Questions for business owners to consider when estate planning

There is a lot to think about when business owners begin estate planning.

As they think through what to do with what is often the most valuable asset in their estate, they’ll need to determine whether the company will be passed on or sold. In both cases, there are questions that need to be answered to ensure a smooth transition. Otherwise, owners risk devaluing their greatest asset, leaving little to their heirs.

“Regardless of whether the owner decides to maintain the business or sell it and divide the profits, the time to consider and lay plans is early on,” says Kimon P. Karas, a shareholder at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Succession planning shouldn’t start at death or disability. That’s too late.”

Smart Business spoke with Karas about the many considerations business owners should make when determining their estate plan.

What are some of the questions family business owners should ask as they prepare their estate plan?
An early question is whether the owner wants the business to continue, or would rather cash out. Assuming that the owner wants to perpetuate the business within the family, he or she needs to determine how engaged the family is in the business and if they are able to manage and operate it.

It’s important to have a plan for the division of roles. In a situation in which there are multiple children and in-laws, delegation of duties and buy-in are critical.

Sometimes, however, there are children and in-laws who are fine not being in the business. The decision then is how to allow each family member to benefit equally from the business — those who are active in operations and those who aren’t.

How is planning affected when there is ownership or management outside of the family?
When a family business is owned in part by people who are not related, it is important for the owners to discuss early on the terms of that ownership. There should be buy-sell agreements in place as well as a succession plan. Have conversations about what happens if one of the owners would become disabled or die, or when or whether children from any of the owners’ families can join the business, and how ownership transfers as the current owners leave the business.

When the owner’s family is not capable of running the company or the non-family management doesn’t want to report to family members who are not actively involved in the business, ownership needs to take that into consideration.

The decision then is whether to sell the business or plan for the non-family management team to control the business. The owner could create a business advisory committee or trust comprising an accountant, lawyer and business consultants to oversee the company. Whatever is decided, the management team needs to be part of the conversation and comfortable with the decision.

What mistakes do business owners tend to make when it comes to estate planning?
The biggest obstacle is not making a decision. That can lead to conflict as the heirs are left to determine their roles and who deserves what share of the profits without the guidance of the owner.

In the case that the surviving members of the family realize that they can’t run the business and they need to sell, they will be selling from a position of weakness. Word will spread quickly and buyers will know what’s going on and why the company is being sold, and that will hurt the sale price.

Generally, business owners ought to be thinking about how to pass on their business when it becomes clear that the business is realizing steady, continued success and is becoming a significant part of the estate. At that point, collaborate with an accountant, attorney, financial adviser and family to create a plan.

Ultimately, whatever the owner decides shouldn’t be a surprise to the family — they should hear from the owner what roles each family member will have and how they’ll benefit from the business, if at all.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co. LPA

What to do when the golf course adjoining your home is redeveloped

Golf courses throughout the country are closing, and the land is being redeveloped for uses that not only destroy the adjoining owners’ “golf-course views,” but diminish the value of their properties. What, if anything, can the owners do to protect their investments?

Smart Business spoke with William J. Maffucci, an attorney with Semanoff Ormsby Greenberg & Torchia LLC, to find out.

Does paying a “lot premium” for a lot with a golf-course view give the purchaser control over future use of the golf-course land?

No. Payment of a lot premium does not ensure that the purchaser will enjoy a golf-course view for any amount of time.

I’m not saying such purchasers have no legal remedies to protect their investments. But if they do have such remedies, they arise from other facts, not from the mere payment of lot premiums.

For example, as part of the planning and promotion of golf-course communities, the developers often agree to include in the land records restrictions on the way in which the golf-course land could be used in the future. Those limitations are intended for the benefit of future owners of the neighboring lots, who, as a general matter, can enforce them.

But there’s an important distinction to note here: A deed or development-plan provision that restricts the use of land to certain categories of use (such as ‘recreational’) or that prohibits other categories of use (such as residential or commercial development) is not the same as a covenant (or promise) by the developer or golf-course operator to continue using the land as a golf course. Affirmative covenants to operate land as a golf course indefinitely or for any significant period are extremely rare, and it’s unclear whether they’re legally enforceable.

That distinction is important because it changes the legal remedies available to the adjoining or neighboring owners. An order enforcing an affirmative covenant to operate land as a golf course would literally prevent any change of use, but an order enforcing a generic use restriction (such as a prohibition on industrial use) would not preclude new uses (such as farming) that would not violate the restriction.

Is attempting to prevent a proposed change of use the only way adjoining or neighboring owners can protect their investment?

Sometimes the owners have another remedy. If they had been induced to pay premium prices by misrepresentations about the future use of the golf-course land, and if they reasonably relied upon those misrepresentations, they may be able to recover monetary damages through civil litigation against their sellers. The damages would be calculated as the difference between the actual fair-market value of the property and the value that the property would have had if the permitted uses of the golf-course land had actually been restricted in the way represented. The owners might be able to recover additional damages if they can prove that the sellers/developers made the misrepresentations intentionally, knowing that the buyers were certain or likely to lose their golf-course views soon.

Is litigation the only option?

Actually, no. In fact, litigation — which is lengthy, expensive, and uncertain — is sometimes the worst option.

The redevelopment of golf-course land often requires a variance from the municipality. Variances cannot be granted until the municipal land-use authority conducts a public hearing at which neighboring owners have the ability to provide input as to the impact of the proposed development. And owners may have other political avenues by which they may ensure that their concerns are brought to the attention of the local decision makers.

If a golf course is closed and the land is redeveloped in a way that reduces the value of neighboring residential lots, the owners of the lot can, in any case, try to lower their property-tax burdens by filing appeals of the property assessments with the county board of assessments. At the hearings on the appeal, the owners would present evidence (preferably through a professional appraiser) that, as a result of the closure and redevelopment of the golf course, the fair-market values of the appellants’ lots are now comparable to that of other local properties (not close to the former golf course) that have much lower assessments.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The Supreme Court makes a significant ruling in favor of employers

On May 21, 2018, the U.S. Supreme Court issued its opinion in Epic Systems Corp. v. Lewis, which significantly undermined the power of workers to effectively assert discrimination and wage and hour claims against their employers.

“Epic Systems enables businesses to proactively address the wave of class action discrimination and wage and hour lawsuits that have inundated businesses in recent years,” says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia LLC.

Smart Business spoke with Goldblum about the Epic Systems decision and the impact it will have on both businesses and employees.

What is the background of the Epic decision?

Epic Systems involved three consolidated cases, and tens of thousands of employees at three companies: Epic Systems Corp., Ernst & Young LLP, and Murphy Oil USA Inc. The employees had signed agreements related to their employment that required them to arbitrate, not litigate, work-related claims and prohibited them from joining with other employees in class-action lawsuits against their employers.

The workers argued that their right to file class-action lawsuits over alleged wage and hours violations is protected by the National Labor Relations Act (NLRA), which was passed in 1935 to offer employees greater leverage to collectively challenge unjust treatment on the job, and which made the agreements unenforceable.

The court, in a 5-4 decision, however, sided with the employers, and Justice Neil Gorsuch wrote in the majority opinion that the 1925 Federal Arbitration Act, which favors the right to privately arbitrate disputes, supersedes the NLRA, and therefore the challenged agreements were enforceable.

What is the impact of the Epic decision?

The practical import of the Court’s decision is that private-sector employees may be contractually barred by employers from the right to enter into class-action lawsuits to challenge violations of federal labor laws. Employers may lawfully require employees, as a condition of employment, to enter into agreements that compel arbitration of work-related disputes and that preemptively bar them from pursuing class action claims in court or in arbitration. Employees who enter into arbitration agreements with class waivers may only litigate claims against their employers in an individual arbitration.

How should employers proceed?

While the Supreme Court’s decision in Epic Systems puts to rest facial challenges to the enforcement of class action waivers in arbitration agreements on the basis that they conflict with the NLRA, employees may still challenge such agreements under generally available contract defenses such as ‘fraud, duress or unconscionability.’ To be sure, the plaintiffs’ bar and employee advocacy groups will attempt to expand these and other arguments to challenge the enforceability of arbitration agreements and class action waivers.

One reaction to class action waivers that has already occurred is the filing by plaintiffs’ lawyers of dozens of individual arbitrations at once against a particular company, for which the company is often required to pay.

These continual challenges to the enforceability of arbitration agreements place an increased premium on employers’ careful drafting, implementation and maintenance of agreements and class action waivers. Moreover, although arbitration has traditionally been seen as a low cost alternative to litigation, that is not necessarily the reality. Arbitration can be a costly and time-consuming process.

Employers should also anticipate that Congress may attempt, at some time in the future, to exempt certain claims, such as those for sexual harassment or discrimination, from mandatory arbitration and class action waivers.

The Epic Systems decision resolves certain long-standing issues regarding arbitration and class action waivers, however significant questions and issues remain that employers must confront when determining whether to implement or maintain an arbitration agreement or a class action waiver. Consult with experienced employment counsel to ensure your company’s program is implemented and maintained in a manner that will support its enforceability.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Identify your intellectual property or risk losing it

Intellectual property (IP) protection is a critical task that enables companies to safeguard the hard work, expertise and ingenuity of their employees, says Kristen M. Hoover, a patent attorney at McCarthy, Lebit, Crystal & Liffman.

But, to be effective, a plan must be crafted to fit the way an organization functions.

“Each business must create a strategic plan that protects its unique intellectual assets everywhere they’re used,” Hoover says. “To do this, companies need to understand what IP they have and how those assets are deployed both inside and outside their walls.”

Smart Business spoke with Hoover on how to formulate a plan to ensure a company’s valuable IP resources are protected.

What constitutes IP and what assets might companies overlook when designing a protection program?
Many companies think IP protection is exclusive to patents. For some businesses, particularly those involved in innovation, manufacturing or R&D, patents will be a key component to their IP protection strategy. However, patents are not the only form of IP protection. IP can also be protected with trademarks, copyrights, trade secrets and contracts.

Trademarks often don’t receive the level of attention they should. Many companies put off seeking protection or do not think about it until a problem arises. Logos, slogans and business names are all items that should be protected. Trademarks are source identifiers and a key component to a company’s brand identity. They allow companies to be instantly recognizable to consumers and build their reputation in the marketplace.

Copyright protection is often overlooked, too, because copyrights are associated with artistic works. However, there are many business assets such as websites, internal manuals and handbooks that are copyrightable.

Additionally, companies that provide consulting work may have prepared materials or give presentations that should be protected. A trade secret is any confidential business information that gives a business a competitive advantage.

This could be any number of things, such as marketing strategies, data compilations, manufacturing processes, purchasing information, personnel information or customer lists. It’s a term that can be applied broadly and cover a multitude of assets, and often companies are not aware of all the assets that could be protected as trade secrets.

Trade secret protection, however, is dependent on companies handling this information appropriately. An IP protection plan should include proper procedures for handling this confidential information.

How can confidential information be protected?
To maintain confidential information, and therefore trade secret protection, companies must have internal policies that restrict access to confidential information, dictate how employees with access handle this information, and require the use of nondisclosure and confidentiality agreements. All employees should be made aware of these company policies and be required to follow them.

Contracts such as nondisclosure and confidentiality agreements are useful tools to maintain confidential information and protect trade secrets. For instance, nondisclosure agreements provide protection when discussing a potential business venture with another company or potential business partner.

While it may be necessary to share protected information in order to explore potential business ventures, it’s critical to take steps to ensure that information is not shared or used beyond the meeting. The nondisclosure agreement allows parties to share information while keeping it safeguarded and providing a means to seek restitution if it is not.

How can companies effectively assess and shore up their IP vulnerabilities?
Companies should talk with a patent attorney who has experience developing effective strategies to protect these valuable business assets.

This should include a review of all aspects of the company’s day-to-day business in order to gain a clear understanding of what IP the company has that should be protected. By working with an experienced professional who can provide guidance at each step, the process of establishing an effective IP protection plan becomes more affordable and manageable.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

It’s never too early to begin crafting your business succession plan

Succession planning can be a difficult task for business owners whose sole focus has always been the growth of the company, says Steven P. Larson, an attorney with McCarthy, Lebit, Crystal & Liffman. However, taking steps to secure your company’s future is the best way to protect yourself, your family and your employees following your departure.

“Every business transition strategy, even within the same industry, is going to follow a different path,” Larson says.

“Every approach is unique because it is based on what you want to accomplish and the legacy you wish to leave behind. There are always options, but the sooner you develop a plan, the more choices you will have. Ultimately, your efforts will provide a great deal of relief and guidance to your family and your employees, knowing that there is a plan in place.”

Smart Business spoke with Larson about how to initiate the succession planning process and the importance of starting early.

Where is a good place to begin your succession planning?
There are two primary areas of focus. The first step is to review your basic estate plan, which should include your will, revocable trust, financial power of attorney, health care power of attorney and living will.

These documents provide baseline protection to ensure that upon your death or incapacitation, a trusted individual is ready to step in and manage your affairs. Along those lines, it’s a good time to consider what protective measures you have in place, such as life insurance and disability insurance to cover you in the event of death or incapacity.

The other area of focus is to develop your ideal business succession plan. Here, the options are vast and highly customizable. While some business owners choose to transfer control of the business to a family member, others may elect to remain with the company in a reduced capacity.

Further options include selling the company to a third party or arranging for a management buy-out, either immediately or over a period of time. Typically, this is a lengthy process that can take years to fully develop and implement from beginning to end. It is never too early to begin thinking about the future of your business and what you want your legacy to be.

How does insurance tie in with both estate planning and business succession planning?
Insurance is important for any business owner, but it becomes particularly significant if you own a business that is highly dependent on your presence to succeed or a service business, such as an architectural firm, law firm or medical practice.

These types of businesses cannot function without you. Thus, you need to formulate a plan that clearly spells out what should take place in the event that you are unable to continue due to your incapacity or death. If you wait until this worst-case scenario occurs, it will be too late to get the insurance coverage needed to protect your business and any stakeholders.

Life insurance is utilized frequently during the estate planning process, particularly for business owners. It may be used to fund a buy-sell agreement, pay estate taxes or provide liquidity to your family.

How prepared are most business owners to deal with succession planning?
It’s one area of the business that is often put off for another day.

Succession planning involves asking and answering difficult questions, including when you should step away, if there is someone in the family or business who has what it takes to lead the company, if you have the time to transfer your knowledge to that person, and ultimately, what is your legacy.

Often business owners have a general idea of what they envision the transition looking like, but it takes work to craft the final version of their succession plan.

Business owners, especially those who built the company from scratch, have a deep knowledge of their business. They also recognize the value of the company, but they may not know what it takes to monetize that worth.

It can be eye-opening to go through a business valuation and determine what needs to be accomplished in order to find the right buyer, if that’s the chosen path. It is important to engage the right team of advisers and give yourself time to complete the process to ensure you achieve your end goals.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to navigate the new IRS audit rules of LLCs, joint ventures and partnerships

On January 1, 2018, IRS audits under the Bipartisan Budget Act (BBA) of 2015 became effective. The new BBA rules, which replace the Tax Equity and Fiscal Responsibility Act (TEFRA) rules, significantly streamline the IRS audit and adjustment process, allowing the IRS to assess and collect underpaid taxes, penalties and interest at the partnership level as opposed to the partner level, making it much easier for the IRS to audit LLCs and Partnerships and assess and collect taxes.

Smart Business spoke with Jeffrey G. DiAmico, a member at Semanoff Ormsby Greenberg & Torchia, LLC, about the implications of the new rules, who it applies to and relief provisions.

Who do the BBA rules apply to?

The BBA applies to all partnerships — including limited liability companies that have elected to be treated as a partnership, and almost any other unincorporated joint business operation, which includes joint ventures — except for certain qualifying partnerships that affirmatively elect out of the BBA rules.

Generally, a qualifying partnership must:

  • Have 100 or fewer qualifying partners.
  • Have only eligible partners, which include individuals, the estate of a deceased partner, S-corporations, C-corporations or foreign entities treated as a C-corp.
  • Attach an annual election statement to a timely filed tax return.

Ineligible partners include: partnerships (tiered structures), trusts (including grantor trusts) and disregarded entities (including single member LLC entities).

How could the new rules impact organizations that file as partnerships?

Under the old TEFRA rules, IRS audits performed at the partnership level resulted in any adjustments being assessed against each partner, each of whom were entitled to participate during the audit process. These rules were an administrative nightmare for the IRS, which is presumably why it audits less than one percent of partnerships.

Under the BBA, IRS audits for the reviewed year are still at the partnership level. However, the BBA authorizes the IRS to assess any ‘imputed underpayment’ at the partnership level (generally at the highest individual rate of tax), and then to collect any underpaid taxes, penalties and interest from the partnership in the year the audit is completed (the adjustment year). If there are different partners in the adjustment year than in the review year, partners can be responsible to pay for someone else’s income tax liability. This radical outcome should be discussed and addressed through updated indemnification provisions in your partnership or operating agreement.

How will partners be notified of an audit?

Alarmingly, the IRS is not required to provide notice to individual partners of a partnership audit — the individual partners have no statutory right to participate in the IRS audit or any resulting appeal, or raise partner-level defenses. There will no longer be a tax matters partner. Instead, the partnership must designate a partnership representative (PR) for each tax year who is the only person permitted to deal with the IRS. The PR will have the sole authority to act on behalf of and bind the partnership and its partners. Accordingly, your partnership or operating agreement must be amended if you want to impose obligations upon the PR to apprise the partners of an IRS audit and provide them with additional protections.

Are there any relief provisions?

For partnerships that are subject to the BBA and cannot elect out, there are two options to mitigate the damage at the partnership level. The partnership can make a ‘push-out’ of the additional tax liability from the partnership to the partners who were owners during the reviewed year; or the partnership can seek a modification of the imputed amount by following specific rules published in the regulations. Partnership or operating agreements should be amended to include a mechanism for making such an election and obtaining partner consent.

What actions should be taken?

Thoroughly examine your ownership structure and amend your partnership or operating agreement. If you are a multimember LLC, partnership, or joint venture, contact you attorney to discuss what changes are required to your partnership or operating agreement.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The deficiencies of online legal services

The 21st century has been marked by a generation of resourceful self-starters. With the advancement of technology and widespread social media outlets, there are unlimited resources available with how-to instructions for just about anything.

The do-it-yourself concept has spilled over to legal services. LegalZoom, among other online services, attempts to streamline the process of creating legal documents while drastically reducing the cost compared to working with an attorney. However, you are getting what you pay for: free or low-cost, canned legal documents.

Smart Business spoke with Lisa A. Shearman, a member at Semanoff, Ormsby, Greenberg & Torchia, LLC, about the tradeoffs of producing legal documents through a website instead of an attorney.

What does a person sacrifice by having legal documents created through a website?

A software package is not going to provide you with the necessary tools to ensure your estate plan is set up correctly. Certainly a will or a power of attorney form can be created through one of these sites, but you’re missing the ‘out of the box’ benefits an attorney can provide.

For instance, your will designates who should receive your property when you die. However, if the beneficiary designations on your financial accounts, life insurance policies and retirement accounts are inconsistent with your will, those designations will override the directions in your will. Estate planning involves more than just a set of written documents. It includes proper planning of all assets and coordination with other advisers, such as life insurance agents, accountants and financial advisors. It involves building a relationship for you and your family.

What can an attorney provide that a website can’t?

LegalZoom’s job is to deliver a generic product. If needed, its site will connect you with an anonymous attorney who isn’t working for you, but rather LegalZoom. An attorney’s job is to assess a client’s individual circumstances, make recommendations based on those circumstances, and create a plan with that information. They work for you and are interested in assisting you with a legal need, not just selling you a product.

Estate planning attorneys assess information about their client’s family, assets and financial situation, including identifying areas of concern, such as beneficiary issues, future incapacity, health care decision making, long-term care planning, asset protection, and minimizing costs, time delay and taxes. Attorneys want to develop a relationship with their clients and the clients’ families so that in the event of a loss, they will be able to provide some comfort and guide them through the legal process.

There is no ‘one size fits all’ in estate planning, especially when there are unique circumstances. DIY programs do not address the various issues that can come up in a second marriage, same sex marriage or special needs situations. Furthermore, with the constant changes in laws, it is important to understand how these changes may affect planning. LegalZoom and other document preparation services are not lawyers and offer no assurance that they keep up with changing laws.

What is the risk of getting legal documents through a website?

The disclaimer on LegalZoom’s website provides in part, that ‘[they] are not a law firm [ ] or a substitute for the advice or services of an attorney. We cannot provide any kind of legal advice, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies.’ Their ‘terms of use’ is pages long, in small print, and essentially provides a complete disclaimer of any legal responsibility to you.

Attorneys are very familiar with these products because they have seen their ineffectiveness, which has been an increasing source of litigation. The savings your family member or business partner may have obtained on the creation of the documents is lost in the first consultation with an attorney when things go wrong. Litigation will cost beneficiaries thousands of dollars, years of time in court and ultimately will leave a family divided. The death of a family member is stressful enough. Without proper planning, that stress will only be compounded as families try to navigate through the administration process with conflicting documents and directions.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Understand a broker’s goal before investing with one

Though most investors believe brokers put investors’ interests above all else, that’s not always true.
“There isn’t a single statute that makes a broker a fiduciary,” says Hugh Berkson, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA.

“Investors don’t understand that and are surprised to find that when something goes wrong thanks to bad or conflicted investment advice, brokers will claim that they are just a salesperson.”

Smart Business spoke with Berkson about the signs that suggest investment brokers are working more for themselves than they are for their clients.

What is it that investors don’t understand about their brokers?
No single statute requires brokers to disclose a conflict of interest, so brokers may put their own or their firm’s interests ahead of their clients’ interests. Investment advisers, on the other hand, operate under a statute that establishes them as fiduciaries. They, therefore, maintain an unquestioned legal obligation to act in their clients’ best interests.

Investors might not be able to tell a broker apart from an investment adviser by title alone. Many brokers try to blur the distinction by using titles like ‘financial adviser,’ but those titles are of no legal import. A savvy investor will ask: ‘Are you a broker, or a registered investment adviser?’

Investors can check any brokers’ background to see whether other investors or regulators have found fault with their conduct through BrokerCheck. BrokerCheck reports are maintained by the Financial Industry Regulatory Authority (FINRA), the regulator that oversees the brokerage industry, and are available for free through FINRA’s website.

Why should investors monitor their investments?
Brokers make investment recommendations to clients and typically don’t believe they have an obligation to monitor their clients’ accounts. Brokers who get paid a management fee (usually a percentage of assets under management) are supposed to keep an eye on the account, but brokers who are paid a straight commission on each transaction likely won’t. That leaves it up to the client to monitor his or her investments.

Brokers can and do hide misconduct, but often there are signs that something is off. For example, something is likely wrong if investors see transactions they didn’t explicitly authorize, a surprisingly high number of transactions, a concentration of their portfolio in a particular investment or category of investments, or results that contradict what the broker told them to expect.

Brokers cross a legal line when they make a trade without a client’s permission, ask to borrow money from a client, or suggest the client should invest with the broker outside of the firm — a ‘can’t-miss’ real estate deal on the side, for instance.

What should investors do if they’re suspicious of their broker’s actions?
Investors can start by talking with a branch manager to try to get the issue resolved, though it’s not certain that the manager will reach a solution the investor finds adequate. When that’s the case, investors would do well to seek legal counsel to determine what, if anything, should be done.

Most attorneys will offer a free consultation to listen to investors’ complaints and give them a sense of whether it’s something that should be pursued.

FINRA maintains a dispute resolution forum — arbitration — to resolve disputes between investors and their brokers. While investors are free to represent themselves in arbitration, they will be at a significant disadvantage when faced with experienced counsel on the other side. Investors can level the playing field by hiring an attorney who understands both the law underlying investor claims, as well as the unique nature of a FINRA arbitration.

For investors with particularly small claims — less than $5,000 — there are law school securities clinics that offer to help investors reach a resolution.

The vast majority of brokers want to do the right thing by their clients and try to add value to the process. Very few brokers violate the industry’s rules and standards. In the unfortunate circumstance that a bad broker violated the rules and caused losses, investors would do well to get help to try to recover their damages.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co., LPA

How to determine the best structure for the sale of your business

In a traditional sale of a business, owners often make a relatively straightforward transaction — they sell the entire company to a buyer, get paid and walk away.

Deal terms need to be set between buyers and sellers. What is discovered during those negotiations will determine if a traditional sale is optimal, or even possible.

“It’s critical to a deal that sellers know what they want before negotiating,” says Michael Makofsky, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Sure, they want to be paid, but in many cases, there’s more to it.”

Smart Business spoke with Makofsky about alternatives to a traditional sale and what owners need to do to prepare ahead of negotiations.

What would indicate that a traditional sale isn’t in an owner’s best interest?
It comes down to what the owner needs to get out of the sale of his or her business. For instance, the owner might need to live off the purchase price for the rest of his or her life. That may drive decision-making in a deal, or at least a push for more money, and that might not work with a buyer.

A seller might still want to be involved in the business, either in the day-to-day or as a consultant. Most buyers, however, will want a clean break so they can pursue other interests.

Typically, a business owner wants to see the employees taken care of and that management can stay on. That may not align with the buyer’s idea of the business going forward. In the case that these caveats exist, a traditional sale may not work.

What options other than a traditional sale exist?
There are many ways to structure a transaction. Recapitalization, for instance, is an option in which an owner doesn’t sell the entire business. Instead, he or she keeps partial ownership, selling the majority and holding the minority, or vice versa.

An owner can maintain a stake in the company and stay involved, while bringing in a buyer who the owner believes can benefit the business. In this structure, the new buyer will want to maximize the company value and sell for a return, which gives the owner a second liquidity event if the value during that time increases. On the flip side, the original owner has another person to deal with, so it has to be someone who the owner is comfortable working with.

A management buyout is another option. Here, the managers become the owners of the company, and the original owner gets the proceeds as well as the comfort of knowing the new owners understand the business, are capable and are likely to keep most or all of the employees. It offers continuity compared to selling to an outside buyer, but sometimes the managers might not have the funds to purchase the business, so the financing has to be worked out.

Who should be on the owner’s deal team?
Lawyers, financial advisers and accountants are all essential members of a deal team.  More than their professional designations, however, team members need real-world buying and selling experience and the ability to combine their respective strengths to become a team.

Working with advisers who haven’t sold a business puts an owner at a disadvantage. Sophisticated buyers won’t point out to the seller’s attorney that something was missed. They’ll take advantage of the opening.

What should owners do ahead of a sale event to maximize their return?
Owners need to think about their timeline well in advance of starting the sale process. Typically, it’s a three- to five-year planning process, much of which centers on positioning the company in the best light.

Buyers expect the company’s financials, corporate documents and contracts to be in good shape for due diligence. When buyers find things they don’t like or things the owner can’t explain, it affects a deal in the form of concessions, a lowered purchase price or the termination of negotiations.

How a business is sold hinges on the wants and needs of the seller and buyer. Structuring a deal that works for everyone takes creativity, flexibility and a knowledgeable deal team to achieve.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co., LPA

New Pennsylvania law puts more of a burden on Pennsylvania companies

“For all you businesses operating in Pennsylvania, effective January 1, 2018, Pennsylvania requires you to withhold Pennsylvania personal income tax, currently at the rate of 3.07 percent, from any payments made to: non-resident individuals; and disregarded entities that have a non-resident member.”

“Anybody who is concerned about the new law should contact their accountant or attorney to make sure they understand the parameters,” says Charles W. Ormsby, Jr., Managing Member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Ormsby about the new tax law, how it will impact companies’ administrative burden and the risks and costs associated with the provision.

How is the new law structured?

If you have an individual (not employee) who was doing work for your business as an independent contractor and they live out of state, you would be required to withhold the 3.07 percent on payments to them and remit it to the Commonwealth of Pennsylvania. Similarly, if you are doing business with a limited liability company (LLC) that is considered a disregarded entity and the owner is a non-resident, you would have to withhold. This holds true even if the company is a Pennsylvania business with a mailing address in Pennsylvania, but the owner lives in New Jersey.

Lease payments are treated a bit differently. If you have a non-resident landlord, you are only required to withhold for individuals, trusts and estates. It does not apply to disregarded entities. The policy behind the law is to capture tax from non-residents who were not paying the Pennsylvania income tax. The withholding is mandatory if a business pays equal to or greater than $5,000 to a vendor, other than a landlord.

How will the law affect a company’s administrative burden?

The law implicitly imposes due diligence requirements on Pennsylvania taxpayers to determine if a vendor is a disregarded entity (such as an LLC) with an out-of-state owner or an out-of-state individual. It is not enough just to send a check to a Pennsylvania address and assume the recipient is a Pennsylvania taxpayer. Failure to withhold can result in your business being required to pay the tax not withheld and remitted, plus penalties and interest. However, your business will not be subject to assessment for failure to withhold for a period ending prior to July 1, 2018. So there is still time to get prepared.

Businesses need to go through their accounts payable to identify whether they are making payments to either landlords or vendors who are out of state and determine whether they are paying $5,000 or more to the vendors. Landlords are not subject to the $5,000 limitation. From the standpoint of remitting, you need to check with your accountant to make sure you are filling out the right forms and making timely payments. There are a set of rules with regard to semi-weekly, semi-monthly and quarterly remittances. A Pennsylvania taxpayer may also want to apply for a 1099-Misc withholding account or use their existing account.

What are some best practices in terms of accounts payable files?

Do not be fooled by simply relying on someone’s street address. You may also want to rely on or use IRS Form W-9. Otherwise you might want to confirm the residence in writing or reach out to people in writing and have them provide written verification as to whether they are a resident or not. Some companies have thousands of vendors so they will need to dedicate a fair amount of resources to doing the due diligence necessary to determine the withholding situation.

How costly could the provision be?

The administrative costs, interest and penalties could swamp whatever the actual amount is that should have been withheld. In addition, if you have a claim that is made by the state for failure to withhold, then you will need to get your accountant or attorney involved and you will need to spend time and money to extricate yourself from the situation. Being prepared in advance is key!

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