Security Law Concerns When Raising Money for a Business Opportunity

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Starting or growing a business takes money.  Sometimes a lot of money.  Often more than the business owner has access to.  There are many ways to raise money for a business.  You can borrow money from friends and family.   Or you can ask friends and family to invest and become partners.   You can ask suppliers or even competitors to lend money or become a partner in your new venture.   Or you can seek out angel investors who find your project interesting.  You can borrow money or you can sell stock or LLC ownership interests.  In each of these situations, federal and state security issues arise.

As a general rule, security offerings must be registered with the Securities Exchange Commission and the various state security agencies unless otherwise exempt.  There are a number of exemptions that might apply in a particular situation.  At the federal level, the most common exemptions are the intrastate exemption (only offer to residents of a single state), sales only to accredited investors (persons of high net worth and/or income) and other Regulation D offerings.   Regulation D offerings are offerings to accredited investors and up to 35 non-accredited investors where certain disclosures concerning the business, the business owners, the securities being offered, and the risks and rewards of the securities are made to investors.

At the state level, offerings are often exempt when less than a specified number of persons in the state acquire the security.  For example, in Ohio sales to 10 or fewer persons in a rolling 12 month period are exempt.  Most states also have exemptions that parrot the Regulation D exemptions.

When doing a Regulation D offering, there can be no general solicitation.  A Form D is prepared and sent to the SEC.  The state security agencies where the investors reside are notified of the offering.  Investors are provided with an offering circular, a subscription agreement and an investor statement.  The offering circular describes the risk and rewards of the offering, and can be used to defend the issuer from claims by investors that the issuer misled them with false information.  The investor statement requires the investor to state where he or she resides and whether he or she is an accredited investor.  The subscription agreement requires the investor to specify exactly how much he or she will invest in the securities.

If you are trying to raise money to start a business or expand an existing business, we can help you avoid running afoul of the federal and state security laws.  Committing security fraud can subject the issuer to treble damages and possible civil and criminal actions.  Please call or email us with any questions or comments at 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING.  The State of Ohio like many states is trying to raise revenue.  The state has engaged many private attorneys and collection firms to track down unpaid tax assessments.  Many of the assessments they are trying to collect are 20 to 30 years old.  The tax returns, cancelled checks and other information taxpayers would use to defend against these assessments has often been discarded.  If you receive a notice from a tax collector seeking to collect an unpaid tax assessment, give us a call or email at 937-223-1130 or jsenney@pselaw.com.

2013 Flexible Spending Account Limits

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The Affordable Care Act (sometimes called Obamacare) imposes a new limit on the annual salary reduction contributions that employees may make to a health care flexible spending account.  The new limit is $2,500 per year and starts January 1, 2013.

The limit applies only to the amount the employee contributes.  It does not limit the amount the employer may contribute on behalf of the employee.  The limit applies on per participant basis.  So if husband and wife are both employed, each can contribute $2,500.

Employer's that sponsor cafeteria plans with flexible spending accounts will need to amend their plans to incorporate the new contribution limits.  But this is not the only change imposed by the Affordable Care Act.  More on other aspects of the new law will be included in an upcoming blog.

Please call or email if you have any questions about the Affordable Care Act, the new FSA contribution limits or how to amend your cafeteria plan at Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING:   Over the last few years, banks mortgage companies were very aggressive in collecting mortgage loans and foreclosing on residential properties.  When a property is foreclosed on, or a deed is given in lieu of foreclosure, the bank will forgive the unpaid balance of the loan.  The amount forgiven is reported to the IRS on IRS Form 1099-C and is generally treated as taxable income.  However, for debt forgiveness that occurs prior to January 1, 2013, forgiveness of qualified principal residence debt is not taxable.  Call if you want to know more about this qualified principal residence debt exclusion or any other tax matter.  Jsenney@pselaw.com or 937-223-1130.

Do I Need an Employee Handbook for My Business?

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If you have more than 3 or 4 employees or more, you should seriously consider adopting an employee handbook.  An employee handbook can be an effective mechanism for setting the culture of your business and limiting your liability exposure. 

An employee handbook offers you the opportunity to answer common employee questions and address issues before they arise.  Your employee handbook can be used by managers and supervisors as a reference book so they act in a consistent and reasonable manner when dealing with employee issues.  Your employee handbook can also contain a code of ethics for employee behavior, while setting forth job performance expectations and award requirements.  And, not to be forgotten, your employee handbook can be used as a tool to remind your employees of all the compensation and benefits they enjoy as a result of their employment with your company.

There are certain things that should be in all employee handbooks.  At a minimum your employee handbook should generally explain to employees your policies and procedures governing “at will” employment, normal work hours, overtime pay, sexual harassment and non-discrimination policy, alcohol and drug policy, maternity leave, dress code, and use of computers, email, social media and internet for personal matters.

You should avoid putting legalese and references to statutes and code sections in your employee handbook.  The employees often won’t understand what these references mean, and you can set a trap for yourself.  For example, the Family and Medical Leave Act (“FMLA”) allows eligible employees to take up to 12 weeks off work during a 12 month period when the employee or a family member has a serious health condition, gives birth, adopts a child, or has any qualifying emergency related to the military.  But FMLA does not apply to your business unless you employ 50 or more employees within a 75 mile radius.  So if your employee handbook says you comply with FMLA, you can be compelled to comply even if you otherwise would not be required to. 

Before creating an employee handbook it is wise to seek advice from a qualified employment law attorney.  We can help you if you want to create or review an employee handbook.  Please call or email if we can assist you in any way with your employee handbook  at  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.     Social media enables people to communicate via the internet to share resources.    The National Labor Relations Board has issued a report regarding the protected nature of employees' Facebook, Twitter and YouTube postings. This report is a guide not only for Union employers, but also non-Union employers.  Attorney Matt Stokely of PS&E has reviewed and written an article summarizing the NLRB Report.   Give him a call at 937-223-1130 to discuss any questions you have about the NLRB Report or would like a copy of Matt's article.

How Do I Fire a Problem Worker?

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Ohio is an “employment at-will” state.  That means in Ohio you can generally fire anyone, at any time, with or without a reason.  But there are some situations that are not within the scope of the employment at-will doctrine or that require special handling.

If you have executed an employment agreement with the employee, and such agreement provides for a specified term of employment, then firing the employee prior to the end of the term would be breach of contract and subject you to damages.  If you have a union workforce and you are firing a union worker, you will need to comply with the firing procedures set forth in the collective bargaining agreement or risk having the union bring labor relations charges against you.

If the employee you are terminating is over 40, disabled, a female or a minority, you may find that the terminated employee makes claims of wrongful discharge based on age, disability, race or sex discrimination.  To defeat such claims you need to properly document the "non-prohibited" reason you are firing the employee.

When terminating an employee, it is best to have a system and to follow the system. You should have regular reviews where the employee’s performance and problems are evaluated and addressed.  If an employee is tardy, or absent, or fails to follow instructions, or is insubordinate, or is simply incompetent, you need to document such matters when they occur.  The employee should be given a “pink slip” and such slips should become part of the employee’s personnel file.  The employee personnel files should be kept under lock and key so employees can’t remove evaluations and reprimands from their file.

Please call or email if you have any questions about how to terminate a problem employee.

AND ONE MORE THING.     Thinking about selling your business?  Do you know how to determine the value of your business?  Are you getting paid cash at closing or in installments? Are you selling stock or assets?  Is the buyer assuming any liabilities?   Are you staying on as an employee or consultant to help transition the business?  Is the buyer keeping your employees?  Do you know what the tax consequences of the sale will be?  There are a lot of things to consider when selling a business.  Call or email me if you want to talk about it.  Jsenney@pselaw.com or 937-223-1130.

Is there Any Relief Available if I Misclassified Workers?

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Surprisingly, the answer is often “yes.”  Section 530 of the Revenue Act of 1978 generally allows a business to treat a worker as an independent contractor for employment tax purposes regardless of whether the worker would otherwise be treated as an employee under the IRS 20 factor test, so long as the business has a “reasonable basis” for so treating the worker and certain other requirements are met.  The relief provided by Section 530 was originally scheduled to expire in 1979, but was extended permanently.

Under Section 530, a reasonable basis for treating a worker as an independent contractor is considered to exist if the business relied on:  (1) published rulings or case law; (2) long-standing practice in the industry; (3) past IRS audit results for the business; or (4) some other reasonable basis.  The legislative history to Section 530 provides that it is to be liberally construed in favor of the business.

Section 530 relief does not apply if the worker or any other person doing similar work has been treated by the business as an employee at any time (after 1977) in the past.  Section 530 also does not apply if the worker is a "leased employee" and provides services for another person, as an engineer, designer, drafter, programmer, analyst or similar skilled worker.   There are additional very specific situations, such as workers who serve as school room supervisors or test proctors, where Section 530 does not apply.

Proper classification of workers is important. But if the IRS determines you have misclassified a worker as an independent contractor, and the worker would be an employee under the IRS 20 factor test, you might be able to use Section 530 to avoid reclassifying the worker, and avoid the tax, penalties and interest the IRS attempts to impose.  Please call or email me to discuss any issues you may have with proper worker classification at  Jsenney@pselaw.com or 937-223-1130.    

AND ONE MORE THING.  The Department of Homeland Security recently announced that certain young people who were brought to the United States as young children, do not present a risk to national security or public safety, and meet several key criteria will be considered for relief from removal from the country or from entering into removal proceedings. Those who demonstrate that they meet the criteria will be eligible to receive "deferred action" for a period of two years, subject to renewal, and will be eligible to apply for work authorization.  If you know someone who might be eligible for deferred action, or want more information about the deferred action program, please have them call (937-223-1130) or email me (jsenney@pselaw.com) or Shahrzad Allen (sallen@pselaw.com).

Should My Workers be Employees or Independent Contractors?

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Treating a worker as an employee typically costs the employer more than treating the worker as an independent contractor.  If a worker is properly characterized as an employee, the employer will be required to pay the employer-portion of the social security and medicare taxes, withhold the employee-portion of social security and medicare taxes, pay unemployment tax, pay workers compensation premiums, pay the employer-portion of any pension or profit-sharing plan contributions, health plan contributions and other employee fringe benefit programs, provide vacation, sick days and maternity leave for the worker, and otherwise permit the worker to participate in all employer-sponsored employee benefit and welfare programs.

On the other hand, if the worker is properly characterized as an independent contractor, the employer is not required to provide any of the above benefits, or pay or withhold any of the above taxes.  The employer is simply required to provide the worker with whatever payments are specified in the independent contractor agreement, and the worker is responsible for paying the appropriate income tax, self-employment tax, workers compensation and other taxes related to such payments.

The IRS looks closely at how employers characterize their workers.  The IRS has a 20 factor test it applies to evaluate whether a particular worker, or group of workers, should be treated as an employee or independent contractor.  Although the IRS test includes 20 factors, theses 20 factors can be summarized into 2 main points of inquiry.  These points of inquiry are: (1) does the employer have the right to control the details of how the worker does his or her job or only evaluate the final product or performance; and (2) does the worker have a real risk of loss.  If the employer has the right to tell the worker how to do his or her job, when to do it, where to do it, when and where not to do it, the worker looks more like an employee.   On the other hand, if the employee is free to do the job when he or she wants to, using whatever procedures or methods he or she wants to, wherever he or she wants to do the job, using assistants or sub-contractors, and the employer controls only the evaluation of the final product or job performance, then the worker is more like an independent contractor.

If the worker is reimbursed for expenses, paid a salary or an hourly wage and is provided a car or tools necessary to do the job, the worker has little risk of loss on the job and looks more like an employee.  To the contrary, if the worker is not reimbursed for expenses, is paid a specified sum for the job and is required to provide his or her own shop or office, transportation and tools, the worker looks more like an independent contractor who runs his or her own business.

Proper classification of workers is important.  If one or more of the workers treated as an independent contractor fails to properly pay income and self-employment tax, and the IRS determines (in its opinion) the worker should have been treated as an employee, the IRS will go after the employer to collect unpaid employee income tax withholding, and both employer and employee social security and medicare taxes.  If this happens, there are some defenses.  The first line of defense is that the IRS is wrong and the worker is properly treated as an independent contractor.  If this does not work, there is a second line of defense based on Section 530.  Section 530 is a piece of legislation that permits the employer to continue treating misclassified workers as independent contractors if certain conditions are met.  More about section 530 in the next Blog posting.   Please call or email if you have any questions about proper classification of your workers.   Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Under a Notice issued by the IRS in 2010, if the estate of a deceased spouse fails to use all of his or her federal estate tax exemption, the surviving spouse may inherit the unused portion.  But to obtain this benefit, the estate of the deceased spouse is required to file an estate tax return, even if no return would otherwise be required.  Earlier this year, the IRS announced an automatic extension of time for smaller estates to make an election to transfer the unused estate tax exemption to the surviving spouse.  This automatic extension applies to estates of married individuals with assets of $5,000,000 or less, but only if the deceased spouse died in the first 6 months of 2011, and the executor requests the extension no later than 15 months after the date of death.  Call or email if you have any questions about taking advantage of this extension.

Are Non-Compete Agreements Enforceable?

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The enforceability of non-compete agreements varies by state.  In a few states, an over-broad or burdensome non-competition agreement will be held to be unenforceable.  In other states, including Ohio, courts will rewrite non-competition agreements so as to scale back overly-broad provisions, while still protecting what the court believes to be the employer’s legitimate business interests.  Courts generally permit a non-competition agreement between a business and a former business owner to be of longer duration, cover broader territories and be more restrictive, than a similar agreement between the business and an employee.  For example, a non-competition agreement might only be enforced by a court against an employee for 12-18 months in a 25 mile radius of the business, while the court might enforce the non-competition agreement for 5 years or more anywhere in the United States if such restriction was necessary to protect the legitimate interests of the business from a former business owner. 

A good non-competition agreement should accurately describe the term, the restricted territory and the types of activities that would be considered competitive.  But a better non-competition agreement should also prohibit solicitation of customers, vendors, employees and others who have a business relationship with the business.  And the best non-competition agreement will also include a provision prohibiting use or disclosure of confidential or proprietary information.

A well-drafted non-competition agreement should provide that the business is entitled to use all equitable and legal remedies necessary to enforce the agreement, and that the business can collect attorney fees and other costs necessary to enforce the agreement.  In many situations it also makes sense for the non-competition agreement to include a liquidated damages clause which provides for monetary damages to be paid to the business if the former owner or employee uses or discloses confidential information, solicits a client or employee or otherwise violates the non-competition agreement.  Please call or email me if you would like to talk about non-competition agreements or need help in enforcing such an agreement.   Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Many small businesses share confidential information with their employees.  This confidential information can include client names, addresses and other client contact information, business methods, business practices and know-how.  This confidential information can be the life blood of the business.  Yet business owners often fail to adequately safeguard this information.  While state law provides some protection for “trade secrets”, such protection is limited and difficult to enforce.  Confidential information should be protected by a properly drafted and executed non-competition and/or non-disclosure agreement.  Call or email me if you would like to talk about protecting your confidential information at Jsenney@pselaw.com or 937-223-1130.

How Do I Get Employees Acting Like Owners Without Giving Them Stock?

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Employee incentive plans can be established to reward management employees based on increases in stock value without actually giving employees stock.  These plans are generally set-up as non-qualified deferred compensation arrangements and are often called stock appreciation right (“SAR”) plans or phantom stock plans.

Under the typical SAR or phantom stock plan, one or more key employee is awarded an SAR.  Under the SAR, a stock value baseline is established (normally fair market value on the date the award is issued), and the employee is given the right to receive cash (not stock) at some time in the future if the stock value has increased over the baseline.  The employee holds only a right to receive cash in the future if the stock value has increased.  The employee does not own the stock itself.  Hence the name “phantom stock.”  But the employee is rewarded if there is improvement in the value of the employer’s stock.  So the employee has every incentive to work hard, and go above and beyond the call of duty, to make the employer more profitable and successful.

Where employees are in a position to affect only part of the employer’s operations, some employer’s like to determine and measure the employee’s incentive compensation based on those specific factors the employee directly affects.  For example, a VP of Sales might receive an incentive award based only on increases in sales.  Or a controller or treasurer might receive an incentive award based on decreases in expenses or improvement in profit margins.

SAR and other employee incentive plans covering only key employees may be subject to ERISA, but generally are exempt.  If I can help you set up an employee incentive plan for your key management employees, let me know.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.    HB 153 was signed into law and contains language eliminating the Ohio Estate Tax for decedents dying on or after January 1, 2013.  Under the new law, the Ohio Estate Tax will still apply to decedents dying before January 1, 2013.   While we can't control date of death, we can advise you on certain strategies to reduce or eliminate federal and state estate tax.  Give us a call or email at Jsenney@pselaw.com or 937-223-1130.

Can I Pay Employees with Stock?

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The point of paying employees anything is to give them an incentive to show up for work and give you their best effort.  There are many different forms of compensation.  Employee compensation often includes basic salary, bonus, health insurance coverage, fringe benefits and retirement plan contributions.  All are important.  But if you really want to get your employees thinking like business owners, you may want to consider letting them acquire an ownership stake.

One way to do this is to give your most valuable employees a stock option.  When an employer gives an employee a stock option, the option agreement should state the number of shares subject to the option, the option price per share, the period of time during which the option may be exercised, applicable transfer restrictions and any other appropriate provisions or restrictions.
    
Stock options generally come in two basic forms.  One type of stock option is called an Incentive Stock Option (“ISO”).  The other type of stock option is referred to as a Non-Qualified Stock Option (“NQSO”).  An ISO is entitled to special treatment under federal and state tax law and must comply with the requirements of such law.   One of the federal income tax requirements of an ISO is that the option price must be equal to 100% of fair market value at the time the option is granted.  For federal and state income tax purposes, the employee does not recognize any compensation income, and the employer gets no compensation deduction, either at the time the ISO is granted or at the time the option is exercised.  Rather the employee recognizes a capital gain (or loss) at such time as the stock received upon option exercise is sold.
    
A NQSO is treated differently than an ISO for federal and state income tax purposes.  The employee recognizes compensation income, and the employer gets a compensation deduction, at the time the option is exercised.  The amount of the compensation income recognized by the employee (and the amount of deduction taken by the employer) is equal to the excess of the value of the stock on the date of exercise over the exercise price.  When the stock acquired upon option exercise is sold, the employee will have a capital gain (or loss).
    
More about stock options, restricted stock awards, phantom stock and other employee compensation and incentive arrangements will be found in a future blog post.  If I can help you set up an incentive or non-qualified stock option plan for your management employees, let me know.  Jsenney@pselaw.com or 937-223-1130

AND ONE MORE THING.    Have you ever heard of a DISC?  Does your business have significant foreign sales or income?  Does your business sell to other companies that export the final product?  You can reduce the federal income tax rate on such income significantly by setting up a DISC.  Give me a call or email me and ask me how at Jsenney@pselaw.com or 937-223-1130.

Should I Treat my Workers like Employees or Contractors?

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When workers are treated like employees, the employer is required to withhold federal, state and local income tax from the employee’s paycheck and pay such income tax withholdings to the appropriate government agency.  Furthermore, when workers are treated as employees, the employer is required to withhold and pay-over the employee-portion of the social security tax (6.2% on wages up to the wage base limit) and the medicare tax (1.45% on wages without limit), and to pay the employer-portion of the social security tax (also 6.2%) and the medicare tax (also 1.45%). 

     When workers are treated as independent contractors, the employer is not required to withhold income tax or payroll tax from the workers paycheck, and is not required to pay the employer-portion of social security or medicare tax.  Rather, the worker is treated as self-employed, and is personally liable to make quarterly estimated payments of income tax and self-employment tax.  Self-employment tax is the functional equivalent of the employer and employee payroll taxes.  Self-employment tax is assessed at the rate of 15.3% on wages up to the wage base limit, then 2.9% on all wages over the wage base limit. 

     When workers are treated like employees, the employer bears half of the payroll tax burden, and has the responsibility to withhold and pay income and payroll taxes to the government.  When workers are treated as independent contractors, the worker bears all of the payroll tax burden, and the employer is not required to withhold or pay-over any tax withholdings.  When workers are treated as contractors, the workers generally do not qualify to participate in group health insurance, retirement plans and other fringe benefit programs established for employees.  For these reasons, employers may see a financial advantage in characterizing workers as contractors rather than employees.

     The IRS looks at worker classification issues closely on audit.  The IRS applies a 20-factor test to determine whether workers should properly be classified as employees or contractors.  Although the IRS test refers to 20 factors, the IRS test really boils down to 2 main issues.  First, does the employer control the manner and methods by which the worker does his or her job?  That is, does the employer control the worker to the extent that the employer tells the worker how, where and when to do the job?  

     Second, does the worker have a risk of loss on the job?  A contractor has to run a business and pay bills.  The cost of labor and supplies on a job may exceed the amount the contractor collects on the job.  On the other hand, employees are paid a set wage by the hour, day, week or other period, and employee expenditures are often reimbursed.  So employees do not generally have a real risk of loss.

     If the IRS determines that an employee has been misclassified as a contractor, the IRS will generally look to the employer to make-up both the employer and the employee portion of income and payroll taxes.  If the employer is insolvent and cannot pay such taxes, the IRS will go after any responsible party.  For this purpose, a responsible party is any person who had the apparent power and authority (ie, a corporate officer) to make decisions concerning which creditors were paid. 

     Misclassification of workers can be a very expensive mistake.  The employer may need to pay income and payroll tax, penalties and interest, and may need to make additional contributions to employee retirement, health insurance and other fringe benefit arrangements.   There are some defenses and safe-havens available when the IRS questions worker classification.  But it is better to assess your situation now, and either correct your classification or prepare your defense strategy, before the IRS raises the issue.  If you want to discuss worker classification issues, please give me a call.   Jsenney@pselaw.com or 937-223-1130.

     AND ONE MORE THING.  How long has it been since you had a Legal Audit?  The Business attorneys at PS&E would like to meet with you and do a free legal audit of your company.  As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk.  If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call.  Jsenney@pselaw.com or 937-223-1130.

Do I Need my Employees to Sign a Non-Compete?

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Whether it is a necessity depends on a lot on what they do and who they know.  But it is not a bad idea to have all your employees sign a non-competition, non-solicitation and non-disclosure agreement as part of the terms of their employment.  Employees often learn confidential and proprietary information about you and your business.  If such information gets into the hands of the wrong people, your business may be injured or destroyed.

A well-drafted agreement will prevent your employees from competing with your business, soliciting your customers or employees, and using or disclosing your confidential information.  If your employee violates or threatens to violate the terms of the agreement, you can send a cease and desist letter, and then sue for breach if he or she does not comply.  If you have to sue, the court can issue a temporary restraining order, permanent injunction and other legal and equitable relief including monetary damages and attorney fees.
If your employee is using or disclosing your confidential information as an employee, partner or owner of another business, you should notify the other business that the employee is subject to a non-compete agreement.  If the other business continues to employee or be associated with the employee, you can sue the other business for tortious interference with contractual obligations.

In the absence of a non-compete agreement, you may be able to find some protection for your confidential information under the Ohio Trade Secrets Act.  But such protection is not perfect and only applies if you can prove your confidential information constitutes a protected trade secret.  More about protected trade secrets in a future blog.  B In any event, it is easier and less expensive in the long run to simply have all your employees sign a non-compete, non-solicitation and non-disclosure agreement when you hire them.
    
If you want some help with drafting a none-compete agreement, give me a call or send me an email.  Jsenney@pselaw.com or 937-223-1130.
    
AND ONE MORE THING.  Have you ever heard of Use tax?  Use tax is the compliment to sales tax.   You are obligated to pay use tax in Ohio if you buy something out of state and then bring it into Ohio to be used or consumed in Ohio.  The state of Ohio is stepping up its enforcement efforts against businesses.  The Ohio tax commissioner estimates that hundreds of thousands of Ohio businesses may owe use tax.  The Ohio Tax Department has an amnesty program beginning October 1, 2011 and ending May 1, 2013.  Businesses that enter the program will have to pay use tax back to January 1, 2009, but will not have to pay interest or penalty.   If you want to know more about use tax or the amnesty program, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

What Rights Do Shareholders Have?

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Under most state statutes, the rights of shareholders generally depend on provisions in the corporation's Articles of Incorporation, Code of Regulations, By-laws, Close Corporation Agreement or other Shareholder Agreement. Accordingly, these documents should be checked first when a shareholder is trying to determine his or her rights. All to often, Shareholders don't bother to find out what rights they have or don't have until a Shareholder dispute erupts.  And then it can be too late to do anything about it.

Shareholders of a corporation often have the following rights:

(1) Voting rights to elect directors, adopt the corporation’s Code of Regulations or amend the Corporation’s Articles of Incorporation;

(2) Voting rights on significant or extraordinary events that affect the corporation such as sale of all assets, merger, consolidation, liquidation, or dissolution of the corporation;

(3) Rights related to the sale, exchange or transfer of stock such as preemptive rights, put rights and call rights;

(4) Rights to receive dividends declared by the board of directors;

(5) Rights to inspect the books and records of the corporation;

(6) Rights to sue the corporation for wrongful acts by the directors and officers; and

(7) Rights to share in the proceeds when the corporation liquidates its assets.

If you have any questions about shareholder rights, or would like assistance preparing Articles of Incorporation, or other corporate governance documents, give me a call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. Minority interests in a closely-held company are worth less that controlling interests in the same company because minority interests lack the ability to control company decisions. Interests in a closely-held company are also worth less than comparable interests in a publicly-traded company because there is no stock exchange or other ready market for sale of closely-held stock. It is important to consider and agree on how interests in a company are to be valued. Call if you have any questions about how to value interests in your company. Jsenney@pselaw.com or 937-223-1130.

Shareholder Fiduciary Duty

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Under the Ohio Supreme Court decision in Crosby v. Beam, majority shareholders have a fiduciary duty to minority shareholders.  When majority shareholders in a close corporation utilize their majority control to their own advantage, without providing minority shareholders an equal opportunity to benefit, such breach, absent legitimate business purpose is actionable.   

Ohio appellate courts have found that a minority shareholder in a close corporation is not an at-will employee who can be terminated at any time by the majority shareholder absent a legitimate business reason.  However, ohio appellate courts have reached a different decision where the minority shareholder signed an employment agreement that permitted termination without cause.  For example, in Cruz v. South Dayton Urological Associates Inc, the minority shareholder had signed an employment agreement that provided the minority shareholder-employee could be terminated without cause on 90 days written notice.  The court found that when the minority shareholder signed the employment agreement containing the without cause termination provision, he relieved the majority shareholders of any duty they owed him, and waived his right to argue that the majority shareholders needed a legitimate business reason to terminate him. 

So word to the wise, whether you are a majority or minority shareholder, review the provisions of your employment agreements and other legal documents with your attorney so you understand your rights and obligations.

AND ONE MORE THING. If you or a friend have invented a new product, or have improved an existing product, you need to be careful to preserve your rights as to such invention or improvement. To protect your rights, you can seek a provisional patent or a full utility patent. But you must make an application within one year after the first public disclosure of the invention.  A public disclosure is any disclosure of information about the invention that is made without restriction on the recipient’s right to disseminate such information. To avoid making a public disclosure, it is important to have every person or entity that will receive information about such invention sign a non-disclosure agreement. Call or email me if you need a non-disclosure agreement drafted.   Jsenney@pselaw.com or 937-223-1130.

How to Break a 50/50 Owner Deadlock

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  If you didn’t have the foresight to include tie-breaking mechanisms in your organizational documents, there are not a lot of options.   If both owners are reasonable, an accommodation acceptable to both can often be worked out.  Perhaps the owners can agree to appoint an impartial arbitrator or panel, and to be bound by the decision of the arbitrator or panel.  Or perhaps one owners agrees to buy out the other partner.  But on those occasions when a compromise or method of resolution cannot be worked out, a judicial dissolution may be necessary.  In a judicial dissolution, one of the owners petitions the court to divide the assets and business between the owners in some equitable manner.  But unless the business has multiple independent divisions that can be easily separated, such dissolution can have a disastrous effect on the business.
     It is inevitable that 50/50 owners will eventually disagree on the direction, the scope or the details of operating their business.  It is not possible to avoid every dispute.  But it is possible with carefully drafted organizational documents to make resolution of such disputes less costly and time-consuming.  There are many different types of tie-breaking mechanisms that can be adopted.  The partnership or operating agreement might provide for: (a) a third person to break ties; (b) a board with an odd number of directors to decide disputes; (c) arbitration to be handled by one or more arbitrators; (d) one of the owners to be the managing partner or member and have the final say; (e) flipping a coin to make the final decision; or (f) whatever else theowners can agree on.
 In the next blog we’ll talk about the fiduciary duty a majority owner owes to the minority owner, and the effect this has on splitting a business or terminating the minority owner.   If you would like assistance drafting tie-breaking mechanisms for a partnership, LLC or corporation, let me know.  Jsenney@pselaw.com or 937-223-1130.
     AND ONE MORE THING.  The definition of “accredited investor” was changed by the Frank-Dodd Act.  If you are trying to raise capital by selling shares to investors, you can avoid a lot of risk and make security law compliance easier, if you only sell to accredited investors.  One of the factors used to determine accredited investor status is net worth.  For this purpose, net worth excludes the value of the investor’s personal residence.  If you want to discuss raising capital by doing a private offering, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Do I Really Need a Buy-Sell Agreement?

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Latest Blog:  Buy-Sell Agreements

 

When setting up an LLC or corporation with multiple owners, it is absolutely crucial for the owners to enter into a buy/sell agreement. In the case of an LLC, the buy/sell agreement is often incorporated into the LLC Operating Agreement. In the case of a corporation, the buy/sell agreement is occasionally contained in the Code of Regulations or By-laws, but generally is a separate document.

A well-drafted buy/sell agreement should contain all the agreed-upon rules governing transfer of ownership interests. Among other things, the agreement should set forth what restrictions apply to transfer of ownership interests, what trigger events require or permit an owner to transfer his or her ownership interests, which party or parties have the right to acquire the offered ownership interests, what price the acquiring party will pay for the offered ownership interests, what payment terms will apply, whether the purchase price in a death or disability situation will be funded by life insurance proceeds, and how disputes as to value or transferability of interests will be resolved.

Without a buy/sell agreement in place, ownership interests are freely transferable. This can lead to interesting, but not so amusing situations. For example, if your business partner dies, you could find yourself in business with your former business partner’s spouse. Things might work out. Or not. Why take the chance? If I can help you put together a Buy-Sell Agreement appropriate for your situation, please let me know. Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. A taxpayer can mix some fun in with a business trip and deduct all of the round-trip transportation costs, so long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of the cost of food and drink while on business status is deductible. In addition, if the taxpayer is an employee and is reimbursed for all of his or her business expenses under an “accountable plan” the reimbursement is tax-free to the taxpayer. Call or email me if you would like to talk about mixing business with pleasure at Jsenney@pselaw.com or 937-223-1130.

 

 

SenneySays is Moving!!!

SenneySays is moving.  But you can continue to follow SenneySays on  Facebook  or LinkedIn.  To check it out just click on one of the links.  If you follow it on Facebook you can LIKE it.  Thanks  Jeff

I Really Mean It!! The Blog is Moving!!

Thank you for being a follower of my SenneySays Blog. We are moving the SenneySays Blog from Blogger.com to our new Pickrel, Schaeffer and Ebeling Website. I’d love for you to follow my Blog on our website at www.pselaw.com. 

You can also find it on Facebook at or even on LinkedIn. Hope you enjoy the Blog and find it valuable for your business. As always if you have any questions, feel free to email me at jsenney@pselaw.com or call 937.223.1130. Thanks again, Jeff Senney, attorney

Blog Moving to PS&E Website

Thank you for being a follower of my SenneySays Blog.  We are moving the SenneySays Blog from Blogger.com to our new Pickrel, Schaeffer and Ebeling Website.   I’d love for you to follow my Blog on our website at www.pselaw.com.  You can also find it on Facebook at or even on LinkedIn.  Hope you enjoy the Blog and find it valuable for your business.  As always if you have any questions, feel free to email me at jsenney@pselaw.com or call 937.223.1130.  Thanks again, Jeff Senney, attorney

How to Treat Start-Up Expenditures

Start-up expenditures generally must capitalized and amortized over a 15 year period.  However, for years after 2010, you may elect to expense up to $5,000 of start-up costs in the year the business begins, and then amortize the balance over 15 years.  The first year expense limitation amount is reduced to the extent total start-up expenditures exceed $50,000. 

Start-up expenditures are amounts paid or incurred in connection with investigating the creation, acquisition or establishment of an active business.  But start-up expenditures do not include any amounts that would be deductible as interest, taxes or R&D expenses.  If a business is disposed of before the end of the 15 year amortization period, any expenditures not yet deducted may be deducted to the extent the disposition results in a loss.

A corporation that makes expenditures in an unsuccessful effort to start or acquire a business may deduct such expenditures as a loss.  Non-corporate taxpayers not engaged in the business of locating or promoting new business ventures cannot deduct  the cost of unsuccessful searches or investigations (they are considered personal expenses).  However, once the non-corporate taxpayer has focused on the acquisition of a particular business, unsuccessful start-up expenditures are deductible as business losses.

You may deduct expenditures related to expansion of your existing business if you can show that the contemplated business expansion and the existing business are closely-related.  But such expansion costs must be capitalized and amortized if they provide you with long term benefits, create separate and distinct assets or relate to a change in the nature of your business operations. 

If you have any questions about whether to deduct or amortize start-up expenditures, or whether you can write-off unsuccessful start-up expenditures as losses, please give me a call or email at (937) 223-1130 or jsenney@pselaw.com.  And please send a copy of SenneySays to your to your friends.   

AND ONE MORE THING.    Tax deductions are a matter of “legislative grace.”  You are only entitled to take a tax deduction if you meet all of the requirements for such deduction as set forth in the federal tax code and regulations.   In order to qualify for tax deductions, you are generally required to adequately substantiate the amount, timing and purpose of the deduction.   In some cases you are required to go even further and maintain a contemporaneous written log to substantiate the expenses.  In other cases, you may be permitted to estimate your expenses based on the US Tax Court’s Cohan rule.   More about substantiation of tax deductions in a future blog.  If you want to talk about it now, please call or email me at  Jsenney@pselaw.com or 937-223-1130.

 Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

IRS Accepts Gambling Addiction as Reasonable Cause

In a previous blog we discussed what constitutes “reasonable cause” for abatement of federal income tax penalties.  Reasonable cause can be any situation beyond the control of the taxpayer that prevents the taxpayer from filing, paying or depositing taxes.  Common examples of reasonable cause are death or serious physical or mental illness.   While there is no published case or IRS ruling on point, in a very recent case I was able to convince the IRS that gambling addiction was a reasonable cause.

 In deciding whether a particular problem or set of circumstance amounts to reasonable cause, the IRS agent reviewing the abatement request will typically want answers to the following questions: (1) Why did these problems keep you from complying with your filing, payment or deposit requirements?  (2) Do you have a history of filing, paying or depositing taxes late?  (3) How were other financial matters handled during this time you had the problem?  (4) Did the time period you had the problem correlate to the time of the tax filing deadline or tax due date?  (5) Was your problem anticipated?  How beyond control of the taxpayer was the problem?  (6) Do you have written documentation to support your claim that a problem existed   such as doctors notices or hospital bills?

There is no special form that needs to be completed to make a request for abatement.  A letter addressed to the IRS collection agent requesting abatement of penalties, which sets forth the facts and includes copies of supporting documentation should be sufficient.

In a recent case I handled involving failure to timely deposit income and payroll taxes, IRS agreed to waive all penalties (and interest assessed on the penalties) based on gambling addiction as reasonable cause for failure to timely deposit.  While there were no published cases or IRS rulings on point, I was able to cite a Mayo Clinic study that indicated gambling addiction was a medical condition caused by an imbalance in the brain chemicals serotonin, norepinephrine (adrenaline) and dopamine, and that such condition prevented the addict from coping with business and financial pressures.        

If you have any questions about reasonable cause for penalty abatement, or need any assistance with a federal or state income tax matter, please give me a call or email at (937) 223-1130 or jsenney@pselaw.com.  And please send a copy of SenneySays to your to your friends.   

AND ONE MORE THING.  Too often business owners forget to prepare and sign a buy-sell agreement.  And way to often they forget to pull it out and see what the buy-sell agreement says.   If the owners do not have a buy-sell agreement in place, the occurrence of a trigger event such death, disability, or termination of employment can lead to confusion at least, and litigation at worst.  If you have any questions or comments about buy-sell agreements or succession planning, please call or email me at ..  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation