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Business Law

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 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.


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.


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.


Wednesday, July 29, 2015

Business Succession Planning Tips

Business succession plans contemplate and instruct regarding any changes in future ownership and management of a business. Most business owners know they should think about succession planning, but few actually end up doing so. It is hard to think about not being in charge of the business you have built up, but a proper succession plan can ensure that your business continues long after you are there to run it, providing an enduring legacy.

Here are a few tips to keep in mind when you begin to think about putting a succession plan into place for your business.

  • Proper plans take time - often years - to develop and implement because there are many steps involved. It is really never too early to start thinking about how you want to hand off control of your business.

  • Succession plans are a waste of time unless they are more than a piece of paper. Involving attorneys, accountants and business advisors ensures that your plan is actually implemented.

  • There is no cookie-cutter succession plan that fits all businesses, and no one way to develop and implement a successful plan. Each business is unique, so each business needs a custom-made plan that fits the needs of all parties involved.

  • It may seem counterintuitive, but transferring a business between people who are familiar with the business - from one family member to another, or between business partners - is often more complicated than selling the business to a complete stranger. Emotional investments cannot be easily quantified, but their importance is real. Having a neutral party at the negotiating table can help everyone involved focus on what is best for the business and the people that are depending on it for their livelihood.

  • Once a succession plan has been established, it is critically important that the completed plan be continually reviewed and updated as circumstances change. This is one of the biggest reasons having an attorney on your succession planning team is important. Sound legal counsel can assist you in making periodic adjustments and maintaining an effective succession plan.

If you are ready to start thinking about succession planning, contact an experienced business law attorney today.


Monday, July 6, 2015

C-Corporation Vs. S-Corporation: Which Structure Provides the Best Tax Advantages for Your Business?

The difference between a C-Corporation and an S-Corporation is in the way each is taxed. Under the law, a corporation is considered to be an artificial person. Shareholders who work for the corporation are employees; they are not “self-employed” as far as the tax authorities are concerned.

The C-Corporation

In theory, before a C-corporation distributes profits to shareholders, it must pay tax on the income at the corporate rate. Then, leftover profits are distributed to the shareholders as dividends, which are then treated as investment income and taxed to the shareholder. This is the “double taxation” you may have heard about.

C-Corporations enjoy many tax-related advantages :

  • Income splitting is the division of income between the corporation and its shareholders in a way that lowers overall taxes, and can avoid or significantly reduce the potential impact of “double taxation.” By working with a knowledgeable tax advisor, you can determine exactly how much money the corporation should pay you as an employee to ensure the lowest tax bill at the end of the year.
  • C-Corporations enjoy a wider range of deductible expenses such as those for healthcare and education.  
  • A shareholder can borrow up to $10,000 from a C-Corporation, interest-free. Tax-free loans are not available to sole proprietors, partners, LLC members or S-Corporation shareholders.

S-Corporation
S-Corporations pass income through to their shareholders who pay tax on it according to their individual income tax rates. To qualify for S-Corporation status, the corporation must have less than 100 shareholders; all shareholders must be individual U.S. citizens, resident aliens, other S-Corporations, or an electing small business trust; the corporation may have only one class of stock; and all shareholders must consent in writing to the S-Corporation status.

Depending on your situation, an S-Corporation may be more advantageous:

  • Electing S-Corporation tax treatment eliminates any possibility of the “double taxation” referenced above. S-Corporations pay no federal corporate income tax, but must file annual tax returns. Because losses also flow through, shareholders who are active in the business can take most business operating losses on their individual tax returns.
  • S-Corporations must still file and pay employment taxes on employees, as with a C-Corporation. An S-Corporation may not retain earnings for future growth without the shareholders paying tax on them. The taxable profits of an S-Corporation pass through to the shareholders in the year they are earned.
  • S-Corporations cannot provide the full range of fringe benefits that a C-Corporation can.

Monday, June 29, 2015

For How Long Should a Business Keep Tax Records?

There are many reasons for retaining tax records. They can be a useful guide for business planning, for tracking receipts and expenses, and in cases where the company or shares are being sold to outside parties. 

The IRS expects taxpayers to keep records for as long as they are needed to administer any part of the Internal Revenue Code. In other words, if you fail to keep records, and an item in a past return is questioned, you may not have the documentation you need to defend yourself and avoid taxes and penalties. In addition, insurance companies and creditors may wish to see tax returns even after the IRS no longer does. 

What is the "Period of Limitations" for a Tax Return? 

Generally, you must keep records that support income and deductions for a tax return until the "period of limitations" for that return elapses. This is the period during which you can still amend your return to get a refund or credit and during which the IRS can still assess more tax. It varies depending on the circumstances surrounding each return. 

  • If you owe additional tax, but you haven't seriously underpaid, committed fraud, or failed to file a return, the period is 3 years from the date taxes were filed. 
  • If you failed to report income that you should have reported, in excess of 25% of the gross income that you did report, the period is 6 years. 
  • If you filed a claim for credit or refund after you filed your return, the period is the later of 3 years after the return was filed or 2 years after tax was paid. 
  • If you filed a claim for a loss from worthless securities or a bad debt deduction, the period is 7 years. 
  • If you filed a fraudulent return or failed to file a return, the period is unlimited. 

Note: Returns filed before taxes are due are treated as though they were filed on the due date.

Other Periods of Limitations

Additionally, if you are an employer, you must keep employee tax records for at least 4 years after the later of the date the tax becomes due or the date it is paid.

For assets, you should keep records until the period of limitations elapses for the year in which you sell the property in a taxable transaction. You will need records to compute depreciation, amortization, or depletion deductions and to add up your basis in the property for purposes of calculating gain or loss. A business law attorney experienced in tax matters can further guide you in relation to your specific situation.


Monday, June 8, 2015

Disaster DIY: Business Law Edition

Have you ever watched the TV show Disaster DIY on HGTV? The premise of the show is that many people have no idea what they are doing when it comes to home remodeling, but they try the “do it yourself” (DIY) approach  anyway. The host of the show then comes in to save the day, repairing what the DIYers have messed up, and teaching them how to do perform certain tasks.

This show has many parallels to the world of business law. It is tempting to try and find a DIY solution to legal issues. Budgets are tight, and professional legal advice can seem like a luxury when you are first starting out or struggling to meet quarterly goals, so many businesses adopt a DIY solution when what they really need is a good lawyer.

The Internet also encourages many businesses to DIY their legal issues, whether its access to legal info or various forms. But the problem is that advice on the Internet is not always accurate, particularly since business law is different in every state.

After pursuing the DIY route and disaster ensues,  business owners are forced to call in the professionals to clean up the mess.  Unlike the TV show, where the show’s producers cover the DIYers costs, the costs of fixing a legal DIY disaster rest solely on the business or the business owner. It often costs businesses significantly more to rework a legal framework that wasn’t carefully thought through. There are two reasons for this. First, proactive legal help is always going to be more cost effective than legal triage; it’s infinitely more costly to actively fight a pending lawsuit than it does to carefully draft and implement needed policies. Second, the results that even the best attorney can salvage from an awful situation are not likely to be as as ideal or as cheap as it would have been to avoid the disaster altogether.


Monday, May 18, 2015

Are Non-Compete Agreements Appropriate For My Business?

The aim of non-compete agreements is to bar departing employees from working for your business competitors or from starting a competing business. These agreements used to be reserved for high-level employees or people working in certain fields who had access to sensitive information. While non-compete agreements are becoming more common, they are only enforceable to a limited degree and in some states not enforceable at all.

In considering whether a non-compete agreement can be enforced, courts generally examine whether there is a legitimate business interest at stake and whether the agreement is narrowly crafted to protect that interest. Courts tend to disfavor restrictive covenants such as non-compete agreements because it limits commerce and can prevent an individual from earning a livelihood. Here are a few factors to consider when looking to implement a non-compete:

  • What is unique about my business? If there is something about your business that sets it apart from its competitors - a product, a process, a method of doing business - a non-compete agreement could protect your advantage. It might also be wise to consider other protections such as patents.

  • Over what area would I need a non-compete to apply? Would employees be barred from working at a competing business across the street? In the same city? Within 50 miles? Within the same state? The larger the radius, the less likely a court is to enforce it.

  • To which companies would a non-compete need to apply? Are your employees going to be able to get jobs in your field if they leave your company, or would your agreement make them essentially unemployable? Courts typically frown on agreements that leave people completely out of work.

  • How long would a non-compete need to last? The shorter the time an employee is restricted by the agreement, the more likely the court is to find the restriction reasonable.

  • Under what circumstances would the non-compete kick in? If an employee is fired, are they going to face the same restrictions as an employee voluntarily leaving your employ?

When considering any agreement with your employees, including restrictive covenants such as non-compete agreements, it is important to consult an experienced business law or employment law attorney who can properly advise you and help you craft an agreement that is likely to be enforceable.


Tuesday, April 14, 2015

Financing and Growing Your Small Business Through Crowdfunding

What is crowdfunding? Part social networking and part capital accumulation, crowdfunding is simply the collective cooperation, attention and trust by people who network and pool their financial resources together to support efforts initiated by others.

Inspired by crowdsourcing, this innovative approach to raising capital has long been used to solicit donations or support political causes. This method has also been successfully implemented to raise capital for many different types of projects, including art, fashion, music and film.

Entrepreneurs can also tap the internet as a way to raise financing from a broad base of investors without turning to venture capitalists. With crowdfunding, you can raise small amounts of capital from many different sources, while retaining control over your business venture. Crowdfunding for business ventures, however, is not without its risks, and likely requires advice of an attorney.

In the traditional crowdfunding model, donations are pledged over the internet to fund a particular project or cause. The contributors are supporting the project, but receive no ownership interest in return for their monetary donation. This type of arrangement can exist with non-profit ventures and political campaigns, as well as start-up businesses. The person or entity soliciting the funding utilizes existing social networks to leverage the crowd and raise contributions in exchange for a reward, which is typically directly related to the project being funded, such as a credit at the end of a movie. With this type of arrangement, the contributor does not receive any ownership interest in the venture in exchange for the donation.

However, when for-profit companies solicit funds from a large number of individuals to raise capital in exchange for shares of ownership in the company, care must be taken to ensure the arrangement does not run afoul of federal and state securities laws.

Various companies and websites have popped up to assist entrepreneurs in raising capital through crowdfunding. Some operate on a flat fee, others charge a percentage of funds raised.  Keep in mind that any securities in a company sold to the public at large must be registered with regulatory authorities, unless they qualify for a specific exemption from the registration requirement. Selling shares of ownership to low-net-worth individuals (“unaccredited investors”) can trigger numerous registration and disclosure obligations. Additionally, state laws may also affect the transaction. As the number of investors and states involved increases, so do the cost and complexity of obtaining this type of capital financing. The various rules can be difficult to navigate, and missteps can result in significant penalties.
 


Monday, March 23, 2015

Overview: Buy-Sell Agreements and Your Small Business

If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.

With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.

A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily.  Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?

In crafting your buy-sell agreement, consider the following issues:

  • Triggering Events - What events trigger the provisions of the agreement?  These normally include death, disability, bankruptcy, divorce and retirement.
     
  • Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula.  The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event.  Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.
     
  • Funding - How will the departing owner be paid?  Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners.  With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”).  Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”).   The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.  
     

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