Michigan Business Lawyer Blog

In a contract, a liquidated damages clause simply limits the amount of damages that one party to the contract will be liable for in the event that they breach the contract or somehow cause harm to the other party to the contract. This type of clause is appropriate when the circumstances are such that it would be difficult to determine how much the actual damages suffered actually are, or if the damage amount would be purely speculative in nature. In that kind of case, the parties can stipulate in their contract what the amount of damages will be. This type of stipulation will be enforced by Michigan courts so long as the amount agreed upon by the parties is reasonably related to the actual damages that might have been expected for a breach or other harm.

Michigan courts have been enforcing liquidated damages clauses for a long time. For example, in one 1908 case, the Michigan Supreme Court stated: “In cases where it is difficult to accurately determine the damages which one party may suffer by the failure of the other to perform his contract, the parties themselves may agree upon such sum as in their judgment will be ample compensation for the breach.”

However, Michigan courts will not enforce a liquidated damages clause if the amount of damages can be readily determined or if the clause appears to impose a penalty instead of truly trying to fix a reasonable damage amount.

Having an enforceable liquidated damages clause can be a real lifesaver if you have been sued and there is a potential for a large damage award. These kinds of clauses can also cut the other way as they can allow a party to recover damages in a specified amount even if their true damages are not as much as the damages provided for in the liquidated damages clause. Either way, it is imperative that an experienced Michigan business lawyer review your contracts to make sure that any liquidated damages clauses will be to your benefit should you need to rely on them in the future.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Contracts , Litigation

Bookmark:

For reasons that remain unknown to me, many people try to represent themselves in court. I certainly understand that good legal representation can be expensive, but I still believe that the final cost of a layperson representing themselves in court is usually far more than the expense of hiring a good lawyer to protect their interest.

While Michigan courts can allow individuals to represent themselves, corporations must be represented by a lawyer in Michigan district and circuit courts (but not in small claims courts). This rule stems from a 1938 Michigan Supreme Court case in which the Court dealt with a turf battle between trust companies and the Detroit Bar Association. The Detroit Bar Association argued that trust companies -- which were corporations -- were engaged in the unauthorized practice of law when they drafted probate papers and wills and participated in probate court proceedings. The Michigan Supreme ruled that while the trust companies could draft probate papers, they could not appear in court without being represented by a lawyer because of the very fact that they were corporations (and not real, natural persons who could truly represent themselves).

Another reason behind this rule is a practical one: It is thought that a person who is not an attorney is more likely than an attorney to burden other litigants and the court with time-consuming, meritless arguments and with time-consuming delays attributable to noncompliance with procedural requirements.

Every state that I know of follows the same rule as Michigan when it comes to representation of corporations in court. But, courts in several states have recognized an exception to this rule where a sole shareholder seeks to represent the corporation. These courts have reasoned that an individual has the right to represent a personal cause in court, and a sole shareholder representing the corporation is only representing such a cause. It is unclear whether this exception to the general rule would apply in Michigan, although it has been cited in a dissenting opinion by a Michigan Supreme Court justice.

Some states have extended the prohibition against self-representation from corporations to limited liability companies (LLC's). For example, a New York court recently ruled that an LLC needs to be represented by an attorney in court. At this point in time, it appears that there is no Michigan law specifically on this point. Regardless, I always advise businesses of whatever form to use a lawyer if they have to be in court. If you think I'm saying this out of my own self interest, think again. Lawyers make a lot of money fixing messes that could have been avoided if people would have just gone to a good lawyer when first confronted with a legal issue in the first place.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Litigation

Bookmark:

What in the world is Michigan usury law? Basically, it's the law that prevents lenders from charging unfair interest rates to borrowers. This law is a very important regulation on loan agreements entered into in the State of Michigan. However, Michigan's usury law is not always easy to locate or understand. Actually, to be more accurate, it's a crazy patchwork of statutes that are not always easy to understand.

The general interest-rate statute in Michigan is MCL 438.31, which states that "the interest on money shall be at the rate of $5.00 upon $100 for a year". However, the statute goes on to state that parties can lawfully stipulate in writing for an interest rate not to exceed 7% per annum. But, the statute further states that it shall not apply to interest rates "regulated by any other law of this state," or render illegal an interest rate contained in a promissory note or other debt instrument issued by any borrower who is not domiciled in Michigan which is legal under the law of the borrower's domicile.

Under MCL 438.32, any seller or lender who enters into any loan agreement or contract that does not comply with the requirements of MCL 438.31 or charges interest greater than that allowed under that statute "is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs and the borrower shall be entitled to recover his attorney fees and court costs from the seller, lender or assigns."

MCL 438.41 is Michigan's "criminal usury" statute, and provides that "a person is guilty of criminal usury when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding 25% at simple interest per annum or the equivalent rate for a longer or shorter period."

While these statutes may seem straightforward, there are many different exceptions that allow for certain debts to be charged interest greater than 7% per year. These exceptions include loans that are secured by a first lien on real estate, business purpose loans, credit card debts, among others. Under the statutory language, it even appears that some loans may even be exempt from the criminal usury statute.

It is important to consult with a knowledgeable Michigan lawyer when faced with issues relating to loans and the legal interest rates that can be charged for those loans. The stakes are high and those who ignore these laws do so at their own peril.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing , Financing , Usury Issues

Bookmark:

Many entrepreneurs do not understand that the process of naming their new venture involves a number of legal considerations. These considerations are both procedural and substantive, and depend on the type of entity that is being named.

Where a business files its name depends on its legal structure. Michigan sole proprietorships and partnerships must file their names with the county clerk in the county where the business is located. These businesses must also file their name in any other county in which they have an office or conduct business. The name for these kinds of businesses cannot be the same as any business names already on file with the county clerk where the filing is made. County clerks are also supposed to refuse name filings if a business's name will cause confusion or deception.

All other types of Michigan business entities must file their name with the State of Michigan and choose a name that is distinguishable on the records of the state administrator from other active business names. The phrase "distinguishable on the records of the administrator" has been defined by guidelines promulgated by the State of Michigan. In short, a name is distinguishable if it has a different sequence of letters or numbers from other names. It is important to note that just because a name is accepted for filing by the State, you still may not have substantive rights to the use of that name, as it may infringe on the trademark or other type of protection previously granted to another business.

It is important to exercise caution in choosing a business name in order to avoid infringing on the names already filed with a Michigan county clerk or filed with the State by another business, or being used by another being used as a trademark, service mark or trade name. To provide you with the maximum protection, a Michigan business lawyer should be consulted whenever a new business is being named.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Entity Selection , General Topics

Bookmark:

These days, Michigan entrepreneurs ultimately wind up deciding to structure their new business as either a Michigan limited liability company (LLC) or as a Michigan S corporation. There are some similarities to these two entities. For example, both LLC's and S corporations offer limited liability and tax treatment friendly to startups. However, there are important differences that must be taken into account when making the all important entity selection for a new business.

An S corporation is really just a "regular" business corporation that elects a special tax treatment. This special tax treatment is elected by filing a form with the IRS after the S corporation is formed by filing the appropriate paperwork with the State of Michigan.
Other than its special tax election, an S corporation has the same characteristics as a regular business corporation.

The special tax treatment afforded to S corporations is the same "pass through" tax treatment that partnerships and LLC's receive. In contrast, C corporation are taxed at two separate levels. This is what is commonly known as double taxation. The first level tax on a C corporation is a corporate income tax on the C corporation's income. The second level of tax is levied when the C corporation distributes profits to its stockholders, who then must pay personal income tax on their dividends. Under a S corporation, there is only one level of taxation. The corporate profits "pass through" to the stockholders, who then pay personal income taxes on those distributions at their individual tax rates.

Certain restrictions are placed on S corporation formations, which is why they are not always the best entity for new businesses. These restrictions include the following:

● An S corporation cannot have more than 100 stockholders. Further, each shareholder must consent to the corporation becoming an S corporation.

● Each stockholder in an S corporation must be an individual who is either a U.S. citizen or resident. In the alternative, an S corporation can be an estate or qualifying trust of an individual U.S. citizen or resident.

● An S corporation cannot have more than one class of stock. However, it is permissible to have voting differences within a class of stock. Having preferred stock is prohibited.

● All S corporations must use the calendar year as its fiscal year unless it can prove to the IRS that another fiscal year satisfies a business purpose.

Depending on your circumstances, an S corporation may be just the ticket for your business. However, caution should be had as choosing the entity for a new business is one of the most important decisions that you can make.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations , Entity Selection

Bookmark:

The Michigan Department of Treasury has launched a new Web tool that provides a calculation of a business's future tax liability under the new Michigan Business Tax. The calculator is aimed at businesses and tax professionals, and provides unofficial estimates that are not legally binding on a business's actual liability under the new Michigan Business Tax. The new Web tool is located on the Michigan Department of Treasury’s Web site that is dedicated to providing information about the Michigan business tax.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Michigan Business News , Tax Issues

Bookmark:

One of the most important practical issues that a new company must deal with is financing. Although there are many different financing options, they basically boil down to two types of capital infusions: equity capital or debt capital. Equity capital consists of the owners' investment in the company. Debt capital comes from a loan. Most new businesses are financed by a combination of debt and equity capital.

Equity Financing
There are a number of advantages to funding a start-up company with equity capital. First, since it is a permanent investment, it does not have to be paid back. This relieves a new business of the (sometimes substantial) burden to its cash flow that comes with the responsibility of repaying a loan. A second advantage is that the more company owners invest in the business by way of equity capital, the greater the new company's creditworthiness will be. That in turn will enable the business to get more favorable payment terms from vendors and will also lay a sold foundation for leasing and bank financing on favorable terms. Similarly, a significant equity investment by the owners of a new company also promotes the new business's creditability with financial institutions, its suppliers, and its customers.

Debt Capital
Many businesses obtain start-up funds by getting loans from relatives, friends, business associates, private investors, and banks. These loans can be in the form of traditional loans or by way of an exchange of ownership stock. However, as much as possible, it is best that debt capital come through a traditional loan and not an exchange of ownership stock so that the new company's owners can maintain the largest ownership percentage possible. Loans may come in the form of a direct loan or they can be in the form of a personal guarantee of a bank loan to the business. Although many banks will not normally make loans to new or risky businesses, the federal Small Business Association has a number of loan guaranty programs that can make it possible for new businesses to obtain debt capital financing that would otherwise be unavailable.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Business Financing

Bookmark:

In an earlier post, I noted that those who are operating their business as a general partnership should consider forming a Michigan limited liability company (LLC) to operate their business. I have also made a number of other very positive posts regarding the LLC entity for conducting business. While LLC's are very innovative, and useful in many situations, entrepreneurs should not automatically assume that an LLC is the best choice of entity in all situations. In some circumstances, the good old corporation may be the best choice of entity for a new business.

In spite of the ever increasing popularity of LLC's, the corporation is still one of the most popular forms of business entity used for the organization and operation of small business firms in America. There are a number of reasons for this. First, a corporation is fairly easy and inexpensive to set up. Second, the corporate entity affords its owners protection from personal liability for the debts and obligations of the business. (Even better, for certain qualifying small business corporations, favorable pass-through tax treatment may be available under the federal tax laws.) Third, the ownership interests in a corporation are represented by shares of stock, which are generally freely transferable.

Although it is relatively easy to set up a corporation, certain formalities must be observed in order to maintain the personal liability shield that corporations provide to their owners. For example, actions by a corporation's board of directors and shareholders must be taken at meetings or by written consent, and records of any such must be maintained. In addition, stockholders in corporations traditionally have not been able to get the same favorable tax treatment that is available to LLC members. This is one reason why corporations have been viewed as less flexible than other business entities like LLC's. However, recent amendments to the Michigan Business Corporation Act allow for different treatment among corporate investors, thus significantly reducing the differences in this regard between closely held corporations and LLC's.

Entrepreneurs should not overlook corporations as a possible entity for operating their new businesses. This is especially true if there is any possibility that company may go public in the future, as almost all public companies are corporations. Entrepreneurs should counsel with an able Michigan business attorney before starting their business in order to determine the best entity for their venture.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Corporations

Bookmark:

A number of Michigan's biggest companies are asking the legislature to raise one business tax and kill another. While everyone seems to agree that Michigan's new 6% service tax is a bad idea, the alternate plan being pushed by Michigan big business would shift the major portion of the business tax burden to thousands of smaller businesses. The big businesses supporting the new plan include the Big Three automakers, and big insurance and banking companies.

The Michigan House of Representatives has obliged these big companies, by passing legislation that would replace the unpopular service tax with a 32.9% surcharge on the new Michigan Business Tax. It is unclear at the present how the Michigan Senate will deal with this legislation. The Michigan Business Tax is scheduled to replace the Single Business Tax on January 1, 2008. The Michigan Business Tax gives gives increased tax breaks to manufacturers and other enterprises that invest in facilities located in Michigan and hire Michigan employees.

The 32.9% surcharge would be imposed on sales and income and would be applied before tax credits. The reason why big business is behind the surcharge plan is that there is a cap on the surcharge so that no single business would pay more than $2 million per year. $2 million per year is a fraction of what the Big Three would pay under the service tax. This is because these companies use so many different kind of services that will be included in the new service tax such as landscaping, consulting, warehousing, and janitorial.

The 6% service tax was a hastily put together solution reached on October 1, 2007 in order to keep the Michigan government from shutting down due to a budget shortfall. The service tax has received very bad reviews from businesses big and small. The surcharge proposed under the Michigan Business Tax would replace all revenue that the service tax is estimated to raise, which is $614 million this fiscal year and $750 million the next.

Michigan's business tax situation is far from settled, with a variety of plans being proposed from a number of different corners. Depending on the exact proposal, it can be difficult to map out which companies will lose and which will win in the final analysis. However, one thing is sure, all of this uncertainty cannot be good for attracting new companies and businesses to Michigan.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Michigan Business News , Tax Issues

Bookmark:

A story in today's Detroit Free Press tells of a Macomb County, Michigan coffee shop that has been accused by Starbucks of trademark infringement. Like most large companies, Starbucks is very aggressive about policing its intellectual property rights, and that includes making sure that no one else infringes on its trademarks.

The Macomb County business, Conga Coffee & Tea shops, has a logo that consists of a green circle surrounding a silhouette of an elephant. The logo for Starbucks is internationally famous and consists of a split-finned siren in the middle of a green circle. Starbucks claims that the two logos are so similar that Conga's logo is "likely to cause consumers to think that Conga is an authorized licensee of Starbucks." Conga's owners disagree noting that the words in the logo are different, the pictures in the logo are different, and the shades of green in the logos are different.

A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others. A service mark is the same as a trademark, except that it identifies and distinguishes the source of a service rather than a product. Often the "trademark" and "service mark" are used interchangeably.

Whether the owner of a registered trademark can prevent someone from using a confusingly similar trademark depends on a number of factors. These factors include whether:

1. The trademark is used on competing goods or services. Generally, goods or services are considered competing if the sale of one is likely to influence the sales level of the other.

2. Consumers are likely to be confused by the dual use of the trademark.

3. The trademark is used in the same part of the country or is used relative to related goods or services. Related goods and services are those that are likely to be noticed by the same customers, even if those goods or services don't necessarily compete with each other.

Federal trademark law provides stiff monetary and injunctive penalties for trademark infringement.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: General Topics , Michigan Business News

Bookmark:

In my last post, I noted that sometimes, unsophisticated folk in Michigan will operate their businesses as a Michigan general partnership, instead of forming a registered business entity with the State of Michigan. Put simply, that is a terrible idea. Once upon a time, many Michigan businesses were run as general partnerships. However, with the invention of limited liability companies (LLC's), the usefulness of general partnerships ended. Nowadays, there is no reason to conduct business as a general partnership, and many why you shouldn't. Instead of operating your business as a general partnership, you should consider operating it as an LLC.

An LLC is formed by filing Articles of Organization with the State of Michigan. Even though this paperwork must be filed to form an LLC, this entity is still considered an unincorporated business association. In reality, an LLC is a hybrid between a partnership and a corporation, and combines the best characteristics of both types of business entities. The LLC business structure was specifically designed to give business owners and managers with a partnership’s operational flexibility and tax advantages and a corporation’s protective shield against personal liability.

Just like with a general partnership, those who organize an LLC have almost total flexibility to set up the company in the way they wish. Like partnerships (and S corporations for that matter), LLC's are given pass-through income tax treatment. In other words, the LLC is not taxed as an entity. Instead, all items of income, loss, credit, and deduction pass through the LLC, flowing directly to the LLC's members. In spite of these tax advantages, the most important aspect of the LLC is the members' limited liability to trade creditors for the LLC's debts and obligations. Generally speaking, LLC members and managers are not personally liable for any of the LLC’s debts, liabilities, or obligations. Of course, members and managers are always liable for their own negligent acts and intentional wrongful acts, even if done during the course of conducting LLC business.

While not best in every situation, the LLC provides a terrific way of doing business for many small businesses, and many larger ones too. In fact, the LLC has become the business entity of choice for many clients, replacing the more traditional forms of business organization, including C and S corporations.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: Entity Selection , Limited Liability Companies

Bookmark:

Does anyone conduct business through general partnerships anymore? As hard as it may be to believe, yes they do. Even though the the usefulness of this business form has long since passed, unsophisticated folk who do not take advantage of competent legal counsel still occasionally opt to run their businesses in this manner.

If you make a secured loan to a general partnership, it is critical that the right name be put on the UCC financing statement in order for it to be enforceable. Some people assume that since general partnerships are registered on the local level with the county register of deeds and not with the state, a UCC financing statement should contain the names of the partners, not the name of the partnership itself.

They reach this conclusion because business "dba's" for sole proprietorships are also registered on the local level and UCC financing statements for loans made to sole proprietorships must list the name(s) of the individual business owners (not the business's dba) in order to be effective.

However, it is important to remember that a general partnership is not the equivalent of a sole proprietorship with a dba. Rather, it is a registered business entity. As such, it is the general partnership name that should be listed on the UCC financing statement and not the names of the individual partners.

Continue reading " What Is the Correct Name to Put on a Michigan UCC Financing Statement When the Debtor is a Michigan General Partnership? " »

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: General Topics

Bookmark:

Michigan law generally recognizes the enforceability of oral contracts. But, in certain situations, contracts must be in writing to be enforceable. One of these situations is when you are dealing with a bank. The Michigan statute of frauds (MCL 566.132(2)), requires certain promises by financial institutions to be in writing to be enforceable:

(2) An action shall not be brought against a financial institution to enforce any of the following promises or commitments of the financial institution unless the promise or commitment is in writing and signed with an authorized signature by the financial institution:

(a) A promise or commitment to lend money, grant or extend credit, or make any other financial accommodation.

(b) A promise or commitment to renew, extend, modify, or permit a delay in repayment or performance of a loan, extension of credit, or other financial accommodation.

(c) A promise or commitment to waive a provision of a loan, extension of credit, or other financial accommodation.

A related section of the Michigan statute of frauds (MCL 566.132(3)) defines financial institution to mean “a state or national chartered bank, a state or federal chartered savings bank or savings and loan association, a state or federal chartered credit union, a person licensed or registered under the mortgage brokers, lenders, and services licensing act … or an affiliate or subsidiary thereof.”

Remember, as a general rule, banks view their agreements with borrowers as being exclusively the written documentation the parties sign. In order to protect yourself when dealing with a bank, so should you.

Posted by Michael J. Hamblin | Permalink | Email This Post

Posted In: General Topics

Bookmark: