When your business doesn’t need a lawyer.

When your business doesn’t need a lawyer.

Why is a lawyer writing to tell you when you don’t need to hire a lawyer? Because it’s a question that many business owners ask themselves all the time, and one that I frequently answer.  This is the first in a series of articles that will hopefully guide you as I frequently guide my clients.

Entity Formation – No, you don’t need a lawyer to form an entity.

Anyone starting a business can access volumes of information about types of entities, the pros and cons of various entity types, and the necessary legal process to form an entity. Assuming you have decided what type of entity to form (which is a question about which you may wish to consult a lawyer), almost anyone can walk through the steps to form the entity. Most states, including Maryland, allow you to form an entity online and provide resources to assist with the process.

While there are more entity types than LLCs and corporations, these two are the most common entities for businesses and the two that I will deal with in this article.

The requirements for forming an LLC are generally simpler than forming a corporation. This is because, when an LLC is formed, the LLC members (owners) do not have to answer questions about the type of stock that will be issued, the initial selection and election of directors and officers, and what type of organizational structure is desired.

If the entity is a corporation, though, there are questions that you should ask and for which you should consider hiring a lawyer (or accountant) to weigh in on professionally:

·      Do I want my corporation to be a “close” corporation? 

·      How many shares should be authorized, and what will the par value be?

·      Do I want more than one class of stock?

·      Who should the initial directors be?

The answer to the above questions will affect what is set forth in the company’s articles of incorporation. If the articles are not correct, they will need to be amended, which, once formed, can be more rigorous than getting it right from the start.  So long as you properly set forth the above information in the articles of incorporation, you don’t need a lawyer to file the articles for you.

Hint: Beyond the actual formation of a corporation, many state statutes require other documents to be completed and other actions to take place if the corporation is to be operated properly. Those actions include the issuance of the stock, the drafting and filing of the organizational minutes, the adoption of corporate bylaws, etc. If these additional steps are not completed, a corporation may lose the limited liability protection that the corporate shield provides.

Who can go without hiring a lawyer to form the entity?

·      Business owners or founders desiring to form an LLC.

·      Business owners or founders desiring to form a corporation who know the answers to the above questions.

Who should consider hiring a lawyer?

·      Business owners or founders who need assistance with the responses to the above questions.

·      Business owners or founders who need assistance with the steps required after the formation of a corporation.

Hint: Many lawyers and firms provide entity formation services that go beyond merely filing the required document with the state. Those services will include the initial discussions about which type of entity to form given the type of business and operational structure you desire. The services will also typically include your ability to ask a lot of questions during the process as well as the follow-through tasks of the corporate formation process including drafting the by-laws, organizational minutes and preparation of the stock ledger and issuance of stock certificates.

This article is general information only and does not constitute legal advice based on any factual scenario. Any situation involves knowing all of the facts surrounding the issue and there is no way in an article like this that all facts can be known. If you have specific legal questions, you should contact an attorney and enter into an agreement of representation. This is not such an agreement and no attorney-client relationship is created herein.

What, exactly, is an easement?

What is an Easement?

An easement is the legal or equitable right of someone to use the land of another for a specific or special purpose, often to travel over the land in question to reach another area of land.  An easement is a legal right if it was created by a legal instrument, like a deed. An easement is an equitable right if it is needed to ensure access to or fair use of another piece of land, for example a property without access to a road would be entitled to an easement over other land in order to reach the road.

The person or entity that owns the easement is called the dominant estate, while the land the easement lies on is called the servient estate.

An easement can last forever, unlike a lease or license, but it does not give the dominant easement the right to sell or improve the land, although the land may be maintained.

Most homeowners are familiar with utility easements -- rights to access property given to power and cable companies.  Counties or localities often also have easements to ensure proper care of roads and sidewalks.  These easements allow the dominant estate to enter onto the servient estate whenever needed for access or maintenance.

If the easement is documented in a deed or other written agreement, it should set forth clearly the rights and responsibilities of both the dominant and servient estates and is the definitive source to understand what the easement entitles the servient estate to do.

Independent Contractor or Employee? (Or, am I like an Uber driver?)

INDEPENDENT CONTRACTOR OR EMPLOYEE?

            Are you an independent contractor or an employee? How do you find out and why does it matter anyway?

"Independent contractor" and "employee" are not just insignificant names or labels in Maryland. This distinction is legally important and just calling someone by one name or the other,or reporting earnings on a Form 1099 instead of a Form W-2, does not make them what they are called. The specifics of the work must be looked at. A  multi-pronged test is used under both Maryland and federal law to determine whether you are an independent contractor or an employee. These terms are explained in a complex web of Maryland and federal case law, statutes, and regulations. This article does not answer specific questions, but gives a general guideline of the factors applied in determining whether you are legally deemed to be an independent contractor or an employee. Some of these factors are: control, hours, work location, pay schedules, expense reimbursement, tools and materials, training, continuing relationship, reporting, benefits, supervision, level of flexibility, and hiring and firing.

In general, an independent contractor is likely to have more control over his or her work and more flexibility to work when and where he or she likes, with less supervision and accountability on the daily steps of the work involved. Often, an independent contractor can schedule their own hours, may work offsite, and may not have a typical boss or supervisor. An independent contractor is responsible for getting the specified work done in the manner that they choose. This, however, does not mean that they lack accountability. An independent contractor still has a specified job to do and a deadline by which to have it done. Independent contractors may be paid hourly or per project. They typically do not receive benefits such as health insurance, disability insurance, unemployment insurance, sick leave, or vacation pay.

In contrast, an employee, in general, has much less control and flexibility. Typically,an employee has a boss or supervisor, specified hours, and parameters set by an employer on how and when work should be done, to the employer's standards.  While many employees work in an office, some tele-commute or work remotely, but are still under the control of the employer. Employees may be entitled to receive benefits including health insurance, life insurance, disability insurance, unemployment insurance, pension or profit sharing, and sick and vacation leave.

So why does it matter whether you are an employee or independent contractor? First, employees are protected by a variety of wage and anti-discrimination laws that do not necessarily apply to independent contractors. Another ramification of the classification as an independent contractor or employee is that an employer is required to withhold certain federal and state taxes, such as Social Security or "FICA" taxes, worker's compensation and unemployment taxes, and other payroll taxes, from an employee's paycheck. An independent contractor, however, does not have these taxes withheld and instead must file and pay quarterly tax returns and pay estimated tax with Maryland and the Internal Revenue Service. If an employer improperly classifies a worker as an independent contractor when the person is actually an employee, the employer can be liable for back withholding taxes and even fines and penalties.

An overall summary of these issues can be found on the Maryland Department of Labor, Licensing and Regulation website at:

http://www.dllr.state.md.us/labor/wagepay/wpempindcont.shtml

and at the Maryland Workers' Compensation Commission website at:

http://www.wcc.state.md.us/gen_info/wcc_benefits.html

                For federal tax status, the IRS has published helpful information on the factors taken into consideration by the federal government in evaluating whether one is deemed to be an independent contractor or employee:

https://www.irs.gov/pub/irs-pdf/p15a.pdf

                                                               The Uber Case     

           In addition to many of the challenges faced by Uber worldwide, a recent hot issue has arisen in the US as to whether Uber drivers are employees or independent contractors. State courts have come to different conclusions. Maryland has not considered this issue in the Uber context, but it stands to reason that this issue is one with nationwide appeal. 

           Recently, a California Labor Commissioner decided that Uber's classification of its taxi drivers as independent contractors is wrong. In 2014 an Uber driver in California named Barbara Ann Berwick filed a wage complaint in California, seeking reimbursement for business expenses -- gas and bridge tolls. Some other states considering this same issue found that people working for Uber were, in fact, independent contractors. In the California case, Uber refused to reimburse these expenses arguing that Berwick was an independent contractor, not an employee entitled to such reimbursement. 

           The California Labor Commissioner awarded Berwick these expenses, finding that Ms. Berwick was an employee under a detailed "economic realities" test under California law. The Commissioner noted that Uber provided iPhones to its drivers, monitored and required certain ratings for all drivers, and had sole discretion to set and negotiate the prices customers would pay. The Commissioner also found that Berwick's job did not require a special skill. In addition, in weighing these factors, the Commissioner found that Uber had a large degree of control over its drivers, thus making them employees, with the full protections to which employees are entitled. 

          While Maryland is not bound by a California decision, it can be persuasive. The Uber issue is a prime example of the varied factors and interpretations used in determining whether one is an independent contractor or employee.

What Should a Maryland Employer or Employee Do?

When accepting a position or hiring, it is critical to keep in mind that whether you call someone an independent contractor or an employee has significant ramifications. Simply calling a person an independent contractor will not legally make it so. Misclassifications can cause independent contractors to miss out on key employment benefits and protections and can result in penalties for an employer, including payment of back taxes, fines, and other penalties.

For people working in the construction, home improvement, and landscaping areas, Maryland law provides some protection against misclassification by employers. The Maryland Workplace Fraud Act of 2009, which was amended in 2012, sets requirements for the classification of a person as an independent contractor or an employee. This was enacted because too many people in these jobs were automatically told they were independent contractors, when they might have legally been employees entitled to employment law protections and benefits.

Because the classification of a worker as an independent contractor or employee requires a careful analysis of many factors, it is wise to obtain legal counsel and speak to an accountant when you are unclear on this important issue.

For more discussion, see  http://www.paleyrothman.com/wp-content/uploads/2013/11/MBJ_Nov13_final_krasnoff_hammerschmidt.pdf; and http://www.msba.org/uploadedFiles/MSBA/Member_Groups/Sections/Labor_and_Employment_Law/laborwinter11.pdf.

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 for Franchisors : Before you offer a Franchise in Maryland.

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.

Do I Owe Self-Employment Tax?

                If you are "self employed" you must pay "self employment taxes." According to the IRS, you are self employed if you are a sole proprietor, independent contractor, member of a partnership, or are otherwise in business for yourself, including part-time businesses. 

                The term "self employment tax" or "SE tax" is somewhat a misnomer, as there are not taxes, per se, that are called self employment taxes. The term instead refers to certain taxes that are generally paid by a combination of an employer and an employee. If an employee is employed by an employer, the employer and employee are each liable to pay half of Social Security and Medicare taxes which are based on the amount of wages paid to the employee.The current rates for SE taxes (Social Security and Medicare) are: "6.2% each for the employee and employer, unchanged from 2015. The social security wage base limit is $118,500, unchanged from 2015.The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2015. 

                If you are self employed, you are required to pay both the employer and employee share of SE taxes.  Thus, self employed individuals must pay a combined total of 15.3% of net income for these taxes (on income up to the limit).  And, since there is not an employer that is paying wages in a paycheck subject to tax withholding, you are required to pay estimated quarterly taxes.  These taxes are owed on the net profit from business income. In order to determine any net profit you subtract qualified businesses expenses and deductions from your gross income to get the net profit. If you have a net loss of income, you will not owe taxes.

               Because tax laws are complicated and changing, it's wise to seek advice from a business attorney and an accountant with expertise in areas affecting self employed individuals. As an overview, the IRS Small Business/Self Employed website has helpful information and tax document links, found here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Publications-and-Forms-for-the-Self-Employed

               

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. 

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.