Is it time for a legal checkup for your business?

Post by Chris J. Trebatoski

I was driving through Chicago listening to CBS radio to get traffic reports when I heard a study of the use of legal services during and subsequent to the Great Recession. Boring, turn off the radio is probably your immediate thought. I thought so too but then the statistics were presented. The study found that most, if not all, small to medium size businesses avoided contact with any lawyer during the past several years as a part of their costs savings efforts.

I had had a gut feeling for the past few years that was consistent with the study. In the twenty nine years that I have practiced law, the past few years have been fundamentally different in terms of the use of legal services by all businesses, large and small. My personal observation has been that fewer businesses were pursuing dispute resolution as a part of their business problem solving, settling cases that in other times would have been tried and trying cases that in other times would be settled. Part of the blame for the decrease in use of legal services has certainly been the general trend in the legal industry to strictly adhere to the hourly fee and seeming inability to be more flexible in terms of client needs and fee arrangements in difficult times. Part of the blame for the decrease in use of legal services is also the belief that litigation is simply too expensive to pursue.

Unfortunately, the combination of economic factors, concerns about fee arrangements and costs of litigation resulting in avoiding legal services has an unintended and potentially dangerous impact upon businesses and entrepreneurs. Much like putting off going to see the doctor can result in a much more difficult treatment course, putting off talking with your lawyer allows small disputes to become large disputes. Reduces the advance protections and risk control strategies available from as part of a legal checkup often resulting in significantly more cost incurred by the client both in terms of legal fees and financial damage to his or her business.

Is it time for you or your business to have a legal checkup? As your business looks toward the future it is better to assess legal risks before lawsuits happen and resolve the nagging disputes before they become full blown legal battles. And if that checkup shows there is a problem that should be addressed, make sure to explore all potential forms of dispute resolution to see which one best fits you, your business and your future.

Business Sale Transactions: Representations & Warranties

Post by David J. Roettgers

Representations and warranties are contained in virtually all business sale transactions. Basically, representations and warranties are promises made by the seller to the buyer representing the condition of the Company and its assets and providing a warranty of that condition. These representations and warranties are critical to both parties because they create the basic understanding of the transaction. In the case of a seller, the seller is concerned that the buyer does not come back to seek some type of recovery (indemnification) for any of the statements in the representations and warranties. With respect to a buyer, a buyer reviews these representations and warranties, including the disclosures, in determining the value of the business.

In a business transaction, several representations and warranties are very standard. For example, the seller usually represent and warrant that they own the stock or the assets being sold and that the ownership interest is “free and clear” of any and all liens or encumbrances. Another standard representation and warranty would include a provision concerning authority to sell the stock/assets of the seller. These types of representations and warranties are not only basic but essential to completing a transaction.

On the other hand, certain representations and warranties (e.g., “compliance with all federal, state, and local laws”, “the seller has never violated any environmental law”, etc.,) are often times carefully negotiated. There are several ways of minimizing the risk in these representations and warranties including using a “knowledge” qualifier. Of course, that leads to other negotiations concerning the definition of “knowledge”. Does “knowledge” mean “actual” knowledge of the owners? Does “knowledge” mean that any employee of the Company, at any given time had or should have had knowledge? Obviously, these are vastly different definitions of knowledge and naturally affect a seller’s potential liability.

Representations and warranties, although important, must also be considered with the terms of the indemnifications provisions. An indemnification provision establishes the liability in the event of a breach of a representation or warranty. Depending on the representation or warranty, an indemnification provision can be limited by the time period for a buyer to make a claim (i.e. a claim must arise within one or two years of the date of sale), magnitude (i.e. a cap on the seller liability such as the selling price or some other dollar amount), baskets (damages must exceed a certain dollar amount before any recovery) and certain other limitations/provisions.

Finally, in reviewing the business transactions, representations and warranties and indemnification provisions must be used to balance the risk associated with the transaction. Depending on the business and concerns, this discussion/negotiation is critical in determining whether a transaction is a fair transaction for both the buyer and the seller.

S Corporation Business or Asset Sellers

Time to Again Monitor Approaching Built-in Gains Tax Changes

Post by John A. Sikora

As we noted in a June 2011 blog posting, gains on sales of property by an S corporation are generally subject to only a single level tax, at rates applicable to the corporation’s shareholders. If, however, the property was held by the corporation when it converted from C corporation to S corporation status (or was acquired by such a converted S corporation in a nontaxable transaction), part or all of the gain may also be subject to a second tax at the S corporation level. This corporate-level tax is commonly referred to as the built-in gains tax (or “BIG tax”).

The BIG tax generally applies to sales of property during the ten year period following conversion to S corporation status. From time to time over the last several years, the ten year period has been reduced for sales in certain tax years. For example, if the property was sold by the converted S corporation in 2009 or 2010, the BIG tax did not apply if the corporation had been an S corporation for at least seven years, and for sales in 2011, at least five years.

The so-called “fiscal cliff” legislation enacted in January 2013 extended the five year period to sales occurring in 2012 and 2013. However, the BIG tax period is schedule to return to ten years for sales in 2014 and thereafter.

Therefore, if a corporation’s S status began more than five and less than ten years ago, and it expects to sell or dispose of property at a gain in a taxable transaction in the coming years, it may want to consider selling it, or perhaps distributing it, this year. Doing so will result in tax at the shareholder level this year, but may eliminate a second, BIG tax that could apply if the taxable event is deferred to 2014 or later years. Such S corporations currently negotiating or under contract for the sale of the business or certain business assets may likewise want to make sure the transaction closes this year.

Disclaimer

The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.