BUSINESS LAW PRACTICE
WITH EMPHASIS ON SMALL BUSINESSES:
Having spent fifteen (15) years as Vice President and General Counsel of a publically held corporation, which had as its core business the ownership and management of apartments and commercial real estate, Doug Brown has an understanding of many of the different types of issues that corporations and other types of entities face in the normal course of business. With a focus on small business owners, his goal is to offer the appropriate legal advice and judgment so as to enable his clients to succeed in their businesses. Part of that strategy is to be pro-active in assisting clients in addressing issues arising in the course of conducting their business thereby allowing clients to focus on their enterprise, instead of on legal issues. Accordingly, he works diligently to ensure that his clients' commercial agreements match their business objectives and minimize their risks to the extent possible. An essential element of achieving this goal is to gain a fundamental understanding of the clients' businesses and their expectations. His experience includes working with, or negotiating with federal, state and local regulatory agencies and government municipalities, as well as working with insurance companies, property management companies, accounting firms, law firms, mortgage bankers, banks, investors, vendors, realtors, multi-family commercial developers and contractors on a national and regional basis. As a small business law attorney, he has the requisite experience to represent business clients in many areas of business law including the following:
1. FORMATION OF BUSINESS ENTITIES. He will discuss with clients the various types of Business entities available and help choose one that minimizes liabilities and taxes while retaining the necessaiy flexibility to achieve the client's objectives. For clients acquiring a business, he will discuss with them the various types of business entities available for acquiring and holding the assets to be acquired. Included among the entities available are corporations, limited liability companies, limited liability partnerships, limited partnerships and proprietorships. Doug Brown will help choose the form of ownership that minimizes liability and taxes while retaining the necessaiy flexibility to achieve the client's objectives. He will work with the client's accountant as necessary, to recommend the type of entity that will meet these criteria.
The more commonly used types of entities for the acquisition and ownership of a business are as follows:
A. Regular Corporation (or "C-Corporation"). A corporation is a separate legal entity that can shield the owners from personal liability and company debt. The duration of a corporation is perpetual. The structure of a corporation includes Shareholders who own the stock of the corporation and who elect Directors. The Directors appoint Officers and the Officers run the day to day operations of the company. In many cases, you will be the 100% owner of the Stock of a new corporation, and therefore you elect the Directors (usually, including yourself only) and then appoint yourself as an Officer or all Officers of the corporation. The rules for operating a corporation are called Corporate ByLaws. Operating a corporation involves holding an annual meeting of Directors and Shareholders, keeping written minutes of important company decisions and maintaining general corporate compliance as provided by the Corporate By-Laws.
The advantages of a corporation are that it is the oldest and probably most prestigious type of business entity and provides personal liability protections, conveys permanence and can reduce taxes. The disadvantages of a corporation can include that it is more expensive to form than a proprietorship, there is more paperwork and more formality required than with a limited liability company.
Though it is more complicated to operate and manage than an LLC, the corporation is still popular because it is the oldest and probably most prestigious form of entity. C-Corporations are taxed at a lower rate on profits and aren't able to deduct items like health care, travel and entertainment expenses than LLC's and S-Corporations. However, corporations can also present more complex tax and management issues than an "S-Corporation".
B. S-Corporation. Once a corporation has been formed, it may elect SCorporation Status by adopting an appropriate resolution and completing and submitting the appropriate form to the Internal Revenue Service. Once the filing has been done, the corporation is taxed like a partnership or sole proprietorship rather than a corporation. Therefore, the income is passed through the Shareholder for purposes of computing tax returns. Most new small corporations elect S-Corporations status, so profits and losses can be added to the Shareholders' personal income tax return without being required to pay taxes on profits, once, then again, when profits are received back by the Shareholders as income in the form of dividends. This is known "double taxation" and is the reason S-Corporations were created.
The advantages of the S-Corporation include the avoidance of double taxation and being an ideal entity for one person corporations. The disadvantages include being more expensive to form and set up than a proprietorship, with more paperwork and formality required than with an LLC
Though taxed in a manner similar to LLC's, the S-Corporation requires the formalities of a regular corporation.
C. Limited Liability Company. A limited liability company, or LLC, is best described as a hybrid between a corporation and a partnership. It provides easy management and pass through taxation to the owners' personal income tax returns, similar to a Sole Proprietorship/Partnership, with the liability protection of a corporation. Similar to a corporation, an LLC is a separate legal entity, but unlike a Corporation, there is no stock and there are far fewer formalities to be observed. The owners of an LLC are called Members instead of Shareholders. Therefore, in essence, an LLC is like a Corporation with less complicated taxation, and formalities required. The key document for an LLC is the Operating Agreement which sets forth the rules for operating the Company.
The advantages of an LLC include affording the liability protection of a corporation without the corporate formalities and extra levels of management, i.e., Shareholders, Directors, Officers. Also it is taxed the same as a Sole Proprietorship. A possible disadvantage is that an LLC is more expensive to operate than a Sole Proprietorship and requires more paperwork and certain formalities to be observed.
The LLC is the preferred entity for most start-up companies with between one (1) to s (5) owners and has surpassed Corporations in its popularity. Ease of management and limited compliance requirements have made the LLC the entity of choice for most small business owners.
2. PURCHASE AND SALE OF EXISTING BUSINESS. The purchase and sale of a business is more of a process than an event. Clients who plan in advance in consultation with their attorney and other advisors are usually better able to appreciate the benefits and risks of the transaction. Some of the more important business and legal issues to be addressed in this process are as follows:
In selling a business, the client will be expected to develop or assemble due diligence materials, prepare appropriate authorizing resolutions and possible minutes of meetings, existing contracts, leases and joint venture agreements, reduce oral agreements to writing and initiate the process of obtaining any required consents of third parties to the sale.
Upon the Seller and Purchaser reaching an agreement in principal regarding the proposed transaction, the parties should enter into a confidentiality agreement in which they agree not to divulge details of the transaction to other parties. The confidentiality agreement may be included as part of a letter of intent. However, in signing a letter of intent which should be prepared or reviewed by an attorney, the client should be clear as to whether the intent of the parties is to sign a binding agreement or just an expression of intent with neither party being legally bound until a formal purchase and sale agreement has been executed. Even if the letter of intent is not intended to be binding, the document will normally be construed as creating a duty about parties to negotiate in good faith.
Probably the most important initial decision to be made by Purchaser and Seller is whether the transaction will involve the sale of the stock of a selling entity or of assets. While most transactions tend to be asset purchases, because a stock purchase is accompanied by existing liability of the Seller, certain tax advantages may be available for a purchaser of stock. The client's advisor could be helpful in helping him make this important decision.
The process of negotiating the terms of the deal can be frustrating to clients. Essentially, the negotiation is about identifying the risks in the transaction and agreeing on which party will bear that risk. Doug Brown can assist a client in evaluating these risks and in deciding whether the purchase price justifies the assumption of certain risks.
A purchaser will want to gain a clear understanding of the scope and conditions of the business being acquired. He will also want to investigate to insure that the business is in compliance with applicable Federal and state regulations. A purchaser will also have his attorney review the seller's contracts, leases, joint venture/partnership agreements, service contracts, loan agreements as to any indebtedness being assumed, pending litigation against the seller and the proper documents of seller's ownership of any intellectual property, particularly as it pertains to social media, as tools for promoting the business being acquired.
The client purchasing or leasing real estate will want to take steps to insure environmental compliance as to the property. This will typically require the closing attorney to engage an environmental engineer to conduct tests to insure the status of compliance with Federal and state environmental laws and to asset any risk being assumed by the purchaser in acquiring the property. The process will entail learning which permits have been obtained by the seller and if those permits can be transferred and if any additional permits must be required of the purchaser. A purchaser who fails to properly investigate the environmental status of property being acquired is running a huge risk of assuming a substantial monetary liability.
A prudent seller will want to understand whom he is dealing with since the financial ability of the purchaser will be key to the purchaser's ability to meet indemnification obligations and the ability of the purchaser to make required payments to the seller if seller financing is involved.
Certain transactions may require that a legal opinion be issued by the attorney for one or both parties to the transaction, most commonly if a third party lender is involved in financing the transaction. The opinion will typically state one or both parties are duly organized under the laws of the state of formation and that the parties have the requisite power and authority to enter into and consummate the transaction. The scope of the opinion may extend further and address the validity and enforceability of certain closing and collateral agreements, such as a non-compete agreement. The broader the scope of the opinion, the more expensive it will be to the client.
In addition to the purchase and sale agreement, Doug Brown will prepare other closing documents, as necessary, including non-compete agreements, legal opinions, a deed, lease, bill of sale, assignment and assumption documents, releases, promissory notes, security instruments, closing certificates, and a settlement statement. He will work with counsel for the other party in deciding who has the primary responsibility for drafting documents, based on a closing document checklist prepared in cooperation with other counsel that may be involved.
As the attorney for the seller or a prospective purchaser of a business, Doug Brown has the experience and skill to anticipate issues to be addressed and satisfactorily resolved so as to allow for a successful closing of the purchase and sale of a business with minimum delay and difficulty.
3. FRANCHISE/LICENSE AGREEMENTS. Doug Brown assists clients in applying for and acquiring franchises, including reviewing and negotiating franchise agreements and related agreements, such as real estate lease agreements and territorial development agreements. He tries to make sure clients have a clear understanding of the rights and obligations of both the franchisor and the franchisee. He also explains to clients the key federal and state laws applicable to franchise agreements.
A franchise agreement is a binding contract between the franchisor and franchisee which is enforced at the state level with each state having its own laws regarding franchise agreements. At least ten (10) days prior to a franchise agreement being signed, the US Federal Trade Commission (the "FTC") under the Franchise Rule, requires a franchisee to be furnished with a Uniform Franchise Offering Circular or Franchise Disclosure Document. Once the Federal ten (10) day waiting period has lapsed, the franchise agreement becomes subject to state law.
1. A thoroughly prepared franchise agreement should address the following key issues, among possible other ones:
(i)Assigned Territory. The franchise agreement will state the geographical area in which you may operate your business and if you have exclusive rights to operate within that designated territory.
(ii)Term of the Franchise Agreement. This provision will state the commencement date and expiration date of the franchise agreement.
(iii)Franchise Fee and Aggregate Investment expected from the Franchisee. As a franchisee you will be required to pay your initial franchise fee in exchange for the rights granted by the franchisor's trade mark and operating system. The franchise agreement should also provide an estimate of other expenses to be incurred regarding the building, equipment, and accessories, utilities, etc., and other operating expenses.
(iv)Training Provided by Franchisor. Each franchisor has its own training program for franchisees and staff which may be conducted at the franchisee's site, or, at the franchisee's principal office. In addition, most franchisors offer ongoing and administrative and technical support.
(v)Trademarks, Patent and Signage Use. This provision will explain how a franchisee can use the franchisor's trademark, patent and signage in the promotion and operation of the franchisee business.
(vi)Royalties. Most franchisors require the franchisee to pay an ongoing royalty, normally based on a percentage of sales from the operation of the business. This payment is typically paid on a monthly basis.
(vii)Advertising. The franchise agent should explain the franchisor's advertising program, including how it benefits the franchisee and explains the amount to be paid by the franchisee as its share of advertising costs.
(viii)Management/ Operating Practices. The franchise agreement should set forth the best practices and proven procedures or protocol for how the franchisee should conduct business in order to be successful franchisee.
(ix)Renewal Rights/Termination Policies. The franchise agreement should address the procedure and policy for the renewal of the term of the franchise agreement by the franchisee and should also explain the basis for which the franchise agreement may not be renewed by the franchisor.
2. Negotiating the Terms and Condition of a Franchise Agreement. The franchisee will want to be alert to objecting to the inclusion of the following provisions which heavily favor the franchisor:
a. Dispute Resolution Venue Provisions. These provisions require franchise disputes to be mitigated or arbitrated in the home state of the franchisor. This provision should be objected to by the franchisee in that it will not only increase the cost to the franchisee, but allows the franchisor to gain the advantage of resolving the dispute on its home turf.
b. Absence of Reciprocal Cure Periods. Many franchise agreements allow the franchisor a longer period of time to cure a default than is allowed for the franchisee. Indeed, some franchise agreements provide no cure at all for the franchisee in the event of a default. Fairness dictates that the franchisor and franchisee have the same or similar cure periods in the event of a default by either party.
c. Gag Rules. Some franchise agreements prevent franchisees from discussing aspects of their franchisee agreements with third parties. This restriction violates the spirit of the FTC rule and most state disclosure laws which require the franchisor a list of termination fees to the prospective franchisee.
d. Lack of Reciprocal Non-Competition Covenants.Many franchise agreements contain overly harsh post-term noncompetition covenants with regard to the term and geographical area. On the other hand, many franchise agreements allow the franchisor to permit competing franchisees almost any place they desire. Certainly, if the franchisor wants protection from the franchisee after the agreement expires or terminates, the franchisee should be afforded the same protection during the term of the franchise agreement.
e. Single Source Reguirements. Frequently, product oriented franchise systems require franchisees to purchase products only from the franchisor or its designated suppliers. In support of the position, the franchisor will refuse to give an allowance to the franchisee to purchase from alternate sources even though quality standards are met. This provision unfairly empowers and benefits the franchisor to the detriment of the franchisee.
f. Reguired Sublease. Often franchisors require the franchisee to sublease the franchised premises from the franchisor which in turn has typically leased the premises from the landlord. This arrangement allows the franchisor to realize a profit with very little risk. In addition, this rent override is frequently non disclosed in the Franchise Offering Circular.
g. Lack of Accountability of Advertising Fund. With the growth of the franchise industry, the trend has been to allow the franchisor to have maximum discretion over the use and application of advertising funds. This sometimes leads to abuses when franchise agreements are drafted so as to allow the franchisor the right to allocate advertising dollars away from markets where franchisees have contributed to advertising funds.
In order for a franchisor to be successful, it must have successful franchisees. The signing of a fairly and thoroughly drafted franchise agreement is a big start toward the achievement of this objective.
3. Negotiating the Terms and Condition of a Franchise Agreement. Confidentiality Agreements. As a pre-requisite to entering into a commercial agreement, one or both parties may desire to execute a confidentiality agreement requiring the parties to not divulge certain information passed from one party to the other. The type of information to be included as confidential is unlimited and may include data, computer software, test results, business practices, trade secrets or other sensitive information. Confidentiality agreements serve the following purposes, among others:
A. They prevent sensitive information from disclosure to third parties.
B. They can prevent the forfeiture of valuable patent rights.
C. They define what information may or may not be disclosed.
D. A confidentiality agreement may limit a party's use of the confidential information, such as specifying the confidential information can be used only to evaluate the disclosure's product and that it may not be used in the recipient's business. Before signing a confidentiality agreement, it is a good idea to investigate the recipient's known practices regarding maintaining secrecy of its own information.
Doug Brown has the experience and insight into the practical aspects of conducting business to appreciate a client's desire for the confidentiality and protection of their trade secrets and business practices.Contact Us
4. Consulting Agreements. When clients need to engage the services of professionals, including architects, engineers, developers, brokers, marketers, information technology experts, accountants, or other professionals or service providers, Doug Brown will prepare an appropriate agreement between the client and the consultant so as to ensure the clients' objectives and provide the necessary protection to the client.
Some of the key provisions that should be addressed in a consulting agreement are the following:
(i) Parties. The agreement should specify whether the consultant's services are to be rendered by a specific individual or by the consultant's company.
(ii) Description of services. This provision should describe in detail the actual deliveries expected from the consultant including work plans, tests to be conducted, and reports to be submitted. The agreement should also include a time line for the work to be done with important milestone's noted where applicable.
(iii) Compensation. The amount and timing of payments to be made should be spelled out, as well as what actions must be completed by the consultant before payments are to be made. Depending on the nature of the services to be provided, a flat fee may agreed upon, where the services are more specific in nature or payments may be made biweekly or monthly, if the consultant is expected to work a certain number of hours each week or month. Where the completion of the work is extremely important, the hiring party may insist on a hold-back provision in the agreement.
(iv) Payment of Expenses. This agreement should clearly provide which party will bear the expenses to be incurred, including travel and office expenses of the consultant which could be billed to the hiring party or included in the compensation to the consultant. In addition, the issue of who will pay expenses incurred by the consultant while performing the work, such as cost of materials, supplies, vendor's services and possibly subcontractor's fees needs to be addressed.
(v) Copyrights and Work Product Ownership. An important issue to be addressed is the ownership of the consultant's work product. Sometimes a client will have total use of the physical product delivered by the consultant but may not have an assignment of copyright because the consultant insists on retaining the copyright. The hiring party would be well advised to require ownership, not only of the tangible documents prepared by the consultant but the copyrights to them. In some cases, the consultant will demand an increase in compensation if the copyright is to be assigned. Nevertheless, it is important that both parties have a precise understanding of their requisite rights regarding the physical documents and the copyrights involved.
(vi) Status of the consultant. Normally, the hiring party will want the consultant to be an independent contractor, rather than an employee so as to avoid the necessity of payment of employment taxes, benefits, and to reduce liability. If so, this agreement should plainly state this to be the case. In addition, the consultant should be able to do his work independently.
5. Non-Compete Agreements. Frequently in the course of buying or selling a business, or in connection with the employment of a key executive or employee, a non-compete agreement is a necessity. In those situations, Doug Brown has the requisite experience to prepare a noncompete agreement that will protect the clients' interests and which will also be deemed reasonable if tested as to the enforceability of the restrictions imposed under the document.
Small business owners are sometimes reluctant to use non-compete agreement because of the relative small number of employees or the costs of preparing a properly drafted agreement. The term non-compete agreement refers to a contract that precludes a person from engaging in certain acts of competition for a prescribed period of time within a prescribed geographic area. In actual practice, however, the term is used to refer to an agreement by which someone has agreed to a type of competitive restriction, including non-solicitation, non-recruiting, nondisclosure and confidentiality agreements.
Some of the main reasons small business owners use non-compete agreements are:
Most small businesses tend to assign responsibility for customer relationships to a few employees. Therefore, when an employee resigns the customer relationship may leave with the employee. Since clients are the key to any business, protecting these relationships is critical. Doug Brown can help protect against this eventuality by preparing a well drafted non-compete agreement.
Proper training of employees is key to the success of any business. Providing this training can be a factor in attracting talented employees. Accordingly, a business owner will want to protect himself against competitors hiring its employees after incurring the expense of training them.
In contemplating the sale of the business in the future, a business owner can protect the value of the business by requiring key employees to sign restrictive covenants if a prospective purchaser of the business thinks certain key employees who are important to customer relationships may not remain after a merger or acquisition, the sale may not occur. It should not be assumed that a business owner can persuade an employee to sign a noncompete agreement at a later date. A properly tailored noncompete agreement can be a valuable asset in the event of the sale of a business.
A business owner should make it clear to employees that they are expected to not take information entrusted to them when they leave to take another job. They should also understand that the relationships they were paid to develop belong to the business owner. Clarifying the expectation of the owner with the employees should be done upon their employment, not later, after a dispute arises.
Trying to discourage competitors from hiring your employees may not be sufficient reason to justify requiring employees to sign a restrictive covenant, but if there is a legitimate business reason for doing so, such as protecting confidential information or customer relationships, requiring key employees to sign a restrictive covenant could send a message to your competitors that you intend to vigorously protect your business. Small business owners need to protect themselves in advance.
Doug Brown has the requisite experience to prepare a noncompete agreement that will protect the clients' interests & which will also be deemed reasonable if tested as to the enforceability of the restrictions imposed under the document.Contact Us
6. Restructuring and Recapitalization of Business Entities. When business conditions or other circumstances dictate changes in the entity structure or require the infusion of additional capital, Doug Brown is prepared to assist clients in designing and carrying out an appropriate business plan to meet his clients' needs.
7. Shareholder Agreements. Corporate Shareholders frequently want to document their desires regarding the rights among themselves, including tag along rights, bring along rights, and the right of first refusal between or among shareholders. In such cases, Doug Brown stands ready to prepare a shareholder agreement to accommodate the specific objectives of the shareholders.
8. Resolution of Corporate Governance Issues. Frequently, issues arising among shareholders, partners, or members of a business entity may require a review of the by-laws, partnership documents, operating agreements or other governance documents as well as legal advice to the parties. As an attorney with fifteen (15) years prior experience as General Counsel of a public corporation, Doug Brown is well prepared to assist clients regarding such issues.
9. Telecommunications Agreements. Doug Brown is experienced in the preparation, sale, assignment and modification of telecommunication leases between property owners/lessors and telecommunication companies/lessees and the preparation of management agreements related to the management of telecommunication leases.
NON PROFIT ORGANIZATIONS: Douglas G. Brown represents non-profit organizations, including organizations providing health care and sponsoring health care related programs, human services organizations and organizations promoting the arts. Among services provided to these organizations are: the formation of a non-profit entities, including Section 501 C (3) tax exempt organizations; preparation of by-laws and amendments to the bylaws; preparing lease agreements, service contracts, purchase and sale agreements for real property or equipment or other personal property, loan closings, construction contracts, loan documents required for loan closings and agreements entered into with other organizations for the purpose of forming alliances between them for providing services or expertise in connection with community projects.
With a focus on small business owners, Doug Brown's goal is to offer the appropriate legal advice and judgment so as to enable his clients to succeed in their businesses.Contact Us