If you’re like many Florida business owners, you may view retirement with both excitement and misgivings. Even as you look forward to having more time to enjoy favorite activities, the idea of moving on from your livelihood can be anxiety-inducing. One option that allows you to step away and still experience the benefits of retirement is bringing family into the picture. The formal requirements under the Florida Business Corporation Act aren’t too complicated, but there’s a bigger picture to consider when you transfer business ownership to a family member. As soon as you begin seriously thinking about retiring, time is of the essence to start planning. You’re in a better position to leave on your own terms, maintain control over the process, and reap the benefits of a steady retirement income. You should discuss the specifics with an experienced Florida business law attorney, especially three key topics that may guide your decision making. Your Company’s Value There are numerous factors to consider about your own retirement situation, but you may also have concerns about your company’s well-being and longevity in moving forward without you. For many closely held companies, there’s significant value attached to the people that built them. When your own unique, personal input is an asset to the business, you need to assess the extent to which the company can survive after you sell it – or whether it can maintain a good proportion of its value by transferring business ownership to a family member. The analysis starts with an unofficial business valuation, typically a basic review of assets, expenses, accounts receivable, and debts, along with the value of your personal reputation and good will. Then, you’d determine whether the total dollar figure could be enough for a comfortable retirement, exclusive of other savings, pensions, and investment income. If you’re convinced that your business would perform well without you at the helm, you need to work out an official business valuation through generally accepted accounting standards. Not only is this necessary for making a decision on transfer or sale, but also for the tax implications in evaluating your expected retirement income. Your Individual Retirement Needs Retirement is a major life transition for anyone, and even more so for someone who owns a business. When considering your own needs for income, you must assess how far your retirement will go for a wide range of expenses, such as: Your basic needs, including your mortgage, utilities Health insurance and medical costs; Car leases; Services you’re used to gaining through the company, such as tax preparation, and club memberships; and, Other expenses that you’ll now be responsible for covering yourself. You must also consider how to apportion your retirement income to cover these costs, especially the amount that comes from transferring your business as compared to your income from investments and other assets. For this reason, as early on as possible in your planning, you should be contributing to a retirement fund that will suit your needs – aside from what you’d make through a sale of your business or transfer to a family member. Keep in mind that you could make arrangements to stay on and play a role with your company when you transfer ownership to a close relative. Many former business owners can serve on the board of directors or in a consultative role, enabling them to make an income without taking full control of operations. You can make an important contribution if you’re serving and maintaining relationships with customers who have been dealing with you directly for years. Options for Structuring the Transfer If you’re leaning toward transferring ownership of your business to family members or trusted employees – as opposed to a third party – there are multiple options and structures to consider. You should discuss the specific pros and cons with a business law attorney, but you might look into: Gift Transfer: You could transfer ownership to the other party as a gift, with the caveat that you’ll earn income form the new owners. As of 2017, the Internal Revenue Code allows you to claim an individual gift exemption of $10 million – or $20 million if you execute the deal with a spouse. Because the laws allow for annual adjustments for inflation, the exemption is $11.4 million and $22.8 million for 2019, respectively. The amounts increase for the next few years. This means you could leverage the business transfer as a gift without adverse tax implications, in some cases. Once the business is no longer part of your estate upon your death, you won’t incur tax liability when the company expands Financed Sale: You may opt to act as a lender in transferring the business to a family member, and there are many ways to structure the transaction. Through a promissory note, you can obtain payments directly from the buyer based upon an amortized schedule – or installment payments followed by a balloon. During the pendency of the arrangement, you’ll make a steady, regular income to maintain a comfortable retirement lifestyle. Partial Sale & Lease Back: If your company has considerable holdings in real estate, a building, or other property, you could sell the business – but retain ownership over these assets. Then, you can rent them back to your family members as new owners of the company. There are tax advantages, but the key benefit is that you can fund your retirement through the lease payments. Keep in mind that you need to include specific provisions when drafting the documents to transfer your business, as disputes can arise when family members are caught off-guard by a lease relationship. “Succession planning, particularly where it involves transferring ownership or operation of a business to children or other family members, must start with the question: ‘What is the best interest of each party?’ Sometimes its easier to jump ahead to talking about available structures before having complete understanding and agreement on the goals.” BrewerLong Attorney Trevor Brewer Contact an Orlando, FL Business Law Attorney for Help…
If you’re new to commercial leasing, you’re probably quite amazed by the highly technical, meticulous nature of the contract. Leases for these spaces are very different from residential agreements, especially since landlords may require you to pay an amount in addition to your actual rent. This payment often covers taxes, maintenance, and insurance (TMI). When you find out that you’re obligated to pay, it could have a significant effect on whether the space is affordable. A Florida contract attorney can explain the details, but it’s helpful to review some answers to frequently asked questions about TMI in a commercial lease. What’s included in TMI? In most cases, the bulk of your TMI will go toward your landlord’s property taxes and some insurance costs. Beyond these amounts, you might think of TMI as including many of the same maintenance costs that you’d pay as a homeowner in an HOA. Examples include: Landscaping, waste removal, and cleaning of common areas; Paying for building management costs; Administrative fees; and, Ongoing repairs and maintenance for the roof, HVAC, plumbing, and related costs. “The division of maintenance obligations is one of the most significant items requiring negotiation and attention to specifics.” BrewerLong Attorney Ashley V. Brewer In addition, Florida imposes sales tax on leases of commercial property, so some of these amounts are also built-in to TMI. Why is TMI separate from the base rent? It’s a common practice for landlords to present their monthly rent in terms of a price per square foot, so tenants like you can compare different spaces. Companies separate out TMI in leases because the tenants are the actually using the property and taking advantage of the features that additional rent supports financially – usually in the form of more customer traffic due to the enhanced appearance of the space. How does the landlord calculate TMI? Usually, your landlord will add up the total costs for annual taxes, insurance, and maintenance, and then divide it by the total square feet of the building. From there, the company multiplies the per square price by the number of square feet in your individual space. The total is the amount of TMI that you’ll be responsible for paying, though the formula may vary depending on your circumstances. Does TMI fluctuate over time? Because property taxes make up a good proportion of the total TMI amount, you can expect your additional rent payments to increase or decrease. As key systems age, including the roof, HVAC, and plumbing, the costs may also fluctuate. Can I negotiate TMI? It can be challenging for a prospective tenant to negotiate changes to TMI. Landlords know that their tenants talk, and they don’t want to create conflict by offering one business a lower TMI as compared to others. Discuss Commercial Leases with an Orlando, FL Contract Lawyer If you have additional questions about TMI in a commercial lease, please contact BrewerLong. Our team advises business owners through Central Florida, including Orlando, Sanford, and Winter Park. We can schedule a free consultation to provide more information on commercial leasing issues.
When you’re buying or selling a business, some of your main considerations will be price, the structure of the transactions, complying with transfer regulations established by the Florida Division of Corporations, and related details. One key issue that may not cross your mind is an exclusivity period. This prohibits a seller from dealing with any other potential buyers while the transaction is still pending. To determine whether you’d want one, you should understand what exclusivity means, learn about the key clauses, and consult with a Florida business law attorney about the pros and cons. Overview of Exclusivity Clauses in Business Transactions An exclusivity provision defines a length of time, typically 1-2 months, where a seller cannot deal with any party other than the prospective buyer regarding the sale of the business. Exclusivity covers a wide range of activities involving a transaction, including: Advertising the business as being for sale; Entertaining an offer made by another party; Entering into negotiations regarding the sale of the business; or, Accepting an offer. The specific terms, including the duration and itemized list of prohibited activities, will be included in the exclusivity section of the letter of intent executed by the buyer and seller. Purpose of an Exclusivity Period These provisions are essential to protect both buyer and seller in a transaction involving sale of a business. In generally, the transaction doesn’t proceed in the same fashion as the purchase of a home or car. There are formalities, due diligence periods, and other tasks that cannot be accomplished overnight. That means exclusivity periods offer advantages to both parties to the transaction. Buyer Benefits: As a potential buyer, you need time to go through the books of the target business and conduct your own assessment of whether the deal is fair. Reviewing the essential information takes time, and you don’t want to feel rushed. Seller Benefits: If you’re on the other side of the transaction, you don’t want to go through the effort and time in selling your business – only to have the buyer proceed lackadaisically or dwell on minute details. After all, even though you have a letter of intent, you don’t have a complete agreement. If the buyer ultimately backs out, you’ll have to start the entire process from scratch, which could affect your business value and bottom line. For this reason, sellers have power to negotiate a reasonable amount of time for the exclusivity period. “A carefully drafted exclusivity provision—as part of a purchase offer, Term Sheet, or Letter of Intent—is key to the negotiation process. It gives the parties time and space to work out the details of a transaction, and even decide whether a transaction can happen, without either party risking terrible consequences.” BrewerLong Attorney Trevor Brewer Key Provisions in an Exclusivity Agreement Though they’re usually part of a larger document as the letter of intent, there are several key clauses that comprise the exclusivity arrangement between a buyer and seller. Some of the more important provisions include: No Shop Provisions: The crux of an exclusivity agreement is the seller’s promise to not solicit, negotiate, or enter into agreements regarding alternative transactions with other prospective buyers. It’s also possible to include the requirement that the seller end any existing sale discussions with third parties. Exclusivity Period: The start and end dates are the key details for this section of the agreement. Usually, the period begins when the buyer has a meaningful indication of interest, often by signing a letter of intent. However, there are other documents that can contain exclusivity clauses, such as a term sheet or offer for sale. The end of the exclusivity is typically marked by both parties’ signatures on an acquisition contract or bill of sale. Obviously, a buyer will want a longer period to address due diligence, but a seller may want to negotiate a shorter duration – such as 1-3 weeks. Termination: Both parties should give themselves an “out” in case the transaction doesn’t measure up to expectations. As the buyer, you may uncover issues that affect the sale price or intentions for the business. The seller could negotiate terms that terminate the exclusivity period if the buyer isn’t making progress toward completing the transaction. Duty of Good Faith: Any purchase agreement should require parties to act in good faith throughout the exclusivity period. A failure to include such terms – or refusal to sign – demonstrates that either the buyer or seller isn’t committed to completing the deal. Consult with an Orlando, FL Business Law Attorney About Exclusivity Issues For more information on how exclusivity periods work in the sale or purchase of a business, please contact BrewerLong. You can set up a free appointment by calling 407.660.2964 or visiting us online. Our team serves business clients in Orlando, Sanford, and throughout Central Florida, and we’re happy to advise you on the key legal issues.
Whatever the reason behind your decision to dissolve your business, it’s important to understand that it’s not as easy as just closing your business doors and moving on. There are multiple requirements under the Florida Business Corporation Act, and noncompliance can lead to serious legal consequences. Though many business owners were fully prepared to start up their company, fewer know exactly how to dissolve a corporation in Florida. The details will vary depending on the nature and where your organization stands within a typical corporate lifecycle, so it’s wise to trust a Florida business law attorney for assistance. A general overview of the steps can also help you learn what to expect. Determine Dissolution Requirements If you never issued shares to stakeholders and haven’t launched operations, your plan for terminating your business is relatively straightforward. You need to complete the necessary forms to dissolve. The paperwork is available online, but you can’t submit your documents through the Division of Corporations website. Instead, you might have to type your information into the relevant fields, and then print everything out and send it through US mail. For corporations that have issued shares and accepted funds or other items of value for an ownership interest, the requirements are different. Notify Stakeholders If people have invested in your company by purchasing shares of stock, they are owners. You couldn’t sell or otherwise cease operations without their consent, so you’ll need to notify them that you intend to dissolve your corporation. Your Articles of Incorporation and Bylaws contain the details on how to call a meeting for purposes of terminating your company, so you’ll need to strictly comply with these rules. During the meeting, members of your board of directors need to officially bring up the issue of dissolution for a vote and recommend it to the shareholders. Then, you must get consent from a majority of the shareholders to dissolve. In some situations involving small businesses, members of the board of directors will also be shareholders. That could make the process easier; however, it’s possible that not all stakeholders agree. Alternatively, there may be many shareholders in a larger company, further complicated the process. “Corporate dissolution should not be seen as the first resort in solving disputes among business owners, managers, and investors. The ideal situation is for parties to engage in a negotiated settlement of their difference, so that the corporation can continue to survive.” BrewerLong Attorney Michael Long Fill Out Dissolution Forms Once you have agreement from all shareholders, you’re ready to fill out the necessary paperwork to wrap up your business. The form is Articles of Dissolution and, though it may seem easy, you need to fully understand the details. You must include: The full, legal corporate name of your company as registered with the Division of Corporations; The date that you originally filed your Articles of Incorporation; The date that you intend for your corporation’s dissolution to officially become effective, which must be within the next 90 days after filing; and, Some details on how your company voted to dissolve, which would typically be a corporate resolution. If you didn’t initiate operations and never issued shares, you must supply the name and relevant dates as mentioned above. In addition, you must include an attestation, i.e., a sworn statement that: You have not issued any shares; Your company didn’t conduct any business; Your corporation has no outstanding debts or legal obligations; and, Members of the board of directors or the original incorporators agreed to dissolution. Complete a Notice of Dissolution Though not mandatory to dissolve your company, you may opt to prepare this notice. The document officially states that your business has ceased, which can be useful in dealing with any debts or legal obligations. If creditors contact you seeking payment, you can use this form to establish the requirements necessary to make their claims and get payment. The document also acts as official notice that creditors cannot bring any new claims for debts you’ve resolved. Submit Materials Along with Fees The final step in how to dissolve a corporation in Florida is sending everything into the Division of Corporations. You should include a cover letter that itemizes everything that you’re including in the packet. It’s also necessary to provide a check, along with all necessary fees – which will vary depending on the method of dissolution. Get Legal Help from an Orlando, FL Business Law Attorney At BrewerLong, our lawyers have decades of combined experience advising business clients throughout Central Florida. We can explain how to dissolve a corporation in Florida, and we’re prepared to help you navigate the process. To schedule a free consultation with a member of our team, please call 407.660.2964 or fill out an online contact form.
Buying an established business can be a great way to hit the ground running. More people are pursuing this path than ever before — according to data from Small Business Trends, the total number of companies bought and sold in the United States hit a record level in 2018. As lucrative as buying a business can be, it is worth noting that, if proper precautions are not taken, purchasing an established company can be a major mistake. This is a complicated transaction. Before you take the plunge, you should consult with an experienced buying a business lawyer in Orlando. Four Reasons You Need an Attorney When Purchasing a Business 1. Conducting Due Diligence Review Are there hidden liability landmines in the business? A comprehensive due diligence review is the only way to know for sure. All of the company’s contracts agreements, warranties, and past business practices must be carefully examined. An experienced Florida business law attorney will help you with his critical step. 2. Negotiation of the Sale Once you have a clear understanding of the strength and weaknesses of the company, you will be in a position to negotiate the best possible deal. Effective negotiation is key. Remember, buying the best business in the world is still a mistake if you get a bad price. You do not have to go through negotiation alone. A top-rated Orlando, FL buying a business lawyer — a professional who has been through the process many times before — will represent your interest during negotiation of the agreement. 3. Structuring the Transaction Buying a business is a complex process. Even if you and the other party are essentially on the same page, you can still run into major problems if you do not know how to properly structure the transaction. Our Florida business lawyers can help you find a structure for the purchase agreement that best protects your interests. 4. Drafting and Executing the Business Purchase Agreement Finally, the purchase agreement must be drafted and carried out. Of course, buying the business is only the first step of the process. When you are making such a significant transaction, you need to make sure that get everything right. With a well-drafted, business purchase agreement, you will be in the best position to build a thriving and successful company. Discuss Your Case With Our Buying a Business Lawyer in Central Florida At BrewerLong, our skilled Florida commercial law attorneys have extensive experience representing clients who are preparing to purchase a business. We are proud to be diligent, sophisticated advocates for our clients. We are here to protect your interests. To arrange a free, completely confidential introductory phone call with our attorneys, please contact our legal team right away. With a law office in Maitland, we represent clients throughout Central Florida, including in Orange County, Osceola County, Brevard County, and Seminole County.
Going into business with one or more other people can be exciting, but it can also be a stressful experience when one or more of your partners does not live up to the terms of the partnership agreement. When one or more of the partners fails to abide by the terms of the partnership agreement, this is known as a breach of the agreement, or a breach of contract. In such situations, the remaining partner(s) want to know about options that may be available with a breach of partnership agreement. We want to provide you with more information about partnerships generally and the importance of partnership agreements, and then to provide you with options that may be available to you if one of your partners breaches the partnership agreement. What is a Partnership? The U.S. Small Business Administration (SBA) explains that partnerships are the most basic business structure available to two or more people who want to go into business together. If two or more people decide on a partnership, they have to decide between one of two options: a limited partnership (LP) or a limited liability partnership (LLP). A limited partnership, or LP, is a business structure in which one general partner has unlimited liability while the other partner(s) have limited liability. The general partner with unlimited liability tends to have greater control over the company, while the remaining partners with limited liability often have less control over the company. A limited liability partnership, or LLP, is a business structure in which all partners or owners of the business have limited liability and share generally in control over the business. Limited liability means that you are not responsible for the actions of any of your other partners, and you are not responsible personally for debts associated with the partnership. In both LPs and LLPs, profits are passed through to personal tax returns. What Should Go Into a Partnership Agreement? Whether you have an LP or an LLP should be outlined clearly in a partnership agreement. In addition to clarifying whether you have an LP or LLP, the partnership agreement is also an important tool for handling breaches by one or more of the partners. An article in Forbes explains that the following elements should go into every partnership agreement. While the agreement need not necessarily be in writing, having a written partnership agreement can be extremely helpful: Each partner’s financial contributions; How the partners will split the profits; What will happen if one partner leaves the business or dies; What will happen if you need to close the business; What will happen in the event of bankruptcy; How partners will share in decision-making; How partners will resolve disputes (e.g., mediation, arbitration, lawsuits); Liquidated damages in the event of a partnership breach; and Dissolution of the business. Handling a Breach of the Partnership Agreement Generally speaking, the best scenario for handling a breach of a partnership agreement is if your partnership agreement specifically outlines your options in such a situation. If your partnership agreement requires mediation or arbitration in the event of a dispute, you should speak with a lawyer about moving forward with mediation or arbitration. However, your partnership agreement also could make clear that you are able to file a lawsuit against the other partner for your losses. In addition, your partnership agreement also might make clear whether you can seek liquidated damages and the amount available. If your partnership agreement does not specify what to do in the event of a dispute or a breach, then you may have one of several options available to you with the help of a business lawyer: Expel the partner from the partnership; File a lawsuit against the partner for the breach; Seek liquidated damages from the partner; and/or Negotiate a settlement. The above options need not be mutually exclusive. For example, you may be able to expel the partner from the business and file a lawsuit against that partner. Depending upon the terms of your partnership agreement, you also may be able to seek liquidated damages for actual or anticipated damages in your lawsuit. Contact a Florida Business Lawyer If you need help handling a partnership dispute, you should speak with a Florida business lawyer about your case. Contact BrewerLong today for more information.
If you are thinking about starting a business, there are many things you need to know about the importance of hiring a lawyer. Many entrepreneurs in Florida have exciting and innovative ideas for creating a new business venture or running a business, but they may not have experience choosing a business structure. Also, they may not have experience handling day-to-day issues that impact a business, incorporating a business and obtaining licenses and other necessary documents, and managing other legal issues associated with a new company. When you are considering a startup, you may be searching for information with terms like “lawyer for business startup.” The following are some reasons from articles in The Muse and Entrepreneur about why you might need a business lawyer for your startup. Choosing Your Business Structure When you are thinking about starting a new business, one of the first things you will need to do is decide on the best structure for your business. While you might be using the term “startup” to describe your business, as an article in Forbes makes clear, a “startup” is not a business structure. Rather, it is a term that is typically used to describe plans for starting a new business that is “working to solve a problem where the solution is not obvious and success is not guaranteed.” Others might describe a startup business in terms of culture as opposed to business structure, in which you engage in “a culture and mentality of innovating on existing ideas to solve critical pain points,” or when people agree to go into business with you with the implicit acknowledgement that they will “forgo stability in exchange for the promise of tremendous growth and the excitement of making immediate impact.” Accordingly, if you are thinking about a startup, you should begin working with a business lawyer to determine what type of business structure is best for you. The following are among the most common options for businesses: Sole proprietorship: This is the simplest type of business structure, and it is the most common for individuals who plan to go into business solo. If you are thinking about a startup and want to own the business yourself—and to hire employees who will not necessarily have a stake in the business—then a sole proprietorship usually is best. With a sole proprietorship, any expenses and income go through your personal tax return. For legal purposes, you and your business are, in effect, the same entity. This means you are responsible personally for any of the company’s liabilities. Partnership: You can choose between a general partnership where all partners have limited liability (an LLP) or a limited partnership (LP) in which a general partner has unlimited liability and all other partners have limited liability. This is a low-cost type of business structure that is relatively simple, and all profits and losses go through your personal tax return. Partnerships typically are best when two—or only a few—people want to go into business together. Corporation: There are a number of different types of corporations, including the common S-corp and the C-corp. Corporations are much more complicated than sole proprietorships or partnerships, and they cost more to create and to run. Corporations always are separate legal entities, which means that individuals are not personally accountable for the corporation’s liabilities (in most situations), and there is the possibility of higher rewards. Corporations also offer flexibility for companies that may grow substantially. Limited liability company (LLC): An LLC has some benefits of a corporation (liability protection) but without double taxation since earnings and losses pass through to the owners through individual income tax returns. LLCs are also relatively flexible and typically are best for businesses that are just starting out. LLCs can be especially popular for startups. Managing Situations That Require Legal Counsel In addition to choosing a business structure, there may be many legal issues that you have not yet even considered. The following kinds of legal issues may need attention when you are starting out with your startup: State and federal laws: There are numerous Florida state and federal laws that govern businesses in a variety of ways, including taxation. It is important to make sure that you engage in appropriate tax planning, and that you pay careful attention to the state and federal laws that may govern your startup. Managing risk: Whenever you create a startup that involves engagement with third parties (people beyond your business partners, such as employees or suppliers) and members of the public (such as customers), it is important to ensure that you know your rights and responsibilities under state and federal law. For example, you will need to be aware of rights and responsibilities under the Fair Labor Standards Act (FLSA), Title VII of the Civil Rights Act of 1964, and various other laws. Creating a business agreement: Whether you are forming a partnership and need to create a partnership agreement or need assistance with bylaws, it is important to work with a lawyer to ensure that you have methods in place for handling business disputes, unexpected situations, and the possibility of dissolution. Incorporation: If you need to incorporate your business, you will need help from a lawyer to ensure that you provide the necessary documentation for your startup. Employment contracts and hiring employees: When you hire employees, it is essential to understand an employer’s rights and responsibilities, as well as to understand the rights that employees have under state and federal law. We can help you to draft employment contracts, to develop an employee handbook, and to help you manage best practices for hiring. Business contracts: Developing enforceable business contracts with suppliers and other entities can be complicated, but a Florida business attorney can assist you. Contact a Business Law Attorney in Florida Are you thinking about options for a startup? It is extremely important to have an experienced Florida business law attorney to assist you from the early stages of your business. Not only can a lawyer help you to choose…
Buying a business can be exciting, especially when you are purchasing a business that already has been operating for years and has a strong client base. At the same time, however, buying a business can have its limitations. When you are thinking about purchasing a business, it is important to think about protecting yourself from potential liabilities that you could incur as a result of the purchase. In particular, you should think carefully about what you are getting if you are buying a business that has debts. We frequently work with clients who ask: If I buy a business do I inherit the debt? The answer to that question depends on a couple of different factors, including the type of purchase you make. We want to provide you with more information about business sales and situations in which the buyer may be taking on the debt associated with the business. Options for Debt in a Business Sale Generally speaking, when a business has debts and is up for sale, one of the following will occur when the business is sold: Buyer will assume the business debt’ Seller will pay the debt prior to the closing of the sale; Seller will negotiate with the lender to reduce the debt prior to selling the business; Debts will be deducted from the proceeds of the sale of the business. Asset Sales and Business Debts Business owners often make the decision to sell the business because they have debts and want to find a way to get rid of the debt. Some of those business owners assume that simply selling the business means that they are selling all of the business assets and debts to the buyer. However, if you are the buyer, it is important to learn more about where that debt will go if you move forward with a purchase of the business. The first type of sale we want to discuss is known as an asset sale. As an article in The Balance explains, an asset sale means that you are selling the various assets of the business. Assets can include both tangible assets (like a commercial building, inventory, and equipment) as well as intangible assets (such as a client or customer list, as well as goodwill developed through a long-term relationship with customers and the community). If you are purchasing either a sole proprietorship or a partnership, an asset sale is the only way to buy the business. Yet other types of business structures also may be able to be sold through an asset sale. Just because it is called an asset sale does not mean that you are purchasing only physical assets. In some situations, a business buyer in an asset sale also can be purchasing business debt or liabilities of the business. In most situations, the buyer and the seller will negotiate about the assets and liabilities being sold or purchased. For example, the buyer of the business might agree to purchase certain assets for a particular amount of money with the understanding that the buyer is also purchasing certain liabilities. The buyer typically will negotiate with the seller, emphasizing that the debt negatively affects the business and its value, and thus will take into account any liabilities or losses in the total purchase price of the business. Stock Sales and Business Debts The other type of business sale is known as a stock sale or a share sale. In most stock sales, the business debts or liability are included in the sale (and the buyer thus assumes those debts). As we mentioned above, neither a sole proprietorship nor a partnership can be sold like this and would need to be restructured as a corporation to be eligible for a stock sale. Successor Liability and Undisclosed Debt The above scenarios assume that the seller properly disclosed all debts to the buyer when negotiating the sale. However, it is important to be aware of situations in which the seller does not disclose certain liabilities or debts. Through a legal doctrine known as successor liability, the business buyer ultimately may be liable for certain debts of the business even if the buyer did not agree to take on those debts in the purchase contract or agreement. In some cases, the buyer may be able to raise the issue of fraud. Contact a Business Lawyer in Florida If you are buying a business with debt, you should work with a Florida business lawyer on the sale to ensure that you get a fair deal on the purchase. Contact BrewerLong for more information about your options when buying a business in Florida.
When you have a business partnership (or an LLC that is treated as a partnership for federal income tax purposes), profits and losses typically need to be divided or allocated to the partners. This is typically done in a way that corresponds with each of the partners’ percentages of business ownership. If you want to divide or distribute profits in a way that does not correspond with the partners’ percentage interests in your business, then you need to look into something known as a special allocation. You need to be very careful with partnership special allocations of profits and losses for purposes of taxation and the Internal Revenue Service (IRS). Since special allocations can be used in some cases to avoid taxation, the IRS pays special attention to these situations. If the IRS does not believe that the special allocation is legitimate, it can tax all of the partners according to their percentage interests in the business even if there is another agreement—such as your partnership agreement—that says otherwise. To understand how special allocations work, it is essential to learn more about why they occur and how the IRS determines their legitimacy. Why Businesses Arrange for a Special Allocation When you form a partnership, you will also create a partnership agreement (an operating agreement for an LLC). In a partnership, profits and losses typically get distributed to owners of the business based on their percentage interests in the partnership. For example, imagine a business that has a partnership structure with four partners: Partner A, Partner B, Partner C, and Partner D. Each partner owns 25 percent of the business, or has a 25 percent interest in the partnership. The U.S. Small Business Administration (SBA) makes clear that profits are passed through to the owners’ personal tax returns. In terms of typical taxation for a partnership, each partner will have profits and losses allocated according to his or her percentage interest in the business and then will pay taxes on those profits and losses. In the above hypothetical example, each of the partners would be allocated profits and losses that correspond to 25 percent of the business’s profits and losses, and then would be taxed on that amount. However, there are some situations in which there may be a need for a special allocation. For example, if Partner A provided all of the startup income for the business, the partnership agreement (or an operating agreement in an LLC) might stipulate that Partner A will be allocated 75 percent of the business profits and losses the first year. This accounts for her initial investment, and the remaining three partners will be allocated equal percentages of the remaining 25 percent of the business profits and losses. IRS Issues with Special Allocations and the “Substantial Economic Effect” Test The above hypothetical scenario is a legitimate reason for a special allocation, but the IRS often looks closely at special allocations because they can be a way for the partners to avoid paying taxes. For example, a special allocation could allocate a larger percentage of profits and losses to a partner who can pay fewer taxes due to his or her tax bracket. Accordingly, the IRS looks at a special allocation to decide whether it has a “substantial economic effect.” If it does, the IRS allows the special allocation. The term “substantial economic effect” is a complicated one to understand. In short the special allocation needs to be in line with the economic circumstances of the partners. Given the complicated nature of special allocations, you should always work with an experienced business lawyer to ensure that the special allocation will pass muster with the IRS. Contact a Business Law Attorney in Florida If you are part of a partnership and you have questions about special allocations, it is extremely important to speak with a Florida business law attorney about how these work. You do not want to allocate profits and losses in such a way that violate rules of taxation. An experienced Florida business lawyer at our firm can speak with you today about your business needs and can begin providing your partnership with information about tax law and special allocations. Contact BrewerLong today for more information about how we can help your business.
Not all contributions to a business are financial. For example, John and Jill might form a business. John contributes $50,000 but Jill does all the work. After two years, the business is now worth $150,000, a three-fold increase in value—all thanks to the sweat of Jill’s brow. Sweat equity is the increase in a business’ value thanks to hard work. If you don’t have the funds to contribute to a business, you can contribute in other ways. But you will want a legal document that protects your right to equity. For help drafting or negotiating a sweat equity agreement, please contact BrewerLong today. Our Florida business attorneys can help you with your agreement today. The Difference Between Sweat Equity and Labor Anyone who works for a business contributes to its value (unless they are terrible at their job). For this reason, a company’s employees might increase the equity of the business. But you don’t need a sweat equity agreement for your employees for one simple reason—they aren’t owners and you don’t intend to make them owners. That’s where the “equity” portion of sweat equity comes in. The term refers to an ownership stake in the business, and a sweat equity agreement is only necessary if you want to grant an ownership stake to someone who doesn’t have capital to buy their way in. When You Need a Sweat Equity Agreement If you are forming a partnership, then you probably need a sweat equity agreement. A partnership is an agreement between at least two people to run a venture jointly. Partnerships bind each partner to each other and make them personally liable for business debts. When you form a partnership, each partner brings something to the arrangement, usually start-up capital as well as their labor. You need a written sweat equity agreement in this situation. You might also need a sweat equity agreement if you are forming a different business structure with someone who wants to earn equity by working. This person might not have any capital to contribute or they have some but want to own more equity than they can buy. If you are unsure about whether you need a sweat equity agreement, meet with an attorney to discuss your case. You need to get these documents nailed down before starting your business, so schedule a consultation. What Goes into a Sweat Equity Agreement? You need an equity agreement that is clear and is written with future contingencies in mind. Generally, an equity agreement should contain the following: The total amount of equity that may be earned. For example, you might want to limit it to 50% if you have a two-person partnership. Larger companies often set the limit much lower. You might also want to set a minimum amount. The rate at which equity accrues. One option is to use the person’s salary or rate of pay to calculate equity. If the person is paid $30,000 a year, then they could have this much equity at the end of the year in lieu of a salary. Conversion rates. Will the sweat convert to equity every month? Every two months? Six months? This can matter if the person is gaining voting rights. Vesting period. You might not want the person to immediately start gaining equity, especially if they are new to the business. You could set a six-month vesting period during which their labor will be compensated in cash and then, after vesting begins, they begin to earn equity. Type of equity. Some companies have different tiers of stock. You should identify the type and the quantity the person is earning. Performance criteria. Be very clear about the responsibilities for each partner, which is vital if a partner tackles several roles at once. You also need a section on separation criteria. Unfortunately, business owners jump around, and you can’t expect someone to stay with the business forever. Sometimes, businesses need to eliminate roles against your wishes. You need to spell out in advance what happens to equity in the event of separation. These are only some of the items that should be in a sweat equity agreement. There are many other helpful terms, depending on your situation. Work closely with a Florida business lawyer to draft a sweat equity agreement that works for you. Should You Offer Equity? You don’t have to offer an ownership stake. Instead, you could make someone an employee and pay a salary or wage. Before deciding to grant someone equity, consider the following: How committed is the person to the business? Have they participated enthusiastically in early discussions of the business? If you suspect a person won’t stick around, you might want to forgo giving them equity. Can the person truly increase the value of the business? If not, then they are probably replaceable and should probably be an ordinary employee. Do see eye to eye? A business will flounder if owners disagree on fundamental issues, like the immediate direction of the company and the preferred rate of expansion. Your answers to these questions will also drive the content of your sweat equity agreement. For example, if you are unsure about someone’s passion or commitment, you might have a lengthy vesting period to protect yourself. Experienced Business Lawyers If you are forming a business, or if you are taking on a new owner, you should carefully cross all your T’s and dot all your I’s. The proper legal documents can help minimize disputes later, which can save your business time and money. Contact BrewerLong today. Our Florida business lawyers have drafted or negotiated many sweat equity agreements. We will identify what you hope to accomplish with this agreement and then tailor it to fit your needs. You can contact us or, call 407-660-2964 for a free introductory phone call.