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Rhode Island Legal Blog

Monday, November 16, 2015

An Overview of the Family Medical Leave Act (FMLA)

The Family Medical Leave Act is a federal law that allows employees to take significant time off from work to take care of a loved one with an illness, medical problem or condition. The law does not require an employer to pay the employee for the time missed, but allows the employer to substitute accrued paid vacation/sick time for unpaid leave taken during the FMLA, meaning that the employee’s leave cannot be extended beyond the statutory period by using his or her vacation time. The FMLA prohibits employers from enforcing any negative consequences against the employee for exercising his or her rights under the FMLA. These would include termination, cutting back on hours, reducing pay, or diminishing the employee’s title or responsibilities.

The FMLA applies to businesses with more than 50 employees. To qualify, an employee must have worked for the employer for at least one year and must have worked at least 1250 hours in that year. The law allows the employee to take up to 12 non-consecutive weeks of unpaid leave a year to care for a spouse, parent or child who has a serious medical condition. There is special consideration given to family members caring for ill military service members. The parents, spouses, and children of these individuals are permitted to take up to 26 weeks off each year to care for their loved one. 

The most common use of the law is to allow an employee to take time off work after a child is born, even though most would not call pregnancy a “serious medical condition.” This is commonly referred to as maternity leave. Although it is not customarily exercised, fathers have an equal right to take time off to bond with their children after birth. The FMLA also allows new parents to take time off work immediately after an adoption. Some people use the Family Medical Leave Act to care for family members dealing with mental health issues, including dementia, addiction, or schizophrenia. The law covers any medical condition which require an overnight stay in the hospital, chronic conditions that require treatment at least twice a year, and conditions that incapacitate the affected person for more than three consecutive days. 


Monday, November 2, 2015

How to Avoid Three Common Pitfalls when Purchasing a Small Business

1.     Buy the assets instead of the business

Purchasing a small business includes assuming any debt accrued by the business. The buyer is also purchasing any potential liability from accidents or misconduct of the seller that occurred prior to the sale. This can be avoided if the new owner purchases the assets instead of buying the entire business. Taking this action also resets the tax basis of those assets to the current purchase price instead of the price the seller paid for them.

It is important to make sure that the assets are being sold unencumbered, meaning that they were not financed since any debts accrued may follow the assets. The assets, such as machinery or furniture, should be inspected and tested to make sure they are in good condition and fully functional. Also, the buyer should consider paying in installments so that if assets turn out to be damaged and require repair or liabilities are discovered down the line, deductions can be made from future payments. Purchasing assets is usually the better option for a small business owner. It is always wise to consult with an attorney to determine your best options.

2.     Examine the lease

Leasing space is one of the most expensive aspects of running a business. Before purchasing, the small business owner should review all potential expenses, paying particularly careful attention to the lease. The purchaser should confer with the landlord to confirm that:

No problems will arise in the lease if a transfer occurs;

No back rent is owed; and

The premises are in good condition.

If the buyer intends to renegotiate the lease, it should be done prior to the purchase. 

3.     Evaluate the landlord

If there are other tenants in the area, the potential buyer should question them in order to assess the landlord's trustworthiness. If other tenants have had problems with the landlord, it is likely that the new owner will have issues as well. If the prospective landlord does not have the reputation of being honest or reliable, it probably does not make sense to go through with the purchase. 

4.     Ensure a smooth transition

Many sellers do their best to hide the fact that the business is being sold from their employees. This can present serious difficulties for the new owner since, in order to continue operations after a purchase, it is crucial that key employees remain on staff to help ease the transition. A potential buyer should always speak with existing employees to confirm their competence and willingness to stay on. These key employees have ongoing experience in running the day-to-day operations of the business and are likely to be aware of problems with running the business that have not been revealed by the seller and are not immediately apparent to newcomers.

At times, the seller stays on to consult with the buyer for months after the sale to ensure a smooth transition. In any event, the buyer should always make sure that the seller signs a non-compete provision to prevent future conflicts.


Monday, October 26, 2015

Common Tax Deductions for Small Businesses

Automobile deductions: Whether an individual uses a personal vehicle for his or her own business or company owns a vehicle, the depreciation of value and costs associated with that vehicle may be deducted from the company’s income at year's end. A taxpayer must keep track of all of these expenses and document them by maintaining receipts and records of expenditures in order to claim the deduction. Alternatively, a business may declare standard deductions for the vehicle based on the mileage of the vehicle. In 2015, this standard deduction is 57.5 cents for every business mile driven. If a vehicle is driven for both business and personal use, the IRS will require a taxpayer to identify the percentage of use dedicated to business.

Capital expenses: Also called startup costs, the IRS allows a business to deduct up to $5,000from its income in its first year of expenses for expenditures made before the doors of the business opened. Any capital expenses remaining after the first $5,000may be deducted in equal increments over the next 15 years.

Legal and professional fees: Fees paid to professionals like lawyers, accountants, and consultants, may be deducted from a company’s income each year. If the benefit of a professional’s advice is spread out over a number of years, the tax deduction must also be spread equally over the same period. The cost of books or tuition for classes to help avoid legal or professional costs may also be deducted.

Bad debt: A business may deduct the losses suffered as a result of a customer who fails to make payment for goods sold. However, a business that deals in providing a service may not deduct the time devoted to a client or customer who does not pay. A service business may deduct expenses made in an attempt to help that customer or client.

Business entertaining:The cost of meals or entertainment purchased for business purposes must be documented by receipts in order to maintain the right to deduct the cost from income for tax purposes. Only 50percent of the total cost of entertainment expenses may be deducted.

Interest: If a business operates on a business loan or a line of credit, the interest on that loan may be deducted from income for tax purposes.

Normal business expenses: The cost of advertising, new equipment, depreciation of existing equipment, moving expenses, business cards, office supplies, travel expenses, coffee and beverages, software, casualty and theft losses, postage, business association dues, and all other business expenses can be deducted.


Monday, October 12, 2015

Five Common Reasons a Will Might Be Invalid

There are several reasons that a will may prove invalid. It is important for testators to be aware of these pitfalls in order to avoid them.

Improper Execution

The requirements vary from state to state, but most states require a valid will to be witnessed by two people not named in the will. Some jurisdictions require the document to be notarized as well. Although these restrictions may be relaxed if the will is holographic (handwritten), it is best to satisfy these requirements to ensure that the testamentary document will be honored by the probate court.

Lack of Testamentary Capacity

Anyone over the age of 18 is presumed to understand what a will is. At the end of life, individuals are often not in the best state of mind. If court finds that an individual is suffering from dementia, is under the influence of drugs or alcohol, or is incapable of understanding the document being executed for some other reason, the court may invalidate the will on the grounds that the individual does  not have testamentary capacity.

Replacement by a Later Will

Whenever an individual writes a new will, it invalidates all wills made previously. This means that a will might be believed to be valid for months until a more recently executed document surfaces. The newest will always takes precedence, controlling how assets should be distributed.

Lack of Required Content

Every will is required to contain certain provisions to carry out its purpose. These provisions, ensure that the testator understands the reason for executing the document.  Although these provisions vary from state to  state, some are common to all jurisdictions. It should be clear that the document is intended to be a will. The document  should demonstrate an individual’s wishes in regard to what should happen to his or her property after death. A proper will should also include a provision to appoint an executor to act as an agent for the estate and enforce the terms of the will. If the document  lacks any of these provisions, the will may be declared invalid. 

Undue influence or fraud

A will that was executed under undue influence, coercion or fraud will be invalidated by a court. If a will has been presented to a testator for a signature as if it were any other document, like a power of attorney or a business contract, the court will find that the will was fraudulently obtained and will not honor it. If an individual providing end of life care with exclusive access to the testator threatens to stop care unless a will is modified, that modification is considered to be the result of undue influence and the court will not accept it.


Monday, October 5, 2015

Own a business with a spouse? What happens after a divorce?

Given that this situation encompasses various areas of law, you should consult both a matrimonial and a business law attorney. Depending upon the type of business the division between you and your soon-to-be ex-wife may be straightforward. However, more than likely, it may take significant work to be able to divide the business. If you and your wife intend to continue to own and/or operate the business together, you could simply divide the ownership between the two of you.

Otherwise, the two of you have to continue to work together until the business is actually sold or dissolved. If the business is such that it has two distinct areas you could spin off one of those into a separate entity that can be owned by one of you.  If the business owns real estate, perhaps some of the real estate could be transferred into a new entity to be owned by one of you with the other of you retaining the ownership of the original entity. If the business is such that it is almost impossible to divide, then perhaps one of you becomes the sole owner of the business and has to pay the other over some period of time for the value of one half of that business. Instead of paying the other of you perhaps an outside loan from a bank or other lending institution could be obtained to provide the funding for the purchase price.

A final option may be that the business has to be sold to an outside third party and the proceeds would be divided between you and your wife in accordance with any agreement between the two of you that have been approved by the divorce court or pursuant to an order.


Monday, September 28, 2015

When Will I Receive My Inheritance?

If you’ve been named a beneficiary in a loved one’s estate plan, you’ve likely wondered how long it will take to receive your share of the inheritance after his or her passing.  Unfortunately, there’s no hard or and fast rule that allows an estate planning attorney to answer this question. The length of time it takes to distribute assets in an estate can vary widely depending upon the particular situation.

Some of the factors that will be involved in determining how long it takes to fully administer an estate include whether the estate must be probated with the court, whether assets are difficult to value, whether the decedent had an ownership interest in real estate located in a state other than the state they resided in, whether your state has a state estate (or inheritance) tax, whether the estate must file a federal estate tax return, whether there are a number of creditors that must be dealt with, and of course, whether there are any disputes about the will or trust and if there may be disagreements among the beneficiaries about how things are being handled by the executor or trustee.

Before the distribution of assets to beneficiaries, the executor and trustee must also make certain to identify any creditors because they have an obligation to pay any legally enforceable debts of the decedent with those assets. If there must be a court filed probate action there may be certain waiting periods, or creditor periods, prescribed by state law that may delay things as well and which are out of the control of the executor of the estate.

In some cases, the executor or trustee may make a partial distribution to the beneficiaries during the pending administration but still hold back sufficient assets to cover any income or estate taxes and other administrative fees. That way the beneficiaries can get some benefit but the executor is assured there are assets still in his or her control to pay those final taxes and expenses. Then, once those are fully paid, a final distribution can be made. It is not unusual for the entire process to take 9 months to 18 months (sometime more) to fully complete.

If you’ve been named a beneficiary and are dealing with a trustee or executor who is not properly handling the estate and you have yet to receive your inheritance, you should contact a qualified estate planning attorney for knowledgeable legal counsel.


Monday, September 14, 2015

Five Considerations For Starting a New Business

1.     Deciding on a Business Form

There are various business forms to choose from.  A sole proprietorship is the easiest to set up, manage, and maintain. There is minimal paperwork necessary to set up a sole proprietorship since there is no distinction between the business and the proprietor. Unfortunately, if a sole proprietorship faces a lawsuit, the owner’s personal assets are at stake.

This can be avoided by registering a Limited Liability Company (LLC) with the state. An LLC limits an owner’s liability to the investment in the company, but it requires filing separate taxes every year and can affect the business’s profit margin. Other common ways of organizing a business include corporations, partnerships, and 501c(3) nonprofit organizations. Partnerships, LLC’s, corporations or nonprofits all have advantages and disadvantages.  It is wise to discuss this matter with a qualified business law attorney who can lead you in the right direction when it comes to business form.

2. Deciding on an S Corp or a C Corp

If you decide that a corporation is the right form, it is important to understand the various types of corporations.  S- and C- corporate forms are available.  There are several differences between a C Corp and an S Corp.  The most significant is the way the two are treated for tax purposes. A C-Corp pays taxes on its profits and the principals pay taxes on the money they have received from the company. In an S-Corp, the business files a K-1 form and the profit from the business is included in the individual taxes of the principal. An S-Corp is permitted to shift some of its income from one year to the next. In addition, a C-Corp has more leeway in determining when its fiscal year starts and ends.

3. Securing an entity name and a tax ID number

Securing a tax ID number is a simple process, requiring only the filling out of forms either on the IRS website, by mail, by fax or by touchtone telephone. No fee is necessary for the application. A tax ID number may also referred to as an EIN (Employer Identification Number), is nine digits long.

4. Register with your state  

In order to ensure compliance with rules governing workers' compensation, unemployment insurance, local taxes and access to other government resources, it is important to notify the state in which you operate what you are doing.

5. Obtain necessary licenses and permits

Depending on the type of business you run, different permits may be required to operate.  For example, a restaurant not only requires approval by the board of health, but requires a liquor license in order to be legally permitted to serve alcohol.

A skilled business law attorney can help you decide what is necessary to start your business off on the right foot.


Monday, September 7, 2015

Would transferring your home to your children help avoid estate taxes?

Before transferring your home to your children, there are several issues that should be considered. Some are tax-related issues and some are none-tax issues that can have grave consequences on your livelihood. 

The first thing to keep in mind is that the current federal estate tax exemption is currently over $5 million and thus it is likely that you may not have an estate tax issue anyway. If you are married you and your spouse can double that exemption to over $10 million. So, make sure the federal estate tax is truly an issue for you before proceeding.

Second, if you gift the home to your kids now they will legally be the owners. If they get sued or divorced, a creditor or an ex- in-law may end up with an interest in the house and could evict you. Also, if a child dies before you, that child’s interest may pass to his or her spouse or child who may want the house sold so they can simply get their money.

Third, if you give the kids the house now, their income tax basis will be the same as yours is (the value at which you purchased it) and thus when the house is later sold they may have to pay a significant capital gains tax on the difference. On the other hand if you pass it to them at death their basis gets stepped-up to the value of the home at your death, which will reduce or eliminate the capital gains tax the children will pay.

Fourth, if you gift the house now you likely will lose some property tax exemptions such as the homestead exemption because that exemption is normally only available for owner-occupied homes.

Fifth, you will still have to report the gift on a gift tax return and the value of the home will reduce your estate tax exemption available at death, though any future appreciation will be removed from your taxable estate. 

Finally, there may be more efficient ways to do this through the use of a special qualified personal residence trust.  Given the multitude of tax and practical issues involved, it would be best to seek the advice of an estate planning attorney before making any transfers of your property.


Thursday, August 27, 2015

Exemption Requirements for Non-Profit Public Benefit Corporations

A public benefit corporation is a type of non-profit organization (NPO) dedicated to tax-exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code which covers: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  Public benefit NPOs may not distribute surplus funds to members, owners, shareholders; rather, these funds must be used to pursue the organization’s mission. If all requirements are met, the NPO will be exempt from paying corporate income tax, although informational tax returns must be filed.

Under the rules governing public benefit NPOs, “charitable” purposes is broadly defined, and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. These NPOs are typically referred to as “charitable organizations,” and eligible to receive tax-deductible contributions from donors.

To be organized for a charitable purpose and qualify for tax exemption, the NPO must be a corporation, association, community chest, fund or foundation; individuals do not qualify. The NPO’s organizing documents must restrict the organization’s purposes exclusively to exempt purposes. A charitable organization must not be organized or operated for the benefit of any private interests, and absolutely no part of the net earnings may inure to the benefit of any private shareholder or individual.

Additionally, the NPO may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.

All assets of a public benefit non-profit organization must be permanently and irrevocably dedicated to an exempt purpose. If the charitable organization dissolves, its assets must be distributed for an exempt purpose, to the federal, state or local government, or another charitable organization. To establish that the NPO’s assets will be permanently dedicated to an exempt purpose, the organizing documents should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. If a specific organization is designated to receive the NPO’s assets upon dissolution, the organizing document must state that the named organization must be a section 501(c)(3) organization at the time the assets are distributed.

If a charitable organization engages in an excess benefit transaction with someone who has substantial influence over the NPO, an excise tax may be imposed on the person and any NPO managers who agreed to the transaction. An excess benefit transaction occurs when an economic benefit is provided by the NPO to a disqualified person, and the value of that benefit is greater than the consideration received by the NPO.

To apply for tax exemption under section 501(c)(3), the NPO must file Form 1023 with the IRS, along with supporting documentation, including organizational documents, details regarding proposed activities and who will carry them out, how funds will be raised, who will receive compensation from the NPO, and financial projections. If approved, the IRS will issue a Letter of Determination. Public charities must also apply for exemption from state taxing authorities, a process which varies from state to state.


Monday, August 17, 2015

Overview of the Ways to Hold Title to Property

You are purchasing a home, and the escrow officer asks, “How do you want to hold title to the property?” In the context of your overall home purchase, this may seem like a small, inconsequential detail; however nothing could be further from the truth. A property can be owned by the same people, yet the manner in which title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:

Tenancy in Common
Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain their same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding.

Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenants, or want to own the property in unequal shares.

Joint Tenancy
Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded.

Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.

Living Trusts
The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a living trust, which avoids probate upon the property owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.

How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney, you can ensure your rights – and those of your loved ones – are fully protected.
 


Thursday, August 6, 2015

Legal Tips from the Shark Tank

Lawyers are often mocked in pop culture as “sharks,” but a quick flip through the TV guide tells you the real sharks out there are in the business world. The ABC reality show “Shark Tank” has become a cultural phenomenon, inspiring tons of people to start their own businesses and invent new products.

If you are part of the wave of Shark Tank inspired entrepreneurs, here are some legal tips for you.

Don’t go into the Shark Tank, or into business, without a plan. On the show, the entrepreneurs that do the best are the ones that are the best prepared to answer all of the sharks’ questions. In the everyday business world the same is true. It’s just that it’s not sharks asking the questions - it’s investors, employees, and the other companies you are doing business with. 

Be prepared to take risks, but preferably not legal ones. Starting a business is a gamble, but it can be downright dangerous if you don’t fully comprehend the legal risks you are taking on. Several entrepreneurs have had their dreams crushed by the sharks because their business is just too big of a legal risk to invest in. In order to be successful in business you need to know what risks you face so you can plan around them.

Be prepared to negotiate. The sharks rarely buy into a business on the first terms offered to them by the entrepreneurs. In and outside the tank, the successful business owners and inventors are the ones prepared to negotiate to get a deal that is good for both parties. This often means giving up more equity than originally planned or revaluing assets to reflect market realities.

Patents are shark bait. The old saying “you’ve got to spend money to make money” is absolutely true in the innovation world. The sharks’ eyes light up when an inventor mentions that they have a patent on the idea or product they are pitching. That’s because patents are hard assets that you can buy, sell, license or build a business around. If you have a great idea, spend the money to patent it. 

Going head to head with the sharks is something only a few businesses do. But feeling like you have been thrown to the sharks is something all business owners and inventors can identify with. If you are looking for someone to help you navigate the legal issues your business is facing - from starting up, to scaling up, to selling out - consider contacting an experienced business law attorney today.


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