Initial Business Entity Formation Concerns

1Creating a business can be a harrowing almost religious-like experience for the intrepid entrepreneur. Most entrepreneurs often realize that they need a business plan and sufficient capital to begin their venture, but routinely overlook the proper formation and maintenance of their business entity. Oftentimes, business lawyers are contacted for help after the owner has run into trouble with the Texas Secretary of State, Internal Revenue Service, or local county filing rules. It is always in the best interest of a budding or seasoned entrepreneur to involve a business lawyer in the formation of the company initially to severely reduce the likelihood of expensive tax, business, and legal troubles in the future.

There are some key questions that a business owner must think about when starting a business:

  1. Who is involved?
  2. Who will be the owners?
  3. Who will govern and manage the entity?
  4. What type of business will the entity conduct?
  5. Where will the entity conduct business?
  6. When will the entity operate?
  7. Why is the entity being formed?
  8. How will the entity operate?

If the prospective owner can answer these questions concisely it makes it much easier for the company to become profitable, maintain a high level profit throughout its’ operations, and allows the lawyer to effectively advise the client about present and future business concerns.

As always, this is not legal advice. You should seek the help of a licensed attorney before acting on any legal matter.

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Why a business must always have a non-disclosure agreement.

houston-skyline-above-buffalo-bayou-kayta-kobayashiYou have a great business idea. It is so great that you are sure that it will make you rich overnight, Forbes will want to place you on the cover of next month’s edition, and you will be known as the next culinary genius or tech billionaire. Well, maybe your idea isn’t that grand, but you still realize that you have an opportunity to make a decent living based on your newly discovered product.

The problem is that now that you have pored over the idea alone in your home office, you must find the a company to source your product, distribute it, market it, and maybe work as an employee for you once the item is sold at retail. This means that along the way of taking your model good from the boardroom to the production lines that you must grant others access to proprietary information that may be copied or sold to other companies by third parties.

Non-disclosure agreements seek to prevent disclosure and usage of proprietary information while providing a form of redress in the way of an injunction if the terms of the agreement are violated. This is very often the first contractual form that a business/individual should have a lawyer create when dealing with third parties. It can save a business owner considerable grief in the future and assist in the successful promotion of the company’s product.

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What does my shareholder certificate actually mean?

6233417-business-law-concept-background-as-a-abstractShareholder rights are derived from the issuance of share certificates.  A share certificate creates a contract between the issusing corporation and holder of the certificate.  This contract gives the shareholder a vested property right in the value of the corporation.  Sando Petroleum Corp. v. Williams, 321 S.W.2d 614 (Tex. Civ. App. — Eastland 1959).

A shareholder or stockholder is typically defined as a person who holds at least one share of stock in a public or private corporation. Shareholders have no power to control day-to-day operations of a business entity. Shareholder meetings must be held on an annual basis or set forth in the bylaws of the business. The eligibility to vote in these annual meetings is determined by a record date that is no more than 60 days and no less than 10 days before the shareholder meeting itself.

As usual, this blog is not legal advice. They are merely my recorded thoughts as a business lawyer and created for my intellectual pleasure.

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Question of the Day: Business Partnership

Question:

“I have a small business.  I have an employee that has been with my company for 23 years.  Well, around 11 years ago I decided to share the profits to show thanks to him for sticking with me during the not so great times . Never actually declaring him as a “partner” he is paid on a profit basis.  He is going through a divorce and his wife wants money.  Does she have any basis for going after my business?  He does use his capitol as well as I do to keep this business running (as far as purchasing supplies).  He is paid very well & is very upset with her !! Thanks in advance !”

Answer:

To succeed in arguing that the arrangement between you and the employee is a partnership, his wife must prove that the intent of the parties was to form a partnership. The court may consider evidence such as a sharing of profits or gross returns, the sharing of liabilities and any agreements to make contributions of money or property to the business, management responsibilities, the amount and type of services rendered by the parties, and the title to any real or personal property used by either of you for the business. You should consult legal counsel before pursuing any other actions.

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Boilerplate Provisions: Copy, Paste, and Go?

In recent years a plethora of self-help options have flourished in the legal industry as people scramble to start their own businesses or just save a few dollars. I would attribute a bit of this newly rediscovered do-it-yourself chutzpah to the sinking economy, but this trait has always persisted below the surface of Americana life and is commonly found in places away from the congested and populous urban cores of our nation where everything is instant and ready-made. It should come as no surprise then as Americans’ spending power weakens, our frugal mentality kicks into high gear.

Man Signing ContractOf course, the problem with this is that this is not how a 21st century driven economy is supposed to thrive…or an effective legal market for that matter.

Generally speaking, you go to a professional for his/her services because you seek the expert opinion of someone educated in the problem you are experiencing. However, what we are experiencing as a legal industry is a number of generally-packaged legal contracts that attempt to color the canvas by throwing a bucket of paint at it and business “consultants” attempting to render legal advice while advising startups and other ventures in marketing, operations, etc… There are a number of problems with this simple remedy to complex issue approach. First, packaged legal contracts often fail to address the nuances of the given particular situation. Just as no person is exactly like another the same can be said for instances when people need legal advice. The sad thing about these types of situations is that people are often paying a substantial amount for package of forms that they believe will alleviate the problem when often it will require an even larger amount of time and money for an actual lawyer to remedy the problem once it arises. Secondly, the rise of the so-called “consultant” in the marketplace diminishes the quality of legal service to you as a consumer because this person is often not aware of the legal changes taking place at the local, state, and national level because they are attempting to sell you an all-encompassing package  or bundle of business and “legal” tools. This is not even considering the fact that they lack any sort of formal education as it relates to law. Additionally, in the event that the consultant passes along a contract to you for usage in your business, it is quite possible that the boilerplate provisions (commonly used phrases or contexts in a contract) may be outdated, lifted from an situation that is inapplicable to your current problem, or mean something completely different than what you are expecting.

So…is the idea of a “Copy, Paste, and Go” contractual formation ever a good idea in a business setting where thousands or millions of dollars are potentially riding on the line?

Not unless you like giving away money because ultimately as my dad always said, “you get what you pay for.”

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Question of the Day: Employee or Independent Contractor?

Question:

Who is responsible for the actions of an individual when a company hires him/her?

Answer:

An employer may be liable for the torts of its employees. However, they will only be actions that fall within the scope of employment. Greater Houston Transp. Co. v. Phillips, 801 S.W.2d 523, 525 (Tex. 1990). Now there is a possibility of successfully winning a suit under the theory of negligent hiring. This claim requires proof that the employer hired an incompetent or unfit employee whom it knew, or by exercise of reasonable care should have known, was incompetent, thereby creating an unreasonable risk of harm to others.

The distinction between employee and independent contractor affects the legal rights and obligations of the employer. This question relies on whether the employer had the right to control the progress, details, and methods of operation of the work.

There is generally a presumption that the person is an employee and not an independent contractor.Hoeschst Celanese Corp. v. Compton, 899 S.W.2d 215, 219 (Tex. App. — Houston [14th Dist.] 1994, writ denied). In this situation, the minimal amount of money lost would negate the possibility of seeing a lawyer who would handle such a case. Perhaps filing a police report and taking the claim to small claims court yourself would be the best solution.

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Why is it so important to name my Texas business before operations begin?

Under Texas Law, a party seeking to render professional services or conduct business under an assumed business name must first register the name. Many current and potential business owners alike mistakenly believe that because they operate a sole proprietorship that they are immune from the consequences of not adhering to the Texas Business Organizations Code.

What if you run into financing issues or contractor concerns regarding a new project? A business cannot legally file a law suit in the state of Texas until an assumed name certificate is acquired. Therefore, even if a huge multinational company decides to pursue legal action against local Joe the Plumber for shoddy work on a new restaurant or commercial building structure it will have no ability to seek redress in Texas courts . A foreign entity may not maintain an action unless it is registered (Applicable to entities created after January 1, 2006 or those who chose to be regulated by the new code). Civil penalties may also result from a party’s failure to obtain a certificate if the failure was intentional.  Liability concerns in civil lawsuits expand in business litigation for defendants because a plaintiff may seek to be reimbursed by the instant court for the costs of finding and serving a business party that operates under a non-registered business name.

As always, should you need personal legal assistance please seek the counsel of a licensed attorney. This blog does not serve as legal advice for your particular legal matter. Never spend money or execute documents based on preliminary name clearances.

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The Prior Disclosure Rule: Duty Valuations and the Customs Modernization Act

currency-dlWhat is a Prior Disclosure?

The Prior Disclosure law provides an avenue for reduced penalties to parties who advise U.S. CBP (Customs & Border Patrol) of noncompliance with import laws before CBP or ICE (Immigration and Customs Enforcement) discovers noncompliance and notifies the party of the discovery. The official policy of CBP is to encourage the submission of valid prior disclosures. Prior disclosures must be submitted pursuant to 19 U.S.C. 1592 and governed according to 19 CFR 162.74. “Under Section 484 of the Tariff Act (19 USC 1484), the importer is responsible for using reasonable care to enter, classify, and determine the value of imported merchandise and to provide any other information necessary to enable U.S. Customs and Border Protection to properly assess duties, collect accurate statistics, and determine whether other applicable legal requirements, if any, have been met.”

“A prior disclosure is made if the person concerned discloses the circumstances of a violation of 15 USC 1592 either orally or in writing to a Customs officer, before, or without knowledge of, commencement of a formal investigation of the violation, and make a tender of any actual loss of duties, taxes, and fees or actual loss of revenue.” 19 CFR 162.74

Who may submit a prior disclosure to U.S. Customs and Border Protection?

Any party involved in the business of importing into the United States. This includes, but is not limited to importers, accounts, customs brokers, exporters, shippers, foreign suppliers, and manufacturers.

A valid prior disclosure reveals the circumstances of a violation of 19 U.S.C. 1592. This section of law permits U.S. Customs and Border Protection to assess monetary penalties against parties who make material false statements, acts or omissions in connection with their importations.

How  do you make a valid prior disclosure?

The presumption is that the disclosing party has the burden of demonstrating lack of knowledge of a commenced formal investigation.  A proper prior disclosure of the circumstances of a violation according to 19 CFR 162.74(b) would orally (if oral then supplemented within ten business days by writing) or in writing that:

  1. Identifies the class or kind of merchandise involved in the violation;
  2. Identifies the importation or drawback claim included in the disclosure by entry number, drawback claim number, or by indicating each concerned Customs port of entry and the approximate dates of entry or dates of drawback claims;
  3. Specifies the material false statements, omissions or acts including an explanation as to how and when they occurred; and
  4. Sets forth, to the best of the disclosing party’s knowledge, the true and accurate information or data that should have been provided in the entry or drawback claim documents, and states that the disclosing party will provide any information or data unknown at the time of disclosure w/in 30 days of the initial disclosure date.

Material false statements, acts or omissions, must result from the parties’ negligence, gross negligence or fraudulent conduct. Parties are not required to make a prior disclosure. They elect to submit the disclosure.

What are common duty violations?

Typical examples of such violations include:

Undervaluation

Misdescription of merchandise

Overvaluation

Antidumping/Countervailing duty order evasion

Improper Country of Origin Description or Markings

Improper Claims for Preference under a Free Trade Agreement

Other Duty Preference Program

What is the difference between unliquidated and liquidated custom entries?

Unliquidated custom entries have no fraud involved which means that generally no penalty will be paid.

Liquidated entries have no fraud involved which generally means that the duty penalty is the only interest on the loss of duties.

How does the disclosure of a fraudulent duty violation affect my penalty fee?

–          Penalty is reduced from the normal assessment of the domestic value of the goods to 1 times the duty loss or

–          If violation involves no duty loss,

  • Penalty is reduced to 10 per cent of the dutiable value of the merchandise.
  • All cases involving liquidated entries and duty loss violations, you must tender this duty loss to CBP.

Why should I elect to a make a Prior Disclosure?

–          Benefit of reduced penalties

–          Conducting periodic self-assessment of your importing activities

–          Availing yourself of this provision of law may permit you to detect and correct errors

–          Ensure future compliance with Customs laws and regulations

–          Reduced legal expenses and/or the elimination of lengthy CBP penalty proceedings

As always, this is not legal advice. You should seek the help of a licensed attorney before acting on any legal matter.

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