ensure that you properly wind up your affairs. These include giving proper notice, filing the requisite forms and finalizing business activities. Below is a summary of the main procedural elements for dissolution of a corporate entity in California.

Shareholder consent.  Businesses must undergo the process of "dissolution" to formally terminate their business entities. The law in California permits a voluntary dissolution if shareholders owning at least 50% of the voting stock elect to dissolve the corporation. A meeting of shareholders to decide on dissolution is generally convened unless the 50% threshold is reached and consent is provided in writing. Upon agreement, the shareholders must sign a written consent form that establishes that the corporation is dissolved, which is then submitted to corporate records. You must give prompt notice to the remaining shareholders who did not consent to the forthcoming action. The process for dissolution is generally outlined in the governing documents of the corporation. These documents should be reviewed to ensure compliance with stated procedures.  It is critical to take the interests of minor shareholders into consideration prior to dissolution to avoid any appearance of abuse by the majority shareholders in electing to dissolve.

Filings.  At the time of dissolution, you must file a Certificate of Election to Wind Up and Dissolve with the Secretary of State (Form ELEC STK). The certificate states the following: (i) the corporation has chosen to dissolve, (ii) the number of shares that voted for dissolution, (iii) the shareholders with at least 50 percent of the voting power approved the dissolution, and (iv) a shareholder was permitted to execute the certificate by shareholders with at least 50 percent of the voting capacity.

Post-dissolution actions. After dissolution of the corporation is granted, the corporation must wind up its affairs. Some of the actions that take place during this period include distributing remaining assets and satisfying outstanding debts and obligations.  Written notice of the intent to dissolve should be provided to all creditors and any individual with a claim against the company (in addition to all shareholders who did not elect dissolution). The Board of Directors retains full power to perform these functions during this time period.   

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.



Dec 12
Shareholder Rights

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When you become a shareholder in a corporation, what rights do you have as a partial owner of the business?  Shareholders are entitled to share in the company's profitability, but they also retain other rights related to the operation of the business. Understanding the nature of your rights as a shareholder is important in maximizing your investment potential and minimizing your risks.

Economic rights.  Shareholders own a portion of the assets of the corporation.  Allocation of profits depends on the number of shares owned by the shareholder.  One of the rights of ownership entails the ability to easily transfer or sell these rights to another individual at your discretion.  Certain corporations issue different classes of shares known as common and preferred.  Common shareholders and preferred shareholders own different stakes in the company.  

Voting rights. Voting rights are one of the primary means for shareholders to exert control in corporate affairs. Shareholders are permitted to vote on certain corporate matters, including electing the board of directors and structural or strategic decisions to be made by the corporation. Shareholders are also entitled to vote when the value of their ownership interest is at issue, such as whether the company should approve a merger or acquisition. Shareholders typically vote on such matters at annual stockholders' meetings or other special meetings that are called to address extraordinary issues.     

Rights to Dividends.   In certain circumstances, shareholders may entitled to receive a share of the corporation's profits in the form of dividends. The Board has discretion to decide what percentage of profits will be distributed to shareholders as dividends. The Board may choose to reinvest the corporation's profits in lieu of distributing them to shareholders. Shareholders only have the right to claim the dividend once it is declared by the Board.

Inspection Rights. While the financials of public corporations are open to public inspection, the financial information of private corporations is not readily accessible. Shareholders have the right to inspect the books and records of the corporation, which can be especially important if a shareholder suspects mismanagement or improper conduct.

Litigation rights. Shareholders have the right to redress misconduct by the Board for a breach of its duties through derivative litigation. When management does not take appropriate legal action, a shareholder can do so on behalf of the corporation after first requesting management take action.

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  ​​​Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.​


Dec 09
Assignment of Business Contracts

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When your business undergoes changes, it might become necessary to revise some of your contracts. Particularly if you sell your business, contracts may need to be assigned to the new purchaser unless prohibited for a specific reason. An assignment involves a transfer of the contract's obligations and benefits to a subsequent party, with the transferee accepting the obligation to perform under the contract. Often the assignor also notifies the other party to the contract of the assignment.

An assignment differs from a delegation. The latter assigns only the duties to be performed under the contract, but does not assign the benefits to be received thereunder. A simple assignment occurs when you have a contract with a counterparty to provide a product and you transfer your obligation to deliver the product and the right to collect payment to another party. If the counterparty assents to the change, then a new contract has been formed. In some cases, the assignor may still be bound by a guarantee that the contract will continue to be performed in accordance with its terms.

The general law in the United States is that most contracts are freely assignable unless specifically prohibited. Thus, there are circumstances where an assignment is not enforceable. First, the contract may prohibit an assignment outright. A non-assignment clause may provide that "neither this agreement nor any of the rights, interest or obligations thereunder shall be assigned by any party without the prior consent of the other party." In some contracts, there is an additional clause providing that consent should not be unreasonably withheld.

There are other more limited circumstances where an assignment would be declared void. For example, state laws may prohibit the assignment of claims against the government. Other laws preclude one party from assigning wages. Claims may also be barred from assignment because they violate public policy. In some cases, an assignment of a contract or claim could materially affect the essential terms of the contract or subject the counterparty to unforeseen or excessive risks. A court may be unwilling to enforce an assignment that alters the material terms or performance under the contract.  

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  ​Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.​



Dec 07
Defenses to a Breach of Contract Claim

Defenses to a Breach of Contract Claim.jpgWhen you are faced with a claim for breach of contract, it is important to be armed with a variety of defenses to support your position. The defenses you raise should be broad in nature (including affirmative defenses) and should be presented early in the litigation to avoid being time barred from raising the defense at a later time. Below is an overview of some of the most common defenses to breach of contract claims.

Indefiniteness. If the terms of the contract were not finalized or the court was not able to determine the essential elements of the agreement, then the defaulting party could argue that the contract was not valid because of indefiniteness. All contracts must contain definite and certain terms in order to be valid and enforceable.

Statute of frauds. Certain contracts are required to be in writing. This includes, among others, contracts for the sale of land, contracts for the sale of goods exceeding a certain amount, and agreements that cannot be completed within one year. A defendant may claim that he is not obligated to abide by an oral agreement because it was required to be in writing in accordance with the statute of frauds.

Capacity.  A party to a contact must have the requisite capacity to enter into an agreement. If the defendant can demonstrate that he lacked such capacity i.e he is a minor or is mentally disabled, then the contract may be voidable. To determine capacity, a court may inquire as to whether the person was aware of his actions at the time of contracting or whether the person was in control of his actions when the agreement was made.

Mistake. A mutual mistake regarding an essential component of the contract at the time the contract was entered into can invalidate the agreement. The mistake must go to the essence of the contract and not simply be related to an ancillary or minor detail.

Unconscionability. When a contract is grossly one-sided, a court may find that it is not enforceable under the law. This kind of contract usually results from broad discrepancies in the bargaining positions of the parties. The premise for setting aside the contract is that this inherent unfairness leaves the weaker party without the genuine ability to contract.

Impossibility. A party to the contract may assert that it was impossible to carry out his obligations under the contract due to changed circumstances.

Fraud. A defending party may assert that the contract was made under fraudulent conditions, through improper inducement (in the case of duress) or as a result of the exertion of unreasonable pressure by the controlling party (in the case of undue influence).

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.

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Dec 05
Attorneys’ Fees Provisions

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When you are involved in litigation, one of your primary concerns is likely the costs of litigation. Attorney's fees in the United States are generally subject to the "American Rule," which provides that each party pays only his own attorney fees regardless of the outcome of the dispute. However, provisions under contract or statutory law may provide exceptions or alter the general rule. In California, the recovery of attorney fees is governed by statute or contract in a number of litigation contexts.

The American rule.  The American Rule is designed to ensure that parties do not avoid litigation for fear of incurring the costs of the opposing party. This rule can be superseded when a specific state statute or contractual provision provides for an alternative payment structure for attorney's fees. Sometimes, either the statute or provision would explicitly require attorneys' fees to be paid by the opposing party or the court would make a determination that one side should pay the expenses of the other party as a matter of fairness in limited circumstances.

Contractual clause addressing attorneys' fees. Parties can include a fee provision in their contract that requires the losing party to pay the attorney's fees of the winning party.  Even when parties can specifically opt to include such a clause, a court may refuse to enforce the provisions if it is found to be unconscionable. A judge could cancel the provision or modify the fees if he concludes that the fee provision is grossly unfair.

State laws governing attorneys' fees. Some states have laws that explicitly mandate that the losing party pay the attorneys' fees of the prevailing party in certain types of litigation. In a number of specific cases, such as those involving antidiscrimination laws, federal laws, or actions that are pursued to obtain some type of public benefit, the losing party may be ordered to pay all legal fees of the other party.     

In California, the prevailing party in a contract dispute is permitted to recover attorneys' fees if the contract specifically provides for such recovery.  Even if the contract specifies that attorneys' fees are recoverable just for one of the parties, the opposing party may also recover legal expenses if he prevails in the litigation. A prevailing party is entitled to fees as a "matter of right." This refers to cases where the party wins the dispute persuasively, but does not necessarily prevail on all the issues.   

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.

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Dec 02
The Basics of Shareholder Derivative Suits

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In a corporation, the managing body has the duty to bring lawsuits on behalf of the corporation and defend the corporation from legal claims. But what happens when a shareholder wants the corporation to pursue a claim and the managing body disagrees?  What happens when a shareholder has a claim against one of the corporation's directors or officers for failing to carry out his or her duties properly or engaging in fraud or self-dealing?

Shareholders can act on behalf of the corporation to bring forth claims or to redress internal misconduct. Known as a derivative action, the shareholder files suit not in his personal capacity, but rather on behalf of the corporation against a third party.  While shareholder derivative suits allow shareholders to step in to initiate litigation when management has not exercised it duty to address the issue, the claim "belongs" to the corporation since the injurious action resulted in damage to the corporation.

Shareholder derivative suits have fairly stringent procedural requirements due to the unusual nature of the action.  In California, before a shareholder can file suit, he is required to make a written demand to the corporation's Board of Directors (Board) to purse the claims.  Only if the Board explicitly refuses to exercise its duty can the shareholder proceed with his claim. The exception to this pre-suit requirement is demonstrating that a demand on the Board would be "futile" because the Board is not capable of seriously considering the shareholder suit due its own self-interest.  The demand requirement is designed to comply with the fundamentals of corporate law: that is, corporate decision making is in the hands of the Board.

The demand on the Board must meet certain standards of particularity; vague allegations of misconduct will be deemed insufficient. The demand must state certain facts such as the identity of the perpetrator of the misconduct, the facts upon which the allegations have been made, and the damages that the corporation has suffered. In addition, the shareholder must offer a written statement of the facts underlying the cause of action or the basis of the complaint. Once these requirements are satisfied, the Board is required to look into credible claims of misconduct.   

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.​



Nov 30
Limitations on Discovery in Litigation

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Discovery is often the most expensive and lengthy aspect of the litigation process. During discovery, each party is permitted to request information and documents from the opposing party. The scope of information permitted during discovery is quite broad. However, there are limitations as to what information may be obtained during discovery and the litigating parties often spend considerable time disputing what is discoverable. The court must often intervene to determine if the request is overly expansive, inappropriate, immaterial or inconsistent with a certain right held by another party.

General premise.  Discovery pertains to any non-privileged matter that is relevant to a party's claim or defense.  It is how each party obtains evidence, and consists of oral (deposition) and written (questions known as interrogatories, as well as requests to produce and for admission) methods.   The questions and requests must be relevant to the matters at stake in the case.  They must take into account the issues being litigated, the parties' access to information and resources, and the amount of money in dispute.  In general, attorneys and parties can request documents or information relating to the facts of the dispute, the background or identity of the witnesses or any other party with knowledge of the issue, the records of the parties, the details of a business, or any facts about what the litigating parties or witnesses did in connection with the issue being litigated.   Any information that could reasonably lead to useable evidence at trial is generally discoverable under the law.  In California, the courts favor broad discovery limits.

Restrictions.  Although broadly construed, the general rule of discovery is subject to restrictions that are intended to prevent abuse and protect the rights of parties and witnesses during the litigation process. These restrictions consist of categories of information that are not discoverable because they are legally privileged or protected in some other capacity.

  • Confidential Relationships.  Verbal or written information transmitted in a confidential relationship such as between lawyers and clients, doctors/psychologists and patients, husband and wife, and clergy and individuals seeking religious guidance are granted a special cloak of confidentiality referred to as privilege.   Proper invocation of privilege prevents confidential information from being disclosed in all but the narrowest of circumstances.  Disclosure of privileged information is only allowed after the court determines several factors including: that it is the only source of evidence; and the party seeking disclosure has no other way to prove their case.  The premise behind protecting this type of information from disclosure is to safeguard the honesty and openness that characterizes certain relationships.

 

  • Privacy. Courts can impose limitations on discovery to protect the privacy rights of third parties who are not directly involved in the litigation. A court may also issue an order to protect information that relates to one of the litigating parties if the information is regarded as highly private, discretionary, and not directly relevant to the dispute.  California regards privacy as a constitutional right and the need for disclosure must outweigh a person's privacy rights before disclosure of private matters is allowed.     

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.​​​



Nov 29
The Advantages of a Buy-Sell Agreement

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If you own a business with another individual, you have probably wondered how the business would be affected if your co-owner died, became disabled, filed for divorce, retired or declared bankruptcy. It is important to be aware of how the event would alter your stake in the business. Whether your business is small or large, lack of preparation could result in unwelcomed financial difficulties and legal disputes. It is therefore critical to have one or more exit strategies in any business relationship.  One of these strategies is to draft and execute a buy-sell agreement with your partner at the initial stages of your business relationship.  There is no better time than when things are going well to discuss and agree on how to handle matters if they ever turn sour.

A buy-sell agreement, also known as a buyout agreement, provides direction regarding the future of your business if one owner leaves voluntarily or as a result of an unforeseen circumstance. The agreement addresses how ownership will be allocated and the mechanism for selling one's share of the business upon the occurrence of a triggering event. The agreement can require that the shares be sold using a predetermined formula for establishing the sale price.  The agreement can also address whether the shares can be sold to outsiders or whether the former owner's portion should be offered only to the remaining owner or to the company.

Aside from helping to protect the financial interests of the remaining owner, a buy-sell agreement can be instrumental in avoiding legal entanglements resulting from the termination of a partnership or other joint venture. For example, if your co-owner gets divorced, the ex-spouse could make a claim for a portion of the business under community property laws.  Some part of the business could be granted to your co-owner's children in the settlement. The agreement allows you to preclude certain parties from obtaining ownership rights in the business upon the occurrence of specific events.   

Many businesses require its owners to obtain life insurance policies on the other owners to ensure that the business is adequately funded in the event an owner dies. If an owner dies, the proceeds from the policy can be used to purchase the ownership interests of the deceased. Using life insurance proceeds is generally the most cost sensitive way to guarantee that the buy-sell agreement is fully funded upon the occurrence of one of the triggering events.                           

Gallagher Jones LLP is committed to offering its clients practical and innovative legal advice to meet their business needs. Feel free to contact Gallagher Jones LLP at (916) 226-4470, or visit www.gjlaw.org, if you have any questions or would like to schedule a consultation.

Thank you for visiting the blog of Gallagher Jones LLP.  Please be aware that this blog is intended to provide general information and is not intended to be taken as legal advice or legal opinions.  Every case is different.  Your visit to this site does not create an attorney-client relationship.  Gallagher Jones LLP accepts clients only in accordance with, and after the completion of, specific procedures.

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