Spross & Associates, PLLC

Keeping Your Company Name

There was an interesting article in the Austin American Statesman about an attorney that is registering assumed names for her client (where she is the president of the client) using names of existing restaurants.

 

http://www.statesman.com/search/content/business/stories/other/2009/08/06/0806brees.html

 

They then send a demand type letter to the company that has been using the name saying they will “sell” it back to them for $20,000.  Don’t be taken in by something like this.  If someone has been using the name in commerce they have acquired common law trademark rights to the exclusion of other similarly confusing names in the local area. The fact that someone files an assumed name certificate either at the state or county level is nothing by a recording function.  The county certainly does not perform any kind of search on the name.  They just stamp it as recorded for the $12.00 filing fee.

Releases in Employment Separation Agreements

One of the things that people don’t think about when they are putting together or executing Employment Separation Agreements as part of their employment is whether or not anything should be excluded from the release.  Employment releases are very broad and cover EVERYTHING, but what if the employee was an officer?  Most Bylaws and other corporate governance documents have an indemnification obligation on the part of the company for actions by the officer/employee in their role as an employee.  Normally, an individual is not named in a lawsuit against a company; however, there are times when the individual does get named (shareholder suits for instance). 

 

If an employee is signing an Employment Separation Agreement, I would suggest that there should be a carve-out for “indemnification obligations that arise pursuant to the Bylaws [or any other agreement that gives the employee indemnification]”.  If this is not carved-out from the release, there is a very good argument that the employee has released any indemnification claim.

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."

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.

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.

Things to Keep in Mind for Blog Postings

Below is a short list of items that you should keep in mind when making corporate blog postings.

• Postings must NOT contain any confidential or proprietary information.
• Postings must be truthful and accurate.
• Postings must not contain any forward looking statements or other marketing/PR material that has not been approved for release.
• Ensure accuracy of your information before posting.  If necessary, have an additional person review the information.
• Write your posts in a way that is easy to read.  Use conversational style, but be sensitive to the ability of other cultures to understand idioms and pop culture references.
• Be professional and courteous at all times in both language and manner.

What is a Double Trigger for Vesting of Options?

If you are an employee or executive at a small company and you have received option grants, you may want to think about having a “Double Trigger” for accelerated vesting of your options on a change of control.  The reason it is called a “Double Trigger” is because there are two things that must occur before the accelerated vesting occurs.  First there must be a Change of Control.  Second, there must be something else that occurs to “Trigger” the acceleration.  A few things that could be are (i) termination without cause; (ii) reduction in responsibilities; (iii) reduction in title; or (iv) requiring a physical move of greater than 50 miles.

 

When the “Trigger” occurs, usually a portion of your remaining unvested options immediately vest.  Keep in mind that it would still be up to you to exercise the options or not.

Major Difference between ISOs and NSOs

So you are at the point in your company where you want to issue stock options and you have heard that there are Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs) and you wonder what the difference might be.  There is one very big difference between the two. ISOs are taxed when the underlying stock is sold and NSOs are taxed when the option is exercised.  This can delay your tax burden by a long period of time.  There are all kinds of issues about capital gains versus ordinary income and other tax consequences to exercising options, but that is for another discussion.

Keep in mind that there are multiple criteria that must be followed for ISOs.  For instance, an ISO can only be issued to an employee.  Make sure you follow all of the requirements for ISOs versus NSOs and get professional help with the appropriate agreements.

Limited Liability Companies (LLCs)

People always ask me, LLC or corporation?  I have been using LLCs lately for three different scenarios.

Scenario 1 – Real Property

I have used LLCs for ownership of real property.  For instance,, if you have rental properties you can place the property inside the LLC.  In theory, the ownership of the LLC will not change over time.

Scenario 2 – Family Owned Business

Let’s say you are creating a business that is going to stay in the family.  An LLC could be used for this situation.

Scenario 3 – Certain Ownership Interest

Finally, if the ownership structure of the business is certain and will not change over time, an LLC could work.  For instance, you know that you will not need an option plan and you will not be handing out equity over time.

General Overview

If there is anything you would like to see discussed in this category, make a suggestion and we will see what we can do.