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Online Corporate Formation – You Get What You Pay For!

February 9, 2010 By Kelly M. Davis Esq. Leave a Comment

Unfortunately, I have noticed in my practice that most of our new clients are not adequately protected from the personal liability associated with their business as they thought. A couple of the most common misconceptions I hear from business owners is that once a Corporation, LLC or other legal entity is formed, the owners are protected from personal liability or that they spent $150 on www.thecheapestllc.com plus the state fee and then magically they are like Teflon.

If your company is already set up as a legal entity, you have taken the first step to protect yourself and your assets personally in the event of a lawsuit. However, many business owners believe that forming a Corporation or LLC guarantees protection from that point forward, if you only spent $150 online I’m still talking to you too. On the contrary, maintaining your company as a separate entity, including exercising proper formalities, such as regular corporate meetings with corresponding minutes, is essential to personal liability protection.

Another common misconception I hear from business owners is that a small business, or a businesses with sole ownership, doesn’t need a corporate entity.  All businesses, regardless of size, have the potential for legal liability. It may be through contracts with customers or vendors, or being accused of a wrongful act. Regardless of the size of the business, defending against a lawsuit can create hardship on the company. However, it can be devastating for the owners personally if there is not proper liability protection, because the person suing you can go after not only your business and its assets, but you personal assets and property as well. Additionally, you can personally be liable for your business’s debts.

Do you fall under one of these  scenarios?  Do you have a corporation but don’t know what a corporate book is?  Don’t know what corporate minutes are?  Know about them but haven’t done them for 10 years?  Or have you never registered your company as a formal Inc or LLC with the Texas Secretary of State?  Perhaps you ordered your corporation online and they sent you some documents or a corporate book to fill out but you either didn’t do it or don’t know if you filled it out properly.

Surely you would agree that it is not wise to not have health insurance or automobile insurance, right?  Then why would you own a company in which the liability of owning the company could devastate your family for countless years simply because you failed to understand and follow simple guidelines to protect your business.  Don’t let this happen to you!

Here is a document that contains some of the reasons that you could Lose Corporate Protection

Filed Under: Construction Law, General Business Tagged With: asset protection, corporate formation, LLC

Protecting Your Receivables

December 17, 2009 By Kelly M. Davis Esq. Leave a Comment

Here is something I wrote after the residential housing bubble burst in order to help my clients protect themselves.  Over the last few months we have seen a size able up-tick in commercial clients having trouble getting paid, so I thought I would re-post it here.  Even though the Dallas local economy is “good” compared to other parts of the country I think right now you can’t be too cautious in protecting your business.

1) Require a Credit Application

Whether your clients are other businesses or individuals, if your client has an open account with you in which you are supplying a good or service prior to getting paid, you must first require a completed credit application. The credit application should include:

* Full legal name   
* Address   
* Social Security or Tax Identification Number

If your client fails to pay their account, your costs in collecting will be much lower if you have adequate information.

2) Require a Personal Guarantee

If you enter into contracts with other companies, you should always require a personal guarantee from the person acting as principle of the company. If your client fails to pay on the account, or otherwise breaches your contract, the principle is personally responsible to you as well as their company.

3) Receivable Turn-Around

Re-structure your companies billing cycle to issue invoices immediately or, at the very least, monthly. Also, shorten the due-date. Your companies accounting will operate much more smoothly without a 45 – 60 day lag in receivables. You will also be able to more accurately estimate your income for operating.  This also helps companies that can use Mechanic’s liens to recover money owed by being able to notify and file within the deadlines of the statutes.

Filed Under: General Business Tagged With: Contracts, Mechanic's Lien, Receivables

How Construction and Other Clients Can Help Themselves

October 26, 2009 By Kelly M. Davis Esq. 1 Comment

When reading over other construction law blogs today, I ran across the great post from Timothy R. Hughes on his law firm’s blog (www.valanduseconstructionlaw.com) about how clients can help themselves.

Below is a copy of his post and the link to the original.


How Construction and Other Clients Can Help Themselves

Posted on October 26, 2009 by Timothy R. Hughes

Construction cases by their nature tend to involve a lot of facts, witnesses, and documents.  They also tend to involve multiple parties, legal issues and arguments, and strategic procedural and motions practice.  By their nature, these realities mean that construction cases can involve quite a lot of legal work and can be expensive to try.

There are several things that clients in construction cases, and indeed all legal matters, can and should do to help themselves.  Following these tips can not only streamline the effort undertaken by the lawyer and thus reduce expenses, but also can help to present your matter in the most effective manner and produce better results:

  1. Be organized.  Handing your lawyer a tabbed binder of documents instead of a disheveled pile of documents means less time reviewing and understanding your care.
  2. Be responsive.  When your matter is analyzed or litigated in fits and starts because you do not respond, that effort tends to always require retreading old ground ramping up again.
  3. Do your homework.  A corollary to No. 2, if you are to obtain documents, information, or provide assistance, understand that your efforts are important to timely and efficient handling of your matter.
  4. Make decisions.  Once there is sufficient information and analysis to make informed choices, it is time to decide.  Failing to pick often not only removes the need or chance to choose, but it translates to expensive lost effort without advancing your matter.
  5. Understand time is money.  Even with all the discussion about alternative fee billing, this will always be true.  I know and understand that client communication is critical.  Clients should know and understand that the more we communicate, particular on rehashing prior discussions or decisions (see No. 4 above), the more expensive the case gets.
Filed Under: Construction Law, General Business Tagged With: Clients, Legal Fees, Litigation

“Paid When Paid” – “Paid If Paid”: Really?

October 19, 2009 By Kelly M. Davis Esq. Leave a Comment

Recently, I had a client that had furnished the supplies and labor on a construction job.  The general contractor on the job failed to pay my client due to the fact that it was not being paid by the owner, attempting to rely on a “paid if paid” clause contained within the subcontract with my client.  Contingent payment clauses are often included in construction contracts to enable one party to avoid making payments to their subcontractors while waiting on payments from an upstream party with the payment obligation.  Contingent payment clauses often have “paid if paid” and “paid when paid” language.

These clauses are highly frowned upon by the courts and typically found to be invalid if the clause is indefinite.  The case law for provisions such as these only goes to timing; the Principal or general contractor cannot withhold payment indefinitely if it is not paid by the Owner.  The clause simply goes to timing of payment, not whether payment will be forthcoming at all.  Gulf Coast, Co., Inc. v. Self, 676 S.W.2d 624, 627-628 (Tex. App. Corpus Christi 1984), writ refused n.r.e., (Mar. 20, 1985).  These clauses may only be relied on for a reasonable amount of time. Id.  It is up to a judge or jury to determine what is “reasonable”.  However, the determination of reasonableness behind clauses such as these, coupled with the Texas Prompt Payment Statute, Texas Property Code Chapter 28, gives us a good starting point as to how long it is considered reasonable to withhold payment.  Texas courts have determined that conditional words such as “if” or “provided that” can be used to enforce clauses such as this. Id.

The Texas Legislature passed a Senate Bill, adding Section 35.521 to the Texas Business and Commerce Code.  Section 35.521 states that a contingent payment clause is not effective against a subcontractor or supplier in the following situations:

1)      If the owner fails to pay the contractor because of the conduct or work of the contractor, unless the nonpayment is the result of the subcontractor or supplier’s failure to meet the needs of the contract.

2)      When the contingent payment clause would be unconscionable if enforced. For example, the contractor must provide the following information to the subcontractor to minimize the possibility of the clause being deemed unconscionable:

  1. Name and contact information of project owner;
  2. Legally sufficient property description;
  3. Surety information; and
  4. Project lenders’ names and contact information.

Further, a contingent payment clause may be invalidated or suspended during the project if the subcontractor subject to the clause has not been paid within 45 days after submitting written request for payment that is in substantial compliance with the pay application, it may send written notice to the contractor objecting to the further enforceability of the clause.  Thereafter, the contractor or its surety may not continue to rely on the clause for any work or material provided by the subcontractor after the notice becomes effective.

With this legislation and case law comes an avenue of collection for subcontractors and suppliers where, in the past, those same subcontractors and suppliers just “wrote it off” if they signed a contract with one of these clauses and didn’t get paid.  Are you owed money on a project that has not been paid because of a contingent pay clause such as the “paid when paid” or “paid if paid” clause?  Now is the time to look into fighting these clauses and collect the money that is owed to you!

Filed Under: Construction Law, General Business Tagged With: Construction Law, Contract Law, Texas

How to Use the Recession to Your Advantage

October 12, 2009 By Kelly M. Davis Esq. 2 Comments

With the government printing money like they actually had some, most people expect the tax rates in the future to go in the upward direction to cover all of the current spending.  Nancy Haney Scott (www.haneyscottlaw.com), an Attorney we recommend to clients needing business “exit strategies,” mergers or acquisitions, wrote a very helpful article advising how business owners can overcome the decline in their business value and utilize the bad economy to set some things in motion and save their family money in the future.

Gifts of Equity in Privately Held Businesses – The Silver Lining of the Recession

By:  Nancy Haney Scott

With all the gloom and doom we sometimes forget that “Every Dark Cloud has a Silver Lining.”  One silver lining is that lower valuations help privately held businesses take advantage of important planning opportunities.  Now is a great time to reorganize your business for more efficient operations, business succession and preparing the company for future exit strategies.  It’s also the time to consider cost savings for estate and gift planning.

For example:  Mr. Smith owns 80% of Devalued, Inc., while his two sons who work in the business own 10% each. Devalued, Inc. was worth $3,000,000 in 2007. By the end of 2008, it was worth $2,500,000.  After exploring the tax strategies and planning opportunities with his counsel he decides to gift 20% of his shares, worth $500,000, to each of his sons leaving him with a 40% stock interest.

The estate and gift tax advantages (assuming current tax law) are as follows:

  1. The stock gifted to each son was previously worth $600,000.  The current market value of such stock to each son is now only $500,000.  If Devalued, Inc. goes back to its prior value once the economy recovers, then the $200,000 increase in the value of the shares now belongs to the sons ($100,000 each) without Mr. Smith having to make an additional taxable transfer.  At a current estate and gift tax rate of 45%, Mr. Smith’s family can save $90,000 (45% * $200,000).
  1. The gifts to each son are gifts of a minority interest in Devalued, Inc. Gifts of shares in privately held business lack marketability due to the limited market for such shares.  Estate and gift tax rules allow discounts for these factors that reduce the value of assets transferred.  A conservative discount rate for minority interests and lack of marketability can be 25%.  With such discounts, the value of each gift for tax purposes is reduced by $125,000.  At a current estate and gift tax rate of 45%, Mr. Smith’s family can save another $112,500 (45% * $125,000 * 2 sons).
  1. Mr. Smith’s gifts of stock are eligible for the annual donee exclusion of $13,000.  In addition, Mr. Smith’s wife, Mrs. Smith will join in this gift, which will allow for a second $13,000 exclusion.  So the taxable value of the gift to each son is now reduced again by an additional $26,000 (Mr. and Mrs. Smith’s $13,000 each = $26,000). The family saves an additional $23,400 (45% * 26,000 * 2 sons).
  1. If Mr. Smith makes no further gifts and dies with his reduced ownership interest of 40%, his estate can claim the minority interest and lack of marketability discounts against his remaining shares.  If Mr. Smith dies in 2014, when Devalued, Inc. is worth $4,000,000,  a conservative discount rate of 25% will save his family another $180,000 (45% * $400,000 discount).
  1. The bottom line is that Mr. Smith can take advantage of the under-performing economy, discounts for lack of marketability and minority interest and the annual gift tax exclusions (with his wife) to save his family a considerable amount of future estate and gift tax.  In the example above, Mr. and Mrs. Smith will need to file a gift tax return in the year the gifts are made.

This is just one example where a lower valuation can be helpful.  Now may also be the time to consider your business succession plan.  The same principles apply.  Each situation is very unique and very fact specific.  Remember this planning depends on the particular factual setting of each client.  One difference in the type of entity or the facts can completely change the outcome.  If you are interested in more information about this concept and other potential advantages to acting now, please contact me at www.haneyscottlaw.com.

Tax opinion disclaimer

This article contains tax advice.  Please note that additional tax issues may exist that could affect the tax treatment of the tax advice or shelter addressed in the advice. The advice does not consider or reach a conclusion with respect to those additional issues.  Further, the advice was not written and cannot be used by the recipient for the purpose of avoiding penalties under code section 6662(d) with respect to those issues outside the scope of the advice.

Filed Under: General Business Tagged With: estate and gift tax, exit strategies, gift planning, reorganize business
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