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California LLC, INC, or NOTHING

California LLC, INC, or NOTHING

California LLC, INC, or NOTHING

(OP)
I live in California. Do not own my own home, or have my own business. Recently I have been presented the opportunity to stamp grading plans for a friend who is designing and eventually selling a "Dream Green Home" near the beach.

I have consulted with him on the design, know it will work, and the only reason why I haven't stamped the plan up until now is because I don't have a contract, my own company, or insurance. I want to take the steps necessary to eventually become a self-employed professional and I have started researching LLCs, LLPs, and INCs. Everything seemed like it would be easy until I read thread784-92621: Inc. Verses LLC or Nothing. That thread ended with a post that claimed, in CA Professionally licensed engineers can not form an LLC or LLP to do engineering work, and that an S-corp. was basically worthless unless you carry a lot of insurance.

Now, I will probably go with nothing as I don't have a lot of clients or capital to start an s-corp.. I could start a LLC or a LLP if I was confident that it would protect me, but judging by what I have read in thread784-92621: Inc. Verses LLC or Nothing Why Bother? Honestly.... I would really like to know!

Maybe if the walls they built and designed cave in, I will be able to see the sky!

RE: California LLC, INC, or NOTHING

At this point, it sounds as if you need to invest in  a meeting with a lawyer who can answer your questions as to what protection an LLC or corp might offer you, or not.  I would not make a major decision like this based on answers in a forum.

RE: California LLC, INC, or NOTHING

LocalGuy,
do NOT desperate so easy. You could have relatively good protection of your personal assets even without carring "a lot of insurance".
First of all so named "errors and omissions insurance" is very expensive!
Second, having insurance you are just attracting lawsuits...
Probably you would ask why. There it is the answer:
It is no likely somebody to go after you if he/she knows you have no money to pay the claim against you.
If the plaintiff knows you have good amount of money in your bank account or insurance company, which would pay if you lose the lawsuit it is very possible you to be named as defendant.
If you have a money(after all this is the purpose of the business, correct?)you still can protect them using the right combination of entities( Family Limited Partership, Trusts, Limited Liability Companies etc.)
I am giving to you(and to everybody interested) one really good web site concerning this matter. In fact the phisical office of these lawers is in California.
The web site is :
http://www.rjmintz.com/apptoc.htm
 

RE: California LLC, INC, or NOTHING

Marinov, That is arguably the worst advice I have ever seen on a professional board... telling someone to not carry insurance simply because you think that would make him the target of a lawsuit is not only foolhardy, it's scary.

What if he makes a major mistake that costs someone their life?  Should the relatives of the person who is hurt simply suck it up and go on about their lives?

Dan - Owner
http://www.Hi-TecDesigns.com

RE: California LLC, INC, or NOTHING

I do side work (about $5K/yr) and use an S-Corp and no insurance.  If you are concerned about liability, you can make sure you have written contracts and limit your liability to your fee.  See below for more on this if you get resistance from your customers.  In a dispute, they would have to sue the company since that is the contracted party.  You may be personally liable if negligent or grossly negligent regardless of contractural arrangements.

In any event, once someone sues you, you will have expenses defending yourself so if you are serious about going solo, eventually, you will need to pick up insurance.  But with insurance, you can raise your liability clause in your contract to make it easier for your clients to agree to.

Don Phillips
http://worthingtonengineering.com

RE: California LLC, INC, or NOTHING

macgyvers2000,
your way of thinking is litle strange to me. So we have to carry insurance, because in case of fatal mistake the victim's family to be conpensated!? I think you went too far, but even in your case:
Usualy that kind of insurance policy is for about 1 - 2 million dollars. What if the jugment against the defendant is for 10 - 12 millions? The insurance company would pay it's part. After that the money will be takken and property of the defendant will be sold to satisfy the plaintiff. What about the engineer "made mistake" and his family...their properties and live are going to be ruined.
macgyvers, there are a thousands ways for all of us to lose our lives, so it is our responsibility to carry life insurance or NOT. The family still can be compensated without ruining somebody else family.

RE: California LLC, INC, or NOTHING

In many condo projects in the west one of the first things new residents get in the mail is a letter from lawers.  The letter ask if everything is allright with their place, is it leaking, is the carpet the color they told you etc etc.  If the law firm is sucessful in getting enough complaints ( real or imagined ) they threaten the developer, the engineer(s), architech etc. etc.
They usually just threaten to sue and settle out of court. If there lucky they get some kind of settlement, the tenants may see a pittance of it.
So what do you do? The ethical thing and fight them? Or justput your money in your wifes name or buy condos in Nevada ( or somewhere elses than it hard for them to get your money).
How do you conduct your self ethically when dealing with such a bunch?  Even if your a minor player they will keep your name on You may get lucky and win the lottery, in which case they wil move you to the top of their list.

Check with your lawyer, if you do work for a general contractor or architech they can cover you with their insurance. Your lawyer can give you the weasel words to put in your contract.  Some won't like it and you won't get the work.

RE: California LLC, INC, or NOTHING

@Marinov: There's a reason certain professions require you to carry insurance... it's not for your protection, it's for the protection of the people your product will be used by.  It's not unheard of for judges to overturn an LLC declaration as unsupportable and allow personal possessions to be seized when the "professional" makes a gross error... by purchasing insurance, the professional has shown he has taken reasonable precautions should an accident occur and is not hiding behind a corporate structure as a safety net to his incompetence.  Except in the case of gross errors, a court is more likely to limit judgements to the payout of an insurance claim and not touch personal possessions.

Mistakes are made time and time again, and insurance will help ensure a person can continue doing their job even when a mistake is made, rather than being permanently crippled by a single suit.  A court can recognize gross negligence and often times will take appropriate measures to ensure an incompetent person doesn't keep working simply because they can continue to afford insurance.  A judgement against a single person for 10 million dollars, at least to me, shows gross negligence, and that person should not be able to hide behind an insurance policy and continue to work.

Dan - Owner
http://www.Hi-TecDesigns.com

RE: California LLC, INC, or NOTHING

Sorry Dan - owner,
your "Robin Hood" like theory doesn't work to me at all!
What do you mean under "... require you to carry insurance"? Require by law or what? It is not liability in auto insurance.
Since it is voluntary we have the freedom to choose - carry insurance or not. Also, if you would have read more carefully my post you wouldn't write "...to overturn an LLC declaration as unsupportable and allow personal possessions to be seized ...", just because concerning assets protection I wrote "combination of entities( Family Limited Partership, Trusts, Limited Liability Companies etc.)", NOT just LLC itself.
Here I try to help the localguy - (starter of this conversation) to find options for starting his own business, not desperate him to waste a lot of money for possibly unnecessary insurances. It is good when we have an options isn't it?
I. Marinov

RE: California LLC, INC, or NOTHING

Choosing to carry insurance or not is like rolling the dice.  Sure you can roll them.  But if you've ever been to Vegas, just remember, it was built on losers.

I'd follow greenone's advice.  I make it a rule to avoid lawyers at all costs, but working or doing business in California is an exception I would make.  You might also want to get a 2nd opinion.  I know that is not cheap, but neither is litigation.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website: www.oil-gas-consulting.com

RE: California LLC, INC, or NOTHING

I have always found that a few hours with a business attorney who has a lot of experience with business formation is an excellent investment.

In addition to the general business formation question that you ask, I think that you also need to think about what the relationship with your friend is. Is he going to be your business partner? If you and him are business partners, I would certainly go to a lawyer together to figure out a corporate structure that works for both of you.

If you're not business partners, are you going to be paid a small sum to have designed/consulted on/reviewed the plans? If so, then should the agreement specify that he's responsible and you're not? Or, should it specify who's liable for what? I don't know the answers here, but I'm guessing that a good lawyer would.

RE: California LLC, INC, or NOTHING

One other thing that I should have mentioned... You may want to think about who will be executing the agreement, or otherwise selling the service to the end customer. Will it be you or your friend / customer / business partner / whatever he is?

That's another point that I would bring up with the attorney.

Mike
http://www.partnerup.com/

RE: California LLC, INC, or NOTHING

Sorry, that should have read "...certain states require certain professions to carry insurance...", so yes, I'm talking about it being a legal requirement.

I fail to see how it is a "Robin Hood theory"... I'm not talking about stealing from the rich and giving to the poor.  I'm saying a proper business plan should include some form of protection from mistakes that invariably happen.  In the case of dissatisfied customers, an LLC would suffice in shielding personal assets from seizure.  In cases where personal harm of a customer is a real possibility, insurance should be purchased for two reasons: 1) To make sure the customer is (at least partially) compensated for the damages, and 2) allow the professional to continue in his line of work without undue delay simply because of an honest mistake (not gross negligence).  To paraphrase Greg from above, a lawyer/insurance is not cheap, but litigation will be even less so.  Roll the dice, if you feel lucky, but you're also rolling the dice for anyone you may hurt since they will have no way to recover any damages... personally, I wouldn't feel comfortable with someone getting the shaft due to my mistake, even if it was unintentional, and because I rolled the dice.

I could say "Insurance is the cost of doing business", but I know many here would disagree with that sentiment (including myself).  I'll alter that a bit and say "For certain professions, insurance is the cost of doing business."

Dan - Owner
http://www.Hi-TecDesigns.com

RE: California LLC, INC, or NOTHING

(OP)
I love the conversation this post has generated.

First off let me clarify that my role is limited to a consulting engineer who will be giving my seal of approval on only a grading plan, which is limited to drainage,  some hardscape, and a small amount of retaining wall less than 4 feet in height (Which I am more than comfortable with). There is not a geotechnical on the project because the lot was previously occupied and the houses all around have been sitting on the soil just fine. For the most part the architect has completed the design based on what he has consulted me on and what he already knows. The civil engineer he has terminated contract with, doesn't even use AutoCAD and has provided him with an archaic plan that has construction notes typed and photo copied onto a hand drawn plan sheet. If he posted here his handle would be OldGuy

I think I got lucky on this one as far as what is required, and just as so many owner engineers out there present their work (or homework) to subordinates as being very easy, I intend on keeping it easy and making a little extra money this year to catch up with the cost of the housing bubble that I live in.

I will attempt to protect myself through a contract that limits my liability and see how fast I can set up a corporation. I'm not worried about negligence, I more worried about the commie lawsuits that might be distributed amongst all the people who bought the "idea" that insurance allows the Responsible Engineer In Charge blame the guy putting the plan on paper without feeling grossly negligent and more in control.

My opinion of lawyers is that I could have been one if I had the money. Speaking of which....the money is out there! It is about time that professional engineers start acting more like lawyers. Starting by encouraging peers to get their own contracts. Unfortunately for our profession most of us are to honest to stay single and daring long enough to get those contracts.

RE: California LLC, INC, or NOTHING

That's exactly what I ment LocalGuy protection from comie  lawsuits. As you said you could protect yourself limiting liability for yourself, but it may be critical during the competition for taking the work. As I already wrote it is good to us to have a options and to know a litle bit more. Take a look on the web site I gave you to have an idea of another possibilitie to AVOID lawsuits. I am including the next text(written by lawer) to make more sense.
Now to you Dan - owner:
Do NOT keep repeting nonsenses, just read the next and you will get the enlightenment, why I call your theory "Robin Hood like" Good luck

The reality of our legal system is that people are named as defendants in lawsuits not because of their degree of fault but because of their ability to pay. When an attorney is approached by a potential client who is claiming injury or economic loss, the attorney will consider whether a theory of liability can be developed against a party who can pay a judgment. This is called the search for the "Deep Pocket Defendant." The Deep Pocket Defendant will have substantial insurance coverage or significant personal assets. The measure of an attorney’s skill is his ability to create a theory of liability which will connect a Deep Pocket Defendant to the facts of a particular case.
Here is an example of what might happen in a particular case. Mr. Woodrow is driving in his car. Mr. Fishbrain runs through a stop sign at an intersection, smashing into Woodrow’s car and causing Woodrow severe injury.
From his hospital bed, Woodrow looks through the Yellow Pages and calls the first attorney he sees, the famous Alan Aardvark. He is what is known as a "contingent fee" lawyer. He works for a percentage of the ultimate recovery and determines whether to invest his time and money in a case based upon what his expected return will be. Since the time and expense of preparing for litigation can be considerable, an attorney cannot afford to take a case that is not likely to pay off. Remember—no recovery, no fee. Usually the attorney advances all costs and expenses, and in exchange, he recovers these costs plus 30 percent to 40 percent of any amounts which he can get from the defendant.
Before Aardvark decides to take Woodrow’s case, he will want to do some serious research to determine the merits of the case. Not the legal merits—the financial ones. He will want to know whether Fishbrain has substantial assets in order to make the case worthwhile.
Aardvark runs a financial search and determines that Fishbrain has no insurance and no significant assets such as a home or a retirement nest egg. What happens? Is that the end of the case? As for Fishbrain, it probably is the end of the case. Aardvark is not going to waste his time suing someone who can’t pay. But Aardvark is not going to give up so easily. He has a client with substantial injuries and that means a large damage award—big bucks. But first he has to find someone who can pay.
Here is how a good lawyer would analyze the case to try to draw in a Deep Pocket Defendant:
1. Was Fishbrain on an errand for his employer at the time of the crash? If so, the employer can be sued.
2. Did Fishbrain have any alcohol in his system? The restaurant that served him may have liability.
3. Was Fishbrain on any medication? The pharmacist, drug company, or physician may have potential liability for failure to provide proper warnings, or for writing or filling the prescription improperly.
4. The stop sign Fishbrain ran through was in a residential neighborhood in front of someone’s house. Did the homeowner properly maintain his property and clear his foliage to provide an unobstructed view of the stop sign? If not, there is a case against the homeowner for negligence.
5. Did the municipality take due care in the placement of the stop sign? Should it have used a traffic light instead? There may be a case against the city or county.
6. The driver’s side door of Woodward’s car collapsed on impact. There is a possible case against the manufacturer for not making a more crash resistant frame.
Do you see how far we are moving away from Fishbrain—the person responsible for the accident—in an effort to tie in a remote Deep Pocket Defendant? In any rational legal system, Fishbrain would be regarded as the wrongdoer—he disobeyed the traffic law and he caused the injury. Instead, we have an attorney trying to force the blame onto someone else—who wasn’t at the scene and doesn’t even know the people involved.
The example that we just gave you is taken from a real case. Guess who ended up as the defendant.
In the actual case, the defendant was Fishbrain’s ninety-two-year-old widowed great-aunt Ellen. As it turned out, she had purchased the car for Fishbrain as a gift to him. Aardvark’s private investigator searched the assets of Fishbrain’s relatives and found that Aunt Ellen had a house that she owned and some savings in the bank. She was named as the defendant in the case and was found liable on a theory called Negligent Entrustment. The jury found that she should not have bought the car for him. She should have known that he was a careless driver and might cause an accident. She caused the accident by buying him the car. The verdict was for $932,000, and Aunt Ellen lost nearly everything she owned.

RE: California LLC, INC, or NOTHING

You're right, Marinov... no one should ever get professional liability insurance.  Let's tell all of our customers "tough luck" should anything happen.  You'll make more net money than the next guy... right up until someone sues you into the stone age.  Not having insurance is hardly a preventative measure against being sued.

I'm done with this thread.

Dan - Owner
http://www.Hi-TecDesigns.com

RE: California LLC, INC, or NOTHING

I have to agree with macgyvers2000.  There are extremes in any situation and exceptions to most rules. And thiose arew what get generally thrown out as examples when they are just that - exceptions.

To counsel or advocate against having the proper business & personal insurance in place is akin to advising someone "no, you really don't have to pay taxes, it's not in the Constitution".

The following is what I recommend to clients (contractors) looking for ways to manage business & project risks (this is the insurance portion and insurance is a risk management tool) - note, this is all inclusive and some don't apply to most and most don't apply to some, well you know what I mean:

1. Put a Controlled Insurance Program (CIP) on a standard retrospective-rated plan or on a guaranteed cost plan, but not a high deductible plan.

2. Make sure all bidding subcontractors specifically identify the work disciplines which they intend to sub out and identify the specific sub-subcontractors.  All tiers of subcontractors should be vetted for references and reputation and their estimated revenues and payrolls should be provided.  All bidders must be advised that they will only be permitted to use sub-subcontractors who have been pre-approved by the Client.

3.  Every tier of subcontractor should be required to provide their Workers’ Compensation Insurance Experience Modifier from the NCCI Bureau.  Minimum standards should be set as to level of modifier that is acceptable, such as not accepting any subcontractors with a three-year promulgated modifier of 1.00 or greater.

4.  Every tier of subcontractor should be required to submit a listing of all OSHA citations, along with safety statistics and man-hours for the past five (5) years showing all OSHA recordable injuries, all restricted work-day injuries and all lost-time injuries and the respective injury rates.  

5. Have each subcontractor and potential sub-subcontractor of every tier sign a statement to the effect that they understand that a CIP may be required and agree to participate, if required.  Make it clear that not all subs will be eligible to participate, but the final decision rests with the General Contractor (GC).

6. In the Instructions to Bidders, make it clear that any bidding subcontractors that do not submit the completed CIP questionnaires, experience modifiers and safety statistics from themselves and all tiers of sub-subcontractors by the date required or with their bids, on the required date of bid submission, will be considered non-responsive and their bid will not be opened.  All bidders should also be required to submit with their bids Insurance Certificates evidencing their existing insurance programs.

7.  Make it clear to all prime subcontractors that they are required to enter into formal written subcontracts with their subs on contract forms prescribed by the General Contractor and to incorporate in them all of the applicable requirements of their prime subcontracts.  No subcontractors that do not have subcontracts approved by the (GC) should be allowed on the project, unless permission is granted by the GC in writing.

8. After award of subcontracts, make certain to recover the insurance premium deductions from the subcontractors’ payments for themselves and all tiers of their subcontractors within the first three such payments, or sooner, if term of work is less.  Never wait until the end of a subs work or the end of the project and attempt to collect it or withhold it from retentions.  The prime subcontractors are responsible for collecting the premium deductions from their subs.

9. When setting up the CIP General Liability and Excess Liability Policies, be sure to exclude claims or lawsuits filed by one participant against another participant alleging the commission of any of the following "Personal and Advertising Injury" perils:

a.  False arrest, detention or imprisonment
b.  Malicious prosecution
c.  Wrongful eviction or wrongful entry into or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor
d.  Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services
e.  Oral or written publication of materials that violates a person's right of privacy
f.   The use of another's advertising idea in your advertisement
g.  Infringing upon another's copyright, trade dress or slogan in your advertisement

In addition to the above, also exclude such claims or lawsuits alleging “Tortuous Interference”.

10. Require all tiers of subcontractors to provide "Consent of Surety Letters" from acceptable surety companies confirming they will agree to issue Performance and Payment Bonds guaranteeing 100% of the work being bid.  These letters must also accompany their bid packages to be considered responsive and eligible for bid opening.  Be sure to include the premium cost for requiring all prime subcontractors to post performance and payment bonds for 100% of their subcontract prices in the project cost budget.  Plan to try to limit reimbursement of any bond premiums to normal industry rates, in order to avoid having to pay high bond premiums charged to a subcontractor that is a marginal bond risk.

11. Make a deal with the CIP insurance broker to review all completed CIP questionnaires for accuracy and completeness and all Consent-of-Surety Letters for authenticity and viability of sureties.

12. Prepare a plan to deal with critical subs who are not bondable, but who can offer acceptable alternative performance and payment guarantees in the form of irrevocable letters-of-credit from acceptable banks. Do a due diligence check on the proposed banks and terms for acceptability.

13. Do not use the withholding of retained funds as a substitute for performance guarantees from sureties or banks.  These are two different requirements for differing reasons.  Retentions will usually not be sufficient to make a subcontractor perform if they get into trouble on the job.  Retentions may also be insufficient to cover a subcontractor's unpaid bills for materials, equipment rental, labor and other costs, which could likely be the source of liens being filed against the project.

14. Be sure to include adequate funding for a qualified proactive safety manager and sufficient safety staff to adequately cover the project.

15. After all underwriting information is received and ready for review by Risk Management and the competitively selected CIP insurance broker, make sure the requirements for the insurance companies bidding for the CIP are thoroughly thought out and included in the insurance bid packages.  One of the most important is the commitment the insurers are prepared to make to support and monitor the project safety effort and help achieve the safety goals set for the project.

16. When all of the insurance bids for the CIP are in, careful analysis must be done to prove that the CIP is beneficially priced and will provide the value added which will enhance the project cost factors and ensure a safer project.  


Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website: www.oil-gas-consulting.com

RE: California LLC, INC, or NOTHING

(OP)
Marinov (Chemical)- Can I get your current name, address, phone, and license number? If I get sued I want to be able to tell my lawyer your whereabouts so that he can name you as the defendant for giving me the advice, to forego insurance and therefore encourage me to practice my profession. So did the lawyer sleep with the Aunt?

Macgyvers2000 - I will not be securing the contract to build or design a Multi-Family Building, Office Building, Prison, or a Hospital. So I think scale really comes into play when you look at this question.
Example:

A small commercial parking lot (30 cars) with some retaining wall along one side - No Problem! If I can get this project I will do it.

600 Car Garage - with elevators and connections to a commercial building above and below ground level. -
Not going to do it! At least not without the insurance you are talking about.

GregLamberson (Petroleum) - Sounds like you are a general contractor or have at least signed one of their contracts. Probably to build something industrial where if one pipe bursts is could cause tank to explode, that could catch a forest on fire, and then burn down a town. Yeah probably going to need Insurance!

I want to consult and design on plans for a "Green Home" that is two stories and duplex from what I just recently learned. The house that is there now will be gone and a new one with two units will replace it. Geeze, I might not even incorporate the more I think about it!



RE: California LLC, INC, or NOTHING

LocalGuy, I would have thought that anybody who took legal advice off the net was already exposing himself to enough ridicule, without throwing threats around. Marinov's POV is odd, but I have heard of doctors and surgeons doing precisely that to make them small targets..



Cheers

Greg Locock

Please see FAQ731-376: Eng-Tips.com Forum Policies for tips on how to make the best use of Eng-Tips.

RE: California LLC, INC, or NOTHING

Greg thanks for the post and your opinion.
Yes, insurance is necessary in some cases. But it is NOT necessary in all the cases. We defenitely need auto insurance, we need insurance for our houses, and
medical one too. We also need dental, life and professional insurance. How many more? The crazy one named "ommit and errors insurance" or insurance against alien's spaceship landing in your garden.....? Get real!!!
What is the probability somebody to "lost his life" because of "your mistake"(according to Dan some named "owner").

What is the logic:
You will be sued if you have a money or "fat" insurance policy. Why?
Because the lawer need money to live!!!
Is he going to waste his experiance and time for ,....just nothing... What are his kids going to eat - his proud..
Of course NOT!
Greg,
Because you mentioned "exceptions" let me just open word for that.
Bill Gates invested all of his money in something "crazy" like microsoft windows. Now he is the richies man on the planet.
Another man, a couple hundred years ago claimed the earth is not the center of the universe and was burnt.... Just exceptions...

Ivo Marinov

RE: California LLC, INC, or NOTHING

Marinov

I'm speaking in terms of design & construction services only.  Here’s an idea, if there is a disaster or serious issue caused by a negligent design firm or a design individual and there is no professional liability or any other type insurance or assets in place by the firm/individual to provide remedy, what about going after the guy that advised them against insurance or normal business risk remedies?  

He doesn’t have insurance or any assets either?  No problem, let's press criminal and civil charges against the designer and his advisor so that at any point in the future should either party ever actually own or acquire anything of value, it would be forfeited.  And what about also imposing a mandate that they are never allowed to bring a civil suit or seek any judgment against anyone for anything regardless of the circumstances?  Seems fair.

I’m all for tort reform and against frivolous lawsuits, but there are many times when valid circumstances justify equitable compensation for a loss or damages.     

You want to focus on the exceptions, not the rules?  Try designing with the same mindset – design everything to the worst possible outcome (or best), the exceptions - see how much work you get.

I agree 100% to utilize contract terms & conditions to limit exposure to the maximum extent possible.  But even then, my advice is simply not to do business with any entity (corporation or individual) that is either not bondable, cannot provide any letter of credit or guarantee, does not carry professional liability insurance, will not or can not provide any means of remedy.

If one is not willing or able to provide some substance, back up, and guarantee to their professional skills and work, my guess is the work product will reflect that attitude and I would choose not to utilize them - period.  But that's just my opinion.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website: www.oil-gas-consulting.com

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