Spross & Associates, PLLC

What About 50/50 Ownership?

I get the question all the time about what to do about 50/50 ownership in entities.  My first answer is “Don’t have 50/50 ownership,” but many times that just doesn’t work.  So now you have 50/50 and you have to figure out what to do if the two “partners” don’t agree.  I’ve been using a two phase approach. 

First, if the issue is not really that important, you cannot agree, but either answer would be okay for the business, you can use a coin flip.  The winner of the coin flip decides.  I like to only have this provision apply if both parties agree to the coin flip.

Second, if the parties don’t agree to the coin flip, there are a couple of things you can do.  You could just wind up the company (not a great answer) or you can appoint business consultants to make a decision.  I like for each of the principals to appoint a business consultant and then those two consultants mutually appoint a third consultant.  Then, those consultants make a decision.  The consultants can be anyone and I don’t like to put any restrictions on who those consultants can be.

Below is a sample provision that could be used.

"Notwithstanding anything to the contrary contained in this Agreement, in the event Principal #1 and Principal #2 are the sole owners and Principal #1 and Principal #2 cannot agree on a course of action that is to be determined by the Members, upon mutual agreement, Principal #1 and Principal #2 agree to flip a coin to decide how to proceed.  In the event Principal #1 and Principal #2 do not mutually agree to flip a coin, Principal #1 shall choose one independent business person and Principal #2 shall choose a second independent business person, and the two business persons so chosen shall appoint a third person who shall cast the deciding vote on the issue giving rise to the deadlock."

Mutual Indemnification

Many agreements have indemnification provisions.  Most of the time the indemnification only protects the party that created the agreement.  You must think carefully about just "making the indemnification mutual".  Many times that does not make sense.  Just making it mutual does not take into account the things that might come up that require indemnification.  For instance, if the indemnification is for "breach of warranties", but one of the parties has not provided any warranties, making it "mutual" is irrelevant. 

One of the most common things that I see is a warranty that has a "knowledge" qualifier and then indemnification is for breach of warranty as opposed to for claims of intellectual property infringement.  If you are the party receiving the technology, you have a hole in your protection for potential third party liability if you just made the indemnification mutual.

Facebook Usernames and Trademarks

Most folks know that Facebook is allowing fanciful usernames starting at midnight on June 13, 2009.  If you have a registered trademark, you can submit that mark to Facebook to "reserve" your username for your company.  There is a very simple webform that requires the exact name of your trademark and the U.S. registration number.  I'm not certain what exactly Facebook does after the webform is submitted.  All I have received back so far is a canned email that says, "Thank you for your submission. If valid, we will process your request and contact you when reserved usernames are available for registration."  To be safe, you should register your user name too. 

Google Interest-Based Advertising and Privacy Policies

Google is in the process of launching interest-based advertising.  As part of that launch, you should update the piece of your Privacy Policy regarding third party advertisers.  Google does not suggest language exactly because everyone’s state laws are different.  However, below is some suggested language that you can tweak for your own purposes.  Make sure you check with your counsel before using this language or any legal language.

We use third-party advertising companies to serve ads when you visit our website.  These companies may use information (not including your name, address, email address, or telephone number) about your visits to this and other websites in order to provide advertisements about goods and services of interest to you.  If you would like more information about this practice and to know your choices about not having this information used by these companies please contact us.  In addition, Google, as a third party vendor, uses cookies to serve ads on the Site.  Google's use of the DART cookie enables it to serve ads based on the users visit to the Site and other sites on the Internet.  Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy on Google’s website.

Does Your Company Make Everyone Sign a Proprietary Information Agreement?

Do you have a proprietary information agreement (“PIA”) that you require all of your employees to sign?  If not, you are making a mistake.  A PIA covers things such as confidentiality, nonsolicitation, noncompetition, at will employment (in applicable states) and dispute resolution.  These agreements are important for a variety of reasons.  First, it is a contractual protection of confidential information which is your company’s family jewels.  It also covers your ex-employees poaching from the company or competing.  Finally, it will have an arbitration provision so that if there is an employment dispute, you will end up in arbitration in front of usually an ex-judge instead of with a jury.

Parachute Payments

Parachute Payments describe a situation where there is a lump sum payment on a change of control of a business.  Many change of control documents have a provision that says if there is a Parachute Payment, the structure of a payout can change to minimize the tax consequences of the company and/or the individual.  First you look to a base period which is 5 years and come up with an annualized base income for the person receiving the payment and if the parachute payment is greater than three times the base amount then it is an considered an excess parachute payment.  An excess Parachute Payment is not deductible by the company.  The person receiving the Parachute Payment it is hit with an excise tax in the amount of 20% over and above their normal withholding.  There are several provisions in the IRS Code that discuss small businesses and small business stock, and in some cases also kick in on a change of assets and not just change of control.  Make sure you talk to your legal and tax expert to learn how a Parachute Payment may affect you in a change of control situation.

What is the difference between ® and ™?

Everyone has seen them.  They are the ® and ™.  Just look on a can of Coke and you will see multiple ®.  Many times a newer product with have the ™.

 

The ® is known as a registered trademark.  It is used for a trademark that has been registered with the United States Patent and Trademark (“PTO”) office.  There is a process that involves filing a trademark application with the PTO.  When the application is approved, the use of the ® symbol may begin.

 

The ™ is used for an unregistered trademark.  This is used to denote common law protection of a trademark.  A trademark owner does not have to register their trademarks, but may rely on common law protection.  If someone has a trademark that they want protected they can use the ™ after the name.  For instance, we use the ™ for our trademark Diamond Docs™.

 

There are a couple of advantages to obtaining a registered trademark.  Among these are the following:

 

·         The ability to bring a lawsuit in federal court

·         A legal presumption of ownership in the trademark

 

One disadvantage of trademark registration is the cost of the application process.

S Elections

Typically, the income of a corporation is taxed to the corporation itself.  This can lead to double taxation.  For instance, if you own all of the shares of a corporation, the corporation would be taxed at the corporate tax rate and then any distributions to you would be taxed as individual income. 

 

This leads to the S Election.  All of the owners of a corporation may make what is called an S Election with the IRS on Form 2553.  In general, an S Election allows the income of an S corporation to be taxed to the company’s shareholders instead of the corporation.

 

There are multiple restrictions on S Elections, a couple of which are that you cannot have more than one class of shares, you can not have any foreign owners of the company and you must have less than 100 shareholders.

Do You Need a new EIN on Conversion from an LLC to an S-Corp

When you convert an LLC to an S-Corp, you do not need a new FEIN; however, the Internal Revenue Service does need to know about it.  You will need to file a new Form 2553 making the S election.  Note: this is not tax or legal advice.

Converting from a LLC to a Corporation in Texas

In order to convert from a LLC to a corporation in Texas, you must file a Certificate of Conversion.  As part of that Certificate of Conversion, you must attach a new Certificate of Formation.  Here is where it gets a little tricky.  Trick #1: the Certificate of Formation must contain a statement that says the new entity is being formed subject to a Plan of Conversion which is on file at the address of the entity.  This means there must be a Plan of Conversion in the corporate books.  Trick #2: the Certificate of Formation must have the name, state of incorporation, organizational form and date of incorporation of the converting entity.  As always, you should seek legal counsel when converting an entity.