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. 

Small Business Owners and the Personal Guaranty - How Can You Avoid Liability?

The easiest method of avoiding personal liability for a debt as a small business owner is to never sign a personal guaranty. However, banks and other institutional and private lenders are mindful that most start up businesses, entrepreneurs, and young businesses have very few valuable assets, thin capital, and unpredictable revenues to obtain sufficient security when issuing a loan. In other words, it is nearly impossible for a small business to obtain a loan without providing the lender the security of a personal guaranty in addition to other commonly used types of security, such as a collateral assignment of leases and rents, security agreement and UCC- 1 Financing Statement ("UCC-1"), or a mortgage  on the commercial property, and, sometimes, the owner's personal residence. 

It is all too common an occurrence that when a business owner decides to exit the business, wind down operations, or sell the assets of the business to a third-party, the personal guaranty may become a significant issue.  For example, if a business debt is owed to a bank for a commercial loan, and the business owner or partners decide to terminate business operations while the debt remains unpaid, it is highly likely that the bank will demand payment from the guarantor under the terms of the personal guaranty.  As another example, a business owner may be personally liable on a loan or lease agreement, and the assets of that business are being sold to a third party.  Not only does this create an issue if the bank holds a UCC lien on those assets, the question arises, for the business owner, as to how the debt will be satisfied so that he/she may be released from the obligations of the personal guarantee.  No business owner should sell a business or its assets, and remain personally liable on any of the business debts, particularly if the debt is tied to those assets.  

How does a business resolve the liability associated with a personal guaranty? 

The easiest way to manage a personal guaranty is to make payment arrangements, or negotiate a payoff of the debt and release of the guaranty.  In this instance, the lender will look for cash and may be willing to accept some type of equity or other type of security as consideration.  It all depends on the circumstances, as well as the viability and nature of the acquiring business. 

The other method of dealing with a personal guaranty is litigation.  If you fail to pay a debt upon reasonable demand of the lender under the terms of the personal guaranty and promissory note, then it is likely that you will be dragged into a state court legal proceeding. Litigation is costly, time consuming and expensive for all participants.  If you are defending the enforcement of a personal guaranty, the best method of defense is equitable principals. In this instance, you are relying on the lender's acts and omissions during loan issuance and administration to provide you with an equitable defense to enforcement. For example, has the lender negligently handled the loan by failing to notify the guarantor of material changes in the loan, such as loan amounts, credit line increases, term, and the like? Did the lender take actions that indicate that it waived its rights to enforce the guaranty, or did it enter into another agreement that satisfies the debt, in full or part? Did the lender fail to adequately provide adverse information concerning the business financial affairs that somehow increased the guarantor's risk?  Did the lender allow the default and permit the debt to accumulate interest and principal? These are all questions that any Boston area business owners should ask when faced with a personal guaranty. 

There also may be issues with the personal guaranty document itself. The document may fail to properly identify the parties; capacities in which the parties have signed; failure of consideration; the guaranty could be a payment guaranty or a collection guaranty;  or some other type of technical issue with the personal guaranty. However, it is highly likely that lenders have learned from mistakes of their own, mistakes of others, and/or have hired skilled lawyers to draft the personal guaranty.  In this instance, the best hope for some type of technical issue is that the lender obtained the guaranty from an unqualified attorney or used downloadable form obtain from an Internet legal form retailer. 

Finally, there is reorganization and/or liquidation in a bankruptcy proceeding.  This is typically the final option for most business owners, and is not desirable for those wishing to keep their financial affairs out of public view, and out of the hands of a bankruptcy trustee. 

As outlined above, there are narrow circumstances that permit a Massachusetts business owner to avoid personal liability for a business debt and/or personal guaranty.  If you or any business owner or a group of business partners have questions about liability under a personal guaranty, Attorney Stefan Cencarik, a business lawyer serving the Boston area, is available for consultation at 617-669-9780. 

Letter of Intent – What Benefits Can This Agreement Provide My Business?

A carefully drafted letter of intent is typically the “agreement in principal” entered into between two parties entering into a business transaction.  A letter of intent (“LOI”), or sometimes referred to as a Memorandum of Understanding (MOU”) or Term Sheet, is a document used to memorialize some of the basic terms of a prospective transaction, as well as express the parties’ commitment to entering into a formal purchase and sales agreement.  A letter of intent is typically used for asset and business purchases, stock or membership interest purchase and sales, equipment purchase and sales, as well as company mergers. The letter of intent is an effective tool of making a seller more comfortable in dealing with the buyer, and will encourage the seller to discontinue any efforts to market and sell the asset.

The most traditional feature of a letter of intent is that the agreement is non-binding. In other words, the parties are not yet entering into a valid and enforceable contract that commits both sides to the deal.  Typically, a letter of intent will outline certain conditions and contingencies that will allow the parties to walk away from a potential deal without any liability.  These conditions and contingencies can range from financing to inspection of the books and records to other due diligence issues.  The letter of intent should have a firm deadline, with conditions for extensions, for entering into a formal purchase and sale agreement.

If the letter of intent, or memorandum of understanding, is non-binding for both parties, then what benefits does this document provide to your business? 

A letter of intent can assist a Buyer by agreeing to an exclusivity period that will preclude the Seller from negotiating another deal with third party buyer or competitor.  The longer and more restrictive the exclusivity covenant, the Seller is more likely to demand more refined deal terms, and resolve some significant issues early on in the negotiation process.  The Buyer and Sellers can both obtain the benefits of setting the essential deal terms, such as: the deal structure, payment or consideration, non-disclosure/confidentiality, exclusivity period, indemnification, hold backs and adjustments, retention of management or key employees, as well as the timeframe for signing the purchase and sale agreement, due diligence and closing. The letter of intent provides both parties the opportunity to resolve substantial deal issues and obtain an ethical commitment from each party to those terms. So, the Letter of Intent will serve as the framework for the ultimate transaction. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting business owners with all aspects of business and asset purchase and sales, or often termed buy-sell agreements. If you are in the negotiation stage, and have questions about a Letter of Intent, please contact Attorneys Stefan Cencarik 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.   

Holding Business Officers and Directors Personally Liable: Part II

On November 4, 2015, the Law Office of Stefan Cencarik, PLLC, a Boston business lawyer, explained the criteria for disregarding the corporate entity, so that shareholders and corporate directors may be held personally liable.   This blog article will focus on the State statutory exceptions that permit direct liability of officers. 

 The Massachusetts Wage Act, M.G.L. ch. 149, § 148 – The Wage Act holds the president and treasurer of a corporation and any officers or agents having the management of such corporation: liable for the non-payment of wages to employees. In other words, Massachusetts business owners and top level managers can be subject to civil liability for non-payment of wages to employees. Those individuals will be personally responsible for payment of any overdue wages plus any double or treble damages  and legal fees awarded by judgment of a Massachusetts Court. In other words, failing to pay employees earned wages has severe consequences in Massachusetts. 

Worker's Compensation, M.G.L. ch. 152 - An employer is required to provide its employees worker's compensation insurance, and failure to do so will subject a corporation's president and/or treasurer to civil penalties, fines up to $1,500 and imprisonment up to one year. In this instance, the corporate veil cannot protect the officers of a corporation who fail to pay worker's compensation premiums. 

Massachusetts Withholding Tax, M.G.L. ch. 62B, s. 5 - Massachusetts employers and businesses paying wages to employees are responsible for withholding and paying tax to the Massachusetts Department of Revenue. Failure to withhold and pay taxes will subject the corporation officer or LLC manager to personal liability, and that person will be liable to the DOR for payment of the tax, until the business turns-over all overdue tax payments.   

Massachusetts Minimum Wage, M.G.L. ch. 151 - In Massachusetts, it is considered oppressive and unreasonable to pay any worker less than the applicable minimum wage. ($9.00 per hour in 2015; $10.00 per hour in 2016; and $11.00 per hour in 2017 and beyond).  Businesses that pay employees less than the statutory wage (docking wages; failing to pay interns or "temps") are presumed to be in violation of minimum wage laws and the corporate officers may be held personally liable. 

Despite these statutory exceptions to the corporate veil, a corporate officer will not be able to use the limited liability protection of the corporation to obtain immunity for criminal actions and/or intentional torts, such as assault and battery of a fellow co-worker.

The next blog article on holding corporate officers personally liable will address the Federal statute and case law exceptions to limited liability. 

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.   

The Sword and Shield - Non-Disclosure Agreements in Massachusetts

What purpose do Non-Disclosure Agreements (NDAs) serve, and why would I want to "complicate" my relationships with employees, other businesses, and investors?  The time for hand shake deals and unspoken understandings is over. No matter how strong your relationship with any individual or company, relationships and attitudes can change in an instant.  It is, therefore, impossible to predict how employees, other businesses, and investors will treat your private discussions, sensitive information, and intellectual property when a relationship suddenly deteriorates.

A non-disclosure agreement (NDA) drafted by a qualified Boston business lawyer will act as your shield and sword. What types of instances call for a NDA, and what types of benefits do these agreements provide your business? There are numerous situations that call for a non-disclosure agreement (NDA): 

- Protection of intellectual property internally - What measures to do you have in place to protect your contact lists, special methods,  unique processes,  knowledge base and best practices, formulas, and other trade secrets from your employees?  What is preventing your employees from quitting their position at your business, and then starting a new competing business in your market? What is precluding a key employee or manager from working for your competitors?  Intellectual property, in general, can be the essence of any Massachusetts business, and the exposure or misuse of this information could negatively impact the revenues of a business.  

An NDA can preclude internal misappropriation of intellectual property by entering into a contract that specifies the ability of a party to disseminate, use, copy, or appropriate intellectual property.  Typically, an NDA will provide the business a right to seek an injunction from a local Court so as to obtain an order to prevent the party from violating the terms of the NDA.  This Court order will compel the party to abide by the terms of agreement, or face any penalties for contempt of court. 

- Protection of intellectual property externally - What types of limitations do you place on external entities or individuals who may need to use your intellectual property from time to time? What rights do your consultants, strategic partners, and other parties have to your intellectual property, and what happens when  you stop doing business with one another. A well drafted NDA can set parameters on the use of your intellectual property outside of your business. And you will have an enforceable contract with pre-determined remedy for enforcing your rights to prohibit misuse of your property.  

-Confidentiality of sensitive discussions - How would your key employees, managers or minority shareholders or members react if they discovered that you were considering offering your ownership interest for sale? What do you think your competition would do if they found out that you were considering merging with another company, or planned on laying off a portion of your workforce? Would you want your proposal disclosed to a party other than your potential new customer? The list of the types of sensitive business discussions that need to remain confidential are endless.  A well drafted NDA can restrain other parties from disclosing information that may provide other parties a competitive advantage, or the disclosure of information that could negatively effect a business.  

The few examples above show that the benefits of an NDA far outweigh any concerns for complicating or scaring others while doing business in Massachusetts. It is, therefore recommended that you have a qualified business lawyer review your non-disclosure agreement, and other business contracts to ensure that your rights are protected and that they comply with Massachusetts law. And, if your business is not using a NDA, it is highly recommended that you accept that this protective measure is a best practice.  

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.  

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.  

Disregarding the Corporate Entity in Massachusetts: Business Owners Beware

In previous articles, Stefan Cencarik, a Lynnfield based Massachusetts Business Attorney explained that the primary benefit of a valid Massachusetts corporation is limited liability for its officers, directors, and shareholders.  One exception to the principal of limited liability is disregarding the corporate entity, also known as “piercing the corporate veil.” This exception will allow a creditor or other claimant to hold either the officers or shareholders personally liable for the debts and other claims against the Massachusetts business corporation. This is the worst case scenario for a business owner who wants to protect their own personal financial assets from business creditors. 

In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court outlined 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 primary purpose of disregarding the corporate entity is to, in rare situations, allow parties to omit the corporate liability protection and to prevent gross inequity by providing an injured party an equitable remedy. The most common example of situation of an entity that may be disregarded is the instance where a small business owner:

Runs a “shell corporation” (without any significant assets or capital); that comingles business and personal financial affairs; fails to follow any corporate reporting, formal procedures, and officer duty requirements; and that is used to provide a direct source of funds or assets to the shareholder, or is used to conduct fraudulent activity.

There are twelve factors used by Courts in Massachusetts to determine whether to disregard the corporate form: (1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the corporation in promoting fraud. Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).

On October 30, 2015, Attorney Stefan Cencarik, a Massachusetts Business Lawyer, explained the importance of observing corporate formalities (Factors #5 & 6) so as to maintain a valid Massachusetts corporation.  Future blog posts will address significant factors so that business owners may avoid disregarded entity status.  If you or any other Massachusetts business owner becomes interested in reviewing the validity of your organization, please contact Attorney Stefan Cencarik at 617-669-9780.  Attorney Cencarik provides legal services in Essex, Middlesex, and Suffolk Counties, Massachusetts, and serves Lynnfield, Boston, Peabody, Beverly, Salem, Danvers, Wakefield, Reading, North Reading, Andover, Woburn, Burlington, Saugus, and many more towns and cities. 

The Importance of Strategy Prior to Exiting a Business Venture

What is your plan for exiting your business?   At some point, a business owner or group of partners will want to retire, work on other ventures,  recoup their investment or “Cash out” their business interest. Sometimes there instances when an individual’s participation or ability to run the business can be affected by financial problems, illness, divorce, disability, and/or death.  It is, therefore, crucial to develop an exit strategy for your business so that you have a plan in place to “move on” while maximizing any financial benefits and limiting any ongoing liability.    

There are several options for successful business succession planning.  These options include an all asset purchase and sale to a third party; a stock / interest purchase and sale to a third party or employees or other partners / shareholders; private equity acquisition; employee / key management stock and interest purchase programs; and intra-family transfer of business interests.  The best option for a successful business succession plan depends on your objectives, and nature and character of your business. 

The business law attorneys at the Law Office of Stefan Cencarik, PLLC provide business succession planning services, and can work with you to ensure that your ends goals for your business are met when the time comes.

The Importance of Corporate Formalities for Any Massachusetts Corporation

One of the foundations of the law of corporations is limited personal liability for the officers and shareholders. In other words, the liabilities of a corporation are treated as separate and distinct from the personal liabilities of the officers and shareholders.   However, in Massachusetts, there is an exception to the rule of limited liability.  In the context of litigation, a reviewing Court may “disregard the corporate entity,” and hold the officers and shareholders liable for the debts and claims against the corporate entity under certain special circumstances.  These circumstances are reviewing together as a whole, rather than on an individual basis, and, it is therefore important to undertake responsibility to ensure that your Massachusetts Corporation complies with existing law and does not meet the criteria for disregarding a corporate entity.  

One of the twelve circumstances that a Court may take into account when disregarding a corporate entity is examining whether the corporation has complied with and observed corporate formalities. The lesson here is that a Corporation must strictly observe corporate formalities. What exactly are corporate formalities? A corporate is required to maintain, keep, and observe certain records and formal procedures that indicate that the corporation maintain a separate existence from the shareholders’ personal business affairs.  Some of the necessary corporate formalities include the following:

·       Stock Register (Ledger): A written record that states the names and addresses, as well as the amount of shares, owned by each shareholder of the corporation.

·       By-Laws: This is an established set of rules and procedures that state how the corporation will be operated, and how the corporation will deal with certain factual scenarios affecting its business affairs.

·       Board of Director Meetings: The Board of Directors must meet frequently, as specified by the Corporate By-Laws, and a record (meeting minutes) must be maintained and kept on file.

·       Shareholder Meetings: Shareholder meetings must occur at least once per year, and a record (meeting minutes) must be maintained and kept of file.

·       Meeting Minutes: A record that states the date, time (time of commencement of meeting, time of conclusion of meeting, time of significant event, decision, vote, etc. at meeting).

·       Bank Accounts: The corporation must maintain a separate bank account from the individual shareholders.

·       Tax returns: The Corporation must file all of its income tax returns with the Massachusetts Department of Revenue and Internal Revenue Service, and pay all taxes due on such returns.

·       Annual Reports: The Corporation must file current annual reports with the Massachusetts Secretary of State, and maintain a resident agent for service of process inside the Commonwealth at all times.

·       Permits / Licenses / Certificates: The Corporation should maintain current and active licenses, permits and certificates requires for its type of business, including a DBA certificate filed with the proper town or city.

The above is not a conclusive list of corporate formalities that must be observed by all Massachusetts corporation. Compliance with observation of corporate formalities is essential for maintaining the corporate status and limited personal liability for corporate officers and shareholders. There may be other formalities that should be observed including, evidencing that assets are titled in the name of the corporation, all business transacted occurs in the name of the corporation, rather than the shareholders, etc. Typically, the corporate Secretary undertakes the responsibility for maintain compliance.

New small businesses can begin to maintain corporate formalities by ordering a “corporation kit” from most well-known office product suppliers.  These kits will contain templates for meeting minutes, stock registers, shares of stock, notices required for board of director meetings, notices required for shareholder meetings, as well as a corporate seal necessary to execute these documents.

If you are an established business, please feel free to contact me at 617-669-9780 to verify whether you are in compliance with observing corporate formalities. 

Those Internet Forms Can Be the End (of You and your future)

Fiscal discipline and use of legal forms downloaded from the Internet from a (supposedly) reputable online retailer seems to be a growing trend among Massachusetts individuals and businesses. Rather than enter the painstaking process of finding an experienced business or real estate attorney that will charge a fair rate, return phone calls and e-mails, and deliver a result; many people turn to the Internet for help.  There are dozens of on-line retailers that sell "legal forms" for the price of $79.00, and sometimes less.  The Web-sites are often advertised throughout the Web and television, and typically have "famous" lawyers, celebrities, and major publications endorse the product. These Web-sites allow a client to purchase and download a "legal form" for issues concerning business law, real estate, and estate planning that follows the "one size fits all" methodology of approaching legal issues.  

Here, the old cliche rings true: "You get what you pay for." When you download "legal forms" off the Internet, what exactly are you getting and what are you paying for?

Cost Savings - How much are you really saving, and what is the potential cost to your financial future and peace of mind? Many of these "legal form" sites provide package deals and an array of "value added" benefits at different price levels.  Compared to the cost of hiring legal counsel, the cost savings of using the Internet to practice law can be substantial for very simple legal matters, and, on the other hand, the costs can be the identical for more complex matters. Cutting a few corners when  planning for the succession of your family business or assets is not a prudent decision.  If you are making decision involving thousands (or millions) of dollars, why would you trust a legal form provided to you on the Web by an unknown author? Legal services from a qualified and experienced business, real estate, and estate planning attorney cannot be substituted by fillable forms when making life and game changing decisions. 

Accountability - Who authored the form that you just downloaded? What are their qualifications, and what type of experiences did that person have that caused them to draft that document a certain way?  Was the form created based on your individual circumstances, or are you buying a template? Who do you speak to if you have legal questions when you need to make decisions in filling out the form? Who do you speak to when an issue arises after the form becomes important, or ends up being reviewed by a Judge or Jury?  The accountability issues concerning online legal forms are endless.  You can be assured that a qualified Boston area business, real estate, or estate planning attorney will be able to answer all of these questions, and fulfill any legal service and consulting need.  When you download and use a "legal form," you will not have a local attorney with verified qualifications that will remain accountable to you and the state bar.  

Advice & Counsel - A form is just a form.  You may receive a brief synopsis of Massachusetts State law that was copied from public information, or some instructions on how to fill out the form. However, you cannot expect an advice on best practices, shared experiences, or any planning or recommendations from an attorney.  You are essentially on your own. Many of these legal form Web-site try appear to be helpful and make promises that a qualified "legal expert" may be available to assist, for an additional (hidden and not so up front) fee. (And in this instance, who is this "legal expert" or "top attorney"? Are they qualified to advise and do they have experience with Massachusetts law? Where is this person located?). 

Confidentiality - Not all "legal form" web-sites allow instant download of forms.  For more complicated business, real estate and estate planning documents, you will be required to submit information via an online form, and you wait up to thirty (30) days for the entire process to be finalized.  In other words, you are submitting confidential information via the Internet to a company (that you met on the Internet) that is tasked with securely storing your information, and performing legal work (by someone that you have never met).  When you hire a local Boston area attorney, your confidential information is protected.  You can assured that it will not be submitted via the Web, or stored by an unknown company.  Additionally, what are the legal form company's duties of confidentiality to you?  They may state that they retain or treat all information as confidential, however, those companies have no legal duty (or accountability) to you as opposed to a local attorney.  

Personalized Needs and Service - The digital age has removed the old fashioned, personalized service from professional services that our parents grew up with.  Legal form web-sites are no different from any other impersonal, digital experience. You rarely deal with a live human being, and when you do it is with a complete stranger outside of Massachusetts.  Depending on whether you select the right attorney, doing business with an attorney will enable you to receive a more intimate level of service with a local professional who will be responsive to your questions, concerns, and overall legal needs. Web-sites cannot substitute real human interactions, and the many benefits that personalized service will provide you in terms of making you feel at ease with any legal process. 

I have heard numerous tales of horror from existing and prospective clients, colleagues, and friends about Internet "legal forms."  Some of these accounts have resulted in  costly, time consuming, and nerve wracking court battles where no party ever truly wins.  When Massachusetts business or individual seeking legal services turn to the Internet to solve a legal need in areas of business law, real estate, or estate planning, they are taking a substantial amount of risk, and making a very expensive  bet that a standardized form will provide a long term, ironclad legal solution.   Take this article as a tale of caution because those Internet Forms Can Be the End (of you and your future). 

What Types of Documents Do I Need for a Massachusetts LLC?

The majority of new small businesses forming in Massachusetts are taking advantage of the flexibility and simplicity of a Limited Liability Company (LLC).  An LLC allows the organization to limit personal liability of its owners and operators; avoid double taxation by taking advantage of the flow-through taxation structure; avoid the administrative and procedural headaches and documentation required of corporations; and allow its owners/operators to expand its ownership base, and adjust profit and loss allocations.   LLCs are for the small start-up business and the more sophisticated, large enterprise. 

Rather than acting as a sole proprietorship, a single member LLC may be created by a single individual conducting permissible and legal business activity. In this instance, only Articles of Organization are required for the LLC, however, every LLC should have a written Operating Agreement.  If your LLC does not have an Operating Agreement, then Massachusetts law (M.G.L. ch. 156C, et seq.) will determine the rights and obligations of the managers and members of the LLC, as well as set out rules for determining how certain factual scenarios are resolved (e.g. the termination of business affairs; or the death or disability of an owner). Your Operating Agreement will set up and detail your organization’s policies and procedures for profit and loss distributions; succession; adding new owners (members); management and governance; and death/disability/wind down/liquidation.

If you are entering into a partnership with one or more partners, then it is critical that you set out and enter into a written Operating Agreement.  In essence, you will be able to formalize the importance features of your partnership, and ensure that both parties’ rights and interests are protected. Here, your Operating Agreement for your Massachusetts LLC can establish procedures for management, day to day decision making, the amount or type of authority of the managers, the exit of a member from the partnership, contributing capital to the organization; and adding new members to the partnership. 

Beyond the basic documents for an LLC, you may need additional documents depending on your type of business and operational structure.  You may need agreements with employees regarding confidentiality of information, trade secrets, customer lists and the like; no solicitation of clients and customers; and non-competition agreements to preclude your employees from working for your immediate competition, or setting up a competing enterprise in your market.  You may also want to sell or vest ownership of the organization to some key employees or set up a structure for succession of your membership interests.  If you are purchasing or leasing equipment, or dealing with a commercial landlord or purchasing commercial space, you will certainly require written contracts in these instances.  

What types of entity are available for my business?

In addition to making a decision on what your business name will be, one of the most important decisions that any new entrepreneur must make is to decide their business entity type.  It is very important to properly select the type of business entity structure that suits your business needs.  By doing so, you will maximize the tax, liability, and other benefits that flow from each type of entity. It is, therefore, essential that you contact one of our Massachusetts business lawyers to provide legal guidance as to the best entity for your business.   

The most commonly used types of business entities available in Massachusetts comprise the following:

Sole Proprietorship (D/B/A; personal name)

Also, frequently referred to as a D/B/A company, a sole proprietorship is the simplest form of a business entity.  A sole proprietorship is an unincorporated business and does not offer the limited liability protections of a corporation or partnership.  Some small business owners begin their business as a sole proprietorship and then seek to incorporate their business once they achieve success in their business. Sole proprietorships avoid the administrative requirements and fees associated with an incorporated business.  However, due to the casual structure of the sole proprietorship and liability issues that a business owner can potentially face when problems arise, a sole proprietorship is not the best type of entity structure.

Corporation (Corp.; Inc.; Co.)

A Massachusetts Corporation is an independent business entity from the business owners (shareholders).  The Corporation will provide a limited liability for the shareholders, and that entity will be responsible for the debts, expenses, and civil claims against the corporation. A Corporation can either taxed as either a C Corporation or S Corporation.  A Corporation must abide by numerous procedural formalities and follow certain rules in order to maintain its legal status in Massachusetts.

Professional Corporation (P.C.)

A Professional Corporations is just like a Massachusetts Corporations, however, this type of entity structure is limited to a group licensed professionals only.  This means that the shareholders must be licensed to practice some type of lawful professional in Massachusetts.  These profession include, but are not limited to: attorneys, certified public accountants, dentists, engineers, physicians and surgeons, veterinarians, chiropractors, podiatrists, physical therapists, psychologists, optometrists, and registered nurses. The P.C. provides limited liability for the shareholders, however, the corporation will not protect a professional from being held liable for their own malpractice / negligence in performing services and their duties as a professional.  

Limited Liability Company (LLC)

Massachusetts law provides for the use of the Limited Liability Company (LLC) type of entity.  An LLC provides its members with the substantial benefits of limited liability for debts and claims against the LLC.  The LLC also provides the passed through tax advantages to the business owners – in other words, the profits and losses are passed through to the owners, and taxation will not occur at both the entity and individual level. Many business owners prefer to establish an LLC due to these substantial benefit and also take advantage of the flexibility and ease of administering the entity.   

Partnerships (Partnership; GP; LP; LLP)

In Massachusetts, the significant business law allows several types of partnership entities:  A general partnership, a Limited Partnership; and Limited liability Partnership. 

A general partnership is similar to a sole proprietorship, however, this unincorporated business involves at least two persons who own the business and share in its profits and losses.  This type of business structure has the same disadvantages as the sole proprietorship and also can lead to a very acrimonious “business divorce” when the basic structure of the partnership is not established.

A Limited Partnership (LP) will involve at least one general partner and one limited partner.  The general partner will make day to day and operational decisions.  The limited partner will not participate in the day to day and operational decisions, and typically take the role as an investor in the business.  The limited partner’s liability is limited to the amounts contributed (capital contribution) to the partnership as long as that partner does not exercise control over the business. The general partner, on the other hand, will assume full liability for the L.P.’s debts and other claims, provided, however, a Corporation or LLC can be a general partner of an L.P.

A Limited Liability Partnership (LLP) is a partnership and allows each partner to take limited liability for the other partner’s negligence, malpractice, errors or omissions. LLPs effectively function similar to a general partnership.  An LLP is frequently used by (but not limited to) attorneys and accountants.

If you or a colleague have any questions about what type of business entity that would be best for a particular business, please contact your local Massachusetts business attorney, Stefan Cencarik, at 617-669-9780.

Should I Set Up a Massachusetts S Corporation?

An S Corporation in Massachusetts can provide strong benefits to business owners and operators.  The primary benefit of an S Corporation is that it avoids the dilemma of double taxation. In other words, taxes will to have to be paid for the activities of the corporation AND for the profits that will be distributed to the shareholders by way of dividends and share appreciation.  A C Corporation is taxed at the entity level and personal level of taxation. The double taxation issue is solved by “passing through” all corporate profits and losses to the shareholders, who will claim those items on their individual income tax return. 

Another substantial benefit of an S Corporation is that it provides its shareholders and officers limited liability. The liabilities of the corporation will be treated separately from the individual shareholders and officers.   Except in narrow circumstances, or in the case of a disregarded entity, the shareholders and officers of a corporation will not have to answer for the debts, civil claims, taxes, and other liabilities of the corporation. 

An S Corporation may also avoid the Self-Employment tax. The current rate is 15.3% of the first $118,500.00 in earnings. Partnership income that is distributed to members of an LLC will be subject to the Self-Employment tax because the members of the LLC are not subject to tax withholding. In comparison, an S Corporation and the wages paid to the owners are subject to withholding, and the individual pays 6.2% for FICA payroll taxes. The employer (corporation) will pay the other “half” of the FICA payroll taxes. 

If you are planning on expanding your corporation to a larger number and different types of shareholders, which is common for an enterprise that raises funds among numerous private investors, an S Corporation may create some disadvantages. S Corporations are limited to a maximum of 100 shareholders, and those shareholders must be United States citizens and permanent residents.  An LLC cannot retain ownership of S corporation stock.  The S Corporation may also have only one class of stock and each shareholder has equal voting rights; there can no be preferential rights to dividends or special voting rights (no preferred stock).

Selection of an S Corporation or C Corporation, or a Limited Liability Company, or other entity, depends on your desired organizational structure, objectives and plans for future growth.  Please contact Attorney Stefan Cencarik for a consultation so that I may advise you on the best entity for your business.  I serve all businesses, entrepreneurs, and individuals in the greater Boston area.

Issues for Business Founders to Address When Starting a New Partnership / Business Venture

When one or more like-minded persons decide to engage in any type of Massachusetts business venture, it is crucial to perform proper planning at the inception of the business.  At the outset, the founders (or partners) in the new business venture can avoid costly, time consuming, and frustrating issues that plague many small businesses in Massachusetts. The downside of improper planning and preparing for the different contingencies that may arise during the formation and operation of business is that some of these issues turn into a dispute, and some others into litigation.

It is crucial at the outset to select the correct business entity for your organizational structure and business objectives. It is equally important to set out each founder’s status, influence, participation, and financial interest in the organization.  It is recommended that, at a very early stage, that business founders discuss several issues, including the following:

What role and status will each founder have in the organization?

Will each founder participate in the day to day affairs of the organization? Will each found work full time?

Who will own certain percentages of the business interests?

What are the restrictions on the transfer and sale of the business interests?

What are the conditions for raising capital, sell business interests, and/or brining on new partners?

Will the founders contribute additional capital to the business if necessary to operate the business?

What happens if one of the founders contributes additional capital to the business and the other founder is unable/unwilling to do so?

What happens to the business if a founder becomes disabled, ill, or dies?

What are the conditions for removal of a founder from the operations of the business?

How can the founders separate their personal assets and liabilities from those of the business entity?

What is the desired business succession plan for the business entity?

Who will own the intellectual property of the business? (This is particularly important if one partner carries over certain patents, trademarks, Copyrights, customer lists, trade secrets, and the like to the business).

This list may be used to generate a discussion prior to meeting with one of our business law attorneys. These are some of the issues that we can address in the planning stage for your business.

Are you an entrepreneur or business setting up, or expanding in the north shore, including Lynnfield, Wakefield, Reading, Andover, Danvers, Peabody, Beverly, Woburn, or Saugus? Contact Attorney Stefan for a free consultation at 617-669-9780.