Month: March 2018

CORPORATE ENTITIES FOR DESIGN PROFESSIONALS: ONE SIZE DOESN’T FIT ALL

You have a license to practice engineering or architecture and want to start your own business.  You’re already licensed – the hard part is behind you, right?  Not entirely.  There are many options to choose from when creating your own company:  a corporation (“Inc.”); a professional corporation (“PC”); a limited liability company (“LLC”); a professional limited liability company (“PLLC”); a limited liability partnership (“LLP”); a partnership; or a sole proprietorship.   Forming a corporate entity has clear advantages for businesses – the primary of which, to limit liability – but the entity type that you choose has important implications for your A/E firm.

Almost every state has specific requirements for which entities may provide architecture and engineering services.  For example, Virginia allows the practice of architecture or engineering by all of the above-referenced entity types if certificate of authorization requirements are satisfied; however, other states (New York, for example) generally restrict the practice of engineering to professional entities and LLPs.   Professional entities typically have strict ownership and management requirements, some of which tend to be difficult for large A/E firms to satisfy.  For example, a Virginia PC that wishes to provide A/E services may only be owned by licensed professionals, with the exception of eligible employee stock ownership plans.  At least two-thirds of its board of directors must be licensed architects, engineers, land surveyors, landscape architects, or certified interior designers. Some states have even more stringent requirements, requiring allshareholders, directors, and officers to be licensed.  This means that a firm that satisfies the requirements to call itself a PC or PLLC in one state may not be qualify for similar recognition (or licensure) in other states.

Choosing an entity type and management are not decisions to be taken lightly and are often guided by uncontrollable factors, such as the licensure of owners.  An entity type that works for one business will not necessarily work for another.  Particularly when professional services are involved, one size doesn’t fit all.

YOU LOST, NOW WHAT? MAKING THE DECISION TO APPEAL

Whether expectedly or not, there may come a time when you find yourself on the losing side of a legal battle. Your first reaction might be to consider pursuing an appeal. Below are some points that are helpful to keep in mind as you evaluate your options.

Think early about the possibility of an appeal: As with most things in life, there is rarely, if ever, a sure thing in a legal dispute. Some decisions made early in the litigation process can affect the success of an appeal later. Planning ahead with your attorney for a possible appeal can save you time, money, and grief down the road. Talk with your attorney about what would be best in your case.

Make sure the decision is appealable: In most instances, only final judgments or orders can be appealed—that is, a decision that effectively ends the case. So, if you lose some sort of evidentiary motion, for example, you likely cannot appeal that decision until the case is over. There may be some exceptions to this rule, though, so consult with your attorney to see what your options are and whether an exception might apply.

Confirm that your attorney will handle your appeal: Some attorneys treat appeals as a separate engagement from the underlying case, so pursuing your appeal may require entering into a new engagement or a different fee structure. Some attorneys refuse to handle appeals at all. Review your initial engagement agreement with your attorney to see whether an appeal is covered in the scope of the services your attorney agreed to provide. If the appeal is especially important or complex, you may wish to consult an attorney who specializes in appeals.

Pay attention to deadlines: It is very important to talk with your attorney about the decision to appeal in a timely manner because there is a time limit in which you must file a notice that you are appealing. In some lower state courts, this period can be as short as ten days; in federal court, you usually have thirty days. Courts take these deadlines very seriously, and missing them can be fatal to your appeal. Consult with your attorney to see how long you have to decide whether you want to pursue an appeal.

Manage Expectations: The appeals process can be frustrating if you have unrealistic expectations. It can be a long time from the time you initiate your appeal until the time you have a decision, sometimes even longer than it took to litigate the underlying case itself. In addition, keep in mind that cases on appeal are often judged under different standards than in the underlying proceeding: what might have been a compelling argument at trial might be an ineffective argument on appeal, for example. Your attorney can help you know what to expect if you proceed with an appeal so you can avoid unpleasant surprises.

Type of Business Entity Type of Business Entity Type of Business Entity Type of Business Entity Type of Business Entity

What Type of Entity is Right for Your Business?

You may have noticed that various real estate acquisition firms, developers, builders, landlords, tenants, and leasing and management firms conduct business in a wide range of entities, but why do they do so and what are the important issues to consider when choosing an entity for your business?  The factors you should always consider before forming an entity are as follows:  (i) limiting your exposure to liability and risk, (ii) minimizing taxation, and (iii) maintaining flexibility in management, ownership structure and compensation.  When you are just starting out, this part of the process may not seem important, but being organized from the beginning can save you a lot of complications and money down the road.  This article explores and compares the benefits and disadvantages of sole proprietorships, the different forms of partnerships, the different forms of corporations, and limited liability companies (“LLC’s”).

I.          SOLE PROPRIETORSHIPS

A.  Formation and Flexibility:  This is how many people do business, which does not require any formal filing with the State Corporation Commission (“SCC”).  The business is owned and managed by one person who receives all of the profits and bears all the losses.  This form of entity is the most simple business entity and has the least administrative burden.

B.  Personal Risk and Liability:  Although flexible, one major downside of this approach is that you have unlimited personal liability for any lawsuits or damages that arise from accidents, unpaid bills, or other problems affecting your business.  In other words, the winner of a lawsuit against a sole proprietor not only collects money from the business but can also ask a court to force the owner to sell personal property, such as the owner’s house, car, etc.  The substantial exposure of the owner to personal liability is the primary reason why these entities are not favored.

C.  Taxation:  From a tax standpoint, your business will file a Schedule C to be attached to your individual 1040 tax return.  In addition, you also have to pay self-employment tax of approximately fifteen percent (15%).

II.  PARTNERSHIPS

The two types of partnerships with which you should be familiar are:  (i) general partnerships (“GP’s”) and (ii) limited partnerships (“LP’s”).

A.  General Partnerships

1.  Formation and Flexibility:  GP’s do not require any formal filing with the SCC, but the partners may file a statement of partnership authority under Section 50-73.93 of the Code of Virginia, if they so desire.  GP’s, from a managerial standpoint, operate much like a sole proprietorship, but consist of two or more owners who make business decisions together and also share profits, losses, and liability according to the agreement of the partners.

2.  Personal Risk and Liability:  The partners’ exposure to liability for debts and obligations of the GP remains unlimited, similar to sole proprietorships.  More importantly, each partner can also be liable for debts and obligations incurred by the other partners in the course of the business.

3.  Taxation:  Tax treatment in GP’s can be advantageous, because, rather than being taxed as a separate entity, the GP’s income and losses flow straight through to the partners and are reported on each partner’s individual returns.  However, self-employment tax still must be paid in GP’s.

B.  Limited Partnerships:  Although LP’s receive similar tax treatment as GP’s, LP’s differ from GP’s in two basic respects: (i) formation and (ii) personal liability.

1.  Formation and Flexibility:  For a LP to exist as an entity, it must file a certificate with the SCC in order to be validly registered.

2.  Personal Risk and Liability:  LP’s may be more attractive than GP’s, because owners in LP’s invest only their capital in the entity, which is managed by a general partner.  In other words, the liability of a limited partner for partnership debts is limited to the extent of the capital he has agreed to contribute, thereby shielding the personal assets of each limited partner from liabilities of the LP.  However, this capital contribution of the limited partner may still be a substantial sum.  Unless otherwise provided in the LP’s partnership agreement, the general partner of a LP has the same rights, powers, and unlimited liability as a partner in a general partnership.  For this reason, it is important that a limited partner not hold himself out to third parties as a general partner, having substantial control of the business, because Virginia courts have found such limited partners to be liable in the same scope as the general partner.  The LP is somewhat cumbersome and is not used as frequently as they were prior to the proliferation of LLCs.

III.  CORPORATIONS

The two types of corporations with which you should be familiar are:  (i) “C” corporations (“CC’s”) and (ii) “S” corporations (“SC’s”):

A.  “C” Corporations:

1.  Formation and Flexibility:  CC’s, which must be registered with the SCC, must adhere to more formalities, because CC’s are owned by stockholders who elect directors to (i) oversee the operation of the CC and (ii) elect officers who run the CC on a day-to-day basis.  Many company decisions require resolutions by the directors and/or shareholders in order to be effective, and therefore record keeping for CC’s is generally more cumbersome and complicated than other forms of business, such as partnerships and LLCs.

2.  Personal Liability:  The largest advantage of CC’s is limited personal liability to the stockholders.  Unlike sole proprietorships and GP’s (but not LP’s), the claims of creditors are limited to the assets of the CC, and stockholders cannot have their personal assets used to pay the CC’s debts.

3.  Taxation:  When it comes to taxation, corporate income is actually taxed twice!  The CC must pay corporate income tax on its earnings and later, when the CC distributes its earnings as dividends to stockholders, the stockholder must also include the dividends as personal income on its tax returns.  This effect is generally undesirable for small businesses.

B.  “S” Corporations:  SC’s share the benefits of CC’s with respect to limitation on personal liability, but differ from CC’s in two critical respects:  (i) Formation and Flexibility and (ii) Taxation.

1.  Formation and Flexibility:  Although a SC is formed like a CC, it only becomes a SC when it makes a “S election” by the timely filing an IRS Form 2553 with the tax authorities.  SC’s must also meet strict criteria, including, but not limited to, the following:  (i) the number of shareholders must be 100 or fewer, (ii) there can only be one class of stock, (iii) all of the SC’s stockholders must be individuals, trusts, estates, or charitable organizations exempt from tax under Section 501(a) of the Internal Revenue Code, and (iv) the corporation must be a domestic corporation.  No stockholder can be a partnership, corporation, or nonresident alien.  Such restrictions can be a significant drawback.

2.  Taxation:  Stockholders of a SC enjoy pass-through taxation whereby income is taxed only once as personal income to the stockholders and reported on their individual returns.  Both profits and losses pass through directly to stockholders.  If there are losses in the early years (or later years), these losses can be offset against the other income the individual might earn.  The other benefit of SC’s is that you can limit and manipulate the amount of taxes subject to payroll taxes and/or self-employment taxes.  By paying employee benefits out of the SC, you get deductions but avoid paying self-employment taxes like you would in a sole proprietorship.  You can also control payroll taxes to some degree by splitting income between wages and dividends, because dividends are not subject to payroll taxes.

IV.  LIMITED LIABILITY COMPANIES

A.  Formation and Flexibility:  LLC’s must be registered with the SCC by filing Articles of Organization (“Articles”).  LLC’s are operated by the members, unless management is delegated to one or more “managers” as provided for in the LLC’s Articles or operating agreement.  All members of the LLC can take an active role in the operation of the business without exposing themselves to personal liability, which cannot be done in GP’s.  On the other hand, you can also limit or prevent other members’ right to vote on management affairs, and have a single manager direct the LLC, if you prefer to retain control.

B.  Personal Risk and Liability:  LLC’s, like corporations, protect members from the claims of the LLC’s creditors by limiting liability for business debts to the value of the members’ investment in the business (which still may be significant), and members cannot have their personal assets used to pay the LLC’s debts.

C.  Taxation and Compensation:  You may choose to have your LLC taxed like a GP or SC, with a single level, flow-through taxation without having to meet the strict criteria and formalities imposed on SC’s (but self-employment tax may still apply).  Although it should be possible for a member-manager to have some of its income treated as non-self-employment income, to the extent it represents a return on its investment in the LLC, rather than the fair market value of its services, there is no authority as of yet to substantiate such a position.  There is, however, an emerging trend that limited members who take a passive role in LLCs may treat their distributions as a return over capital contribution rather than a salary.  Another benefit of the LLC is the flexibility in allocating profits and losses.  There is no restriction on how to do this.  You can compensate a member on any number of criteria, such as the overall profitability of the LLC, the profitability of a division, or the discretion of the manager or managing member.  The value of this flexibility is that you can make someone a member and customize their compensation and incentives.

Choosing the right entity will, of course, depend on a number of factors, including, but not limited to, the nature of your business, your long-term goals, and the company’s finances.  For those entities that require formal filings, some individuals choose to form the companies themselves, but you are better off getting a lawyer to do it.  Please note that the information contained herein reflects a general overview of Virginia law, and while most states are similar, there can be variances among different jurisdictions.  If you were to file incorrectly, you could find yourself in a bind at tax time.  It is always a good idea to consult an attorney experienced in these matters, and the more specific your business plan and your preparation, the easier it will be for your lawyer to help you form the entity that is right for your business.

Laptop, Computer, Desktop Laptop, Computer, Desktop Laptop, Computer, Desktop Laptop, Computer, Desktop Laptop, Computer, Desktop

OSHA DEADLINE FOR ELECTRONIC REPORTING OF INJURIES AND ILLNESSES APPROACHING

Last year, the Occupation Safety and Health Administration, (OSHA), issued a rule that requires certain employers to electronically submit on-the-job injury and illness information. In keeping with its responsibility to improve safety for workers, the change seeks to focus more attention on safety through transparency in reporting practices and to ensure that workers will not fear retaliation for reporting injuries or illnesses.

The new rule which took effect on January 1, 2017, initially required employers to electronically submit annual injury and illness data from 2016 on Form 300A to OSHA by July 1, 2017. Prior to that date, OSHA extended the deadline to December 1, 2017. In late November of 2017, this date was extended yet once again. OSHA is providing three options for electronic data submission. Users will be allowed to manually enter data via webform, upload a CSV file to process single or multiple establishments all at once, or the ability to transmit data electronically through an automated application programming interface (API).

The reporting rule also incorporates additional anti-retaliation protection, which prohibits employers from discouraging workers from reporting injuries or illnesses. The new rule further clarifies existing requirements that an employer’s reporting procedures must be reasonable and not deter or discourage employees from reporting injuries and illnesses. Employers are required to inform employees of their right to report work-related injuries and illnesses free from retaliation. And, under the new rule, OSHA can pursue retaliation claims against an employer even if no worker files a retaliation complaint.

The new anti-retaliation requirements became effective on August 10, 2016, and enforcement by OSHA commenced on December 1, 2016. Establishments with 250 or more employees in industries covered by the record-keeping regulation must submit data from their 2016 Form 300A by December 15, 2017. These same employers are required to submit data from all 2017 forms (300A, 300, and 301) by July 1, 2018, and thereafter beginning in 2019 by March 2. Establishments with 20-249 employees in fields categorized as high-risk industries, such as the construction field are required to submit injury and illness data on this same schedule. Employers are urged to comply with these new regulations to avoid fines and penalties.

law office law office law office law office law office

BUYING AT A FORECLOSURE SALE “DON’T LET A BARGAIN BECOME A BURDEN”

Looming maturity dates (for which borrowers are not prepared to pay the remaining balance) or other monetary defaults of numerous commercial mortgages may present many opportunities for purchasing property on a discounted basis.  With proper precautions and investigation, what appears to be a “deal” really can be a “deal.”  However, purchasing a property at a foreclosure sale or other distressed sale has many traps for the unwary.  What appears to be a bargain can quickly turn into a nightmare, if the buyer rushes into the purchase without enough information.

Bidders often forget that, at a foreclosure, they are agreeing to purchase the property “as-is,” subject to (i) no closing contingencies and (ii) all of the property’s defects and deficiencies.  If a bidder is successful, the bidder is committed to completing the acquisition of the property, regardless of the condition of the property.  There are countless examples of expensive post-acquisition issues that could have been easily detected with minimal due diligence.  Some of these latent issues include environmental conditions, liens and deed restrictions, and major repair items.   Accordingly, purchasers of real estate at a foreclosure sale should undertake the same due diligence as if they were purchasing the real estate in an arm’s length non-foreclosure transaction from a third party (even though time may be limited).

The purchase that may seem like a bargain can become a financial disaster if purchasers do not enter the purchase with their eyes wide open.  Prior to bidding, every bidder should obtain a title report, which will identify the liens and encumbrances that will continue to burden the property following the foreclosure purchase.  In addition, although access to the property is often limited prior to foreclosures, the prospective purchaser should also try to obtain a basic property condition report prior to bidding.  If purchasers are not careful, they could end up purchasing a property that is (i) subject to debt far higher than the amount of the purchase price or (ii) in very poor physical condition.

Although this may sound unfair to the buyer, the buyer is typically paying a substantially discounted price. The money saved is often spent on performing repairs and improvements that have been neglected by the financially distressed owner.  Also, lenders price their loans with the anticipation that they will be able to sell the subject properties at foreclosure with minimal costs and liability exposure.  If lenders were subjected to the same costs and liability as a seller in a “regular” sale, the borrowing costs and interest rates for all borrowers could increase.

Proper due diligence and consulting with your attorney on the front end can save tremendous heartache on the back end.  If a deal looks too good to be true, it probably is, and the purchaser should not be afraid to walk away from the sale if they feel they do not have sufficient information.

THE INFORMATIONAL RIGHTS OF MINORITY SHAREHOLDERS IN VIRGINIA

Although minority shareholders of Virginia stock corporations have little power to elect directors or sway corporate policy, they—or their attorneys or agents—do have some basic informational rights, set out in Sections 13.1-770 through 13.1-773 of the Code of Virginia, to “inspect and copy” certain documents if they give at least 5 business days’ notice to the corporation and pay a reasonable charge for copies of the requested documents.  The right to copy records includes, if reasonable, the right to receive copies, including through an electronic transmission if available and requested by the shareholder.  Therefore, it may be easier for all concerned if the shareholder asks for scans of the requested documents to be e-mailed to the shareholder or the shareholder’s attorney.

Since a corporation’s annual reports and copies of the corporation’s articles of incorporation and any amendments can be obtained from the State Corporation Commission, it may not make sense to put them on the requested documents list, even though the statutes allow such a request.  Otherwise, the following business records can be requested by any shareholder:

1. The corporation’s bylaws or restated bylaws and all amendments currently in effect.

2. The minutes of all shareholders’ meetings, and records of all actions taken by shareholders without a meeting, for the past three years.

3. All written communications to shareholders within the past three years.

4. Financial statements for the past three years.

5. A list of the names and addresses of the corporation’s current directors and officers.

Shareholders meeting certain other requirements and having good reasons for wanting the records may also request:

6. Excerpts from minutes of any meetings of directors or shareholders, or records of actions taken by shareholders or directors without a meeting, to the extent that such records are older than 3 years.

7. Accounting records of the corporation.

8. The historical record of shareholders.

If a corporation does not allow the shareholder to inspect and copy the above-referenced records, the circuit court in the city or county where the corporation’s principal office is located (or the registered office, if the principal office is outside Virginia) may, upon application of the shareholder, order the corporation to furnish such records or permit inspection and copying of the records demanded.  And if a court issues such an order, it may also order the corporation to pay the shareholder’s costs, including reasonable counsel fees, incurred to obtain the order if the shareholder proves that the corporation refused inspection without a reasonable basis.  The court may also impose reasonable restrictions on the use or distribution of the records by the demanding shareholder.

The statutory information rights do not affect the right of a shareholder in litigation with the corporation to demand, or the power of a court to compel, the production of corporate records for examination.  These information rights may not be abolished or limited by a corporation’s articles of incorporation or bylaws.

DON’T LET “NON-BINDING” AGREEMENTS ACTUALLY BIND YOU

More often than I like, my first contact with a prospective borrower from a bank is when I am e-mailed a copy of a signed commitment letter.  In some cases, that commitment letter was preceded by a term sheet that I also didn’t see.  Similarly, often my first contact with the buyer or seller of a business is when I am sent a copy of a signed “non-binding” letter of intent.  In most instances, I will see something in the document that I wish I could have changed—and might have, if I had been involved in the process earlier.

Notwithstanding the language about some or all of the provisions of such letters being “non-binding” or “not giving rise to any legally binding obligation on the part of any of the parties,” the provisions of an approved term sheet or signed letter of intent or commitment establish the expectational outline within which definitive transactional documents or loan documents must live, and any later attempts to go outside that outline likely will be met with resistance by the other party.

For example, if you have been approached to sell your business and have strong feelings about the maximum length of time that you are willing for your representations and warranties (and the related indemnities) to survive closing, or the minimum amount of cash you want to receive at closing, or the maximum amount of proceeds you want to put in escrow, it is critically important to include those issues in the term sheet rather than 10 drafts into the negotiations of an asset purchase or stock purchase agreement.  Likewise, if you object to confession of judgment provisions, you should have the commitment letter say that there will be no such provisions in the loan documents.  The lender may be unwilling, but at least you get the option to give up your wish or to search for another lender before your attorney has spent much time and your money negotiating documents that you will never sign.  These are just a few of the items that should be addressed up front in a term sheet.

Since it is likely that your attorney sees more loans and more deals than you do, I would argue that you should get him or her involved as early as possible in the process.  Because of his or her experiences, your attorney may focus on some aspect of the deal or loan that you haven’t.  For example, you may be ready to sign a commitment letter to sell your business before you have thought to ask the proposed buyer to sign a non-disclosure agreement. Again, that is only one example.

Arlene Klinedinst Arlene Klinedinst Arlene Klinedinst Arlene Klinedinst Arlene Klinedinst

Arlene Klinesdinst Elected Chair of VBA’s Labor Relations and Employment Law Section

Vandeventer Black LLP AV® Preeminent-rated partner Arlene F. Klinedinst was elected to serve as new Chair of the Virginia Bar Association Labor Relations & Employment Law Section. Klinedinst also served as Chair of Vandeventer Black’s Labor and Employment Department.

“Serving as Chair of the Labor Relations & Employment Law Section is a great honor for me,” said Klinedinst. “I am proud to serve such prestigious organization and follow in the footsteps of so many former Chairs, whom I admire.”

For nearly 30 years, Klinedinst has represented a variety of organizations and businesses across a broad range of employment issues, including discrimination, harassment, wrongful discharge, wage and hour claims, VOSH/OSHA citations, unfair labor practices, grievance arbitration, and covenants not to compete.  Additionally, she advises employers on preventative measures such as handbooks and policies, legal compliance, and union avoidance.

Klinedinst is listed as a Best Lawyers in America® in Employment Law-Management & Labor Law-Management, Virginia Business Magazines’ Legal Elite, a Virginia Super Lawyers Super Lawyer, and among Virginia Living Magazine Women In The Law 2017.  In 2016, she became a Fellow of the Virginia Law Foundation.

Upcoming Events
Stay Connected
0
    0
    Your Cart
    Your cart is empty