BUSINESS LAW QUARTERLY || Q2 || 2019
Design Your Business – Plan The Smart Way
MATTHEW K. TAYLOR
Entrepreneurs, startups, and established companies must each consider many of the same business and legal issues before setting up a new business. Although it is not a legal requirement, at the outset of a new business venture, the founders should clearly define the business’ objectives in a concise, dynamic business plan to effectively communicate these goals to key stakeholders such as lenders, equity investors, suppliers, distributors, and management. Among other things, effective business plans should: (i) include an executive summary; (ii) describe the products or services to be offered; (iii) list the company assets, liabilities, budgets, and key timeless; (iv) summarize management structure, company structure, and company goals; (v) profile the target customer and analyze the competition and market trends; (vi) describe marketing strategies; and (viii) and forecast sales growth and profits. However, before disclosing a business plan to outside parties, a nondisclosure agreement should be signed to protect sensitive business information. At Taylor Law Offices, we specialize in drafting nondisclosure agreements that protect a business’ confidential information.
Business Entity Structure
CHRISTIAN S. MARTINEAU
One of the most important decisions in forming a new business is selecting the appropriate legal structure, which impacts liability, taxation, ownership, management, financing, and other key issues. Although there are various ways to structure a new business, the three most common forms of business’ are limited liability companies, S- corporations, and C-corporations. These entity forms are popular for a reason. Unlike other types of business entities, each of these provide limited liability for the owners. Limited liability means that you can only lose as much as you put in the company. With this in mind, the key to developing a successful business is selecting a limited liability entity structure that matches the needs of your business.
LLCs are ideal for new businesses that want flexibility in their management and do not want to be forced to follow a strict set of rules regarding corporate formalities. Although corporations have been in existence for centuries, LLCs were only first recognized in the 1970s and were designed to give business owners more hands-on control over the company. For example, no matter how the control and ownership of an LLC is structured, its members have the freedom to choose how to it will be taxed. Unlike a C-corporation, an LLC is not taxed by default. Rather, LLCs are called “pass- through” entities because the tax burden passes through the LLC and is applied directly to the individual member’s income instead. This “pass-through” taxation, which is also a key feature of S-corporations, avoids double-taxation and can potentially save new business owners a lot of money over the life of the business.
By default, LLC members pay self – employment tax on their income, whereas corporate shareholders who also work in the business are considered employees and pay taxes on their employment income as well as
their dividends. Moreover, the traditional C- corporation, which is a great choice for business’ that envision offering shares to the public, is subject to double taxation. Double taxation means that the corporation pays taxes on annual earnings and the shareholders pay taxes on dividends. Essentially, income taxes are paid twice on the same source of earned income.
In addition to different tax treatment, the ownership and management structure is an important difference between LLCs and corporations and should be considered when determining the type of business entity. Corporations are owned by shareholders, whereas LLCs are owned by members. Unlike corporations, LLCs have the flexibility of offering membership equity interests in exchange for a capital contribution (money), specific property (ideas, equipment), or sweat equity (hard work). This flexibility allows members to structure company ownership based on a set of metrics to meet the specific needs on the business. Corporations, on the other hand, are owned by the shareholders in direct proportion to how many shares a person has. And while multiple classes of shares can be created, only C-corporations can create different classes of shares with unique rights. In regard to management,, corporations are governed by a board of directors and corporate officers and neither the board nor the officers need be shareholders. Alternatively, LLCs are managed by the members in any manner they see fit. This type of management allows the members to define their respective duties in the company and structure control based on the unique circumstances at hand.
As is evident, there are a number of factors to consider when choosing the type of business. At Taylor Law Offices, we have helped hundreds of new business analyze these factors and determine their ideal business entity structure.
Selling Your Professional Company
CHRISTIAN S. MARTINEAU
There are numerous factors to consider when during the purchase or sale of a professional company. However, one factor that is often overlooked during the initial due diligence phase is the legality of the proposed transaction. Under Idaho law, a professional entity is an entity formed for the sole and specific purpose of rendering professional services. Like most states, Idaho allows professionals, such as doctors, dentists, and attorneys to form either a professional entity or a regular entity. This is why you will often see the letter “P” in front of certain company designations such as Taylor Law Offices PLLC. The “P” stands for professional and it signifies that only licensed professionals own the limited liability company. Although professional entities and regular entities are nearly identical under Idaho law, there is a very specific set of provisions that impact the purchase and sale of professional companies.
Most notably, Idaho law requires a professional entity to be owned only by other professional entities or natural persons that are duly licensed in the respective profession. In turn, this means that the owners of a professional entity are prohibited from selling the company to anyone except for other licensed professionals or professional entities. For example, members of the fictitious “Idaho Family Medicine PLLC” cannot sell the company or their interest in the company to an unlicensed individual or the fictitious “Boise Family Medicine LLC”. If a sale of this type were to occur, either party could seek to have the purchase and sale agreement rescinded by an Idaho court due to illegality, which could then result in an expense court battle between the buyer and seller.
For decades, the Idaho Board of Medicine took the position that unlicensed entities were prohibited from hiring physicians as employees to provide medical services to patients. This prohibition is referred to as the corporate practice of medicine and has been an important aspect of Idaho law since the early 1950’s. In 2016, however, the Idaho Board of Medicine passed a resolution stating that it would no longer discipline physicians for working for unlicensed entities. This resolution essentially disavowed the corporate practice of medicine doctrine, which in turn, has now created new opportunities for non- professional entities and unlicensed individuals to invest in, purchase, or open medical practices. However, the fact that the Idaho Board of Medicine has elected to not discipline practitioners for practicing in a way that violates Idaho law does not make the violation any more lawful.
As such, if you are considering selling your professional company, the first task of due diligence should be to determine status of any potential buyer. Doing so during the initial phases of the transaction will eliminate the risk of the purchase being reversed due to illegality. If you are a professional and are considering a purchase of sale of a professional entity, reach out to us at Taylor Law and we will help guide you through the deal and ensure the transaction will be legally enforceable.
The Changing Bankruptcy Landscape
MAX T. WILLIAMS
In today’s world, debt is a part of everyday life and provides a standard of comfort that would be difficult or near impossible to achieve under ordinary income. But with prosperity, comes risk. While a lot of Americans will be able to pay off their debts monthly, or even annually, a large portion of the population spends more than they bring in. This is where bankruptcy comes in. Bankruptcy is a vehicle, embedded in the Constitution, that gives debtors a fresh start and is designed to equitably distribute a debtor’s estate to all creditors. Over the years, bankruptcy filings have been on the rise. Especially Chapter 7 filings, also known as asset liquidation filings, which are the most common filings in bankruptcy courts. Chapter 7 allows a debtor to discharge all debts and liabilities upon approval by the court. With the rise of Chapter 7 filings, credit card company and lender concerns over repayment of debt has risen as well. As a result, due to heavy lobbying efforts by credit lenders, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known colloquially as BAPCPA 2005.
The crux of BAPCPA 2005 is that it is more difficult for higher income individuals to qualify for Chapter 7, thus it serves to push debtors into a Chapter 13, which requires a payment plan, approved by all the debtor’s creditors, to repay all or most debts over a five-year period. The result from BAPCPA 2005 for the average consumer is an individual that exceeds the median income and has some money left over after accounting for living expenses will likely not qualify for Chapter 7 bankruptcy. Another concern involves certain debts that were exempted from discharge after BAPCPA 2005. The most relevant ones to the daily consumer are: (1) more than $750 in cash advances on a credit card taken out within 90 days; (2) more than
$500 charged on a credit card for luxury goods within 90 days of the bankruptcy filing; and (3) all federal and private student loans (previously, some student loans were dischargeable; now, most are not unless the debtor can overcome a high burden of proof to show undue hardship).
In summary, it is important to manage your debt so that you don’t find yourself in need of help from the bankruptcy courts. Discharge was not easy before BAPCPA 2005, but it is even harder now for middle class America because it is no longer a guarantee that you will be allowed to file under Chapter 7, and your income may force you to file for Chapter 13 which requires you to formulate a repayment plan and pay back all of your creditors before being granted a discharge.
What Types of Insurance Does a Small Business Need?
TODD C. AMICK
If you’re running a small business, or plan to, you probably know about some of the common perils you may face. However, there are numerous others that you may not be aware of. This is where it’s important to investigate a little deeper before signing with an insurer.
In order to better protect yourself and your business, you need to identify the most common claims made against your type of business and obtain coverage for those risks. This may appear to be common sense, but the majority of business owners we work with have failed to do this and it cost them.
Identifying Risks: The best ways to identify risks are from your own experience, reaching out to other people in similar fields and asking them, discussing risks with insurance agents, and talking to attorneys experienced in suing/defending similar businesses. While you may not be able to identify all potential risks, you will be ahead of most of your competitors by doing so. The next and possibly more important step is to get verification that you are covered for these risks by an insurer.
Insurance Coverage: Insurers are not in the business of paying claims, they are in the business of receiving premiums and paying as little of those premiums on claims as possible. Therefore, simply getting insurance coverage is rarely enough. There are few worse letters you can get than one from your insurer that states: “This claim is not covered for X exclusion”. What this means is that you and/or your business is responsible for not only paying the claim, but for hiring and paying an attorney to defend your business on the claim. Even a relatively low value claim ($5,000 to $20,000) may cost you $10,000 to $20,000 in legal fees.
After you’ve identified the most likely risks, the key is to call various insurance agents to discuss these risks, get their assurance that those risks are covered, and request quotes for the coverage. Unfortunately, after doing this, you may not be covered. The agent’s job is to sign you up. Dealing
with insurance claims is the adjustor’s job, so many agents don’t really know about the various insurance contract exclusions used to deny coverage. However, the insurer should be bound by representations made by the agent if those representations and the insurance agreement conflict. Therefore, a good start is to verify that you have coverage for the risk scenarios you discussed by sending the agent a letter/email detailing your conversation, the potential risks that you discussed with the agent and request confirmation from that agent that these risks are covered by your policy.
At a minimum, consider buying General Liability and Business Property insurance for your small business. Or you can get a BOP – a Small Business Owner’s Policy – which contains both in a single policy. Consider Workers’ Comp Insurance if you have employees; it’s mandatory in most states. If you or your employees will be driving for work purposes, you’ll want Commercial Auto Insurance as well. Once you have these primary coverages in place, consider the risks that are unique to your business and look into adding coverage to fill in any gaps your primary policies don’t cover.
Types of Insurance:
Liability Insurance is a must for your small business. It helps cover the cost of liability claims made against your business. Liability insurance comes in several different forms. Two of the most popular types are General Liability and Professional Liability.
General Liability Insurance helps cover the costs of claims made against your business for bodily injury or property damage. For example, a customer slips and falls in your store and makes a claim against your business for the costs of their medical treatment. General Liability Insurance can help cover the costs of this claim. General Liability Insurance can also help cover the costs of claims that your business damaged someone else’s property. For example, a customer slips on your freshly mopped floor and is injured. This results an emergency room visit and several thousands of dollars in medical costs. When this customer makes a bodily injury claim against your business, General Liability Insurance helps cover the costs.
Professional Liability Insurance (Error’s and Omissions “E&O”) helps cover the costs of claims that your business committed errors or omissions in the products or services you provided. For example, a client makes a claim against their hair stylist because, due to an error in processing her color treatment, her hair turned bright orange instead of the chestnut color she requested. The hair stylist’s Professional Liability Insurance can help cover the costs to settle this claim.
Professional Liability also helps cover the costs of errors made because of clerical mistakes. This can include mistakes made by employees and not just the owners. For example, the receptionist at a dentist’s office scheduled a patient for the wrong type of service and that service was performed on the patient. Professional Liability Insurance can help cover the cost of the claim made against the dentist’s office.
Small Business Insurance helps cover the costs of liability and property damage claims. It can also replace lost income if your business is temporarily unable to operate because of a covered incident. But you must opt and pay for this coverage. Because small business insurance encompasses an array of different coverages, most small business insurance policies can be tailored to fit your business’s unique needs.
Workers’ Compensation Insurance helps provide benefits to employees who become injured or ill on the job. In the unfortunate event that an employee dies due to a work-related injury or illness, benefits can be paid to his or her family.
Commercial Auto Insurance helps cover the costs of auto accidents that you or your employees are involved in while driving for work purposes.
Business Income Insurance helps replace lost income if you must temporarily shut down your business because of a covered incident.
As with Santa Clause, the Easter Bunny, and the Tooth Fairy, your faith that your insurer is there to help you must come to an end. Trust but verify needs to be your mantra with insurance. A few hours with your attorney combined with some research will save you time, money and aggravation in the future.
MATTHEW K. TAYLOR
The articles in this publication are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Nothing in this publication creates an attorney-client relationship between you and Taylor Law Offices PLLC. The opinions expressed in this publication are the opinions of the individual author and may not reflect the opinions of Taylor Law Offices PLLC or any individual attorney. Portions of this publication may contain Attorney Advertising under the rules of some states. Prior results do not guarantee the same or a similar outcome.
To schedule a free consultation at Taylor Law, please contact us at 208-342-3006.