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.

Rent, Expenses and Term – Fundamental Components of Commercial Leases

          When entering into a new commercial lease, it is essential that you engage a commercial lease attorney to assist you in reviewing and negotiating the important terms.  This blog article will highlight the most fundamental lease component base rent, expenses that are often passed on to the tenant, and the term of the lease. 

          The most common factor in evaluating the cost of a commercial lease in Massachusetts is the base rent, which is most commonly assessed base on square footage of the rental property.  One should also pay attention to any adjustments in rent per annum.  Once a business owner determines an acceptable rent amount, he/she should consider the rent adjustments and additional expenses that will be associated with renting the space.

          The most common type of commercial lease is the triple net (NNN) lease that will shift the financial burden of property taxes, insurance and common area maintenance (CAMS) and/or operating costs to the commercial tenant. However, triple net leases can also contain additional provisions that expand the scope of tenant financial liability on the leases.  In some cases, commercial landlords may shift the entire burden of property maintenance, repairs, upgrades, and upkeep on the commercial tenant.  This means that the tenant will be responsible for cleaning, snow removal, landscaping, repairs to mechanical systems, and other common every day repairs.  Here, liability may fall on the tenant for the entire building and land, or just a portion thereof, or solely the interior of the property.  In many instances of shared commercial space, commercial landlords will charge the tenant operating costs or CAMS, and maintenance and repairs will be included in the lease.  In this case the tenant will pay its pro rata share of the common expenses, and will not have to bear the entire burden of such expenses.      

           When entering into a new commercial lease, one of the most important features to consider (other than the price) is the term of the commercial lease. In this case, it is important that you consult a Boston area commercial lease attorney to help you with the various issues and considerations that can arise when evaluating a lease term.  In many cases, commercial landlords will offer better rent terms with a longer term of tenancy.  However, this is not a general rule, and a business owner should consider their medium and long term goals for growth prior to committing to a location.  Commercial leases are excessively difficult to avoid for tenants in Massachusetts without significant financial penalty or litigation, so it is best to determine whether the needs and plans for the business align with the term of the proposed tenancy. Additionally, a prospective tenant should conduct significant due diligence prior to entering into a long term lease, including a inspections of the physical condition of the building, assessment of traffic and parking, review of local bylaws, regulations and permit/license requirements, and a review of the surrounding area for its character, propensity for crime, ongoing development, and other features of the area.

            If you are a business owners in Eastern Massachusetts who requires assistance from a commercial real estate attorney that is experienced in drafting, reviewing, negotiation and consulting with clients on commercial leases, you may contact the Law Office of Stefan Cencarik for your leasing needs.  Our commercial lease attorneys are able to help guide you through this process and we can leverage our network of professionals to assist you in evaluating your next business location.

Commercial Leasing for New Businesses

When considering a new commercial lease for your business, it is essential that you assemble the right team to assist you with assessing the value of the location and contract, negotiating and reviewing the lease terms, and assessing other important features of the building and location.  In addition to using the services of a commercial real estate broker and/or commercial leasing specialist, it is crucial that you engage a commercial lease attorney.  An attorney that is experienced in drafting, reviewing and negotiating the different material terms and clauses in a commercial lease can help ensure that you sleep better at night after signing a long term contract for new office or facility.

A commercial lease is a legally enforceable contact that will span a considerable amount of time, such as five years, and will becoming a significant part of your operating budget.  A commercial lease is unlike a residential lease in Massachusetts as the residential tenant protections do not apply in this area.  In this regard, commercial leases are regarded strictly as a business transaction and the commercial landlord is providing a significant amount of authority and rights over the commercial tenant.  There are many clauses concerning default, destruction of the property, base rent adjustments, maintenance expenses, and others that can shift financial and legal responsibility from the landlord to the tenant.  These clauses become traps for the unwary and the involvement of a commercial lease attorney can help you avoid these trap and put your business on the path to success. 

The Law Office of Stefan Cencarik, PLLC and its commercial lease attorneys (commercial real estate lawyers) are adept at drafting, reviewing, negotiating and consulting with clients on commercial leases.  We can also leverage an experienced trusted professional network so as to recommend the right consultant and brokers to help you find, select, and evaluate your next commercial lease property. 

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. 

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.  

Does My Business Need a Trademark or Servicemark?

What is the difference between a trademark and servicemark? The word "trademark" is used in two senses: First, to define the legal concept that protects visual representations, and as a broad term that encompasses both trademarks and servicemarks.  In fact, Federal law specifically references trademarks, and makes little mention of servicemarks, however, those laws concerning trademarks apply equally to servicemarks.  In the case of a servicemark, it best to think of it as a type of trademark. 

A trademark is a word, phrase, logo, graphic symbol, or other device used to identify a good or product so that it may be distinguished from competing goods and services. A servicemark is used to identify a mark that markets, sells and distributes services.

When an application for registration is pending before the United States Trademark and Patent Office, you may use the ™ or TM symbol to declare that you have filed for registration of the trademark.  When an application for registration is pending before the USTPO, you may use the ℠ or SM symbol to denote that you have applied to register your servicemark. Upon approval of your application and registration of your trademark or servicemark, you may use the ® symbol to declare to the worlds that you own a valid registered trademark. 

If you have questions about when to use a trademark or servicemark, or combination of both, to identify your business, products, or services, you should contact an intellectual property attorney to determine the best strategy to protect your business assets. 

What is Trademark Infringement, and What Can My Business Do About It?

In order for your business to take advantage of the Federal rights and protections contained in the Lanham Act (the Federal trademark series of laws), you must first possess a registered trademark or servicemark.  If you have not already applied for a trademark or servicemark for your unique and valuable company name, company logo, product brand or service, you should consult a qualified business law and/or intellectual property attorney to discuss how you can protect your valuable assets.  This article will presume that a business has already received a certificate of registration of a trademark or servicemark from the United States Trademark and Patent Office.  What rights does this Certificate of Registration provide your business when you discover that a competitor or former employee (or ex-business partner) is now using your trademark? 

This blog article will focus strictly on trademark infringement, as this type of injury and civil claim is the starting point for any type of trademark dispute. (Future articles will discuss other claims and remedies concerning Cyber piracy and Unfair Competition).  

A claim for trademark infringement is rooted in 15 U.S.C. s. 1114, and declares use of a trademark without the consent of the owner to be unlawful.  Copying, counterfeiting, or imitating a registered mark in connection with the promotion / marketing, sale or distribution of goods and services, which is likely to cause confusion, a mistake, or deception to consumers qualifies as infringement. In other words, if a competing business is using a name logo to attract new customers that contains the same or very similar characteristics of your registered logo mark, you may have a claim for trademark infringement.  This is an oversimplified example, and each case is fact specific, therefore, only an intellectual property lawyer with litigation experience can determine whether your business is a victim of trademark infringement. 

If you learn that your registered trademark is being misused, then you may file a civil action in the United States District Court for the District of Massachusetts.  You will be able to obtain an injunction that prohibits further use of your mark; and in more egregious cases, obtain the profits earned by the infringer by use of the mark, recover losses incurred by your business due to the infringement, and costs of action. Prior to filing a civil action it is customary for an attorney representing the trademark holder to serve a cease and desist letter on the infringer. This will put the infringer on notice of your mark and potential claim.  

If your business already possesses a registered trademark and you suspect that you are a casualty of trademark infringement, it is best that you contact Attorney Stefan Cencarik to determine your rights under Federal law. 

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. 

Independent Contractor vs. Employees in Massachusetts

Employers beware that the Commonwealth of Massachusetts treats nearly all workers as employees through strict interpretation of the characteristics that qualify a worker as an independent contractor. Equally important is the fact that the State treats enforcement of the independent contractor laws  as priority, and both civil and criminal penalties can be levied against businesses, in addition to injunctions and other orders for compliance. Massachusetts targets employers who fail to properly classify workers as independent contractors.  The State is well aware that businesses often improperly classify employees as "independent contractors" in an effort to avoid paying for or providing benefits to the worker, and/or avoiding tax and other witholdings, as well as payment of unemployment and worker's compensation insurance premiums. 

M.G.L. ch. 149 s. 148B, declares that all workers are to be considered employees, unless the circumstances and nature of that individual's employment meet all of the following criteria:

 1.  "The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact." In other words, your business cannot retain management control or authority over the manner and means of the worker's performance of their duties and tasks.  The worker must be free to perform any work at their own control, discretion, professional standards, and time frames. 

2. "The service is performed outside the usual course of the business of the employer." If the worker performs work that relates to or provides support for the nature of your business, that individual is an employee.  For example, a computer engineering firm cannot classify a software  analyst as an independent contractor, however, it can hire an attorney or certified public accountant at another firm to perform those specific professional services.  This is the strictest factor of the Massachusetts independent contractor statute, and most businesses fail to meet this criteria.  

3. "The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed."  The worker must perform a service that is distinguishable and separate from the business, and that service is customarily provided in that worker's profession or business.  

If your classification of workers fails to meet one of the above three criteria, then your worker must be classified and treated as an employee.

Failure to properly classify and treat workers as employees can result in a significant amount of liability for an employer. If you fail any of the above criteria, and then do not provide vacation, sick, and leave benefits; fail to pay tax and witholdings; fail to pay worker's and unemployment insurance premiums; and allow other benefits (such as Maternity Leave or Family Medical Leave Act (FMLA)), you will be subject to both civil and criminal liability.  For example, an aggrieved employee who has been misclassified as an "independent contractor" may file a complaint with the Massachusetts Attorney General's Office, and then may be provided with a private right to initiate a civil action against your business.  This lawsuit may enable an employee to recover lost wages, plus the monetary value of the lost benefits, plus treble damages and legal fees.  If a business has misclassified employees in a widespread basis, it could be exposed to numerous claims involving substantial damages and penalties for failing to comply with Massachusetts independent contractor law.  This scenario could potentially end in disaster for a business. 

Don't Forget Your Annual Report Deadlines

In Massachusetts, all organized and registered entities are required to file an annual report with the Massachusetts Secretary of State, Corporations Division, and pay the applicable annual fee. Depending on the type of entity that you operate, the deadlines for filing annual reports vary. Make sure to mark your calendar and stay on top of these deadlines so that you can maintain the legal status of your entity. 

Domestic (Massachusetts) and Foreign Corporation - File 2.5 months from the end of the fiscal year.  For most corporations ending the fiscal year on December 31st, this means the annual report must be filed no later than March 15th. 

Domestic and Foreign Non-Profit Corporations - File by November 1st.  This excludes churches, hospitals, religious organizations, schools, universities and colleges, and some library institutions. 

Domestic and Foreign Limited Liability Company (LLC) - File by the anniversary date of the LLC.  This means that the date that the entity was organized in Massachusetts, which will vary for each LLC. 

Recall from past blog entries that filing the annual report for your business is crucial for a number of reasons.  The most important reason is that if you do not file your annual reports and pay the application fee to the Secretary of State in Boston, he will administratively dissolve your entity. Upon dissolution, you are no longer a legal entity and have no authority to conduct business, such as entering into contracts, filing a lawsuit on behalf of the entity, etc. Based on past experience, it sometimes takes several years of unfiled annual reports and fees to accumulate before this occurs, however, there are reported instances where dissolution can occur after a number of months. It really depends on how quickly the Secretary of State Office discovers that your reports and fees are delinquent. It is an all too common occurrence that many businesses discover after several months (and sometime years) that the entity was dissolved, which leaves business owners scratching their heads as to what types of new issues may present themselves as a result of dissolution.  It is, therefore, recommended to stay on top of the annual report and fee deadlines and requirements, or contact a business lawyer if your business lies in a state of dissolution.   

Setting Up Shop in Massachusetts From Out of State

Are you an out-of-state business or entrepreneur interested in expanding your businesses into Massachusetts? If so, stop reading, pick up the telephone and call a Boston area small business lawyer immediately.  Doing in business in Massachusetts can be a lucrative venture, however, this state has a well deserved reputation for being a consumer (and Plaintiff) friendly jurisdiction, and there are many state laws and regulations that determine how a business may operate and conduct its affairs. Depending on your industry, type of business, and procedures for operating under the laws of your home state, you could potentially expose yourself to both criminal penalties and/or civil liability when you begin operating in Massachusetts. The worst way to start off your business is to receive a cease and desist letter from the Massachusetts Attorney General's Office.  

The starting point for any out-of-state business that desires to set up shop in Massachusetts is to register as as foreign entity with the Massachusetts Secretary of State, Corporations Division in Boston. M.G.L. Ch. 156C, s. 48 and M.G.L. ch. 156D s. 15.03 requires that all entities conducting business in Massachusetts must register as a foreign entity within 10 days.   You will be required to file a relatively simple application, a certificate of good standing from your home state, and pay a filing fee.  If you do not intend to maintain an office or other commercial space in Massachusetts, you also need to find a registered agent for service of process.  There are many professional agents for service of process in downtown Boston that will serve as your nominee agent, and take responsibly for timely notifying you of any process that was served on you. 

You will also need to investigate and adapt to the specific regulations and licensing requirements for your industry and type of business. This is the more complex issue for most out of state businesses.  It also is possible that you need a permit or license at the state or city/town level, or both. Finally, if you conduct business in a different name than your legal entity name, you will need to file a d/b/a certificate with the city or town that you are doing business in. 

If you have questions about how to expand you business into Massachusetts, Attorney Stefan Cencarik can be reached at 617-669-9780.   

Company Policies and Employee Manuals: Dust Collecting Binders or Necessary Safeguard?

Hiring employees for your Massachusetts business entails a significant amount of responsibility and legal liability.  What is your policy for addressing particular circumstances that will, without a doubt, occur during the operation of your business?  In other words, what is your paid and unpaid leave policy? What is your sexual harassment or violence in the workplace policy? What are the rules for performance and conduct of employees in the workplace? What is your procedure for termination of employees? These types of questions and significant concerns for your business can continue in perpetuity. 

Regrettably, most small businesses do have an oral (or unofficial) policy for addressing these types of circumstances, or have some semblance of how to deal with these problems as they arise.  However, this approach will not reduce the risk of an employee lawsuit for wrongful termination, unpaid wages (subject to treble damages and attorneys fees under the Massachusetts Wage Act), and other grounds for suing an employer for damages.  Most small businesses with 1 to 25 employees do not have company policies and an employee handbook. The reason is that these small businesses operate lean and mean, or have rapidly expanded to the point that they do not have the time and resources to structure the internal affairs of the organization. This oversight can be disastrous when an incident occurs or dispute arises, and a former employee hires an attorney to file a lawsuit against your business.  

At a minimum, all businesses should have a basic set of written company policies, including: At will employee policy; sexual harassment policy; anti-harassment policy; anti-discrimination policy; safety policy; Method and frequency of payment of wages; COBRA and mini-COBRA (Businesses with 20 or more employees); Breaks and facilities for nursing mothers; Maternity leave; Military leave, and

A Massachusetts small business should also have a basic employee manual that recites company policy, as well as states rules and procedures for: Orientation; Use of company technology and equipment (Cell phone, Internet, E-mail, and Computer); Compensation; Confidentiality and non-disclosure; Intellectual property; Drug use and testing; Non-smoking; Conduct; and Termination.  

Off the shelf or downloadable Internet forms containing template company policies and employee manuals are not enough to protect your business. These templates may not be in compliant with Massachusetts law, and are not tailored to your specific business needs. They may also be incomplete, poorly drafted, or written so as to protect the employee and NOT your business. Remember that if an employee files a lawsuit against you, your written policies will be strictly interpreted against you. And not having any policies at all can put the success and health of your business at risk. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting small businesses and entrepreneurs in Boston and its surrounding areas, including Suffolk, Middlesex, and Essex counties.  To discuss whether your business is in compliance or protected against potential liability, please contact Stefan Cencarik, your business lawyer, at 617-669-9780.