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

Bookmark:

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

Bookmark:

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

Bookmark:

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

Bookmark:

One of the most important assets a business can have is its name. A business name sets the tone and marks the brand of the goods or services offered by a company. In Michigan, business names are registered with the Michigan Department of Labor and Economic Growth, Bureau of Commercial Services.

Possible names for Michigan corporations, limited liability companies (LLC's) and limited partnerships can be pre-cleared by using the name availability search utility on the Michigan Department of Labor and Economic Growth's website. You can also call the Bureau of Commercial Services and obtain pre-clearance over the telephone. The purpose of pre-clearing a business name is to reduce the chances that a business's organizational documents will be rejected by the Bureau of Commercial Services because of a name conflict. That said, pre-clearing is not the same as reserving a name. It is possible for a name to be pre-cleared in the state's name database only for a conflict to be discovered when an examiner actually sits down to review the business organization documents.

The Bureau of Commercial services maintains a list of the names of all domestic and foreign corporations, LLC's and limited partnerships that have been duly formed or registered under the laws of the State of Michigan. The Bureau of Commercial Services will not accept business organizational documents for filing if the business's name conflicts with the name of a business that is already registered with the State of Michigan. A business name will conflict if it is not distinguishable from other business names on the records of the Bureau of Commercial services. A business name is distinguishable if it contains one or more different letters or numerals, or if it has a different sequence of letters or numerals from other business names on record.

Although that standard may seem simple enough, it gets a little bit more complicated because there are a number of terms and characters whose presence or absence will not make a name distinguishable. The Bureau of Commercial Services has published an online memo giving guidance on determining whether a business name will conflict with other business names already registered with the Bureau of Commercial Services.

In my next post, I will discuss a number of additional issues that must be addressed when considering what name to give a new business entity.

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

Posted In: Business Formations

Bookmark:

One of the perks of retaining an attorney to assist you in a legal matter is the age old protection offered by the doctrine of attorney-client privilege. Communications with a lawyer are protected by the attorney-client privilege when they are between a lawyer and a client seeking confidential legal advice. When the client is a business - such as a corporation - the privilege will protect the communication between a company employee and the company's lawyer so long as the communication pertains to the employee's duties and was made at the direction of the employee's supervisor.

It is important to remember that the attorney-client privilege only covers legal advice. It does not cover business advice. Moreover, communications between an attorney and his or her client will not be protected if they are made to further an illegal action or crime. It is also very important to remember that communications can be stripped of the attorney-client privilege if the client discloses the protected communications to third parties or allows a third party to listen to the attorney-client conversation.

These issues can become difficult when two or more business partners retain an attorney to incorporate or otherwise organize their new business. This is because a lawyer who is retained to organize a business usually considers the business entity itself to be the client. This means that although the business founders may initially be the representatives of the company, they may well not be considered the client for purposes of determining the existence and extent of the attorney-client privilege for communications between the founders and the company's lawyer. If a dispute arises between the founders or a founder and the company, the company's attorney ethically cannot represent opposing parties. Plus, communications the attorney had with the parties may not be covered by the attorney-client privilege.

It is important for Michigan business owners and entrepreneurs to consider their need for a lawyer to assist them with their legal issues. Business lawyers can play a number of different roles for business owners. A good Michigan business lawyer can help a Michigan business succeed by providing good advice and legal guidance. Keeping attorney-client communications confidential is an important part of of this process and is something that all businesses and entrepreneurs should be aware of.

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

Posted In: General Topics

Bookmark:

The Michigan Supreme Court recently heard oral arguments in the case of Miller v. Allstate. The major issue in this case is whether those providing a service requiring a license must incorporate under the Michigan Professional Services Corporation Act (PSCA) instead of under the Michigan Business Corporation Act (BCA). Before the Miller case reached the Michigan Supreme Court, the Michigan Court of Appeals ruled that under the language of the PSCA, any licensed professional who incorporates must do so under the PSCA and not the BCA.

Traditionally, only members of the “learned professions” (i.e., doctors, lawyers, and the clergy) have been required to incorporate under the PSCA. All other businesses that provide personal or professional services have had the option to incorporate under the BCA or the PSCA, even if a license was required to provide those services.

In Miller, the patient was referred for physical therapy treatments. The treatments were administered by licensed physical therapists according to prescriptions that were properly issued by the patient's doctors. The company providing the physical therapy services was incorporated under the BCA. When the physical therapy company billed Allstate, Allstate refused to pay, on the basis that it believed the physical therapy company had been improperly incorporated under the BCA instead of the PSCA.

Allstate asserted that the physical therapy company had to incorporate under the PSCA because it provided a personal service requiring a license. Allstate claimed that because the physical therapy company was incorporated under the BCA, its incorporation was defective, thus allowing Allstate the legal right to refuse to pay the physical therapy company's charges. Importantly, Allstate has asserted that if any corporation provides services that require a license and is not incorporated under the PSCA, the corporation’s incorporation is defective. If incorporation is deemed to be improper there can be negative repercussions with respect to a number of issues, including whether the corporation can collect its outstanding accounts receivable and whether shareholders may be personally liable for company obligations.

The Miller case has caused a major uproar in the business and legal communities. It appears to have caught many, including the State of Michigan, off guard. Numerous business interests as well as the State of Michigan have taken formal positions opposing Allstate’s arguments as being illogical and inconsistent with the plain language and purposes of the business incorporation acts in Michigan.

While there are several other issues involved in the Miller case, the question of defective incorporations is the most wide-reaching and has the greatest potential to disturb the status and operations of many Michigan corporations. An adverse ruling by the Michigan Supreme Court on this point could mean that any Michigan business corporation that incorporated under the BCA and has provided services requiring a license could experience some difficulties.

An experienced Michigan business lawyer should be consulted if a business or professional has any questions about the issues raised in the Miller case, or any other issues concerning the proper incorporation of a business.

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

Posted In: Business Formations , Corporations , Entity Selection

Bookmark:

One of the perks of obtaining nonprofit status is getting tax breaks. Not only can charitable institutions get federal and state income tax breaks, they can also get real estate property tax breaks.

The requirements that must be satisfied in order to get a property tax exemption are contained in MCL 211.7o(1). These requirements include the provision that the real estate be "owned and occupied" by the nonprofit charitable institution. While that may seem easy enough, it was enough to trip up the Liberty Hill Housing Corporation in its recent Michigan Supreme Court case.

The case arose out of Liberty Hill's request to the City of Livonia for a property tax break. The City declined Liberty Hill's request. All parties agreed that Liberty Hill owned the property in question. The request was denied because the City didn't believe that Liberty Hill actually occupied the property. Liberty Hill leased to the property to disabled and low income individuals for their own personal use as housing. Liberty Hill mounted unsuccessful appeals to the Michigan Tax Tribunal and the Michigan Court of Appeals.

In its decision, the Michigan Supreme Court affirmed the lower tribunals, ruling that "to occupy property under MCL 211.7o(1), the charitable institution must at a minimum have a regular physical presence on the property." Leasing the property disqualifies it from being eligible for a tax break even though such activity is in furtherance of Liberty Hill's charitable purpose.

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

Posted In: Nonprofit Organizations

Bookmark:

Generally, if you purchase equipment for your business you have to depreciate the cost of that equipment little by little over multiple years. However, for certain equipment purchases, IRS Code Section 179 provides a way for businesses to deduct the entire cost of an equipment purchase in one year instead of over a number of years.

Quite simply, Section 179 allows businesses to simply expense certain equipment purchases instead of depreciating them. In practical terms, a Section 179 deduction means that a business gets to claim all of the money paid for the purchased equipment in the year the equipment is purchased. If the equipment purchase was depreciated, that benefit would have to be spread out over a number of years.

There are a number of requirements for a business to use Section 179:

1. A business needs to have taxable income of at least the amount that it will expense under Section 179. This taxable income can come from a variety of sources.

2. A business can either expense items under Section 179 or depreciate those items over multiple years, but not both.

3. Any item that is expensed under Section 179 must be used for more than 50% for business purposes. If it is used less than 100% for business, only the percentage used for business purposes can be claimed.

4. Any equipment that is expensed under Section 179 should still be used 50% or more for business purposes for the same number of years that it would have otherwise been depreciated.

There are a number of items that Section 179 does not apply to such as real estate, inventory items, property purchased from a relative, heating and air conditioning units, and items already owned in a previous year that are being converted to a business use.

If you own a Michigan business and have any questions about taking a Section 179 deduction, you should contact an accountant or a Michigan business lawyer for more information.

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

Posted In: Tax Issues

Bookmark:

Michigan's state government provides some very good online resources and tools for businesses. One of these tools is a web page for filing annual reports for Michigan corporations and LLC's. As long as the corporation or limited liability company is in good standing, current and prior year annual reports may be filed online.

The deadline for submitting annual reports for Michigan LLC's is February 15. However, there is no late fee if the annual report is filed late, and it can still be filed online so long as the LLC is classified by the state as being in good standing. The deadline for submitting annual reports for Michigan corporations is May 15. There is a late fee for late filings that ranges from $10 to $50 depending on when the late filing is made.

It is important to remember that when filing annual reports only required information should be included on the report statement. If non-required information is included on the report, it could delay the filing of the annual report. Finally, a business that files its annual report online must pay the required fee using a valid Visa or MasterCard.

The state maintains a very helpful web page that explains the online filing service and has answers to commonly asked questions.

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

Posted In: Corporations , Limited Liability Companies

Bookmark:

Statistics from the United States Equal Employment Opportunity Commission (EEOC) indicate that workplace religious discrimination and accommodation claims have increased by nearly 70% in the last decade. As one might imagine, this has resulted in greater monetary penalties against companies that do not properly handle religious discrimination and accommodation issues in their facilities.

Religious discrimination by employers is prohibited by both by federal law (Title VII of the Civil Rights Act) and state law (Michigan's Elliott-Larsen Civil Rights Act). These laws require covered employers to accommodate their employees' religious practices so long as such an accommodation does not impose an "undue hardship" on the employer. Some examples of religious practices that can commonly arise in the workplace include requests for days off to attend religious services or church related activities, dress and grooming issues, and expressions of faith to co-workers and customers.

When an employee requests a religious accommodation in the workplace, an employer must engage in a process to try to find a "reasonable" accommodation. Although that may seem relatively straightforward, it is often difficult to determine just how reasonable an offered accommodation is. Each case must be carefully analyzed based on the particular facts and circumstances of that case.

When faced with these kinds of issues, it is imperative that Michigan businesses consult with a Michigan business lawyer who has experience in employment law cases. Leaving these issues to chance could result in a very negative legal outcome as well as extensive damage to a business's reputation in the community.

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

Posted In: Employment Law

Bookmark:

The Federal Trade Commission (FTC) approved a new Franchise Rule on January 22, 2007. The new Rule is in the form of an amendment to the old FTC Franchise Rule.

The amendment to the old FTC Franchise Rule modifies what franchisors must disclose in their franchise disclosure documents (formerly known as Uniform Franchise Offering Circulars (UFOC's)), as well as the timing requirements for making the required disclosures. The new Franchise Rule was effective on a voluntary basis on July 1, 2007. The new Franchise Rule will become effective on July 1, 2008.

The new Franchise Rule contains a number of innovative modifications to the old Franchise Rule. These modifications include the elimination of the "first personal meeting requirement", the elimination of the requirement to separately furnish a completed franchise agreement, and the addition of an allowance for electronic delivery and execution of the franchise disclosure document and agreement. There are also changes to requirements concerning financial disclosures, disclosure of franchisee associations, disclosure of confidentiality clauses and agreements, as well as a number of other changes.

Franchises can be a very complicated area of business law. Any Michigan business or resident who is involved in a franchise transaction should seek the counsel of an experienced Michigan franchise lawyer to help them through the complexities and potential pitfalls of franchise law.

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

Posted In: Franchise Law

Bookmark: