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. 

 

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.  

 

So, You Want to Buy a Business and You Have Never Done This Before . . .

Would you perform a root canal, or other surgical procedure on yourself?  The most common (and rational) answer is: NO.  Most Boston area businesses and residents will hire a professional to assist them when they have a highly complex, specific need. What makes a business purchase different from a surgical procedure or even the purchase of a new home? What type of prudent business decision are you making when you do not hire a qualified business lawyer to protect your interests and make sure you are receive the fruits of your deal? Hiring a business lawyer serves as the shield and sword for your financial interests in any business transaction.  This is neither a "do it yourself" task for an experienced entrepreneur or savvy business person, nor a person entering the world of business ownership for the first time.     

A new business owner may consider exercising fiscal discipline by deciding not to hire an attorney to assist them with their business purchase.  Often new Massachusetts business owners want to avoid having to borrow or obtain additional funds, and/or have to pay out more funds to attorney in addition to the purchase price.  This decision can be fatal for a number of reasons. You do not have an experienced third party to provide you with an outside counsel that is based on experience, best practices and tribulations. You will not have an individual that is not personally vested in your deal to provide you with objective advise, opinions, and  advocacy (if necessary) during a transaction.  You also will not have an independent party to assist you in the due diligence and legal relations that you will invariably enter into. 

Non-employee companies, main street businesses, suppliers, and venture funded, high growth companies all can benefit from a business lawyer who can ensure that you make a strong start out of the gate.  As soon as you make an offer (or even earlier in the negotiation process) you should consult with a qualified Boston business lawyer to ensure that you are protected each step of the business transaction.  Attorney Stefan Cencarik works closely with experienced and new entrepreneurs alike, and is committed to helping you close the deal on-time and on budget.