Professional baseball player and Team Israel participant, Alex Katz, came to Heitner Legal with a business law issue. He had created a very successful sports cleat/turfs/shoe customization company and was having a dispute with his business partner.
A common question we get over here is whether it is important to create a corporate entity and whether a corporate entity truly protects you from personal liability if something goes wrong. The simple answers are that a corporate entity is important to have if you’re running a business, all business activities should run through that entity and the entity will shield you to an extent.
A corporation will protect you, at least in Florida, only to a limited extent based on what is commonly referred to as a practice of piercing the corporate veil. It does not work on all occasions, but plaintiffs’ lawyers commonly try to go after individuals by way of saying that the corporate veil was pierced based on their actions.
In Florida, generally these three things must be proven in order for the corporate veil to be pierced, thereby lending an individual to potential liability:
- The shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent and the shareholders were in fact alter egos of the corporation;
- The corporate form must have been used fraudulently or for an improper purpose; and
- The fraudulent or improper use of the corporate form caused injury to the claimant.
The three-part inquiry was quoted in a Florida Third District Court of Appeal case P&S & Co., LLC v. SJ Mak, LLC, wherein the court held that the corporate veil was properly pierced. The court cited to a decision from 2008 in Gasparini v. Pordomingo, in which case the court found that none of the three factors were alleged or proven. That case did a bit of work to help comfort business owners who may be in fear of a lack of protections attached to their corporate entities.
The mere fact that an individual is a stockholder and officer of a company does not, without more, create personal liability, said the Court, adding that “the law is clear that the mere ownership of a corporation by a few shareholders, or even one shareholder, is an insufficient reason to pierce the corporate veil . . . even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation’s separate identity was lawfully maintained.”
Thus, it is important to make sure that even if a corporate entity is, technically, an alter ego of you as an individual, the corporate form is not used fraudulently or for an improper purpose. By avoiding such improper use, you should still be able to avoid personal liability in Florida.
Have you ever received a check that you couldn’t cash or deposit? These checks are often returned with the designation “NSF,” which is simply an accronym for “non-sufficient funds.” It’s not only a real frustration to deal with, but can severely hurt your business.
In common-speak, we call these “bad checks.” Interestingly, in the State of Florida there is a cause of action for just that — Bad Check — and it could mean not only a requirement that the bad check sender pay up money to the intended recipient, but can also carry criminal penalties.
Private practice lawyers don’t charge individuals with crimes. Instead, the State of Florida could potentially take action, on a criminal basis, against the sender of a bad check.
“Florida law gives the authority to prosecute the crime of passing worthless bank checks to the State Attorneys of Florida’s 20 Judicial Circuits,” states a page from the Florida Attorney General’s Office. “The proper judicial circuit for the prosecution of this crime is usually the circuit in which the check was presented and accepted. The law requires that certain steps be taken by the recipient of a ‘worthless check’ before the State Attorney begins prosecution.”
But you may be more concerned, at least initially, in recovering the money that you were owed and, if possible, having your attorney’s fees and costs in the collection process paid for. That is where we can help.
Florida’s Bad Check Statute — F.S. 68.065 — says that if you provide a written demand that the money under the bad check be paid and the money isn’t paid within 30 days, then you may be entitled to 3 times the amount initially owed. Additionally, court costs and reasonable attorney’s fees may be reimbursable. Furthermore, you can charge up to 5% of the face amount that was due as a service fee.
Don’t let someone get away with sending you a bad check. Contact us if you want more information about how we can help.
How easy is it to pierce the corporate veil and seek damages from an individual who is an officer/director/member of his company? It needs to be examined on a case-by-case basis under the specific laws of the jurisdiction in which the issue arises. But it is never an easy task.
The key is often determining whether an individual is providing services strictly through the company or corporation, or doing so separately. Additionally, individuals can sometimes unknowingly put themselves on the hook for potential liability by expressly or impliedly guaranteeing services or the quality of same.
The broadest protection for individuals is often provided by the Limited Liability Company, which is typically governed by an Operating Agreement or the laws of the state under which the LLC was incorporated. An LLC is viewed as a form of legal entity that has attributes of both a corporation and partnership, but is not characterized as either under the given law.
As one court has stated, “[n]either the members of the limited liability company nor any managers of the limited liability company are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the limited liability company.”
Based on the above, an LLC member must do something above simply being a member to invite the possibility of piercing the corporate veil and allowing a plaintiff to go after him for damages, individually.
Typically, a plaintiff will be required to show that an individual committed a stringent level of wrongdoing to pierce the corporate veil of an LLC. Control of the LLC, alone, is commonly not enough. A plaintiff should be prepared to offer proof that the individual engaged in fraud, illegality or other unlawfulness in order to pierce the corporate veil.
Additionally, piercing the corporate veil often requires a showing that the individual’s control was so complete that the business entity had no separate mind, will or existence of its own.
Put simply, piercing the corporate veil is no piece of cake.
At Heitner Legal, we can help you either go after an individual or defend against a plaintiff seeking to pierce the corporate veil. We have a wide range of experience with Business Law issues, including with regard to civil litigation and transactional matters.
Last month, it was reported that prominent children’s store, Toys R Us, would be going after the trademark application filed by up-and-coming hair salon and boutique, Hair Are Us. On March 17, 2014, the popular hair extension business based out of Atlanta, Georgia –with additional locations in Miami, Florida and Los Angeles, California – filed for the trademark seen at the top of this article.
Due to the fact the contemplated trademark encompasses “Hair Are Us” and includes the phrase “Are Us” – words included as a substantial part of registered trademarks vigorously protected by Toys R Us’ parent company, Geoffrey LLC, such as “Babies R Us,” “Stickers R Us,” and even simply “R Us” – Toys R Us elected to oppose the application based on the grounds that the mark dilutes its family of marks and sounds confusingly similar thereto, thereby likely confusing consumers into believing that Hair Are Us is connected with other stores owned and operated by Geoffrey LLC.
Generally speaking, an opposition is a legal proceeding governed by the United States Patent and Trademark Office (USPTO) and allows a third party or an owner of a trademark to try and prevent registration of a pending application for a mark. This proceeding is triggered after the applied-for mark has been published in the Trademark Official Gazette (TMOG). Thereafter, the opposing party must file its opposition, or a request to extend its time to file an opposition, within thirty days of the date of publication. A trademark application may be opposed on absolute – i.e. the applied-for trademark is merely descriptive or generic – or relative grounds, such as the case here. The most common defenses to an opposition proceeding is that the mark was used prior to the opposing party’s trademark and/or that no likelihood of confusion exists between the marks, thus they should be permitted to co-habitat in the marketplace.
Roughly less than five percent of trademark applications are opposed each year. However, the fact that this is a low percentage should not deter start-up companies and other entities looking to establish their respective brands from conducting a thorough and extensive search of the USPTO before deciding on what their mark should be. Specifically, companies should seek guidance through the form of an advisory opinion detailing whether or not its proposed mark is available based on other applied-for and registered marks found within the USPTO, and the likelihood of registration of the mark in the event that it is.
A trademark not only serves as a company’s source identifier, but also as an outright statement to the purchasing public that what they are purchasing comes directly from or is endorsed by that company. As such, not only must trademarks be vigorously protected, but they also must be readily available at the outset so as to avoid the chances of a third party swooping in to enforce its rights and going after the company for unknowing infringement.
Trademark infringement lawsuits are costly and may extend for lengthy periods of time. Therefore, it is frugal to spend money now in order to save money later; as a result, advisory opinions should be one of, if not, the first expenses a start-up company makes.
While American law is less than 250 years old, some of the expressions used in the U.S. legal system come from a time much older. Latin phrases, such as per stirpes, malum in se, malum prohibitum, and de facto are all still used in American law today. Another such phrase, pari passu, is used as legal terminology, and can play an important role in complex transactions.
Translated literally, pari passu means “with an equal step” or “on equal footing”. It is commonly used in law, and is defined in Black’s Law Dictionary as “proportionally; at an equal pace; without preference”. The term is most relevant in matters relating to estate planning and finance.
Pari passu is important to understand, because it can have dire effects on complex transactions that can affect how creditors are paid. An example of pari passu occurs during bankruptcy proceedings. When a verdict is reached, all creditors can be regarded equally, and will be repaid at the same time and at the same fractional amount as all other creditors.
The purpose of pari passu is to ensure that borrowers neither have nor subsequently create a class of creditors whose claims rank legally senior to the indebtedness represented by the loan agreement. New creditors are naturally concerned about whether senior creditors have a first call upon the borrower’s debt payments or, in the event of the borrower’s bankruptcy, enjoy a priority in the distribution of the borrower’s assets. A pari passu clause can help ease these concerns.
For lenders, a pari passu clause is essentially a conversation starter. Before most lenders make a loan, they will want to know of the existence of any legally superior lenders whose claims will rank higher than theirs. If a lender discovers such superior lenders after the money has been lent, the false representation will provide a basis for calling the loan. Additionally, a pari passu clause protects a lender against the involuntary subordination of its loan.
For borrowers, a pari passu provision is rarely controversial. The borrower’s principal objectives in negotiating this kind of clause are to ensure its accuracy and to limit the constraint it may impose upon the borrower’s future debt servicing behavior. At the very least, both sides should agree that the new loan should rank equally with the borrower’s other debts.
Regardless of one’s role in a transaction, a pari passu clause can be troublesome if not approached properly. At HEITNER LEGAL we can guide you through the intricacies of complex transactions and intimidating terms in contracts, like pari passu. Additionally, we can draft documents for you to help in any transactions you may be engaged in.
Black’s Law Dictionary (9th ed. 2009)
With the NFL Draft just passing and the NBA Draft looming, one thing to pay attention to is how many athletes start their own nonprofit organizations after they sign their first professional contracts. A nonprofit organization is a charitable organization that does not exist to create a profit. There are a number of reasons why starting a nonprofit is a great idea for an athlete besides the obvious that it is a good PR move. A couple of those benefits are tax exemptions and the shield of personal liability.
First and foremost, a nonprofit is eligible for tax exemptions that for-profit corporations do not qualify for, such as an exemption from corporate income tax. A nonprofit organization must file annual tax returns, must state any changes in its purpose and activities, and must succumb to periodic audits to confirm it continues to follow applicable standards. In addition to being exempt from federal income tax, nonprofit organizations also may qualify for state and local tax exemptions by meeting certain criteria. Furthermore, nonprofit organizations may qualify for tax credits, which reduce the amount in taxes they pay at the end of the year.
Second, an integral benefit of a nonprofit organization is the shield of personal liability it provides. Board members, officers, as well as employees of the organization have certain protections from personal liability. Creditors can only go after corporate assets, thus the individuals who manage, work for, and volunteer for the organization are not liable for corporate debts, unpaid organization debts, or lawsuits against the organization. As an extra precaution, it is advised to purchase liability insurance once the nonprofit organization is incorporated.
There are things that anyone, including athletes, looking to start a nonprofit organization need to be aware of in order to run a legitimate nonprofit organization and enjoy the benefits thereof. First, in order to avoid termination of nonprofit tax exemption, you must comply with tax laws and IRS regulations. If tax exempt status is revoked, the once nonprofit organization will be taxed as a regular taxable corporation, thus all income is taxed and donors are not able to receive deductions for their donations. Moreover, gifts received under false pretenses are taxable income and officers and directors would be subject to payment of excise taxes. Other penalties that could occur are fines, penalties, and back taxes on a nonprofit organization that violates the rules.
Once you are aware of the benefits, disadvantages, and problems that could arise if the nonprofit status is abused, then all that is left is to start your nonprofit organization. At HEITNER LEGAL we can guide you through the process of starting your nonprofit organization, from obtaining research to incorporating your nonprofit organization. Additionally, we will inform you of the proper way to run the nonprofit organization in order to enjoy the benefits and avoid any abuse which could result in fines, penalties, or even termination of your nonprofit tax exemption.
Joanne Fritz, Before you Incorporate as a Nonprofit – Pros and Cons, About http://nonprofit.about.com/od/nonprofitbasics/bb/corppros.htm
Robert Vaux, Tax Advantages of a Nonprofit, Chron http://smallbusiness.chron.com/tax-advantages-nonprofit-10551.html
As attorneys who represent athletes, we need to make sure that we are exploring every available avenue that is in our clients’ best interests. One of these avenues that has presented itself is the creation and maintenance of loan out corporations.
A loan out corporation is a company that is set up as a separate legal entity from the individual, which provides an athlete with legal protection and tax benefits. These loan out corporations can be in the form of C Corporations, S Corporations or LLCs (limited liability companies). Each corporate structure has its advantages and disadvantages, thus it is essential to be aware of which structure is best suited for the individual athlete.
Once the loan out corporation (or company, when an LLC is the corporate structure used by the individual) is formed, the athlete may create a contractual relationship with the loan out corporation by becoming an employee of the corporation. In turn, the corporation contracts with third parties for the athlete’s services. After the contracted services are performed, the corporation receives the agreed fee and the athlete receives his or her salary from the corporation.
There are an array of benefits that athletes receive from forming a loan out corporation. First, the expenses incurred from the services performed by the corporation are deductible, because the athlete is just an employee of the corporation. Alan Kufeld, a recognized tax authority and partner at Flynn Family Office, explains “Because loan out corporations are separate legal entities, the personal wealth of the entertainers is protected from liability connected to the corporation.” Further, athletes can set up qualified plans like a defined benefit pension or a 401(k) savings plan through the corporation. However, due to the complexities, it is recommended that the athlete work with a tax expert to ensure that he or she complies with all applicable tax codes.
HEITNER LEGAL can discuss the benefits and detriments of starting a loan out corporation with any interested athlete. Additionally, we can discuss the advantages and disadvantages of forming a C Corporation, S Corporation, or LLC and we are equipped to guide any athlete through the every step of the process of starting a loan out corporation.
Russ Alan Prince, What is a celebrity loan out corporation, Forbes (Oct. 27, 2014, 6:26 AM), http://www.forbes.com/sites/russalanprince/2014/10/27/what-is-a-celebrity-loan-out-corporation/
Howard J. Weiner, Tax considerations for athletes and entertainers, American Bar Association (Apr. 22-24, 2010) http://www.americanbar.org/content/dam/aba/migrated/Forums/entsports/PublicDocuments/taxconsiderations.authcheckdam.pdf
George G. Short, The loan out corporation in tax planning for entertainers, 44 Duke L.J. 51, 51-52 (1982) http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3639&context=lcp
Limited Liability Companies (LLCs) are a favorite type of of business entity for many businessmen. Advantages of LLCs include the following:
- Limited liability – no “member” is liable for anything other than the amount of his investment in the LLC, regardless of how involved that member is in the daily operations of the business.
- Taxed as a partnership – can elect to be treated as a partnership, so LLC can operate as a “pass-through” entity and avoid double taxation (“check the box” option), and there is flexibility in allocation of gains and losses that is not present in S corporation.
- Flexibility in operations – provides nearly total flexibility in how operations are to be conducted.
A judgment creditor is somebody who has proved that he is owed a debt and has received permission to use judicial process to recover the debt. One method used by judgment creditors to collect the debt is a charging order. A charging order requires the debtor to compensate the creditor with any distributions the debtor would otherwise receive.
Another perceived benefit was that Florida LLCs had charging order protection. Read more “Florida LLCs Lack Certain Protections For The Time Being”