Michigan Business Lawyer Blog

Contracts are the lifeblood of business. Without enforceable contracts, much business activity that we all take for granted would likely grind to a halt. Under Michigan law, contracts can be oral, written, express or implied.

There are four basic elements that must be present in order for an enforceable contract to be formed. First, the parties must have the legal capacity to make make a contract. For example, a party does not have the legal capacity to enter into a contract if they are a minor or mentally incapacitated. Second, there must be an offer and acceptance of that offer. Third, the parties' agreement, must be supported by what is called "consideration". Consideration is merely a legal term for something of value. Fourth, the contract must have a legal subject matter.

Often times, business people will try to save time or money by not having a formal, written contract prepared to document a deal. The business person will instead simply exchange oral promises regarding the deal, with the expectation that the other side will either keep their promises or that if they don't, the oral contract will be enforceable. This can be a very dangerous way of doing business.

While it is generally true that oral contracts are enforceable, under Michigan law certain contracts must be in writing to be enforceable. These contracts includes the following:

1. Contracts involving transfers or leases of real estate.

2. Contracts that are incapable of being performed in one year.

3. Contracts in which one person agrees to be liable for another person's debt.

4. Contracts for the sale of goods for $1,000 or more.

Even if a contract is not required to be in writing to be enforced, the better practice is to always reduce any important agreement to writing. This helps to ensure that the parties' expectations are met and helps to prevent later misunderstandings. Also, from a practical standpoint, written contracts are usually easier to enforce than oral contracts.

Any person who is getting ready to enter into an important contract should consult with a knowledgeable Michigan contracts lawyer to help make sure that they get the benefit of their bargain.

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

Posted In: Contracts

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The importance of choosing the right entity for a new Michigan business cannot be overstated. One type of business entity may be perfect for a certain kind of business, and a disaster for another kind of business. It's important for those forming new businesses to carefully consider the kind of entity they will use. In Michigan, there are three main kinds of business entities: C corporations, S corporations, and limited liability companies (LLC's).

Basically, there are three major issues that must be considered when choosing the entity for a new business.

Who Will Own the Business?
The first issue that must be addressed is who will own the business. This issue is very important for choosing a business entity. For example, if the owners will be a small number of individuals, it could be appropriate for the business to be conducted as an S corporation, depending on the circumstances. If the business consists of a real estate investment, then an LLC will probably be the best entity choice. If the business is going to be funded with venture capital money or will be taken public, it will most likely have to be set up as a C corporation.

How Will Earnings Be Distributed?
The second issue that must be addressed is how earnings will be distributed to owners. When a business has earnings, it can either retain those earnings to fund further business growth, or it can distribute those earnings to the owners. There can be significant differences in the tax treatment of such distributions, depending on the type of business entity involved and the nature of the distributions. For example, if a business plans on distributing current income to its owners, a pass through entity, such as an S corporation or LLC, may be the best entity because there will only be one level of taxation instead of the double layer of taxation involved in a C corporation. However, if a business intends to retain its earnings to fund future growth, a C corporation may be the better entity to accomplish those goals.

Will the New Business Generate Profits or Losses?
The third issue that must be addressed is whether the new business is likely to generate profits or losses. If the business is expected to initially generate losses, a pass through entity is likely the best choice of entity because the owners will be able to deduct those loses from their income. If a company is expected to generate profits, a C corporation may be the best entity choice due to the low initial corporate tax rates as well as various tax deductions that are available to reduce taxable income.

Anyone starting a new Michigan business should consult with an experienced Michigan business attorney to help them determine the best entity for their business.

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

Posted In: Entity Selection

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The new Michigan Business Tax was enacted with the supposed aim to benefit Michigan businesses by replacing the much hated Michigan Single Business Tax with a tax that was fair, reasonable, and economically viable. But as it turns out, it may be that the cure is worse than the disease.

Crain's Detroit Business magazine has a recently posted story that demonstrates some of the unintended consequences that the new tax act seems to be having. This article highlights the state tax travails of a Plymouth, Michigan high tech company named Stardock Corporation. Crain's notes that Stardock is exactly the kind of company that Michigan should be working to cultivate. It's a high technology and entertainment enterprise that creates computer games and software. It has 55 employees and projects gross revenue this year of approximately $18 million.

Stardock's tax troubles are very simple: Under the old Michigan single business tax, it's state business tax liability was approximately $1,200. Under the new Michigan Business Tax and its accompanying surcharge, it's state business tax liability this year will be almost $170,000! Not surprisingly, the company is contemplating a move to a more tax friendly state. Stardock claims that it wants to pay its fair share of taxes but that its tax burden under the new Michigan Business Tax and surcharge are so "lopsided" that it would be "suicide" to stay in Michigan unless there is some sort of favorable resolution.

This article is good food for thought. In addition to Stardock, many other Michigan businesses are facing steep tax increases under the new Michigan Business Tax. Of course, companies should have to pay their fair share of taxes. But, it seems that the current Michigan business tax structure has gone beyond that goal and is actually causing businesses that Michigan sorely needs to consider leaving the Great Lakes State. That's not good for anyone in Michigan.

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

Posted In: Michigan Business News , Tax Issues

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It is essential for Michigan business owners to understand that just because the Michigan Department of Labor & Economic Growth ("DLEG") registers a business name does not necessarily mean that the registered name is protected against infringing use. Business owners must understand the difference between the rights conferred by registering a business name with the DLEG and the rights to use a name or trademark to identify goods or services.

Registration of a business name by the DLEG simply means that the business has complied with the Michigan law that prohibits someone from using a name that is not distinguishable from other business names on the records of the DLEG's Bureau of Commercial services. The registration does not mean that someone else is not already using that name in connection with providing similar goods and services. Even worse, if someone was already using a name at the time it was successfully registered by someone else with the DLEG, trademark law may prohibit the use of that name by the person who registered it with the DLEG.

This means that a new start-up company may have to scuttle its plans for its business name if it receives a "cease and desist" demand or is hit with a trademark lawsuit seeking an injunction and/or money damages, even though the start-up company registered its business name with the DLEG. To prevent this from happening, a new business should conduct a thorough search of possible names in order to decide how protectable any particular business name will be if it is adopted and whether the name will infringe on someone else's trademark.

As if that weren't enough, there are Internet issues to consider when naming a business. Most businesses would prefer to use their corporate name as their web address. Examples of this include www.apple.com for Apple Computer and www.microsoft.com for Microsoft. But, registering a business name with the state authorities does not necessarily give substantive rights to an Internet domain registration for that name. Internet domain names are given out on a "first-come, first-served" basis, and business name registrations with state agencies have no effect on whether a particular Internet domain name is available. The Internet Corporation for Assigned Names and Numbers (ICANN) has a Internet domain name dispute resolution process - the Uniform Domain-Name Dispute-Resolution Policy - for those who believe someone has wrongfully registered an Internet domain name.

As detailed in these last two posts, there are a number of important issues that must be addressed when naming a Michigan business. A good Michigan business lawyer can help businesses with clearing possible names to use in connection with their activities.

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

Posted In: Business Formations

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