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So You Want to Start Your Own Business

Monday, 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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So You Signed a Non-Solicitation/Non-Complete/Non-Disclosure Agreement, Now What??

Monday, 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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Buy-Sell Provisions in Corporate Shareholder and LLC Operating Agreements

Monday, 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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Drafting Corporate Documents

Monday, 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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Play By the Franchise Rules

Wednesday, 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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Post Judgment Oral Examination of a Judgment Debtor

Monday, 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

  1. Please provide your full name, including aliases.
  2. What is your soc Sec No.
  3. What is your Driver’s License Number.
  4. What is your date of birth.
  5. How many children do you have?
  6. What are the names of your children and their ages?
  7. Provide your children’s social security numbers.
  8. What is your current home telephone.
  9. What is your current cell phone numbers?
  10. Provide all email addresses you have used during the past 3 years?
  11. Provide the name, address and phone number for your 3 closest relatives not living with you?

Residence

  1. What is your current residence as of this morning?
  2. Do you own or rent?
  3. Are you current on your mortgage payments?
  4. Name all other real property owned by you or your spouse jointly or individually.
  5. Name all other real property rented by you or your spouse jointly or individually.
  6. [If renting, give name/address/phone number of the estate agent/landlord.]
  7. Have you recently moved?
  8. Name all addresses where you and/or your spouse have slept over the past 90 days.
  9. Provide all of your previous addresses utilized by you or your spouse over the past 7 years.
  10. Is your current residence up for sale?
  11. How much are you asking for it?
  12. How much is owed on it?
  13. Are you planning on moving?
  14. Are you in the process of purchasing or renting a new residence?
  15. If so, what will be your new address?
  16. How much did the new house cost?
  17. Provide the names of all persons currently living in the same location with you. 

Vehicles

  1. Name all motor vehicles owned by you or your spouse.
  2. Owned or leased?
  3. Year/make/model/condition?  Registration number?  License plate number?
  4. Are the vehicles owned outright or are they financed?
  5. If so by whom?
  6. Are you in the process of buying a motor vehicle?
  7. What are the vehicles worth today?
  1. List the automobiles purchased by you or your spouse within the past 7 years.
  2. 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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Post Judgment Request for Documents

Monday, 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.

  1. 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.
  2. 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:
    1. Copies of the official vehicle Titles;
    2. Copies of the Vehicle Registration document;
    3. Any documents showing the Tag number;
    4. Any documents showing the VIN number;
    5. Copies of loan statements for past 12 months;
    6. Copies of records indicating payments made during the last 12 months; and,
    7. Copies of all loan agreements and notes.
  3. 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.
  4. All documents and bank account statements from any financial institution where Defendant has, or had within the past 3 years, an account.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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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Reviewing a Commercial Lease

Monday, October 29th, 2018

When reviewing a commercial lease on behalf of a business tenant client, my goal is twofold: to obtain the most favorable terms possible for my client in the short term, while also protecting the client’s long term interests by limiting risk and personal exposure in the event of an unforeseen event that hurts or derails the business.

These are some of the issues I look to in my review:

  1. Make sure all lease terms mirror the terms found in the Letter of Intent executed by my client and the landlord.
  2. Attempt to obtain an abatement of rent for a period of a minimum of 60 days, to as much as 180 days if possible. Regardless of the rent abatement, at minimum we also want to make sure that the rent commencement date, which is the first date rent is due, is pushed far enough out to make sure we are open and operating at that time.
  3. Attempt to obtain tenant improvement money, which is money paid by the landlord to my tenant client and which the tenant must use to build out and renovate the premises. The amount of any TI money can fluctuate dramatically depending on how much work the space needs, and the business of the tenant.
  4. Understand whether we are dealing with a gross (“all-in”) lease where the tenant makes one monthly payment including everything due, or a triple net lease (“NNN”) where rent and CAM fees and taxes and insurance are broken out separately, or a hybrid of the two? Oftentimes a client can be confused about what the monthly payments actually are and not understand terms like additional rent, operating costs, and CAM fees.
  5. What about the HVAC unit, which in many instances can be a costly repair or replacement in the event the tenant takes on the responsibility to maintain and replace the HVAC if it breaks down. I recommend an inspection of the HVAC prior to signing the lease, as well as some warranty period where the landlord guarantees the operation of the HVAC.
  6. Is the tenant free to sublease a portion of the premises without landlord interference?
  7. Is there a liquidated damages clause in the event the lease is terminated early? This would mean that the tenant is on the hook for the entire remaining term for rent and all other expenses due and owing in the event of default.
  8. If this is a retail establishment, does my client tenant have exclusivity? In other words, is the landlord prohibited from permitting the operation of another wings place in the same plaza that my client who sells wings is in?
  9. Finally, there is most likely a personal guaranty.  Do spouses and even silent partners have to sign it? Is there a cap on it or is it unlimited?  I normally try to negotiate some type of cap on the guaranty.  Six months to one year’s worth of rent is oftentimes a manageable “out” for a tenant looking to get out from under a lease for a dying business.

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Forming a Benefit Corporation/LLC in Maryland

Monday, October 29th, 2018

A Benefit corporation/LLC is formed to create a public benefit, in addition to creating profit for its shareholders. In Maryland, a company can be recognized by the state as a benefit corporation/LLC by stating in its corporate charter that it is a benefit corporation/LLC, getting certified as providing a public benefit, taking into consideration more than just profit, and submitting an annual benefit report to each stockholder or member.

How to Form a Benefit Corporation/LLC with Maryland SDAT:

1.  Draft or amend existing Articles of Incorporation/Organization by making reference to the election to be a benefits corporation/LLC at the top of the charter document, or the amendment to the charter document;

2.  State in the Articles or the amendment to the Articles that the corporation/LLC is a benefit corporation/LLC and has the purpose to create a general public benefit, defined as a “material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.”

3.  A business has the option of stating in the Articles or the amendment to the Articles a specific public benefit that the business seeks to provide, for example:

    • providing individuals or communities with beneficial products or services;
    • promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
    • preserving the environment;
    • improving human health;
    • promoting the arts, sciences, or advancement of knowledge;
    • increasing the flow of capital to entities with a public benefit purpose; or
    • the accomplishment of any other particular benefit for society or the environment

 

4.  A business may also change its name to “xyz, Benefit corporation/LLC” or “xyz, A Benefit corporation/LLC”.

5.  Also, the company must deliver an annual benefit report to each stockholder/member, which must include:

  • the ways the a general public benefit was pursued and to what extent one was created;
  • the ways the any specific public benefit was pursued and to what extent one was created;
  • any circumstances that hindered the creation of the public benefit; and
  • an assessment of the societal and environmental performance of the benefit corporation prepared in accordance with a third-party standard applied consistently with the prior year’s benefit report or accompanied by an explanation of the reasons for any inconsistent application.

The report must be delivered by the company to each stockholder/member within 120 days of the end of each fiscal year, and must publish it on the company’s public website.

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Reviewing a Franchise Agreement for a Franchisee Client

Monday, October 29th, 2018

When a franchisee client asks me to review a franchise agreement prior to signing, I review it with the mindset that if the franchisee’s business performs well, the franchisee will be happy with the franchise relationship and the agreement he or she signed, BUT if the franchised business ultimately fails, it is my job to protect the franchisee at the outset in the strongest way possible. Therefore I review a franchise agreement focusing on how best to protect my franchisee client’s personal assets in the event the franchised business fails.  Here are some of the things I look for in the franchise agreement:

1.  does the franchisee have an exclusive territory?

2.  may the franchisor alter the franchisee’s territory during the term of the agreement?

3.  may the franchisee advertise or market for clients outside the designated territory in areas that are not owned by other existing franchisees?

4.  what are the franchisee’s renewal rights? Attempt to limit what terms of the agreement the franchisor may change on renewal.

5.  what social media presence is the franchisee permitted to maintain?

6.  while there is most likely a personal guaranty, who is required to sign it? ie. spouses and/or passive investors?

7.  is there a cap on the personal guaranty of a reasonable amount that the franchisee and franchisor are comfortable with, or is it an unlimited guaranty? When negotiating on behalf of a franchisee, I attempt to limit the cap with the mindset that this amount is the franchisee’s buyout amount in the event the worst occurs and the franchisee has to stop operating.

8.  is there a right of first refusal of the franchisor in the event the franchisee wishes to sell the business, and what are its terms?

9.  is there a unilateral right of the franchisee to terminate the agreement? There are rare, but franchisee counsel should try to push for such a provision anyhow.

10.  are any of the franchisor’s rights to terminate the agreement out of the ordinary or particularly onerous?

11.  is there a liquidated damages clause in the event the franchise agreement is terminated?

 

 

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