Category: Business & Corporate

By Roy Schneider, Esq.

Of the two common methods used when buying a business, the purchase of shares and the purchase of assets – the asset-purchase option is perhaps the least understood but in many cases the most advantageous. They offer the following benefits:

• Generally, the sale of all or most of a business’s assets requires the majority vote of the business’s shareholders, but the transaction is not subject to the appraisal rights of shareholders who did not vote in favor of the sale.
• When buying a business’s assets, a buyer can elect to purchase only selected assets. In doing so, he or she avoids exposure to liabilities and minimizes risk.
• When a buyer purchases a business’s assets he or she can allocate the purchase price among the assets to reflect the fair market value of each asset. This legal right offers two opportunities: 1) a step-up of the tax basis, 2) higher depreciation and amortization deductions, both of which lead to future tax savings.
• The avoidance of double taxation in the event the target business is an S-corporation, LLC or partnership.

The above advantages are significant but must be balanced against potential disadvantages. These include:

• Asset sales can be complex in that they typically require the consent of third parties regarding, for example, office space leasing, contract assignments and permit transfers. Since third parties may use the transaction to renegotiate contracts, delays and cost increases are often experienced.
• When buying a business or a percentage of a business, it’s often not necessary to delineate exactly what you are buying. This isn’t usually the case when purchasing a portion of assets. Instead, the buyer will likely need to define the specific assets he or she wishes to acquire. If the buyer is acquiring a subsidiary or a division, he or she typically acquires the assets that are used exclusively or primarily by that business unit. However, “shared assets” can cause legal confusion, and it’s usually necessary to negotiate their cost and transfer and/or licensure.
• If the target business is a C-corporation, it is subject to double taxation in the event of an asset sale.
• If there are any disclosed or undisclosed liabilities that the buyer is not including in the purchase, there is a risk that the transaction will violate fraudulent conveyance laws on the part of the target business, which may ultimately impact the purchaser who might be compelled to reverse the transaction.

Perhaps it’s because of these serious disadvantages that less than a fifth of all acquisitions are structured as asset purchases. Nonetheless, it makes sense to consider all options when deciding how best to structure any acquisition.

Experts predict that within the next few years many businesses will be going on the market with the retirement of baby boomers. If you are interested in acquiring an existing business, contact the business attorneys at Schneiders & Associates, L.L.P before embarking on such a venture.

By Roy Schneider, Esq.

Many people decide to start their own businesses because they’re intrigued by the idea of being their own boss.  All decisions, risks, and rewards are yours and yours alone. This equation changes, however, when you decide to start and run a business in partnership with another person. Many of the freedoms, risks and rewards are similar – but there are unique questions that business partners should ask each other to help ensure the relationship starts and continues smoothly.

Before and during the process of developing a business partnership, it is crucial to ask and answer the questions below.

1. What goals do I have for this business? What goals does my partner have? What if one partner wants to create a business that will provide income for his family for several years or decades and the other partner wants to build a company that will grow quickly and sell well? These are not necessarily incompatible goals, but it is important to get these goals onto the table to discuss how to start and run a business that might meet both partners’ goals.

2. What is each partner’s level of commitment in terms of time? You can prevent a major source of partner conflict by being explicit about how much time each of you expects to spend working on running and developing the business. Will either of you work full-time for your business at the beginning? Will either of you have other work commitments? If so, are there any situations in which that partner will close out other work or business commitments to focus more energy on this endeavor?

3. How will cash invested by partners be treated? Will cash investment be treated as debt to be repaid? Will cash investment buy a higher level of company shares? Will the debt be convertible? These questions and answers also have tax implications, so it may be wise to consult a certified public accountant along with a qualified business law attorney during your start-up phase.

4. How comfortable are we with change? Change is the only constant in any business environment, and the most successful businesses are those that are highly adaptable to change – in the market, in the economy, in the personnel, etc. That said, business partners should have a conversation about their “sticking points” – those aspects of the business that one or another partner does not want to change. One partner may be fully committed to the specific product being produced, whereas another partner may be unwaveringly dedicated to a certain market segment. Learn each other’s “sticking points” now to minimize conflict during the inevitable periods of change and adjustment as the business ages and grows.

5. How much will we pay ourselves? Who has the authority to change compensation amounts in the future? This issue is related to the question of who is investing how much cash into the business during the start-up phase. Compensation can be a volatile issue. Regardless of how difficult the conversation may be, partners must thoroughly discuss pay structure at the very beginning of a business relationship to minimize conflict down the road.

6. Who will own what percentage of the company? In other words, how will we divide the shares?  The answer to this question often depends on whether one or both partners provided cash for start-up costs, as well as the time commitment each partner plans to make.

7. Who has what kinds of decision-making authority? The answer to this question often is related to the division of shares between the partners, but this is not a requirement. You can designate shares as voting shares or non-voting shares, and you can also choose to set up a board of directors. The partners will have to decide which areas, if any, they each have individual authority over, which areas they must agree on, and which areas the board of directors will control. Common areas of decision making authority include human resources (hiring and firing), capitalization, issuance of shares, and mergers and acquisitions.

8. Will we sign contractual terms with the company in addition to the shareholder agreement and partnership agreement? Two common examples of additional contractual terms are the non-compete agreement and the confidentiality or non-disclosure agreement. If founding partners are going to sign such contracts, what will the terms of each agreement be?

9. What if one or both of us wants to leave the company? It is better to define exit procedures in the early stages of the business start-up. If no guidelines are in place, one partner’s desire to depart can cause high conflict as formerly aligned partners try to come to agreements about ending their relationship.

10. Can either of us be fired? If so, what are the grounds for termination and who has the authority to make that decision?  What is the procedure? Discuss and commit to writing your strategy for terminating the operational role of a co-founder if necessary.

11. What is our business succession plan? While it is not necessary to have a fully developed and executed business succession plan before starting a business endeavor, it should at least be a topic for discussion in the early stages. Partners may have different ideas about how control over the business will pass to others in the future, and a conversation about succession planning can reveal these differences and give each partner food for thought as a plan is developed.

Have several conversations about these topics, and you will find yourself well prepared when it comes time to put your partnership agreement into writing prior to the start of your partnership, and as you thereafter periodically evaluate the progress of your partnership in meeting your business goals.

By Rennee R. Dehesa, Esq.

If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenuptial agreement. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.

With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.

A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily. Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?

In crafting your buy-sell agreement, consider the following issues:

Triggering Events – What events trigger the provisions of the agreement? These normally include death, disability, bankruptcy, divorce and retirement.

Business Valuation – How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula. The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event. Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.

Funding – How will the departing owner be paid? Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners.  With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”). Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”). The agreement may also authorize the company to use its cash reserves to buy-out the departing owners.

If you have a small business with more than one owner that is not your spouse, a Buy-Sell Agreement can be the difference between an amicable and profitable departure from the business and one that can be very costly and speculative. See us today about creating a Buy-Sell Agreement that will benefit all owners and the Corporation.

By Roy Schneider, Esq.

Entrepreneurs must navigate through a maze of legal issues and decisions when launching a new business. At the outset, you may think some seem inconsequential – but, tragically, that would likely be your first of many mistakes. The choices you make today will have lasting effects on the viability and profitability of your new business venture. Below are some of the most common mistakes made by first-time entrepreneurs, and what you can do to avoid making them yourself.

Choosing the Wrong Business Structure

The type of business entity you select will affect your liability exposure, income tax obligations and opportunities to raise capital throughout the duration of your venture. Sole proprietorships, C-corporations, S-corporations and limited liability companies (LLC) all have their advantages and drawbacks. Sole proprietorships are simple to start up, but leave your personal assets vulnerable and offer few tax advantages. C-corporations and S-corporations shield your personal assets, and each afford different tax advantages and disadvantages. Additionally, maintaining the protection afforded by the corporate business structure requires a certain amount of record-keeping and forms which must be filed with governmental agencies. LLCs offer you liability protection, but may not be the best choice depending on various factors, including taxes, ownership structure and, in some states, professional licensure. Often, the corporate structure is the most advantageous, but this decision really should be made in consultation with a business or tax attorney.

The “Gentlemen’s Agreement” – A Handshake and Your Word

Your word may be your honor, but a written contract is the only way to be sure all parties share a mutual understanding regarding their obligations. Whether it is your best client, that independent contractor you’ve been courting, or vendors you have known for years, do not assume everything will go according to plan. Putting your agreement in writing not only ensures that everyone’s expectations are clear, it is also valuable evidence in the courtroom, should things not proceed according to plan. Bottom line – get it in writing!

Adding Partners Without a Written Agreement

It’s easy to sweep this one aside when you are passionately focused on the work of getting your business off the ground. And those new partners likely share your same passion. However, until a detailed written Partnership Agreement is drafted and signed, you may be unclear about each other’s expectations in the short term, or, if your business is wildly successful, tied up in protracted, long-term litigation, to establish who owns what (Facebook comes to mind). Redirect some of that passion, and benefit from the goodwill it creates, to negotiate a Partnership Agreement early on that covers responsibilities, ownership structure, provisions for transferring ownership, and what happens when there’s a disagreement about the direction of the company.

Sharing Ownership 50/50

Establishing equal percentages of ownership in the company sounds like a fair and reasonable arrangement. However, this type of situation makes it difficult to bring on investors, and can bring the company to a standstill if the partners cannot agree on a decision. Instead, issue shares in the company in such a manner that investors can be added later; and make sure those shares are distributed to the founders with at least a 51/49 split, giving the majority shareholder the authority to make executive decisions even if there is a stalemate.

If you believe that you may have made one of these “mistakes,” please call us and we will be glad to assist you in correcting these before they become serious problems.

Schneiders & Associates, L.L.P. is a multi-service law firm located in Oxnard, California with a focus in business and corporate related matters. 

By Roy Schneider, Esq.

A trademark or service mark is a word, name, logo, symbol or design that identifies the source of a product or service, distinguishing it from the competition. While trademarks are used to identify products, service marks are used to identify services. Both marks are afforded the same protections and subject to the same requirements.

To qualify for trademark protection, the mark must be used in commerce and it must be distinctive. Trademark law is tied to the power of Congress to regulate interstate commerce. Therefore, to qualify for federal trademark protection a mark must be used in interstate commerce. Marks used in intrastate commerce are eligible for state trademark protection. If a mark is not being used in commerce at the time a trademark application is filed, the mark may still be registered if you can establish a good faith intent to use the trademark in commerce on a future date. Nevertheless, trademark rights are awarded to the first individual or entity to actually use the mark in commerce.

The trademark must also be sufficiently distinctive to identify and distinguish the goods or services from those of other sources. Distinctiveness generally falls within one of four categories: 1) arbitrary or fanciful; 2) suggestive; 3) descriptive; and 4) generic.

A trademark categorized as arbitrary or fanciful, or suggestive, is automatically considered to be inherently distinctive, and the exclusive right to use the mark is determined solely based on who was first to use the mark in commerce. Descriptive trademarks are only protected if the mark has acquired secondary meaning to members of the public. If the mark merely describes the type of product or service, it will not stand out and leave an impression in the minds of consumers. Generic terms are ineligible for any trademark protection. A trademark may be generic at the outset, or it can become generic over time through common usage, such as “aspirin”.

Trademarks can be registered at either the federal or state level, depending on whether the product or service will be sold across state lines or within one state only. Registration is not required for trademark protection, but there are significant advantages to registration. Registration puts the public on notice that the mark is used to identify a particular good or service. Under federal law, a registered trademark can achieve incontestable status following five years of continuous use. Under state law in most jurisdictions, even unregistered trademarks are protected under unfair competition laws.

Trademarks that are registered at the federal level are permitted to use the ® designation. Absent registration with the U.S. Patent and Trademark Office, trademark owners can use the letters “TM” or “SM” in conjunction with the mark, to alert the public of the owner’s claim to the mark.

Trademark owners are obligated to protect the mark by taking legal action against any infringers, regardless of how insignificant the infringement may seem. Owners must be consistent in asserting and defending their rights to the mark. Failure to do so could result in a waiver of the right to enforce the mark.

Don’t compromise your rights in your trademark or service mark. Contact us today for guidance throughout the registration and renewal processes and in preserving your rights against those who infringe on your mark(s). 

Schneiders & Associates, L.L.P. is a multi-service law firm located in Oxnard, California with a focus in intellectual property related matters.

By Roy Schneider, Esq.

Many business owners establish corporations to shield themselves from personal liability for business debts and protect their personal assets from creditors of the company. When established and maintained properly, a corporation is treated under the law as an independent entity, with many of the rights afforded to individuals. Such rights include the ability to own and transfer property, enter into contracts, obtain funding and to initiate legal action. A corporation is a separate, distinct entity, apart from its shareholders; as a result, only the corporation’s assets can be seized to pay judgments or satisfy other debts owed by the company.

However, the liability protection afforded by the corporate business structure is only available if the integrity of the corporation as a separate entity is respected by the courts and taxing authorities. Certain corporate formalities must be observed in order to preserve the corporation’s status as a separate entity apart from its owners. Failure to comply with these requirements may permit creditors to “pierce the corporate veil” and seek payment from the individual shareholders directly. To ensure the corporate veil remains intact, the corporation must act like a separate and distinct entity, and the shareholders must treat it as such. If certain corporate formalities are not consistently observed, a court may find that the corporation is merely an “alter ego” of the individual owner(s), and the corporate structure may be “disregarded”. When this occurs, the corporate veil is pierced and the individual shareholders can be held personally liable for the debts of the company.

Formalities that must be observed in order to preserve the integrity of the corporation and ensure the protection afforded by the corporate veil remains intact include:

Corporate Records

The corporation’s financial and corporate records must be documented. Most states also require that the shareholders and the directors meet at least once per year. A record of these meetings, in the form of minutes or written resolutions must be properly executed and maintained by the company.

Commingling of Assets

The corporation and the shareholders must treat themselves as separate entities. The corporation should have its own bank and credit card accounts. Business owners should clearly document and account for expenditures made from corporate accounts if they were for personal benefit.

Capitalization

The corporation must be fully capitalized, or funded. This is typically accomplished by selling shares. Even in a one-person corporation, that individual shareholder must purchase his or her shares of stock in the company.  The corporation should also avoid becoming intentionally insolvent by transferring assets to the shareholders if it is likely that such transfer will inhibit the corporation’s ability to meet its financial obligations.

Failure to Pay Dividends

Payment of dividends is neither required, nor appropriate in every situation. However, if the payment of dividends is appropriate, or required, and the corporation fails to pay them, this could suggest that the corporation is actually an alter ego and not a separate legal entity.

If you have a corporation or a contemplating setting up a corporation, you should take all steps necessary to make sure you obtain the legal protections afforded because of such entity.  The business law attorneys at Schneiders & Associates, L.L.P. will be pleased to meet with you to discuss how to best protect your assets by proper use of the corporate form.

By Roy Schneider, Esq.

Which entity is best for your business depends on many factors, and the decision can have a significant impact on both profitability and asset protection afforded to its owners. Below is an overview of the most common business structures.

Sole Proprietorship

The sole proprietorship is the simplest and least regulated of all business structures. For legal and tax purposes, the sole proprietorship’s owner and the business are one and the same. The liabilities of the business are personal to the owner, and the business terminates when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.

General Partnership

A partnership consists of two or more persons who agree to share profits and losses. It is simple to establish and maintain; no formal, written document is required in order to create a partnership. If no formal agreement is signed, the partnership will be subject to state laws governing partnerships. However, to clarify the rights and responsibilities of each partner, and to be certain of the tax status of the partnership, it is important to have a written partnership agreement.

Each partner’s personal assets are at risk. Any partner may obligate the partnership, and each individual partner is liable for all of the debts of the partnership. General partners also face potential personal legal liability for the negligence of another partner.

Limited Partnership

A limited partnership is similar to a general partnership, but has two types of partners: general partners and limited partners. General partners have broad powers to obligate the partnership (as in a general partnership), and are personally liable for the debts of the partnership. If there is more than one general partner, each of them is liable for the acts of the remaining general partners. Limited partners, however, are “limited” to their contribution of capital to the business, and must not become actively involved in running the company. As with a general partnership, limited partnerships are flow-through tax entities.

Limited Liability Company (LLC)

The LLC is a hybrid type of business structure. An LLC consists of one or more owners (“members”) who actively manage the company’s business affairs. The LLC contains elements of both a traditional partnership and a corporation, offering the liability protection of a corporation, with the tax structure of a sole proprietorship (if it has only one member), or a partnership (if the LLC has two or more members). It’s important to note that in certain states, single-member LLCs are not afforded limited liability protection.

Corporation

Corporations are more complex than either a sole proprietorship or partnership and are subject to more state regulations regarding their formation and operation. There are two basic types of corporations: C-corporations and S-corporations. There are significant differences in the tax treatment of these two types of corporations, however, they are both generally organized and operated in a similar manner.

Technical formalities must be strictly observed in order to reap the benefits of corporate existence. For this reason, there is an additional burden of detailed recordkeeping. Corporate decisions must be documented in writing. Corporate meetings, both at the shareholder and director levels, must be formally documented.  

Corporations limit the owners’ personal liability for company debts. Depending on your situation, there may be significant tax advantages to incorporating.