Business Law

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The Business Law Blog covers business structuring, financing, commercial transactions, mergers and acquisitions, intellectual property, and employment issues.

SEC Continues Work on crowdfunding rules
August 05, 2014


Crowdfunding--the use of the Internet to raise money through small contributions from a large number of investors--could cause a revolution in small-business financing. Through crowd funding, smaller entrepreneurs, who traditionally have had great difficulty obtaining capital, have access to anyone in the world with a computer, Internet access, and spare cash to invest. Crowdfunding sites such as Kiva, Kickstarter, and IndieGoGo have proliferated, and the amount of money raised through crowdfunding has grown to billions of dollars in just a few years. 


There are five basic crowd funding models, distinguished by what investors are promised in return for their contributions: (1) the donation model, (2) the reward model, (3) the pre-purchase model; (4) the lending model; and (5) the equity model. 


Some crowd funding sites encompass more than one model; it is especially common to see the reward and pre-purchase models on a single website. Other sites rely on only a single model. 


Donation Sites 


The contributions on donation sites are, as the name would indicate, donations. Investors receive nothing in return for their contributions--not even the eventual return of the amounts they contributed. However, although the contributor's motive is charitable, the recipient's motive need not be. Donations may fund for-profit enterprises. 


Pure donation sites are rare, and those that exist focus on requests by charities and other non-profit institutions, rather than requests by business. Some of the reward and pre-purchase sites also allow unrewarded requests for donations, but one study found that only 22% of all crowdfunding initiatives were requests for donations, with no rewards offered. 


GlobalGiving is an example of a pure donation site. It allows donors to direct contributions to development projects around the world. The GlobalGiving Foundation, which operates the site, takes a 15% fee and guarantees that the remainder of the donation will reach the project within 60 days. However, GlobalGiving, like other pure donation sites, is limited to nonprofit organizations. None of the leading crowdfunding sites available to business entrepreneurs uses the pure-donation model. 


Reward and Pre-Purchase Sites


The reward and pre-purcahse crowdfunding models are similar and often appear together on the same site. The reward model offers something to the investor in return for the contribution, but does not offer interest or a part of the earnings of the business. The reward could be small, such as a key chain, or it could be something with a little more cachet, such as the investor's name on the credits of a movie.


The pre-purchase model, the most common type of crowdfunding, is similar. As with the reward model, contributors do not receive a financial return such as interest, dividends, or part of the earnings of the business. Instead, they receive the product that the entrepreneur is making. For example, if the entrepreneur is producing a music album, contributors would receive the album or the right to buy the album at a reduced price upon completion. 


Kickstarter and Indigogo are the leading reward/pre-purchase crowdfunding sites. The two sites are similar. Kickstarter requires its projects to offer what it calls "rewards," typically of the pre-purchase variety. According to Kickstarter, "Rewards are typically items produced by the project itself--a copy of the CD, a print from the show, a limited edition of the comic." Typically, the "donation" required to receive the product is below the planned retail price. For example, Dan Provost and Tom Gerhardt, who designed a tripod mount for the iPhone, offered one of the mounts to anyone who donated $20.58. They planned to sell the mount for a retail price of $34.95. But Kickstarter's rewards are not limited to pre-purchase. Other suggested rewards include "a visit to the set, naming a character after a backer, or a personal phone call." The creators of the iPhone tripod mount, for example, offered to dine with anyone who contributed $250. 


IndieGoGo, unlike Kickstarter, does not require campaigns to offer what it calls "perks," although it does recommend them. Many of the perks offered on the IndieGoGo site follow the pre-purchase model, but some go well beyond that. 


Both Kickstarter and IndieGoGo take a cut of the money collected. Kickstarter uses an "all-or-nothing" funding model and does not allow projects to be funded unless they reach their stated funding goal. If a projects reaches its funding goal, Kickstarted collects a 5% fee; if not, Kickstarter does not charge a fee. IndieGoGo allow project creators to draw on pledged funds immediately, whether or not the funding goal is reached, but the fee depends on whether the funding goal is met. IndieGoGo charges a 4% fee if the funding goal is reached and a 9% fee if it is not. 


Lending Sites (Peer-to-Peer Lending) 





July 1st Deadline for charities seeking tax exemption on ma real property
Apr. 29, 2014 


The general rule regarding taxation in Massachusetts is that all property is subject to tax unless specifically exempted by the legislature. In the case of certain "charitable organizations," i.e., qualifying nonprofits, the legislature has carved out an exception to the general rule in order to provide relief from real and personal property tax. Proving a qualification for the property tax exemption requires not only meeting the procedural requirements of the statute but also meeting definitional constraints imposed by both the statute and the Massachusetts courts. The statutory property tax exemption has been shaped by numerous judicial decisions that have attempted to clarify both the statutory language and the legislative intent.


To qualify for a property tax exemption, real property must be owned or held in trust by a charitable organization, and must be occupied by the charitable organization or its officers for the charitable purpose of the organization; personal property is exempt whether or not it is actually used for the organization's exempt purpose. 


 Local assessors determine whether the property tax exemption is available for individual charities based on whether the property is used for a charitable purpose as of July 1 of each year. If charitable use changes after July 1, adjustments may or may not be made. For example, property occupied by a non-charitable entity on July 1 remains taxable for the entire tax year, even if the property is sold to a charitable entity on July 2. For this reason, if a charity is contemplating the purchase of real estate that will be used in furtherance of a charitable purpose, it should either take title to the property prior to July 1 or arrange for a tax escrow with the seller for the entire year. By contrast, if a charity sells its property to a non-charitable entity after July 1, the non-charitable entity will be required to pay a pro rata amount of tax. If a charity sells exempt property to another charitable entity, the purchasing charity must apply for a new exemption; the seller's exemption is not transferable. 


WHERE SHOULD I ORGANIZE MY LLC?
MAR. 12, 2014


The answer to this question depends, in large measure, on the size of the business seeking to organize as an LLC. 


For sophisticated parties and major transactions, the Delaware LLC is usually the best choice. Delaware LLCs are probably used most for structured finance, as corporate subsidiary structures, investment funds, and joint ventures. 


Non-Delaware LLCs are popular among small businesses that function locally. The non-Delaware statutes may not be as flexible or as sophisticated as the Delaware statute, but most small businesses don't need great flexibility or great sophistication. Additionally, organizing in Delaware requires the small business to qualify in the state or states in which it operates. While that is not a big deal with a large transaction, it means more money. The small business would have to pay two states and two registered agents. 


To learn more, contact us


TOP 3 LEGAL TIPS FOR SOCIAL MEDIA ADVERTISING
MAR. 05, 2014


1. Clearly and Conspicuously Disclose When a Social Media Post Was Essentially a Paid Ad


If your campaign includes a writer who receives compensation or a commission, a writer who has been given a free product to review, or a writer who obtains free services in exchange for the promotion, the writer must disclose that fact. Recently released FTC guidelines explained that disclosures made solely at the bottom of posts, in small print, in "legal guidelines," or far away from the claim will not be sufficient. The disclosures must be at least the same size as and proximate located to the advertising claim, among several other requirements outlined by the FTC. For tweets, place a hashtag (like #ad) at the beginning of the tweet. Further, if your campaign will enlist employees, make clear that they are employees. 


2. Copyright Laws Apply


Do not assume that copyright laws are somehow more lax on social media. As a general matter, others' photos, videos, songs and other works should not be placed in social media campaigns without first obtaining permission. 


3. Not Everyone Wants to Be Famous--at Least Not without Compensation


In other words, right of publicity laws should be respected. Obtain permission, preferably in writing such as in a consent agreement, from any employee or non-employee who is photographed or discussed, especially prominently or recognizably, in your company's campaign ads or posts. 


TOP SIX FACTORS TO CONSIDER WHEN CRAFTING YOUR COMPANY'S SOCIAL MEDIA POLICY
MAR. 04, 2014


Overview 


Social media is growing. An intelligent social media policy for your company is more important than ever. Here are the six most important factors to consider when drafting your company's social media policy.


1. Avoid Over-Broad Statements


Although it may seem sensible and harmless to include prohibitions in a policy to not make "offensive" or "inappropriate" posts, such seemingly innocuous statements have led the National Labor Relations Board to deem such policies in violation of the Act. This is because, under the Act, employees should have the opportunity to critique how the company treats its employees. Instead, companies should prohibit more targeted (including more egregious) behavior, such as by restricting the posting of "malicious, obscene, threatening, intimidating, racist, or harassing content." 


2. Do not Implement Over-Broad Confidentiality Rules


A company should clarify what types of things should be held confidential. Otherwise, employees could reasonably believe that they are restricted from discussing employment conditions and pay.


3. Allow "Friending" 


Current guidance indicates that a prohibition on friending co-workers would discourage communication among employees in violation of their concerted activities rights. 


4. Carefully Address Trademark Considerations 


On one hand, each company should proactively monitor and police its logos, company names, and other brands. Otherwise, the company risks loss or dilution of its trademark rights, among other concerns. On the other hand, employees should be able to engage in protected rights, through discussing and identifying their employers. A middle ground, however, can adequately address both concerns. Employees can be permitted to use logos and other trademarks in certain situations and manners, but not in others. For instance, employees can be prohibited from using your brands in connection with commercial ventures unrelated to the employer, and if they do use a company logo, the employee can be requested to include a disclaimer that he or she is not a company spokesperson. 


5. Review the Latest Guidance and Decisions 


The National Labor Relations Board frequently issues decisions that comment upon companies' social media policies and whether the terms therein were satisfactory. The NLRB also, albeit less frequently, issues advisory opinions on social media guidelines and policies. 


6. Address Your Company's Issues


Your company or industry may have unique characteristics and challenges that warrant special considerations in a social media policy. For this reason, do not assume that your policy best protects the company's interests if you simply copy it from a sample policy. Think about what issues you should specifically address. This may be your company's truck drivers and their use of geotagging on social media on the job. It could be that your employees regularly obtain highly confidential data from customers, requiring greater security of the content on employee's mobile devices. Protecting your company's culture, and a fear of losing quality job candidates in your industry, may even necessitate that you simply use a softer tone in your social media policy. 


WHAT ARE THE STEPS TO STARTING A BUSINESS?
FEB. 26, 2014


Starting your own business is exciting and challenging. How you form your business and where you form your business is extremely important. Here are some of the big ticket items that are at stake:  


  1. you ability to finance your business; 
  2. your personal liability for contracts and torts; 
  3. how high your taxes will be; and 
  4. how easy it will be to sell your business or pass it on to your children.


Consider the issues in this article carefully and consult an attorney to help you through this important process. 


How Should I Organize My Business?


There are a range of business entities available to you: 


  1. sole proprietorships,
  2. partnerships, 
  3. corporations,
  4. limited liability companies, 
  5. business trusts (in Massachusetts), and 
  6. multi-entity forms.


Each offer unique tax- and non-tax advantages. Here are the most important non-tax factors to consider: 


  1. limited liability, 
  2. transferability of interests, 
  3. continuity of existence,
  4. centralization of management and control, 
  5. administrative complexity and expense,
  6. capitalization needs.


A talented attorney can explain how these non-tax factors affect which entity you should select for your particular business. 


How you organize your business also determines how high your business will be. Answer these top tax-related questions before organizing your business: 


  1. Do you expect substantial losses in the early years of your business?
  2. Do you have income from other sources?
  3. To what extent will you be operating the business? Do you plan to hire employees and managers in the future?
  4. ​Will a substantial amount of profit be reinvested in the business? 
  5. Will you want to sell your business or pass it on to your children?


Organizing your business in the wrong way leads to higher taxes, greater exposure to risk, and a reduced ability to obtain financing. In short, selecting the wrong business entity reduces the chances your business will survive.


Should I Organize My Business as a Nonprofit? 


The purposes and activities of some organizations qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. So, in addition to selecting the appropriate entity based on the various tax- and non-tax factors above, you should speak to your attorney about whether your organization qualifies for tax-exempt status. 


Where Should I Organize My Business? 


General Factors to Consider


Where you organize your business is often as important as how you incorporate your business. Where you organize your business will determine the: 


  1. requirements for formation,
  2. control and management of, 
  3. liability, and 
  4. tax obligations.


of your business. An attorney can answer your questions with the respect to these important issues.  


Should I Incorporate My Business in Delaware?


Should you desire to form a corporation--rather than a partnership, limited liability company, or other business entity--you may wonder if it is best to incorporate your business in Delaware. It is true that there are advantages to incorporating in Delaware. Of those advantages, here are the most important: 


  1. greater flexibility to make major business decisions, as major business decisions--e.g., mergers, sale of all or substantially all of the corporate assets-- require a simple majority;
  2. a Court of Chancery that truly understands business; and 
  3. the ability to issue shares without certificates.


But there are real hurdles for incorporating in Delaware. Delaware requires the incorporator to file a certificate of incorporation, which must include: 


  1. the name of the corporation; 
  2. the address of the corporation's registered office in Delaware and the name of its registered agent at that address; 
  3. the nature of the business or purposes to be conducted by the corporation, 
  4. the total number of shares of stock that the corporation shall have authority to issue and the par value of each such share, and
  5. the name and mailing address of the incorporator(s). 


Additionally, other states where you do business will require you to file (and pay for) a registration as a foreign business entity. Thus, incorporating in Delaware requires higher fees and adherence to the laws and regulations of multiple states. 


Conclusion


Where you organize your business and how you organize your business may determine whether your business can succeed. Talented owners fail at business because they do not properly take into account the tax- and non-tax factors for organizing a business. Speak to an attorney before organizing your business.  


WHAT ARE MY SHAREHOLDER RIGHTS?
FEB. 24, 2014


Not all directors and officers meet their fiduciary duties. As a shareholder, you may feel that the directors or officers are inappropriately managing the business. If that is the case, here are two top options for protecting you and the corporation from further harm. 


Force an Inspection of the Corporation's Records


A shareholder has a right to inspect and copy specified corporate records during business hours. Speak to a lawyer to discuss which records are subject to inspection, proving that you have proper purpose to inspect the records, and determining exactly what financial information the corporation must disclose. 


File a Shareholder Suit against the Corporation


A shareholder may bring a derivative action (i.e., shareholder suit) on behalf of the corporation and against the corporation's directors and officers for breaching of fiduciary duty. Speak to a business-law attorney to determine if you may bring the suit, and the contents of the written demand you make upon the board. 


Summary


Where you organize your business and how you organize your business may determine whether your business succeeds. Even talented owners with desired products or services can fail at business by failing to organize his/her business properly. Speak to an attorney who can clear your path. 


OBTAINING TAX-EXEMPT STATUS FOR YOUR BUSINESS ORGANIZATION
FEB. 10, 2014


Do I Qualify for Tax-Exempt Status?


Here are the top three factors to consider with your attorney for determining whether your organization qualifies for tax exemption: 


  1. Will your organization's proposed purposes and activities qualify under section section 501(c) of the Internal Revenue Code? 
  2. Does your organization satisfy the organizational and operational tests and other special requirements imposed on section 501(c)(3) organizations?
  3. Will your organization attract broad-based support from the general public so that it qualifies as a publicly-supported charter rather than a private foundation?


How Do I File for Tax-Exempt Status?


Organizations seeking recognition of exemption under IRS 501(c)(3) must file IRS. If you want the IRS to make a prompt and favorable determination on your application, here are some things to consider: 


  1. Read and follow the instructions on the form. Some applications fail because the applicant did not precisely follow the instructions. 
  2. Demonstrate that your organization's purpose and activities place it clearly within established precedent. Your organization's educational purpose. Be absolutely sure to cite court decisions, Treasury Regulations, or published rulings by the IRS. Submitting a properly completed application showing that your organization is entitled to exemption under established rules is the best way to secure prompt and favorable treatment. Speak to an attorney to complete your application.


How Should I Organize My Nonprofit?


There are many ways to organize your nonprofit:


  1. unincorporated associations,
  2. trusts,
  3. LLCs,
  4. corporations, and
  5. multi-form entities.


Each entity offers unique advantages and poses unique disadvantages, including:


  1. requirements for formation, 
  2. control and management
  3. liability issues, and 
  4. tax considerations.


You should contact a nonprofit attorney to weigh these factors carefully. 


Summary


TAX FACTORS TO CONSIDER BEFORE FORMING YOUR BUSINESS

FEB. 5, 2014


Avoiding Double Taxation


Double taxation--i.e., taxation at the entity level and again at the owner level--is a serious disadvantage that you should avoid if possible. C-corporations pose the greatest danger here. But a good lawyer can navigate your C-corp. away from the threat of double taxation and actually reduce your overall tax burden by forming a C-corp. and properly structuring: 


  1. reasonable salaries, 
  2. interest,
  3. rent,
  4. royalties, and 
  5. other ordinary and necessary business expenses


In contrast to the C-corp., sole proprietorships and partnerships are taxed as so-called "flow-through entities"--i.e., the tax is imposed only at the owner level. So, for the simplest way to avoid double taxation, you may consider forming  a sole proprietorship or partnership, but understand you may lose advantages offered by the C-corp. 


Questions to Discuss with Your Business-Law Attorney


Here are some very important questions you should go over with your attorney before making selecting you business entity form: 


  1. Do you expect substantial losses in the early years of your business? 
  2. Do you have an income from other sources? 
  3. To what extend will you be operating the business? Do you plan to hire employees and managers in the future? 
  4. Will a substantial amount of profits be reinvested in the business? 


Your answers to these questions have substantial tax implications for your business. 


Final Note


Choosing how your business will be taxed is one of the most important business decisions you will make. A talented lawyer can save your business a great deal of money. 



WHERE TO INCORPORATE YOUR BUSINESS

JAN. 22, 2014


Introduction


Persons planning to incorporate a business in Massachusetts or New York may consider whether instead it should be organized as a Delaware corporation. If business is to be done in Massachusetts or New York in the corporate form, the choice is between: (1) incorporating in Massachusetts and New York or (2) incorporating in another jurisdiction and applying for authority to do business in Massachusetts or New York as a foreign corporation. The choice requires consideration of the relative business and tax advantages from the viewpoint not only of corporate management but also of shareholders, creditors, and others within the corporate community. 


Why Incorporate in Delaware?


The elements that have made Delaware the most favored corporate domicile in the United States may be placed in four basic categories: 


  • a corporate law that that permits the holders of stock and the management elected by those holders to conduct corporate business with a minimum of red tape, confusion, and procedural expense; 


  • a court system that: (a) has the capacity and sophistication to deal with internal corporate problems; (b) responds with speed and predictable consistency; 


  • a modern and efficient office for the handling of corporate filings; and 


  • tax policies that have been moderate and consistent.


Comparing Massachusetts Corporate Law to Delaware Corporate Law


Shareholder action without a meeting


Both Massachusetts and Delaware permit shareholder action by written consent of the proportion of shares that would be required in a vote at a meeting duly held. The Massachusetts provisions that permit less than unanimous written consent for shareholder action taken without a meeting are more restrictive than the Delaware provisions. 


Shareholder approval of extraordinary action


Massachusetts calls for a two-thirds vote of the voting shares for extraordinary corporate action in connection with:


  • certain amendments to the articles of organization;


  • sale, lease, or exchange of all or substantially all corporate assets; and 


  • merger.



By comparison, Delaware permits amendment or restatement of a certificate of incorporation, merger or consolidation, and sale, lease, or exchange of all or substantially all corporate assets by majority vote of the shareholders. 


Calling special shareholders' meetings


In Massachusetts, in addition to the president and directors of a corporation, the holder(s) of at least 10 percent of the voting stock (40 percent in the case of a corporation with stock registered under the Securities Exchange Act of 1934) (“Exchange Act”) may compel the secretary or another officer to call a special shareholders' meeting. In Delaware, the power to call a special meeting is limited to the directors or such other person or persons as the certificate of incorporation or bylaws may provide.


Shareholder appraisal rights


Shareholders of a Delaware corporation have appraisal rights in the event of a merger or consolidation, except in certain cases in which the stock is listed on a national securities exchange or held by more than 2,000 shareholders. Massachusetts permits appraisal not only in instances of merger and consolidation, but also under certain circumstances in the event of sale, lease, or exchange of all or substantially all the corporation's assets, and in connection with certain control share acquisitions of stock.


Voting and inspection by non-shareholders


A Delaware corporation in its charter may confer upon the holders of bonds, debentures, or other obligations the power to vote with respect to corporate affairs and management, and may also confer upon them rights of inspection and other rights commensurate with those held by shareholders. Massachusetts has no comparable provision. 


Number of directors


Delaware permits a corporation to have only one director regardless of the number of shareholders. A Massachusetts corporation is permitted to have fewer than three directors only if the corporation has fewer than three shareholders or unless specifically provided for in its articles of organization.


Removal of directors


Directors of a Massachusetts corporation may be removed with or without cause and by directors for cause. By contrast, directors of a Delaware corporation may be removed only by the shareholders with or without cause. Both statutes provide that in having classifieds or staggered boards, shareholders may remove only for cause, further limited in Massachusetts to corporations having a class of voting stock registered under the Exchange Act. In Massachusetts, a director may be removed for cause, only at a meeting called for that purpose, and the meeting notice must state that one of the purposes is to remove the director, whereas the Delaware statute does not expressly provide for such rights. 


Close corporations 


Delaware permits a close corporation--defined as a corporation having 30 or fewer shareholders--to elect to be governed by special provisions of its General Corporations Law directed to close corporations, permitting, for example, corporate governance by shareholders in place of directors. Massachusetts does not have comparable special close corporation provisions in Chapter 156D (the for-profit--as opposed to the not-for profit--statute), although the Massachusetts Business Corporation Act permits an agreement among shareholders that eliminates the need for a board of directors.


Reasons for Incorporating in New York


New York has long been a leading state in the number of new incorporations annually. New York has a modern corporate statute, the BCL, that is well-organized, carefully drafted, and kept up-to-date by annual amendments. 


New York also has more judicial decisions on corporation law than any other jurisdiction, adding further definition, predictability, and sophistication to its statutory law. The policy of the judiciary has been to try to balance as fairly as possible the interests of directors, officers, shareholders, creditors, and the public. 


In administering the law, the New York Department of State, Division of Corporations, conscientiously reviews documents before filing them, ensuring less chance of defective instruments being filed. 


Among the usually favorable New York constitutional and statutory features are the broadly construed reserved powers, a variety of statutory provisions designed to accommodate the needs of close corporations (without the necessity of electing to be a "close corporation"), the definitional section, the detailed formulations on preemptive rights (non-mandatory unless otherwise provided in the certificate of incorporation), proxies (especially irrevocable proxies), actions by r in the right of a corporation to secure a judgment in its favor, indemnification of directors and officers, and liability insurance. Additionally, flexibility is achieved by the many statutory provisions that are expressly subject to various by the certificate of incorporation, bylaws adopted by shareholders, or bylaws generally. 


Note: The most unique disadvantage of New York incorporation is that the ten largest beneficial shareholders of a closely held domestic corporation have unlimited personal liability for unpaid wages and fringe benefits of the corporation's wage earners. Foreign incorporation avoids such liabilities. 


Conclusion


Delaware is often chosen state of incorporation for Fortune 500 corporations because of its perceived favorable climate for management. Few of the advantages have any practical effect for small business.