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Tuesday, February 8th, 2011
A Stock Purchase refers to the sale and purchase of an ownership interest in an entity like a corporation, partnership or limited liability company. The Seller sells, and the Buyer purchases, all or part of the outstanding shares of stock in a corporation, or all or part of the membership interest in an LLC or partnership, as well as all of the existing assets and liabilities of the entity. This includes the name and goodwill of the business, which oftentimes can be valuable. The existing entity itself does not change. Rather, the owners of the stock or membership interest in the entity change from Seller to Buyer, while the entity itself continues uninterrupted.
In a Stock Purchase, unless agreed otherwise, the Seller is absolved of any obligations or liabilities stemming from its prior ownership interest in the entity, as the Purchaser becomes the owner of not only the assets of the entity, but likewise the debts and obligations as well. For this reason a Seller will generally prefer a Stock Purchase over an Asset Purchase, as a Stock Purchase allows the Seller to walk away from the business without the fear of future debts, liabilities or obligations of the business. For the Purchaser of stock in such a transaction, I cannot stress how important it is to perform the maximum amount of due diligence it can, in order the possibility of assuming any unintended or unknown liabilities and obligations, since such liabilities should have or could have been known.
Unlike a Stock Purchase, an Asset Purchase involves, as the name implies, the purchase and sale of only the assets of a particular business, without the purchase or sale of any stock or other ownership interest in the company. The Purchaser buys, and the Seller sells, only the specific assets identified in the governing document, named the Asset Purchase Agreement. Any assets not included in the Asset Purchase Agreement remain the property of Seller. The Buyer must create a new entity that will own the purchased Assets, or use an already existing entity for the transaction.
The Seller of assets retains ownership of the shares of the stock or other membership interest in the business, and as a result the Seller also retains any existing or future obligations and liabilities of such business, except those specifically transferred to the Buyer as part of the sale. For this reason a Purchaser will normally prefer an Asset Purchase to a Stock Purchase. This way, the Buyer obtains only the specific assets which it desired to purchase, and which debts, obligations and liabilities it is assuming, if any.
An additional cost that may be necessary in an Asset Purchase is the need to possibly transfer ownership of certain assets used in or by the business, and/or assign leases and other third party contracts to which Seller was a party.
There are many tax issues that must be addressed when deciding between a Stock Purchase an Asset Purchase. I advise my clients to see the advice of an accountant for such issues.
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Tags: asset purchase agreement, breach of contract case, business contract review, business formation, business incorporation, business law, business litigation, business start up, Buy a Franchise, buy sell, buy-sell agreement, corporate bylaws, corporate formation, corporate lawyer, limited liablity company, LLC, LLC sale, maryland breach of contract, maryland business, maryland business law, operating agreement, purchase a franchise, sale of assets, sale of corporation, shareholder agreement, small business, small business lawyer, stock purchase agreement, stockholder dispute, why incorporate?
Wednesday, January 26th, 2011
A local business owner came to me recently in order to appeal MDOT’s denial of an application for Maryland DBE/MBE certification. Since I had never before read an MDOT denial opinion, there were several interesting issues raised by MDOT that I thought were worth discussing.
1. Ownership – The owners of the business are a husband and wife, and the wife applied as the majority owner of the business for MBE Certification. MDOT focused in part in denying the application on the fact that when the woman owner invested capital in the business at the outset, that her investment came from a credit card jointly held with her husband, and that the credit card balance was eventually paid in full from a jointly held checking account owned by her and her husband. Careful legal drafting of the Articles of Incorporation, and legal advice with regard to who funds the business and how it was funded, would have gone a long way at the outset in potentially avoiding MDOT’s rejection of this application.
2. Control – With regard to control, MDOT focused on two issues: i) the woman owner unquestionably has to be able to prove that she exercises control over the day-to-day operation and management of the company, and has an overall understanding, competence and experience in the business; and ii) the corporate documents, including the Articles of Incorporation, Bylaws, and Shareholder Agreement or Operating Agreement cannot in any way restrict or limit the woman owner’s ability from making the business decisions of the company without the cooperation of the non-disadvantaged owner. In this instance, the company’s Bylaws gave the non-minority owner the same voting rights as the disadvantaged owner, so that she was effectively precluded from making business decisions unilaterally. Properly drafted Bylaws may have avoided this problem.
Reading the opinion as a whole, MDOT focused on several issues which, while separately may not have added up to much, when combined, raised enough questions in MDOT’s mind so as to justify the denial of the business’s DBE/MBE application. The good news is that many of these issues can be avoided with careful legal drafting at the outset.
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Tags: business formation, business incorporation, business law, business start up, corporate bylaws, corporate formation, DBE, DBE application, DBE certification, Disadvantaged Business Enterprise, government contracting, government contracts, maryland business, maryland business law, maryland government contracting, MBE, MBE application, MBE certification, MBE/DBE, mdot certification, minority business, minority business enterprise, minority owned business, montgomery county government contracting, operating agreement, shareholder agreement, small business attorney, small business lawyer, uniform certification application, woman owned business, Women's Business Enterprise
Wednesday, October 6th, 2010
Maryland law does not require that a sole member limited liability company (“LLC”) have an existing, enforceable operating agreement on file. Nevertheless, there is an excellent reason to draft and execute one: by executing an LLC operating agreement, the single member of the LLC has drawn a line of protection guarding that person against personal liability for the business debts and obligations of the LLC.
Specifically, Maryland courts have held that the protection from liability that exists by virtue of the LLC’s formation can disintegrate if the LLC fails to observe certain corporate formalities. One of these formalities is the existence of a valid operating agreement. Having an operating agreement in place can protect the single member from liability when a third party attempts to sue the individual member in order to satisfy an obligation resulting from a debt of the LLC.
Without an operating agreement, it may prove more difficult for the sole member to avoid liability. Courts sometimes blur the line between a sole member LLC with its protection from liability for its individual owners, and a sole proprietorship where such protection does not exist. However, this line becomes more clear cut, and courts will as a result hesitate to “pierce the corporate veil” and hold an individual liable for the LLC’s debts, when corporate formalities like having an operating agreement are complied with.
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Tags: benefits of LLC, business contract review, business formation, business law, business name registration, business start up, corporate bylaws, corporate formation, corporate start up, limited liability company operating agreement, limited liablity company, LLC, llc agreement, llc operating agreement, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholder dispute, shareholders' agreement, single member limited liability company, single member llc, small business, small business attorney, small business lawyer, small business needs
Tuesday, August 24th, 2010
Click this link to view an excellent powerpoint presentation discussing the application process for Maryland Minority Business Enterprise status as found on the Maryland Transit Administration website:
http://mta.maryland.gov/business/advertisingwithmta/MBE%20Certification%20Power%20Point%20Presentation.pdf
Please contact me if you need assistance with your MBE certification.
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Tags: business formation, business incorporation, business law, business name registration, business start up, corporate formation, corporate start up, DBE application, DBE certification, government contracting, government contracts, limited liablity company, maryland business, maryland business law, maryland government contracting, MBE, MBE application, MBE certification, MBE/DBE, minority business, minority business enterprise, minority owned business, montgomery county government contracting, operating agreement, shareholder agreement, small business, small business attorney, small business lawyer, small business needs, woman owned business
Tuesday, August 24th, 2010
If you are a minority-owned business, (at least 51% owned by a member(s) of one or more of the following groups: African American/Black, Female, Asian Pacific, Hispanic, Subcontinent Asian, American Indian/Native American?), and you wish to do business with Montgomery County, the State of Maryland, or the federal government, you should consider filing for MBE/DBE certification. The following is from the Maryland DOT website:
The Maryland Department of Transportation’s (MDOT) Office of Minority Business Enterprise has two primary functions: Minority Business Enterprise (MBE)/Disadvantaged Business Enterprise (DBE) certification for the State of Maryland and the administration and coordination of the MBE and DBE programs within the MDOT administrations.
To ensure that only bona fide MBEs/DBEs participate in the programs, Maryland has a comprehensive certification program. Only those businesses determined to be owned and controlled by socially and economically disadvantaged individuals are certified. A firm designated as an MBE and/or DBE will have its name appear in the MBE/DBE Directory, a reference document made available on the Internet to all State departments/agencies, the contracting community and the general public.
Recognizing that the potential for MBE/DBE participation is dependent upon several variables, each MDOT administration examines its respective contracts/purchase orders and establishes specific goals on a contract-by-contract basis. Procedures are followed to assure that an award of a contract is not made until a prime contractor has met the MBE/DBE goal(s) or has demonstrated a good faith effort to meet the MBE/DBE goal(s).
After a contract has been awarded, MBE/DBE participation is closely monitored by key personnel within each administration. Monitoring includes a review of the subcontract financial transactions, and visits to the job-site to verify actual work being performed by the MBE/DBE firm. The standards for MBE/DBE compliance are spelled out in the MBE/DBE Program Manual. Any deviation from compliance standards is documented and if it is not corrected, sanctions may be applied against the contractor and subcontractor(s). The MBE/DBE Program Manual identifies the sanctions which may be instituted.
Periodically, MDOT revises the MBE/DBE Program Manual for improvements and to include any applicable changes in federal and/or State regulations or laws. Persons having an interest in the program may find this guide helpful in understanding MDOT’s MBE/DBE Program. Copies of the complete Program Manual are available online in Adobe PDF format or at the following address for a nominal fee:
Maryland Department of Transportation
Office of Minority Business Enterprise
7201 Corporate Center Drive
Hanover, MD 21076
410 865-1269 or 1-800-544-6056
TTY 410 865-1342
http://www.mdot.maryland.gov/
To view the Uniform Certification Application to get certified as a Maryland minority-owned businesses, click:
http://www.mdot.maryland.gov/MBE_Program/Documents/DEEO-50%20Uniform%20Certification%20Applic.pdf
To see what documents need to accompany the application, click the following if you are a corporation:
http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-CORP0710.pdf
Click the following if you are a limited liability company (LLC)
http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-LLC0710.pdf
If you need assistance with your MBE application, please contact me.
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Tags: business formation, business law, business lawsuit, business name registration, business start up, corporate formation, corporate start up, DBE certification, government contracting, government contracts, maryland business, maryland business law, MBE application, MBE certification, MBE/DBE, minority business, minority business enterprise, minority owned business, shareholders' agreement, woman owned business
Tuesday, August 24th, 2010
Many of my woman-owned business clients want information dealing with the certification process in order for their businesses to get certified in Maryland as a woman-owned business.
If you are a woman-owned business and you want to do business with Montgomery County or the state of Maryland, check out the following link from the Montgomery County Department of Economic Development website which contains a ton of useful information:
http://www.montgomerycountymd.gov/dedtmpl.asp?url=/content/ded/ tech_transfer/bew_resources.asp
As you will see, the available information is extremely beneficial, including information on business coaching roundtables, networking events, the local small business reserve program, the technology women’s network, and of course, how to get the certification process started as a woman-owned business.
If you need assistance with the woman-owned business certification process, please contact me.
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Tags: business formation, business incorporation, business law, business start up, corporate formation, corporate start up, DBE, DBE application, DBE certification, Disadvantaged Business Enterprise, government contracting, government contracts, limited liablity company, LLC, maryland business, maryland business law, maryland government contracting, MBE, MBE application, MBE certification, MBE/DBE, minority business, minority business enterprise, montgomery county government contracting, operating agreement, shareholder agreement, small business, small business attorney, small business lawyer, uniform certification application, woman owned business, Women's Business Enterprise
Wednesday, July 28th, 2010
Start-up companies many times do not know the extent of their legal and other needs after forming a business. The drafting and filing of Articles of Incorporation or Articles of Organization are just the beginning of your company’s service needs. I recommend that each new business owner immediately reach out to establish relationships with the myriad of services providers your business needs, now and in the future. Such service providers include many of the following:
– a corporate law attorney specializing in employment, contracts, intellectual property, litigation and other corporate issues;
– a CPA for your business accounting and tax services;
– an insurance broker for your business liability, E&O, and other insurance needs;
– a banker with whom you have a personal relationship with;
– a financial advisor for your 401K, retirement and other accounts;
– an IT services firm to be on call for your computer networking needs;
– a payroll company to handle weekly payroll and taxes for your employees; and
– a company to develop your website, and then focus on your internet advertising, search engine optimization, and other advertising needs in order to properly publicize your business over the internet.
Please don’t hesitate to contact me should you need referrals in any of the above areas.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business formation, business incorporation, business law, business lawsuit, business litigation, business name registration, business start up, corporate bylaws, corporate formation, corporate litigation, corporate start up, limited liablity company, maryland breach of contract, maryland business, maryland business law, new business formation, new business start up, operating agreement, shareholder agreement, small business attorney, small business lawyer, small business needs, start new business
Monday, April 12th, 2010
In a recent Maryland Federal District Court Case, Antonio v. SSA, LLC, (2010) it was held that the parent of a company may not be held liable in Maryland for the acts of a subsidiary corporation under the corporate veil piercing doctrine without a showing of fraud or a necessity to enforce a paramount equity.
While the parent company, in this case ABM, did have control over the operations of the subsidiary company SSA, Inc., for example: (1) ABM owned 100% of the voting securities in SSA, Inc., (2) SSA, Inc. does not hold annual board meetings, keep corporate minutes, or conduct its own audits, and (3) all but one of SSA, Inc.’s officers are ABM’s officers, the Court held that control was by itself not enough to hold the parent company AMB liable and justify piercing the corporate veil.
The Court required that in order to hold the parent liable for the acts of the successor, the plaintiff mush show fraud on the part of the parent, or necessity to enforce a paramount equity. The court did not define what in this case would have amounted to a paramount equity, only stating that in this case none existed.
To read a comprehensive blog of all of the issues address by the court in this case, visit the blog of the Business Law Section of the Maryland State Bar Association at http://marylandbusinesslawdevelopments.blogspot.com/search/label/corporate%20veil.
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Tags: business formation, business incorporation, business law, business lawsuit, business litigation, business start up, corporate bylaws, corporate formation, corporate litigation, corporate parent, limited liablity company, LLC, maryland business, maryland business law, parent company, parent subsidiary, subsidiary corporation
Monday, January 11th, 2010
I often am asked by business clients how to address the circumstances surrounding the transfer of ownership if one of the owners dies, becomes disabled, or whose employment in the business is terminated for-cause? The answer is through the use of language addressing buy-sell situations that are included in an Operating or Shareholder Agreement.
A carefully drafted buy-sell provision will address the buyout of a deceased or disabled owner’s share of the business, usually through the use of the proceeds of life and disability insurance policies taken out by the business on the lives of the owners. A buy-sell provision will also address termination of an owner’s employment with the business for-cause. A sample buy-sell paragraph will read something like the following:
Sale of Shares on Death, Disability or Termination of Employment. If, during the term of this Agreement: a) a Shareholder dies or becomes permanently disabled (meaning the Shareholder becomes unable to carry out his duties as a Director or Officer of the Company for a period of 90 consecutive days or more); or b) a Shareholder who is also an employee of the Company has his or her employment terminated by Company for-cause, then the Company shall buy, and the Shareholder, his estate or the named representative of the Shareholder shall sell, the Shares of said Shareholder to the Company.
A buy-sell provision will go on to address how to arrive at the price at which an owner’s shares may be sold for, as well as whether such price will vary depending on the circumstances surrounding the owner’s departure from the business.
A buy-sell provision will also address an owner’s potential divorce, so as to prevent remaining owners from having to own and operate the business with the spouse or other family member of a former owner.
Every LLC Operating Agreement and Corporate Shareholder Agreement should address the buy-sell provisions referenced above. This will go a long way towards solving many potential disputes involving circumstances associated with the transfer of ownership of a business before they arise.
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Tags: business formation, business incorporation, business law, business start up, buy sell, buy-sell agreement, corporate formation, corporate start up, death of business owner, disability of business owner, limited liablity company, LLC, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholder dispute, shareholders' agreement, stockholder dispute
Monday, September 14th, 2009
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
Limited Liability
Limited liability companies (“LLCs”) have become increasingly popular over the past several years as alternatives to corporations because they legally enjoy the same limited liability advantages as corporations, while also providing certain tax benefits that not all corporations do. LLCs, corporations, and most partnerships shield their owners from liability for the actions of the entity. So regardless of the corporate form, owners of these entities will rarely be held liable for the debts and other actions taken by the corporation.
The reason that LLC’s have increased in popularity is because members of an LLC garner pass-through tax advantages similar to what partners receive in a partnership. While owners of a corporation face “double-taxation,” first at the net income of the corporation and second at the individual shareholder level on the dividends the shareholders receive, LLC members are taxed only once, at the individual level on the profits they receive. With all else being equal, this tax savings is the main reason that a start-up entity will choose to go the LLC route as opposed to the corporation route.
In most other respects, LLCs are similar in nature to corporations. An LLC is suitable for one or several owners, called “members.” As a partnership agreement governs the partners’ relationship and a shareholders’ agreement governs the shareholders in a corporation, a properly drafted LLC operating agreement sets out the rights, duties, obligations and remedies of the LLC’s members.
A managing member, designated in the operating agreement, runs the day to day operations of the LLC, and there can be more than one managing member if desired by the members. LLCs may, but are not required to, appoint officers of the LLC. Members of an LLC may consist of individuals, corporations, other LLCs, or a mixture of each.
Persons desiring to form an LLC in Maryland can search the Maryland SDAT website for name availability at www.sdatcert3.resiusa.org/ucc-charter.
After determining whether a name is available, forms for an LLC’s Articles of Organization can be found at www.dat.state.md.us/sdatweb/sdatforms.html#entity.
Just remember to consult an experienced Maryland business attorney before you get started.
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
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Tags: benefits of LLC, business contract review, business formation, business incorporation, business name registration, business start up, corporate bylaws, corporate formation, corporate start up, limited liablity company, LLC, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, shareholders' agreement
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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