Blog | Freeman Lovell

Received a Notice of Proposed Discipline? 3 Steps Federal Employees Must Take Now

Tue, 21 Apr 2026 16:35:47 GMT

Receiving a Notice of Proposed Discipline, particularly of a proposed removal, is one of the most stressful experiences a federal employee can face. Whether you work for the Veterans Administration, Internal Revenue Service, Department of Defense, or U.S. Forest Service your career, pension, and livelihood are suddenly on the line.

Panic is a natural reaction, but it is not a strategy. If you have been handed proposed discipline, here are three steps you must take immediately.

1. Check Your Deadlines In the federal sector, the clock starts ticking the exact moment you receive your notice. Federal employees typically have only 7 to 14 days to submit a formal response. Missing this strict deadline forfeits your right to defend yourself before a final decision is made.

2. Request the Evidence File Your agency cannot simply fire you without proof. You have the absolute right to review the materials they relied upon to propose your removal. We scrutinize this evidence against a set of aggravating and mitigating factors, often called the "Douglas Factors," to determine if a penalty is appropriate. Often, agencies overreach, and a strong defense can expose that.

3. Secure Your Right to Reply In response to most forms of discipline, you have the right to provide both a written response and an oral reply to the Deciding Official. Having legal counsel on your side ensures your response is strategic, professional, and focused on mitigating the penalty or stopping the disciplinary action entirely.

The Takeaway: Federal employment law is a highly specialized field. A general, private-sector employment lawyer often does not know the unique rules, acronyms, or administrative courts governing federal employees. You need counsel with specific experience dealing with federal agencies. At Freeman Lovell, we have our very own experienced Federal employment law practitioner, Adrienne Langmo. If you have received a Notice of Proposed Discipline, don’t navigate it alone—contact Adrienne Langmo today for experienced guidance and help.

10 Years, 10 Lessons

Mon, 30 Mar 2026 17:22:26 GMT

What We Would Tell Our Year-One Selves

In 2016, Freeman Lovell was born from a simple question: How would a law firm operate if it were designed specifically around the needs, constraints, and realities of entrepreneurs?

At the time, our founding partners, Josh Freeman and Steve Lovell, saw a significant gap. The legal industry was built for two extremes: massive global corporations or one-off individual matters. This left the small-to-mid-market entrepreneur—the engine of our economy—underserved and overcharged.

Now, during our tenth anniversary, we sat down to look back at the journey. If the 2026 versions of ourselves could sit down for lunch with the 2016 versions, here are the 10 lessons we’d share about our experience building a business.

1. Small Businesses and Small Legal Teams Pair Well

In Month One, our biggest worry was whether clients would trust a lean, entrepreneur-focused firm over a big, flashy law firm. We quickly learned the opposite: those very clients were starving for the agility that big firms couldn't offer.

The Lesson: Don't apologize for your size; lean into the responsiveness it allows.

2. Good Things Take Time: Trust the Process

In Year One, we estimated things would be easier and go faster by a factor of about three. We’ve since gained a deep appreciation for what our clients go through every day.

The Lesson: Building a brand and a reputation is a slow-burn investment. Double your timeline, triple your patience.

3. Outcomes Over Overhead

We opted for a remote-first, lean blueprint long before it was popular. We realized early on that there is a sharp distinction between essential infrastructure and optional trappings.

The Lesson: High-tier legal strategy and technology are "must-haves." Focus on investing in things that improve client outcomes.

4. Keep Your Growth in Alignment

There was a time when we grew too fast. We added attorneys and employees who weren’t truly aligned with our values, and our service levels began to suffer. We had to take a hard look in the mirror and make some difficult course corrections. But through the process, we learned so much about who we want to be, how our people and clients should be served, and what that looks like for Freeman Lovell.

The Lesson: Work with people who are aligned with your business and clients' needs.

5. Simple is Better Than Perfect

Early on, we allowed too much complexity to creep into our processes and policies in an attempt to be "perfect." We eventually learned that perfection is an impossible, exhausting quest.

The Lesson: Focus on simplicity. It allows the business to run smoother and makes you more agile when things go wrong.

6. Consider the Full Business and Legal Ecosystem

For entrepreneurs, legal questions aren't confined to a single silo. A real estate lease affects your tax structure; a hiring decision affects your IP.

The Lesson: In business, everything is connected. We can better help our clients scale when they’re able to make informed, strategic decisions at every step of the journey.

7. Vetting for "Fit" is a Non-Negotiable

If we could save our younger selves the most stress, it would be this: better evaluate the alignment of every person you invite into your circle.

The Lesson: Whether it’s an employee, a partner, or a client, if the values aren't aligned, the partnership will eventually fail.

8. Your Success is Earned Years Before the Exit

We’ve seen that a successful sale isn't won at the closing table. It’s earned through clean corporate practices, protected IP, and enforceable contracts set up years in advance.

The Lesson: Preparation changes the nature of decision-making. Early preparation makes for smoother exits.

9. Success Looks Different for Every Entrepreneur

Helping an entrepreneur means different things for each entrepreneur we work with. While there are similarities, there are so many unique needs every business has. It’s not a static service; it requires flexibility and creativity because every business has unique needs.

The Lesson: To truly serve an entrepreneur, you have to be as dedicated to their "why" as they are.

10. The Decade of Reinvention

As we enter Year Ten, the road ahead is unprecedented. AI technology is fundamentally changing what it means to be a lawyer. We expect the next ten years to be a period of experimentation and exploration.

The Lesson: There has never been a more interesting time to be in business. Don't fear the change—lead it.

To our clients and partners from the last decade: Thank you for being part of this journey! We wouldn’t be here without you.

WORKPLACE LAWSUITS

Fri, 20 Mar 2026 18:37:18 GMT

The #1 Secret Weapon Against Workplace Lawsuits

(It’s Not What You Think)

Imagine this Scene:

Employee: "Dave keeps making jokes about my appearance and calling me 'sweetheart.' It makes me really uncomfortable."

Manager: "Oh, that's just Dave! He's from a different era and means no harm. Don’t worry about it."

Yikes. If your legal radar didn't just beep, grab a seat—we need to talk.

The "He Means Well" Liability

As a business owner, you rely on managers to run the floor. But legally, your managers are the company. And under many employee rights laws, like federal anti-discrimination laws and state equivalents, a manager's knowledge of a problem is the company’s knowledge.

By dismissing this complaint, our hypothetical manager legally signaled: The company knows about the harassment and refuses to act.

Why An Ounce of Prevention is So Valuable

Ignoring complaints can transform what could have been addressed with a simple conversation in the moment into an expensive year’s-long lawsuit.

Federal Risk: The Equal Employment Opportunity Commission (EEOC), that is charged with enforcing federal anti-discrimination laws, will not accept "that's just Dave" as a valid legal defense.

State Risk: The State agency equivalents won’t either. State laws like the Massachusetts Fair Employment Practices Act (Chapter 151B) and the Utah Antidiscrimination Act add strict compliance rules. In some jurisdictions, managers can face personal liability, but your business will ultimately foot the massive legal bills.

The Takeaway

Good managers protect your business. Ensure they know how to handle the human element.

Take complaints seriously: No brushing things off, ever.

Document everything: If it isn't in writing, it didn't happen.

Escalate: Know exactly when to involve upper management, legal counsel, and/or HR.

Don’t Know Where to Start? Give us a Call!

A well-trained manager is your best liability insurance policy. Here at Freeman Lovell, we can provide that “ounce of prevention” to save you in the long run with management trainings and preventative legal advice. Reach out to our labor & employment attorney,

Adrienne Langmo for more information.

Scaling Your Startup: Is Your Next Hire a Contractor or an Employee?

Wed, 18 Feb 2026 16:19:40 GMT

For small business owners in Utah, growing the team is an exciting milestone and you’ve likely faced the classic question: Should I hire an actual employee, or can I just find a "guy who knows a guy" and pay him via Venmo?

While it might be tempting to treat an employee (W-2) and an independent contractor (1099) as interchangeable based on your budget, the IRS and the Utah Labor Commission see things very differently. Misclassifying a worker isn't just a clerical error; it can lead to significant back taxes and penalties.

Here is a practical look at the differences to help you stay compliant while you scale.

The Independent Contractor (1099)

Think of a contractor as a separate business entity that you have hired to perform a specific project or attain a specific result. They are specialists who bring their own "secret sauce" to the table.

Autonomy : They generally use their own equipment, set their own hours, and work from their own locations.

The "What" Not the "How" : You have the right to control the result of the work, but not the specific methods used to achieve it.

Financial Independence : They pay their own self-employment taxes, health insurance, overhead, and will typically invoice you for their services. They may have other clients besides your business.

The Employee (W-2)

An employee is someone who is fully integrated into your business operations. They are part of the daily rhythm of your company and are under your direct supervision.

Direction and Control : You dictate when they work, where they work, and the specific sequence of their tasks. You provide the equipment to complete those tasks.

Business Integration : Their services are usually a "key aspect" of your regular business activity. If your business is a bakery, the person baking the bread is likely an employee; the person fixing the oven is likely a contractor.

Employer Obligations : You are responsible for withholding income taxes and paying a share of Social Security and Medicare. In Utah, you’ll also need to ensure you're covered for Workers' Compensation and Unemployment Insurance.

The Bottom Line: Control

The government looks closely at the reality of the working relationship , not just the title you put on a contract. Your degree of control , or lack thereof, is key. Ultimately, if it looks like a duck and quacks like a duck, they’re going to treat it like a duck.

Taking the time to classify correctly now prevents headaches down the road. We are here to help you craft, review, and amend employment and contractor agreements and navigate any other issues that may arise as you scale your workforce.

Is Your Team Oversharing With AI?

Thu, 08 Jan 2026 20:45:31 GMT

AI is undoubtedly amazing. On one single platform I can direct it to, for example, “write me a 400-word blog post about the legal risks of private employees use of AI directed at Utah small to medium-sized businesses.” And then ask it to illustrate that post with an image of a robot in a skirt suit.

(And now you’ll wonder if I even wrote this post myself…. I did. But I did not sketch the image myself.)

And we all know AI has real limitations. We’ve heard the stories about AI hallucinations, where it simply invents an answer. And often AI simply gets it wrong. For example, I often use AI to pull up the citation to a statute and often it produces a link to a bill that hasn’t been enacted, a bill that’s been repealed, or a similar statute that’s applicable to a different industry than the one I asked it to find.

But there’s also legal risks in using “Open Access” or “Free Tier” AI versus “Enterprise” or “Business” AI. Open access/free tier AI is the version you can use for free on a web browser or on app on your computer or smart phone. With many of these tools, user inputs may be stored or used to improve the model. Enterprise or business AI, by contrast, is a commercial‑grade system that typically offers encryption, enhanced privacy controls, and contractual data‑security commitments.

If you do not have the latter—enterprise AI— then you really may want to find out what your employees are inputting into an unsecured AI tool. Is it client or employee information, like personally identifiable information? Medical information? Company trade secrets? Financial information?

Depending on your company size and the type of information input into an unsecured AI tool, employees may be creating legal risk under Utah’s data breach notification law, the Utah Consumer Privacy Act (for businesses that meet its thresholds), federal privacy laws, even anti-discrimination laws and contractual confidentiality obligations you have made directly with your clients.

The New Year is a great time to review old policies, create new ones, and train staff on these concerns. We are here to help you navigate these emerging issues!

-By Adrienne Langmo

RIFs and Furloughs, the Federal Way

Tue, 30 Sep 2025 19:07:41 GMT

As the federal fiscal year draws to a close, thousands of federal employees face an unsettling possibility if a continuing resolution is not passed: not just another shutdown and temporary furlough, but permanent layoffs through Reduction in Force (RIF) notices.

This week, the Office of Management and Budget (OMB) instructed federal agencies to consider issuing RIF notices to employees (if certain conditions are met) rather than the usual temporary Furlough notices issued during shutdowns.

This is a big shift. But it does not mean layoffs are guaranteed. If they occur, federal employees are protected by a robust set of legal rights.

There’s still a process before a RIF can be properly issued, complete with notice rights, retention rights, appeal rights and such other rights that the OMB does not purport to usurp.

That said, we understand that the anxiety of this uncertain moment is real. Here are some tips to best prepare for the unknown, come the end of the federal fiscal year:

Download Your eOPF, ASAP

o Your electronic Official Personnel Folder may become inaccessible during a shutdown. Download it now to preserve your employment records.

Download Your last 3 Performance Appraisals, ASAP

o Include mid-year reviews and commentary. These documents may affect retention rights in a RIF. Also save records of other awards, commendations, and other notable performance records.

Save Key Communications

o Save emails, memos, or notices from HR or supervisors about your employment status or shutdown protocols.

Ask Questions

o Supervisors, HR, and union reps are navigating this too. Don’t hesitate to ask questions.

If you receive a RIF notice or suspect you were subject to procedural violations, don’t hesitate to

reach out to us for our advice. We are here to help.

Shutdowns may be political. Your livelihood is personal. Let us help you safeguard it.

-Adrienne Langmo, Partner

Demystifying FMLA

Fri, 12 Sep 2025 16:57:06 GMT

If you're working for — or running — a business with under 50 employees, the Family and Medical Leave Act (FMLA) might seem like a distant federal regulation. But for eligible employees and covered employers, it’s a powerful tool for balancing work and life during major health or family events. Here's what you need to know.

�� The What

The FMLA is a federal law that allows eligible employees to take up to 12 weeks of unpaid, job-protected leave in a 12-month period for specific family or medical reasons, including:

The birth or adoption of a child
Caring for a spouse, child, or parent with a serious health condition
Recovering from a serious health condition themselves
Certain military-related family needs

The leave can be taken intermittently, in blocks, or in one long swath. During FMLA leave, employers must maintain group health benefits as if the employee were still working. When the leave ends, the employee is entitled to return to the same or an equivalent position.

�� The Who

FMLA is mandatory for employers with 50 or more employees within a 75-mile radius. So, if your business has fewer than 50 employees at a given location, you’re not legally required to offer FMLA leave —but you can choose to adopt similar policies voluntarily.

Employees must also meet FMLA eligibility criteria:

Worked for the employer for at least 12 months
Logged at least 1,250 hours in the past year
Work at a location with 50+ employees within 75 miles

*State employees may have additional benefits provided under state law. Here, we’re discussing private employers and employees.

��️ Employer Takeaways

Treating employees appropriately during their FMLA leave and upon their return can present some hurdles for employers and coworkers, particularly when an employee has been on leave for some time and, e.g., projects or programs have evolved in their absence. You don’t have to navigate these situations alone; we can provide your team with the tools and information necessary to smoothly navigate the full FMLA process and avoid any sticky FMLA retaliation or interference claims.

And, even if you’re not legally bound by FMLA, offering comparable leave can be a smart move. It builds trust, boosts retention, and shows you value your team’s well-being. Consider crafting a voluntary leave policy that mirrors FMLA protections, including:

Clear eligibility rules
Defined leave duration
Job protection guarantees
Coordination with paid time off or disability benefits

For small businesses, this means you have flexibility—but also responsibility to communicate policies clearly. Want to overhaul those policies or craft great messaging to your team, give us a call! We’re here to make leave policies less painful and more practical.

�� Employee Takeaways

If you work for a small Utah employer, ask about your company’s leave policies. While FMLA doesn’t require you to use your accrued leave during your FMLA leave, it allows your employer to write into its policy a requirement that you do so. Make sure you read that policy!

And, even if FMLA doesn’t apply, your employer may offer benefits similar to FMLA. If you’re dealing with a serious health issue or family emergency, document your situation, give notice as early as possible, and follow internal procedures. Need help understanding those procedures or your rights as an employee? We got your back!

⚖️ Final Thoughts

FMLA is more than a legal acronym—it’s a lifeline for employees facing life’s biggest challenges. For Utah employers, understanding the law and choosing to offer similar protections can set your business apart. Whether you're an HR manager, CEO, or a team member, knowing your rights and responsibilities helps everyone navigate leave with clarity and compassion.

Moonlighting, Side hustles, and Non-Competes

Wed, 03 Sep 2025 17:58:19 GMT

So, you’ve got an employee that wants to teach a night class? Drive for a ride share? Pursue a passion project on the side? That’s great…. Right?

You can ensure it’s great for both you and your employee by entering a non-compete, non-solicitation, non-disparagement, and/or non-disclosure agreement and setting clear workplace boundaries .

Non-Compete Agreements can help employers do damage control when an employee wants to branch out. Non-competes alone are limited, but when properly crafted and paired with the other agreements listed above, they can provide peace of mind and protection to employers. Utah law takes a close look at these agreements when it comes to enforceability, so don’t go it alone when it comes to crafting one.

Boundaries

Set boundaries with your employees on the use of their time, your equipment, and your company’s other resources like client lists or IP. And pay close attention with remote or telework employees where boundaries may be squishier. Here’s some examples where

lines may get blurred:

Can the employee use the office printer, or their allotted printing budget for their teaching gig? What if it’s just a couple sheets of paper? What if it’s their 100-page course outline?
Maybe. Do you have an equipment policy that allows employees minor personal usage of the office equipment? Does it define “minor”? Might you want to update that policy if it doesn’t provide the clarity you need? We can help!
Can the employee pick up a ride share client in the company vehicle while they’re out running an errand for the company What if it’s their personal vehicle? What if the trip is along the way, no deviation?
Definitely not the company vehicle for insurance purposes of carrying a random person around. But otherwise, this raises the charmingly titled legal doctrine of “frolic and detour” where it is much less messy in terms of liability (for accidents, etc.) if the employee does not engage in personal errands while on the clock, when they’re supposed to be completing your company’s business. No double dipping. No frolicking, as tempting as frolicking sounds.
Can they email one of the company’s clients with a question that’ll help them move things forward on their side project?
Generally, probably not, especially if you have a non-solicitation agreement in hand. But, it may depend on more details than this scenario offers. When in doubt, talk about it with your employee, get an idea of what their end game is, and give us a call if you need a sounding board.

Need help handling questions like these, updating policies, or putting together a non-compete agreement? We can help!

Beneficial Ownership Rules

Thu, 28 Dec 2023 10:28:56 GMT

Starting January 1, 2024, a new rule took effect requiring all registered legal entities, including limited liability companies and corporations, to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). We wanted to give you a heads up about the rule and give you as much information about what it means to you.

What is the rule?

The rule, which is called the Beneficial Ownership Information Reporting Requirements (BOI Rule) , comes from the Corporate Transparency Act, which was passed by Congress in 2021. This law created the BOI Rule with FinCEN as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other deceitful ownership structures. Under this new law, FinCEN will permit Federal, State, and local officials to obtain ownership information for authorized activities related to national security, law enforcement, and intelligence.

When does the rule take effect? And when do I have to submit a report?

The BOI Rule took effect on January 1, 2024 . If your company existed before January 1, 2024, you must file its initial beneficial ownership information report by January 1, 2025 . If your company is formed or registered after January 1, 2024, you must file its initial beneficial ownership information report within 90 days after receiving actual or public notice that its creation or registration is effective.

If any beneficial ownership information changes, you will have 90 days from the day of the change to file an updated or corrected report with FinCEN.

What if I don’t file a Report?

According to FinCEN:

“The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.”

What do I need to include in the report?

The BOI Rule requires that all entities report information about the company, each individual with substantial control over the entity, and each beneficial owner.

What information is required to report about the entity?

Full legal name of your company and any DBAs names;
Complete current street address for your company's principal place of business (P.O. boxes will not be accepted);
The jurisdiction of formation or registration; and
Tax identification:
IRS tax identification number (TIN) and employer identification number (EIN).

What information is required to report about the controlling individuals and beneficial owners?

The individual's legal name;
Individual's date of birth;
Individual's residential address; and
A unique identifying number from an acceptable identification document (such as an unexpired driver's license, passport, identification document issued by a State or local government or Indian tribe) and the name of the issuing state or jurisdiction.

Who is considered to have substantial control of the entity?

Examples of an individual that exercises substantial control over the entity are:

An individual is a senior officer (President, CEO, CFO, COO, Manager, or other office who performs a similar function);
An individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company;
An individual is an important decision-maker for the company; or
An individual has any other form of substantial control over the company.

Who is considered a beneficial owner?

A beneficial owner is an individual that owns or controls at least 25% of the entity’s ownership interests. This includes individuals that indirectly own or control 25% of the ownership interest. For example, if Joe is a 50% owner of Parent LLC, which in turn owns 50% of Subsidiary Corp, then Joe beneficially owns 25% of Subsidiary Corp (50% of 50% = 25%).

What type of entities will be required to file a report with FinCEN?

All domestically formed entities and foreign registered entities in the USA are required to file a report. Types of entities include corporations, limited liability companies, limited partnerships, general partnerships, and any other entity registered with a state Secretary of State or Division of Corporations or other similar office.

There are some types of companies that are exempt from the reporting rule, and in general they are companies that already have to report beneficial ownership to another federal agency. The 23 exemptions listed by FinCEN are: Securities reporting issuer, Governmental authority, Bank, Credit union, Depository institution holding company, Money services business, Broker or dealer in securities, Securities exchange or clearing agency, Securities exchange or clearing agency, Other Exchange Act registered entity, Investment company or investment adviser, Venture capital fund adviser, Insurance company, State-licensed insurance producer, Commodity Exchange Act registered entity, Accounting firm, Public utility, Financial market utility, Pooled investment vehicle, Tax-exempt entity, Entity assisting a tax-exempt entity, Large operating company, Subsidiary of certain exempt entities, and Inactive entity.

Can you help me with my company’s report?

Yes! We are happy to help prepare and file your company’s BOI Rule report with FinCEN before the December 31, 2024 deadline.

We offer a flat-fee service that is discounted based on how early you pay and submit your information.

We also know that some situations can be complicated, so please feel free to ask us any questions regarding compliance with the beneficial ownership interest reporting requirements for your company by emailing teamjosh@freemanlovell.com .

The Reg D Private Securities Offering Guide for Small Businesses and Entrepreneurs

Thu, 06 Apr 2023 20:06:37 GMT

10-Point Checklist for a Successful and Compliant Reg D Private Securities Offering

Introduction:

As an experienced business attorney who advises small businesses and entrepreneurs, I've witnessed firsthand the challenges and rewards of raising capital. One popular method for startups and small businesses to raise funds is a Regulation D (Reg D) private securities offering. This article provides a 10-point checklist to help you navigate the legal complexities of conducting a Reg D offering for your business.

1 - Choose the Right Exemption:

Reg D offers three main exemptions: Rule 504, Rule 506(b), and Rule 506(c). Choosing the proper exemption is crucial based on the amount you plan to raise and the type of investors you wish to target. Consult with an attorney to determine which exemption is the best fit for your specific needs.

2 - Form Your Business Entity:

Before you can proceed with a Reg D offering, you need to ensure your business entity is properly formed and registered in the state where it operates. Your attorney can help you decide on the most appropriate business structure and guide you through the formation process.

3 - Craft a Comprehensive Business Plan:

A well-prepared business plan will help you attract investors and keep your business on track for success. Include detailed information about your company's objectives, market analysis, financial projections, and management team. Your attorney can review your plan to ensure it addresses any legal or regulatory concerns.

4 - Draft a Thorough Private Placement Memorandum (PPM):

A PPM is a disclosure document that provides potential investors with important information about your business and the securities offered. It should cover risk factors, offering terms, investor suitability standards, and subscription procedures. Your attorney can assist you in drafting a PPM that complies with federal and state securities laws.

5 - Develop a Subscription Agreement:

This legally binding document outlines the terms and conditions of the investment, including representations and warranties, investor qualifications, and any investor-specific rights. Work with your attorney to create a subscription agreement that meets the unique requirements of your offering.

6 - Set Up an Escrow Account:

Establish an escrow account with a qualified financial institution to securely hold investor funds until you reach the offering's minimum funding threshold. This step helps ensure transparency and trust between you and your investors.

7 - Verify Investor Accreditation:

For Rule 506(c) offerings, it's essential to take reasonable steps to verify the accredited investor status of potential investors. This process usually involves obtaining documentation demonstrating the investor's income or net worth. Consult with your attorney to ensure you're meeting the verification requirements.

8 - File Form D and Comply with State Laws:

After the first sale of securities, you must file Form D with the Securities and Exchange Commission (SEC) within 15 days. Additionally, you may need to comply with state "blue sky" filing requirements. Your attorney can guide you through this process and ensure you meet all applicable deadlines.

9 - Maintain Ongoing Compliance:

Keep accurate records of all investors, funds received, and securities issued. Provide regular updates to investors about your company's progress and address any concerns they may have. Your attorney can help you stay on top of ongoing compliance requirements.

10 - Stay Informed and Plan for the Future:

Securities laws and regulations can change, so staying informed and adapting as needed is essential. Work closely with your attorney to ensure ongoing compliance and develop a post-offering plan for managing investor relations, providing financial reporting, and meeting regulatory obligations.

Conclusion:

Conducting a Reg D private securities offering can be a powerful way for small businesses and entrepreneurs to raise capital. Following this step-by-step guide and working closely with an experienced business attorney, you can navigate the legal complexities and successfully complete your offering.

NIL Network Launches the NIL Verified Network

Wed, 15 Feb 2023 22:15:00 GMT

The membership program represents a critical step forward in creating a more equitable and trustworthy NIL landscape for college athletes

SAN DIEGO (FEBRUARY 16, 2023) . NIL Network today launched the NIL Verified Network, a membership program of service providers dedicated to ensuring transparency, honesty, and fairness within the emerging NIL industry. Inaugural members are NOCAP Sports, Hawker Family Sports & Entertainment, NextFan, FanWord, Frieser Legal, CleanKonnect, Campus Ink, and Vantage Sports - all companies that have demonstrated their athlete-centered business models.

As college athletes navigate the NIL landscape, it has become increasingly important for them to be able to differentiate between trustworthy service providers and those that seek to exploit the lack of regulation in the field.

Michelle Meyer, founder of NIL Network and former NIL Coordinator at San Diego State University, started building the NIL Verified Network program in May of 2022 after witnessing firsthand the frustrating reality that’s happening on the ground floor, well outside any NIL headlines.

"Bad actors are thriving in the wild west landscape right now,” Meyer explained. “Social media allows these opportunists to directly access the athletes, where they exaggerate their credentials, over promise their services, and will say pretty much anything to gain the athlete’s trust. Then, they pressure these young adults to sign horribly one-sided contracts, knowing that most college athletes don’t have the support to fully understand what they’re agreeing to. I’ve seen it too many times already. Enough is enough."

NIL Network is striving to eliminate these bad actors by bringing together the athlete-centered NIL businesses, supporting their efforts, and amplifying their brands.

Meyer continued, “I am ecstatic to finally get the NIL Verified Network launched and am grateful to have the support and commitment from our inaugural members. All of these initial businesses have stood out to me over the past few years as being innovative, collaborative, and most importantly, hyper-focused on the athlete experience. They immediately recognized the importance of a network like this and have been so patient as we’ve worked through the business vetting process and standards.”

That standard, NIL Verified™, is the first-to-market NIL service provider verification process and is a requirement to become a member of the NIL Verified Network. Developed with the expertise of former Power 5 compliance director and current Freeman┃Lovell partner Patrick Stubblefield, NIL Verified™ aggregates information about a business’ registration, employees, business practices, and compliance with NIL laws, NCAA interim policies, and institutional policies. Additionally, it includes a review of the service provider’s terms to ensure they include all of the expected clauses and fair language for college athletes.

“An entirely new industry popped up nearly overnight once the NCAA’s rules around NIL relaxed. Through this NIL Verified process, I think we’re helping push the industry to maturity,” stated Patrick Stubblefield, attorney at Freeman | Lovell. “Being familiar with state NIL laws should be the industry standard. Deploying ethical payment terms should be the industry standard. Fair contracts that do not take advantage of athletes should be the industry standard. I believe that services such as NIL Verified can help push towards a reality where the industry standard is to engage with athletes ethically.”

With the NIL Verified Network, athletes and administrators can have confidence that they are partnering with companies that prioritize their best interests, making the NIL industry a safer and more equitable place.

LEARN ABOUT THE NIL VERIFIED NETWORK

ABOUT NIL NETWORK

NIL Network was founded in 2020 as a free resource to help athletes, coaches, and administrators understand the NIL changes that were coming the following summer.

Today, NIL Network is a platform that equips athletes, administrators, and other early adopters with industry leading databases, objective resources, and trustworthy connections so they can succeed in the nascent name, image, and likeness era of collegiate sports.

Media Contact:

Michelle Meyer

Founder, NIL Network

michelle@nilnetwork.com

nilnetwork.com

Client Alert: Employee Benefits/Executive Compensation and Tax

Mon, 09 Jan 2023 15:58:00 GMT

For the second time in recent years, Congress passed broad legislation with far-reaching impact

on retirement savings programs. The SECURE 2.0 Act of 2022 (SECURE 2.0) was included as

part of the Consolidated Appropriation Act, 2023, which was passed by Congress on December

23, 2022, and signed into law by President Biden on December 29, 2022. SECURE 2.0 builds

on the changes made to the retirement system by the Setting Every Community Up for

Retirement Enhancement (SECURE) Act enacted in 2019.

SECURE 2.0 is largely designed to enhance access to retirement savings vehicles and make it

easier for individuals to save. It is also aimed at streamlining administration and reporting

requirements and preserving retirement income. Many of the changes do not take effect until

2024 or 2025, but some provisions will impact plans in 2023. Most plans will be impacted by

SECURE 2.0 provisions. It is notable that SECURE 2.0 does not include major tax provisions or

extenders.

The following is a high-level summary of some of the more consequential provisions of

SECURE 2.0.

This is a brief summary of some of the provisions in SECURE 2.0. These changes will likely

impact most retirement plans, so plan sponsors and administrators will need to monitor future

developments from the Department of Treasury and the IRS and be ready to implement the

various changes on the various compliance dates. If you have any questions about SECURE

2.0 or its requirements, please contact the author of this Client Alert Jeffrey Rambach, at (DD)

312-929-4425; (O) 385-355-4826 jeffrey.rambach@freemanlovell.com or your Freeman Lovell

attorney.

Disclaimer: This alert is provided for information purposes. It does not contain legal advice or create an attorney-client relationship and is not intended or written to be used and may not be used by any person for the purpose of avoiding penalties that may be imposed under federal or state tax laws. The information and explanations stated in this alert are based on initial consideration of the law after its enactment and may be subject to different interpretation of the law and its meaning and effect in the future.

Cryptocurrency Client Tax Alert

Mon, 28 Nov 2022 15:00:00 GMT

NEW INFORMATION REPORTING REQUIREMENTS FOR CRYPTOCURRENCY BEGINNING IN 2023

Under the broker information reporting rules, brokers must report transactions in securities to both the IRS and the investor. These transactions must be reported on Form 1099-B. Legislation enacted in 2021 extends these broker information reporting rules to cryptocurrency exchanges, custodians, or platforms (e.g., Coinbase, Gemini, or Binance), and to digital assets such as cryptocurrency (e.g., Bitcoin, Ether, or Dogecoin).

In addition to extending the above information reporting requirement to cryptocurrency, the legislation also extends existing cash reporting rules (cash payments of $10,000 or more) to cryptocurrency, so that businesses that accept payments of $10,000 or more in cryptocurrency will have to report that to the IRS (on IRS Form 8300).

The new reporting rules apply to transactions that take place in 2023 and later years .

Existing broker reporting rules. Under current rules, if you have a stock brokerage account, then whenever you sell stock or other securities, you receive a Form 1099-B at the end of the year. On that form, your broker reports details of transactions, such as sale proceeds, relevant dates, your tax basis for the sale, and the character of gains or losses.

Furthermore, under the “broker-to-broker” reporting rules, if securities are transferred from one broker to another broker, then the old broker must furnish a statement with relevant information, such as tax basis, to the new broker.

New reporting for digital assets (most cryptocurrencies, and potentially some non-fungible tokens (NFTs)). The 2021 legislation expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and to the IRS at the end of each year.

These exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B at the end of each tax year. Specifically, cryptocurrency exchanges will have to get the customer’s name, address, and phone number, the gross proceeds from the sale of digital assets, and capital gains or losses and whether these were short-term (held for one year or less) or long-term (held for more than one year).

Note that it’s not yet known whether exchanges/platforms will have to file Form 1099-B itself (modified to include digital assets) or some other, new IRS form.

Digital assets defined. For these reporting requirements, a "digital asset" is any digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. The IRS can modify this definition. As it stands, the definition will capture most cryptocurrencies, and could potentially include some non-fungible tokens (NFTs) that are using blockchain technology for one-of-a-kind assets like digital artwork.

Cash transaction reporting on Form 8300 will apply to cryptocurrency. Under a set of rules separate from the broker reporting rules, when a business receives $10,000 or more in cash in a transaction, that business must report the transaction, including the identity of the person from whom the cash was received, to the IRS on Form 8300. For this cash reporting requirement, businesses will have to treat digital assets like cash.

IRS’s Form 8300 requires the reporting of the identifying information of the individual from whom the cash was received-including address, occupation, and taxpayer identification number-as well as other information. The current-law rules that apply to cash usually apply to in-person payments in actual cash. It may be difficult for businesses seeking to comply with the post-2022 reporting rules for more than $10,000 in cryptocurrency to collect the information that must be reported on Form 8300.

What you should know. If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will need to begin tracking the holding period and the buy and sell prices of the digital assets in customers’ accounts.

Be aware that the transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies.

Finally, it’s good to keep in mind that the cryptocurrency exchanges or platforms will probably not have all the information they need to meet their reporting requirements under the new rules. This may make the first year of reporting for digital assets challenging for investors, as well as exchanges and platforms.

WASH SALE RULE AND CRYPTOCURRENCY

A wash sale occurs when you sell or trade securities at a loss and then buy them or substantially identical securities within 30 days before or after the sale. Under these rules if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it's even sold.

Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

The wash sale rule currently only applies to assets classified as stocks or securities and other financial instruments that are traded on organized exchanges. Cryptocurrency is classified as property by the IRS and is currently not subject to the wash sale rule. This means crypto investors are subject to the same taxes on capital gains and losses that apply to other investors, but they escape the wash sale rule that applies solely to financial securities thereby enabling an investor in a virtual currency to sell their position to lock in a capital loss and immediately repurchase the currency without losing exposure to the cryptocurrency.

It is worth noting that because of the growing popularity of cryptocurrencies, this “wash sale loophole” has received the attention of Congress and the Treasury Department and continues to be scrutinized. Under proposed provisions of the Build Back Better Act, which was ultimately defeated in the U.S. Senate, digital assets like cryptocurrency would have been treated the same as stock and securities in applying the wash sale rule for federal income tax purposes. This legislation would have applied to taxable years beginning after December 31, 2021. Although other bills are expected in the future that would apply the wash sale rules to cryptocurrencies there are no current proposals to close this loophole in 2022. As a result, it is suggested that interested investors might be able to lock in capital losses and repurchase their holdings before year end 2023 without risk of encountering the wash sale rule. Beginning in 2024, though, this might be subject to change.

We will continue to monitor the evolving reporting requirements and tax treatment of cryptocurrencies. Please contact the author of this Client Tax Alert Jeffrey Rambach, at (DD) 312-929-4425; (O) 385-355-4826 jeffrey.rambach@freemanlovell.com or your Freeman Lovell attorney with any questions or concerns you may have about these new reporting rules and tax treatment of cryptocurrencies.

Year-end 2022 Gift and Estate Tax Planning: Consider These Available Planning Ideas

Wed, 02 Nov 2022 12:46:00 GMT

Before it’s too late and as the year winds down to an end, it is important to identify the current status of proposed legislation that could strongly impact gift and estate tax planning strategies in 2023 and beyond. Even though the Inflation Reduction Act was recently enacted into law, it did not enact a number of proposed high-profile changes that were present in the earlier Build Back Better Act legislation. Depending on the outcome of the midterms, it is possible for concepts originally incorporated in the proposed Build Back Better legislation to come back to life. Generally, that would require Democrats to increase their control in the Senate and maintain a majority in the House. If this were to happen, previously proposed changes may be reconsidered.

Some proposed legislative changes to keep an eye on are (i) a reduction in the unified credit for estate and gift taxes to revert to its 2010 level of $5 million per individual, indexed for inflation, (ii) significant estate and income tax changes to the grantor trust rules, (iii) limiting valuation discounts to assets other than “nonbusiness assets”, (iv) elimination of the favorable 75% and 100% exclusion rates for gains realized from Qualified Small Business Stock if a taxpayer’s income exceeds $400,000, (iv) state and local tax cap changes, and (v) the elimination of the backdoor Roth IRA. Should there be a “blue wave” this November, you should revisit your year-end planning strategies.

Potential Planning Opportunities to Consider in 2022:

Fortunately, for now, there remain many effective and well-established tax planning strategies available to consider since the proposed legislative changes noted above were not enacted. These strategies include, but are not limited to, the following:

Other Planning Considerations

Contact your Freeman Lovell attorney if you have questions, or any of the attorneys in the firm’s Estate Planning Practice Group, including:

Jeffrey Rambach (DD) 312-929-4425; (O) 385-355-4826 , jeffrey.rambach@freemanlovell.com

Kristina Otterstrom (DD) 832-800-9326; (O) 385-355-4826 , kristina.otterstrom@freemanlovell.com

Peter Ness (DD) 603-234-1142 (O) 385-355-4826 , peter.ness@freemanlovell.com

Karissa Wilcox (O) 385-355-4826 , karissa.wilcox@freemanlovell.com

2023 Tax Rates and Deduction Amounts

Wed, 02 Nov 2022 04:00:00 GMT

The tax rates and deduction amounts for the 2023 calendar year will be as follows.

Federal ordinary income tax rates

Basic standard deduction

Each additional standard deduction (65 or over or blind):

Standard deduction for Dependents

For an individual who can be claimed as a dependent on another's return, the basic standard deduction for 2023 will be $1,250, or $400 plus the individual's earned income, whichever is greater. However, the standard deduction may not exceed the regular standard deduction for that individual.

FICA (employment tax)

SECA (self-employment tax)

Capital Gains Rates

The tax rate is 0%, 15%, or 20% depending on the amount of adjusted net taxable gain as shown below.

Alternative Minimum Tax Exemption Amount

For 2023, a taxpayer’s AMT is initially determined as the sum of 26% of the first $220,700 (or $110,350, in the case of married taxpayers filing separately) of alternative minimum tax income (AMTI) in excess of the allowable exemption amount and 28% of any additional AMTI.

Estates and Trusts

Kiddie tax

The exemption from the kiddie tax for 2023 will be $2,500. A parent will be able to elect to include a child's income on the parent's return for 2023 if the child's income is more than $1,250 and less than $12,500.

AMT exemption for child subject to kiddie tax

Note that no special exemption amount applies through tax year 2025.

Income-based limitations on Sec. 199A qualified business income deduction .

For 2023, taxpayers with taxable income above $182,100 for single and head of household returns, $364,200 for joint filers, and $182,100 for married filing separate returns are subject to certain limitations on the Code Sec. 199A deduction. The 2022 amounts were $170,050, $340,100, and $170,050.

Modified Adjusted Gross Income (MAGI) for making deductible contributions by active plan participants to traditional IRAs

In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of: (1) an inflation-adjusted statutory dollar limit, or (2) 100% of the compensation that's includible in his or her gross income for that year. For 2023, the statutory dollar limit is $6,500, plus an additional $1,000 for those age 50 or older.

If the individual (or his or her spouse) is an active plan participant, the deduction phases out over a specified dollar range of MAGI. For taxpayers filing joint returns, the otherwise allowable deductible contribution will be phased out ratably for 2023 for MAGI between $116,000 and $136,000.

For 2023, for single taxpayers and heads of household, the otherwise allowable deductible contribution will be phased out ratably for MAGI between $73,000 and $83,000. For married taxpayers filing separate returns, the otherwise allowable deductible contribution will be phased out ratably for MAGI between $0 and $10,000.

For a married taxpayer who is not an active plan participant but whose spouse is such a participant, the otherwise allowable deductible contribution will be phased out ratably for 2023 for MAGI between $218,000 and $228,000.

MAGI limits for making contributions to Roth IRAs

Individuals may make nondeductible contributions to a Roth IRA, subject to the overall limit on IRA contributions.

The maximum annual contribution that can be made to a Roth IRA is phased out for taxpayers with MAGI over certain levels for the tax year. For taxpayers filing joint returns, the otherwise allowable contributions to a Roth IRA will be phased out ratably for 2023 for MAGI between $218,000 and $228,000.

For single taxpayers and heads of household, it will be phased out ratably for MAGI between $138,000 and $153,000. For married taxpayers filing separate returns, the otherwise allowable contribution will continue to be phased out ratably for MAGI between $0 and $10,000.

Estate, Gift and GST Tax

If you have questions about these changes in tax rates and deduction limits or other federal or state tax law matters, please contact the authors of this Alert noted below or any attorney at Freeman Lovell, PLLC you know.

Jeffrey C. Rambach, 312.929.4425 , , jeffrey.rambach@freeemanlovell.com

Peter G. Ness, 603.234.1142 , , peter.ness@freemanlovell.com

What is a Registered Agent?

Mon, 31 Oct 2022 13:12:00 GMT

A registered agent is an individual or a company that is an LLC’s or corporation’s official point of contact in the state. A registered agent receives service of process, other legal documents, and official communications from the state or other parties, and forwards those important documents and communications to the LLC or corporation for which it is acting as registered agent.

This article covers:

If you have ever filled out the documents to form an LLC or corporation you have seen that the state requires the name and address of the LLC’s or corporation’s registered agent. And if you want to register or qualify the LLC or corporation to do business in foreign states — that is, any state other than the formation state — you will have to provide the name and address of a registered agent in each foreign state, too. Below we will explain why that is the case.

Definitions: resident agent, statutory agent, and agent for service of process

While every state law requires an in-state physical presence for an LLC or corporation, the terms they use for the agent providing that presence may vary. Most states use the term “registered agent,” highlighting the fact that the name and address of the agent are registered by the entity and are on file with the state.

However, some states use the term “resident agent,” which serves to emphasize that the agent must be a resident of the state.

“Statutory agent” is another term that may be used, highlighting the fact that this agent is required by statute. “Agent for service of process” is another term that is used, highlighting that the main function is the receipt of service of process.

Many statutes also require the LLC or corporation to set forth a registered office address. This is the registered agent’s location in the state. It must be a physical address. A post office address is not sufficient.

Who needs a registered agent?

Every LLC and corporation formed under the laws of a state or the District of Columbia must appoint and maintain a registered agent in its formation state and in every state where it is qualified to do business as a foreign LLC or corporation. Other statutory entities, and particularly those that provide the owners with limited liability — such as limited partnerships, general partnerships, and limited liability partnerships — are generally subject to a registered agent requirement as well.

This is a statutory requirement. It is required of corporations and LLCs by the state corporation and LLC statutes. It is not optional. And failing to comply with the registered agent requirement can result in statutory penalties.

Who besides the business entity filing office requires a registered agent?

Other state or federal statutes may require a registered agent in order to engage in certain businesses or activities. This is in addition to the state corporation and LLC laws requiring domestic and foreign corporations and LLCs to appoint and maintain a registered agent.

Often this is required for out-of-state businesses so that the administering agency, or a citizen of the state conducting business with the company, will be able to contact it, and if necessary, serve documents on it by contacting or serving the registered agent. A registered agent requirement imposed by a statute other than the business entity statute is sometimes referred to as a “special agency”.

An agent for service of process is also often appointed in contracts. A contracting party will provide the name and address of an agent upon whom any suits being filed against it arising out of the contract may be served. This provision adds a measure of predictability to the contract and helps avoid litigation over procedural issues. Unlike the statutory registered agent requirement — which provides the public with access to the name and address of the registered agent — only the parties to the contract have access to the agent for service of process information in a so-called “contract agency”.

A contract agency clause can be included in any contract or agreement.

However, it is commonly seen in, among others, loan agreements, guarantees, indentures, and franchise agreements. It is a fairly standard practice for lenders or guarantors to require that the borrowers appoint an agent for service of process in the loan or guarantee agreement.

Why do states require a registered agent? (And what does a registered agent do?)

The main function of a registered agent is to be available to receive service of process at a location in the state. Service may be delivered in person by a process server or sheriff or, in some states, by certified mail, return receipt requested. (A few states allow additional methods of delivery.)

A court can only make a ruling requiring a defendant in a lawsuit to take some action if the court has personal jurisdiction over the defendant. Valid service of process is required by the Due Process Clause of the U.S. Constitution in order for the court to have personal jurisdiction.

When filing a lawsuit against an entity such as a corporation or LLC, it can be difficult to know who is an authorized person to deliver the documents to. Not everyone associated with an LLC or corporation is authorized. And even if the plaintiff knows who is authorized — for example, corporate officers or LLC managers are generally authorized — those individuals may be hard to find. But because each LLC or corporation has to appoint a registered agent, and because the registered agent’s name and location are a matter of public record, the plaintiffs should have an easier time serving process.

Another important function of the registered agent is to be the point of contact for the Secretary of State (or whatever the business entity filing office is called). The filing office may send annual or biennial reports, notices of delinquency, and other important communications to the address of the registered agent. And because companies are required by statute to keep the name and address of the registered agent up to date, those important documents should be going to the proper person at the proper location.

What is service of process?

As we noted, a main function of the registered agent is to receive service of process. So, what is service of process?

Process is the document that provides notice that there is a lawsuit filed against the individual or entity. Service of process is the delivery of that document. Usually, this involves serving the defendant with a document called a summons. The summons is often accompanied by a complaint.

When an individual is sued, it is easy to figure out to whom to give the legal papers — that individual. But what about when it is a business entity such as a corporation or LLC? You cannot just go into a business and leave the papers with anyone who might work for the company. Service of process can only be served on someone the rules and statutes say can be served.

The service of process laws of every state provide that in the case of an LLC or corporation, process may be served on the registered agent. In most cases process can also be served on a corporate officer, LLC member or manager, a managing agent, or a general agent.

However, even when service on the registered agent is not required, plaintiffs often choose to serve the registered agent because the name and address are readily available and it avoids what can be timely and costly litigation over whether the individual served was actually authorized.

What other documents are served on a registered agent?

In addition to receiving service of process in connection with a lawsuit against the LLC or corporation directly, the registered agent receives other mission-critical documents, such as the following:

If an LLC or corporation has employees, it may be served with wage garnishments. A garnishment is an order directing a third party to seize the assets of a debtor to settle a debt. In the case of a wage garnishment, that third party is an employer, the debtor is an employee, and the assets are the wages owed to the employee. The wages of individuals can be garnished for child support, tax liens, student loans, and consumer debt.

Employers can be penalized for failing to comply with wage garnishment orders. For this reason, it’s very important to ensure that an LLC or corporation with employees has a professional registered agent handling service of process. Seven percent of United States employees have their wages garnished. And if an LLC or corporation receives a garnishment and fails to take action in time, it can be liable for the amount its employee(s) owes.

Similar to a garnishment is a charging order. A charging order is a court order requiring a third party to make payments owed the debtor to the debtor’s judgment creditor. For example, an LLC may be served with a charging order requiring it to pay any distributions owed to a member to that member’s judgment creditor.

How is a registered agent appointed or changed?

When you form an LLC or corporation, you must designate an initial registered agent and registered office. The state won't approve your Articles of Incorporation or Articles of Organization if you do not do so. The requirement applies when you register to do business in another state (foreign qualify) by obtaining a Certificate of Authority.

In a number of states, the formation or qualification document must contain the registered agent’s acceptance of the appointment. The registered agent’s name and address also must be set forth in the LLC’s or corporations’ annual or biennial report.

However, it is not enough to have a registered agent at the time of formation or qualification. An LLC or corporation must continuously maintain a registered agent in its home state and in every state where it is qualified to do business. The registered agent appointed upon formation or qualification will not necessarily be the registered agent forever. This is particularly true where the registered agent is an individual associated with the company rather than a professional registered agent. (Companies may decide to change professional registered agents, too.) Say an owner, member, lawyer, or employee is appointed. That person may leave the company’s employ and must be replaced as registered agent. Or if the company’s address is used as the registered office, and the company moves, the registered office address must be updated.

Changing the registered agent or office is a statutory transaction and the statutes vary somewhat. Often the states provide a change of registered agent or registered office form. In some cases, the change may be made on the annual report. In others, an amendment must be filed.

What happens if you don’t have a registered agent or your agent information is not accurate?

Having a registered agent is required by statute. And the information on file with the state — regarding who the registered agent is and where the registered agent is located — is also required to be accurate. There are penalties for violating those statutes. Under many statutes, the failure to maintain a registered agent and registered office, and a failure to notify the state upon a change of registered agent or registered office, is a basis for the state to begin procedures to administratively dissolve a domestic corporation or LLC or administratively revoke the authority to do business of a qualified foreign corporation or LLC.

In addition to the statutory penalties, being without a registered agent can put a company at risk in other ways.

Default judgments

The company may not receive a summons in a timely manner. For example, if a company is sued and there is no registered agent to receive the summons, the plaintiff can serve the company in another way — one that may result in the company not responding to the summons in time. In many states, for example, process may be served on the Secretary of State if attempts to serve the registered agent failed. And if there is no registered agent and no other person can be found, the plaintiff may be able to go to court and obtain permission to deliver notice of the lawsuit by “substituted service” — such as by publication in a newspaper — or other methods that may not result in actual notice.

If an LLC or corporation is validly served and does not respond, the plaintiff can obtain a default judgment. A default judgment can be entered against a defendant even if the lawsuit was frivolous and the defendant could easily have won the case. By the time the judgment is enforced against a company’s assets, it may be too late to undo the damage. And while courts do not favor defaults, and will overturn them, if the reason for the default was the LLC’s or corporation’s failure to comply with the state’s registered agent requirement, the court may be less inclined to do so.

Loss of good standing

A company risks its good standing with the state. The failure to maintain a registered agent by itself may be considered a basis for losing good standing. In addition, the annual or biennial report the corporation or LLC is required to file may be sent by the state to the registered agent. If the registered agent information on file with the state is not up to date the LLC or corporation may not receive the report and may not file by the due date. That will also result in a loss of good standing. And not being in good standing can have a serious impact on a business. It can prevent a company from bringing a lawsuit in the state, expanding into other states, or obtaining financing that it needs to expand the business.

Fines and penalties

An LLC or corporation may be hit with monetary penalties for non-compliance with statutory requirements.

Administrative dissolution

As noted earlier, the state can administratively dissolve an entity. If this happens, the owners may be exposed to liability for debts owed to business creditors. In most cases administrative dissolution can be remedied—but not in every case and not after too much time has elapsed.

Who can be a registered agent?

The minimum qualification to serve as a registered agent is pretty simple. The registered agent must be an individual resident of the state or a domestic or qualified foreign business entity with an office in the state. The one restriction in most states is that the LLC or corporation cannot act as its own registered agent.

For entities that are formed or qualified to do business in a state where one of the owners, managers, officers, or employees resides, the temptation may be to simply appoint one of these individuals as the registered agent. Another temptation is to have the entity’s attorney serve as the registered agent. Although expedient, these solutions usually are not the best option. An individual may not be at the registered office when process is delivered. Or they may be busy with their own work and forget to forward the documents to the LLC’s or corporation’s attorneys or otherwise may not be trained on what to do with these important and time-sensitive documents. Individuals also quit, retire, or move, and a new registered agent and office must be appointed.

What are the benefits of using a professional registered agent?

It is often a better strategy to choose a professional registered agent because it is essential that the registered agent always be ready, willing, and able to perform two critical functions mentioned earlier:

A professional registered agent — as the name implies — is a company in the business of providing registered agent services. With a professional registered agent, you can be confident that there will be someone at the registered address during all standard business hours and available to be served with a legal notice. There is no worry that the registered agent will be on vacation or away from the office when service of process is attempted. Moreover, receiving legal notices in front of customers (and if operating a home-based business, in front of your family, friends, and neighbors) can be uncomfortable, to say the least. This is more likely to happen if you use the business or home address as the registered office address than if you use a professional registered agent’s address.

Another key factor is that promptly relaying the information is essential, especially in the case of a lawsuit — which usually requires a response within a matter of days to avoid a default judgment. Receiving and forwarding legal documents is the professional registered agent’s entire job, not simply an interruption in an otherwise busy schedule.

Finally, dealing with paperwork and keeping up with industry requirements and regulations is time-consuming. A professional registered agent is focused on this area of the law and, in the case of CT, has a team of attorneys and contacts with state legislatures that monitors and responds to changes in the law.

When to use a professional registered agent

The choice of registered agent, like the choice of entity type, formation state, and entity name, is one of the earliest and most important decisions that a business entity's owners can make.

The following questions can help you decide whether having a professional registered agent makes sense for your LLC or corporation. If you answer “Yes” to any of these questions, you should strongly consider appointing a professional registered agent.

What to look for when choosing a registered agent

A registered agent should be reliable, accurate, and consistent. They should be available and physically present at the registered office during normal business hours. This ensures any hand-delivered legal documents get proper attention.

They should also know the business entity and compliance rules, have professionally trained staff with expert knowledge on how to properly handle and forward SOP papers, have state-of-the-art processes in place to deliver crucial documents to you, and follow up with you regarding delivery.

It is also important to have a registered agent that has the coverage and expertise to support your business as it expands into other states where a registered agent will be required.

For more information, see How to choose a registered agent.

Conclusion

Choosing a registered agent for a corporation or LLC is a very important decision. It is a vital role. If not done properly, it can have disastrous consequences for the company. It is for that reason that professional registered agent companies exist. Every person who is responsible for deciding who should be the registered agent in the home state or a foreign state should seriously consider appointing a professional registered agent.

If you need a registered agent in Utah, Arizona, Texas, Maryland, Massachusetts, or any other US state, set up a consultation with Freeman Lovell’s team of experienced attorneys. We work with small business owners and entrepreneurs to help them protect their interests and make the right strategic moves. You’re in the driver’s seat, and we’ll help you get to your destination.

Freeman Lovell Registered Agent Fees:

2022 Year-end Tax Planning for Businesses

Fri, 28 Oct 2022 13:00:00 GMT

With the end of the year approaching, it is time to start thinking about moves that may help lower your business’s taxes for this year and next. This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act of 2022 and the potential change in congressional balance of power resulting from the midterm elections.

Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.

If proposed tax increases do pass, however, the highest income businesses and owners may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you or your business, but you may benefit from many of them. We can narrow down specific actions when we meet to tailor a particular plan for your business, In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:

• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2022, if taxable income exceeds $340,100 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold.

• Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for 2022. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us.

• More small businesses can use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2022 if, during a three-year testing period, average annual gross receipts don't exceed $27 million (next year this dollar amount is estimated to increase to $29 million). Not that many years ago it was $1 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

• Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2022, the expensing limit is $1,080,000, and the investment ceiling limit is $2,700,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

• The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So, expensing eligible items acquired and placed in service in the last days of 2022, rather than at the beginning of 2023, can result in a full expensing deduction for 2022.

• Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the expensing deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2022.

• Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren’t required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, and where potentially increasing tax rates for 2023 aren’t a concern, consider purchasing qualifying items before the end of 2022.

• A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2022 (and substantial net income in 2023) may find it worthwhile to accelerate just enough of its 2023 income (or to defer just enough of its 2022 deductions) to create a small amount of net income for 2022. This allows the corporation to base its 2023 estimated tax installments on the small amount of income shown on its 2022 return, rather than having to pay estimated taxes based on 100% of its much larger 2023 taxable income.

• Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash-basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 2½ months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.

• To reduce 2022 taxable income, consider deferring a debt-cancellation event until 2023.

• Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of 2022 income is desired, consider disposing of a passive activity before year-end to take the suspended losses against 2022 income. If possible 2023 top rate increases are a concern, holding off on disposing of the activity until 2023 might save more in future taxes. These are just some of the year-end steps that can be taken to reduce taxes.

If you would like to discuss or have questions about taking advantage of one or more year-end tax planning opportunities, we encourage you to contact one of our tax attorneys noted below or any attorney at Freeman Lovell that you know. Again, by contacting us, we can create a particular plan that will work best for your business.

Jeffrey C. Rambach, 312.929.4425, , jeffrey.rambach@freeemanlovell.com

Peter G. Ness, 603.234.1142, , peter.ness@freemanlovell.com

2022 Year-End Tax Planning for Individuals and Families

Thu, 27 Oct 2022 13:00:00 GMT

With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act of 2022 and the potential change in congressional balance of power resulting from the midterm elections. Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions. If proposed tax increases do pass, however, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2022 to be taxed at currently lower rates, and deferring deductible expenses until 2023, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you (or a family member) may benefit from many of them. We can narrow down specific actions when we meet to tailor a particular plan for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:

• Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

• As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $83,350 for a married couple; estimated to be $89,250 in 2022). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.

• Postpone income until 2023 and accelerate deductions into 2022 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2022. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That's especially a consideration for high-income taxpayers who may be subject to higher rates next year under proposed legislation.

• If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2022 if eligible to do so. Keep in mind that the conversion will increase your income for 2022, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

• It may be advantageous to try to arrange with your employer to defer, until early 2023, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.

• Many taxpayers won't want to itemize because of the high basic standard deduction amounts that apply for 2022 ($27,700 for joint filers, $13,850 for singles and for marrieds filing separately, $20,800 for heads of household), and because many itemized deductions have been reduced or abolished, including the $10,000 limit on state and local taxes; miscellaneous itemized deductions; and non-disaster related personal casualty losses. You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a restricted amount of debt, but these deductions won't save taxes unless they total more than your standard deduction.

• Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year. The COVID-related increase for 2022 in the income-based charitable deduction limit for cash contributions from 60% to 100% of MAGI assists in this bunching strategy.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2022 deductions even if you don't pay your credit card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2022, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2022. But this strategy is not good to the extent it causes your 2022 state and local tax payments to exceed $10,000.

• Required minimum distributions RMDs from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2022. If you were 72 or older in 2022 you must take an RMD. Those who turn 72 this year have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs next year.

• If you are age 70½ or older by the end of 2022, and especially if you are unable to itemize your deductions, consider making 2022 charitable donations via qualified charitable distributions from your traditional IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (The qualified charitable distribution amount is reduced by any deductible contributions to an IRA made for any year in which you were age 70½ or older, unless it reduced a previous qualified charitable distribution exclusion.)

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2022 if you are facing a penalty for underpayment of estimated tax and increasing your wage withholding won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2022. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2022, but the withheld tax will be applied pro rata over the full 2022 tax year to reduce previous underpayments of estimated tax.

• Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.

• If you become eligible in December of 2022 to make HSA contributions, you can make a full year's worth of deductible HSA contributions for 2022.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $16,000 made in 2022 to each of an unlimited number of individuals. You can't carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2022 return normally filed next year), or on the return for the prior year (2021), generating a quicker refund.

• If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2022 to maximize your casualty loss deduction this year.

These are just some of the year-end steps that can be taken to save taxes. If you would like to discuss or have questions about taking advantage of one or more year-end tax planning opportunities, we encourage you to contact one of the experienced tax attorneys noted below or any attorney at Freeman Lovell that you know. Again, by contacting us, we can tailor a particular plan that will work best for you.

Jeffrey C. Rambach, 312.929.4425, jeffrey.rambach@freeemanlovell.com

Peter G. Ness, 603.234.1142, peter.ness@freemanlovell.com

Does Your Business Qualify for Tax Credits Under the Inflation Reduction Act?

Wed, 19 Oct 2022 13:58:00 GMT

Inflation Reduction Act's Individual, Small-Business Credits

The recently enacted Inflation Reduction Act of 2022 (PL 117-169) (the “Act”) contains several new environment-related tax credits that are of interest to individuals and small businesses. The Act also extends and modifies some preexisting credits.

Extension, Increase, and Modification of Nonbusiness Energy Property Credit

Before the enactment of the Act, you were allowed a personal credit for specified nonbusiness energy property expenditures. The credit applied only to property placed in service before January 1, 2022. Now you may take the credit for energy-efficient property placed in service before January 1, 2033.

Increased credit. The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred by you for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can't exceed $150.

Annual limitation in lieu of lifetime limitation. The Act also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.

Extension and Modification of Residential Clean-Energy Credit

Before the enactment of the Act, you were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024.

The Act makes the credit available for property installed in years before 2035. The Act also makes the credit available for qualified battery storage technology expenditures.

Extension, Increase, and Modification of New Energy Efficient Home Credit

Before the enactment of the Act a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.

The Act makes the credit available for qualified new energy efficient homes acquired before January 1, 2033. The amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.

New Clean-Vehicle Credit

Before the enactment of the Act, you could claim a credit for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year.

The Act, among other things, retitles the NQPEDMV credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must take place in North America.

No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer's suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs).

Finally, the way the credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.

Credit for Previously Owned Clean Vehicles

A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price. No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others. In addition, the maximum price per vehicle is $25,000.

New Credit for Qualified Commercial Clean Vehicles

There is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022.

The credit per vehicle is the lesser of: 1) 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or 2) the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.

Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Under pre-Inflation Reduction Act law, a "qualified small business" (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax.

Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can't exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

Extension of Incentives for Biodiesel, Renewable Diesel and Alternative Fuels

Under pre-Act law, you could claim a credit for sales and use of biodiesel and renewable diesel that you use in your trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now you are permitted to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024.

You're also now allowed to claim a refund of excise tax for use of 1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of such mixtures on or before December 31, 2024, and 2) alternative fuel as that used in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.

Specific IRS guidance and details are still under development, but the wide variety of credit extensions and enhancements merit consideration for eligible taxpayers beginning in 2023.

If you would like to discuss or have questions about taking advantage of these new and modified tax credits, or other federal, state, or local tax law matters, please contact any attorney at Freeman Lovell that you know, or the authors of this Client Alert noted below.

Jeffrey C. Rambach, 312.929.4425, jeffrey.rambach@freeemanlovell.com

Peter G. Ness, 603.234.1142, peter.ness@freemanlovell.com

Why You Should Get Your Business Involved in Hunger Action Month

Wed, 22 Sep 2021 19:33:00 GMT

Together, We Can Make a Difference

September is Hunger Action Month, and we at Freeman Lovell are encouraging all entrepreneurs to do their part to make a difference.

Why Should You Join?

Every year, families and individuals alike struggle to make ends meet. Unfortunately, the amount affected has increased significantly over the past year and a half, with over 38 million Americans suffering from hunger. A combination of all-time high unemployment rates, decreased access to many social services, and closed school cafeterias have caused many people to question when their child’s next meal will be.

When you commit to making a difference during Hunger Action Month, you provide life-changing resources to those in need.

Who Are You Helping?

No community is immune from the effects of food insecurity, and it’s the responsibility of all to do our part to ensure that no person goes hungry. So, when you give back, who are you helping?

How Do You Get Involved?

There are so many ways to get involved with Hunger Action Month. You can donate your time, money, or resources to help those in your community.

Here are a few easy ideas:

Local Resources:

We have added links to local food banks and hunger statistics for each of our office locations for your convenience.

Utah: , Utah Food Bank , [Utah Hunger Stats]

Arizona: , Arizona Food Bank , Arizona Hunger Stats

Texas: , Texas Food Bank , Texas Hunger Stats

Massachusetts: , Massachusetts Food Bank , Massachusetts Hunger Stats

Maryland: , Maryland Food Bank , Maryland Hunger Stats

Want to take a more hands-on approach? Many religious and educational groups provide services and meals for the needy. If you’re interested in getting involved at a grassroots level, this could be a great option for you and your team.

Ultimately, it doesn’t matter as much HOW you give back, so long as you DO give back in one way or another. As Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.”

Still On the Fence?

We all know that participating in philanthropic endeavors is the right thing to do. Still, if you need a little more encouragement about how philanthropy can positively affect your ROI, we’ve got your back.

In today’s world, , you can’t underestimate the power of brand reputation . Having a brand geared for good creates a strong company culture. It also makes a message your audience can relate to (provided that you are authentic and genuine when participating in these endeavors).

Being a brand that gives back shows that you are actively making your community a better place for all. Become a leader for positive change, and you will be surprised by how your business can blossom.

Want to learn more about how to get your business involved with community outreach programs, nonprofits, scholarships, etc.? Our team of experienced business attorneys at Freeman | Lovell, PLLC, can help. Schedule a , consultation today to get started.

From Idea to Exit: Structure - Rights of First Refusal

Tue, 06 Apr 2021 02:36:00 GMT

At Freeman Lovell, our business lawyers help entrepreneurs and small business owners structure and build businesses that can scale and be sold someday.

https://youtu.be/3X3b7rEG4mo

First Protect Your Business

As a business law firm that focuses on helping small businesses succeed, one of the common mistakes we see businesses make is adopting operating agreements or corporate bylaws that don’t allow the company to control its cap table by protecting the company’s owners instead of protecting the company itself.

The decision between a right of first refusal and a right of first offer is a place where this mistake is commonly made. Many business owners mistake a right of first refusal and a right of first offer as the same thing. This article will clarify the differences.

What is a Right of First Refusal?

A right of first refusal gives the company the right to buy the equity that an owner is trying to sell to a known third party.

For example, let’s say that I own equity at XYZ Corp with others. Later on, I decide to sell my shares and, as part of this decision, I find a friend who wants to buy my shares in XYZ Corp. If XYZ Corp has a right of first refusal provision in its bylaws, then the company has the first right to buy the equity on the same terms that my friend wants to buy my shares.

After presenting the terms to the company, the company can elect to purchase my shares on those terms. If the company declines to purchase on those terms, then the other owners may have the right to buy my shares on those terms (depending on the terms of the operating agreement or bylaws). Only when neither the company nor the other owners choose to buy my shares can I return to my friend and sell the shares to him on those terms.

In sum, the right of first refusal works when an owner first finds the buyer, negotiates terms with the potential buyer, and then presents them to the company and its owners to decide whether they want to match those terms and buy the shares.

What is a Right of First Offer?

In a right of first refusal, the equity owner has to negotiate and set terms with the potential buyer first. In a right of first offer, the owner must negotiate first with the company before finding a third-party to buy that equity.

For example, say I am an owner of membership units in ABC, LLC, and its operating agreement contains a right of first offer clause instead of a right of first refusal. To sell my units before I find a third-party buyer, I need to go to the company first and make an offer to sell on the terms I set. Then the company can accept or deny my offer. If the company rejects my proposal, I can try to find and sell the shares to a third-party buyer.

Company > Owner: The Case Against the Right of First Offer

Here are the reasons why I advise my entrepreneur clients generally to avoid the right of first offer:

In comparison with a right of first offer, here are the reasons why a right of first refusal is better for the company:

These provisions can be complicated. Our job is to help our clients understand these options and put their business first.

Freeman Lovell’s business and corporate attorneys ensure that entrepreneurs and small-business owners have operating agreements and bylaws that work for their company’s success. To learn more about how to structure a business for success, watch our From Idea to Exit presentations .

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

From Idea to Exit: Structure - For Cause Repurchase Rights

Tue, 06 Apr 2021 02:18:00 GMT

You know how hard it is to build a successful business. Our business lawyers want to make sure that entrepreneurs and small business owners have every advantage possible in making that happen.

A solid and secure legal foundation is a crucial component to doing so, and that is why your operating agreement or your bylaws are so critical to your business. In previous posts, we discussed methods of ensuring that your business can control your company’s equity in a way that allows the company to grow, develop, and reach its potential.

Considering this theme, a provision that we as business attorneys advise our clients to include in their operating agreements or bylaws is a for-cause repurchase right.

https://youtu.be/ZBX-UOqy1Qs

Protection from Bad Actions

For-cause repurchase rights protect the business when owners make actions that are not in the company’s company’s best interest. The for-cause repurchase rights allow the company to distance itself from that owner and purchase that owner’s equity back.

An example of an action that is not in the company’s best interest is if an owner of the business is convicted or engages in an activity that could lead to a conviction of a misdemeanor or felony-level criminal offense involving fraud, embezzlement, or dishonesty. By having this provision, the company can elect the right to repurchase that owner’s equity.

Another common trigger in a for-case repurchase clause is if there's a material breach that goes uncured of the operating or shareholder agreement or other agreement between an owner and the company. The threat of losing your equity creates an additional incentive for owners to comply with their contracts and obligations to the company.

Ability to Rebuy Equity

The idea is that if someone does something that materially hurts the company, then the company needs to be able to repurchase that bad actor’s equity. There is no room on the cap table for deadweight, and there is no reason that they should ever benefit further from you building your business.

We even regularly add a provision that allows for the company to buy the equity at a reduced rate, typically at about 50% of the fair market value of that owner’s equity. The percentage discount can change depending on how big of a disincentive they want to set for bad-actors. As a result, we regularly see the discount spanning between 20% and 80%.

As these are common aspects that go into a for-cause repurchase right, it's something that each company should carefully evaluate having in their operating agreement or bylaws.

The business attorneys at Freeman Lovell love assisting entrepreneurs and small-business owners understand, mitigate, and take the right legal risks in their operating agreements and bylaws.

Call or text us at (385) 217-5611 or send us a message through our , Contact Form .

You can also access all of our presentations on this section to learn more about how you can build your business and how we will clear the way for your success from idea to exit at this LINK .

Buy-Sell Basics

Fri, 12 Mar 2021 07:00:00 GMT

At Freeman Lovell, our business lawyers help entrepreneurs and small business owners not only avoid the legal pitfalls that can cripple their businesses but build scalable businesses and provide a successful exit for that owner.

Most multi-owner businesses need a buy-sell agreement in their LLC’s operating agreement or corporation’s shareholder agreement. The buy-sell agreement determines what happens to business owners’ equity in everyday situations like the death, disability, divorce, or bankruptcy of an owner.

This article will discuss the following topics:

Importance of a Solid Foundation

A solid legal foundation is one of the essential keys to having a viable and sellable business, specifically how you choose to resolve the following issues:

Most fatal flaws that kill businesses happen because foundation cracks are left ignored until it is too late to fix them. However, you can avoid many of these problems if you catch them early on in your business journey .

Your LLC’s operating agreement or corporation’s bylaws and shareholders’ agreement will cover most of these issues. That is why those agreements must be written well and regularly reviewed.

Control Your Cap Table

One of the critical components of creating a solid foundation for your business is ensuring that it controls equity ownership. Controlling your cap table is important because, as your business grows, you will likely compensate key employees and partners with equity to attract the best talent and partners.

Making sure that you don’t have deadweight equity holders owning chunks of your business can be very important to do this right. The key ways that an LLC or corporation does this is through equity vesting and equity repurchase rights.

Our last article focused on vesting, and this article will focus on those repurchase rights that fall under the label of a buy-sell agreement. The events that trigger a company’s repurchase rights in a standard buy-sell provision are the following:

There are other repurchase rights that you should include in your operating agreement or shareholder agreement, like “for-cause” repurchase rights and others. For now, we’re going to focus on the buy-sell standard repurchase rights and how to structure and navigate those.

The Standard Buy-Sell Provisions

Our last article focused on vesting, and this article will focus on those repurchase rights that fall under the label of a buy-sell agreement. There are a few events that trigger a company’s repurchase rights in a standard buy-sell provision.

Death & Disability

Do you want the company to have the option to repurchase the equity of a deceased or disabled partner, or do you want to allow their heirs and estate to inherit the equity? These are critical questions to ask when considering this provision for your buy-sell agreement.

Here are the simplified mechanics of how this provision works:

In some versions of this provision, the other partners can also purchase the deceased partner’s equity if the company decides not to buy back the equity.

In general, I like to see companies keep their options open and put their rights before the owners’ rights. With this in mind, my preferred approach is to give the company the right to purchase the equity at that time. Until then, you won’t know the company’s needs for additional equity or how great or difficult it may be to work with the deceased partner’s heirs.

Don’t worry; you won’t be taking advantage of them. The company will still have to pay the estate for the full fair market value.

Divorce & Bankruptcy

When a partner (or that partner’s spouse) files for divorce or bankruptcy, the divorce or bankruptcy court can take actions that could lead to having new and unwanted partners. In a divorce, this would be the partner’s ex-spouse. In bankruptcy, this would be the bankruptcy estate trustee. Either way, the business loses control of the cap table.

So how does this provision help?

First, this provision is triggered upon a court’s order or law that changes the ownership. So if your partner can navigate the divorce or bankruptcy in such a way that the ownership of his or her equity in the business doesn’t change, then this clause is never triggered, and that partner continues to own all of their equity.

So what happens if the court does transfer the ownership of your partner’s equity?

Here are the simplified mechanics of how this provision works:

In some variations of this provision, the partner has the first right to buy back their ex-spouse’s equity.

Another critical aspect of making this provision binding is to have each partner’s spouse sign a spousal consent to the divorce and bankruptcy repurchase right.

Common Ways to Value a Business for Repurchase

So you added a buy-sell agreement to your operating agreement or shareholders agreement. The next step is to decide how to set the purchase price if an equity repurchase gets triggered. This section will explore the four most common valuation approaches that I see in my practice as a business lawyer. They are the following:

These goals will help you determine which of the above options you choose:

Business Valuation

With a business valuation, it’s as easy as hiring a business valuation expert to prepare a business valuation. To complete their report, the valuator will do the following:

The not-so-easy part is getting all this information about your business. Business valuations can take months to complete and cost you thousands of dollars or more, depending on your business’s size and the complexity of its structure.

The upside of using a business valuation to determine the purchase price for your buy-sell agreement is that it is the most objective and accurate method to set a purchase price if a triggering event occurs. Another upside is that the valuation is determined by an independent third-party. The downside is that it is intensive in terms of business owner effort, time, and cost.

If the accuracy of the purchase price is the most crucial consideration, then going with a formal business valuation is the way to go.

Annual Determination of Company

This approach to valuing the company is the least scientific. With this valuation approach, the company’s owners and managers get together once a year and set the repurchase price for the coming year. Typically this happens in conjunction with an annual meeting at the end of a fiscal year. When done right, the owners consider some of the factors that a business valuation expert would consider, as discussed in the previous section. Ultimately, this is something that the company’s ownership and management determine.

This valuation approach works well when each of the owners fully engages in the company and understands the business well.

As a business attorney, I have concerns about this approach. When you have a larger group of owners who don’t have much experience with the company’s operations, this valuation approach can lead to legal disputes over whether the company’s management or ownership manipulated the valuation.

Another problem that arises with this approach is if the Company forgets to set the valuation in any given year or can’t reach a consensus on setting the purchase price. If that happens, there needs to be a different fallback method of valuing the company and establishing the buy-sell purchase price.

Multiple of EBITDA

EBITDA is a way to measure profitability without adjustments for non-operating expenses associated with interest, taxes, depreciation, and amortization. EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. Here is the formula for calculating EBITDA:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

The “multiple-of-EBITDA” valuation approach is popular with technology companies because a multiple on EBITDA is a common way to value tech companies and negotiate investment valuations. For this reason, it is usually at the top of the mind of a founder seeking investors.

After calculating EBITDA, the next step is to understand what multiple to apply to your company. Multiples depend on business size, industry, location, and several other factors. Multiples for small to mid-sized private businesses typically range between 1.5x and 10x. Talk to a business valuation expert or business broker to get a feel for what the going multiples are for your business type.

Once you do the legwork to make sure that you can easily account for your EBITDA and set an appropriate multiplier, you will be ready to go. If a repurchase event triggers the repurchase of equity, you can take a look at your books, do a little math, and voila, you have your purchase price.

While this is super easy, the challenge arises when you are in a fast-growing business. A company that goes from $500K EBITDA to $1.5M EBITDA could quickly jump from a 2x multiple to a 5x multiple. Planning for this and building a range table into your valuation mechanism is essential, or it requires regular review and updating.

As a business lawyer watching my clients’ behavior, I have observed that most business owners don’t regularly review and revisit these things because they are not at the forefront of growing and building a business. If you go this route, take growth into account on increasing multiples or regularly review your operating agreement and shareholders agreement as a company. To share some practical advice, our law firm’s board of managers review and provide feedback on our operating agreement annually.

So while this is potentially an easy and convenient way to set a repurchase price, it comes with some accuracy perils that you will need to carefully monitor.

Book Value

One of the most straightforward ways that some companies choose to have their repurchase price value available is to have the repurchase price based on its book value. The book value is the value kept on the company’s internal books and accounting. The advantage to this approach is that it is effortless to establish, assuming that you are keeping up on your accounting. The disadvantage of this is that a company’s book value is often significantly less than its fair market value.

As a corporate attorney, I regularly advise against this for my clients, but on occasion, a client will insist, and if they are on top of their accounting and understand the risks, I will oblige.

How to Afford the Repurchase Price

The most crucial component of a buy-sell agreement is how your company is going to afford it. If you don’t plan to afford the purchase price, you can put your company in a deep financial hole if a repurchase right is triggered.

As a business lawyer, I prefer to make the repurchase optional instead of obligatory. That way, if there aren’t funds to complete the repurchase or if the financial responsibility of the repurchase is too burdensome on the company, then the company can opt-out of the repurchase right. This approach is part of the business-first philosophy that I advocate.

The second thing I do is give the company the option to pay the repurchase price either upfront or over time to avoid forcing the company to come up with a large lump sum all at once.

Third, if the business has the capital to do so, look into other alternatives to pay as much of the repurchase price upfront as possible. These alternatives include key-person insurance, SBA and bank loans, and sinking funds.

Installment-Payment Structure

You should address these three components of the installment-payment structure in your operating agreement or shareholder agreement:

My default percentage for a small business is 10%, and the company pays the remainder over five years at 5% interest. Larger companies will reduce this percentage.

Another tip is to include an installment-payment provision as a fallback option even if you use one of the below alternatives.

Key Person Insurance

Key person insurance can be either life insurance, disability insurance, or both, which the company purchases on the key owners. If a triggering event happens, the insurance is paid to the company. The company can use this insurance to fund the buy-sell repurchase price.

Like personal life insurance, key person policies can be purchased as term or whole life insurance policies and vary in price based on the key owner’s age and health.

Suppose you use key person insurance to help fund the buy-sell agreement. In that case, you will need to make sure that you pay attention to the increases in the value of your key owner’s equity to make sure that you have sufficient insurance available to pay the repurchase price.

As discussed above, this is a reason that we advise our clients to have the installment payments options available as a fallback option because this will function better with these key person policies.

Take Out a Loan

If worse comes to worst or you want to fund the repurchase immediately, you can go to your bank or other private lender and get a loan to finance the repurchase price. There are various loan programs available for these kinds of purchases, each with different pros and cons.

You must consider that the lender will require you to give some kind of collateral for the loan. This collateral could be assets or equity in your company. In some circumstances, the lender may also ask for liens on your personal assets like your home, cars, and other valuable assets. Another common request from your lender will be a personal guaranty of likely all significant equity owners.

Granting collateral and personal guaranties can result in significant additional risk to your company and your personal finances. Proceed with caution!

Sinking Fund

A sinking fund is just a fancy way of saying that you will set aside a certain amount of money on a monthly, quarterly, or annual basis that will be used for paying the repurchase price of the buy-sell agreement. Setting up a sinking fund can be as easy as setting up a separate savings account. This money can also be invested in different liquid investments to safely increase your savings set aside to cover your buy-sell purchase price.

In conclusion, these are some of the common ways to cover a buy-sell agreement’s repurchase price. Remember, these are not exclusive, but you can use these strategies together to pay the repurchase obligations allowed in your operating agreement or shareholder agreement.

Beware the Shotgun Provision

A provision that sometimes sneaks its way into operating agreements and buy-sell agreements is the shotgun provision.

The shotgun provision allows an owner to purchase equity from or sell their equity to their partner at an amount that they set. Then, the non-offering partner has to decide whether to buy his partner’s equity or sell his equity to his partner at that amount.

While this sounds innocent enough, I am not a fan. As a business lawyer, one of my jobs is to watch out for situations where parties can use contracts to take advantage of other parties. When people are taken advantage of, lawsuits happen, and lawsuits are what I get paid to help my clients avoid.

I have seen with this provision that owners can take advantage of the financial disparity between owners. Suppose one owner has significantly fewer financial resources than another. In that case, the financially weaker owner is at a significant disadvantage. The financially stronger owner may use this provision to force the financially more vulnerable partner out of the business even when that owner may not want out.

Another problematic situation arises when you have more than two owners. Trying to navigate this provision equitably between two owners is hard enough. Try doing it with five owners. It quickly becomes a mess.

As a corporate attorney trying to protect businesses’ interests over the owners’ interests, I also don’t like how owners who may provide a significant value to the company could be forced out of the business by this provision by an owner with differing opinions.

Beware the shotgun provision. There are just too many ways to abuse it.

A Buy-Sell Doesn’t Replace Vesting

A quick word of caution about buy-sell agreements; the buy-sell agreement doesn’t replace equity vesting. Having a buy-sell agreement in your operating agreement or shareholder agreement doesn’t replace properly using vesting. Vesting is a separate, critical way to control your cap table and equity. Buy-sell agreements do not protect the company from an equity owner who just stops providing your company services.

When Buy-Sell Agreements Don’t Make Sense

Most businesses are well served with a buy-sell agreement, but most are not all. Here are a couple of situations where buy-sell agreements may not make sense:

The Wrap-Up

While there are many nuances to buy-sell agreements, every multi-owner small business should explore whether a buy-sell agreement makes sense for their operating agreement or shareholder agreement. If it makes sense to include one, make sure that you think about how to value the company’s equity and start planning how the company will pay that repurchase price. Ignoring those two items is a formula for buy-sell failure.

If you want some help getting this figured out for your business, don’t hesitate to contact one of Freeman Lovell’s business attorneys. We can help you.

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

Want to know more?

Check out our YouTube channel and see more videos like the one below:

https://youtu.be/eEOSgm9RoQo

Structure - Vesting and Dividing Equity

Thu, 04 Feb 2021 02:06:00 GMT

At Freeman Lovell, the success of entrepreneurs and small businesses is our goal. Whether you are a tech founder, real estate investor, or creative professional, our business lawyers are here to help you avoid common legal traps and take the right risks to take your business from idea to exit.

A common question our business attorneys get is how to split up equity between the founders of your business. This article will discuss: (1) a formulaic way to divide up equity among your founders, and (2) how to determine how to properly use vesting.

Think Long Term

Before we jump in head first on equity splits and vesting, I want to discuss several guiding principles to keep in mind as you figure out your equity split. The first is to think long term. Imagine your business in 10 years after ups and downs but plenty of growth and success. How much is your business worth? One million, fifty million, or an easy billion? When you imagine your business at what it could be and not what it is when you start, it’s easier to understand how much equity is 10%, 20%, or more. It’s also easier to understand why vesting, even for founders, is so important.

The Success of the Business Is The Big Picture

The next guiding principle is to think of your business as a living, breathing organization more important than the owners. Keeping that in mind, your business should be divided up and equity reserved to account for future growth, future needs, and future success.

Dividing the Pie

Dividing up equity is much like baking and cutting up a pie. You should consider several ingredients when dividing up equity between founders.

Ingredients

Typical ingredients of starting any successful business are the following: the idea, the cash & property, the connections, the marketing, and the services and execution. Like the ingredients in a recipe, you should allocate a percentage of the cap-table pie to each of them.

, The Idea

A percentage of the equity should go to the founder or founders that had the idea. In my opinion, this ingredient should make up between 10% and 20% of the company. The idea is also a part of the business that is being fully contributed from the business’s outset and should not be attached to any vesting requirements.

, The Cash & Property

If any of the founders are contributing cash or property, either tangible or intellectual property, those founders should receive a percentage of fully-vested equity in the business. This amount will vary significantly based on the amount of cash or the value of the property contributed.

, The Execution and Services

The long, hard work to build the foundation of a business that can scale is not trivial and should be compensated accordingly. In my opinion, I believe that majority of a company should go in this bucket. Of course, you don’t want to give all the equity up for a promise of hard work, and this is the area where I see the most mistakes made. I have seen instances when entrepreneurs give a cofounder a considerable amount of fully-vested equity. Then the partner just stops working, leaving you stuck with a deadweight co-founder and no way to reduce their equity accordingly. Don’t let this happen. All equity you allocate to a founder for the services they will provide should be subject to vesting.

, The Expertise

Some businesses will need specific skills or unique expertise to be successful. Sometimes this required expertise will be technical, professional, or experience-based. Regardless, there is value in this expertise, and you should compensate it with equity. Typically, this expertise will need to be applied over time for it to be valuable, and for that reason, this equity should not be vested upfront but slowly over time.

The Connections

In some circumstances, you may have a person that brings significant industry connections or influence that you would like to be part of your founding team. There is real value behind these connections for the long term success of your business. A founder that puts those connections to work and jumpstarts a business should be compensated with equity accordingly. Like expertise, because these connections will need to be nurtured consistently over time. For that reason, this equity should also vest over time.

Reserved Equity for Future Executives and Employees

Now that you have figured out how to divide up equity between founders, you need to take another look at the long-term vision for the company. Are you going to need to grant more equity to employees, future executives, employees, or other key partners? If you answer yes to this, you will want to set aside a pool of equity for them. You may need to give them sufficient equity to attract that kind of talent. Companies that plan on using equity to attract employees will often set aside an additional 10% to 20% of the company’s equity to grant when bringing on others in the future.

Control Considerations

As you go through and divide up the pie considering the above ingredients, one other consideration that you need to consider is how the divided up equity will affect the owners’ decision-making. You should think through how the percentages would affect decisions both on a majority and supermajority basis. Founders are regularly giving themselves amplified voting rights by putting in their operating agreements or bylaws that the founders have two votes or more per share and everyone else just one vote per share.

Vesting

Why Vesting

As we touched on above, vesting is very important. Vesting allows you to control the ownership of equity over time to ensure that a founder, employee, or advisor keeps acting in the company’s best interest. Vesting ensures that if they lose interest and stop providing services, you can claw back some of the equity that they didn’t earn by failing to provide services for the length of time you expected for the amount of equity granted.

So why not just give out equity grants every year or at the end of the services are provided? Well, it comes down to taxes. If you make separate grants at the end of each year, the grantee will need to pay taxes on the business’s increasing value, or the option or profits interest strike price would be higher and higher each year. If you grant them a larger percentage early in the company when the company is worth very little, with a long term vesting schedule, that equity owner can file an 83(b) election and pay very little tax.

Time-Based vs. Performance-Based

There is a regular debate of whether to use time-based vesting or performance-based vesting. For me, nine times out of ten, err on the side of time-based. Here are the basics of both:

Basics of Time-Based Vesting

The industry standard is the 4-year vest, one year cliff. This structure has nothing to do with clothing and even less to do with geography. What this means is that the equity granted is going to vest over four years. So what in the world is the one-year cliff? The one-year cliff means no equity vests until the grantee provides a full year’s services to the company. An employee who has this vesting schedule is required to stay for all 12 months of the first year to get anything, and then after that, equity will vest monthly. This vesting structure is a mechanism to prevent short-term employees from having any long-term interest in the company. As a business lawyer, I like this vesting structure because it is straightforward and easy to track and calculate. I like this as a business attorney because it is difficult to dispute the vesting calculation. There is nothing a corporate attorney hates more than a dispute over a contract that they drafted.

Basics of Performance-Based Vesting

There is no industry standard when it comes to performance-based vesting. Generally, performance-based vesting is based on the company or employee meeting some financial or numerical criteria. Performance-based vesting sounds fine and good, but is it? Here are three top-of-mind reasons I don’t like this type of vesting:

One type of performance-based vesting that I am okay with is when hourly and monetary contributions are predetermined, tracked, and calculated for the founders. Performance-based vesting is a good structure for businesses made up of founders who have other full-time jobs. How this works is that you grant 1,000,000 units/shares, and each year, 200,000 of those units/shares can vest based on the hours and dollars contributed by the grantee.

Conclusion

If you take anything away from this, I hope it is this: Think long term. Use vesting with any amounts of equity that the grantee should earn over time. Give fully vested equity for the business concept and actual cash and property contributed.

If you want some help getting this figured out for your business, don’t hesitate to contact one of Freeman Lovell’s business attorneys. We can help you.

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

Want to know more?

Check out our YouTube channel and see more videos like the one below:

https://youtu.be/f9rEs-5eHA0

Structure - Control Your Cap Table

Thu, 21 Jan 2021 16:36:00 GMT

The fact that you are reading this means that you are an entrepreneur, business owner, or planning to become one. You are our heroes and we applaud you for taking on this journey and challenge. One of the most important things that you can do in starting a business is properly being able to control your cap table. And controlling your cap table will enable you to have a business that can grow and scale.

What is a Cap Table

So first off, a cap table is the list of owners of equity in your business and how much equity you have reserved to sell or grant in the future to additional owners, including employees or investors. Here’s a visual example of what a cap table looks like:

How to Control Your Cap Table

What does it mean to “control” your cap table? With an Operating or Shareholder Agreement, there are two different philosophies that are in tension in each. On one hand, you can err on the side of protecting the company, and on the other, you can err on the side of protecting the owners.

I often see owners make the mistake of erring on the side of protecting the owners in a way that lays roadblocks in front of the business when it tries to grow and scale. Anti-dilution clauses and requiring unanimous consent from owners to authorize and issue new equity are the most common ways people stumble when trying to grow a business. In my professional opinion, I would trade an anti-dilution provision for preemptive rights, and unanimous approval for supermajority consent and good faith requirements.

What to Include in Your Operating Agreement or Shareholder Agreement

Now that you have a business that you want to scale, and you want the company to control the cap table instead of having an owner-controlled cap table, what’s next? Here are 5 items that you should consider when preparing your Operating or Shareholder Agreement:

Provisions to Avoid in Your Operating Agreement or Shareholder Agreement

Not only are there some provisions you should include in the Operating Agreement of Shareholder Agreement, but there are some you should avoid. Here are 2 provisions (that we briefly mentioned previously) you should keep out and not allow in your Operating Agreement or Shareholder Agreement:

What to Include

Equity Splits and Vesting

With the right provisions in your Operating Agreement or Shareholders Agreement, you need to consider how to split and allocate the company’s equity. When determining how much equity to give co-founders, employees, or other owners, you should take into consideration a number of factors:

One thing to remember is that the equity associated with items 1 and 2 should be fully vested, but any value attributed to item 3 should be protected and incentivized to be earned through vesting provisions.

Buy-Sell Provisions

Buy-sell provisions typically give the company a repurchase right if equity ownership changes hands due to one of the following events:

A well-drafted buy-sell provision will put the business in a position to avoid ownership disputes with heirs, individuals with powers of attorney, ex-spouses, bankruptcy trustees, and estates, who may have very different motivations and desires for the business then your intended partner.

Rights of First Refusal

A well-drafted right of first refusal will protect the business from allowing an owner from selling its interest to a third-party without the consent, approval, and right of the company or other current owners to buy that interest first. This is important so that a controlling interest is not sold to a competitor or other party who may have a different vision for the future of the business, which could lead to division and distraction in working through these issues.

For-Cause Repurchase Rights

One of the ugly places a business can find itself in is having a major equity holder engage in an activity that seriously hurts the business, its reputation, or its future prospects and then having to continue to pay that person as the other business owners rebuild the business through their own efforts, fixing another partner’s damage. A properly drafted, for-cause repurchase right will allow a company to repurchase the equity of such a bad-actor partner at a value that takes into account the damage that partner did to the business.

Drag-Along Rights

Another bad place a business can find itself in is having a minority owner holding back a major transaction. One way that this can happen is in the event of an equity sale of the business. In an equity sale of a business, it is necessary to have all equity owners be required to sell and transfer their individually-owned equity in the business. Without a drag-along provision, you could find yourself in a position where an owner of less than 1% of your business could stop the ability to complete an equity sale, forcing you to do an asset sale of the business instead which could have far-reaching tax consequences.

What to Avoid

Anti-Dilution Clauses

This is a provision you should avoid as if your life depended on it, except for in very limited exceptions. An anti-dilution provision is a provision that says that a certain owner’s ownership percentage cannot dilute below a certain percentage of equity in a company. This becomes a huge problem as a company grows and scales. The difference between 5% of an early-stage company with limited value and 5% of a company on the verge of going public is huge. These situations also come with significant tax implications when new equity has to be granted without additional compensation. If someone says they want anti-dilution, say no and offer them a preemptive right to be able to purchase an amount of any future round of financing at the same terms and conditions as future investors.

Unanimous Consent

I’m always very concerned about unanimous consent provisions in an operating agreement or shareholder agreement. This is because the only partner a unanimous consent requirement protects is the smallest owner. Imagine our government trying to function if one congressman could stop any legislation from passing. It’s important to carefully figure out a supermajority consent or voting structure for your business that avoids deadlock and requires proper approval of business decisions that generally favor the best interests of the business and its owners, but giving the tiniest owner a veto right on the business decisions is a dangerous proposition.

Is this Really that Important? But I Get Along Really Well With My Partners...

As business lawyers, our job is to plan for the worst. One of the things that we hear all of the time is: “I trust my partners and we’ll be able to work things out.” While this may be true in most scenarios, there are a minority of scenarios where this is not the case and the damage leveled in such scenarios can be crippling.

We have witnessed companies in a matter of weeks going from the prospect and commitment for 7 and 8 digit investments to filing for bankruptcy because their operating agreements and shareholder agreements were unbalanced in protecting the owners instead of the business.

Controlling your cap table is critical for the future of your business.

If this all seems like a lot to understand or follow, or you just want a business lawyer to walk you through this process, don’t hesitate to reach out to an experienced business attorney or corporate lawyer at Freeman Lovell. We have the resources, expertise, and experience to guide you through your entrepreneurial journey from idea to exit.

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

When Is it Advantageous to Form an S-Corp

Wed, 16 Dec 2020 20:56:00 GMT

If you’re starting your own business, you may be wondering how to set up and structure the business in a way that allows you to stay within the bounds of the law, but also limits the amount of taxes you are required to pay to the IRS. Those who operate their own professional practices (such as doctors, lawyers, dentists, accountants, engineers, etc.) or individual consultants should consider forming an S corporation. The Freeman Lovell team can help you with this endeavor.

Pros of Forming an S-Corp

The biggest advantage of forming an S corporation is that it can save you money on taxes. People who own their own businesses and are not in the employment of others must pay higher FICA taxes (Social Security plus Medicare). That’s because when an employee works for a company, the company pays half of the FICA taxes and the employee pays half. But when you are self-employed, you must pay both portions.

As you can imagine (or may already know well), this can be a sizeable sum. When you form an S Corporation, instead of paying FICA taxes on all the revenue you collect, you only pay them on your salary, which is a number you determine based on the going rate for that job in your particular market.

This move can save you many thousands of dollars. But it isn’t easy to do and there are many caveats, so it’s critical to enlist the help of a professional accountant when you make this decision.

Another tax benefit you can reap from forming an S corporation is that it can function as a pass-through entity. This means you don’t have to pay corporate income tax; instead, you pay taxes as if your revenues are personal income. This is only advantageous in certain situations, however.

Cons of Forming an S-Corp

One of the biggest cons of forming an S corporation is that if you make a mistake, you could end up owing the IRS tens or even hundreds of thousands of dollars.

That’s because operating an S corporation has strict and specific rules.

First, you may only have one class of financial stock. You cannot have preferred shares with different owners receiving varying distributions of profits and losses like you can with a partnership.

Second, your S corporation must be a small business — you cannot have more than 100 owners.

Third, only individuals and not businesses or groups are allowed to invest.

And lastly, no foreign investors are allowed.

This may seem uncomplicated at first glance, but it’s easier than you think to make a mistake. What if you accepted investment money from an individual whom you assumed was an American citizen but was, in fact, not?

A mistake like this can wipe out a year’s worth of income. That’s because if the IRS finds out, they automatically start taxing you as if you are a C corporation. This may not cost you that much, but if you have appreciating or depreciating assets (such as real estate), this switch can get pricey.

Separately, an S corporation structure is not helpful for businesses that need investors, because it’s so restrictive. Thus, entrepreneurs who aim to grow their businesses over time would not do well with an S corporation structure.

The Bottom Line on S-Corps

Based on what you’ve learned here, if you think forming an S corporation would be advantageous to you — whether you are just starting your business or you have been in business for years and want to make the switch — talk to the team at Freeman Lovell.

Forming an S corporation can provide significant tax advantages, but it can also backfire if you aren’t well-versed in all the IRS rules, regulations and technicalities. Moreover, we always recommend that you involve your business lawyer in the decision as well since their advice regarding restructuring your business is invaluable. CPAs and business lawyers each have an important contribution to make the decision to form an S corporation.

Freeman Lovell is dedicated to assisting entrepreneurs and small-business owners with all their tax-related issues, including forming an S corporation.

Call or text us at (385) 217-5611 or send us a message through our Contact Form .

All You Need to Know about an LLC

Mon, 16 Nov 2020 20:55:00 GMT

Not so long ago, the limited liability company (LLC) was a new kind of legal structure available for small businesses. At that time, LLCs were like the new kid on the block amongst all the other business entities. Since then, it hasn’t just made a place in the market, but has become one of the most popular business entities used by business owners due to its flexibility and liability protection.

Let’s say that you started a small business and ran into some legal issues or got into a huge debt. The liability protection of an LLC would make sure that your personal belongings like your car and house are safe. All the debt will be paid using the business assets only. Without the liability protection, you might end up losing everything you have including the company and the shirt off your back.

Now, you might be thinking that all this just sounds the same as a corporation. And, you are right, to a point. But there are some other things that the LLC offers that a corporation does not, particularly its flexibility. In this post, we will deep-dive into what an LLC is, and how it is a great business entity choice for your business.

https://youtu.be/45kNLkE2CnY

What is a Limited Liability Company?

Just like a corporation, a limited liability company is a legal entity separate from its owners. An LLC can easily get its own tax identification number, do business, and even open its own checking account. It is a simple and highly versatile company structure as compared to S-corps and C-corps . In short, it is a legal entity similar to the combination of the following:

The owners of an LLC are called members and every member of the LLC has liability protection. Generally speaking, there can be an unlimited number of members and anyone can be a member of an LLC, including:

An LLC can be opened in any state. The profits and losses of the company can easily be divided differently among the various entity designations. This means that the LLC members can distribute the earnings using any method they want, unlike s-corporations. In addition to this, limited liability companies do not have to worry about much of the standard documentation that the other corporations have to complete to stay compliant, including shareholder meeting minutes, annual director meetings, and other formalities.

How are LLCs Taxed?

One of the main benefits of starting an LLC is that you get a lot of tax flexibility and benefits. By default, the LLC is taxed as a pass-through entity. This means that it can avoid the double taxation issue that C-corps have, so that the income tax is only paid at the personal level by the members on their personal income tax returns for the earnings made in the company.

Another tax benefit is that the LLC members can easily claim their own share of loss in the business on their income taxes. This is something great for those who have just started up as it helps in saving a lot of tax. But to be able to gain these benefits, you will have to choose to be taxed as an S-corp, which is one of the four tax classifications available for an LLC.

The four tax classifications available to LLCs include: C-corporation, S-corporation, partnership, or disregarded entity (sole proprietorship). Before we can talk about each, you need to know that electing to be taxed as an S-corporation might not be the best choice for your company. You will need to choose the best method that suits your business and its needs. The best way to get around this is by taking the help of a tax lawyer and a business attorney while electing on how you want your LLC to be taxed.

With this said, let us now look into the differences in each tax classification with the help of the table below:

From the table, if you elect to be taxed as a:

By default, the federal government taxes a single-owner LLC as a disregarded entity and a multi-owner LLC as a partnership. To get the benefits of being taxed as a C-corporation or an S-corporation, you will have to file for the election using the Form 8832 with the Internal Revenue Service.

Note: Before you make a tax election, you should consult an experienced tax lawyer and your CPA. They will help you make the right choice based on your business plans and future.

Advantages of LLCs

There are a lot of advantages of an LLC, these include:

The above advantages are the same regardless of the tax classification made for your LLC. But it should be kept in mind that the tax classification election you make will dictate if your company is allowed to enjoy some additional benefits or not, other than those mentioned above. Each of these benefits have been explained in the below table:

#1 Equity Flexibility

#2 Pass-Through Profits & Losses

Disadvantages of LLCs

Just like everything, LLCs come with some trade-offs. These include:

Who Can Form an LLC?

Many small business owners choose to open an LLC due to its flexibility, versatile taxation methods, and the many benefits that it comes with. So, the LLC structure is can be perfect for all kinds of businesses including professional practitioners, real estate companies, retail companies, e-commerce businesses, technology companies, etc.

But at the end of the day, choosing the LLC as your business entity would depend on how you see your business growing and progressing in the future and what you want it to do . The best way around the decision is by taking the help of an experienced business attorney and tax lawyer .

Freeman Lovell LLC offers these services and can help you make your choice. All you need to do is contact us and let us know about your business plan. Based on this, we will guide you in making the right choice. Feel free to reach out to me at josh@freemanlovell.com or text us at (385) 217-5611 to learn more!

From Idea to Exit: Structure – A Deep Dive on C-Corps

Mon, 28 Sep 2020 23:18:00 GMT

Progress is driven by entrepreneurs like you. Every day, you take risks, moving quickly, adjusting to an ever-changing commercial environment. With one slip-up, legally, your progress can be halted. That is why it is important to start your business from a strong position.

As we discussed in the previous post, A Guide to Choose The Right Business Entity , the first step to setting up a business is deciding what entity type to set up. There are three major entity types that businesses can choose from: an LLC, a C-Corp, or an S-Corp. Each type has its own set of advantages and disadvantages. In this article, we will focus on C-Corps and their strengths and weaknesses to help you make an informed decision for your business. Seeking the guidance of an experienced business lawyer can help ensure that you select the corporate structure that best reflects the goals and needs of your business.

What Is the Purpose of a C-Corp?

The purpose of a C-Corp is to protect each individual owner’s assets from seizure if the corporation gets sued. C-Corps were created to replace traditional partnerships where each business partner was liable for the debt and mistakes of the business. This meant that if the business is sued, each individual partner’s personal assets, such as their home, could be seized to pay the debt. Instead, a C-Corp protects each individual partner’s personal assets allowing them to engage in business deals, they may not have otherwise if their personal assets were on the line.

What Are the Tax Options for C-Corps?

There is only one taxation option for the C-Corp, meaning that this entity is less flexible than an LLC in that regard.

What Are the Pros of a C-Corp?

When examining the benefits of creating a C-Corp, it is important to consult with a qualified business attorney who can help you examine the goals and purpose of your business to give you advice and determine which entity type best fits your needs.

How Do You Qualify for Qualified Small Business Stock (QSBS)?

In order to qualify for QSBS, a business must meet the following general criteria:

What Qualifies as a Qualifying Trade or Business?

Under 26 USCS § 1202, the IRS defines a qualifying trade or business as “any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees” or is otherwise engaged in the business of finance, investment, banking or another similar business. An experienced business attorney will be able to help you determine if and how your business qualifies if you wish to take advantage of this option.

It is important to discuss both the goals and purpose of your business with your business attorney as well as your exit strategy to determine whether using the Qualified Small Business Stock option makes sense for you.

What Are the Downsides to Choosing a C-Corp.?

As with each of the three major types of corporate structures, C-Corps have their downsides that go along with the benefits.

What Types of Businesses Are Best For C-Corps?

The businesses that tend to benefit most from using the C-Corp structure are those businesses seeking to eventually offer an Initial Public Offering (or IPO). In an IPO, a privately held company begins to sell stock to the public on public-traded stock exchanges. The benefit of an IPO is that a company begins to be publicly traded and they can use that as their main source of raising capital. Given the flexibility with the different types of stock a C-Corp can offer, this makes it an ideal corporate structure for those businesses seeking to be publicly traded.

Another ideal candidate for the C-Corp structure is a high-growth startup looking to obtain backing from investment firms or venture capitalists. Investment firms tend to look favorably on businesses formed as C-Corps because the investment packages tend to be simpler and the growth and equity for investors are also easier to understand. It also has tax benefits for charitable or foreign investors. For many investors, the Qualified Small Business is also an attractive option because it allows the investor to save on capital gains taxes provided that they are willing to hold onto the stock for five years.

The Bottom Line

In the end, it is very important for you to choose the business entity that is right for you. Keep in mind how it will affect your business, finances, and legal exposure. And while you choose your business entity, whether a C-Corp or another type, make sure that your CPA and your business lawyer agree with your choice.

As entrepreneur lawyers, we appreciate your path as a business owner. We love working with bold visionaries like you that navigate your industry with purpose. That is why we are here, to help you navigate hidden legal risks so that you can focus on your business.

For any queries and doubts that you have, talk to your business lawyer and tax attorney. In fact, we offer these services and can help you. So, if you need help with choosing your business’s type and starting your business, Freeman Lovell can help you. Feel free to reach out to me at josh@freemanlovell.com or click on the button at the upper right corner of the website to contact us to learn more!

Tips on Strategically Approaching Loan Workouts

Thu, 17 Sep 2020 12:47:00 GMT

Written by Chris Wallace

Entrepreneurs and small business owners have been among the hardest hit by this new economic reality. One particular burden a lot of companies are dealing with is debt. If you’re going to thrive during the crisis, you may need to restructure the terms of your loans. We are here to help you strategically navigate loan workouts, so you can survive the crisis while maintaining productive relationships with your creditors.

Loan Workouts are a restructuring of your loan to help you recover from the debt without filing for bankruptcy. Your bank usually wants you to remain out of bankruptcy as much as you do. Despite the reputation that banks and private lenders are sharks that will take everything from you if you fail to make a payment, they, in fact, want you to succeed with your loan. The bottom line is that banks and lenders almost always make more money if you pay your loan off. Even if you are behind on payments and full repayment looks doubtful, they want as much money back as possible. In stressful times, creditors are willing to work with you on solutions that will benefit everyone.

When entering a negotiation with your lender, here are 5 things to help you work with your lender:

1. Keep the long-term perspective. You want a creditor who will be your partner for the life of your business. Remind them of that, because they want that too (think repeat customers). If they don’t have this mindset, you may want to consider structuring a workout so you can move on from them.

2. Know your financials and have detailed financials ready. Your lender is sometimes required to review these financials, but having them in front of you will allow you to know your options and will help you and your lender come up with creative solutions.

3. Evaluate the value of the collateral. Make sure you know the value of the collateral you have for the loan. If the value has increased or decreased, it will impact negotiations.

4. Come with options planned out. This is where it helps to talk with someone who understands how to navigate loan workouts. If you’re going it on your own, keep the long-term context and think of the leverage you might have.

5. Stay persistent, polite, and professional. Remember that your creditor, or the person working with you, may be dealing with pressures outside of their control.

As you begin to move forward with a loan workout, never forget that your creditors want to work with you, not against you. Especially in difficult times such as now. If you follow these five steps, you’ll be on your way to success.

For a free 10 minute consultation with one of our attorneys give us a call at 385-355-0471 or sign up for a time , here .

A Guide to Choose The Right Business Entity

Thu, 03 Sep 2020 22:32:00 GMT

Entrepreneurs like you drive progress in your part of the world every day. You take risks and need to adjust quickly, yet one wrong step, legally, can cripple all you are working so hard for. In this article, we want to guide you through one of the most important decisions as an entrepreneur, finding the right business entity type for your business.

Turning an idea into a successful business is exhilarating. But it means making some crucial decisions right from the start. We’re on your side to help you identify and avoid common legal mistakes so you can continue turning your vision into reality. In fact, the very first decision that you will have to make is selecting the type of business entity that fits your company. This decision will have significant financial and legal implications for your business, and that is why you should talk to a business lawyer and tax attorney before you make a final decision.

The type of business entity you choose will determine the amount of taxes you will end up paying in the future. It also influences your ability to raise funding from outside investors or get a small business loan. In addition to this, your business entity type is the one that determines your personal exposure you might face if someone sues your business.

There are over a dozen business entity types in the USA including, sole-proprietorship, partnership, non-profit, corporation, limited liability company, and so on. But the most common entity types are:

● Limited Liability Company (LLC)

● C-corporation

● S-corporation

With so many options, how do you know which is best for your business? That is what we will discuss in the next section.

Note: Do remember that you will still need the advice of a corporate lawyer and a tax attorney to guide you. At the end of the day, they are the ones who know the laws best in your area and can help you make the right choice.

Types of Business Entities

Limited Liability Company (LLC)

A Limited Liability Company is a “One Size Fits Most” kind of business entity. An LLC is a popular choice for most small business owners. It is a highly flexible kind of business, meaning that it can be managed in a number of ways. An LLC, which is short for the Limited Liability Company, offers limited liability protection to the owners for business debts and obligations.

Here are some reasons why an LLC makes a great option for a small business:

● An LLC has very few on-going requirements and paperwork as compared to the C-corps and S-corps.

● It offers liability protection to the owners for business debts and obligations. This means that the owners’ personal assets are not at risk and cannot be used to pay off business debts or any other legal liabilities.

● The IRS allows an LLC to choose the way they want their entity to be taxed. So, you can elect to be taxed as a C-corporation, where you will have to pay the taxes both on the corporate level and the personal level. Or, you can elect to be treated as a pass-through entity, where all your taxes are paid on a personal level and eliminate the possibility of being taxed twice.

● The owner of the LLC does not need to be a U.S. citizen or be a permanent resident in the USA. Anyone can form an LLC, but there are other legal requirements that a corporate lawyer can help you with.

● An LLC also offers enhanced credibility where lenders, suppliers, and partners may favor it more as compared to the other business entities.

Despite all the advantages, an LLC is not perfect. One of the drawbacks of the LLC is that the owner will have to pay the self-employment tax along with the personal income tax on profits earned. This makes the overall tax payment more than you might expect.

An LLC would be the best choice for you if:

● You want a flexible management structure for your company.

● Your startup has losses in the initial years and you want to be able to pass-through these losses to you and your partners.

● You want your business to own real estate.

● You want to use flexible accounting methods. LLC does not have to use the accrual method of accounting like some C-corps have to.

● You want flexibility in sharing profits among the owners.

● You do not want to have many on-going formalities and documentation requirements.

If the above is what you are looking for, then an LLC is a great choice. Just remember to get advice from a business lawyer and a tax attorney when making your choice to be sure that it is the right fit for your business idea.

C-Corporation

A C-corporation is a business entity that tends to have higher risk and higher costs to maintain, and offers potentially higher rewards as compared to the LLC. Considered independent legal entities, C-corporations have a higher separation from their owners. In this entity type, the officers, board of directors, and shareholders (who are the equity owners) control the company. However, all these roles can be taken care of by one person. So, if you create a C-corp, you can be in charge of everything, if you want.

Here are the reasons why a C-corporation makes a great option for your business:

● Just like an LLC, owners do not have personal liability for the liabilities and debts of the business.

● You will have the choice to offer stock options in exchange for funding to grow your company, unlike an LLC.

● The owners of a C-corp pay much lower self-employment taxes as compared to what the LLC owners pay.

● C-corps may be eligible to get a lot of tax deductions compared to business entity types.

But a C-corp does not have it all. There are a lot of tax laws and regulations that the C-corporation has to comply with. A C-corp has to follow various formalities like creating bylaws, holding annual shareholder and board meetings, and recording the minutes of meetings. Moreover, the process to start a C-corporation also includes a lot of paperwork and each state has its own laws for it. A corporate lawyer can help you with this.

Additionally, C-corporations face double taxation where the company pays tax on the income made (as part of the corporate tax return), and then the shareholders pay taxes on the dividends they receive (as part of their personal tax returns). The owners cannot deduct any losses the business might have on their personal income tax, as all the deductions are made on the corporate level tax payment. One way to avoid double taxation is if the owners invest their profits back into the company.

A C-corporation would be the best choice for you if:

● You want to grow your company into an empire and need institutional or venture capital funding.

● You want to be able to offer stock options to employees in your company so that they stick around longer and increase the productivity and revenue of the company.

● You want to be able to sell your business easily when you are done with it.

● You want the flexibility to set salaries for owners and employees to minimize Social Security and Medicare taxes.

● You want the flexibility to spread the earnings of the company among the shareholders and corporation for tax-planning purposes.

● You want company earnings to stay in your business so that it can grow.

● You want to lower your risk to the exposure of getting an IRS audit. An audit rate is higher for the business whose income is reported on the Schedule C of Form 1040, the Individual Income Tax Return form.

● You want to have an IPO ultimately or a large exit.

In short, C-corps can be a great choice for those who want to grow their company. It also helps you with a lot of legal protections that no other business types offer.

S-Corporation

The S-corporation is a “Proceed With Caution” kind of entity. It has limited liability protection just like the C-corp but the tax is paid at a personal level as it is a pass-through entity. This means that the shareholders will have to pay the tax on the profits they make on their personal income tax returns. To own an S-corporation, you will have to first form a corporation or an LLC and then elect to have it taxed as an S-corp using the IRS form 2553.

Here are the reasons why an S-corporation makes a great option for your business:

● The shareholders, who are the owners of the company, are not personally liable for the liabilities and debts of the business.

● There is no double taxation issue here as the S-corp is a pass-through entity like an LLC.

● There are also employment tax savings that you can take advantage of.

● If structured well, it can help you make the right amount of money and be successful in your business.

But there are a lot of negative points as well. With some limited exceptions, an S-corp cannot be owned by an entity, trust, or another corporation, unlike the C-corp of LLC that can be owned by anyone. All owners also have to be U.S. citizens. The S-corp has a limit issuing stocks, where it can have only one type of financial stock in the company.

It also has a limit on the number of shareholders that the company can have, 100. Additionally Restructuring an S-corp is highly challenging and tough. It is tough to move assets in and out of the company, especially if the assets keep increasing or decreasing in value. So, if you have an S-corp and want to convert it into another business entity, it could be very expensive in taxes and/or legal and professional fees. If you are looking to restructure an S-Corp, make sure to discuss carefully with a business lawyer and tax attorney.

An S-corporation would be the best choice for you if:

● You want flexibility in selecting your choice of accounting methods.

● You want the flexibility to set the employees’ or owners’ salaries to minimize social security and Medicare taxes.

● You want to take advantage of pass-through taxation and savings on self-employment taxes.

In short, an S-corporation is very inflexible. With all its positive and negative points, it is the perfect fit for businesses like the pure service business, and professional practitioners. So, before you choose to select this business type, ensure that you contact your tax attorney and corporate lawyer to see if it is the right choice for you or not.

The Bottom Line

In the end, it is very important for you to choose the business entity that is right for you. Keep in mind how it will affect your business, finances, and legal exposure. And while you choose your business entity, make sure that your tax attorney and your corporate lawyer agree with your choice.

Healing the Legal Relationships Harmed by COVID-19: Part 3, EMPLOYERS & EMPLOYEES

Thu, 14 May 2020 19:04:00 GMT

April 24th, in a Freeman Lovell webinar, Josh Freeman and Michael Thomas discussed the impact of COVID-19 on legal relationships. This post is a supplement to that webinar. A recording of the webinar is embedded in the below post, or you can watch it HERE .

Written by Michael Thomas

This is Part 3, the final installment, of our commentary on Healing the Legal Relationships Harmed by COVID-19. As discussed in our Webinar on April 24, 2020, employers are facing unique challenges with a workforce that is sick, quarantined, social distancing, forced home with kids due to school and daycare closures, or—at the very least—concerned for their safety in the workplace.

https://www.youtube.com/watch?v=OjMqWO0fJcs

New federal legislation addresses these needs in the Families First Coronavirus Response Act (the “FFCRA”). The FFCRA requires employers to provide leave for employees adversely impacted by illness, quarantine, or childcare needs. Employer obligations have been discussed in our prior blog post , and the Department of Labor has assembled a comprehensive Q&A with information and direction for employers and employees available , HERE . In our Webinar, we discussed some new developments with the FFCRA, including penalties and the small business exemption.

The penalties for noncompliance with the FFCRA will come in the form of (1) discrimination claims by impacted employees and (2) DOL enforcement. A violation of the FFCRA for failure to provide necessary leave is treated as a violation of the minimum wage laws, which carry a $1,000 per offense fine. Penalties are less severe if they are not found to be “willful,” so a demonstrated effort at compliance is an important first step.

Of course, you won’t face a penalty for noncompliance if you are exempt from FFCRA leave requirements, as is the case for vulnerable small business owners. The small business exemption, provided in the Federal Register, excuses you from providing paid leave if any of these three situations apply:

It is critical that you document your analysis on this issue and hold onto the documentation for four years. The DOL is not likely in a position to do widespread enforcement right now on the massive scale that these issues apply. So, employers claiming the small business exemption are not expected (or even able) to submit any kind of request or approval for the exemption. Instead, you will be expected to show how you complied if you are ever audited or challenged in the future.

When employees do return to work, some reservations about safety in the workplace are to be expected. Employers should make every effort to comply with their industry’s developing safety standards. For example, the DOL has released a guidebook on Preparing Workplaces for COVID-19, available HERE . Employers can educate their workforce on safety and compliance issues. Where reasonable accommodations can be made—such as for those with particular infection risks—find a workable solution. And then uniformly enforce your policies and attendance requirements to avoid claims of discrimination.

Watch the recorded Webinar for further details on these important developments.

, We know you may have many questions about moving forward now that businesses may be welcoming more clients, customers, employees back as we move forward during this pandemic. To schedule a call with one of our attorney's please fill out your information here

Healing the Legal Relationships Harmed by COVID-19: Part 2, LANDLORDS & TENANTS, WHAT TO Consider

Wed, 06 May 2020 22:42:00 GMT

Written by Michael Thomas

In Part 1 of this post , we introduced some of the complications that may arise due to COVID-19 in what were previously well-functioning legal relationships. Businesses are reviewing their current and future contractual obligations more closely. And new statutes and regulations are being passed in different states, addressing a business's responsibility and liability when it comes to the novel coronavirus. In the State of Utah, for example, Governor Herbert signed into law the bill we discussed in the webinar providing immunity from civil liability for harm resulting from exposure to COVID-19 on a business owner's premises.

https://www.youtube.com/watch?v=OjMqWO0fJcs

Tenants looking for a way out

The relationship between landlords and tenants has been among the hardest hit. Tenants find themselves struggling to pay rent or, in some instances, not able to make the most out of the space they have rented in the way they would like. Reportedly, some tenants have seized on an opportunity to have an excuse to forego rent payments even if they are in a position to pay! Does a pandemic mean that everyone can just walk away from their leases? Not necessarily.

A good starting point is the applicable contracts. For landlords: do you have a business interruption policy that may apply? And what does the lease provide that may apply to this situation? Has access been guaranteed? Has rent been conditioned on a certain level of access or peaceful enjoyment of the premises?

One relatively common contract provision that may apply is “force majeure,” or Act of God, terms. Such a term provides that performance is excused if an unforeseeable major event makes performance impossible. If a force majeure clause is in a lease, look closely at how it is drafted. In many instances, payment will not be excused; rather, providing the space may be excused. Without an express provision in the contract, common law (court-established) principles of “impossibility” or “frustration of purpose” can apply in similar ways.

Whether you are applying a contract provision or the common law, there is a difference between “impossible” and “burdensome.” A tenant typically takes on the risk that the lease could become less ideal, and that making use of the space could become difficult. So landlords should not bear the brunt alone of a change in circumstances.

student housing and co-working spaces

Student housing and coworking spaces present a unique challenge. Close quarters with other tenants can make compliance with public health directives impractical. However, consider that tenants in these spaces agreed to rent the space knowing that they would be sharing it. That means it is foreseeable that problems with other tenants could arise. If, as a landlord, you can do the things in your power to make the space safer, assuming compliance by all tenants, then coexistence becomes at most burdensome because of the other tenants rather than impossible because of something inherent in the property and the circumstances. The difference between “burdensome” and “impossible” could very well become the test for whether you are still entitled to collect rent.

Of course, maintaining a healthy working relationship with your tenants can be the best way to secure payment without resorting to legal action. Consider whether spreading out tenants, allowing deferrals, or implementing physical barriers can mitigate harms. What kind of safety precautions can you employ to make the space safer? The more we learn about COVID-19, the more ideas will arise for doing just that.

Part 3 of this post will provide an update on developments for employers. For the full webinar, see the link in this post.

Healing the Legal Relationships Harmed by COVID-19: Part 1, legal considerations

Wed, 29 Apr 2020 17:12:00 GMT

Last Friday, in a Freeman Lovell webinar, Josh Freeman and Michael Thomas discussed the impact of COVID-19 on legal relationships. This post is a supplement to that webinar. A recording of the webinar is embedded in the below post, or you can watch it HERE .

Written by Michael Thomas

A less accounted-for, but deeply felt, impact of the COVID-19 outbreak is the strain it is putting on some previously functional legal relationships. It didn’t take long for COVID-19 to start impacting legal issues. To take one early example, a Florida judge ruled earlier this month that a divorced emergency room doctor’s timesharing rights with the couple’s 4-year-old would be temporarily suspended “in order to protect the best interests of the minor child.”

Family law is not the only area that is changing. What about service providers? What happens when there is a dispute about a contract with a client? How should businesses interact with customers? Should employers require employees to come to work once a Stay-at-Home order is lifted? And what about landlords and tenants? Are leases still enforceable during a pandemic?

https://www.youtube.com/watch?v=OjMqWO0fJcs

Considerations for business owners

It can be hard to know where to start when deciding what steps to take as you get back to business. Here are a few key considerations.

Statutes and Regulations

The first place each business needs to do is to look at what liability they are open to depending on the statutes and regulations that oversee that type of business. For example, the Utah State Legislature has approved a new Bill ( H.B. 3007 ) that gives immunity from negligence claims related to COVID-19 exposure on a business's premises (pending Governor veto or signature). For example, that means that if a customer is exposed to COVID-19 from another individual while on a business's premise, the business would not be liable. That does not mean that businesses can be reckless in their precautions to avoid the spread of COVID-19 without repercussions. Plus, if a business falls under OSHA or local health codes, they must maintain those standards. (If you have any questions about how this new Bill may affect your business, feel free to contact us . )

Contractual Obligations

Businesses and individuals should take a look at what contractual obligations they are subject to. Despite COVID-19 uprooting normal life, most contractual obligations will remain in place, subject to be fulfilled and enforced.

This can be particularly tricky for contracts like Service Agreements or Leases that may have a force majeure clause. Force majeure is a common clause that may be placed in contracts that release one or both parties in a contract from certain obligations to perform when there is an extraordinary and unforeseeable event (historically described as an "act of God"). But without any specific language in a force majeure about a pandemic, there is still some debate whether the COVID-19 crisis applies to the contract. (If you would like us to review a contract, send us a message )

Case Law Precedent

Even with the unique situation, we are in, much of how judges may interpret laws and situations among COVID-19 will be established through case law precedent. There may not be much precedent when it comes to legal relationships during a pandemic, however, we can look back at other situations that may be comparable and indicate how a judge may rule in a dispute. (We can help you understand the potential results of disputes by looking back at case law precedents that may relate to your situation. Tell us about your situation . )

Business Judgement

Ultimately, how you approach the threat of COVID-19 depends in large part on how you do business. You will need to balance costs and safety. Paying for additional protective and hygienic equipment costs money may cost your bottom line even more while sales are lower than usual, but giving your customers peace of mind will be critical to keeping their trust.

Are you someone they can trust and feel safe around? A restaurant may change their dining options from dine-in to pick-up only. What will evoke trust from its customers? Facemasks, new contactless protocols, videos of cooks maintaining strict hygiene practices? What if a different restaurant had none of the workers wore masks or gloves? What if the cashier sniffles and wipes his nose with the same hand he uses to pass food to a customer? Which restaurant would you go to? Your business may not serve food or have customers visit your place of business, but as we move forward during this time, public perception of how businesses are adapting to COVID-19 will be crucial. Complying with laws and regulations is a starting point, but keeping or regaining trust will be the key to weathering the storm.

Part 2 of this post will address considerations for landlords. And Part 3 will provide an update on developments for employers. See the full webinar above.

New Website Design and Introduction to CAS

Thu, 23 Apr 2020 18:28:00 GMT

We hope you are all keeping safe and healthy. We understand that at this time, there is a large amount of uncertainty in the economy, and we are not sure what the new normal will be or when it will arrive.

Last week, if you had visited our website, you might have noticed that it looks a bit different than before. If you haven’t seen the changes yet, please check it out by clicking , HERE . Over the past few months, we have been working on a full redesign of our website to help you better navigate and understand the services we can provide.

In addition to our traditional legal services, we have included a new service designed to help you save money and time while keeping your business safe from legal risks. The new service is our Contract Automation Suite ("CAS," for short), our tech solution for small businesses to protect themselves with robust legal documents on a budget.

With a few clicks of your mouse, you can enter your company's information and generate custom drafts of critical legal documents to protect and drive your business forward. CAS is available in both "a la carte" (in which you only pay for each individual document you generate), or unlimited for $100/month. With the unlimited plan, you can create as many contracts as your business needs, instantly. With both options, you can either take the contract and go, or you can ask us to do a quick review to make sure it fits your situation perfectly.

CAS currently includes:

However, these are not the only contracts we will include in CAS. We are continually working on adding additional legal documents to CAS that will help your business grow and strengthen in this uncertain time.

To sign up and to access our CAS, visit our website , HERE

5 Tips to Survive the Crisis and Thrive in Recovery

Wed, 08 Apr 2020 15:40:00 GMT

These are hard and scary times for entrepreneurs. Our margins are shrinking if not gone. How and where we work have been turned upside down. Our customers and almost all segments of the economy are shrinking. There are people everywhere suffering and losing loved ones.

The novel A Tale of Two Cities, by Charles Dickens, starts with the line: “It was the best of times, it was the worst of times, . . . it was the spring of hope, it was the winter of despair . . . .” Call me an optimist, but I think that this challenging and awful time also presents some wonderful consequences and opportunities.

We are spending more time with our families. We are reevaluating our lives, what it means to be alive and happy. We are finding new joy in the small and simple things in our lives. We better understand the strength of the human spirit and our collective will to sacrifice for others. We see that there is joy in sacrificing some things now for a better future.

Back to business. So what do we do now that the world has been turned upside down? The first and most necessary thing is to survive. Once we have secured our survival, then we can focus on positioning ourselves to thrive in the future to come.

LET’S SURVIVE

Get Lean and Sacrifice

The first step to survival is to get lean and make the right sacrifices.

Take the time to evaluate carefully who you are as a business and what are your essential functions. You will need to evaluate and judge between which business expenses are necessary, which are nice to have, and which are no more than bloat and fat, left over from a period of excess. You need to eliminate the bloat and fat quickly. Nice-to-haves probably also need to go. Only the essentials should survive.

Now is the time to cut the fat and keep the essential. Many companies are now in a position to renegotiate terms and rates to encourage economic growth and recovery as soon as possible.

You should also plan on adjusting your compensation plans to ensure all of your needed people can survive. The businesses that fire and lay off much of their lower-paid employees and contractors may survive, but they are going to have a tough time taking the next step of positioning the business to thrive through an economic recovery period. That is why many leaders have been reducing their and their senior people’s salaries and compensation packages first.

Profits First

The age of easy investment and being able to count on future investment rounds to fuel future growth is likely over for the foreseeable future. Angel and venture investors are likely going to shrink the size of their investments and use more of the dry powder that they have to support their current portfolio companies.

It will be crucial to find ways to become profitable earlier and extend out burn-rates as long as possible. There are many examples of bootstrapped companies in all industries. Studying up on those companies is a solid investment of an entrepreneur's time.

If you need cash to cover expenses, take advantage of the PPP and EIDL SBA loan programs. Get or increase your lines of credit and apply for whatever bank and other debt financing that you may be eligible for.

At the end of the day, in this economy, the companies that can scale back expenses and quickly get back to profitability will be those that will be able to survive and position themselves to thrive moving forward.

Be Lawsuit Ready

Entrepreneurs need to be aware that periods of economic recession and recovery are times of increased legal disputes and lawsuits . The two actions that we suggest our entrepreneur clients take are: (1) to evaluate, and enhance if necessary, commercial liability insurance policies; (2) evaluate your contracts and limit liability moving forward; and (3) ensure that your business is going to protect you personally from liabilities and lawsuits brought against your company.

The first step is as easy as giving a call to your insurance broker. Bring them up to speed on your business and discuss whether your insurance package is comprehensive enough in scope to cover the many areas of liabilities that you may face and large enough to cover the costs of liabilities and lawsuits that may be coming your way.

The next step we advise is to review your customer and other 3rd party facing legal agreements and contracts and review and/or implement provisions that cap or limit your overall liability under those contracts to make sure that if you do have an increased number of legal claims and lawsuits on those contracts that they will stay within insurance limits and not put your business resources at risk.

The final step is to review your business structure and the level of formality that you have been operating your business legally under and tighten up any areas that might expose you as an owner to being liable for business expenses. The areas where we see the most mistakes made are the following:

NOW TO THRIVE

Get Flexible and Diversify Product and Service Offerings

Successful and thriving businesses have multiple revenue streams that support and drive to the sales of the key products or offerings of your business.

Now is the time to explore how you make money. Here are some things to ask yourself and explore:

I’m not suggesting that you do everything, but that you are very strategic in how you link these different offerings together to strategically lead your clients to your most profitable products or services.

Play the Long Game

Look into the future regularly and make plans for how you see your company fitting into the future business landscape. Economic downturns and recessions are temporary. The key is to look far enough forward to see how the economic downturn is going to change the nature of your industry and business and start now to prepare your customers and clients to see you as a fearless leader in leading the industry into that new reality.

Build a strong foundation. In hard economic times, where there is more time and capacity, it is time to invest in your foundation. Invest in expanding your customer base and enhancing the loyalty of your customer base to you. Invest in your systems, processes, and core business activities to support the exponential growth to come with your expanded base when the economy starts heading back up.

Give back and support those on the front lines of the pandemic. Now is not the time for profiteering. Find ways to support your customers, your community, your family, and your friends. The better we all make it through this period, the quicker and stronger the recovery will be. Support your local food bank and homeless shelters. Be generous with your time, resources, and support the community who has supported you through the good times.

Let’s do what we can today so we can look back as a people at this time and say: “It was the best of times, . . . it was the spring of hope . . . .” We can get through this together!

Update: Get Ready! The Paycheck Protection Loans Are Almost Here

Thu, 02 Apr 2020 06:00:00 GMT

As a small business owner, this economic uncertainty is overwhelming. Work is slowing down or shutting down altogether. The employment laws have changed over night. Cash flows patterns are no longer reliable. Nothing seems to be as it was just a few short weeks ago.

To help with this, on March 27 Congress approved and the President signed the $2 trillion coronavirus stimulus package, called the CARES Act, sending $350 billion to the new Paycheck Protection Program (“PPP” for short). With many small businesses suffering from a loss of cash and funds, the PPP is aimed to give forgivable loans to help businesses make payroll and avoid laying off workers.

WHEN AND WHERE TO APPLY

The great news is that it appears that businesses can start applying for these loans tomorrow, April 3rd. The unrolling of the loans for certain business types, sole proprietor and independent contractors may not be available until April 10th. We’re still waiting to get confirmation of this from our financial institution, but relief should be here very soon and you should get your application materials ready. A list of participating lenders as well as additional information and full terms can be found at www.sba.gov .

While the Cares Act is a new law, its PPP will use existing channels, including the 7(a) Loan Program (which offers loans to small businesses), to distribute the new PPP loans. Even though the PPP loans will use established channels, it is going to change much of the previous framework, on top of the changes already made from the March 6th stimulus law, the Coronavirus Preparedness and Response Supplemental Appropriations Act.

WHAT YOU’LL NEED TO DO TO APPLY

You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click HERE for a sample application published by the SBA. The following is the general information and materials you will need to apply:

EXPANSIONS OF PREVIOUS SBA ELIGIBILITY REQUIREMENTS

Now, with the new laws, the number of businesses eligible for loans has increased, providing additional assistance to those struggling to keep employees on payroll and maintain operations. this is how the stimulus laws will change the SBA’s small business loan programs:

Paycheck Protection Program (PPP)

Loan Forgiveness

Debt Relief

What Changes have been made to SBA Express Loans?

What Changes have been made to Economic Injury Disaster Loans (EIDL)?

The Coronavirus Relief Bill—The CARES Act

Fri, 27 Mar 2020 06:00:00 GMT

Entrepreneurs and small business owners have been among the hardest hit by this new economic reality. You are the heart and soul of the business community and survival is a must. We are here to be by your side and help you through this perilous time. Navigating all of the risks is not going to be easy, but we are going to stay on top of what is happening and do all we can to help you take the right risks to ensure that you not only survive, but position yourself to thrive once this storm passes!

Gratefully, some financial help appears to be on the way and there are many questions and uncertainty about what it really means. This is what we know now.

CARES ACT. The Senate and House have just passed a roughly $2 trillion coronavirus response bill (the "CARES Act") as a life preserver for the American economy to keep both individuals and businesses from drowning during this crazy time during which much of American life has halted. Now that President Trump has signed the CARES Act, below is what we can expect.

RELIEF FOR SMALL BUSINESS . In addition to the benefits to individuals, $377 billion dollars of the aid package is dedicated to small businesses which is going to be broken up in the following ways.

Paycheck Protection Program (PPP) Loans.

Amounts and Forgiveness . $350 billion of the $377 billion dollars will be used for potentially forgivable small business loans. Borrowers can borrower 2.5 times their monthly payroll expenses, up to $10 million. The amount of loan forgiveness may be modified or reduced if the employer decreases the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. Employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period.

Repayment Terms . Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%.

Limitations on Uses . Any portion of the loan that is used to keep workers on payroll for up to 8 weeks or pay rent, mortgage and existing debt could be forgiven, as long as the workers stay employed through the end of June. However a salary cap of $100,000 applies. These loans cannot be used for leave pay that is already covered under the Families First Coronavirus Response Act.

How Loans Will Be Distributed . These loans will be distributed through approved banks, credit unions and other lenders. It is unclear which lenders those will be and when they will start taking applications, but expect to see the common players in the SBA lending world being involved given the incentives that the government is giving to lenders to process and originate these loans.

Personal Guarantees and Collateral . No personal guarantees or collateral are going to be required for these loans.

ECONOMIC INJURY DISASTER LOANS (EIDLs).

The CARES Act is also expanding the eligibility requirements of small businesses and adding funding to the EIDLs program administered by the SBA. EIDL loans can be up to $2 million, have low interest rates, and long repayments terms.

There are EIDL grants as well. $10 billion of the $377 billion is dedicated for small business grants through the EIDL program of up to $10,000 to cover immediate operating costs. These grants are forgivable.

As long as you are not using the EIDL loan or grant proceeds for the same expenses as PPP loans, there is no restriction on getting both loan types.

You can apply for an EIDL by clicking here to get started.

EXISTING SBA LOAN RELIEF. $17 billion of that $377 billion will be dedicated to providing relief to small businesses that already have SBA loans. These funds will be used to cover 6 months worth of principal and interest payments. So if you have an existing SBA Loan, you may be in luck.

RELIEF FOR SOLO-ENTREPRENEURS AND FREELANCERS. In the past, self-employed people, freelancers, and independent contractors could not apply for unemployment. To account for those individuals, the bill adds a temporary Pandemic Unemployment Assistance program to help people who lose work as a direct result of the public health emergency through the end of this year.

REFUNDABLE TAX CREDITS. Employers are eligible for a 50% refundable payroll tax credit on wages paid up to $10,000 during the crisis. The credit will be available to employers whose businesses were disrupted and those that had a decrease in gross receipts of 50% or more when compared to the same quarter last year. This credit can also be claimed for employees who are retained but not currently working due to the crisis for all employee wages for firms with 100 or fewer employees.

CONCLUSION. We are watching these developments closely and want you to be aware of all the opportunities that are available to help you weather this storm. If you have any questions about this, you can reach out to any of our business attorneys. This summary has been compiled and prepared by Josh Freeman, Esq., who can be reached at josh@freemanlovell.com .

Stay healthy and strong! We’re here to help and guide you through!

Families First Coronavirus Response Act

Thu, 26 Mar 2020 06:00:00 GMT

Prepared by Michael Thomas

We have had a number of clients and other members of the community who are employers reach out to us about their obligations to employees during this time when business is halting or stagnating due to concerns over the spread of COVID-19. In an effort to keep people employed and paid while handling treatment and safety precautions, Congress has enacted the Families First Coronavirus Response Act (the “FFCRA”).

The highlights of the FFCRA are as follows:

SICK & QUARANTINED EMPLOYEES

Employers must provide Emergency Paid Sick Leave to an employee who is unable to work or telework because the employee is:

Employers must provide pay for up to 80 hours of paid sick leave for these people. Wages are limited to $511 per day up to $5,110 total per employee for their own use.

Employees who work a part-time or irregular schedule are entitled to be paid based on the average number of hours the employee worked for the six months prior to taking paid sick leave.

Employees who have worked for less than six months prior to leave are entitled to the average number of hours the employee would normally be scheduled to work over a two-week period.

Sick leave benefits are also available to employees who are:

For these situations, the payment requirement is less: two-thirds the employee’s regular rate with a cap of $200 per day, up to $2,000 total per employee.

PARENT EMPLOYEES

LAYOFFS

Unfortunately, some employers are being forced to consider furloughs (mandatory, temporary unpaid leave) and layoffs.

This memo is provided for your reference and information and does not constitute legal advice. Giving legal advice requires us to establish an attorney-client relationship, including a review for conflicts of interest. This summary is current as of the date above.

Click here for a copy of the United States Department of Labor Mandatory Workplace Poster

Founder’s Guide, Part 3: Maximize Your Net Exit by Choosing the Right Entity for Your Startup

Wed, 11 Mar 2020 06:00:00 GMT

As entrepreneurs you take risks every day, one of those risks should not be tied to making a wrong decision on your entity structure. In this Part 3, we'll discuss how properly structuring your business can significantly decrease risks and increase the net value of your business. As an entrepreneur, one of the first questions that you are faced with is what kind of entity you should form. The possibilities are seemingly endless. You can go with a C-Corp, an S-Corp, an LLC, or an S-LLC. Let's explore the Pros and Cons of each type which may help you get some clarity for a decision that is not always a one-size-fits-all determination.

Pros and Cons of the Different Entity Types

C-Corp:

S-Corp:

LLC:

S-LLC:

The following table compares the above-listed entity types:

Conclusion As you can see this is a complex decision to make and one that you should discuss carefully with both your attorney and accountant and preferably at the same time. The three takeaways from this article are the following:

Founder's Guide, Part 2: Boost Your Valuation by Branding with a Strong, Defensible Trademark

Tue, 03 Mar 2020 21:09:51 GMT

First off, I want to applaud you. Thanks for taking risks, starting businesses, and making the world a little bit better as you implement your vision. We want you to be rewarded generously for your risks and sacrifices as an entrepreneur, and we don’t want you to have any unpleasant legal surprises along your business journey. One thing that you can do to eliminate unpleasant surprises and grow a business you can sell is to implement a solid brand protection strategy by using a strong and defensible trademark for your business branding. An essential aspect of branding is choosing a brand that can be backed by a strong and defensible trademark. You may be wondering, what goes into a strong and defensible trademark.

Step 1: Choose a “Fanciful or Artful” Brand for a Strong Trademark

The strength of a trademark depends on how the name relates to the goods and services being provided. Trademark law has identified the following categories of trademark strength from strong to weak:

Fanciful or Artful (Strongest)
Suggestive (Strong)
Descriptive (Weak)
Generic (Weakest)

Fanciful and Artful. Fanciful isn’t usually a goal in business, but in branding and trademarks it is. A fanciful or artful mark is one where the mark has nothing to do with the goods or services being sold. Like using the word “Orange” for your content marketing company. Or, from a real example, using the name “Domo” for a business intelligence company.

Suggestive. Suggestive in this sense isn’t referring to “suggestive” music or television content like my grandmother was concerned about me consuming as a young man. In trademark law, a suggestive mark is one that suggests a characteristic of the goods and services being sold. For example, Little Caesar’s Pizza’s mark “Hot and Ready” is a suggestive mark of the characteristics of the pizza they sell.

Descriptive. Descriptive marks are similar to suggestive marks but are even more literal in their describing the good or service being sold. Selling hot sauce under the mark “Spicy” would be a descriptive mark.

Generic. Generic marks are those that literally identify the goods and services being sold. For example, the mark “Car” for the sale of cars would be a generic mark. Generic marks often are refused registration.

Take Home. The take home here is to brand your business using a “fanciful or artful” mark, something that is catchy and unrelated to the goods and services that your business sells.

Step 2: Determine if There is a Likelihood of Confusion with Another Mark

Now that you have a fanciful and artful brand, the next thing that you need to do to have a strong, defensible mark, is to determine whether your mark is going to encounter a likelihood of confusion with another trademark. Under trademark law, two different businesses may have identical or similar marks so long as they don’t sell the same goods and services. So the overlap that you are looking for is two fold: (1) whether the marks are the same or similar; and (2) if the names are the same or similar, do the companies sell similar goods or services.

Trademark Search . So to accomplish the first task, you need to search whether there are other companies out there with a similar name or mark. The way this is done is by searching the following databases:

TESS Database on the United States Patent and Trademark Office website (USPTO). (This is where you can both identify if there are similar marks and determine if there is an overlap in the goods and services sold under the two marks).
Online google and search engine search for prior use.
State Trademark registries usually on the State’s Secretary of State website.
Business name databases and registries usually on the State’s Secretary of State website.

This can be a complicated and long search process. One tool that is available is to have LegalZoom conduct this search for you. This is usually a cost-effective way to complete this search, especially if your attorney is doing it for you. I still would suggest you have an attorney review that report and register the trademark.

Similarity of Marks . In conducting this search, the spelling of the brands or names is not the only factor that is important. The following are the important factors to consider whether the name/brand is the same or similar:

Spelling of Marks
Sound of Marks
Appearance of Marks
Meaning of Marks
Commercial Impression Given by Marks

Sound of Marks. Spelling of marks is self explanatory so I’ll move onto the next. If two marks sound the same, then there could be a likelihood of confusion. For example, if I want to register LWYR but there is already a Lawyer mark, I will likely run into issues for the marks sounding the same if there is an overlap in goods and services of the two marks.

Appearance of Marks. This issue usually rears its ugly head when logos are being trademarked and the two logos are not identical but resemble each other. An example of this, is a logo that resembles the superman logo with a different letter or different style, but appears similar.

Meaning of Marks. Two marks will be considered the same or similar if the two marks used are not the same word but have the same meaning. This usually comes up when a word in another language is used. For example, “Wolf Chicken” would be considered similar to “Lobo Chicken” because Lobo means wolf in Spanish.

Commercial Impression. The USPTO may consider two marks that give the same commercial impression to a consumer to be confusingly similar. For example, “Wild Boy Boxers” may be considered confusingly similar to “Crazy Man Boxers.”Take Home. These are nuanced issues and in reviewing and working through these issues is where attorney’s fees are worth their while.

Step 3: Register and Enforce Your Mark

The final step is to register your mark with the USPTO, brand away, and enforce your mark by stopping imitators from using similar marks that will dilute the strength of the mark and brand.

Registration . Register your mark with the USPTO. The following are numerous advantages to registering your mark:

Legal presumption that your business owns the mark and exclusive rights to it. (This will save you a ton of money if you have to file suit to enforce your mark).
Public notice of your trademark and brand.
The ability to record with U.S. Customs & Border Protection to prevent importation of infringing foreign goods.
Your ability to use the official trademark symbol on your marketing and advertising materials.
Ability to bring lawsuit in federal court.
Ability to use U.S. registration as basis for foreign registration. (As you expand internationally, this will save you a lot of money as well).

Enforce Your Mark . The final step to maintaining a strong, defensible mark is to enforce your mark when imitators emerge. Part of keeping your mark strong and defensible is preserving your mark undiluted by other people using the mark in an unauthorized manner. The more that the mark holder permits the unauthorized use of the mark, the more difficult legally it is to enforce the mark and stop other people from using the mark. For that reason it is best practice to have an employee regularly search online for the unauthorized use of the mark, and, if any such use is found, to quickly send cease and desist letters to those parties using the mark.

Conclusion . Creating a solid brand protection strategy can help you grow a business you can sell and avoid costly legal surprises along the way. A strong and defensible trademark will not only add to your branding but also create value in your business. By investing in the value of the brand, and not only the business assets themselves, you will be more apt to sell your business on your terms.

Founder’s Guide, Part 1: Boost Your Valuation with IP and Trademarks

Wed, 05 Feb 2020 21:12:49 GMT

Both Utah’s tech and venture capital scene have been exploding recently. More and more Utah companies are being acquired and funded through venture capital financing rounds.

One thing that I have noticed is that startup business owners often leave a significant amount of money on the table in acquisition or venture deals because of a lack of careful and thoughtful upfront legal work.

There are two areas where startup owners may lose money in these transactions: (1) in the valuation of the company, and (2) in the negotiation of indemnification reserves.

Valuations of startups are typically based on a combination of the company’s EBITDA and a multiplier. The negotiation of the multiplier is often where business owners make or lose millions, or, in the case of those majestic unicorns, billions of dollars. Given there are market conditions and business aspects that influence the multiplier, but the ability to negotiate an above-market multiplier or being forced to take a below-market multiplier is generally a function of buyer or investor comfort with the cleanliness of the deal and lack of risk being assumed.

Indemnification reserves, on the other hand, are significant chunks of the purchase price in an acquisition that is not paid immediately to the seller but held in escrow for years to be used to pay the buyer if assumed risks turn into actual liabilities. Here is another place where startup owners gain or lose money.

One of the critical areas where startup business owners gain and lose money in these valuable negotiation points is in intellectual property ownership. There are three fundamental intellectual property rights:

Trademarks
Copyrights
Patents

Trademarks

Most, if not all, businesses need a trademark or two (or ten). At the very least, they need to take into account the availability of trademarks in determining its business name and brand.

Step 1: Name and brand your business in a way that can be protected by a good strong trademark and register that trademark.

Nothing is worse than to start a business under a certain name and build a brand to learn that you have to change your brand because you are infringing on another business’s trademark. So the first moment in time that trademarks should influence your business is from before you form it and give it a name.

Step 2: Protect and enforce your trademark rights.

So now you have a business and a brand, what does a trademark do for your business? Trademarks protect against other companies using the brand you have created to advertise and sell competing goods and services under the same or confusingly similar brands or logos. This not only limits exact copycats from branding in your name or like you, but if their name is confusingly similar or their logo’s look is confusingly similar, you can protect your rights and block them from trying to take advantage of your hard work in establishing your brand.

If you notice that another company is using your trademark or a mark that is confusingly similar in your same space, to keep your trademark enforceable, you need to send them a cease and desist letter immediately and take whatever steps necessary to protect your trademark from being used and having its value diluted

Step 3: Keep your trademark current and don’t let its registration lapse.

Like diamonds, trademarks can be forever, but trademarks once registered, need to be renewed every five years and need to be used during that time to be extended.

Having strong and defensible trademarks can increase the value of your business significantly, especially when it comes to selling your business or raising money through venture capital or other channels. When potential buyers or investors come along, they are going to want to see that you have a strong and defensible ownership in your brand, and the best way to do this is to have registered trademarks. When a potential buyer or investor comes along and realizes that you don’t have a trademark or haven’t been protecting that, your valuation will immediately go down.

Copyrights

The next most commonly used intellectual property right in startups and businesses are copyrights. Copyrights are not just for visual art, literature, or music anymore, but now are commonly used to protect rights in source code and professional writing materials.

Copyrights are different from trademarks in that they are used to protect the unauthorized duplication, sale, or use of the copyrighted materials. This becomes most useful to tech startups that invest a significant amount of money in writing proprietary source code for their business that they want to protect from another company from using. So if you have done this and own valuable, proprietary code that is not open source, you should definitely get it copyrighted.

Also, unlike trademarks, and diamonds for that matter, copyrights are not forever. Copyrights only last 70 years. Like trademarks, potential buyers and investors who see that your source code is protected from imitators and other infringers will see a lower level of risk, and the strength of your owned rights will no doubt boost the value of your company.

Patents

Last but not least, Patents. Patents are generally the least used of these intellectual property rights. That is because they can be really expensive to register, and not every business lends itself to patents.

Patents are very common in the science and high tech companies who are making non-obvious and novel inventions. You can also use patents to protect non-obvious and novel business processes but to do so successfully. Those processes need to utilize some form of novel technology or science.

Like copyrights, patents are only valid for 70 years, and then after that, the technology can be used openly by anyone.

While patents are the least common form of intellectual property rights, patents are also usually the most valuable of the intellectual property assets of a company, especially at the time of acquisition or investment.

The Long and Short of It

While this is a very general explanation of the basics of intellectual property rights and how they can increase the value of your business, there is much, much more to say on these topics. The take-home lesson about intellectual property rights for the business owner is the stronger your portfolio of registered trademarks, copyrights, and patents, the better position you are going to be in to negotiate the highest purchase price or valuation of your company and also decrease indemnification reserves.

Schedule an Intellectual Property Review and Audit

Does your company need to review its intellectual property ownership and opportunities? Not knowing where you are at in regards to your intellectual property can cause problems in the future when negotiating additional funding or selling your business.

At Freeman Lovell, we have a team of attorneys that can help you analyze the strengths and weaknesses of your intellectual property. By clicking on the button below, you can set up an intellectual property review and audit with one of our attorneys. Then we can help you create a plan to secure your intellectual property interests for the future.