What are some contract buzzwords I should be aware of?

These days, we sign large and complex contracts routinely. For example, have you signed an iTunes user agreement? A cell phone plan contract? A “terms and conditions” contract for software or use of a website? You may not understand everything that is written in the contract, but there are a few red flags that should grab your attention.

Watch out for clauses that provide that the contract will automatically renew without any input from, or notice to, you. You’re probably familiar with contracts of this type, as they have become ever more popular. Many streaming video websites, for example, have automatic renewal clauses in them. Many gym memberships have automatic renewal clauses as well. Be on the lookout for these, because you may not realize your contract includes this type of clause until you see it many months or even a year later, on your bank statement.

Another important phrase to be on the lookout for is early termination fees. This is especially true when it comes to purchasing a cell phone service contract, but this phrase can be found in other types of contracts as well. You’ll want to note exactly what the penalty is for leaving the agreement at an earlier date than you’ve agreed to.

In certain types of contracts, such as those for gym memberships you’ll want to be on the lookout for liability waivers. Is your gym telling you that they will not agree to be responsible even if they negligently injure you? Have you found this term in an agreement for your child’s summer camp? You’ll want to consider the implications of such waivers before agreeing to the terms.

Lastly, keep in mind that contracts now commonly use arbitration clauses. These are clauses that specify that your grievance with the company cannot be heard in a court of law, but rather via a process called arbitration. Arbitration is essentially a privatization of the court system. It is often significantly faster and cheaper, but at the same time questions of neutrality can be raised. Is the arbitrator being paid by your adversary? Keep this in mind if you see an arbitration clause.

Before signing contracts of importance, it is wise to consult with an experienced attorney who will guide you and protect your personal and/or business interests.

What can happen to a business when it is in violation of state and/or federal environmental standards?

When starting a business, the regulatory impositions often seem overwhelming. From taxes to licensing to zoning, the number of state and federal requirements placed on the backs of a business owner can quickly lead to confusion and anxiety – particularly when facing an audit or inspection. However, among the various regulatory mandates imposed on business owners, environmental guidelines and laws can reap some of the highest penalties for the unsuspecting industrialist – and an ounce of prevention is always worth a pound of cure.

Take, for instance, a highly publicized (and embarrassing) story published about one of South Carolina’s most notorious polluters: Utilities, Inc., a national corporation maintaining several subsidiaries in South Carolina and surrounding states. According to an exposé of the company published in 2013, it has fielded over 55 environmental sanctions by South Carolina authorities alone – not to mention an untold number of violations against EPA standards.

Most notably, companies owned by Utilities, Inc. are named in dozens of sanctions involving improper sewage treatment, violations of the health code, and unlawful dumping of deadly chemicals into surrounding bodies of water. In 2013, the company was blamed for the elevated arsenic levels in local drinking water, levels that caused many area residents to experience bouts of severe illness.

The company has since paid $645,000 to South Carolina’s Department of Health and Environmental Control. However, dabbling in this sort of environmental laziness can lead to much higher penalties in the event individuals begin filing personal injury lawsuits stemming from their exposure to harmful toxins. What’s more, failing to properly address environmental concerns can lead to a costly public relations disaster, causing an offending company to go out of business altogether.

What do these words mean? How do they affect the meaning of the contracts?

All of us sign contracts on a routine basis, whether we work under contract or sign contracts for personal reasons, such as during a purchase. You may, for example, have signed a contract when you signed up for cell phone service. If you took the time to read the entire contractual agreement to determine exactly what you were agreeing to, you may have found yourself stumped by certain of the terms. In this post, we’ll define some of the terms that appear frequently in contracts. Remember, however, that the best way to interpret a contract is with the expert advice of a seasoned business law attorney.

In general, contracts are formed after the acceptance of a valid offer. The party extending the offer is called the offeror, and the party receiving the offer is called the offeree. Much of contract litigation focuses on the offer — the offeror’s willingness to enter into a contract with the offeree that provides the offeree with the power to accept the offer and create a contract. In addition, much litigation is devoted to the acceptance — the moment that the contract is created.

Contracts often have conditions. Depending on the language used, the obligations of one or more parties to do something pursuant to the contract may not come into effect until a particular condition has been satisfied. All contracts, however, must have what is called consideration. Consideration is the bargained-for exchange of the parties — “this for that”  which the parties perform pursuant to the contractual exchange.

When a contractual agreement is breached, that is when one or more parties fails to do what they have agreed to do, the non-breaching party can seek a remedy. One type of remedy is damages — the financial adjustment the court can order one party to make to right the wrong. Damages are computed in many different ways, but are always designed to attempt to make the non-breaching party whole again after the breach, by, for example, ordering the breaching party to pay compensation. Another type of remedy is an injunction, which forces one party to take a particular action.

This post is just a limited overview of very common contractual terms. To go further in depth speak with an attorney at Willcox, Buyck & Williams, P.A. Contact us at our Florence office at 843-536-8050, or our Myrtle Beach office at 843-461-3020.

Family Business: Preserving Your Legacy for Generations to Come

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.

How can I protect my business from liability due to hackers and cyber-security issues?

It seems as though every month or so, some large retailer (or the federal government) is caught scrambling to undo the latest remote hack of consumer financial data. From Home Depot to Michael’s, hackers have found intricate ways to obtain and misuse consumers’ credit card numbers, Social Security numbers, and other sensitive data. And, when this happens, where do consumers turn for answers and/or compensation? The store that allegedly allowed the breach.

Of course, stores that accept credit cards have the major credit card companies to fall back on in the event an issue occurs. Moreover, most banks will cover the cost of a data breach or fraud – reimbursing the entire sum to the cardholder with (virtually) no questions asked. Small business owners, however, wonder if there are any steps they can take to help provide added peace of mind to their worried customers, who, of course, are  eager to protect their identities and hard-earned income?

In Washington, Congress is preparing to impose international sanctions on nations considered to be involved in data hacks on American private business and government. In addition, it is preparing to add significant amendments to the Cyber Security Bill, including a clause that limit’s businesses’ liability when sharing information with the FBI or Secret Service about the details of a hack. For those who are engaged in tech, loss prevention, or anti-fraud industries, this detail could help block lawsuits from those concerned with privacy matters over the greater good of consumers overall.

Of course, consumer privacy is another major issue to consider (think: AshleyMadison.com), and many opponents of the Cyber Security Bill (in current form) object to its contents on the grounds that it provides businesses and the government with too much leeway in release personal information about perceived threats. For instance, some lawmakers are seeking to include language requiring companies to “remove, to the extent feasible, any personal information of or identifying a specific individual… that is not necessary to describe or identify a cyber security threat.” Others wish to expand this language further, requiring businesses to remove data it “reasonably believes” (as opposed to “knows”) does not pertain to a significant cyber security threat.

If you would like to discuss your business’s rights and obligations with regard to consumer data and liability, please contact one of our skilled and knowledgeable business attorneys at Willcox, Buyck, & Williams. Serving South Carolina for  over a century, we can be reached at 843.536.8050 or 843.461.3020.

Should I Incorporate My Business?

The primary advantages of operating as a corporation are liability protection and potential tax savings. Like any important decision, choosing whether to incorporate involves weighing the pros and cons of the various business structures and should only be done after careful research.

Once incorporated, the business becomes a separate legal entity, and assets of the corporation are separated from the owner’s personal finances. As a result, the owner’s personal assets generally can be shielded from creditors of the business.

To maintain this legal separation and avoid “piercing the corporate veil,” the corporation must observe certain formalities, including:

• Keeping corporate assets and personal assets separate (no commingling of funds)
• Holding shareholder and director meetings at least annually
• Maintaining a corporate record book including bylaws, minutes of shareholder and director meetings, and shareholder records
• Filing annual information statements with the Secretary of State
• Filing a separate tax return for the corporation

Many business owners are concerned about “double taxation” of income that affects certain types of corporations known as “C-Corporations”.   Double taxation results when the C-corporation has profit at the end of the year that is distributed to the shareholders. That profit is taxed to the corporation, at the corporate tax rate, and then the dividends are taxable income to the shareholders on their personal tax returns. However, the corporate tax and dividend rates can be lower than the individual tax rate that a sole-proprietor would pay on a 1040 Schedule C, and a knowledgeable accountant or tax attorney may be able to advise on how to minimize the burden of double-taxation and indeed pay an effective tax rate which is lower than what a sole proprietor would pay.

For example, a small C-Corporation will likely have a shareholder who is also an employee. Paychecks to the shareholder/employee are, of course, tax deductible to the business. To the shareholder/employee, they are taxable income (as would be the case with a paycheck from any employer). A bonus could be paid to the shareholder/employee in order to lower the corporation’s taxable profit, eliminating the double-taxation. These calculations should be performed by a tax advisor, but shifting income from the corporation to the shareholder/employee (or not, depending on which has the lower tax rate) can be an effective way to lower your overall tax liability. In addition, there are certain advantages that are only available with a C-Corporation, such as full tax-deductibility of medical benefits for a shareholder/employee.

The S-Corporation avoids the double-taxation by offering a tax structure similar to the Limited Liability Company. A corporation with 100 or fewer shareholders can elect to be treated as an S-Corporation. If the corporation is profitable, the shareholder/employee must draw a reasonable salary (and pay employment tax on it), but then all remaining corporate profits flow through to the shareholder’s personal tax return (thereby avoiding the FICA tax on the portion of profits that is taken as a dividend).

An experienced attorney can help you decide which form of ownership is best for your business, help you establish the entity, and ensure the required formalities are observed.

Is the SEC within its authority to regulate CEO salaries of public companies?

In 2010, the Dodd Frank Act was enacted to help address some of the egregious and dishonest acts that gave rise to the 2008 financial crisis. Among many other mandates, the Act included a provision requiring that CEOs of publicly traded companies list their salaries in ratio format as compared with the median salary of their employees. The measure, however, has taken several years to implement, and was finally adopted as a proposal the Securities and Exchange Commission (SEC) in August, 2015.

According to Section 952(b) of Dodd Frank, commissioners of the SEC were directed to amend the Code of Federal Regulations to require the following three pieces of information in each quarterly filing:

• The median of the annual total compensation of all employees, excluding the chief executive officer (or any equivalent position);
• The total annual compensation of the chief executive officer
• The ratio of the median employee salary to that of the chief executive officer.

The mandate, which was set into law in 2010, remained stagnant on the books for another two years, at which point the SEC stated it would be “finalizing the [pay ratio rule] within the next two months…”

Finally, in 2013, the SEC formally initiated a proposal to implement the pay ratio rule. Thereafter, nearly 300,000 public comments were launched from concerned investors in favor of the increased disclosure. Not until August 2015, however, did the proposal make it to a vote – which resulted in a 3-2 passage of the pay ratio rule, a measure which some decry will do nothing but ‘publicly shame’ CEOs and the companies for whom they work. Critics also launched complaints about the expensive bookkeeping requirements the new law will impose on these corporations.

Supporters of the measure, however,  hope the publicity aspect will deter the “reckless” salary configurations that contributed to the 2008 market crash. The measure is also calculated to address the burgeoning income gap between the wealthiest Americans and those enduring the plights of low income and poverty.

If you are concerned about compliance with SEC mandates and would like to discuss your company’s obligations, please contact Willcox, Buyck & Williams, P.A. at 843-536-8050 in Florence or 843.461.3020 in Myrtle Beach.

Negotiating a Commercial Lease? Be Sure to Address These Issues

When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives.  While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions.   As you review your commercial lease, pay special attention to the following issues which can greatly affect your legal rights and obligations.

The Lease Commencement Date
Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the rent commencement date.

Lease Renewals
Your initial lease term will likely be a period of three to five years, or perhaps longer. Locking in long terms benefits the landlord, but can be off-putting for a tenant. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date.  This will afford you the right, but not the obligation to continue with the lease for an additional period of years.   Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation.

Subletting and Assignment
If you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. An assignment transfers all rights and responsibilities to the new tenant, whereas a sublease leaves you, the original tenant, ultimately responsible for the payments due under the original lease agreement. Tenants generally want to negotiate the right to assign the lease to another business, while landlords typically prefer a provision allowing for a sublease agreement.

Subordination and Non-disturbance Rights
What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “nondisturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.

Which Business Structure is Right for You?

Which entity is best for your business depends on many factors, and the decision can have a significant impact on both profitability and asset protection afforded to its owners. Below is an overview of the most common business structures.

Sole Proprietorship
The sole proprietorship is the simplest and least regulated of all business structures. For legal and tax purposes, the sole proprietorship’s owner and the business are one and the same. The liabilities of the business are personal to the owner, and the business terminates when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.

General Partnership
A partnership consists of two or more persons who agree to share profits and losses. It is simple to establish and maintain; no formal, written document is required in order to create a partnership. If no formal agreement is signed, the partnership will be subject to state laws governing partnerships. However, to clarify the rights and responsibilities of each partner, and to be certain of the tax status of the partnership, it is important to have a written partnership agreement.

Each partner’s personal assets are at risk. Any partner may obligate the partnership, and each individual partner is liable for all of the debts of the partnership. General partners also face potential personal legal liability for the negligence of another partner.

Limited Partnership
A limited partnership is similar to a general partnership, but has two types of partners: general partners and limited partners. General partners have broad powers to obligate the partnership (as in a general partnership), and are personally liable for the debts of the partnership. If there is more than one general partner, each of them is liable for the acts of the remaining general partners. Limited partners, however, are “limited” to their contribution of capital to the business, and must not become actively involved in running the company. As with a general partnership, limited partnerships are flow-through tax entities.

Limited Liability Company (LLC)
The LLC is a hybrid type of business structure. An LLC consists of one or more owners (“members”) who actively manage the company’s business affairs. The LLC contains elements of both a traditional partnership and a corporation, offering the liability protection of a corporation, with the tax structure of a sole proprietorship (if it has only one member), or a partnership (if the LLC has two or more members). Its important to note that in certain states, single-member LLCs are not afforded limited liability protection.

Corporation
Corporations are more complex than either a sole proprietorship or partnership and are subject to more state regulations regarding their formation and operation. There are two basic types of corporations:  C-corporations and S-corporations. There are significant differences in the tax treatment of these two types of corporations, however, they are both generally organized and operated in a similar manner.

Technical formalities must be strictly observed in order to reap the benefits of corporate existence. For this reason, there is an additional burden of detailed recordkeeping. Corporate decisions must be documented in writing. Corporate meetings, both at the shareholder and director levels, must be formally documented.

Corporations limit the owners’ personal liability for company debts. Depending on your situation, there may be significant tax advantages to incorporating.

In most states, employers are required to carry workers’ compensation insurance to cover workplace injuries sustained by their employees. Workers’ compensation insurance is a “no fault” system which allows every employee to receive benefits for a job-related injury, regardless of who caused the accident or illness, though intentional, self-inflicted injuries may be excluded from workers’ compensation benefits. The system balances the needs of workers, who are entitled to receive prompt medical treatment for their injuries, with the needs of employers who can conduct their business operations free from the fear of being sued by an injured employee. Workers’ compensation programs can provide claimants with medical benefits and, provided certain requirements are met, temporary compensation payments until the employee is able to return to work. In certain situations, claimants may also receive permanent benefits such as job retraining or supportive medical care.

But what happens if you get hurt and your employer doesn’t have the required workers’ compensation insurance?

Regardless of whether your employer participates in a workers’ compensation insurance program, it is important that you seek medical attention immediately, to ensure you receive proper treatment and to document your injuries. Typically, an injured worker’s only legal option for recovering compensation from the employer is to file a workers’ compensation claim. There are a few exceptions, however, such as when an employer intentionally causes the workplace injury, or when an employer fails to carry the required workers’ compensation insurance.

If you are injured and your employer does not participate in a workers’ compensation insurance program, there may be coverage available to you through a government fund for injured workers whose employers do not have the mandated workers’ compensation insurance. If you find yourself in this situation, check with your state’s Labor Department to find out what programs may be available in your area, and to report your employer’s non-compliance with the workers’ compensation laws.

Injured employees whose employers do not carry valid workers’ compensation coverage also have the option of filing a civil lawsuit against the uninsured employer to recover compensation for their damages. Through the civil court system, uninsured employers may have to pay substantially more in damages to cover the injured employee’s losses including medical bills, future lost earnings, and pain and suffering. In most jurisdictions, workers’ compensation insurance programs limit the injured employee’s recovery by disallowing claims for “pain and suffering” or punitive damages which would be allowed in a civil lawsuit. Civil cases also differ from claims made through no-fault workers’ compensation programs in that certain legal principles may apply, such as “contributory negligence,” which can limit an employee’s recovery based on percentage of fault.

In most jurisdictions, employers who fail to carry workers’ compensation insurance are not only liable to their injured workers, but also face penalties for violating the law.