Is your Massachusetts LLC or Corporation in Good Standing?

It is vital that a Massachusetts corporation or partnership remain in good standing with the Commonwealth of Massachusetts. Good standing exists when a Massachusetts entity registers itself with the state; files all necessary documents; and pays all applicable fees and taxes to both the Secretary of State and Department of Revenue. 

When in good standing with Massachusetts, an entity may request a certificate indicating its good standing and compliance.  Such certificate can be necessary when an entity enters into an asset purchase agreement; contract to purchase a commercial building or land; lease of equipment or business fixtures; or where an individual or entity seeks bank financing or capital.  The certificate of good standing is one of many common conditions to close the aforementioned transactions. 

To remain in good standing with the Secretary of State, annual reports must be filed with the applicable fee/tax paid (depending on entity type.)  A corporation will pay the filing fee with the Secretary’s office and then pay taxes to the Department of Revenue. A partnership will pay $500 to the Secretary’s office when filing the annual report.  An entity will not be issued a certificate of good standing if it’s fallen behind on filing annual reports with the Secretary of State. An entity may file annual reports for previous years so as to place the entity in good standing and avoid dissolution of the entity by the Secretary of State. The entity is responsible for the past due filing fees, and a reinstatement fee if the entity has been dissolved.

 A Certificate of Good Standing (issued by the Secretary of State) provides the following information:

  1. Name of the entity;

  2. Date the entity was formed;

  3. Confirmation that the entity has filed all annual reports and paid all related fees;

  4. Confirmation that there are no proceedings pending for dissolution of the entity;

  5. That no articles of dissolution have been filed by the corporation; and,

  6. That according to the records of the state secretary the entity appears to be in good standing.

 The Certificate of Good Standing does not provide an opinion nor make any warranties regarding:

  1. The financial health of the entity’s business;

  2. Whether there are pending lawsuits or judgments against the entity;

  3. Whether the entity is subject to a bankruptcy proceeding; and,

  4. Any number of the countless conditions that often affect a business (such as market conditions.)

To remain in good standing with the Department of Revenue, an entity must timely meet all tax obligations, including corporation taxes (excise, use and sales); room occupancy taxes (if applicable); meal taxes (if applicable), and withholding taxes . The Certificate provides no representation concerning unemployment insurance obligations and other taxes provided by statute. Nor does the certificate make any opinion or representation on the financial health of the business, or any other condition not related to taxes owed.  The Department of Revenue may issue a Certificate of Good Standing and/or Tax Compliance upon request by a corporation, LLC, LLP or other entity.  

If you have questions about your business entity, or how to revive a dissolved entity, or a related issue, feel free to contact one of our Massachusetts business and corporate lawyers at 781-463-6063. 

S-Corporation vs. C Corporation

New business ventures are often faced with several critical questions and decisions when creating a new business. The first step is to determine the the nature of the Massachusetts corporate entity that they desire to operate (i.e., corporation, limited liability company, etc.). This decision depends on several factors including the type of business (services or products), the contemplated ownership structure, tax considerations and potential financing opportunities.

If a new business owner decides against forming a Massachusetts Limited Liability Company, and determines that forming a Massachusetts Corporation is the most advantageous entity, the next important step is to determine whether the entity will be taxed as a C-corporation or S-corporation. The “S” and “C” Corporation designations refer to different sub-chapters of the Internal Revenue Code (Federal tax laws), and are more particularly described below.

C-Corporations

A corporate entity will be taxed as a C-Corporation by default unless it makes an election to be taxed as an S-corporation.  A C-Corporation is subject to double taxation, once at the entity level and then again on the shareholder level, when dividends (profit distributions) are paid out to the shareholders. Funds that are earned in a C-Corporation can be retained within the entity rather than being passed through (and taxed) to shareholders, and the corporation can also carry losses Therefore, as opposed to an S-corporation, money that is earned in the C-corporation will be retained within the company rather than passing through to the individual shareholders. Additional benefits include the ability to hold initial public offerings (IPOs), carry back of losses up to three years and less limitations on the type of shareholders.

S-Corporations

S-corporation status is the most common election made by small businesses. However, the small business must meet several requirements, including the entity must have only “allowable” shareholders, less than 100 shareholders and there may be only one class of stock. In other words, the number of Massachusetts Corporation shareholders will be limited and all will have the same voting rights and distributions.

S-Corporations are treated as a “pass-through” entity, similar to a Massachusetts Limited Liability Company (LLC). In other words, the company will not be taxed at the entity level, and will only be taxed at the shareholder level. Each shareholder will then be responsible for paying their own taxes on their share of income derived from the corporation.

If you are forming a new entity and creating a new business, please contact one of our Lynnfield based business attorneys at 781-463-6063.

The Value of Outside General Counsel for Your Business

One of the many values of our business lawyers is that we help ensure that you are positioned to effectively resolve issues that arise in the lifecycle of a business. It is important for business owners and entrepreneurs to carefully consider the value of advice of a business attorney rather than exercise financial restraint when making important decisions that often significantly affect the success of a business. Rather than risk the serious consequences of decisions made without the consultation of a business attorney it is suggested that business owners conduct a careful cost/benefit analysis into whether one should hire a lawyer. Consulting with an attorney at the onset is similar to insurance: your decision help’s you mitigate risk and minimize loss when potentially disastrous events occur.

Business and Entity Formation

A business attorney can help you select the right type of business entity to meet your objectives and needs.  There are several entity choices available in Massachusetts: Corporations (both C-Corporations and S-Corporations), Limited Liability Companies (LLC), Partnerships (Limited Partnerships and Limited Liability Partnerships), as well as other specific entity types for professionals, charitable purposes, and other highly specialized business. Selection of the proper entity type will establish a foundation for sustainable long term growth, investment return, limited liability for parties, favorable taxation, dealing with external issues and pressures, and other matters. 

Contracts / Negotiation

An attorney knowledgeable on business law in Massachusetts can make sure that your rights and interest are protected.  It is critical that the contract provisions that deal with particular issues and contingencies are not only fair, but also align with your interests in any given transaction.  An attorney specialized in these areas can consult and assist in contract negotiation and work on the “fine tuning” of contractual terms. The type of contracts that a business attorney might review includes employee agreements, commercial leases, equipment purchase agreements, buy-sell agreements, licenses, and bank-investor financing documents.

Intellectual Property

It is essential for a business owner to consider their intellectual property rights. This can manifest itself in trademarks, service marks, copyrights, and patents.  Intellectual property can also include other types not specified in Federal statute, including issues such as trade secrets and formulas, customer lists, methods and processes. You should consider protecting your intellectual property from competition as well as protecting it internally from employees, partners and other shareholders. A competent business attorney can help you navigate legal protections available to protect what makes your business unique. 

Asset/Stock, Interest Sales and Mergers and Acquisitions

During a businesses lifetime, the owner(s) will want to expand the business or take advantage of an exit opportunity.  A business attorney can help you craft and implement a strategy for the sale of the shares or membership interests to an outside organization, or to your own employees or other shareholders, or members.  An acquisition will allow shareholders to exit the business by converting their interest in the entity to cash or another option(s). If you find yourself at the beginning of these discussions with a potential buyer it is critical that you consult a business lawyer such as ourselves at 781-463-6063. 

Disregarding Entity Protections in Massachusetts

In prior Blog posts, our Lynnfield based Lawyers specialized in Massachusetts business law explained that the main benefit of a properly formed Massachusetts corporation is the limited liability afforded its officers and shareholders.  One exception to limited liability however is disregarding the corporate entity, otherwise known as “piercing the corporate veil.” The exception allows a claimant (such as a creditor) to hold either the officers or shareholders personally liable for claims against the corporation. 

In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court stated that the criteria for disregarding the corporate entity:

‘(a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting.’

The main reason usually cited for disregarding the corporate entity is, in rare situations, to prevent gross inequity by providing an injured party a remedy by permitting parties to disregard the corporate protections. A plain example of a situation where an entity is disregarded is when a small business owner runs a “shell corporation” (a corporation without any meaningful assets or capital) that comingles business with personal financial affairs, that doesn’t follow corporate reporting, formal procedures, nor officer duty requirements, and that is used to provide a direct source of funds and/or assets to a shareholder, or that is used to perpetuate fraud.

Massachusetts court use 12 factors to determine whether to disregard a corporation’s liability protections (e.g. pierce the veil):

1.      pervasive control;

2.      nonfunctioning of officers and directors;

3.      confused intermingling of business activity assets, or management;

4.      thin capitalization;

5.      use of the corporation in promoting fraud.

6.      nonobservance of corporate formalities;

7.      common ownership

8.      absence of corporate records;

9.      no payment of dividends;

10.  insolvency at the time of the litigated transaction;

11.  siphoning away of corporate assets by the dominant shareholders;

12.  use of the corporation for transactions of the dominant shareholders;

Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).

If you as a Massachusetts business owner is interested in reviewing the validity of your organization, or are interested in learning more about the services we provide in business legal consulting, please contact us at 781-463-6063. 

 

Fiduciary Duties in Corporations and LLCs

Corporate officers (such as the President, Treasurer and Secretary), partners in a partnership, and Managers and Members of a Massachusetts Limited Liability Company (LLC) owe a fiduciary duty to the business entity. A fiduciary duty means that the individual owes a duty of honesty and loyalty, and must act in the best interest of the business entity. When Boston area corporate officers and LLC participants divert business opportunities or assets to themselves for personal gain, or engage in competing enterprises, that individual has potentially committed a breach of fiduciary duty.

For example, a corporate officer may not use the property of a corporation to benefit another entity or herself/himself. Corporate operating funds, client lists, and other confidential, proprietary information cannot be used for personal gain and to the detriment of the entity. Additionally, a corporate officer must keep and not disclose company confidential information to parties outside of the entity and to its detriment, such as trade secrets or other business processes.

If you have questions about a potential breach of fiduciary duty committed at a business entity in the Boston area of Massachusetts, please contact one of our business litigation attorneys at 781-463-6063.

Personal Guaranties: Don't Overestimate the Simplicity of this Instrument

Commercial lenders and landlords are more often looking to borrowers and tenants to sign personal guaranties. A personal guaranty is a legal and binding promise to pay the debt of another person or entity should that person or entity default on the primary obligation. In other words, the individual who signs the personal guaranty will be liable for the debt and payments obligations as if he or she signed the promissory note or lease him/herself.  If you are considering signing a personal guaranty, you should consult one of our Lynnfield corporate attorneys or real estate attorneys to advise you on the various risks and benefits associated with the guaranty.

Guaranties are typically not included in a promissory note or lease agreement itself. Guaranties are contained in separate documents, as notes and leases alone are typically insufficient to create a binding obligation. There are numerous valid defenses to guaranties, which means that if you ever have to enforce a guaranty by commencing litigation against a guarantor, a skilled attorney will be able to uncover flaws that support legal defenses to the guaranty. This means that if the guaranty is not properly (and near perfectly) drafted, then a guarantor may have the opportunity to demonstrate that the guaranty is unenforcable and avoid payment of the debt. If you have questions and concerns about drafting or reviewing a guaranty for enforcability, please contact one of our business - corporate attorneys for a free consultation in Boston or at our Lynnfield office.

Just like mortgages and security agreements (that secure personal property) a personal guaranty serves as collateral so as to secure a loan. Here, the collateral is a promise by a third party to repay the debt should the primary debt obligor default on the promissory note. A personal guaranty drafted by an experienced Massachusetts corporate lawyer can provide strong protection for the financial interests of a lender. However, the viability of a personal guaranty depends on the financial condition and asset holdings of the guarantor. If, for example, the guarantor becomes insolvent or has no assets to satisfy a potential judgment on the promissory note then then collection on the guaranty becomes unrealistic and a lender will end up spending legal fees on a debt that will never be repaid. Therefore, it is important for a lender to perform due diligence on any guarantor prior to entering into this type of contract. 

In Massachusetts Courts, the enforcement of personal guaranties is a common theme of lawsuits on promissory notes. The guaranties are almost always contested by any guarantor with something to lose. Therefore, a pre-printed or template form will cause the lender and note holder to assume a substantial amount of risk that the guaranty will be found unenforcable. If you have questions abut personal guaranties for any loan transaction, please contact one of our business lawyers who advise clients in Eastern Massachusetts on these types of transactions.  NORTHSHORE LEGAL may be reached for a free consultation at 781-463-6063.

Litigation or Mediation or Arbitration?

It is not uncommon for Massachusetts business and consumers to become ensnared in a dispute with family members, neighbors, business partners, vendors, customers, contractors, and other parties.  When that happens, it is best to contact an experienced Massachusetts litigation attorney as soon as possible and to avoid acting as your own lawyer . When a dispute arises, there is more than one way to resolve the dispute. The most common method of dispute resolution is litigation. In other words, you will "sue" or file a lawsuit in State or Federal Court, which will submit you to a binding and rigid process that will decide the outcome of any claims and requests for assistance. Litigation is costly, time consuming and represents a stressful experience. Many parties are not mentally or financially prepared to endure this process. 

Litigation is the formal process of resolving a grievance through the Federal or State Court systems. The process begins with the filing of a complaint, which places the opposite party on notice of your legal and equitable claims, as well as the factual allegations in support of those claims. A complaint can also be used to support preliminary relief, such as a Motion for Real Estate Attachment; Preliminary Injunction or Lis Pendens.  These early remedies are designed to prevent the transfer, concealment and liquidation of assets, and to help provide a security for judgment.  The parties will then enter the process of obtaining evidence to support or refute the claims, and then submit their respective cases to a jury or judge at trial. A trial can provide varying results that will leave litigants with potentially a complete victory, a total loss or a "push. A trial is risky for all litigants and can produce sometimes unpredictable results. 

As a way for avoiding the costs and risk associated with litigation, there are alternative dispute options available to parties.  

What is the Difference Between Mediation and Arbitration?

The difference between mediation and arbitration is commonly misidentified. Mediation is a formal process where a neutral third party (a mediator) attempts to negotiate and assist the parties in coming to settlement terms.  A mediator is often a retired judge, experienced and respected attorney, and does not "take sides" in any dispute.  Parties can always negotiate settlement terms on their own, however, those discussions can sometimes lead to deadlock or become stale. Therefore, a mediator can offer fresh perspectives for both parties; render opinions about the strengths and weaknesses on the claims and defenses; provide different settlement structures; and minimize the emotional responses, animosity and vitriol that has boiled over during a dispute. This process is voluntary and neither party is compelled to accept an agreement in mediation, however, the majority of qualified mediators are adept at getting the parties to find an agreement that they can live with. 

On the other hand, Arbitration is a formal process that allows parties to try their case privately and without court assistance. This process is typically expedited and the trial is before a arbitration and not a jury of peers. At the arbitration, each party will have the opportunity to provide witness testimony and enter documents into evidence. The arbitrator will then make a decision in the weeks or months that follow the arbitration. This written decision may be filed in Federal or State Court, and can have the same effect as a judgment against a party.  That is, unless, a party appeals the decision and is successful in overturning the decision on appeal. 

Some of the immediate advantages of mediation and arbitration are cost and time.  The legal fees and expenses are substantially lower if a case settles in mediation or tried before an arbitrator. The time that it takes for a grievance is also substantially reduced. 

If you have questions about the dispute resolution process, please contact one of our Massachusetts litigation attorneys at 781-463-6063. We can advise you as to the best method of dispute resolution, Our litigation attorneys serve clients in Boston, the Greater Boston area, and, of course, throughout the North Shore.  

 

Important Clauses in Employment and Independent Contractor Agreements

Many Massachusetts employers and business owners are now turning to at-will employment contracts and independent contractor agreements to protect their interests and govern its relationship with employees and contractors. These types of employment agreements are commonplace in most management and professional job positions, as well as for skilled outside, independent contractors.  In all likelihood, if a business provides a lucrative job position to an employee, an employment agreement may become a condition prior to commencement of employment. 

What are the types of clauses that businesses, employees, and contractors can expect to see in a well-drafted employment agreement? 

Term of Service or At Will or Terminable Status - Typically, most employment agreements or independent contractor agreements are "at will." In other words, you are not provided to any continuing right to employment or payment for a certain term. In most cases, a business can terminate its relationship with employees according to the terms of the contract; the company's own policies; and within the bounds of Federal and State laws. So long, as businesses are compliant with these covenants, policies and laws, then the business can terminate employment for any reason. Some employment or independent contractor agreements do contain a set term of service.  If you are drafting an agreement or signing one, and you contemplated a term of service, make sure that this is clearly reflected in the document. 

Confidentiality - Most businesses and employers will take measures to put their employees and contractors on notice that its considers its data, systems, processes, lists, diagrams, and other information as confidential.  The Employer will restrict the employee or contractor's use of that information by setting terms on how such information may be used, and set limitations on that person's authority to use that information.  These clauses typically contain a continuing duty in perpetuity for an employee or contractor to maintain the confidentiality of information. 

Non-Compete / Non-Competition - Most businesses and employers will restrict an employee or contractors' ability to work or sell information to its competition or set up a competing enterprise.  Any non-compete must be reasonable.  It cannot impose draconian conditions that eliminate a person's ability to work for a different employer. Non-compete agreements are reviewed on a case by case basis, and a well-drafted and reasonable agreement will be enforced by a Court. In other words, the business or former employer may obtain an injunction that legally prohibits you from working for a competitor.  Most, if not all, employers now ask whether you are subject to a non-compete agreement prior to commencement of work.  The reason is that a potential employer can also incur liability by hiring an individual who is subject to this type of restriction.  

If you are a business that desires to set out the terms of your engagement with employees or contractors, or have questions about an agreement, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780. We represent clients in the Boston and North Shore areas, including Boston, Cambridge, Lynnfield, Woburn, Burlington, Andover, Saugus, Peabody, and the surrounding towns and communities.  

 

Informal Partnerships Can Lead to Litigation

Partnerships are difficult endeavors for the majority of business owners and investors.  Informal (or handshake or gentlemans' / ladies' agreements) are sometimes ordinary practice when two or more individuals decide to enter into a joint business venture. When going into business with a relative, long time friend, or work colleague, it may appear to be a good idea to rely on these types of informal agreements, however, when problems arise for the business or the individuals partners individually, that close relationship may be relegated to irrelevance. 

Most, if not all, Massachusetts legal practitioners would recommend against informal partnerships, and instruct their client to form a Limited Liability Company (LLC). Unless a formal entity is registered in Massachusetts and unless the partners decide to conduct business under the LLC, both partners will be personally liable for the debts and liabilities of the partnership. In other words, if the partners incur debt or face the prospect of a legal claim, each partner will put at risk their own personal assets and income.  Also, what happens if one partner commits an unlawful act or injuries another party in commerce, and is subject to litigation? Without any form of limited liability, the other partners will also be liable for those actions. 

Additionally, what happens when the partners decide to part ways, and when there is a dispute over ownership, buyout, rights to intellectual property, or continuing use of customer lists, or other goodwill? What happens if the partners are unclear about the management and/or daily duties, time commitment, financial investment requirements, or transfer of ownership?

Without some type of legal entity structure or written partnerships agreement, informal business partnerships may expose partners to unnecessary (and costly) liabilities and litigation. If you are considering forming a new business partnership in the Boston and North Shore areas of Massachusetts, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780 for a consultation.  

Be Careful When Selecting Your New Company Name

Starting a new business venture is not easy.  Selection of entity, agreements with founders, fundraising and investments, finding office space, purchasing equipment, materials, and supplies,  creating a new web-site, and attracting customers or other relationships is difficult work.  Entrepreneurs and new business owners sometimes find the most onerous task in selecting a new organization name.  While it is important to select a business name that not only relates and identifies your business, most marketing experts would recommend that you select a name that you can build a brand around.  Eventually, as your business grows, you will build a reputation, loyal customer base, as well as a name and logo that uniquely identifies your business.  These intangible assets, or "goodwill," become valuable when you consider a sale or buyout of your business or interests. 

In addition to the creative and artistic challenges of selecting an entity name, what types of legal issues can arise during entity name selection?

First, and foremost, it may be that an entity with the same name already legal exists in Massachusetts.  If the name of your organization, and the organizational type (LLC, Inc., Corp., etc.) has already been selected by another organization, and it remains an active, valid entity, you will not be able to use that name. The Secretary of State for the Commonwealth of Massachusetts will not permit entities operated and owned by different parties to use the same legal organization name. (You can use the same trade name as another organization so long as your organization type is different. Example: You are an LLC, and the other entity is a Corporation). In this instance, your name selection may be limited by another organization's prior use and registration of that name.  

Second, your ability to obtain a domain name, for the purposes of identifying your Internet resources (computers, web-site, email server, etc.), may also be limited.  In all likelihood, unless you have selected a unique or obscure name, the domain name and extension will not be available for the original top level domains, including .com; .org; and .net.  You may have to select a name and extension at a generic top level domain, such as .attorney or .financial.  Or you will have to use a variant of your actual entity name, or adopt a trade name (D/B/A). 

Finally, and most importantly, selecting the "wrong" trade name can expose your business to a trade mark or service mark infringement cease and desist letter, or infringement action. There are both state common law trade mark laws across the United States, including Massachusetts, as well as Federal trade mark laws, The Lanham Act.  These laws and acts make it unlawful for a business that provides similar products or services to use the same or similar name and/or logo of another business that has already secured rights to that name and/or logo.  In other words,  you cannot profit from the exact use or variation of another entity's name and/or logo.  The test for Federal trade mark infringement is whether your use of the trade mark of another can cause confusion to potential customers. If you are opening a fast food hamburger restaurant, you could not use the name "McDowell's" and use a yellow "M" in an Arial font to identify your business without infringing upon one of the most recognizable service marks world-wide. 

As described above, selection of a new organization name is not an easy task, and there are some potential intellectual property legal issues that should be evaluated by a qualified business lawyer.  If your business needs business startup or business formation services, please contact Attorney Stefan Cencarik at 617-669-9780. 

 

Closely Held Corporation Can Cause Legal Issues and Headaches

Closely held Massachusetts corporations (or often referred to as closely held business) are typically entities that are controlled and owned by a small, limited number of persons.  Closely held corporations are often associated with a family business (a/k/a family owned business) and the concept has expanded to include small groups of partners who were at one point friends, colleagues, or co-workers. A typical closely held business is controlled by a select group of persons who play a significant role on the board of directors and as key manager of the company. The affairs of a closely held business are private, and ownership interests are not publicly traded.

The downside of closely held businesses is that they very frequently entail disputes among the owners. One recent example of the severe issues that a closely held business can face is the recent dispute in 2014 involving Market Basket.  This popular supermarket chain operates approximately 75 stores in New England, and was primarily owned by two cousins. An internal dispute arose among the primary shareholders and key board of director members that led to a very public dispute regarding control and ownership of the entity.

This is one example of where disputes can arise when shareholders disagree on the control, discretion and decisions of the board members and officers. Shareholders can also be dissatisfied with the amount of profits earned by the company, as well as question the decisions of the Board and officer that caused the company’s poor financial performance.  Or in other situations, if a company is being sold or liquidated, the shareholders may have concerns about the valuation of the company and how shareholders will be treated.  And finally, significant issues can arise when an owner wants to exit the business and decides to sell his or her stock.

The Law Office of Stefan Cencarik, PLLC handles various business litigation and disputes, and provides related consulting services, mostly involving closely held businesses. Rather filing a lawsuit, it is best to initially explore various dispute resolution alternatives, such as informal negotiation and mediation. If you are experiencing issues with a closely held business, please contact an experienced and skilled business lawyer at 617-669-9780. 

Your Business Definitely Needs a Standard Form Contract

Most, if not all, successful businesses that provide services and products to other businesses or consumers have a standard form contract. This contact essentially spells out the terms of any deal with a client or customer, as well as includes protections and contingency planning for your business.  A well-drafted business contract by a skilled business lawyer can provide substantial benefits to your organization, particularly when something "goes wrong" and a dispute arises.  I had litigated numerous cases where a business owner has justified their disregard for a contract by stating that "I have never had any issues before so why should I expect one in the future?" This is a short sighted approach to the reality that operating a business involves a substantial amount of legal liability.  Almost every business during its life cycle will encounter a legal issue, and when it does arise, a well-drafted contact will become a worthy investment and help protect your business if you end up in litigation. 

The words "standard form contract" is really a flexible term, and it is highly likely that each contact will be tailored to a particular deal or customer. The "standard" component will incorporate a contract structure, essential terms and conditions, as well as a deal structure. This contract will become part of your business best practices and will help your managers and employees enter into agreements that will not cause you additional legal headaches. Some of the "standard" components of a business contract include: 

 - Specific Services / Products  

- Pricing and Payment 

- Representations / Warranties / Limitation of Liability  

- Dispute resolution - Arbitration, preliminary injunction, and other rights. 

-Choice of Law / Venue 

These are just a few areas that should be addressed by any "standard" form business contract. If you have not yet invested in a business contract, please contact the Law Office of Stefan Cencarik, PLLC, business and contract lawyers that works closely with closely held businesses.  Or if you would like to ensure that your existing business contract meets your business and legal needs, please contact our contract lawyers at 617-669-9780 for a free consultation. 

Before You Develop and Release Your New App . . . Legal Issues to Consider

As our business and social communications become increasingly based on mobile devices, there will be a continuing need for new applications (apps). As such, there will continue to be a strong market for new app developers.  It may be that a group of like minded and talented individuals have decided to form a joint venture and create a new application.  Or it may the instance where one is tired of being an employee, and has developed the skills, network, and talent to improve an app and develop a new app. It is sometimes difficult to predict the market success of an app, however, once you realize the potential of your venture there are some important legal issues that one should consider. 

First, and foremost if you are developing a new app, and have not yet retained the services an a business law attorney, you may want to consider your options for forming a registered entity. In other words, you should strongly consider forming a corporation to organize your business and to set up a deal with the other founders.  If you intend on seeking any funding rounds from venture capitalists or other private investors, you should strongly consider Delaware as your state for incorporation. Delaware has favorable corporate laws and, most importantly for venture capitalists and investors who will own shares of your company, does not tax shareholders. 

The second issue to consider when developing a new app, and you will certainly need an attorney specializing in intellectual property and/or business (corporate) law to secure your rights to valuable app (intellectual property). You will need non-disclosure and non-compete (non-competition) agreements for your employees, independent contractors, investors, vendors, and other parties. You may need a trade mark to secure your rights to a particular name or tag line for your product of company.  You may produce various media, art, graphics, designs, or other written materials that require Copyright protection so that you may restrict others from publishing or profiting from your intellectual property without your permission.  Finally, you may have a process or method that is unique to your app, and you will require a patent attorney to assist you filing a patent application with the United States Patent and Trademark Office. 

Another issue to consider is how your have structured your partnership with the other founders or key managers of your new app company. Who owns what and what that ownership interest provides (in terms of profits), voting on important corporate matters, etc.  What happens when one of the founders disagrees with the direction of the company, and wants a "buyout?" How do you intend to handle the admission of new shareholders to the corporation, such as venture capital firms and other investors? These are but a few issues that any new app company must discuss with a small business lawyer in an effort to draft a shareholder agreement.  It is essential to put down the deal in writing during the early development stages of any company to avoid potential financial and legal issues at a later date.  

If you are seeking an attorney that can provide advice, counsel, and legal work for your new application (app) venture, please contact the Law Office of Stefan Cencarik, PLLC, a Lynnfield, Massachusetts business and intellectual property lawyer, at 617-669-9780 or visit www.northshorebusinesslaw.com. 

 

Incorporating in Delaware - What Advantages Does This Provide my Business?

Previous blog articles have addressed in detail the numerous financial and legal benefits of forming a registered entity (Corporation; LLC; etc.) in your home state.  This article will now address the benefits of incorporating in Delaware. 

The most sought after benefit of incorporating in Delaware is that there is no corporate tax, and the state's laws are well developed in the area of corporate law.  First, shareholders of a Delaware corporation are not required to pay personal income tax to the state if they are not residents.  There is no requirement under Delaware law that shareholders, officers or directors be residents of the state. If you business is looking  to obtain funding from a venture capitalist, or have the hopes of an IPO, then it is (practically) mandatory that you incorporate in Delaware.  It is better to first incorporate in Delaware to avoid the expense and frustration of having to convert your entity to a Delaware corporation when you begin funding discussions. 

Additionally, Delaware law is also structured in favor of upholding the limited liability of a corporation.  This is essential so that the officers and directors, and in some cases shareholders, cannot be held personally liable for acts or omissions while conducting corporate affairs. If a lawsuit is filed against a corporation and the suit falls into the area of corporate litigation, then the fate of the parties will be decided by a Judge rather than a jury.  In this case, a Judge who is experienced in all aspects of corporate affairs and disputes will decide the outcome rather than citizens of a community. 

If you first incorporate in Delaware, and intend on conducting your business operations in Massachusetts or another State, you will need to comply with State law concerning registration of a foreign entity. For example, pursuant to  M.G.L. ch. 156D § 15.03 a foreign corporation must register with the Massachusetts secretary of state within ten (10) days of transacting business in the Commonwealth.  In order to do so, you will need a Certificate of Good Standing from Delaware.  You must then file the applicable form and pay the required fee to the Massachusetts Secretary of State, Corporation Division. 

Selecting the right entity and structuring your organization in two states including Massachusetts and Delaware requires the expertise of a business law attorney. Attorney Stefan Cencarik, a business attorney in Lynnfield is available for consultation and can assist you in selecting the right entity.  

Protect Your Brand and Identity: The Benefit of Trademark Protection

The intellectual property of your business is a valuable asset, and deserves the same protections as your other important business assets.  A small business typically invests a considerable amount of time, effort, and money towards developing a unique name and logo for their organization.  Those resources could go to waste, and the reputation and market for a particular business all could be in jeopardy if a competitor decides to use the same or similar logo or name.  What kind of confusion would it cause to the customers of a small business if a competing business set up a web-site or store that mimics your exact business? How would the bottom line of a business be affected by this type of scenario? And most importantly, what rights does a business owner have to prevent this type of activity?

A Federally registered trademark is the best method to restrict competition, former employees, vendors, independent contractors, and other parties from misusing your valuable name and logo for their own financial gain. A trademark also prevents these organizations and individuals from profiting at the expense of your business. A trademark is typically a visual representation, such as a design, logo, emblem, picture, or image that is associated with a business name, product or service.  A trademark allows a business to distinguish itself from its competition by providing it with a unique means of identification and brand identity.   

Applying for trademark protection is the best method to provide protection of your mark pursuant to Federal law. As soon as you file an application for trademark registration, you have the exclusive right to use your mark across the United States, and, upon approval of your application and Registration, your business will enjoy all the Federal rights and protections of a Registered ® trademark.  These rights include the ability to file a lawsuit for trademark infringement in Federal Court (United States District Court for the District of Massachusetts), which will allow you to recover damages (including lost profits and the infringer's unfair gains), legal fees and costs. You may also serve a cease and desist demand on any infringer and use the Registered trademark symbol to provide notice to any party that your mark is protected.  Your trade mark will also further your claim and demand to exclude any other entity or person from using your mark since you will be able to prove ownership and use of those marks. How do you intend to prove that you own a particular mark and used it prior to a competitor if you have not registered your mark? 

In this instance, the costs and benefits of retaining an intellectual property attorney outweigh the small cost of applying to register your mark.  The trademark process is not simply filing forms and paying a fee.  There is a substantial amount of due diligence that must occur prior to the filing of an application, then there is the technical application process itself along with subsequent filing requirement to ensure that your mark is protected throughout the life cycle of your business.  Attorney Stefan Cencarik, a small business lawyer in Lynnfield, Massachusetts, is able to assist with any intellectual property legal needs, including trademark or servicemark registration.  

 

Choosing Your Next (or First) Business Purchase

It may be that you are bored with working for someone else, or you have a new source of capital that you want to reap financial rewards. Or you have just sold your business, have taken some time off, and are ready to re-enter the business and entrepreneur world.  The first decision that will inevitably need to be made is whether to: (1) Start up a new business and build it up from the ground level; or (2) Acquire an existing business  and try to operate it for a profit.   If an entrepreneur or small business owner is at this stage that person already has some semblance of the type of business and market that he/she would like to enter.  Then comes the next question: what do I do next? 

If you want to start a new business, the first step is to form a legal entity, such as a corporation or LLC, and consult with a small business lawyer to determine how to structure operations and ownership of your new company.  It is also important at this stage to determine the rights, responsibilities, and ownership structure if you are forming a new organization with partners.  It is very important to set out the terms of the partnership from the outset so as to avoid any confusion or dispute about profit and loss sharing, amount of capital contributions, or buyouts of other members when that time comes. Then you can set up entity bank accounts, pay all witholdings and taxes, and enter into legally binding relations in the name of the company, such as real estate lease agreements, equipment leases, bank lines of credit, mortgages, and other types of business contracts.  Then, in some cases, a new business can engage in various types of fundraising through private or institutional investors.  Finally, the next step depends on the needs for your type of business. You may require supplies, inventory, equipment, office or production space to further the goals of your business.  This is an oversimplified summary of the steps on how to start a business, and if you have questions on how to start a business it best to consult a qualified small business lawyer, certified public accountant, and/or a business consultant. 

If you decide that you would rather avoid the start up headaches and growing pains of a new organization, it may be better to purchase an existing business.  There are numerous business brokers and business to business (B2B) sale web-sites that are listing numerous business for sale.  When you buy an existing business you are buying an existing revenue stream, customers, goodwill, relationships, and, in some cases, inventory, equipment, employees, managers, commercial real estate leases, licenses and permits, and other valuable assets.  In this case, it is very important to verify with the broker what portions of the business are being sold, and you should contact a business lawyer to ensure that you receive the benefit of your bargain. After you gain an understanding of what you are purchasing, you should retain the services of a small business lawyer, accountant/ CPA, and other business consultants to assist you with your due diligence. This may sound like a daunting and expensive task, but the counsel and expert advice that you will receive will help you avoid significant financial and legal problems and ensure that you successfully operate your business.  The purchase of an existing business can be nothing short of a mine field of financial and legal liability, and it is best to err on the side of caution before you sign a letter of intent.  

 

The Importance of Buy Sell Agreements for Business Partners

Buy Sell Agreements can be an effective tool for eliminating any confusion or dispute when it comes time for a partner to exit a business relationship.  A Buy Sell Agreement is a contract between two or more business owners that specifies the terms and conditions for a "buyout" and exit for one of the owners. These agreements are sometimes embedded in an Operating Agreement for an Limited Liability Company (LLC) or a Shareholder Agreement for a Corporation. 

It is a common occurrence, at the beginning stages of a business, that the partners are so focused on fundraising, marketing, and management of the business that those individuals ignore the importance of organizational matters. In other words, the partners put off meeting with a business attorney to set out an agreement that will become essential when it comes time to transfer ownership of the business.  A Buy Sell Agreement should be viewed as a indispensable agreement that can structure a partnership arrangement, and ensure that the business founders set conditions for long term control and ownership of the organization. 

These types of agreements can avoid numerous issues and potential litigation as a result of a disagreement on the transfer of a founder's interest to a third party; termination of the founder's involvement or employment in the business; buyback of interest by the organization or other founders; or death, disability, or insolvency of one of the founders. 

One of the principal and most common features of a Buy Sell Agreement is a provision that provides other corporate shareholders or LLC members the rights to purchase the shares or interest held by the other owner.  For example, if an owner materially changes their involvement in the management and day-to-day affairs of the organization through resignation, or termination, then the Buy Sell Agreement would provide the remaining owners the automatic right to purchase the interest or shares held by the departing owner. The agreement should specify the method for determining the buyout price, such as: a predetermined value; valuation of the business; or formula. The agreement would also set out the time frames; methods of payment; process for valuation of the business; and other conditions of the partner's departure from the business. 

The other types of situations that necessitate a Buy Sell Agreement are changes in the financial, health, and domestic status of one of the shareholders or members.  A business partner could face severe financial troubles that could cause a partner to become insolvent, or subject to numerous lawsuits involving personal creditors. Those creditors may seek to attach any dividends or equity disbursements of the partner, or the partner may be placed in receivership or bankruptcy.  In those instances, a receiver or bankruptcy trustee would be looking to claim all profit rights of the owners, or liquidate the business interest to a third party. This is an undesirable position for the other business partners particularly in the context of a private, closely held organization where the affairs of the business, in part, would be exposed to a public court proceeding. 

Additionally,  it may be that a business partner enters a divorce proceeding, and it becomes important to preclude shares from being held by a former spouse. Finally, there are the health and life consequences of death, disability, and/or incompetence.  A business partner may be permanently unable to participate in the affairs of the business, and  this will create problems at the management and ownership levels since owners are also typically key employees of the business.  In each of these circumstances, a well drafted Buy Sell Agreement can specify the buyout process, conditions, and price for transitioning ownership of the business to the remaining partners. 

A properly drafted Buy Sell Agreement can help business partners can help make all of the expectations and conditions clear out the outset when it comes time for a partner to move on. Attorney Stefan Cencarik, a Boston area business lawyer, works closely with business partners and entrepreneurs to help create Buy Sell Agreements, and is available for consultation at 617-669-9780.