QUESTIONS ABOUT YOUR CORPORATION AND OUR SERVICES

This was prepared to answer the many questions asked by clients during corporate planning conferences over the years. We appreciate your taking the time to read it. If it raises new questions, please make a note of them and we will answer them at your conference.

LIMITED LIABILITY COMPANY:

Q. Do the comments about Corporations also apply to LLC’s?

A. Generally, yes. Although there are some technical differences between the two, in theory an LLC is just another form of a corporate entity. The principles mentioned in this newsletter applies to both, although in practice the format may be a bit different.

Throughout this newsletter the term “Corporation” shall be inclusive of an LLC Company, and “Shareholder” shall be inclusive of LLC Members. In addition, “stock” equates to Membership Units.

DOCUMENT EXECUTION:

Q. How are Corporate Documents Executed to Avoid Personal Liability?

A. The corporate officer or other representative authorized to sign documents on behalf of the corporation (the “Authorized Representative”) should be aware that he may be subject to personal liability if he signs corporate documents in a manner that does not unequivocally show that he is signing in a representative and not an individual capacity.

Whenever signing documents on behalf of a corporation, case law indicates that an Authorized Representative should always name the corporation, indicate his representative capacity and make certain the other parties executing the document understand that the Authorized Representative is signing as a representative of the corporation and not as an individual. Assuming John Doe is president of ABC Corporation, a correct form of signature would be:

ABC CORPORATION

By: _________________________

John Doe, as President

For an LLC it might look like:

ABC Company, LLC.

By:_________________________

John Doe, as Managing Member

Any ambiguity whatsoever concerning an individual’s signature on behalf of a corporation can lead to potential personal liability .

SHAREHOLDER AGREEMENTS:

Q. Why Have a Buy-Sell Agreement?

A. The complexity of the relationships between multiple shareholders of closely-held corporations, or members of an LLC, often requires that such shareholders or Members enter into agreements defining their relationships. These agreements, alternatively referred to as Stock Purchase Agreements, Buy-Sell Agreements, Shareholder (Member) Agreements and other terms, are often among the most important agreements into which the shareholders will enter.

Q. What is The Purpose of Buy-Sell Agreements?

A. The purpose is far reaching in scope since there are numerous varied terms and conditions which may be conceived by and important to shareholders. The following is a summary of many of the more significant purposes:

Restrict Transfer to Outsiders. Typically, shareholders of closely-held corporations work together because they share common goals and respect for their fellow shareholders. Therefore, it is prudent to place certain restrictions on the ability of a shareholder to transfer his shares upon death to his spouse or heirs, or to make a lifetime transfer of stock to a third party.

Buy out at Termination of Employment. It is common for the Shareholder Buy-Sell Agreement to contain provisions requiring a shareholder who has left the employment of the corporation to give the corporation and/or the remaining shareholders an option to purchase such shareholder’s stock upon termination of employment.

Providing Liquidity for Stock. The stock of a closely-held private corporation, is not very liquid. In order to grant liquidity to a closely-held corporate shareholder, the Shareholder Buy-Sell Agreement may provide for the payment for a shareholder’s stock in a variety of manners.

Establishing Value for Stock. For estate tax purposes, as well as for other reasons, it is often desirable for shareholders to establish the fair market value of their stock. The purchase price is established in the Shareholder Buy-Sell Agreement.

CORPORATE MINUTES:

Q. Why Keep Corporate Minutes?

A. Accurate minutes of shareholders’ and directors’ meetings can be beneficial to the corporation. Conversely, the failure to maintain accurate minutes can be extremely costly. Corporations are required by law to keep minutes of meetings of all shareholders and directors.

Q. What Are The Benefits of Keeping Corporate Minutes?

A. Accurate and complete minutes will help preserve the corporate entity and may provide valuable evidence in contested tax matters. Therefore, corporations should prepare minutes of meetings evidencing the material decisions made by the corporation’s directors and shareholders.

The most compelling reason for corporations to maintain accurate and complete minutes is the requirement found in the Florida General Corporation Act. The Act mandates annual meetings of shareholders, and further requires that all proceedings of shareholders and directors be documented in minutes of those proceedings.

Accurate corporate minutes also help to preserve the corporation’s distinct legal status when questions of liability arise.

The maintenance of corporate minutes can also help to avoid corporate tax liability. The accumulated earnings tax, for example, is a federal tax imposed on earnings and profits which are deemed by the IRS to have been accumulated for purposes of tax avoidance. If the corporation is forced to defend itself against the imposition of the accumulated earnings tax, the minutes will serve as evidence of the fact that the earnings and profits were retained for bona fide business reasons. Corporate minutes, prepared at the time the business purposes were established, may provide the only reliable evidence of the bona fide business purposes for the retention of earnings if officers or directors who were involved in the decision have left the corporation or are otherwise unavailable to testify.

FICTITIOUS NAME:

Q. What is a Fictitious Name?

A. A Fictitious Name is any name under which a person transacts business in the State of Florida, other than such person’s legal name, which legal name would include your full corporate name of record. Exemptions from the registration requirement include attorneys practicing law and certain professionals licensed with the Department of Professional Regulations.

Q. Where Are Fictitious Names Registered?

A. All Fictitious names must be registered with the Florida Division of Corporations of the Department of State. The registration is valid for a period of five years and must be renewed during the last six months of the expiration year.

Q. What is Needed to Register a Fictitious Name?

A. In order to register a fictitious name, the owner must file a sworn statement with the Division of Corporations listing:

1) The name to be registered.

2) The mailing address of the business.

3) The name and address of each owner, and, if a corporation, its federal employer’s identification number and Florida incorporation or registration number.

4) Certification by the applicant that the intention to register such fictitious name has been advertised at least once in a newspaper in the county where the principal place of business of the applicant will be located. This is a reduction from the prior law which required advertisement once a week for four consecutive weeks.

5) Any other information the division may deem necessary to adequately inform other governmental agencies and the public as to the persons so conducting business.

CORPORATE TRADE NAMES:

Q. What is a Trade Name?

A. A Trade Name is the name of a corporation, business or organization and symbolizes the reputation of that entity rather than identifying foods of services. The approval of a corporate name by the Florida Secretary of State does not establish the right to use that name under federal trademark law.

Q. How Would a Trade Name be Protected?

A. The protection of such names are generally subject to the same limitations and conditions as are “trademarks”. The mere use of a name can establish certain common law rights to that name; however, in order to obtain full protection under federal and state trademark law, the name must be registered with the Federal Patent and Trademark Office and/or the Florida Department of State.

Q. What are the Benefits of Registering?

A. To obtain exclusionary rights and:

1) An organization can ensure quality, distinguish its services, and maintain goodwill.

2) Registration may deter another organization from adopting a similar name, thus avoiding any future litigation.

3) Prima facie evidence of continued use since the filing date will exist.

4) After five years of continuous use, the name becomes incontestible, which precludes an attack against the registration on the basis of prior use or descriptiveness.

5) Unlike the rights established under common law, whose geographical scope is limited to the area in which the name is used, registration provides an organization nationwide rights to that name.

6) The right to bring suit in federal court regardless of diversity becomes available, as do various statutory remedies such as treble damages and criminal penalties.

As many advantages exist under trademark registration, an organization may want to consider contacting counsel for assistance in doing so. At the very least, prior to commencing use of a name an organization should determine, through a trademark search, whether any other entity engaged in a similar business uses the same or similar trade name. These measures can help uphold a business reputation and/or prevent costly litigation.

NON-COMPETE AGREEMENTS:

Q. What is a Non-Compete Agreement?

A. A contract by which a person is restrained from exercising a lawful profession, trade or business of any kind, is a “contract in restraint of trade” and is void and unenforceable under Florida Statues, Section 542.33 (the “Non-Compete Statute”). The Statute also identifies specific exceptions to this rule which applicable, will permit the enforcement of non-competition agreements.

Q. Under What Circumstances are Non-Compete Agreements allowed?

A. 1) One who sells the good will of a business, or any shareholder of a corporation selling or otherwise disposing of all of his/her shares in such corporation, may agree with the purchaser to a non-compete agreement, so long as the purchaser continues to carry on the business.

2) One who is employed as an agent, independent contractor, or employee may agree with his/her employer to a non-competition agreement, so long as the employer continues to carry on a similar business.

3) A licensee may agree with a licensor to a non-competition agreement.

4) Partners, in anticipation of dissolution of a partnership, may agree to a non-competition agreement.

In the situations specifically permitted in the Non-Compete Statute, non-competition agreements will be enforced by a court so long as they are reasonable in terms of geographic area, time and scope of prohibited activity. Each case will be analyzed by the court, on an individual basis, to determine the reasonableness of the restrictions by balancing the interests of the purchaser/former employer/licensor, in preventing competition, against the oppressive effect of such enforcement against the party who seeks to compete. Non-competition agreements should be drafted and reviewed by counsel familiar with the statutory and judicial framework.

S CORPORATIONS:

Q. What is a S Corporation?

A. The S corporation is a unique business entity created by Congress to, in part, enable taxpayers to select the form in which to conduct business without regard to the tax consequences that would otherwise result from such a choice. The S corporation generally eliminates the double tax effect created by the taxation of corporate income and the subsequent taxation of any dividend income of the shareholders.

Q. What are the Stock Requirements for S Corporations?

A. The IRS has focused on a single class stock requirement that is set forth in the Internal Revenue Code. As an S corporation, there can be only one class of stock which must share equally in dividend and distribution rights provided, however, that there can exist differences in voting rights without causing a violation of the single class stock requirement on October 4, 1990. The first set of proposed regulations were extremely restrictive and severely criticized by virtually all tax professionals.

Q. What Are The Regulations?

A. The final regulations state that a corporation is considered to have one class of stock if all the outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds. Thus, an S corporation may not issue a class of stock having a preference as to dividends or liquidation proceeds.

The final regulations also provide specific guidelines with respect to buy-sell and redemption agreements. They are to be disregarded in determining whether the single class of stock restriction has been violated unless the principle purpose of such an agreement is to circumvent the single class of stock requirement and the agreement establishes a purchase price that, at the time the agreement is entered into, is significantly greater then or less than the fair market value of the stock.

Any S corporation that is entering into employment agreements, buy-sell agreements, debt with shareholders, or other similar agreements should carefully review these agreements ti insure that they do not violate the single class of stock requirements.

INDEPENDENT CONTRACTOR vs. EMPLOYEE:

Q. What Factors are Looked at By The IRS to Determine an Independent Contractor from an employee?

A. The IRS uses 20 factors to determine whether a person should be classified as an employee or an independent contractor. These factors include, among others, whether the employer instructs the worker on how to complete the task, whether the employer provides training, whether the worker renders services personally, whether the worker can hire and fire assistants, whether there are set hours of work and whether the worker has a significant investment in tools or machinery. The IRS looks at these factors to determine who has the right to control the specific manner or method by which the work is performed. As a general rule, a worker who has a substantial investment in tools and equipment and who performs significant services for more than one person should be classified as an independent contractor.

Q. If an Independent Contractor, What Procedures Should be used?

A. If an employer does hire independent contractors, in order to show the IRS that the employer is not exerting too much control, the following practices and procedures should be used:

1) A business should limit the amount of instructions it provides independent contractors;

2) The business should not provide on going and organized training programs;

3) The business should not require the worker to be integrated into the employer’s business;

4) Independent contractors should have a right to hire and fire assistants;

5) Avoid providing equipment to workers;

6) Retain documentation to support status of independent contractors, such as business cards or invoices of workers; and

7) Execute an independent contractor agreement that clearly sets forth the

independent contractor relationship and obligates the independent contractor to pay all FICA, FUTA, and income taxes.

EMPLOYMENT DISCRIMINATION:

Q. What is The Americans with Disabilities Act (ADA)?

A. A federal law covering business with 15 or more employees, which prohibits discrimination against a qualified individual with a physical or mental disability. This prohibition on discrimination applies to all phases of employment processes including job application procedures, hiring, promotion, discharge, compensation, job training and other terms and conditions of employment. Discrimination on the basis of a handicap is currently prohibited under Florida Law. The ADA is intended as a supplement to state statutes, not a replacement.

Q. Does this mean the disabled receive preferences?

A. No. In order for the ADA to offer protection to an individual with a disability, the individual must be “qualified” or able to perform the essential functions of the position with or without reasonable accommodation. The act does not require an employer to give preference to a qualified individual with a disability. Additionally, employers will be required to provide reasonable accommodation to qualified individuals unless the employer can shown the accommodation would cause undue hardship. Factors to be considered in determining whether an accommodation would cause undue hardship include the nature and cost of the accommodation, the financial resources of the facility and entity, the number of employees and the type and the type of operation. The employer is the party responsible for demonstrating that an accommodation would cause an undue hardship.

OUR SERVICES

Q. What services does your firm offer?

A. In addition to the services relating to forming your Corporation or Limited Liability Company, we can also assist in considering and drafting Shareholder (Member) Agreements, Buy-Sells, Leases, Employment Agreement, Non-Compete Covenants, and similar Corporate documents.

We also can serve as your Registered Agent and office, for which we charge an annual fee of $75.00. In return, we are the place upon when official notices may be served so you do not have to deal with that or have an office location open each day as required by law.

In addition, as your Registered Agent, we will check the records of the Florida Secretary of State each year to insure that you have filed your annual report with them and if not, send you a reminder to do so in order to avoid an Administrative Dissolution.

This newsletter is designed to provide informative material of interest to our readers. Readers should not take or omit any action based solely on the basis of this newsletter as isolated circumstances may require action different from that described­ in this general orientation document. Appropriate legal advice or other expert assistance should be sought from a competent professional.