June 27, 2017

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://dat.maryland.gov/businesses/Pages/Maryland-Checklist-for-New-Businesses.aspx.  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.

June 20, 2017

Do I Need a Lawyer for a Contract Review?

The contract might seem incredibly simple. You found a great form online, you’ve gone over the details several times and it looks like you might be able to come to a final agreement. Good intentions have been expressed on both sides. However, as the saying goes, “business is business.”
You might be dealing with a family member or a friend you’ve known for years, but that’s not enough to guarantee peace of mind. There could be legal ramifications if you choose to draft your contract without the assistance of a lawyer. In fact, doing it without a lawyer could lead to problems down the line.

You might choose to go with a verbal contract. They are allowed, but can be difficult to enforce in court. If it’s on paper, you have something on record, and that’s the key if a dispute ever arises. It’s also strongly recommended that you have a lawyer review your contract. Although you’ll find plenty DIY (do-it-yourself) opportunities, your best course is to seek the help of a Maryland business lawyer who can help you craft the right contract for your needs.

Here are some basics to consider when putting your contract together.

Have a Plan
In most cases, it’s fine to create an outline of what you’d like your contract to be. Whatever specifics you want in the contract should be included.  You will need to ensure that all terms are put the contract, even those seemingly innocent verbal agreements. Additionally, if your business partner resides in a different state, it’s a good idea to decide which state’s law will apply to the contract (you’ll have to choose which state). Leave nothing to chance. Have your attorney work with you to create a plan that works best for you.

When Things Don’t Work Out
Nothing’s ever perfect and even the best plans can be waylaid. That’s where a detailed contract can come into play. It gives you insurance against a worst-case scenario if your business venture doesn’t work out. The contract can spell out exactly the way you’d prefer to resolve any differences, whether it’s through mediation or arbitration. Your dispute doesn’t have to always be solved in court.

Protect Your Intellectual Property
When it comes to creative ventures, as much as you’d like to ignore the business aspect, the reality is that a well drafted contract will save you a headache (and legal fees down the road). If you’re engaged in a publishing business, whether you’re writing the next great novel or inventing a new technology, you need to take protecting your intellectual property very seriously. Even if the contract seems straightforward, you should always have an attorney review the document.
  
It’s About Your Best Interests
No matter how you decide to move forward with your business venture, having a contract is the first step to protect you and cover your bases if something goes wrong. More importantly, a contract is essential to keep your best interests covered, and a skilled Maryland business attorney can deliver the content (and protection) that you need. A contract review attorney can help steer you in the right direction, so everyone involved can rest easy and feel confident.  

Katherine Taylor is an experienced Maryland business attorney who has reviewed, drafted and litigated hundreds of contracts. Go to www.taylorlegal.com for more information. 

June 13, 2017

WHY YOUR START-UP COMPANY NEEDS A LAWYER


            If you are starting a new company in Maryland, particularly a small business, you may wonder, "why do I need a lawyer?"  With the abundance of information readily available on the Internet, couldn’t you save money on lawyer fees by not retaining a business lawyer from the outset and just hope legal issues either don’t arise or are simple enough for you to navigate on your own?  After all, you can find a lot of legal information readily available in Maryland, for example, on the State Department of Assessments and Taxation (http://dat.maryland.gov) and Department of Commerce (http://commerce.maryland.gov/start/resources) websites, such as the types of legal entities recognized, the forms to set up the type of entity you select, and some basic business information.

            However, retaining a knowledgeable Maryland business lawyer from the start has many advantages, including: advice on planning and starting your business, evaluating the right type of business entity for your needs, selecting a location, complying with zoning laws, tax planning and business deductions, employee issues, copyright/trademark, complying with regulations and business filing requirements, safeguarding your work product, understanding covenants not to compete, licensing and permit requirements, technology, financing, loans, and many other issues just to get our business off the ground and started on solid footing. Often starting a business is much more complicated and involved than most people realize.

            Consequently, advanced planning with the business knowledge of a reputable Maryland business attorney can save you headaches, money, and avoid potential costly legal battles that may have been avoided. An  attorney who understands your business model, goals, customers, competition, and cash flow can offer a wealth of wealth of strategic advice and help you steer clear of  rouble areas or effectively resolve them.

            So, while you can try to “wing it,” trying to piece together information from the Internet (perhaps not knowing whether certain cites are up to date or credible), it is advisable to have a trained lawyer skilled in understanding, explaining, and keeping up to date on statutes, regulations, and case law governing start-ups in Maryland.

            Katherine Taylor is an experienced Maryland business attorney and a former CPA who understands the ins and outs of starting a business. Go to www.taylorlegal.com to see more about TaylorLegal.






June 6, 2017

EMPLOYERS BEWARE! YOU MAY BE LIABLE FOR AGENTS' AND EMPLOYEES' ACTS


                In Maryland an employer can be liable for the negligence of an "agent, servant, or employee." The legal term for this is "respondeat superior." In Latin this literally means "let the master answer." First, while we often hear the word "negligence," what does it mean in this context? In general, negligence is a breach of a duty owed that "proximately" (or directly) causes the alleged harm. This is a threefold test and all three elements above are required to establish negligence. Therefore, questions arise in evaluating an employer's responsibility for an employee's  negligence include: Is the person someone to whom a duty was owed? What is the applicable "standard of care" (this varies depending on the context)? Was there any intervening act or omission that caused or contributed (called "contributory negligence") to the alleged negligence? If so, does this break the "chain of causation?" Applying this to the employer context, an employer can be held "vicariously liable" for negligent acts of an agent, servant or employee.

                Who is an "agent, servant or employee?" The definition of an employee was discussed at length in a previous blog written by Maryland business attorney Katherine Taylor (Employee or Contractor?). An agent is someone doing something on behalf of an employer, who Figuratively stands in the shoes of an employer and acts on his or her behalf. The arcane term Servant" comes from early Maryland common law and does not mean "servant" in the way we think of it today. Instead, it is basically another term for employee.

                Under what theory does someone sue an employer for negligence of an employee? The Theory is that an employer is responsible for the acts of an employee. Are there any prerequisites? An employee must be "acting within the scope of employment" before employer liability can attach. How does this work in the real world? Say an employee is driving a delivery truck for an employer and causes an accident. The first question to ask is whether the employee was acting on behalf of the employer. For example, when and where did the accident happen? Was the employee using the truck during regular work hours? Was the employee on a "mission" for the employer or was the employee doing personal business unrelated to the employer? Did the employee have a valid license? Did the employee have training or ability to drive the type of truck? Did the employee have a good driving record? If not, did the employer know this or should the employer have know about this?  Was the employer aware of any issue that should have prevented this employee from driving this truck for this mission?

                As you can see, there are many issues that can arise in the employer/employee context. What can an employer do to reduce the chances of being held liable for an employee's negligence?

The following tips can help:

                1. Carefully screen and interview potential employees to make sure they are a good fit for you and your business.

                2. Do a background check, including driving record and criminal history.

                3. Check references.

                4.  Communicate clearly what is expected and what is prohibited during employment hours.

                If an issue arises, you should think about contacting a Maryland business attorney who can help you wade through the many layered issues in an employer liability case.  A business lawyer experienced in this area can help you evaluate the facts, understand the law, advise you, and assert any available defenses on your behalf.

Katherine Taylor is a Maryland business attorney who has extensive experience dealing with employer/employee issues. Go to www.taylorlegal.com for more information.