September 27, 2016

WHAT IS AN S CORPORATION?

             Exactly what is an S corporation and what types of businesses may be interested in being an S Corp?  First, it is very important to understand that an S Corp is a FEDERAL TAX STATUS of a corporation and not a type of entity. What does this mean? This means that when you form a corporation in Maryland (or any other state), you do not form an S Corp per se. In Maryland, you will form a regular corporation and then file an S Corp election with the IRS. (The Articles of Incorporation and/or the Organizational Meeting minutes will state that the corporation's owners will elect S Corp status.)

             So, why would my corporation choose to be an S Corp? Under IRS regulations, because a corporation is a separate legal entity, it must usually file a tax return and pay taxes on its taxable income. However, the IRS regulations allow certain small businesses to be treated for tax purposes as if they were being run by the owners themselves without a separate entity. Under Subchapter S of the IRS regulations (this subchapter is where the name "S Corp" comes from), a corporation can elect to have the IRS disregard the corporation as a separate taxable entity and allow the taxable income or losses of the business to be reported on ("flow to" or "pass through" to) the owner of the business in proportion to their ownership shares. This prevents "double taxation" of corporate income because the income is taxed only at the owner level rather than at the corporate level as income and then again at the owner level as dividends.

            Aside from the avoidance of double taxation, An S corporation offers flexibility regarding
how earnings are paid to its owners, whether they are paid as salaries (subject to FICA and other taxes) or as distributions, not subject to these taxes. An S corporation must file a tax return but the
shareholders, not the S corporation,  pay taxes on profits on their individual tax returns. 

            The I.R.S. has very specific criteria that must be met before an S corporation election is
approved. To be eligible a corporation must:

            1. timely file Federal Form 2553;

            2. have no more than 100 shareholders, who meet the specified I.R.S. definition of "shareholder;"

            3.  have no nonresident alien shareholders; and

            4.  have only one class of stock.

            5.  and not be an "ineligible corporation" under the I.R.S. Code.

            The following links provide more information on the required form and criteria in order
to be a qualified S corporation: https://www.irs.gov/pub/irs-pdf/f2553.pdf.

            Before attempting to file these forms, however, you first must incorporate in
Maryland and file the required documents with Maryland's State Department of Assessment
and Taxation ("SDAT"),  found at http://www.dat.state.md.us/sdatweb/stock.pdf.  Maryland
requires that any corporation provide the following information: name of corporation,
purpose for which the corporation is formed, the addresses of the principal place of business and
resident agent, the issuance of stock shares and the par value, the number of directors pursuant to
the bylaws (which  can be increased or decreased), and the name of the directors and successors
who shall act until the first meeting or until their successors are chosen.

            Once the corporation is filed, the next step is to file an I.R.S. Form 2553 to elect S
corporation status.  After both of these steps, if all criteria has been met, an S corporation is
valid.

            Once the S corporation is formed there are legal requirements going forward. The most important requirements relate to the number of shareholders and the type of person or entity that can be a shareholder. S Corps are also limited to certain classes of stock they can issue. For this and other reasons, many tech startups planning to look to venture capital investment should not elect S Corp status. 
  
            Since there are many considerations in evaluating what type of business entity is best for
your  business, and once you decide that, how to go about meeting the requirements for both
setting up and then maintaining your business, an attorney can be one of you most valuable assets.

September 20, 2016

Do I Have a Valid and Binding Contract?

          Is the agreement I just entered into a legally binding contract? In general, a valid contract requires four elements: offer, acceptance, consideration, and performance. The process begins when one party offers the terms for the contract. Next, the other party can accept, reject, or request to modify the contract. At this step there is often back and forth, with negotiation on the terms of the contract. If the parties agree to the terms, then consideration or something of legal value must be offered and accepted. This could be and is often money or services. If the above are met, the next step is performance. In order for the contract to be completed, there must be performance according to the terms of the contract.

            But before you can have a valid contract you must also have parties who have "capacity." In Maryland, this means that the parties must have reached the "age of majority," or 18. In addition, a party must not be under a disability that would prevent them from understanding the contract. They cannot be under "duress," which means unlawful coercion or force, taking away the voluntary consent to contract. A contract with willful misrepresentations may be  fraudulent and nonbinding. Instead, the basis of a valid contract is a mutual agreement, sometimes referred to as "mutual assent," and a "meeting of the minds." Contracts, to be valid, must be entered into freely.

            There are many issues that may arise after a valid contract is entered into. There may be issues such as what contract terms mean, the scope of the contract, the manner of performance, the consideration and the time frame, among others. The language used in a contract is critical. People drafting or signing contracts may not realize the legal implications of terms used.

            Most contracts can be oral or written. Certain contracts, however, such as those under the Uniform Commercial Code for the sale of "goods" must be written. Nevertheless, it is usually advisable to have a written contract. It is important to know that a written contract is interpreted from "the four corners," of the page, and cannot be modified or explained by "parole evidence," or outside evidence regarding what the contract really means. Consequently, it is critical that the written contract accurately says what you intend. There can be many legal issues with both the drafting and enforcement of a contract. If there is a "breach" of contract, or failure of one party to uphold the terms of the contract, legal action may be required.

            If there is a proven breach of contract, another issue is the measure of damages. This can be complicated and may require experts.

            The statute of limitations, or time in which to file suit for a breach of contract in Maryland is generally three years. However, there are some exceptions. Consult an attorney for the specific statute of limitations in any breach of contract case you face.

            Whether you are the promisor (person making the offer) or promissee (person to whom the offer is made), it is advisable to contact an attorney. Often doing so at the negotiation stage can save a lot of headaches and ensure that the contract says and does what you intend.
           


September 15, 2016

How Do I Sell My Small Business?

            You own a small business. It may have been a good experience or a headache but for whatever reason, you've decided to sell it. You've never done this before and aren't sure what's involved.

            The first thing is to carefully analyze your business from every angle. Get all of your business documents organized. These could include financial records, profit and loss statements, accounts receivables, tax returns, transferable leases, contracts and agreements, pending orders, furniture and equipment lists, warranties, covenants not to compete, and consulting or management agreements, among many other possible things particular to your business. If the business operates as an LLC, make sure you have your articles of organization and any operating agreement available. If the business operates as a corporation, make sure all of your governing documents are in one place and up to date.

            Before you attempt to sell your small business you want to have a clear handle on what you are selling and be able to present it accurately and to your best advantage. Doing the above organization will help you ensure that you have covered each aspect of your business.

            Early on, you will need to decide whether you will be selling the assets of the business or whether you will be selling the ownership interests (LLC interests or corporation stock). You should consult with a tax professional at this point because the type of sale can affect your tax situation. This can be tricky. Since there are tax ramifications in the sale of a business, you not only want to be sure that you sell your business for the right price, you also want to know what, if any, tax liability you will have after the sale closes.

            Next you want to be sure that you have accurately valued your business and/or the assets of the business. You will likely need to hire a business appraiser. Often a broker is hired to help in this process. A broker will be able to develop a marketing plan and sales strategy.  You will want to be sure you have research supporting the value of your business and your sales price, with supporting information tailored to your type of business and location. 

            It is likely that the sale of your business will be more complicated than you think. You should have a purchase agreement or letter of intent for the proposed purchaser. With this is hand, you know you have a prospective buyer but you are not done yet. You need to do your "due diligence,' meaning to check the finances and representations of the prospective buyer to see if you wish to move forward with this buyer. If not, the whole process starts again.

            Once you have found a buyer that meets your criteria, you will want to have a detailed contract for the sale of your business drawn up. This is a critical document with all the important terms and details of sale. Therefore, it is very important that it is accurate, complete, and covers all areas. Not doing so can invite costly litigation or disputes after the closing. It's wise to have an attorney draft the contract. You'll want an attorney you are comfortable dealing with to do this, and one who understands your business and objectives in the sale.

            If you sell the ownership of the LLC or corporation, after the sale the entity will continue under new ownership and you, as the former owner, can enjoy the fruits of your years of labor. If, however, you sold only the underlying asset of the business, then after the sale of assets you will continue to own the entity. A knowledgeable business attorney can also help you file necessary legal documents to dissolve your business. For example, if you own a corporation, it you may need to file articles of dissolution. This is an important step to ensure that there is no lingering liability or obligation for you as owner.
           

            

August 30, 2016

FRANCHISE LAW IN MARYLAND

                Franchise law is complicated. According to the Maryland Attorney General, Maryland is one of about 15 states that requires "registration" of franchise offerings.
                  
                What is a franchise?  Maryland Annotated Business Regulation Code,  Section 14-201 defines it as follows:
        
                (1) "Franchise" means an expressed or implied, oral or written agreement in which:

                (i) a purchaser is granted the right to engage in the business of offering, selling, or distributing   goods or services under a marketing plan or system prescribed in substantial part by the franchisor;

                (ii) the operation of the business under the marketing plan or system is associated          substantially with the trademark, service mark, trade name, logotype, advertising, or
                other commercial symbol that designates the franchisor or its affiliate; and

                (iii) the purchaser must pay, directly or indirectly, a franchise fee.

                (2) "Franchise" includes an area franchise.

                "Franchisor" means the person offering to sell a franchise. The term "franchisee" means the person buying a franchise.

                There are many laws and regulations in effect to require fair dealing and full disclosure regarding proposed franchise sales and purchases. In addition to the laws governing franchises set forth above, there are many regulations that you must comply with under Maryland's Code of Regulations ("COMAR"). Currently, these regulations are set forth in over 116 pages and can be found at  http://www.oag.state.md.us/securities/SecuritiesAct.pdf.  For more information, see the following links from the Maryland Attorney General's Office:
Information on Renewing and Amending a Franchise Registration

                 A Franchisor also has to comply with Federal laws and regulations of the Federal Trade Commission.

                As if selling or buying a franchise isn't complicated enough, there are many potential issues that can come up  including: registration, renewal, advertising, civil enforcement, criminal penalties, record keeping, liability and releases, false or misleading prospective information or statements, material changes and notice requirements, registration, escrow requirements, disclosure forms, and other financial and legal issues.

                Given the complexity of franchise law, it's wise to hire a knowledgeable attorney to assist you, whether you plan on buying or selling a franchise.

August 23, 2016

WHAT IS AN "OPERATING AGREEMENT" AND WHY DOES MY LLC NEED ONE?

             Say you've decided to form a limited liability company, commonly referred to as an "LLC." You've heard that an LLC needs an "operating agreement" in Maryland but you don't know what that means or how to proceed. This article will guide you.

            The first thing is to be sure that you have the correct legal entity for your business (see prior blog link on choosing a proper legal entity. You may want to consult a lawyer to discuss the pros and cons of each. If you do decide that an LLC is the correct entity for you, you first need to register the entity with the Maryland State Department of Assessments and Taxation (SDAT). A good link on creating an LLC can be found at http://www.dat.state.md.us/sdatweb/artorgan.pdf.

            Maryland law does not require that an LLC have a written operating agreement. However, it is advisable to put your agreement with your fellow LLC members in writing. The agreement itself is not filed anywhere. Nevertheless, it is a binding contract with legal ramifications. 

            The operating agreement, while not filed with the state, should be kept with the LLC's permanent documents. The operating agreement is an important binding agreement that outlines the roles and responsibilities of the member(s). It should set forth the framework of how the LLC will be funded, run, organized, and managed. It should include specific and detailed information regarding, for example, the name of the LLC, the registered agent, the address, the date of formation, the terms under which the LLC will operate, the purpose of the LLC, the names of the member(s), and procedures relating to meetings. It should specify who will fund the LLC and make financial decisions for the LLC. It should specify the percentage of member(s) ownership, voting rights and responsibilities, and sharing of profit and losses of the LLC. It may include provisions on how to modify or amend the agreement or make changes to the LLC or deal with dissolution of the LLC. The Maryland statute on operating agreements can be found in the Corporations and Associations Annotated Code, Section 4A-402, and linked here for your convenience: http://www.lexisnexis.com/hottopics/mdcode/.

            Sometimes people ask if an LLC has shares of stock like a corporation. It does not. The members own "LLC interests" or "membership interests." The interests that each member has is set forth in the operating agreement and may also be documented in a certificate of ownership or interest. Even if LLC interests are not documented in a certificate, like a stock share, it is very important to documents when interests are transferred, bought or sold.

            The whole purpose of an operating agreement is to provide a well thought out structure of the LLC in advance of starting it. Much of the work in creating a strong operating agreement is a clear vision for your business and a well thought out way to execute it.

            A well thought out and planned operating agreement can get an LLC off to a strong start, with a clear purpose and a way to achieve it clearly spelled out. This can avoid costly litigation and ill will among members should there be a dispute on how the LLC is run. Planning ahead is both wise and cost effective.


            If you search online you can find a number of sites with "free" or "for a small fee" websites that will provide forms for your operating agreement. Be careful. While these can be a good starting point, if you haven't fully thought out all the angles of setting up and running your LLC, these may not be advisable for you. An experienced business attorney can make sure you have considered all the issues important to your specific LLC and mission, and prepare an operating agreement that covers what you need.

August 17, 2016

SHOULD I HAVE A LAWYER REVIEW MY COMMERCIAL LEASE AGREEMENT?


            You're an owner leasing commercial rental property or a tenant wishing to lease. You've
agreed on the important lease terms such as square footage, rent, and term. So why should you
spend the time and money to involve a lawyer you ask? On both sides, it's advisable.

            Leases are contracts and commercial leases are usually contracts involving a lot of money
over a long term. Therefore, you want to be sure that the written lease agreement actually
reflects what you agreed upon. The precise wording in these contracts is critical and has
legal ramifications. Lay people may not be aware what the terms mean legally. It's important
before you sign any lease agreement to understand what you are signing, what rights you are
getting and what rights you are giving up.

            You also need to know what liability you may face. In addition, you need to protect
yourself in case problems arise. Many questions can arise after a lease agreement is signed.
These are as varied as the individual deal itself. For example, if something major like the heat or
air conditioning breaks, is the landlord or the tenant responsible for the cost of repair? Another
example could be who is responsible to clean snow from the sidewalks, landlord or tenant?
Other issues may include use of the property, term, rent (there are different types of commercial
rentals, and ways to calculate the rent), subletting, renewal, default, warranties, insolvency,
signage, parking, covenants, restrictions, maintenance and repairs, build outs and property
changes, lease modifications, zoning, insurance and utilities, taxes and assessments, rights with
respect to other tenants, and  other issues particular to your lease. You can see that the list of
issues is long.

            When you've gone through all of the stress of getting to the point where you sign the
lease, you may be just ready to sign the lease. But don't, without carefully reviewing the lease
and your understanding of it with a business attorney. This extra step can make for a sound
deal that meets your needs. A knowledgeable attorney can advise you before you sign if the
lease has potential problems. If so, addressing them in advance is often much easier and cost effective.

April 21, 2016

Why Every Designer Needs a Lawyer

Why Every Designer Needs a Lawyer

If you’re a designer, you’ve undoubtedly pushed out many of your personal creative projects online. In all likelihood, you’ve spent a lot of your time and hard work to create designs that affect others in a profound manner. All you ask for is recognition and credit for your creative expression — yet what happens if somebody claims your work as their own?

This is, by and large, a huge fear for many designers. Whether you’re a graphic designer, a web developer or a UI/UX artist, it can be a flagrant offense when others steal your intellectual property. What you should know: you can legally protect your creative property. By partnering with the right lawyer, you can grant yourself peace of mind.

All designers are defined by the content they produce and when something as subjective as ‘creativity’ comes into play, it can become a breeding ground of legal issues. Take a look at Apple and Samsung’s patent lawsuit: after Apple had initially won the lawsuit in 2014, its victory was overturned on Samsung’s appeal.

Designers need their own contracts and their rights protected above all. Here’s how a lawyer can help you with all of that:

A lawyer can draft a contract tailored to your needs

Prior to entering any agreement between yourself and a client, a lawyer would urge you to prepare a contract. This contract exists as a formal legal document that both you (the designer) and your client are blinded to. The client must understand that before they acquire your services and commission you, the contract is there to protect your rights. Especially when time is of the essence, a lawyer will help you draft a contract based on the context of your needs and requirements even under the pressure of time constraints.

A lawyer saves you time and reduces your risks

In most — if not, all — contracts, a proper contract will have the designer’s terms and conditions included in it. This is to create transparency and clarity between both parties. Your terms of services are another layer of protection for your and your creative property. Undoubtedly, you’ve come across other businesses’ or designers’ individual terms and conditions and they’re seemingly filled with legal jargon. You might be tempted to find a terms and conditions template and substitute your name in, but it may not give you the customization and proper protection you need. Instead of putting yourself through the risk and hassle, a lawyer grants you the security that your terms and conditions are done the right way.

Lawyers help designers understand their rights

It’s important to distinguish the difference between selling your work and selling your rights. While both reward you with your livelihood, only one protects your copyright. In the harsh reality of the world, companies can and will discretely add clauses to contracts that abolish your rights to your work. Without any experience, a designer can negligently gloss over the fact. A lawyer can help you identify these clauses, and can then proceed to either have the clause removed or, in the very least, have its scope mitigated. As a designer, it’s important you protect your brand as much as your intellectual property.



Hiring a lawyer is the smartest investment you’ll make. Not only will you grant yourself peace of mind, but you’ll free up your time from handling the legalities of your profession. You’ll have more time to focus your energy towards your passion, rather than redirecting it towards the constant worrying of protecting your intellectual property.


Written by Daza Design

Daza Design is an online design agency that provides website, logo, and print design services. Their top-notch services have helped clients in a wide range of industries. They love all things design. It’s what they do from pixels to print.

You can reach Daza Design at:

Tel: (213) 674-0048