Written by Raymond McKenzie on February 24th, 2020
1.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.
2.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.
3.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.
4.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.
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Tags: business contract review, business formation, business incorporation, business law, business start up, corporate formation, corporate start up, maryland business, maryland business law, operating agreement, shareholder agreement, small business attorney, small business lawyer
Written by Raymond McKenzie on February 24th, 2020
Business clients often confuse the above terms, each of which protect business owners from a different type of harm. I will summarize the three types of agreements below.
Non-compete agreement:
A covenant not-to-compete is an agreement whereby a party agrees not to compete against another party: 1) in a specific line of business; 2) for a definite period of time; 3) in a limited geographic area.
A non-compete agreement is usually found as part of a broader contract, such as an employment agreement or franchise agreement, and will take effect upon termination of the contract. Maryland courts allow a covenant not-to-compete to be enforced provided it is “reasonable” in the activity it restricts, as well as in its geographic scope and duration. A typical non-compete looks something like the following:
“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from acting, directly or indirectly, as an owner, manager, operator, consultant or employee of any business or business activity that is in the business of providing services similar to or competitive with Company.”
Non-disclosure agreement:
A non-disclosure, or confidentiality, agreement (“NDA”), is an agreement whereby a party pledges not to disclose the confidential and proprietary information of another party. NDA’s are commonly used to protect confidential information not generally made available to the public such as trade secrets, customer lists, business and marketing plans and strategy, and financial information, so that such information does not fall into the hands of competitors or even the public at large. NDA’s can be found in many employment and independent contractor agreements, as well as agreements where businesses are performing due diligence on one another prior to some type of relationship commencing.
Unlike the situation where covenants not-to-compete must be reasonable in all areas, non-disclosure agreements will be enforced by Maryland courts unless the person or company that is alleged to have violated the NDA is able to show that it learned of the confidential information from an independent, outside source. Whatsmore, an NDA need not contain any geographic or time restrictions in order to be valid and enforceable.
A typical NDA will look like this:
“Employee acknowledges that Company may, in the course of Employee’s employment, provide Employee access to Company’s trade secrets, customer lists, business and marketing plans, financial information, and other confidential information related to the business of Company, including access to Company’s Employment Manual (the “Manual”). Employee agrees to retain all such information as confidential and may not use such confidential information on his or her own behalf or disclose such confidential information to any third party during or at any time after the term of Employee’s employment.”
Non-solicitation agreement:
A non-solicitation agreement is an agreement whereby a party pledges not to solicit the clients and customers of another party. Non-solicitation agreements are generally found in employment and independent contractor agreements, as well as vendor arrangements where one party is granted access to the clients list of another party.
Like an NDA, a non-solicitation agreement need not contain any geographic or time restrictions in order to be valid and enforceable in Maryland. A common form of non-solicitation agreement follows:
“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from soliciting business from, or performing services for, or inducing or attempting to induce, any customer or client of Company, its subsidiaries or affiliates, to cease doing business with Company, or in any way interfering with the relationship between Company and any customer or client of Company.”
Many business contracts will contain one or more of the above agreements. It is therefore important to be able to distinguish among them, and draft contracts that are specific to your business needs. Contact a business lawyer for advice.
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Tags: breach of contract case, business contract review, business formation, business incorporation, business law, business lawsuit, business litigation, corporate bylaws, corporate formation, corporate litigation, covenant not to compete, maryland business, maryland business law, non solicitation agreement, operating agreement, shareholder agreement, small business attorney, small business lawyer
Written by Raymond McKenzie on February 24th, 2020
I am often asked by clients who own their own businesses 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 well-drafted 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: breach of contract lawsuit, business contract review, business formation, business incorporation, business law, business litigation, business start up, corporate bylaws, corporate formation, corporate start up, maryland business, maryland business law, operating agreement, shareholder agreement, small business attorney, small business lawyer
Written by Raymond McKenzie on February 24th, 2020
The Payment Requirement required for a license to be deemed a franchise:
The last of the three definitional elements of a franchise covered by the FTC Franchise Rule is that purchasers of the business arrangement must be required to pay to the franchisor as a condition of obtaining a franchise or starting operations, a sum of at least $500 at any time prior to or within the first six months of the commencement of operations of the franchised business.
Here is what the FTC Franchise Rule states on the “Required Payment” element, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf.
As to what constitutes a payment, the term “payment” is intended to be read broadly, “capturing all sources of revenue that a franchisee must pay to a franchisor or its affiliate for the right to associate with the franchisor, market its goods or services, and begin operation of the business. Often, required payments go beyond a simple franchisee fee, entailing other payments that the franchisee must pay to the franchisor or an affiliate by contract – including the franchise agreement or any companion contract. Required payments may include: initial franchise fee, rent, advertising assistance, equipment and supplies (including such purchases from third parties if the franchisor or its affiliate receives payment as a result of the purchase), training, security deposits, escrow deposits, non-refundable bookkeeping charges, promotional literature, equipment rental and continuing royalties on sales. Payments which, by practical necessity, a franchisee must make to the franchisor or affiliate also count toward the required payment. A common example of a payment made by practical necessity is a charge for equipment that can only be obtained from the franchisor or its affiliate and no other source.”
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Tags: Buy a Franchise, buying a franchise, buying a franchised business, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise dispute, franchise law, franchise lawyer, franchise litigation, franchise your business, franchisee, FTC Franchise Rule, Maryland franchise registration, selling a franchise
Written by Raymond McKenzie on February 24th, 2020
Here is what the FTC Franchise Rule states on the “Significant Control or Assistance” element of a franchise relationship, directly from the FTC website at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf.
“The FTC Franchise Rule covers business arrangements where the franchisor will exert or has the authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.”
The relevant question is when does such control become significant.
“The more franchisees reasonably rely upon the franchisor’s control or assistance, the more likely the control or assistance will be considered “significant.” Franchisees’ reliance is likely to be great when they are relatively inexperienced in the business being offered for sale or when they undertake a large financial risk. Similarly, franchisees are likely to reasonably rely on the franchisor’s control or assistance if the control or assistance is unique to that specific franchisor, as opposed to a typical practice employed by all businesses in the same industry.
Further, to be deemed “significant,” the control or assistance must relate to the franchisee’s overall method of operation – not a small part of the franchisee’s business. Control or assistance involving the sale of a specific product that has, at most, a marginal effect on a franchisee’s method of operating the overall business will not be considered in determining whether control or assistance is “significant.”
For the sake of the Rule, significant types of control include:
-site approval for unestablished businesses;
-site design or appearance requirements;
-hours of operation;
-production techniques;
-accounting practices;
-personnel policies;
-promotional campaigns requiring franchisee participation or financial contribution;
-restrictions on customers; and
-locale or area of operation.
Significant types of assistance include:
-formal sales, repair, or business training programs;
-establishing accounting systems;
-furnishing management, marketing, or personnel advice;
-selecting site locations;
-furnishing systemwide networks and website; and
-furnishing a detailed operating manual.
The following activities will not constitute significant control or assistance:
-Promotional activities, in the absence of additional forms of assistance; [This includes furnishing a distributor with point-of sale advertising displays, sales kits, product samples, and other promotional materials intended to help the distributor in making sales. It also includes providing advertising in such media as radio and television, whether provided solely by the franchisor or on a cooperative basis with franchisees.
-trademark controls designed solely to protect the trademark owner’s legal ownership rights in the mark under state or federal trademark laws (such as display of the mark or right of inspection);
-health or safety restrictions required by federal or state law or regulations;
-agreements between a bank credit interchange organization and retailers or member banks for the provision of credit cards or credit services; and
-assisting distributors in obtaining financing to be able to transact business.”
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Tags: buying a franchise, buying a franchised business, franchise agreement, Franchise Disclosure Document, franchise dispute, franchise law, franchise litigation, FTC Franchise Rule, Maryland franchise registration, selling a franchise
Written by Raymond McKenzie on February 24th, 2020
Often times I have prospective franchisor clients, that is, clients who believe they have a business concept that can be expanded possibly through licensing or franchising, ask me to explain the differences between licensing and franchising from a legal perspective. Inevitably, the conversation turns to an explanation from the client as to why the concept is not truly a franchise after all. As I have explained on this blog previously, while there certainly are relationships that are true licenses, more often than not, many licensing relationships are indeed nothing more than disguised franchises.
Here is what the FTC Franchise Rule states on the issue, directly from the FTC website found at http://www.ftc.gov/bcp/edu/pubs/business/franchise/bus70.pdf. The FTC Franchise Rule covers the offer and sale of franchises. As under the original Rule, a commercial business arrangement is a “franchise” if it satisfies three definitional elements.
“Specifically, the franchisor must: (1) promise to provide a trademark or other commercial symbol; (2) promise to exercise significant control or provide significant assistance in the operation of the business; and (3) require a minimum payment of at least $500 during the first six months of operations.”
Be aware that the name given to the business arrangement is irrelevant in determining whether it is covered by the amended Rule.
“With regard to the trademark element, a franchise entails the right to operate a business that is “identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark.” The term “trademark” is intended to be read broadly to cover not only trademarks, but any service mark, trade name, or other advertising or commercial symbol. This is generally referred to as the “trademark” or “mark” element.
The franchisor need not own the mark itself, but at the very least must have the right to license the use of the mark to others. Indeed, the right to use the franchisor’s mark in the operation of the business – either by selling goods or performing services identified with the mark or by using the mark, in whole or in part, in the business’ name – is an integral part of franchising.
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Tags: Buy a Franchise, buying a franchise, buying a franchised business, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, Franchise Disclosure Document, franchise dispute, franchise law, franchise lawyer, franchise litigation, franchise your business, FTC Franchise Rule, maryland business law, Maryland franchise registration
Written by Raymond McKenzie on February 24th, 2020
A Maryland corporation or LLC need only file Articles of Incorporation/Organization with Maryland Department of Assessment and Taxation in order be lawfully incorporated. Once formed, it is advisable that every Maryland entity consult with a Maryland business attorney to discuss the drafting of a set of Bylaws, as well as a shareholders’ agreement or operating agreement.
Maryland law mandates that each Maryland corporation must have a set of Bylaws that lay out the procedures concerning the governance of the corporation. A Maryland corporation’s Bylaws may contain any provision not inconsistent with law or the charter of the corporation for the regulation and management of the affairs of the corporation.
A Maryland corporation’s Bylaws usually set out the powers, duties, rights and obligations of its directors and officers, including how many directors the corporation may have, the procedure for calling shareholder and Board of Director meetings, how and where corporate records are to be maintained, stockholder reports, voting and proxy procedures, how stock may be transferred, how directors are elected and removed, how officers are appointed and removed, as well as numerous other matters related to the corporation as a whole.
A Maryland corporation may, but is not required to, have a shareholders’ agreement. A shareholders’ agreement is an agreement between the stockholders of a corporation that governs the rights and obligations of the shareholders. First and foremost, a shareholders’ agreement will state the individual equity in the corporation as held by the shareholders. A shareholders’ agreement typically states how new shares of stock are issued, and addresses issues surrounding restrictions on stock repurchase and transfer, including how stockholders of a company may sell their shares, what happens to the shares upon the death or disability of a shareholder, whether other shareholders have the right to purchase another shareholder’s stock upon death or disability, what procedures are used in order to assign value to stock shares, and what happens to stock upon the breach of a shareholder agreement by a stockholder.
A shareholders’ agreement will also govern how the day-to-day operations of the company are managed, how a Board of Directors will be elected and terminated, what decisions require majority, super-majority or unanimous consent of the shareholders, how the Board will appoint Officers of the corporation.
The resolution of shareholder disputes through mediation, arbitration or litigation, or a combination thereof, may also be included in a shareholders agreement, as well as what law governs any dispute.
When you are in the start up and formation stages of your new business, consult with your business attorney regarding the drafting of Bylaws and a shareholders’ agreement.
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Tags: business contract review, business formation, business incorporation, business law, business start up, corporate bylaws, corporate formation, corporate start up, limited liablity company, maryland business, maryland business law, operating agreement, shareholder agreement, small business attorney, small business lawyer
Written by Raymond McKenzie on October 31st, 2018
In its simplest form, “Franchising” is the license of the franchisor’s business or operating system and its trademark to a franchisee for some period of time, in exchange for a fee. The fee usually takes two forms: an initial franchise fee paid up front and an ongoing monthly royalties paid during the life of the franchise.
A common mistake of businesses wishing to expand in the U.S. is their attempts to avoid U.S. state and federal franchise laws that may apply. In other words, these would-be franchisors attempt to avoid the disclosure requirements applicable to all franchisors in order to save on legal fees in the short-term. However, this mindset may lead to substantial problems down the road. These businesses oftentimes try to hold themselves out as “licensors” instead, and in doing so fail to provide to their “licensees” the franchise disclosure document (“FDD”) required of franchisors.
Although the preparation and annual maintenance of an FDD may not be cheap, the short-term legal costs are money well spent compared to the financial and other costs associated with lawsuits from disgruntled licensees, or even worse, investigations by state franchise administrators.
For example, a company’s failure to abide by state and federal franchise laws that require franchisors to disclose to the prospect in an FDD all material facts relating to the franchise system to prospective franchisees, and to register that FDD in certain states, can be catastrophic. In addition to potentially giving a licensee/franchisee the right to rescind its agreement, other penalties include repaying back to the licensee/franchisee of all amounts paid to the company. In addition, fines and/or penalties payable to the state may also be required. Not to mention the legal fees that accrue with dealing with all of these potential issues.
The message is simple – don’t trade long-term security for short-term savings. Have an experienced franchise lawyer advise you on the requirements of franchising at the outset.
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Tags: Buy a Franchise, buying a franchise, buying a franchised business, FDD, federal franchise law, franchise agreement, franchise arbitration, franchise attorney, franchise concept, Franchise Disclosure Document, franchise dispute, franchise law, franchise law firm, franchise lawyer, franchise litigation, franchise purchase, franchise your business, FTC Franchise Rule, maryland business, maryland business law, Maryland franchise registration, sell your franchised business, selling a franchise, small business attorney, small business lawyer
Written by Raymond McKenzie on October 29th, 2018
Following up on my earlier blog posts that included post-judgment interrogatories and requests for documents, a judgment holder can also request that the debtor appear before a court-appointed examiner and answer questions under oath from the judgment holder’s counsel. Failure of the Debtor to appear for the exam or answer the questions truthfully could lead to imprisonment of the Debtor.
Here is a sample of some of the questions I ask in an oral examination:
Background
- Please provide your full name, including aliases.
- What is your soc Sec No.
- What is your Driver’s License Number.
- What is your date of birth.
- How many children do you have?
- What are the names of your children and their ages?
- Provide your children’s social security numbers.
- What is your current home telephone.
- What is your current cell phone numbers?
- Provide all email addresses you have used during the past 3 years?
- Provide the name, address and phone number for your 3 closest relatives not living with you?
Residence
- What is your current residence as of this morning?
- Do you own or rent?
- Are you current on your mortgage payments?
- Name all other real property owned by you or your spouse jointly or individually.
- Name all other real property rented by you or your spouse jointly or individually.
- [If renting, give name/address/phone number of the estate agent/landlord.]
- Have you recently moved?
- Name all addresses where you and/or your spouse have slept over the past 90 days.
- Provide all of your previous addresses utilized by you or your spouse over the past 7 years.
- Is your current residence up for sale?
- How much are you asking for it?
- How much is owed on it?
- Are you planning on moving?
- Are you in the process of purchasing or renting a new residence?
- If so, what will be your new address?
- How much did the new house cost?
- Provide the names of all persons currently living in the same location with you.
Vehicles
- Name all motor vehicles owned by you or your spouse.
- Owned or leased?
- Year/make/model/condition? Registration number? License plate number?
- Are the vehicles owned outright or are they financed?
- If so by whom?
- Are you in the process of buying a motor vehicle?
- What are the vehicles worth today?
- List the automobiles purchased by you or your spouse within the past 7 years.
- Do you or your spouse own a boat? If so, follow up.
I also ask detailed questions about current employment and employment history, bank accounts, general financial questions dealing with stocks and other investments, IRAs, retirement, life insurance, wages and income, tax returns, and any other sources of income or assets.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business lawsuit, business litigation, collections, corporate litigation, maryland breach of contract, maryland business, maryland business law, post judgment collections, post judgment interrogatories, request for oral examination, small business attorney, small business lawyer
Written by Raymond McKenzie on October 29th, 2018
Following up on my earlier blog post that included post-judgment Interrogatories, whereby a judgment holder can require a debtor to answer certain questions about the debtor’s assets and wages, a judgment holder can also request that the debtor turn over documents.
Here is a sample of some of the documents I request.
- Defendant’s federal and state income tax returns for the years ____, ____, and ____, including any Schedules thereto, whether such returns were individually filed or jointly filed.
- For all automobiles which Defendant has any ownership interest, exercise control or possession or have any financial responsibility for, provide the following documents for each vehicle:
- Copies of the official vehicle Titles;
- Copies of the Vehicle Registration document;
- Any documents showing the Tag number;
- Any documents showing the VIN number;
- Copies of loan statements for past 12 months;
- Copies of records indicating payments made during the last 12 months; and,
- Copies of all loan agreements and notes.
- All documents concerning payments, loans, exchanges, sales, distributions or transfers of cash or assets (including automobiles, boats, jewelry, electronics, etc.) with value of $2,000 or greater made by Defendant since __________ through the present.
- All documents and bank account statements from any financial institution where Defendant has, or had within the past 3 years, an account.
- All documents and brokerage account statements from any bank, financial institution, or brokerage firm, where Defendant has, or had within the past 3 years, a brokerage or stock account.
- For any real estate owned by Defendant either individually or jointly with another person or entity at any time since __________, provide all documents related thereto, including any rental/lease agreements, rental receipts, deeds, purchase contracts, mortgage contracts, mortgage notes, and mortgage statements.
- For any income earned by Defendant during the past 3 years, provide copies of documents related thereto, including pay stubs, checks, receipts, statements, work orders, bank documents, including deposit slips and wire transfers, related to any payment to Defendant.
- For any business entity, corporation, company, partnership, (“Entity”) for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide all documents concerning any bank or investment account of the Entity, all documents concerning any loans or disbursement made by the Entity to Defendant or one of your family members, and all financial statements including general ledgers, accounts receivable, accounts payable, income statements, balance sheets and profit and loss statements concerning the Entity.
- For any Entity for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide copies of the Articles of Incorporation or Organization, By Laws, Shareholder Agreement, Operating Agreement, Partnership Agreement and Minutes of any Board or Shareholder meetings.
- Provide all documents concerning any financial agreements, transactions or loans made between Defendant and any other individuals or entities during the past 3 years.
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Tags: breach of contract case, breach of contract lawsuit, business breach of contract, business law, business lawsuit, business litigation, corporate litigation, maryland breach of contract, maryland business, maryland business law, post judgment collections, small business attorney, small business lawyer
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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