Are you thinking about opening a business? Starting your own business in Florida can be a complicated and daunting process but being a business owner can also be extremely rewarding. While the necessary steps for starting a business can be extensive, an experienced Florida business formation lawyer can assist you. The attorneys at BrewerLong regularly assist clients as they are forming their companies. We can continue to serve your business as you seek a commercial space, negotiate a commercial lease agreement, handle employment law matters, and even if you need to consider dissolving your business. In the meantime, we want to say more about how to start a business in Florida. Develop a Business Plan The first part of starting a business in Florida involves developing a business plan. As you develop your business plan, you will want to consider many of the following: Type of service or product your business will provide; How your business will provide that service or product; Where your business will be located; Type of commercial space you plan to rent; Who will run the business; Whether you will have investors; Whether you need a license or permit to run your business; Financial goals of the business; Estimated timeline for profitability; Who your target customers might be; Who your likely competition will be; How many employees you plan to hire; Tasks for employees; and Marketing for the company. Decide on a Business Structure There are many different types of business structures from which you can choose. The U.S. Small Business Administration (SBA) provides helpful information about each available type of business structure, as well as the pros and cons for each. The following are different types of business structures: Sole proprietorship This is the easiest type of business to form, and as the SBA underscores, it gives the owner complete control of the business. One of the reasons that a sole proprietorship is the easiest type of business to form is because you can automatically have a sole proprietorship if you are engaged in business activities and if you do not specifically form another type of business. Like other businesses, sole proprietors are able to obtain a trade name. However, there are drawbacks to a sole proprietorship. Most significantly, the individual and the business are not separate—the business owner is personally liable for all business debts. To be clear, the assets and liability of the individual business owner and the business itself are not separate from one another. Accordingly, the business owner of a sole proprietorship is personally liable for business debts. Typically, a person chooses a sole proprietorship if she or he is just getting started and wants to “test out” the business before formalizing it through another type of business structure. Partnership There are two different kinds of partnerships: limited partnerships (also known as LPs) and limited liability partnerships (also known as LLPs). Both types of partnerships are similar to one another except for one major difference. In a limited partnership, there is one “general partner with unlimited liability,” who also tends to have more control over the business. The other partner(s) have limited liability and tend to have less control over the business. Limited liability partnerships are businesses in which all partners have limited liability. In a partnership, profits pass through to the partners’ personal income taxes, and limited liability partners are not required to pay self-employment taxes on the profits. Limited liability partners are not personally responsible for debts of the business. Corporation There are different types of corporations, including a “C corp,” an “S corp,” and a “B corp.” C corps are the type of corporation that most people are thinking about when they are imagining a corporation. Owners are protected from personal liability most strongly in a C corp, but there are relatively high financial costs, as well as “extensive record-keeping, operational processes, and reporting.” Corporations are separate entities from the individual business owners, but unlike partnerships, profits made by a corporation are taxed. In some situations, the profits actually get taxed twice. First, the profits are taxed when they are made, and then they are taxed again when they are paid out as dividends to individual shareholders. An “S corp” is a particular type of corporation designed to prevent the “double taxation” we just mentioned but forming one of these can be particularly complicated. A “B corp” is a particular type of for-profit corporation. In terms of taxes, it works just like a “C corp,” but it has a different purpose than a “C Corp.” In short, as the SBA clarifies, a “B corp” is “driven by both mission and profit.” Limited liability company, or LLC An LLC is a common type of business structure that has features of both a partnership and a corporation. In most cases, individual owners are protected from personal liability, and profits are passed through to the owners’ personal income without corporate taxes. At the same time, owners of an LLC do have to pay self-employment tax. Give Your Business a Name and Establish It Legally Florida law has specific requirements for naming corporations, LLCs, and partnerships. In short, you will need to check with the Florida Division of Corporations to determine whether there is an entity that already has the name of your planned business. You will also need to do a trademark search to ensure that the name you have in mind for your business has not been trademarked. Then, you will need to establish your business as a legal entity. An experienced Florida business lawyer can help with these complicated steps. Register Your Company in Florida To register your business, you will need to provide specific information to the Florida Department of State. The particular type of documents you need to submit depend upon the type of business structure you have chosen. Determine Whether You Need a Permit or License If you need any type of permit or license, you will need to get it before you officially open your…
Starting a business takes a lot of time, and so does closing one. We wish it were as easy as turning off the lights and notifying the post office to stop delivering mail but closing a business in Florida requires several steps to protect yourself legally. We are happy to help. To wind down a business, you need to notify certain stakeholders that the business will cease to exist, which protects you from future lawsuits or incurred costs. The steps you take are generally the same whether you are running a large business with 100 employees or are a sole proprietor working out of a home office. As experienced Florida business law attorneys, we have written this article on how to close a business in Florida to give you a general idea of the work involved. Vote to Wind Down, if Necessary If you run a corporation, then your shareholders will need to vote to formally wind down the business. They also need to do this at a formal shareholder meeting. Avoid sending out an email or a form letter asking people to let you know if they want to wind down. Hold an official meeting and keep records of the vote. Don’t skip this step. If you do, you could end up financially and legally liable to customers, employers, the IRS, and other government agencies. For example, a customer could allege that your business was really a sham since you don’t follow required formalities to shut it down. That could put you on the hook financially for business contracts and other debts. If you run a sole proprietorship, you don’t need to vote. But you still should carefully document the date that you have decided to stop operating your business. Notify Employees If you don’t have employees, you can skip this step. However, if you have hired full- or part-time employees, you must do the following: Give them clear notice of when their employment terminates. By shutting the business you are, in effect, laying someone off. Coordinate to pay the final paycheck in a timely manner. Florida has deadlines you need to follow. Make sure to compensate employees for unused vacation time. Deal with retirement accounts. Contact the investment company for more information. A key consideration is timing. As soon as you tell an employee you are closing the business, they might immediately jump to a different job. You might need only a skeletal crew working for you as you wind down. Pay Your Creditors A business that is winding down still needs to pay its creditors back. This means you can’t sell your business or its assets and then skip town with the proceeds. Instead, go through your contracts, both short-term and long-term. Identify how much money you need to pay off your debts and make sure you set an adequate amount aside. If the contract gives you a right to early termination, make sure that you exercise that option. What happens if you don’t have enough money to pay all creditors? Realize that they can come after you if you made a personal guarantee on a loan. (This happens more frequently than you probably imagine.) Talk with a business attorney for more information. You might need to file for bankruptcy to wipe out the debts. Pay Your Taxes Notify the IRS and the Florida Department of Revenue that you are closing your business. If you don’t, they might assume you are hiding business income and they could open an investigation. You also need to make all necessary payroll and other contributions, exactly as you did before the winding down process. If you don’t have the money, then a business bankruptcy might be your only option for handling unpaid tax debt. Close Your Bank Accounts Once all checks and transfers have cleared, you should close your accounts. Don’t close too early or checks will bounce. If you have cash in the account after paying off all debts, you will then distribute it to any shareholders. Notify the State You Are Winding Down The state needs to know that the business has closed. This protects you by preventing someone from fraudulently assuming your business identity and doing business with unwary creditors. Fill out the necessary paperwork and keep a copy for your records. Hang onto Business Records Many of our clients have successfully wound down a business only to have an issue crop up years down the road. Maybe the IRS claims they are owed money, or a creditor sues for additional payment. For these reasons, you must keep all your business records, in order, in a safe place. Speak to a Business Lawyer Today Closing a business in Florida isn’t easy, and it is rife with pitfalls. If you have a question, our Florida business lawyers can answer. Brewer Long has helped many business’ owners wind down, and we can help you too. Contact us today for a free, introductory phone call, 407-660-2964.
You’re starting a business and you need a commercial location. Or maybe your business is growing and you need more space. Whatever the case, if you’re about to navigate the legal and financial minefield of a commercial lease, have an experienced attorney review the document before you sign. Here are three critical reasons why: 1. Complex zoning issues. Before you sign a lease, be sure the city and county zoning will allow you to operate your business on the site. Don’t just assume—verify. If you sign a lease without confirming the zoning, you risk being locked into years of rental payments on property you can’t use. Zoning ordinances can be tedious and nuanced. They address a wide range of issues, including the type of business (retail, restaurant, manufacturing, professional, etc.), health and safety regulations, parking, signage, accessibility and more. Check into all applicable regulations before making a commitment. If the current zoning doesn’t allow what you want to do, you may be able to obtain a variance or special exception. An attorney can help you negotiate a zoning contingency into the lease and navigate land use issues with the appropriate government agencies. 2. Terms that heavily favor the landlord. It’s likely that the landlord uses a lease has been drafted to favor the landlord and contains language that burdens the tenant with a long list of significant obligations, expenses and liabilities. For example, many landlord leases contain broad remedies the landlord can self-execute if you default on the lease while limiting the landlord’s liability or your recoverable damages if the landlord defaults. Another issue to watch for is when landlords use a standard form that contains generic terms that are not appropriate for your particular business or industry. An attorney can often negotiate a more balanced agreement that is specific to your needs and operation. 3. Get all promises in writing. In your conversations, the landlord or leasing agent may agree to certain things that are important to you, but if those points aren’t included in the written lease you sign and a dispute arises later, you have no recourse. Don’t rely on verbal assurances. An attorney can craft the appropriate language for points you need added to the lease. Be wary of a landlord who objects to your attorney reviewing their lease or who insists there is no room for negotiation. In our experience, even landlords who have a “take it or leave it” attitude become more reasonable and cooperative after they receive an attorney’s comments on the lease. Commercial leases are complex. An experienced real estate attorney knows which lease terms are standard, which can be negotiated and which should be added to the landlord’s draft to limit your costs and liabilities, reduce risks and facilitate a smooth landlord/tenant relationship. To schedule review of a commercial lease, call our office at 407-660-2964 or email Calla Portillo at firstname.lastname@example.org.
Just because an image is on Google doesn’t mean you can use it on your website or in other marketing materials You need images for your website and other projects, such as brochures, reports, presentations, social media and so on. But original and even stock photography can be expensive. If you’re tempted to just download what you need from the internet without paying for it, don’t. Here’s why: Just because it’s on the internet doesn’t mean it’s free for anyone to use. The creators of the images own the copyright and control the use. While many creators put their work out in the public domain because they want it shared as much as possible, others want to be paid or at least want to control where their work appears. You could be sued. The copyright owner could be entitled to recover their own damages as well as any profits you may have earned from using the image—and that’s not all. If the owner simply doesn’t like the way the image was used and feels your use diminished the value of it, they can seek statutory damages in amounts ranging from $750 to $30,000—even if they didn’t suffer any monetary loss from your use or you made no profit from it. If the court finds your infringement was willful, it can increase the statutory damage award to $150,000 and you could be liable for attorney’s fees for both yourself and the copyright owner. (See 17 U.S. Code §504) You may have to remove the image from wherever you have used it. It can be time-consuming and expensive to remove the image from your website, social media accounts and printed materials and replace it with something you have the right to use. If you don’t manage all the locations where you used an image, you might not be able to recover them all, putting you further at risk of liability to the owner. Even if you know where you used it, you don’t know who else may have copied it from those sources and used it. Are You Currently Using Images You Don’t Have Rights To? What’s likely to happen if you’re using copyrighted images you didn’t pay for? It can range from nothing (if the copyright owner either doesn’t find out or chooses to not take action) to costing you so much in time and money that your company is at risk. The most likely scenario is that you’ll receive a cease and desist letter. Cease and Desist Typically, copyright infringement cases begin with a cease and desist letter which claims ownership of the copyrighted material and demands that the infringement stop and not restart. It may or may not also demand a payment of damages to settle the dispute right away, under threat of litigation if you do not comply. Often, if you comply with the cease and desist letter, that will be the end of the matter—but it’s not always that simple and it can get expensive. If you receive a cease and desist letter, you should have an attorney review it to see what the sender is demanding, determine if the demands are valid, and help you formulate a plan to comply. The cost of legal review—that is, just to have an attorney look at a cease and desist letter—can run $250-$500, which is significantly more than you would likely pay to purchase images from a reputable source in the first place. The cost of compliance with the cease and desist letter will depend on the owner’s demands. If you just have to remove a single image from your website, the cost could be minimal. If you’ve used multiple images and/or used them in multiple places, the cost could be substantial. In addition to the labor involved, you may have to destroy and replace supplies of brochures, books or even products if they contain infringing content. It’s possible you won’t be able to fully comply with the demands of the cease and desist letter. For example, if you’ve used a copyrighted image as part of a social media post, it could get shared far beyond your ability to retrieve and replace. In that scenario, you will likely have additional legal costs and the potential for damages. Note: Though this article focuses on images, the information also applies to written content, audio files, videos and other intellectual property. How to Protect Yourself from Copyright Infringement Claims The two primary ways to protect yourself from copyright infringement claims are to either create your own images or purchase images from a reputable source. When you purchase the rights to use someone’s intellectual property, you are buying a license that outlines what you can and can’t do with the material. Before you purchase images, understand the terms of service (TOS) of the seller’s website as well as the license details. These documents are often full of legalese and difficult to read, but it’s essential that you do this in case you ever need to mount a defense against an infringement claim. There are places where you can download images for free. Some are reputable (such as the Library of Congress), some are not. But free doesn’t mean unrestricted. As with purchasing images, read the terms of service and any restrictions on use that the copyright holder may have stipulated. Another issue to be aware of is that some free image sites do not vet their own image sources. People have uploaded images they don’t own to those sites. If you use one of those images, you could be held responsible, even though you were acting in good faith. Keep Track of Your Licenses Set up a system to keep track of the licenses you have purchased. You can usually do this with a simple spreadsheet. You can also include the license information in the metadata of the image file. The details you want to retain include the image itself; where it was purchased; how much was paid; and license details. You should…
What Should You Do if You Get Sued? When you own a business, getting sued is not a matter of if, it’s a matter of when. The more successful you are, the greater the chances that someone will file a lawsuit against you or your company. That’s why you need to know what to do before you hear that dreaded phrase: “You’ve been served.” First and most important: Don’t panic. Stay calm and take purposeful and immediate action. Here’s what you should do—and you should do it immediately (the same day if possible) after you are served: Read the lawsuit. You need to know who is suing you and what they allege you did or did not do. The summons will tell you the exact number of days you have to respond to the lawsuit so you know what your deadline is. Call your attorney. Even if you believe that your insurance company is going to handle your defense (more about that later), your own trusted legal advisor should be notified and kept advised as the case progresses. Put your insurance carrier on notice. Let your commercial insurance agent/broker know you have been served with a complaint. He or she will give you instructions on how to notify the insurance carrier and may assist directly in placing the carrier on notice of the claim. Important! Regardless of the nature of the claim or claims alleged in the complaint, never assume that your insurance doesn’t cover that type of claim. Notify your carrier even if you think it’s an uninsured risk because you could be wrong. Let your insurance carrier tell you whether some or all of the claims asserted against you are covered under your policy. Designate a Point of Contact Once you have contacted your attorney and placed your insurance carrier on notice of the claim, you should designate an individual within the company to be the primary point of contact for all things related to the lawsuit. Your internal point of contact should be a C-level or department-head person who reports to the CEO. This person should have the necessary authority as well as the time and ability to deal with the lawsuit. It should not be the CEO; the CEO needs to stay focused on running the company. Preserving Evidence Upon receipt of a complaint, meet with all of your department heads—particularly your IT department head—and put procedures in place to securely preserve all data which might in any way relate to the lawsuit. Contact a business litigation attorney if you’re unclear on any detail about your obligations and the process for preserving evidence. The failure to preserve data can have significant negative implications for you in the litigation. Insurance Coverage A standard insurance policy issued to business entities will protect them against liability claims for: Bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations Advertising liability Personal injury (PI) liability Risks related to contracts and business relationships with partners are usually not insured. You may choose to purchase additional coverages such as employment practices liability, which provides coverage to employers against claims made by employees alleging discrimination (based on sex, race, age or disability, for example), wrongful termination and harassment, as well as other employment-related issues, such as failure to promote. The terms of your policy dictate whether claims or losses are covered. When it comes to lawsuits, there are two significant components to insurance: Providing a legal defense Paying any damages. Upon receipt of your claim, your insurance carrier will take one of three actions: Advise you that the claim is covered and the insurance carrier will provide a defense. Advise you that the insurance company believes that the claim may not be covered under your policy and they are going to reserve their rights to deny coverage later, but they are currently going to provide a defense. Advise you that the insurance company is denying coverage for the claimed loss and that they are not going to provide a defense. Once you have a statement from your carrier on the status of coverage, you will know what you are facing. The Value of Business Counsel with a Knowledge of Insurance Coverage As counsel who has experience in business litigation and insurance coverage, we can be a crucial resource to you from the moment that you are served. Having a knowledgeable attorney involved in the communications with your insurance carrier can influence the carrier’s decision in close cases. Additionally, if you find yourself with a limited amount of coverage, we have had success in getting insurance carriers to assign us as litigation counsel. That way, you can utilize the insurance dollars to defend, and maybe settle, the claim up to the amount of the coverage, and then transition to the self-paid defense of the claim with counsel that you know and trust. We can also assist you with understanding and evaluating your various layers of insurance coverage in advance of a claim. This is a service we routinely provide our clients. We’ll help you be sure you have the right coverage in the right amounts to cover both defense costs and damages. We’ll evaluate coverage limits, overlapping coverage, excess coverage (which picks up the cost of risks you’re not otherwise insured for), deductibles and more. Even though you may have a knowledgeable, trustworthy agent, it’s worth having someone who knows what’s happening in the legal world take a look at your situation. To schedule an insurance coverage review, call our office at 407-660-2964 or email Calla Portillo at email@example.com.
Know the Legal Issues Related to These Three Employment-Related Documents Whether you’re getting ready to hire your first employee or you’ve had hundreds of people on your payroll for years, it’s essential that your employment documents work for you rather than against you. That means they need to be clearly written, comprehensive, and compliant with all applicable laws and regulations. There is a long list of documents you’ll use as you recruit, hire, manage, and terminate workers, and they will vary based on your specific industry and needs. But three important employment-related documents apply to virtually every operation: Employee handbook Work-for-hire agreements Restrictive covenants agreements Employee Handbook The employee handbook (sometimes called an employee manual or policy and procedure manual) is the document that establishes the ground rules for how you want people to conduct themselves within their capacity as your employees. Employee handbooks typically cover policies on such issues as: Paid and unpaid time off policies, including holidays, vacation, sick leave, family medical leave and other types of leave. Employee behavior, including attendance, dress code, meal and rest breaks, as well as bans on harassment and discrimination and your general expectations of employee conduct. Social media policy, including whether employees can access social media at work, the use of company information and trademarks on the social media accounts of employees and their family and friends, and how employees should respond to offensive or negative posts about the company made online by others. Compensation, including when and how employees are paid, overtime policies, and pay grade structures. Benefits, including health and other insurance coverage, other benefits you may offer, and eligibility criteria. In addition, there are likely other issues specific to your operation or industry that you may want to cover in your employee handbook. A well-crafted employee handbook eliminates misunderstandings and ambiguity regarding what is acceptable workplace conduct and what is not. It also provides the employer with a legal foundation should disciplinary action, up to and including termination, be necessary. Work-for-Hire Agreements A work-for-hire or work-made-for-hire agreement specifies that whatever materials your employees produce during the course of their work belong to the company. While this most commonly applies to intellectual property and creative endeavors such as writing, design, and photography, it’s a good idea to have every employee sign a work-for-hire agreement stipulating that whatever they produce in their capacity as your employee becomes the company’s property. Restrictive Covenants Agreements It’s important to take appropriate steps to protect your proprietary business information as well as your customer interests and relationships through the use of restrictive covenants agreements. These documents include things that could have a negative impact on your company that employees agree not to do, such as non-compete, non-disclosure, non-solicitation, and non-disparagement. It may not be necessary or appropriate for every employee to sign an agreement covering one or more of these restrictive covenants; that’s a judgment call you must make based on your specific circumstances. Two Most Common Mistakes While the complexities of employment law make creating effective documents a challenge, the two most common mistakes employers make in this area are: Not having employees sign relevant documents. If you go to the effort and expense to create various agreements and other documents, be sure every employee signs the ones appropriate to their job and status. Not understanding what the documents say. Before you ask an employee to sign your documents, take the time to understand exactly what they mean and be sure the terms are enforceable. Get a Document Checkup How long as it been since an attorney has reviewed your employment-related documents? If you don’t remember and if you’re not sure they’ll protect your company in the event of a dispute, take advantage of our Legal Sleep Aid service. I will review up to five of your documents and let you know where the red flags are and what you can do about them. Go here for complete details.
Maitland, Florida, November 13, 2017－BrewerLong is pleased to announce that Kristi L. Benson has joined the firm as an associate attorney in its Maitland office. The addition of another business attorney highlights the firm’s strategic focus on helping business owners and executives who are starting, running, growing and selling their companies. “We are excited to welcome Kristi to our BrewerLong team,” said Trevor Brewer, Partner and Business Attorney at BrewerLong. “Her technical and analytical legal experience will be a huge asset to our firm.” Benson is excited to be working alongside partners, Michael Long and Trevor Brewer, in corporate litigation, intellectual property, and general business matters. She will be assisting BrewerLong’s business clients in areas such as commercial litigation, business sale transactions, employee agreements, private loan transactions, ownership agreements and contractual negotiations. “I am thrilled to be part of this team of reputable attorneys,” Benson said. “My passion is to support business leaders in a legal capacity, allowing them to achieve their goals. I am grateful to work at a company where my core values are aligned with the firm’s mission and vision.” Benson received her undergraduate degree from Stetson University in DeLand. Florida and her law degree from Stetson University Law School in St. Petersburg, Florida. About BrewerLong BrewerLong is committed to serving Central Florida businesses and executives as they start, run, grow and sell their businesses. For more information, please visit www.brewerlong.com.
These 10 points will help you build a Board that can take your company to the next level. Representative Democracy. The primary purpose of the Board of Directors is to represent the shareholders, to protect their investments, and to ensure that they receive an adequate return. Directors are elected by the shareholders to serve terms of one or more years, concurrently or staggered, as provided in the Bylaws. The Big Picture. The Board of Directors is the highest governing authority in a company. It is generally the Board’s job to hire, oversee and approve compensation for the Chief Executive Officer and other executives, to approve payment of dividends, and to recommend for or against major transactions affecting the shareholders. One Director, One Vote. Actions and decisions of the Board of Directors generally require the vote of a majority of the directors. The Bylaws might require a supermajority or unanimous approval for certain decisions. The Board may hold live or telephonic meetings (at which minutes must be kept), or they may sign written resolutions in lieu of a meeting. Caring Souls. Directors owe a duty of care to the company and shareholders. They must act in an informed and deliberate manner. Directors should have a good working knowledge of the business, its plans, and potential problems. The Board should avoid not only haste but the appearance of haste. Trust But Verify. In exercising their duty of care, directors may rely on information and advice provided by company executives, managers, and employee, as well as outside experts, such as attorneys, CPAs, and investment bankers. But directors should actively question and test the information and advice they receive. Always Be True. Directors also owe a duty of loyalty to the company and shareholders. They must make decisions based on the best interests of the company, and not any personal interest. Directors must first offer to the company any opportunity to that is related to the business of the company. Cured. A director has a conflict of interest when he or she has a personal interest in a transaction to be approved by the Board. The conflict may be “cured,” and the transaction upheld, provided the conflict is known to the disinterested directors of shareholders who approve the transaction. Inside Out. Directors who are also employed by the company are known as “inside directors,” while independent directors are known as “outside directors.” In some sense, inside directors always have a conflict of interest (their paychecks). For this reason, it’s good practice for the Board to have a majority of outside directors (this is generally a requirement for publicly traded companies). Committee Time. Especially when the Board of Directors has a large number of members, it is often more effective for directors to act and make decisions in committees made up of a small number of directors. Committees are created to focus on specific topics, like executive compensation or finances. A committee of independent directors can be used to approve decisions for which inside directors have a conflict. Personal Judgment. Directors are not personally liable for losses suffered by the company or the shareholders, provided they have met their duties of care and loyalty. Even if the directors’ decisions turn out to be unsuccessful or unwise, the directors are generally protected under the so-called business judgment rule.
What you need to know before including stock options in your employee incentive program. A Range of Options. Stock options are just one form of employee incentive, all of which are intended to encourage key employees to make the company successful. In evaluating the alternatives, there are two important questions: What will incentivize the employees? How much ownership should the employees have? Don’t Believe the Tax-Free Hype. Incentive stock options (ISOs) are popular because they are believed to be tax-free for the employees. They’re not, in most cases. When ISOs are exercised, the “spread” (the difference between the exercise price and the fair market value of the stock) may not be subject to ordinary income tax, but it is subject to the alternative minimum tax (AMT). Also, when the stock is sold, the employee must pay capital gain taxes on the difference between the exercise price and the sale price. Through the ISO Hoops. To avoid ordinary income tax on the grant and exercise of ISOs, specific requirements must be met. At the time ISOs are granted, the exercise price cannot be less than the stock fair market value. ISOs must be exercised within ten years of being granted. After exercise, the option stock cannot be sold until two years after the date the option was granted and one year after the date the option was exercised. The Trigger Trap. Often the event that triggers the exercise of ISOs is a sale of the company. But exercise-and-sale as part of a company sale means that the employee cannot satisfy the two-year-from-grant and one-year-from-exercise holding requirements. As a result, the employee must pay ordinary income taxes on the difference between the option exercise price and the stock sale price. Plain Vanilla Options. Options that are not intended as ISOs are called non-statutory options (NSOs). Generally, the employee pays ordinary income taxes on the value of the options at the time they are granted, and the employer gets an immediate deduction for the same amount. There is no required time limit on when NSOs can be exercised, and there are no holding requirements. Restrictions May Apply. An alternative to options is restricted stock. Key employees are given company stock directly, but there are restrictions on voting rights, sharing in profits, or whatever the employer decides. However, the tax laws applicable to S corporations only permit restrictions on voting. Like NSOs, the employee generally pays ordinary income taxes on the value of the restricted stock at the time it is granted, and the employer gets a deduction. Tax Timing. Ordinary income taxes on NSOs and restricted stock can be delayed if they are subject to substantial risk of forfeiture. For example, restricted stock may be forfeited if the employee’s employment is terminated. The restricted stock would not be taxed until it becomes vested. However, the employee might choose to pay the tax early, by making an 83(b) election, if the stock is expected to go up in value. Real, Live Stockholders. Employees who exercise options or receive restricted stock are real stockholders. They are entitled to view the company books, to vote on directors and significant transactions, and they are owed fiduciary duties. The employer can impose some restrictions, but some stockholder rights by law cannot be limited. A Ghostly Alternative. Another alternative is “phantom stock.” Phantom stock is not actually stock at all. Instead, it is a promise to pay bonuses based on increases in the value of the company stock. Phantom stock avoids the complexity of ISOs and the stockholder rights of options and restricted stock. On the other hand, phantom stock may not incentivize employees as much as would stock ownership. If the name phantom stock isn’t scary enough, they’re also called stock appreciation rights (SARs).
Before you sell stock in your company, understand these 10 issues: The Other SEC. Whatever you call it—stock, units, interests—outside investment in a business is a security. The sale of any security is regulated by Federal and state law. This doesn’t mean that you have to “go public” through an IPO just to sell your stock, but it does mean that you have to worry about securities regulations. Ignore them and you might face civil or criminal penalties. Compliance Made Easy. The sale of stock does not require full-blown (read: costly) registration with the SEC if you comply with one of the private placement exemptions. These exemptions put limits on the total offering price, the offering duration, the number of investors, and/or the information required to be given to prospective investors. For each of the exemptions, no general solicitation or advertising is allowed. The In Crowd. It’s always a good idea to limit the offering of stock to “accredited investors.” Accredited investors can presumably take care of themselves because of their net worth (at least $1 million for an individual) or their annual net income (at least $200,000). How do you know if someone is an accredited investor? You ask, usually by having prospective investors fill out a questionnaire. Stick to the Script. At the heart of securities regulations is concern over what promises are made to potential investors. It’s important that your sales pitch is in writing, which is often called a private placement memorandum (PPM). The PPM includes all of the good and bad information about the stock being sold. What’s the Plan? Your PPM should go into as much detail as possible about the company’s plans for using funds raised from the sale of its stock. This is important from a marketing standpoint (no one will give you money without a good plan), and it is also important for full disclosure. To provide some comfort for the initial investors, PPM’s will often state a minimum amount that must be sold, or else their investments will be returned. Bespeak Caution. An important part of the PPM is the Statement of Risk Factors. This is everything that could go wrong with the investment. Since you’ll want your business plan to be as glowing as possible (you’re trying to make a sale remember), the Statement of Risk Factors is an essential dose of reality. If an investor later complains about the investment, you can point to the Statement of Risk Factors. Widgets for Sale. Your stock is a product, and your goal is to sell it. You need to design that product with care. Is the stock voting or non-voting? What rights will the investor have to distributions? What rights will the investor have upon the sale or liquidation of the company? The design of the stock is in the Owners’ Agreement, which can include different designs for a number of classes of stock. Me First. A common design element for stock offered for sale is a preferential return. Investors want to know that their dollars aren’t going straight into your pocket. One way to assure them is to promise that they get first dibs on the company’s profits, either from operations, the sale of the company, or both. Stock with these rights is often called preferred stock. Be careful: It’s a no-no for S corporations. Me Too. Another concern of many investors is that soon after they buy their stock, the company will sell new, improved stock (with better preference rights, for instance) or sell the same stock cheaper. To deal with these concerns, you might include preemptive rights in the offered stock. Preemptive rights allow the stockholders first dibs on any new classes of stock the company sells in the future. Pace Yourself. Don’t sell more stock than is absolutely necessary. Each time you sell new stock, you have to give away more of the company profits and/or control of the company. If you give away too much in the early rounds, you won’t have anything left when you need it. Venture capitalists, especially, demand a lot.