Michigan Business Lawyer Blog

Many business owners don't realize that one of the most important business assets in their company may not be a physical asset. Rather, it very well might be an intangible asset like a trademark. A trademark can be a business's name, logo, or any other symbol or device that distinguishes that business or its products in the marketplace. Properly protecting a trademark prevents others from wrongfully using a business's identity to market their own goods or services. This will help to prevent confusion on the part of a company's customers and damage to a business's brand.

A trademark can be any device that is used to identify the products or goods that one business produces from those of its competitors. Simply put, a trademark is commonly referred to as a brand name. Trademarks are essential business assets because they allow companies to establish their reputation in the marketplace by preventing companies hawking an inferior good or product from deceptively trading on other companies' brand identity in order to confuse consumers and diminish the reputation or profit of those companies. Trademarks can include items like words, names, symbols and logos. In essence, a trademark can be anything that distinctly identifies a business with respect to the goods it produces.

A service mark is just like a trademark, except that companies use service marks to distinguish their particular services (as opposed to goods) from their competitors.

Trademark and service mark protection can arise under the common law without a business taking any special action. A higher level of protection can be achieved by registering a trademark or service mark with the appropriate state authorities. Unfortunately a state-registered trademark or service mark does not offer significant protection for products or services that are offered in more than one state. To achieve the highest level of protection, a trademark or service mark must be registered with the United States Patent and Trademark Office. Doing so will provide the highest level of protection on a nationwide basis (and potentially worldwide if the proper steps are taken).

Trademarks and service marks are definitely not do-it-yourself projects. A business attorney with experience in intellectual property issues should be consulted anytime a business or entrepreneur needs assistance with matters involving trademarks or service marks.

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

Posted In: Trademarks

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The U.S. Department of Labor has posted a very useful tool for businesses to research minimum wage laws that may apply to them. This tool is an easy to use minimum wage law map on the Department of Labor's website. To find the information, simply click on the desired state and the basic minimum wage rate appears, along with any applicable laws. Of course, businesses should consult with their legal adviser if they have any questions regarding these laws.

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

Posted In: Business Financing , Employment Law , General Topics

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One fairly common technique for owners of closely held businesses to extract additional tax-advantaged income from their companies has been for them lease real estate or personal property to their businesses. This kind of rental permits the owners to withdraw money from the business without it being classified as salary or dividends. However, if closely held business owners use the rental income to offset real estate passive activity losses, they could expose themselves to possible disallowance under the IRS's self-rental rule.

In the Beacher case, the Ninth Circuit Court of Appeals (based in California) recently ruled that a closely held business owner renting real estate to their business won't result in a tax break. The court ruled that the rental income cannot be offset by passive losses even if those losses come from real estate activities. The court affirmed IRS rules that deny passive losses against rental income when the taxpayer works more than 500 hours in one year for the business, and greater than 50% of the business's stock is held by five or fewer stockholders. Although this rule applies to C corporations there is a similarly restrictive rule for rentals to S corporations.

Business owners can still obtain some tax benefit from renting to their businesses. Payroll taxes are not owed on these kinds of rental payments, unlike salary payments. But, if the rental amount is deemed not to be arm's length (i.e., it is excessive), the IRS could try to reclassify that excess amount as additional salary or possibly even as a nondeductible dividend.

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

Posted In: Tax Issues

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Many Michigan businesses use contracts to stipulate with certain workers that they are independent contractors and not employees of those businesses. But, businesses using contracts in this way need to be very careful. Contracts classifying workers as independent contractors instead of employees have no tax effect. The IRS can still reclassify those workers as employees if the business has enough control over them.

In Peno Trucking (TC Memo. 2007-66), the Tax Court addressed the case of a trucking company who used contracts to say certain workers were independent contractors and not employees. Peno Trucking's truck drivers had no investment in the trucks and were directed where to drive. Also, the trucking company paid all the costs of operating the trucks. The Tax Court determined that the drivers were actually employees -- despite their contracts to the contrary -- because the company controlled their work.

Businesses who have issues related to worker classification should consult with a knowledgeable business attorney to ensure they get it right and avoid any nasty IRS surprises.

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

Posted In: Contracts , Employment Law , Tax Issues

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As the end of this year approaches, you are likely involved in reviewing the various aspects of your business's financial and operational health. Likewise, you should consider giving your business a legal checkup. Legal checkups, or legal audits, are something like an accountant's financial audit or medical examinations given by a physician.

During a legal checkup, your lawyer examines business records and practices and recommends steps that you can take to protect the legal health of your business. In a typical legal checkup, your lawyer will review documents such as your corporate charter, corporate minute book, purchase order forms, sales contracts, employment agreements, and loan agreements. Afterward you may get a written report summarizing findings and recommendations. An audit may uncover legal problems that should be corrected. For example, it may reveal that the company should revise sales contracts to limit warranties and liabilities or revise its employment applications to preserve the right to fire unsatisfactory employees.

Besides a written report, your lawyer can meet with you to explain the audit findings and recommendations and tell you how to avoid potential legal problems. At the meeting you can also learn which problems need immediate attention and which ones are less serious. Having a legal checkup can help you prevent and remedy a variety of problems that could get in the way of your business's success. Consider contacting a good Michigan business lawyer to schedule a legal checkup for your company.

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

Posted In: Corporations , General Topics , Limited Liability Companies

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In my last post, I discussed the basics of buy sell agreements. In this post, I will explain some of the specific advantages to having a buy sell agreement between the owners of a closely held Michigan business.

1. Creating a Market for Selling Partner's Interest. When a buy sell triggering event does happen such as the death or disability of an owner, there is an automatic market for selling that owner's interest in the business. The importance of this cannot be overstated since it can be difficult to locate buyers for interests in closely held companies. Without a buy sell agreement, it might be possible to sell the interest of a deceased or disabled partner only at a bargain basement price.

2. Establishing a Transition Plan. Having a buy sell agreement allows the owners to plan in advance for a smooth transfer of the business when an unexpected triggering event occurs. This allows the business to continue operating and growing in an organized fashion while at the same time limiting disruptions to customers in what will likely be a very hectic and difficult time.

3. Generating Funds for the Selling Partner and/or His or Her Family. The proceeds from the sale of a business interest under a buy sell agreement can be a life saver for the deceased or disabled owner's family. In the event of the business owner's death, buy sell proceeds can be used to defray certain estate-settlement expenses such as death taxes and administration costs. Also, part of the proceeds can be allocated to help pay living expenses of the deceased partner's family. If the partner is disabled, the proceeds can be used to pay the living expenses for the entire family.

4. Establishing Value for Estate Tax Purposes. The price set in the buy sell agreement may be used to establish a valuation of a deceased partner's business interest for estate tax purposes. There are certain requirements that buy sell agreements must meet in order for the values set therein to be respected by the IRS, so for this reason alone (although there are many others) it is imperative to have a competent Michigan business lawyer prepare these agreements.

A buy sell agreement is a tremendous tool that allows partners in closely held businesses to do advanced planning for their business and personal affairs in a way that can benefit all involved. But, preparing these kinds of agreements should not be a "do it yourself" project. Contact a good business lawyer to assist you.

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

Posted In: Business Formations , Corporations , General Topics , Limited Liability Companies

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Most entrepreneurs have their hands full actually running their businesses. It's not uncommon for entrepreneurs to leave planning for contingencies for later. But, it is important to make plans to protect your family should the unthinkable happen. One way to do this is to have a buy sell agreement with your business partners that will protect your family's interests if you become disabled or die. Not only will a properly drafted buy sell agreement protect your family, it can also help to protect your partners and the business you have worked so hard to grow.

In a nutshell, a buy sell agreement is a legally binding contract that provides for the orderly disposition of a business interest when a specified event happens. Typically, a buy sell agreement is prepared so that the triggering event is the death of one of the business owners. But, a triggering event can also be a disability, retirement, or some other kind of major event in the lives of the owners. When the triggering event happens, the disabled or retired owner or the deceased owner's family will sell their interest to either the business itself or the remaining business owners. A properly prepared buy sell agreement is a win-win situation for all involved. A market is created for the business interest of the selling owner or their family, the remaining owners are able to keep control of the business as agreed on by everyone before a major event occurs, and the business can continue to operate and grow in an orderly and organized fashion.

The exact details of how this transition happens depends on the kind of buy sell agreement that is used. There are three basic kinds of buy sell agreements:

1. Cross-purchase agreement.
2. Redemption agreement.
3. Hybrid agreement.

A cross-purchase agreement is used when the remaining or surviving owners basically agree to buy each other out. For example, if a business has three partners, under a cross-purchase agreement, if one of the partners dies, the other two partners would purchase the deceased partner's interest in the business from his or her estate.

When a redemption agreement is used, the business itself buys the interest of the deceased or departing partner.

A hybrid agreement is often used and typically provides the remaining business owners the first option to buy the deceased or departing partner's interest, with the business itself obligated to purchase that interest if the remaining partners do not exercise their option.

Buy sell agreements are often funded with life insurance policies taken out on the lives of each of the business's partners. This provides for ready capital to purchase a deceased partner's interest without burdening the finances of the business or surviving partners. It is imperative that an experienced business lawyer be consulted regarding the preparation of a buy sell agreement. There are many legal, tax, and practical issues that must be accounted for when using these types of agreements and an improperly prepared buy sell agreement can be worse than not having one at all.

In my next post, I'll discuss some of the specific advantages to having a buy sell agreement.

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

Posted In: Business Formations , Corporations , General Topics , Limited Liability Companies

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The IRS has extended fast-track mediation of tax controversies to include small business and self-employed taxpayers. The IRS touts its fast-track mediation program as its attempt to meet taxpayer needs by resolving controversy at the earliest resolution point within the IRS. The Large and Mid-Sized Business Fast-Track Settlement program was started in 2002 and is considered a success by the IRS. As a result, the IRS decided to extend the opportunity to mediate tax controversies to smaller taxpayers.

The program has been implemented on a two year trial basis. The initial six-month focus period ran from September 5, 2006, through March 5, 2007. Qualifying small business and self-employed taxpayers in the cities of Chicago, Houston, and St. Paul, Minn., were eligible to participate in the program. The program will be expanded to other cities during the trial period on a staggered roll out basis.

There are a number of benefits to the program. These include a significantly reduced IRS process as well as an assurance that the taxpayer will not be charged “hot” interest under IRS section 6621. If the taxpayer and the IRS are able to reach a resolution, the taxpayer and the IRS must both sign a consent form acknowledging acceptance of the mediated result. Taxpayers do not give up any of their rights by participating in this program and have the right to withdraw from the mediation program at any time. If there are issues that are not resolved through mediation, the taxpayer can engage the normal IRS appeal process to seek a resolution.

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

Posted In: Tax Issues

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Occasionally I am asked by clients if it might be advisable for them to incorporate their new business in some exotic locale such as Delaware or Nevada. Some of these clients have heard that many large Fortune 500 type businesses were incorporated in Delaware, even though their headquarters and principal places of business are located elsewhere. Others have heard radio ads touting the tax and other advantages of incorporating in Nevada or some other remote state. Generally speaking, my advice to those starting small Michigan businesses is to incorporate them right here in the Great Lakes State.

While a business can theoretically incorporate in any one of the 50 states (including Delaware and Nevada), incorporating in another state such as Delaware or Nevada will have the effect of adding additional costs to the incorporation process, while providing almost no benefits to the small business corporation.

What about the supposed tax advantages to incorporating in Delaware or Nevada? While it is true that these states do not require corporations to pay income tax, you will still have to pay income and franchise taxes in Michigan if you do business in Michigan regardless of your place of incorporation.

Another reason clients think about incorporating in Delaware in particular is that so many large companies do so. However, just because large companies incorporate in Delaware doesn't mean that is the best move for a small company. Most large companies incorporate in Delaware because of its sophisticated and business friendly court system. However, a small business corporation doing business in Michigan is unlikely to encounter situations where the differences in Michigan's law or legal system and Delaware law or legal system are really that significant. Plus, the cost for a Michigan small business to litigate a dispute in a Delaware court is sure to be much more expensive than having that same dispute resolved by a Michigan court.

If you believe that there may be an advantage for your small Michigan business to incorporate in a location other than Michigan, be sure to consult with a competent Michigan business lawyer before you do so. He or she will be able to advise you on where it makes the most sense to form your business.

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

Posted In: Business Formations

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You've negotiated an important agreement, you've reduced it to a written contract, and now you are ready to sign on the dotted line. Most people think that actually signing a contract is a mere formality. However, it is important not to let your guard down at this point. Whether you properly sign the contract may make the difference between a smooth business transaction or a messy court fight.

The following steps should be followed when signing any contract:

1. Make Sure the Contract You're Signing Is the Contract You Agreed to Sign

If the contract has gone through a number of rounds of negotiations or revisions, don't just assume that the copy put in front of you to sign is what you think it is. Before you sign it, be absolutely sure that you fully know and understand the terms of the document. Under Michigan law, you are generally bound by a contract that you sign even if you have no knowledge of its contents. Unless you can prove that the other party engaged in fraud or other wrongdoing in preparing the contract or inducing you to sign it, you will be required to abide by it.

2. Date the Contract

While a contract does not have to be dated in order to be valid and enforceable, it is a good idea to do so. Dating a contract will help you to positively identify it later if you need to and will help you place it in its proper chronological context. Also, it is legal in Michigan to predate a contract. In other words, you can provide that your contract is entered into "as of" or "effective" a date earlier than the date of the contract is actually signed. If that is done, the contract will be effective retroactively "as of" or "effective" that earlier date.

3. Make Sure Both Parties Sign the Contract

This may seem like a basic (and it is!) but you'd be surprised at how often this slips by in the hustle and bustle of getting on with business. Although you don't necessarily have to sign an agreement for it to be valid, why would you want to take that chance? There is absolutely no better way of proving that a party intended to be bound by a contract then by whipping it out and displaying their signature on the document. If it is possible that the parties to a contract will not sign it at the same time, you might consider adding a section in the contract providing that the contract will not be legally binding unless it is signed by both parties.

The parties do not necessarily have to sign the same copy of the contract in order for it to be binding. If the parties do sign different copies of the contract, they must agree that each of their signature pages together constitute a complete executed agreement. That's why contracts often contain a provision stating that "the parties may execute this contract in counterparts, each of which is deemed an original and all of which constitute only one agreement."

4. Make Sure Any Last Minute Changes to the Contract Are Initialed

The best course of action is to have any changes included in the signature version of the contract. This will help ensure there are no misunderstandings as to what the parties intended to sign. However, if it is not possible to have have a contract revised and reprinted before it is signed, make sure that any changes made to the contract by hand are initialed by each party to the contract.

5. The Parties Must Sign the Contract in Their Correct Capacity

If an entity is a party to a contract, it is imperative that the signature block properly identifies the party signing on behalf of that entity. For example, if someone is signing as president of a corporation, the signature block should look something like this:

Acme Widgets, Inc.

By: _________________
John Doe

Its: President

Why is this so important? Because signing correctly on behalf of an entity will prevent any later claims that the person signing the contract is personally liable for the entity's contractual obligations.

6. Make Sure the Other Party Has Authority to Sign the Contract

The importance of this cannot be over emphasized. Obviously, you do not want a company to claim that it doesn't have to abide by the contract because it was signed by someone who was not authorized to do so. Thus, if the other party to the contract is a corporation, you need to be sure that the corporation is actually in existence, that the person signing on behalf of the corporation has the authority to do so, and, that the contract was approved by the corporation's shareholders or directors.

7. Keep an Original Signed Copy of the Contract in Your Files

Each party should get an original signed copy of the contract for their files. That means if there are two parties to the contract, two identical contracts must be signed. One original copy of the contract should go to you, and one original copy should go to the other party.

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

Posted In: Contracts

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