Friday, September 20, 2013

Follow me on Twitter

I have received numerous inquiries regarding my Twitter handle.  Its https://twitter.com/dja2law  Follow me...

Thursday, September 19, 2013

Risky Business: “Bring-Your-Own-Device” and Your Company

http://www.americanbar.org/publications/blt/2013/09/01_pavon.html

Thursday, April 25, 2013

Entrepreneurs...spend your legal dollars wisely....#preventativelaw

Entrepreneurs...if you have a complex contract then having your lawyer negotiate it is only step one. If you don't have your lawyer maintain the contract (periodically check up to see if the terms are being followed) then you may be headed to expensive litigation if a problem arises. Don't be penny wise pound foolish!

Wednesday, August 8, 2012

How to Minimize the Impact of Divorce on Your Small Business

The author of this post is Jennifer Brandt  who is a family law attorney specializing in divorce, custody, alimony, support and distributions of assets who is a member of the law firm Cozen O'Connor. 

Divorce in itself is often devastating to the parties involved, but when one of those parties is a small business owner, the business can be affected as well.

Aside from financial concerns, anxiety and emotional turmoil usually associated with divorce can have a major impact on the business.  It can affect the person who is the party to the divorce, as well as other business partners and employees.

In connection with the distribution of assets in the divorce, the business will likely be valued. This will require a financial expert who will be scrutinizing the books and records of the company. Questions will be asked about business practices and expenses. Financial documents concerning the business must be produced, and there is a risk that confidential information may be disseminated. 

There can also be a significant cost for the business valuation. Oftentimes two financial experts are engaged (one for each party).  Employee hours must be taken away from the work of the business and time must be spent gathering information for the valuation(s). 

Business operations are often stalled given that if the business improves, the value of the business increases and additional monies will have to be paid to the spouse.  In the worst case scenario, the business may even have to be sold in order to pay the non-owner spouse his or her share of the business.

There are ways, however, to minimize the impact of a divorce on the small business:

No. 1: First and foremost – get legal counsel.  A good divorce attorney will have extensive experience in managing both the personal and business aspects of a divorce, and can provide counsel on how to reduce the impact on the business. 

No. 2: A prenuptial agreement or a postnuptial agreement (entered into after marriage) can predetermine the distribution of assets in a divorce, and thus can protect the business. 

No. 3: If there are multiple business owners, the business partnership agreement or shareholder agreement can address a methodology of buyout or valuation of interest if a divorce is filed against one of the business owners.  While this type of instrument may not bind the family court, it does show an intention to minimize business disruption in relation to the other owners which a court would likely respect. 

No. 4: If the first two agreements don’t exist, the parties can agree to hire one joint financial expert to value the business which will help streamline the process and keep costs down.  To the extent the books and records of the business are well organized and readily available, the valuation will likely move more rapidly.

No. 5: The parties, counsel and any experts involved can enter into a confidentiality agreement to protect sensitive information and give assurance that trade secrets will not be disseminated. 

No. 6: To avoid the sale of the business, oftentimes a settlement can be structured with payments to a spouse made over time so the business is preserved.

Involvement of the small business in a divorce is inevitable given that it is frequently the largest marital asset owned by the parties. However, by following these few tips, the business can be protected with minimal disruption.

Wednesday, May 30, 2012

Wednesday, March 14, 2012

Closely-Held Corporations Need a Reasonable Compensation Analysis

This is a great article from Fulcrum Inquiry.

Reasonable compensation questions affect millions of closely-held corporations whose owners actively participate in the business. The issue involves how much payroll taxes are due from the earnings of the business. Amounts not characterized as salary are reported as S-corporation income on the shareholder’s personal tax return, where it is not subject to payroll taxes. In re: Watson P.C. vs. United States, no. 11-1589 8th Cir. (2/21/12), the Eighth Circuit affirmed the district court’s decision, holding that an S-corporation shareholder-employee (Watson) characterized too little of the amount paid to the owner as taxable salary.

While one might view the case as an IRS victory, the case also stands for the proposition that a professional services business does not have to classify all of its earnings as taxable compensation subject to payroll taxes. In most of the earlier S-corporation reasonable compensation cases, the shareholder-employee failed to take any salary, leaving the IRS and the courts the simple task of reclassifying the distributions as compensation for services. In Watson, the employee-shareholder took as salary an amount that the IRS viewed as being too small. Although Watson has to pay additional payroll taxes, the trial and appellate courts allowed Watson to receive substantial distributions that were not subject to payroll taxes.

As long as one pays a reasonable salary, significant tax savings are possible and appropriate.

The taxpayer in this case unsuccessfully asserted that the objective and analytical reasonableness of salary was not a factor. Instead, the intent of the taxpayer should be controlling. The Eighth Circuit summarized the taxpayer’s position as follows:

“DEWPC [the taxpayer] repeatedly asserts that there is no statute, regulation, or rule requiring an employer to pay minimum compensation. And, by requiring proof of reasonable compensation, DEWPC argues, the district court imposed a minimum compensation requirement. Rather than looking to whether compensation was reasonable, DEWPC contends that the district court should have focused on taxpayer intent when characterizing the payments.”

The trial and Eighth Circuit rejected this contention. Instead, the courts relied on an Internal Revenue Code §162(a)(1) compensation deduction analysis. This code and related Treasury Regulation §1.162-7(a) indicate a deduction may be made if salary is both (1) "reasonable" and (2) "in fact payments purely for services".

Another appellate issue involved whether the IRS expert witness should be allowed to testify on the reasonableness of compensation. The IRS witness is a valuation “engineer” who addresses financial issues other than compensation. The valuation expert testified on the health and financial performance of the employer, the compensation of others in the industry, the results of third-party salary surveys, and how these factors should be used in arriving at a reasonable compensation result. The trial and appellate courts agreed that the valuation professional was an appropriate expert witness on the compensation questions.
 
If you need a reasonable compensation analysis contact me at (800) 730-5691 or The Out-House General Counsel.

Thursday, March 8, 2012

5 Legal Matters That Can Make or Break a Small Business

When you’re running a business, making mistakes is a fact of life. But making legal mistakes – especially when they are avoidable – can mean the difference between the success and failure of your company. 
For your reference, a look at five legal areas that could break your business:
1. Contracts…
“What’s in the small print does matter. Businesses will sometimes use the same generic purchase order, order acknowledgement or delivery confirmation form for every deal, assuming that the same form works in all circumstances or that the boilerplate, microscopic type does not really matter… The order of the exchange, subject matter of the terms and even the size and font of the type face can affect which terms will be enforced.” (10 Things Every Small Business Owner Should Know About Contract Law by Dinsmore & Shohl LLP) 
2. Trademarks…
“… it is advisable to clear up any trademark issues before launching a new product or services. To do otherwise can be expensive and aggravating. Taking the time and money to choose a strong, non- infringing mark, and to protect it with a federal registration, is a worthwhile investment for the growth and expansion of your brand.” (Launching Your Business or Product? Pick a Good Trademark by Akerman Senterfitt) 
See also: Trademarks 101 (Delain Law Office, PLLC) 
3. Organizational documents…
“Part of the formational process for any of the three types of limited liability entities involves a filing with and certification by the state… Proper tax elections also need to be made. There are also statutory operational formalities involved with those entities (bylaws, formal notice, meetings, and voting, with written minutes or resolutions, etc.), unless properly provided otherwise by an LLC Operating Agreement providing for operational informality, or filing a Corporation as a Close Corporation with a Shareholders Agreement allowing for lack of formality.” (Business Formation Q&A by D. Lee Gwinn) 
4. Employment agreements…
“Do not assume that handshakes and a shared sense of adventure will insulate the company from misunderstandings with the stakeholders/founders… Hence, often a separate employment agreement on top of the operating agreement (LLC) or shareholders agreement (Corporation), is necessary to set out specifics about the founder/ employee’s relationship to the business entity (e.g., at-will employment, duties, obligations, confidentiality, termination, equity incentive and other forms of compensation, etc.).” (Top 10 Legal Documents For Any Technology Venture by Wahab & Medenica LLC)
5. Non-compete agreements…
“While you may read your employment agreements and understand what you intended, a judge may not. In two recent cases, circuit courts examined non-compete agreements in light of entire employment contracts. The cases show that terms buried within a separate portion of an employment agreement might give the court a reason to decline to enforce your non-compete agreement. Specifically, courts have declined enforcement because the agreements were written in an inconsistent manner or because the employee’s job title changed after signing the agreement.” (Are Your Non-Compete Agreements Enforceable? by Warner Norcross & Judd) 
—- 
Related Reading:
 Legal Resource Guide for Entrepreneurs (Fenwick & West LLP) 
If you are contemplating starting a small business, please consult an attorney who specializes in Small Business Law.  You can always contact me at (800) 730-5691 or The Out-House General Counsel.

Thursday, March 1, 2012

Deadlocks Between Owners Of Corporations And Limited Liability Companies

Deadlocks Between Owners Of Corporations And Limited Liability Companies

Business disputes are common. Here are some typical ways to deal with them.
One of the most common small business situations we encounter is dealing with conflicts, or "deadlocks," among stockholders or a corporation or members of a limited liability company.

These are particularly difficult situations, especially when there is not an effective operating agreement or shareholders agreement providing for the resolution of deadlocks.
One draconian remedy is available through the courts.  Courts often require at least three items before getting involved.  These three items are:
  1. There is such dissension among the stockholder/members, directors or officers that the company cannot successfully carry on its functions.
  2. The imminent danger of loss of assets is threatened.
  3. No other remedy appears to be adequate.
In these cases, the court can appoint a receiver to protect the interests of the company and its owners.
In setting up a company with equal members where a deadlock is possible, the owners should consider a number of common provisions for dealing with deadlocks.  These provisions include:
  • Mediation.  Mediation allows the owners to meet, usually with a trained mediator, to try to come to a resolution.
  • Arbitration.  Arbitration allows a neutral third party to make a decision.  This is a difficult option for business issues because there are often not right or wrong decisions involved in business disputes.
  • Russian roulette.  A russian roulette provision requires one of the owners to serve a notice on the other party naming a price at which it values an interest in the company.  The owner receiving the notice has the option to buy the other owner's share or sell its share to the other owner at that price.
  • Texas shoot-out.  Each owner sends a sealed bid to a third party setting a price at which they are willing to buy out the other owner.  When the bids are opened, the owner with the highest bid can purchase the other owner's share in the business at that price.
  • Dutch auction.  Like the Texas shoot-out, each owner submits the minimum price at which he or she will sell their share in the company.  The owner with the higher bid then has the option to purchase the other owner's share at the price in such other owner's bid.
By thinking ahead and including provisions like these, owners often have more incentive to resolve their disputes before triggering one of these types of provisions.

Important Tip There is often a lot of optimism at the time of starting a business among the business partners. Despite the optimism, it is a good idea to think through what happens if disputes arise down the road. Preparing for these disputes can help a business get off to a better start.

Tuesday, January 24, 2012

What If I Do Not Pay My Payroll Taxes

What if I don't pay my payroll taxes? We were asked this payroll question recently, and here's our answer: you should never ever fail to pay your business payroll taxes!


What happens if I don't pay my employer payroll taxes or my withheld employee payroll taxes?

When asked this question recently by a small business owner, we were shocked to think that somebody might think they could get away without paying payroll taxes.

It's very important to pay your payroll taxes because you will be held personally liable for them, even if you think you have limited your liability through your company's legal structure.

Personal Liability for Payroll Taxes

The federal tax code imposes personal liability on any "responsible person" who fails or refuses to collect and pay the required taxes.

A responsible person includes someone who controls the employer's money, has signature authority on a payroll account or is a corporate officer.

As outlined in Section 6672 of the Internal Revenue Code, the responsible person is personally liable for a 100% payroll penalty for any failure pay withheld taxes from employees. In other words, you personally will owe the IRS all of that money.

Note that this is for employee payroll taxes that you have withheld, not for the employer payroll taxes. The covered employee taxes include federal withholding and the employee FICA and Medicare taxes withheld.

Bankruptcy Won't Get Rid of Your Personal Liability for These Debts

A scenario in which a business owner might be tempted into not paying payroll taxes owed is when things are really tight.

Instead of missing a payroll or an important vendor payment, a desperate business owner might use the withheld payroll taxes from a previous payroll to pay current obligations.

You should never do this. If the business is struggling that much, a bankruptcy filing may be around the corner.

While filing for company bankruptcy will stall and/or eliminate many business debts, the IRS has taken steps to ensure that your debts to them will not go away.

Obligations to government agencies for taxes, interest and penalties survive bankruptcy proceedings.

You can close the company down and distribute assets to creditors on a pro rata basis, but you will need to pay the government in full, even if it comes out of your own pockets.

You can even go to jail if you fail to live up to your tax obligations, and ignorance or mistakes are no excuse in the "eyes of the government" for your not paying correctly.

So, a word to the wise – treat your payroll tax obligations to the IRS as sacrosanct. As tempting as it might be to use that money for other purposes, don't do it

If you find youself in a Payroll tax bind, contact me at (800) 730-5691 or The Out-House General Counsel.