Law Offices of Ronald D. Jackson

Practical Tips

Disclaimer

What is a trust?

A trust is a fiduciary relationship under which one party, the trustee,holds legal title to specific property and manages it for the benefit of designated persons, the beneficiaries, who are considered to own the equitable title in the property.

Use an option contract to gain control of real estate.

In real estate, an option gives the holder the right, but not the obligation, to buy a property in the future. If the holder complies with the terms of the option, the seller must sell. An option is often an effective way to gain control of property.

Choose a strong trademark.

A trademark is a word, name, symbol, or device used to indicate the source of goods or services. Trademarks answer the question: Whose product or service is it? A fanciful, arbitrary or coined name is inherently strong and receives the strongest protection. Suggestive names can also be very strong trademarks, however, a descriptive name is not protectable unless it has acquired secondary meaning, i.e., when consumers have come to associate the name with a particular business, product or service.

An S Corporation offers owner-employees a unique tax advantage.

Most people know that an S corporation is a "pass-through" business entity for tax purposes, which means the business entity is not taxed. Profits and losses pass through to the owners for tax purposes. However, a unique and advantageous feature of an S corporation that few people know about is that "constructive dividends," the net income that flows through to a shareholder, are not subject to withholding or social security taxes. Of course, salary income of an S-corporation shareholder-employee is subject to withholding and social security taxes, but "constructive dividends" are not. To qualify for this unique tax advantage, the shareholder/employee must receive a reasonable salary.

Five commonly used methods to value a business.

Often used methods to value a business include:

(1) Fixed price agreed up-front by the owners.

(2) Book value (i.e., assets minus liabilities).

(3) Multiple of book value.

(4) Capitalization of earnings.

(5) Appraisal.

Five creative ways a corporation can use stock as compensation.

Five forms of stock compensation are:

(1) Stock grants.

(2) Stock purchase plan.

(3) Rights to purchase stock or options.

(4) Performance shares.

(5) Stock appreciation or phantom rights.

Two reasons employees prefer incentive stock options.

Employees prefer incentive stock options, because no tax is due until he or she disposes of the underlying stock, and the sale is entitled to capital gains tax treatment. Incentive stock options can play an important role in a company's recruitment, retention, and compensation strategies.

Nonqualified stock options are a flexible form of compensation.

Nonqualified stock options may be awarded to consultants, directors, employees, key partners, and others. In contrast, incentive stock options can only be issued to employees.

Copyright law does not protect ideas.

Copyright law protects the particular form or way in which you express ideas. However, the ideas themselves are not protected by copyright law. Trade secrets is the body of law that protects valuable information that is not generally known to the public and that you keep secret. Before you share confidential information with a prospective business partner, consider asking them to sign a properly drafted nondisclosure agreement (NDA) or confidentiality agreement. An NDA is a good way to protect your valuable ideas.

Five reasons to register your copyright.

Copyright registration benefits include:

(1) A public record of your copyright claim.

(2) Satisfaction of a prerequisite for filing an infringement lawsuit.

(3) A presumption of validity of your copyright claim.

(4) Eligibility for an award of statutory damages for infringement.

(5) Eligibility to have your attorneys fees paid by the infringer.

These benefits can give you (the plaintiff) signficant leverage when facing an alleged infringer.

Stock redemptions explained.

A stock redemption occurs when a corporation purchases its own shares. Under corporate law, a stock redemption is considered a distribution. The board of directors may authorize a stock redemption only if the company is solvent (i.e., able to pay it's debts when they become due, and assets exceed liabilities). The purpose of the restriction is to protect creditors. Directors are personally liable for any distribution that does not satisfy the solvency tests.

Guidelines for valuing a closely-held business.

Revenue Ruling 59-60 (1959-1C.B.237) includes eight factors, which have become the standard of appraisal for valuing a closely-held corporation. The revenue rule is used for income tax purposes and employee stock ownership plans. Consideration of the factors cited in Revenue Ruling 59-60 is the beginning analysis of any evaluation of the fair market value of a closely-held company.

How to evaluate an appraisal.

Always consider the following:

(1) The purpose of the valuation.

(2) Why the method used to determine value is reasonable.

(3) The factors considered in determing the valuation.

In a nutshell, you need to know if the appraisal is credible and defensable.

Consider personal goodwill when you buy or sell a business.

Personal goodwill is sometimes called professional goodwill or practice goodwill, and relates to the value associated with an individual's expertise, reputation, personality and other personal qualities that contribute to the success of a business. It exists in situations where there is no existing covenant not to compete. Personal goodwill does not belong to the business. It is distinct from enterprise goodwill. In some situations, a retiring owner who posesses personal goodwill may find it advantageous from a tax perspective to sell it to the acquiring company and enter into a covenant not to compete.

What is a trade name?

A trade name is a business name used to identify a particular commercial entity and to distinguish it from the business of others. While a trade name may be, and often is, a service mark as well, that is not always the case. The right to use a trade name, and the right to exclude others from using the same or a similar trade name, is based on the same principles applicable to trademarks and service marks, that is, the common-law principles of unfair competition. Depending on the circumstances, exclusive rights to the use of a trade name are enforceable under applicable laws.

What are "blue sky" laws?

Blue sky laws are state statutes that require you to disclose information during the offer and sale of securities (e.g., stock). The goal of these laws is to protect investors by ensuring that they are sufficiently informed about the risks of investment. All securities offering, even if exempt from registration, are subject to anti-fraud provisions. This means that you are responsible for any false or misleading statement or omission, whether oral or written, that is made during the offer and sale of any security. Under the law, the definition of a security is very broad, and encompasses much more than stock. Violation of blue sky laws can lead to private lawsuits and/or governmental prosecution against you.

Making a section 83b election could save you money when you receive restricted shares.

Section 83b refers to a provision in the U.S. tax code. It is a provision that you may elect to use when you receive restricted stock. Restricted stock carries a substantial risk of forfeiture. For instance, the stock award might say that you will forfeit the stock if you fail to meet certain future performance goals.

To understand how a section 83b election works, you must first understand how the receipt of restricted stock is treated under U.S. tax law. The basic tax rule is that you don't report income immediately when you receive an award of restricted stock. Instead, you report income when the stock vests (i.e., when the restrictions lapse). The income you report includes any increase in the value of the stock during the vesting period. This income is taxed as ordinary income, not capital gain. For example, assume Mary's company awards her 10,000 shares of restricted stock when the shares are worth $1.00. Mary's shares vest three years later at which time the shares are worth $5.00. Mary would report nothing when she receives the restricted shares, however, she must report $50,000 when her shares vest. Her substantial gain is compensation income, subject to ordinary income tax rates. Note that Mary is taxed when her shares vest whether or not she sells them at that time!

Here's how an 83b election might have helped Mary. Because she receives restricted stock, she can make a section 83b election. Under section 83b, she voluntarily pays tax when she receives the stock, but not when it vests. Thus, Mary reports $10,000 of compensation income when she receives the stock, but nothing when it vests. That's a far cry from the $50,000 in ordinary income that she must report if she fails to make a section 83b election. Furthermore, having made a section 83b election, Mary becomes eligible for capital gains tax treatment when she sells her stock. If she sells her stock for $50,000, she reports $40,000 as a long-term capital gain, thus saving her a great deal of money.

There is no guarantee that an 83b election will save you money. It is analogous to a bet on your company's future. The outcome depends on the situation, and is not predictable. However, you should seriously consider the advantages and disadvantages of an 83b election whenever you receive restricted stock.

How to know when to sell commercial property (from an income perspective).

To determine whether to sell or hold income producing property, first evaluate the expected future performance of the property. Then, investigate the alternative investments available in which you can reinvest the cash from the sale, and the tax consequences of selling one property and acquiring another. If the property is sold, you will have to pay capital gains taxes, mortgage balance, other taxes, and selling expenses (if any) before you will have funds available for reinvestment. Before you sell, consider whether you will be able to reinvest your sales proceeds and earn an after-tax internal rate of return greater than the return you expect to earn if you keep the property.

Advantages of a limited liability company (LLC).

(1) An LLC is the most flexible business entity, because it can be structured or tailored to meet specific needs of individual business partners.

(2) An LLC provides limited liability protection for all members, which is analogous to the protection shareholders receive in a corporation but it is vastly superior to the unlimited liability that general partners are exposed to in a general or limited partnership.

(3) An LLC affords its members pass-through tax treatment. LLC members can avoid double taxation, which can be an issue with a corporation.

(4) An LLC is not subject to restrictions on the number or type of members. This feature of an LLC makes it a viable option for people who want pass through tax treatment but who can not qualify as owners in an S corporation. This feature also makes an LLC an attractive entity for someone who wants the benefits of pass-through tax treatment, but who wishes to avoid the risks of unlimited liability associated with operating a business as a sole proprietorship.

Why a shareholders agreement is important to your success.

For owners of closely-held businesses, a shareholders agreement , also known as a buy-sell agreement, is one of the most valuable documents. This is an agreement that usually includes you, the corporation, and the other shareholders. A properly written shareholders agreement can provide the following benefits:

(1) A mechanism to sale your shares and liquidate your investment.

(2) A mechanism to resolve disputes between business partners quickly and fairly. This can save you a great deal of the time and heartache that usually comes with a messy business divorce.

(3) Restrictions on the transfer of stock so you are protected against unwanted shareholders (i.e., business partners) and the creditors of other shareholders. A shareholders agreement can also help you avoid personal liability for violations of state or federal securities laws. Lastly, if your company is an S corporation, a buy-sell agreement is essential. By restricting the transfer of shares, the agreement facilitates the preservation of the S election, which is very important because it is the avenue on which pass-through tax benefits flow.

Take care to preserve your company's trade secrets.

A trade secret is any information of commercial value that a business keeps secret. To acquire a trade secret, a business simply needs to create and keep a secret with commercial value. Trade secret status can apply to a wide range of things including ideas, business plans, inventions, processes, financial data, customer and prospect lists, marketing plans, and other valuable information. If it is valuable information and the business takes measures to keep it safe, then it probably qualifies as a trade secret. Trade secret status for informatoin can last indefinitedly as long as the business takes appropriate steps to protect the information. However, information loses its trade secret status if:

(1) You disclose it without receiving a promise of confidentiality (e.g., disclosure without an NDA during a meeting or negotiation session).

(2) The recepient discovers the information independently and in a lawful manner.

(3) The recepient gets it from a third party source who had the right to supply it without restrictions.

(4) It is disclosed publicly (e.g., the information is posted on the Internet, in a newsgroup, or revealed at a conference).

If particular information is important to your business' competitive advantage, then it is vital that you keep it secret and take appropriate steps to avoid improper disclosures.

Take steps to preserve your patent rights.

Patents cover new, useful, and "nonobvious" inventions and processes. It is best to file a patent application before you publicly disclose your invention. File international applications within one year of your first national application. In the United States, a company may file a patent application up to one year following the date of first sale, offer for sale, public use, or publication of the invention. However, the patent laws of many foreign countries are not as lenient. A company may forfeit the right to file a patent application in some foreign countries if the filing occurs after the date of first sale, offer for sale, public use, or disclosure. Be careful with your inventions. See advice from an experienced patent attorney early.

What a patent means (in the real world).

Patent law covers new, useful, and "nonobvious" inventions, which includes business methods. Having patents in your company's intellectual property portfolio can be very beneficial. However, most business people don't understand that having a patent does not mean:

(1) Someone can not challenge its validity. In fact, it's common for an alleged infringer to challenge the validity of a patent.

(2) Someone can not design around the patent claims. Anyone can make a product with a similar function as yours as long as they design it in a way that avoids your specific patent claims.

(3) Someone will not use the "patented" technology. A patent gives you the right to sue for infringement. It gives you the legal right to go after infringers. Like any right to sue, the ultimate value of a patent may depend on how deep your pockets are.

Is a Letter of Intent enforceable?

Beware of the fine print!

Before you sign on the dotted line of a letter of intent:

(1) Look for a disclaimer. Check to see that the letter of intent contains a disclaimer, which clearly indicates that the parties do not intend to be bound by its terms.

(2) Make it clear that only the contract will bind. Make sure the letter of intent provides that only the written contract or purchase agreement to be negotiated and drafted later will bind the parties.

(3) Take care regarding any nonsolititation provisions. Be very careful if the letter of intent contains a nonsolicitation provision, a common clause that prohibits you and/or the other side from seeking or entering into a letter of intent or purchase agreement with a third party usually within a specified time period. Make sure the intent of any nonsolicitation provision is clear, and that you uphold your end of the bargain.

(4) Take care regarding any due diligence provisions. Be very careful if the letter of intent contains a due diligence provision, a common clause that gives one side or both the right to receive and review certain documents about a proposed deal within a specified time period. Make sure the intent of the parties regarding any review provision is clear.

(5) Get legal help. Don't treat a letter of intent lightly. The best time a lawyer can help you is before mistakes are made. A so-called "nonbinding" letter of intent can be tricky, because it may not legally mean what most people believe. The fact that both parties say it is "nonbinding" may not be legally relevant at all. Whether a letter of intent is an enforceable contract depends on the fine print and the situation.

What is a qualified intermediary?

In a 1031 exchange, an investor who sells investment property defers capital-gains taxes if he or she invests the proceeds in "like kind" property within 180 days. However, to qualify for the favorable tax treatment, the investor can't touch the money from the sale. Instead, the investor must place the money into a 1031 exchange account until it's used to buy a new property. This is where a "qualified intermediary" or man-in-the-middle comes in. The investor hires an intermediary to handle the money in the 1031 exchange account until the investor is ready to close on a new property, which consummates the 1031 exchange. While many commercial banks and title insurance companies offer intermediary services through affliated companies, the intermediary services industry is largely unregulated. Learn more about "qualified intermediaries", and how to choose one wisely.