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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.
Posted in business law | 1 Response »
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
Thursday, January 20th, 2011
I was recently asked to litigate a breach of contract claim on behalf of a party who was wronged by the breach of another party to a contract. The kind of contract is immaterial for the purpose of this article. It could have been an independent contractor agreement, or employment agreement, or an asset purchase, stock purchase, non-compete, or non-solicitation agreement, or any one of a dozen other types of contracts. Regardless, as I have said previously in these posts, there are certain contractual provisions that should be found in just about every contract. What may be possibly be the single most important provision, from my perspective, happened to have been omitted from this particular contract, that is, a provision addressing the potential recovery of attorney’s fees resulting from litigation.
I say that this may be the single most important provision in a contract not in a substantive sense, as the material terms of the contract must of course be included with specificity. The services to be performed or the products to be sold are obviously vital, since without which there may be no meeting of the minds and thus no contract in the first place. And there are other material provisions related to the deal itself that must be included as well, ie the duration of the agreement, compensation, termination, etc.
But aside from the substantive points of the deal, there is not a more important procedural, boilerplate, provision than a provision addressing attorney’s fees. Why? Because in many cases, the lack of such a provision makes litigating over a contract a financially untenable idea. A party to a contract may have the facts and the law on its side. The case may essentially be a slam dunk, if such things exist. However, if at the end of the day, the damages available to the winning party only barely exceed the amount the party paid to its attorney’s to prosecute the case, then regardless of how great a case it is, the filing of a lawsuit or arbitration makes little sense from a bottom line perspective. None of us, clients or attorneys, litigate in order to achieve moral victories. If maintaining a lawsuit does not make sense from a financial point of view, then regardless of right and wrong and getting even, I always advise my clients to consider the case strictly from a business perspective, leaving aside emotion.
That is why it is such a huge benefit when a contract at issue contains a prevailing party clause with regard to attorney’s fees. This magic language allows a wronged party to sue with the understanding that if the facts and the law support her case, then she will be made whole in regard to not only the actual damages she sustained as a result of the breach of contract, but in addition, all costs, expenses and attorney’s fees she expended in litigating the matter. Please then, I ask you to review EVERY agreement your business has signed, as well as every agreement you sign from here on out, and prior to execution, include a provision similar to the following:
“In the event of litigation [or arbitration] for any matter arising out of or related to this Agreement, the party prevailing in any such action shall be entitled to recover from the losing party its reasonable attorney’s fees and all other legal costs and expenses, including filing fees, expended in the matter.”
The importance of this provision cannot be overstated, since attorney’s fees on even a fairly “routine” matter can easily run into the tens of thousands of dollars, and for more complex cases against defendants with deep pockets, it would not be a surprise to see attorneys’ fees in the hundreds of thousands of dollars.
Posted in business law, franchise law | No Responses »
Tags: arbitration, arbitration clause, asset purchase agreement, attorneys fees, attorneys fees clause, breach of contract arbitration, breach of contract case, breach of contract lawsuit, business breach of contract, business contract, business contract review, business law, business lawsuit, business litigation, confidentiality agreement, contract terms, corporate agreement, corporate litigation, covenant not to compete, franchise agreement, franchise arbitration, Franchise Disclosure Document, franchise law, franchise litigation, maryland breach of contract, maryland business, maryland business law, non solicitation agreement, operating agreement, partnership agreement, prevailing party, prevailing party clause, shareholder agreement, shareholder dispute, small business attorney, small business lawyer, stock purchase agreement
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.
Posted in business law, Uncategorized | 1 Response »
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.
Posted in business law | No Responses »
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
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.
Posted in business law | No Responses »
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.
Posted in business law | No Responses »
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
Saturday, February 20th, 2010
I frequently tell my franchise and business clients to be wary of automatically including an arbitration clause in a franchise agreement or other contract they execute. Several years ago it was savvy for a business owner or franchisor to include mandatory arbitration in their agreements. Now, many of the reasons that supported the inclusion of arbitration clauses have been diminished, making the inclusion of mandatory arbitration in many contracts a questionable strategy at best. I now advise my business and franchise clients against arbitrating disputes for the following reasons:
1. Arbitrations are not “cost-savers” like they used to be thanks to the multiple fees associated with the process. Unlike judges, arbitrators are paid by the parties on an hourly basis. It is therefore in an arbitrator’s financial interest for the case to reach a hearing, regardless of the claim’s merits. In addition, many hearings go on much longer than necessary, allowing witnesses and testimony with questionable relevance to be heard. As a result, arbitrator’s fees can be quite significant for even routine business disputes. The arbitrator’s fees are of course in addition to the fees that business clients pay to their own attorneys for handling the matter, plus the hefty filing fees that many arbitration forums charge as well. For example, the American Arbitration Association, the preeminent arbitration forum in the U.S., charges filing fees ranging from $300 to $2,500.00 for commercial arbitration disputes. Contrast these expenses with trials and other court hearings, where judges have no financial interest in prolonging a case, and filing fees are minimal.
2. The distribution of who pays the arbitrator’s and other fees can disfavor the party bringing the action. The filing party, known as the Claimant, will be responsible for paying not only the arbitration filing fees, but also its portion AND the other party’s portion of the arbitrator’s fees mentioned above should the defending party, called the Respondent, refuse to pay its share of such fees. In such a case, the Claimant must pay all fees in order for the matter to go on, yet the Respondent remains entitled to participate in the arbitration process. If the Claimant fails to pay all of the fees owed to the arbitrator, the arbitrator will likely suspend or dismiss the action entirely. Because there is no incentive for a Respondent to pay its share of an arbitrator’s compensation or other fees, the absurd ersult of the Claimant paying all fees happens more than one would think. Combined with the fees a Claimant must pay to its own attorney, it is easy to see why a business owner would question the use of arbitration in the first place.
3. Arbitrators have far more discretion to rule than judges, sometimes in spite of the evidence presented. The arbitration process is much less formal than a trial. While some informality saves the parties time and expense and speeds up the process, the biggest informality can alter the entire outcome, namely, the fact that the rules of evidence do not apply to arbitration. As a result, arbitrators are free to allow documents and testimony that is questionable as to veracity and authenticity into evidence, even though such evidence would not be permitted in a court of law. In plain terms, an arbitration hearing can literally turn into a free for all, with the arbitrator allowing all kinds of testimony and documents to be factored into an award. This sort of setting can severely hurt a business client who is relying strictly on the language of documents and the actions of the parties, while in turn favoring a party hoping for chaos, basing its case on hearsay and unsupported and unreliable accusations. [Tune in to PART 2 next week]
Posted in business law, franchise law | No Responses »
Tags: arbitrate business disputes, arbitration, arbitration clause, breach of contract case, breach of contract lawsuit, business breach of contract, business contract review, business law, business lawsuit, business litigation, commercial arbitration, corporate litigation, franchise agreement, franchise arbitration, franchise law, litigate or arbitrate?, maryland breach of contract, maryland business, maryland business law, operating agreement, shareholder agreement, shareholder dispute
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.
Posted in business law | No Responses »
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
Posted in business law | No Responses »
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
Monday, July 6th, 2009
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
Why incorporate?
The first question a Maryland prospective business owner may ask is “why should I incorporate?” The reason to incorporate one’s business is to achieve limited liability, which means that a business owner is liable to third parties only up to the amount that the individual has invested in the business. A person that owns a business individually puts all of his or her personal assets at risk in the event the business fails. By incorporating, a business owner’s personal assets are shielded from creditors of the business in the event the business is unable to meet its debts as they become due.
What form should my business take?
After making the decision to incorporate, a prospective business owner must ask “what corporate form should my business organization take?” Businesses can take the form of a corporation, partnership, or limited liability company (LLC). (As an aside, LLCs are creatures of statute that are organized, not incorporated, and therefore are not considered corporations as the term is legally defined. Nevertheless, LLCs do enjoy the same limited liability advantages as corporations and partnerships, and are therefore included as part of the discussion as what form a business should take.)
In order to determine what form your business should take, you should consult an experienced business accountant and corporate attorney, since each form of business has separate advantages and disadvantages, as well as differing tax treatment. There is no exact answer for every business owner, as each determination can be made only on the unique facts of that business owner’s situation.
Once the choice is made as to corporate form, business owners can search the Maryland SDAT website for name availability at www.sdatcert3.resiusa.org/ucc-charter/.
After determining whether a corporate name is available, forms for Articles of Incorporation (for corporations), Articles of Organization (for an LLC) and Certificate of Organization (for partnerships) can be found at www.dat.state.md.us/sdatweb/sdatforms.html#entity. The Articles must be filed with the Maryland Department of Assessments and Taxation along with the appropriate fee.
Once filed and approved, a federal tax identification number will usually be required for the business. You can obtain one electronically within 30 minutes in most cases at www.irs.gov.
Finally, with whatever business structure you choose, applicable corporate documents must be drafted to memorialize the agreement between the parties, ie a shareholder agreement for shareholders of a corporation, a partnership agreement for partners in a partnership, or an operating agreement for members of an LLC. These agreements are a pivotal step in the start-up process, as it will in many cases be the only document that defines the exact business relationship between the parties. Crafting such a document requires the expertise of a business lawyer. Other tasks that a business attorney may perform at the outset on behalf of business clients are the registration of trademarks and service marks, as well as obtaining fictional (d/b/a) names.
Need an Attorney to help your Maryland or DC business? Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com
Posted in business law | No Responses »
Tags: business formation, business incorporation, business law, business start up, maryland business, maryland business law, operating agreement, partnership agreement, shareholder agreement, what form a business shoud take, why incorporate?
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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