Michigan Business Lawyer Blog

If your business has any employees, you almost certainly have obtained the social security numbers of those individuals. Under Michigan's Social Security Number Privacy Act, you must take all reasonable steps to protect those social security numbers. The first thing you must do is put in place a social security number privacy policy. This policy must be placed in your employee handbook.

To comply with the law, your social security security number privacy policy must:

1. Assure the confidentiality of the social security numbers in your possession.

2. Prohibit the illegal disclosure of social security numbers.

3. Limit access to the social security numbers.

4. Provide a method for disposing of papers that contain social security numbers.

5. Establish penalties for violation of the policy.

There are a number of other important provisions in the Michigan Social Security Number Privacy Act. To help ensure compliance with this important law, you should contact a Michigan business attorney for assistance.

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

Posted In: General Topics

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One of the advantages of acquiring a business through an asset purchase is that the assets are transferred to the purchaser free and clear except for enforceable liens and security interests. However, there is a doctrine that anyone contemplating an asset purchase should be aware of. It's called "successor liability".

Successor liability is an "equitable" doctrine that a court can apply when a strict application of the law would result in an injustice under the circumstances of a particular case. When a court imposes successor liability, a plaintiff with a claim against the seller of the assets will be allowed to assert that claim against the purchaser.

Successor liability can be imposed in a number of circumstances, including:

1. When the purchaser intentionally assumes the seller's liabilities.

2. If the asset sale is a fraudulent scheme for the seller to escape liabilities.

3. If the asset sale is a de facto merger of the seller and purchaser.

4. When the purchaser merely continues the business of the seller.

It is important for any Michigan business that is considering purchasing assets of another business to engage a competent Michigan business lawyer to thoroughly analyze the transaction so that it can be structured to avoid (to the extent possible) successor liability for the obligations of the seller.

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

Posted In: General Topics , Sale/Purchase of a Business

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One of the biggest challenges for owners of Michigan small businesses is obtaining sound guidance and advice in running and growing their companies. Any Michigan small business owner struggling with this issue should seriously consider taking advantage of the resources SCORE offers.

SCORE is a nonprofit association that was founded in 1964 and whose mission is to foster entrepreneurs and the formation, growth and success of small business nationwide. Headquartered in Herndon, VA and Washington, DC, SCORE partners with its 10,500 volunteers and the U.S. Small Business Administration (SBA) to offer resources to entrepreneurs throughout the US and its territories. SCORE's partners include both working and retired executives and business owners who dedicate their expertise and time to serve as business counselors.

Some of the unique and useful assistance SCORE offers includes:

1. Offering advice to entrepreneurs via email.

2. In person mentoring for small business owners at its chapter offices nationwide.

3. Low-cost workshops at its chapter offices nationwide.

4. Many informative articles and business templates on its website.

5. Online workshops and learning opportunities.

The resources SCORE offers are truly incredible. Every Michigan entrepreneur and small business owner would be well served to at least check out the offerings on SCORE's website.

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

Posted In: General Topics

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When a business acquires another business, it can generally be done in one of two ways: a stock purchase or an asset purchase. A stock purchase is just that, a purchase of the selling company's shares of stock (assuming it's a corporation). Along with ownership of the company's stock comes ownership of its assets and its liabilities. In an asset purchase, the seller keeps ownership of the shares of stock in the business and takes ownership only of the specific assets and liabilities included in the deal. All the other assets and liabilities stay with the existing business and, therefore, with the seller.

Sellers generally prefer to structure sale/purchase transactions as stock purchases because it allows them to completely withdraw from the business after they sell it. When they sell their stock in their business, they are usually totally free from any future responsibilities or obligations relative to the business. Also, a seller's tax on a stock purchase transaction is usually computed at the lower capital gains rate. In an asset purchase transaction that involves a corporation, the seller could face double taxation. This is because the corporation will be taxed at the corporate level on the gain from the asset sale and the shareholder(s) will be taxed if and when the proceeds are distributed.

On the other hand, a buyer will generally prefer an sale/purchase transaction to be structured as an asset purchase. This sort of structure allows the buyer to know specifically which assets and liabilities are being acquired and assumed. This is important to the buyer if the company has a large number of either potential or actual liabilities. It is especially important if it is difficult to quantify the exact amount of the liabilities being acquired. A buyer may also benefit from structuring an acquisition as an asset purchase if the value of a purchased asset has increased. A buyer can write up the tax basis of a purchased asset to the amount of the fair market value paid for that asset. This will allow the buyer to claim increased tax depreciation, which will lower its taxable income, with resulting lower taxes.

It is imperative that each party to a Michigan business sale/purchase transaction retain an experienced Michigan business lawyer to assist and advise them through the process. This will help to ensure that the transaction is structured in the best possible way to achieve all of the intended and desired business and tax benefits.

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Posted In: General Topics

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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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As Sir Francis Bacon noted long ago: Knowledge is power. This is especially true for small businesses and their owners. Getting the correct, and timely, business and economic information can make the difference between merely surviving and thriving.

The United States Department of Labor, Bureau of Statistics hosts a terrific website (The Michigan Economy at a Glance) that provides a wide variety of up-to-date demographic, business, and economic information about the State of Michigan, and its most important counties and cities. This information includes labor force data, wage and salary information, layoff data, prices and living conditions and employment information.

The information available at this website is detailed and is broken down into a number of different categories and demographics. It is a true goldmine of information that provides Michigan businesses and their owners with a terrific information source regarding our state's economy and consumer activity.

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

Posted In: General Topics

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In its "first ever high court performance survey", the prominent Michigan legal journal Michigan Lawyers Weekly has released the results of its survey of lawyers who practice before the Michigan Supreme Court regarding the quality of the justices who sit on the state's highest court.

The legal journal conducted its survey between Nov. 28 and Dec. 17, 2007. It contacted every lawyer who appeared before the court during any one of its last six terms and asked them to rate the justices. The journal contacted 774 lawyers, of which 79 took part in the survey.

The survey asked the lawyers to rate the justices on a 1 to 5 scale based on their "overall" performance, how they compare to other justices, as well as on eight defined "judicial characteristics." On the scale, a rating of 5 was "excellent," and 1 was "poor".

Once considered one of the country's top supreme courts, thanks in large part to the contributions of Justice Thomas Cooley, the Michigan Supreme Court has in recent years been criticized by some as being an an overly enthusiastic participant in "tort reform". These critics claim that the court has been intellectually inconsistent in its opinions, with a bent toward favoring insurance companies and large corporations to the detriment of Michigan's consumers and working class.

No matter how you feel about the Michigan Supreme Court, or the justices serving on it, the survey published by Michigan Lawyers Weekly is a very interesting piece of reading that anyone interested in Michigan's legal landscape should review.

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Posted In: General Topics

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Most business people in Michigan these days can be heard grousing about the sorry state of Michigan's government. While I agree with most of these complaints, there is one thing that the state government in Michigan has done a fantastic job on. It's the Department of Labor and Economic Growth's web page for its Bureau of Commercial Services.

This web page contains a vast repository of information and tools useful to Michigan businesses and their counselors. It contains everything from business and licensing services, to useful forms and publications and a nifty calendar of events. To me, one of the most useful features of this site is the business entity search, which allows users to look up businesses registered with the State of Michigan, and even look at electronic copies of documents filed with the state such as articles incorporation and the like.

It would be well worth it for every business person in Michigan to take a few minutes to explore what this site has to offer. It is one thing our state government has done a great job at, and it is a terrific example of how a state government can leverage technology to provide exceptional services to its constituents.

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Posted In: General Topics

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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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Most Michigan businesses start off with much optimism and good will among the owners. Everyone is on the same page and shares a vision for making the business a wild success. However, as with many things, once the honeymoon phase of the venture ends, the owners may wind up not having as much in common as they thought. In fact, business owners often wind up strongly disagreeing with each other regarding a number of business issues ranging from basic operations to critical strategic planning matters.

Often, minority shareholders (i.e., those holding less than 51% of the corporation) fail to insist on having the corporate formation documents contain an adequate level of protection for them should differences arise with the majority shareholders regarding how the corporation should be managed. Often, the shareholder with the most shares ultimately winds up with control of the corporation and successfully squeezes out minority shareholders. Squeeze outs can take many forms, such as being locked out from the corporation's premises, employment termination, expulsion from board positions, discontinuation of dividends, and partial or complete denial of access to corporate information.

Michigan law provides remedies to minority shareholders who are being squeezed out of their companies, or who are being subjected to some kind of unfair oppression by majority shareholders. Shareholders who believe they are being treated unfairly may bring what is known as a Section 489 action in their local county circuit court. A Section 489 action is based on the Michigan statute found at Michigan Compiled Laws (MCL) 450.1489.

Under this statute, minority shareholders have remedies for "willfully unfair and oppressive" conduct. Potential defendants in a Section 489 action may be not only corporate directors, but also ‘‘those in control of the corporation". Those in control of the corporation are usually, but not necessarily, the majority shareholders.

Relief available under Section 489 includes injunctive relief, forced purchase of the minority shareholder's stock at fair value, liquidation and dissolution of the company, and monetary damages. Section 489 has been the subject of much litigation and occasional legislative action. Those who believe they are the victims of minority shareholder oppression should carefully choose a Michigan business litigation attorney to assist them with resolving their matter.

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

Posted In: Corporations , General Topics , Litigation

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A typical Michigan business owner has invested a tremendous amount of time and energy into building up his or her business. But, many neglect one of the most important things they can do to protect their business and their families: succession planning.

Although it can be daunting to undertake business succession planning, it is truly critical for business owners to face this issue head on. One of the worst things a business owner can do is to wait to tackle business succession planning until circumstances force the owner or his or her family to consider the future of the business. This is because by then it might very well be too late to prepare and implement the desired or appropriate succession plan. Even in the best of circumstances it can sometimes take between three to five years to put a comprehensive business succession plan into place.

Many business owners think that succession planning is concerned only with naming a successor. But, there are a number of other issues that are addressed in a comprehensive succession plan. A good plan should address such issues as how the business owner plans to reduce his or her role, how the business owner communicates his or her departure to employees, and what will happen to the employees' benefits.

It is important to remember that business succession planning is a process, not a one time event. It is also important to use the appropriate professionals to assist in the process, such as knowledgeable business lawyers, accountants, financial planners, and even investment bankers in certain situations.

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

Posted In: Corporations , General Topics , Limited Liability Companies

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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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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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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

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