Michigan Business Lawyer Blog

Although no one starts up a business with plans to fail or lose money, the success rate statistics for new businesses can be daunting. That's why Section 1244 stock should be on the mind of every new business owner who organizes their business as a C corporation.

Section 1244 stock is possible thanks to Section 1244 of the Internal Revenue Code. This is known as the small business stock provision, and was enacted to allow stockholders of domestic small business corporations to deduct losses incurred when they dispose of their small business stock as ordinary losses instead of capital losses.

The general rule is that any loss suffered by a stockholder upon liquidation of the company will be considered a capital loss. But, if the stock is Section 1244 stock, a part of the loss ($100,000 for husband and wife filing jointly, otherwise $50,000) will be treated as an ordinary loss. Since the loss is treated as ordinary, it can be used directly to offset the stockholder's investment income, passive income, wages, and self-employment income. In addition, because the use of the loss is accelerated, the tax advantage is much greater than if the loss is treated as capital.

Whether stock is Section 1244 stock depends on whether the requirements of IRC 1244 are met at the time the stock is originally issued. These requirements relate to (1) the corporation issuing the stock; (2) the stock itself; and (3) the stockholders of the corporation.

Being able to issue Section 1244 stock is one of the great tax benefits of organizing a business as a C corporation. Of course, you should consult with a knowledgeable Michigan business lawyer when setting up your corporation so that he or she can advise you on the requirements for issuing valid Section 1244 stock.

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

Posted In: Business Formations , Corporations , Financing , General Topics , Tax Issues

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At some point, virtually every business will need to borrow money to finance its operations or expansions. Financing can be used to fund working capital or other financial needs such as funding inventory, equipment, buildings, plants, and general business growth. Businesses obtain loans from a number of different sources that range from the traditional (banks) to the more exotic (finance and factoring companies).

There are many different kinds of loans; one size definitely does not fit all. Therefore, it is imperative that a business seeking a commercial loan gets the kind of loan that it needs, and that works well for that particular business. Loan options include lines of credit, term loans, real estate loans, equipment leasing, factoring, and industrial revenue bond financing.

Any Michigan business that is getting a commercial loan should seek the advice of a competent Michigan business lawyer (with real estate financing experience) to help them in the process. A commercial borrower's lawyer has four main responsibilities to his or her client. First, a borrower's lawyer will help ensure the borrower understands the loan itself and is actually getting the loan the borrower thought it was getting. Second, the borrower's lawyer will review the loan documentation and try to get the appropriate changes made to protect the borrower in the areas that are important to the borrower. Third, the borrower's lawyer will review the loan's terms and conditions so the borrower fully understands its rights and responsibilities under the loan. Fourth, the borrower's lawyer will attend the loan closing and help facilitate a smooth cap to the loan transaction.

It is best for a business to involve its attorney as early in the loan process as possible. Ideally, a business will be in communication with its lawyer before the loan commitment letter is signed. This will help make it possible for its lawyer to fully assist and protect the borrower in the loan negotiation process.

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

Posted In: Business Financing , Financing , General Topics

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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

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