What are some of the difficulties of operating my family-owned business with the next generation?

One of the biggest issues faced by partners of family-owned businesses is dealing with co-owning family members as business partners, rather than as family members. This is true of businesses comprised of siblings, as well as parent-child businesses. In order to successfully operate a family-owned business it is important to recognize that the business, despite the familial relationship of those involved, is still a business and a balance must be struck between being a family and being business partners. This means knowing when to treat your partners as business partners and when to treat them as family members. For example, in making routine business decisions, those decisions need to be based on what is best for the business fundamentally, not the personal interests of a particular family member. When it comes time to buy-out the retiring generation, however, the retiring partner may want to give weight to their family relationship in order to facilitate the transition of the business.

The attorneys at Mette, Evans & Woodside have extensive experience representing family-owned businesses and partners.

If You are the Only Member of a Limited Liability Company (LLC), What Steps Should You Take to Protect Your Family if You Should Unexpectedly Pass Away?

LLC-agreement-paperworkBy Timothy A. Hoy, Esq.

A: First, you should understand Pennsylvania law on the effect of your death on the limited liability company (LLC). Unless you have an operating agreement for the company which says something different, the law provides that the company will cease to exist within 180 days of your death. The law obligates the executor of your estate to wind up the affairs of the company, which generally means liquidating the assets of the company (e.g., selling equipment and collecting accounts receivable), paying the company’s creditors, and distributing any leftover funds to your estate. Do not assume that your executor or your heirs have the authority to continue the operations of the company, except as necessary to wind up the company.

Second, you should consider creating an operating agreement for your company. The rules summarized in the preceding paragraph can be changed in the operating agreement. Many single member limited liability companies view an operating agreement as unnecessary, but specifying what will happen to the company following your death is one good reason to have one. For example, you may want to specify in the operating agreement that your entire interest in the company, including the authority to govern the company, may be transferred via your will.

Finally, you should consult with an attorney to prepare the operating agreement and either an attorney or a financial advisor about succession planning for your business. This short summary of the law in Pennsylvania and the value of an operating agreement should be supplemented by comprehensive advice from your advisors.

Pennsylvania to Examine Its Professional Licensing Procedures

by Paul J. Bruder, Jr.

Gov. Tom Wolf has ordered a review of the professional licensing process to examine whether costs and procedures in Pennsylvania are consistent with those in other states. Wolf signed Executive Order No. 2017-03, which authorizes the Commissioner of the Bureau of Professional and Occupational Affairs, an office within the Department of State, to compare Pennsylvania’s professional licenses against national and regional standards. This could affect a large number of various professions, from real estate, construction-related professions, and medical and dental professions, to name just a few. While only 20 percent of Pennsylvania workers need a license to engage in their profession, the number of workers with an occupational license has grown rapidly since the mid-1900’s.

Commissioner Ian Harlow’s role will be to work with the state’s 29 boards and commissions to evaluate each one’s licensing process, fees, training and continuing education requirements. The commissioners will prepare a joint report for submission to the Governor, which compares Pennsylvania’s requirements with other states in the region, and across the country.

“Requiring a license to work in certain jobs helps to keep all of us safe, but those requirements should be fair relative to other states in our region and across the country,” Wolf said. “Overly burdensome requirements and fees can block some workers – especially minorities or spouses in military families who move frequently – from starting a career and supporting their families.”

Advantages of Converting a Limited Partnership to an LLC

by Paula J. Leicht

Advantages of Converting a Limited Partnership to an LLC

Two recent changes in Pennsylvania law made it advantageous to convert a limited partnership which owns real estate (and/or other income-producing assets) to a limited liability company.

A preferred form of ownership for real estate and other income-producing investments prior to January 1, 2016 was the limited partnership which owns the real estate with a limited liability company (“LLC”) as the general partner. This vehicle accomplished two purposes: one, it avoided the Pennsylvania capital stock tax which an LLC was subject to; and two, it preserved liability protection for the general partnership interest. This approach involved the creation of two entities, a limited partnership and a limited liability company as the general partner, and the requirement to file two separate tax returns.

Two recent changes in Pennsylvania law now make it possible to convert the limited partnership to an LLC without incurring realty transfer tax liability on the transfer and the second change effective January 1, 2016 repealed the capital stock tax on LLC’s. The LLC to serve as general partner may now be dissolved as the unlimited liability protection is obtained through the converted limited partnership.

These two changes now make it possible for real estate investors to convert their limited partnerships into LLCs without having to worry about long-term tax obligations and also to continue to enjoy limited liability protections. With only one entity remaining, the limited partnership that converted to an LLC, only one tax return needs to be filed.

If you have an interest in more information on this subject, please contact our office.

Will Your Business Be a Victim of Cybersquatting?

cybersquattingby Aaron D. Martin

The protection of your company’s online identity is more important than ever before. You need a unique presence to maximize business from online inquiries. Because of the value of a business’s online presence, dishonest competitors will sometimes attempt to improperly divert online search results through “cybersquatting.”

Cybersquatting occurs when a business unrelated to yours improperly uses your business name or mark to market itself online to your detriment. It often takes the form of the registration of a domain name that is confusingly similar to yours.

The Anticybersquatting Consumer Protection Act provides powerful remedies for the bad faith misappropriation of domain names. Remedies can include an injunction to stop the offending action, damages and attorney’s fees. Other laws protect against other forms of online deceptive and confusing advertising.

When cybersquatting occurs, aggressive legal action to stop the practice can help protect a company’s online presence. Experienced legal counsel in this area can help restore a level online playing field and allow a company’s honest online marketing efforts to succeed.

Planning for the Future of Your Enterprise

You have a business idea. It may be that you have discovered a unique product or idea (invented or just came upon an opportunity to market some else’s product or idea). Perhaps it is filling a discerned need in your community, say an Italian restaurant or book store, fitness club or any number of other perceived needed facilities in your community. Perhaps it is a real estate opportunity at a unique “ideal” location which you have discovered/controlled.

In most cases, it is definitely advisable to establish a business identity and generally advisable to establish a separate (from you personally) business entity. In many cases, it will cost money (sometimes lots of it) to actually launch your enterprise. Also, as with most business ventures, you plan to earn money and, generally, a profit from your enterprise. Many enterprises will also require more than one person to effectively operate the enterprise. This might be simply employees but it may require the actual “investment” of more than just you. In some cases, you actually came up with your idea with one or more other people who all desire to pursue the enterprise. We often loosely refer to such people as your “partners.” This article is intended to assist you in charting a course for your enterprise which will be appropriately suited for your expectations.

Of utmost importance is the type of entity that you create. In this regard, let us look at your choices:
1. Sole Proprietorship;
2. Partnership – “General” or “Limited;”
3. Corporation (“C Corporation”);
4. S Corporation;
5. Limited Liability Company (LLC); and
6. Nonprofit Corporation or LLC.

Although it is very difficult in any article to thoroughly review each of the foregoing entities, we provide the following simple definitions of each of the above-listed entities:

1. Sole Proprietorship
Although you may select a name other than your own such as “ABC Enterprises” which will require you to register with your state a “fictitious name,” a sole proprietorship has no separate legal existence from you, the owner. Income and losses are taxed on your personal income tax return.

2. Partnership
There are two types of partnerships which are described as:

a. General Partnership – This is a combination of at least two separate people or entities for the joint conduct of a business enterprise in which each partner has unlimited liability for the obligations of the enterprise. While votes on decisions can be allocated to the percentage of ownership of each partner, often decisions are made by the concept of “one man, one vote.” In any event, each individual partner (whether a 50% owner or a 1% owner) can be held personally liable for all of the debt or obligations of the partnership; and

b. Limited Partnership – In this type of partnership, not every partner will be liable for the obligations or debts of the entity. The partnership will have one or more general partners and one or more limited partners. The most notable item here is that a limited partnership also has “limited liability” which generally means that the limited partner cannot be held liable for the debts of the partnership beyond the amount of funds that the limited partner has invested in the partnership. The general partner, however, is liable for all of the debts of the entity. However, we often make a corporation or LLC the general partner which enables the parties to essentially limit their liability.

3. Corporation
“C Corporation” – We are going to describe corporations in both 3 and 4 of this article because there is a very different tax treatment of corporations depending upon the type of corporation the organizers select.

a. Corporation (generally) – A corporation is a separate legal entity which is owned by shareholders and the governance of the company is generally ruled by a Board of Directors who are elected by the shareholders.

b. In some cases, there are more than one “class” of shareholders, and not every class has the same rights, including share of profits and voting privileges, among other things.

c. The “C” designation comes from the U.S. Internal Revenue Code and basically means that the corporation is taxed separately from its owners (shareholders). This is different from a sole proprietorship or partnership where the income taxation is at the owner’s level and on the owner’s income tax return.
d. One of the downsides of this tax structure is that when the corporation is sold, there is usually income tax to be paid, first by the corporation and second by the owner shareholders.

4. S Corporation
This is a corporation which has elected a special tax status from the federal and state government to allow all of the taxable income of the corporation to be passed down to the corporation’s shareholders, i.e. to be taxed as a partnership or sole proprietorship. However, most all corporate governance issues are typical of all corporations.

5. Limited Liability Company (LLC)
An LLC is a flexible form of enterprise which blends elements of partnership and corporate structures. Although not a partnership or corporation, it does provide limited liability to its owners similar to the shareholders of a corporation. But, it can be taxed like a partnership for both federal and state purposes. This has become the entity of choice for many new enterprises. Please note that an LLC can select to be taxed like a “C” Corporation or as a partnership.

6. Nonprofit Corporations or LLCs
Most entrepreneurs do not intend to not make a profit; however, there are times and circumstances where a nonprofit corporation or LLC may be desirable when the organizer is mostly interested in accomplishing a unique goal and will be satisfied with receiving just a salary and having the entity not be subject to federal and state taxes in many cases. Please note, however, that not all nonprofit entities are tax exempt. There are additional standards at both the state and federal level to allow a nonprofit entity to be tax exempt. An example of a nonprofit corporation which is typically not tax exempt would be an entity owned by a group of hunters to own a hunting cabin property.

Each of the foregoing entities will not be appropriate for all business enterprises. For instance, it is generally foolish to have a real estate enterprise as a C Corporation. This can cause enormous problems from a taxation perspective. First, you will want the ability to pass through to the investor all of the tax deductions available to an entity holding an improved piece of real estate. Moreover, a sale of the real estate asset would result in tax at the C Corporation level and again at the individual investor level, commonly called “double taxation.” Consequently, partnerships or LLCs, which are taxed as partnerships, are the typical choice for real estate entities.

Restaurants are generally considered high risk and, consequently, we would generally recommend a corporate form or at least an LLC which has limited liability. This is typical advice for most business enterprises which may have any significant risk of liability.

It is also very important to be conscious of the roles of the various investors, such as who will be the CEO, whether as a President of a corporation or Manager of an LLC. But, the most important issue is “control.” Who is/are in control of the entity? There are many different ways to assure that a particular investor or group of investors are in control of the entity and safe from unwanted takeovers. This topic is too complex to be a part of this article, as very careful planning and strategizing is typically advisable to address the “control” issue.

It is most important to determine at the beginning of the venture when everyone is of one mind and relatively optimistic about the future to address and agree upon the issue of how easily transferable will be the ownership interests. In some respects, each investor most likely wants the ability to acquire the interest of any investor who unexpectedly dies or elects to withdraw from the entity. In order to accomplish this, an owner’s agreement must be a fundamental part of the initial organizational documents. But, the investors also need to be flexible enough to enable the infusion of additional equity investments.

Many people do not realize that not every legal entity can last forever. Both federal tax law and many state partnership laws require the “termination” of the entity in certain circumstances, including the death of a partner or the passing of time. LLCs and corporations do not have comparable provisions. This issue should not be forgotten.

The remaining issues for this article relate to the ability of the enterprise to raise additional capital and bring in additional investors to help raise that capital. In this regard, it is fundamental that the entity has enough flexibility built into its organizational and investor documents to enable the issuance of more stock or membership or partnership interests and that applicable securities laws be appropriately considered by the enterprise. This does not mean that upon creation the entity file a securities registration with the United States Securities Exchange Commission or relevant state regulatory bodies. Rather, it does mean that creating a corporation with only ten or one hundred authorized shares of stock may be ill-advised.

While this article raises almost as many questions as it answers, hopefully it has helped the reader to appreciate the importance of the initial legal decisions to commence a business enterprise. Most of the above issues can be readily addressed with some brief but sound legal and accounting advice which should not cost thousands of dollars or long delays.

Should I Be Concerned about Using Online Legal Forms for My Business?

by Thomas A. Archer

Should I be concerned about using online legal forms for my business?

When they need legal documents, some business owners opt to employ “online” forms, versions of documents used previously, or borrowed from other companies. It’s understandable that businesses might view this practice as a harmless way to minimize costs.

The trouble with using generic forms is that, when put to the test, the user often discovers that there are unforeseen liabilities. States have different laws and requirements that call for specific documents or language in order to comply with those laws. Failure to use the correct agreements could be a barrier to obtaining financing. The wrong type of lease can leave a business on the hook for what should otherwise be the responsibilities of another party. Without proper documentation, a transaction or business decision can be rendered completely unenforceable.

The old adage, “an ounce of prevention is worth a pound of cure,” applies to legal documents. The cost of dealing with unintended consequences and mistakes in “pre-owned” documents is much higher than employing experienced legal counsel at the outset to ensure that the legal documents are correct for your business.

Do You Have a Legal Wellness Program?

by Kathryn Simpson

Legal Wellness Program

Health wellness programs are becoming increasingly popular. Today, most people, if not directly participating in one, are at least familiar with the concept. Companies sponsor wellness programs for a number of reasons including lowering operating costs, helping employees avoid major issues and improving overall workforce performance.

Recently, I was working with a client and after I had concluded the representation he told me that it was a pleasure working with me, but he hoped he would not need my services in the future. It’s a common refrain among clients, since no one wants problems to occur that would require legal attention.

This particular client was involved with corporate wellness programs and I explain to him that in many cases lawyers’ services are generally used when there’s a problem. However, like his professional focus on wellness, we also help people in a proactive way to accomplish the very same things as a good wellness program.

Clients who voluntarily “enroll” themselves in legal wellness programs and proactively monitor and attend to things before they become problems realize the same benefits of lower cost risks, avoiding major issues and improving overall legal health.

Do you have a legal wellness program?

Think about changes in your personal life and how they impact legal matters. When was the last time you looked at your will? Did you have children when you drafted that will? Or are your children now grown with children of their own? Did you own a home at the time? Were you struggling from paycheck to paycheck and now you have some assets – assets that may result in significant taxes should your estate not be in shape?

How about your business? Have you reviewed your legal structure lately? Would you benefit from a change? What about all those business documents (by-laws, employment agreements, buy-sell agreements, leases, insurance policies, etc.) are they current and in order? Do you even know where they are?

If all these questions are making you a little queasy, you might want to consider starting your own legal wellness program. The attorneys at Mette, Evans & Woodside are experienced in advising and counseling individuals and businesses on their legal needs and are ready to help you achieve legal wellness.

Protecting Your Electronic Communication Privacy

by Kathryn Simpson

Protecting Your Electronic Communication Privacy

Anyone who has had an appointment with a health care provider in the past nine years is familiar with the privacy policies that protect their health information. Federal law requires the protection of this information and provides a sense of security in knowing that your health privacy is protected. But how well are your other “secrets” protected?

If you are employed, emails sent and received on your employer’s computer and any written or verbal communications, including text and voice-mail messages, on employer-provided cell phones are not protected from your employer’s eyes and ears. Employers can and do monitor emails, voicemails, and text messages as well as employee’s social media sites. They do so for many reasons including to ensure that employees are not disclosing confidential and proprietary information.

Communications that you wish to keep confidential, including correspondence with your attorney, should be made in a manner to ensure privacy. You can communicate via email from your home computer using an email account other than that used for work or from your personal smart phone.

In addition, you should password protect your smart phone. The theft or loss of a phone may result in much more than just inconvenience. If there are confidential communications on your device, it could result in the loss of any privilege of confidentiality. If you have other private information on your device, identity theft is a real risk if it can be accessed.

Protect your privacy by being vigilant and smart.