Category: Business & Corporate

By Roy Schneider, Esq.

Business succession and exit strategy plans contemplate and instruct regarding any changes in future ownership and management of a business. Most business owners know they should think about succession planning and their exit strategy, but few actually end up doing so. It is hard to think about not being in charge of the business you have built up, but a proper succession plan can ensure that your business continues long after you are there to run it, providing an enduring legacy or at least a smooth exit which will provide income for retirement.  Here are a few tips to keep in mind when you begin to think about putting a succession plan into place for your business.

• Proper plans take time – often years – to develop and implement because there are many steps involved. It is really never too early to start thinking about how you want to hand off control of your business.  Part of the planning requires a review of the current structure of the business, accounting practices, actual or potential claims from customers, vendors and employees
• Succession plans are a waste of time unless they are more than a piece of paper. Involving attorneys, accountants and business advisors ensures that your plan is actually implemented.
• There is no cookie-cutter succession plan that fits all businesses, and no one way to develop and implement a successful plan. Each business is unique, so each business needs a custom-made plan that fits the needs of all parties involved.
• It may seem counterintuitive, but transferring a business between people who are familiar with the business – from one family member to another, or between business partners – is often more complicated than selling the business to a complete stranger. Emotional investments cannot be easily quantified, but their importance is real. Having a neutral party at the negotiating table can help everyone involved focus on what is best for the business and the people that are depending on it for their livelihood.
• Once a succession plan has been established, it is critically important that the completed plan be continually reviewed and updated as circumstances change. This is one of the biggest reasons having an attorney on your succession planning team is important. Sound legal counsel can assist you in making periodic adjustments and maintaining an effective succession plan.

If you are ready to start thinking about succession planning and to develop an exit strategy contact one of the experienced business law attorneys at Schneiders & Associates, L.L.P. today.

By Ted J. Schneider, Esq.

There are a number of reasons to dissolve a partnership.  Whether business is not going well, you can’t get along with your business associates or you are ready to retire, it might be time to end your partnership.  Before making the final decision, you should consider whether dissolving the partnership is the only option.  Is there any other way to alleviate the problem?  Could you buy out your partner, or simply sell your share allowing the business to continue under different management?  Dissolution generally is not a simple process, and if it is your only option, it’s important that you be aware of some important issues.

Most partnerships operate pursuant to a partnership agreement.  Sometimes, these agreements include provisions for dissolution.  If this is the case in your partnership you should follow these provisions closely to avoid later disputes.  If there is no partnership agreement, you should try to formulate a dissolution strategy with your partner(s), following the guidelines set forth by statute and California partnership law.  Formulating a strategy amicably might not be possible, especially if the dissolution is the result of a disagreement or personality clashes.  In that case, you have the option to pursue alternative dispute resolution such as arbitration or mediation, as well as the ability to litigate to force dissolution of the partnership.  Litigation is expensive and time consuming and therefore might not be the best choice.

When preparing to dissolve a partnership you should collect all of the money owed to the business and pay any debts the partnership may have in an effort to wind up the business.  You should discuss the dissolution with the partnership’s accountant, and also inform the IRS and the state of the dissolution for tax purposes.  It is also a good idea to consult with an attorney regarding dissolution paperwork and tax matters, as failure to file properly can result in penalties.

You should also ensure the dissolution is made formal to avoid any confusion in the future regarding your relationship with your partner(s).  In order to do this, you must file a Statement of Dissolution with the State of California.  Formally dissolving your partnership will protect you from debts and contracts entered into by your former partner(s) after the dissolution is final.

Depending on the type of partnership and business you are involved in, different or additional concerns may need to be considered.  Partnership dissolution is not as straight forward as it may seem, especially when there is animosity among or between the partners.  In order to handle matters appropriately, and to avoid costly litigation and potential liability down the road, you should talk to an experienced business attorney. 

Please feel free to contact the business attorneys at Schneiders & Associates, L.L.P. for assistance in planning for or executing a partnership dissolution or buyout.

By Roy Schneider, Esq.

Many businesses have customer lists that they consider their own private property.  It is common, however, for sales representatives and other employees to regard customer lists as theirs too, something they can take to a new employer.

Employment agreements, confidentiality agreements, and non-solicitation agreements can all be used to eliminate confusion over whether a customer list is transferable or not.  The legal effect of these agreements are in flux and are hotly litigated at present.  It is important to have these agreements drafted by competent counsel and reviewed periodically to make sure they remain consistent with the law.

In the absence of clear contractual protections, however, case law and state “trade secret” statutes may decide whether a list is the exclusive property of a business.  If the list is a “trade secret,” a business owner may have an easier time protecting it and obtaining damages for its use by ex-employees and competitors.  47 states, including California, have adopted some version of the Uniform Trade Secrets Act, which provides for penalties and remedies for the misappropriation of trade secrets.

When is a list a trade secret?

Generally, a list receives “trade secret” protection if, first, it contains information not readily ascertainable from public sources, that is, it is a “secret”.  Merely listing customers and general contact information is usually not enough to elevate the information to trade secret status.  Customer information that has been obtained through time and expense may be considered “trade secrets”.  Also, these “trade secrets” should have independent economic value.  That is, a competitor would pay money for the information. Second, owners must usually take some measures to keep the information confidential.

What steps can a company take to ensure that a list is viewed as a trade secret?

The following are elements which, when present, can lead to a customer list being deemed a trade secret.

• The list contains unique, non-public information about each customer, such as ordering history, needs and preferences, and private phone numbers and e-mail addresses.  The more a customer list contains valuable details painstakingly compiled about each customer, the less likely a court is to say that the list could have been readily assembled from public sources.
• The list is marked “private” or “confidential,” and employees are informed that it the property of the company.
• Electronic versions of the list are password-protected, and access is limited to certain users.
• Printed copies are kept under lock and key.
• When the list is shared with third parties, there is a confidentiality agreement.
• The owner can show that time and effort was invested in building and maintaining the list.

A recent case involving former employees of an insurance company shows how these factors can influence a court.  In that case, the customer list contained more than just customer names, birthdates and drivers’ license numbers.  It also contained laboriously compiled information about the amounts and types of insurance each customer had bought, the location of insured property, the personal history of policyholders, policy termination and renewal dates, and other potentially valuable details.  The list conferred a powerful, competitive advantage and the court deemed it a “trade secret.”

Meeting the criteria spelled out in that case and in the suggestions above does not guarantee that a customer list will be deemed a protected trade secret.  It could, nonetheless, increase the odds.  California favors free and open completion and even invalidates covenants not to compete between an employer and employee.  Use of the procedures above, which merely attempt to prevent an employee from competing will be rejected by the courts.  Careful attention must be made to how best to protect your confidential, proprietary and trade secret information.  If you own a business or are an employer with information you wish to protect from employees and third parties, please make an appointment with a knowledgeable business law attorney at Schneiders & Associates, L.L.P. to review your situation.

By Roy Schneider, Esq.

There are many reasons for retaining tax records. They can be a useful guide for business planning, for tracking receipts and expenses, and in cases where the company or shares are being sold to outside parties.

The IRS expects taxpayers to keep records for as long as they are needed to administer any part of the Internal Revenue Code. In other words, if you fail to keep records, and an item in a past return is questioned, you may not have the documentation you need to defend yourself and avoid taxes and penalties. In addition, insurance companies and creditors may wish to see tax returns even after the IRS no longer does.

What is the “Period of Limitations” for a Tax Return?

Generally, you must keep records that support income and deductions for a tax return until the “period of limitations” for that return elapses. This is the period during which you can still amend your return to get a refund or credit and during which the IRS can still assess more tax. It varies depending on the circumstances surrounding each return.

• If you owe additional tax, but you haven’t seriously underpaid, committed fraud, or failed to file a return, the period is 3 years from the date taxes were filed.
• If you failed to report income that you should have reported, in excess of 25% of the gross income that you did report, the period is 6 years.
• If you filed a claim for credit or refund after you filed your return, the period is the later of 3 years after the return was filed or 2 years after tax was paid.
• If you filed a claim for a loss from worthless securities or a bad debt deduction, the period is 7 years.
• If you filed a fraudulent return or failed to file a return, the period is unlimited.

Note: Returns filed before taxes are due are treated as though they were filed on the due date.

Other Periods of Limitations

Additionally, if you are an employer, you must keep employee tax records for at least 4 years after the later of the date the tax becomes due or the date it is paid. For assets, you should keep records until the period of limitations elapses for the year in which you sell the property in a taxable transaction, which is usually 3 years. You will need records to compute depreciation, amortization, or depletion deductions and to add up your basis in the property for purposes of calculating gain or loss.

Business owners should be aware of other record keeping time periods such as for expired or terminated contracts, corporate minutes and resolutions, employee files, governmental notices and the like.  If you would like to know more about your responsibilities for record keeping and develop a document retention policy, please contact our corporate attorneys at Schneiders & Associates, L.L.P.

By Roy Schneider, Esq.

A limited liability company is a very popular business form that combines some of the best features of a corporation and a partnership.  Like a partnership, an LLC is taxed through its individual members.  Like a corporation, it provides limited liability to its members.  In most situations, the personal assets of LLC members cannot be reached for the debts or liabilities of the business.  But, also similar to a corporation, there are certain scenarios where personal assets can be reached.  Most LLCs have more than one member.  In recent years, a variation called the single member LLC has become widely used.  As the name suggests, these LLCs have only one member.  While the structure and organizational requirements of single member LLCs are essentially the same as ordinary LLCs, there has been some uncertainty as to whether these businesses afford their members the same type of limited liability.

Initially, not all states recognized single member LLCs.  Now, all fifty states and Washington, D.C. recognize these business forms and have statutes governing them.  Generally, single member LLCs provide personal asset protection to their members for the liabilities of the business.  But, they do not always provide the reverse protection that a corporation or ordinary LLC includes.  In the case of an ordinary LLC, the personal creditors of the member cannot go after that member’s share without what is referred to as a “charging order”.  A charging order is a legal device that allows the creditor to place a lien on the member’s LLC interest.  The member’s interest is essentially any distributions made to them by the LLC.  Therefore, creditors can collect the members interest but not outright and not without jumping through a number of hoops.  In the case of a single member LLC, the charging order protection may not be provided.  While some states like Wyoming have specific laws making the charging order protection applicable to these types of businesses, other states, like California and New York, have made no decisions distinguishing ordinary LLCs from single member LLCs.  Therefore, in these states it is important to remember that legislation and judicial decisions have the potential to cause serious problems for business owners in the future.

When wrestling with matters of business formation there are many factors that need to be considered and the advice of a seasoned business law attorney can help.  Contact a business attorney at Schneiders & Associates, L.L.P. for a consultation today.

By Roy Schneider, Esq.

The Immigration and Nationality Act (INA) requires employers to verify the identity of their employees and their eligibility to work in the U.S.  To comply, employers must retain original I-9 Forms for current employees and, for former employees, keep them for at least three years.  These need not be submitted to the government but must be available for inspection.  From time to time, U.S. Immigration and Customs Enforcement (ICE) ask to inspect the forms.

What Does an Inspection Entail?

An employer who receives a Notice of Inspection must produce its I-9s, usually within 3 business days, and may be asked for payroll records, employee lists, articles of incorporation, and business licenses.  ICE may ask the employer to bring the documents to an ICE field office, or officials may visit the employer.  At the inspection, in addition to printed documents, the employer must retrieve any electronically stored documents requested and provide the ICE officer with the hardware and software needed to view them.  The employer must also provide an electronic summary of information in the I-9s, if one exists.

What Happens Afterwards?

After reviewing the I-9s, ICE may send the employer one or more of the following:

• Notice of Inspection Results, also known as a compliance letter, informing a business that it is in compliance.
• Notice of Discrepancies, informing the employer of problems with the employer’s I-9s and documents submitted by the employee.  The employer must provide a copy of the notice to the employee, who then must prove to ICE that he or she is eligible to work.
• Notice of Technical or Procedural Failures, listing technical violations and giving the employer ten business days to correct them.  If not corrected in time, these failures may become “substantive “violations.”
• Notice of Suspect Documents, stating that ICE has found an employee unauthorized to work.  The employer must terminate the employee or face penalties.  ICE gives the employer and employee an opportunity to show that this finding is in error.
• Warning Notice, notifying the employer that there are substantive verification violations, but that the circumstances do not warrant a fine.
• Notice of Intent to Fine (NIF), informing an employer that it has been found to have knowingly hired and employed ineligible workers.  The employer must cease and may face fines and criminal sanctions.  An NIF may also be sent for technical errors that an employer failed to correct.

What If ICE Decides to Fine an Employer for Violations?

In response to an NIF, employers may seek a hearing before an Administrative Hearing Officer or try to reach a settlement with ICE.  If an employer does nothing, ICE will issue a Final Order.

Civil fines can be as low as $110 and as high as $1,100 for each employee, depending on mitigating and aggravating factors.  Serious violations may also lead to prosecution for knowingly hiring unauthorized workers, document fraud, harboring, and other crimes.  With the high stakes involved in being accused of I-9 violations, if you are concerned at all about your policies and procedures with respect to the employment verification process, or if you have received a Notice of Inspection, contact the employment law attorneys at Schneiders & Associates, L.L.P. as soon as possible for a review and consultation.

By Ted J. Schneider, Esq.

Corporate bylaws are a critical component in the foundation of any corporation, partnership or association. Generally, the bylaws establish the rules for internal operations and governance of your company.  While business owners have a large degree of control when it comes to the bylaws, they must be in compliance with state law. Some states have strict mandates on what information must be included, while others may not specify exactly what must be covered and there may not be a set format. In California, there are a number of default statutory provisions that will control the internal governance of your company unless you have elected to alter those default provisions with customized bylaws.  There are certain things that are typically covered in a company’s bylaws.

Bylaws often set forth what officers the company is to have, such as president, secretary and treasurer, what the duties and responsibilities are for those officers, and how the officers are elected. It will also set forth the term of office such as a one, two, or three year term. The bylaws also address the operation of the company’s board of directors. The bylaws would set forth how many board members are allowed or required and their terms of office. Most of the time, the shareholders will elect the board of directors, and then the board members will elect or appoint the officers of the company. The bylaws establish this election procedure.  Consequently, the officers report to the board, and the board reports to the shareholders.

Other matters that are often found in the bylaws include the procedure for notifying the board of an upcoming meeting and the timeline for doing so. In addition, the bylaws can establish the number of board members that are required to be present at a meeting for there to be a “quorum” in order to do business and how many votes are needed for something to be approved. One thing that likely will not be in the bylaws but you might want to consider if there will be multiple owners of the business, is a buy-sell agreement. A buy-sell agreement would outline rights and responsibilities for each owner and generally would provide the right or option for the company or other shareholders to buy out one of the co-owners’ shares.

It’s important to consult with a business law attorney to make certain that your bylaws are in compliance with all applicable state statutes, and that your company is actually following the procedures set forth in your bylaws. Your attorney may also help you identify potential pitfalls and minimize any future risks that might harm your company down the line. 

The business attorneys at Schneiders & Associates, L.L.P. can help guide you through the process of understanding, creating or amending your company’s bylaws to ensure they comport with you desires for efficient corporate governance.

By Roy Schneider

Selecting a name for your business can be challenging. It must be unique, memorable and representative of your product or service. Depending on the name you ultimately choose, you may also need to file for a DBA.

Simply defined, DBA stands for “Doing Business As.” A DBA is a fictitious business name, also referred to as an assumed business name, that differs from the personal name of the owner(s) or the official name of a registered corporation. For example, if Patricia Smith is a sole proprietor and opens her bakery under the name of Patty’s Cakes, the bakery would have an assumed name because it is not the owner’s legal name.

DBAs are a form of consumer protection, giving customers insight into the individuals or corporation that they’re really hiring or purchasing a product from. Generally speaking, there are two instances where a DBA will be needed.

1. A sole proprietor or partnership where the owner(s) names are not used.
2. An existing corporation or LLC wants to do business under a different name. This may occur when a new product is launched or the company is looking to expand into a new industry.

For sole proprietors, who operate under an assumed name, a DBA is often required to open a bank account and start accepting payments for the business. It’s important to note that a DBA is not a substitute for a trademark which requires a separate application filed with the United States Patent and Trademark Office in order to obtain federal registration rights. When filing a DBA is required, this can generally be done by completing a fictitious business names statement and filing it along with a nominal fee at the county clerk’s office. DBAs generally are valid for five years. If you are looking to start a business under a fictitious name, it’s imperative that you consult a business attorney who is familiar with the business formation laws in your county. For more information or assistance with respect to filing a DBA for your business, contact your local business attorneys at Schneiders & Associates, LLP.

By Roy Schneider, Esq.

Most business owners in the United States have heard of C-Corporations and S- Corporations but over the past few years, a new corporate form has emerged that is not yet well known – the benefit corporation (B-Corp). Unlike C and S Corporations which can be used across almost all industries for a wide range of small and large businesses, the benefit corporation was designed specifically for for-profit entities that want to benefit society by solving social or environmental problems while also benefiting the shareholders. To date, there are nearly 1000 benefit corporations around the world. A good example of a benefit corporation is Yellow Leaf Hammocks, a California-based company that sells high-quality hammocks that are hand woven by hill-tribe artisans in rural northern Thailand. While generating profit, the company also creates jobs, helping with economic development in an impoverished community.

The History of the B-Corporation

Corporate laws are largely based on one main principle: maximize shareholder value and profits. Under this model, corporate directors may actually be subject to lawsuits from shareholders should they decide to pursue social or environment goals, at the expense of increasing profits. With a shift in social consciousness towards environmental sustainability and community development initiatives, many states have passed benefit corporation legislation that seeks to establish a legal framework for companies who would like to pursue a social or environmental goal while still having a healthy bottom line.

Should You Consider a B-Corporation?

In determining the best corporate structure for your company, it’s important to note that benefit corporation legislation has not yet been passed in all fifty states, although it is permitted in California. In understanding your options it’s best to consult with a business law attorney, such as those at Schneiders & Associates, L.L.P., who can advise as to whether a B-Corp may be a good option for your company. While the regulations will vary state to state, all are based on a standard model and generally differ from any other for-profit corporation in three ways:

1. Benefit corporations must declare and continuously show their commitment to an independent, third-party cause.
2. The Board of Directors of a benefit corporation are expected (and protected) to make decisions based on their companies’ mission, not just for profit.
3. Benefit corporations may be held accountable if they abandon their commitment to the social or environmental cause on which they were founded.

While emerging companies may apply for benefit corporation status, an existing for-profit corporation can amend its certificate of incorporation with a super majority vote of the shareholders. Once a company has secured benefit corporation status, they must regularly have their activities assessed using an independent third party standard.

The Benefits of a Benefit Corporation

There are quite a few myths and misconceptions when it comes to the benefit corporation; one of these is the belief that these companies receive major tax breaks or don’t have to pay taxes at all. This is not the case; in fact, benefit corporations have no tax exemptions. Many argue that one of the key benefits in securing the status is the ability for a company to differentiate itself from competitors, highlighting its commitment to a social cause that might resonate with consumers. Some commentators believe that in the near future, large organizations and municipalities will give certain preferences to B-Corporations in awarding contracts. This is a new option in California and seems slow to catch on. However, this may become the entity of choice in the coming years. 

Whenever handling issues of incorporation, the counsel of a qualified attorney is highly recommended. In the case of the benefit corporation which is a new type of entity, working with a lawyer well-versed in in the California law governing B-Corporations and experienced in corporation formation is even more critical. An attorney can help you identify the best course of action, apply for B-Corp status and help to ensure compliance long after your company has taken off. If you think your contemplated or existing company could benefit from adopting B-Corporation status, please contact the experienced and knowledgeable business law attorneys at Schneiders & Associates, L.L.P. to learn more about this new form of doing business.