Articles Posted in Team Building Phase

teamwork-382673_640.jpgThe New York City Council approved its fiscal year 2015 budget (PDF file) in late June. The new budget includes $1.2 million for the support and development of worker-owned cooperative businesses, commonly known as “worker cooperatives.” The defining feature of a worker cooperative is that the employees own all, or at least a substantial majority, of the company. Advocates for worker cooperatives state that they can benefit local communities by keeping ownership close to home and promoting good employment practices. The allotment of funds by the City Council is reportedly the largest investment ever by a city government in this type of business.

The U.S. Federation of Worker Cooperatives (USFWC), the only nationwide organization for worker cooperatives, defines the business form as an entity that is “owned and controlled by [its] members, the people who work in [it.]” Worker cooperatives have two “central characteristics,” according to the USFWC: (1) investment in and ownership by “worker-members,” who receive distributions of profits; and (2) a democratic decision-making process involving one member, one vote. Profits are often known as “surplus,” which is one of many ways that worker cooperatives seek to distinguish themselves from other models of business ownership.

Article 5-A of New York’s Cooperative Corporation Law allows businesses incorporated in the state to elect to be governed as a worker cooperative. Businesses that make this election are subject to parts of both the business corporation law and the cooperative corporation law. New Jersey does not have a specific business form for worker cooperatives, but businesses can choose to form as a corporation under subchapter C or S, as a limited liability company (LLC), or as other business forms.
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US_Corporateation_Income_Tax_Return_2011_form_1120.jpgThe minority shareholder of an S corporation appealed a ruling of the Internal Revenue Service (IRS), which held him liable for tax on his pro rata share of the corporation’s income, to the U.S. Tax Court. He argued that he was not the “beneficial owner” of the shares and therefore should not be liable for the tax because he had been shut out of management and received no distributions from the corporation. Kumar v. Commissioner of Internal Revenue, T.C. Memo 2013-184 (2013). The Tax Court rejected his argument, finding that the liability of an S corporation shareholder for federal income tax on the corporation’s earnings is not dependent on factors like management authority or actual receipt of distributions or other income. This should serve as a reminder for all S corporations to maintain shareholder agreements that provide for distribution of income in minimum amounts sufficient to cover taxes.

A subchapter S corporation avoids the “double taxation” found in corporations covered by subchapter C of the Internal Revenue Code, in which the corporation first pays tax on its income, and the shareholders then pay tax on dividends they receive. S corporations do not pay federal income tax. 26 U.S.C. § 1363(a). Instead, income and losses “pass through” directly to the shareholders, who pay taxes on income and deduct losses in proportion to their number of shares on their personal tax returns.

The petitioner in Kumar owned 40 percent of Port St. Lucie Ventures, Inc. (PSLV), a Florida medical practice organized as an S corporation. A dispute arose between him and his business partners in 2004. Around the same time, the majority shareholder of PSLV allegedly shut the petitioner out of the management of the company. The petitioner did not receive any wages or distributions from PSLV for 2005 or any subsequent year. He did, however, receive a Schedule K-1 from the corporation for the 2005 tax year, which reported his share of the corporation’s taxable income as $215,920 and his share of interest income as $2,344.
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Civilrightsact1964.jpgUnder a 2012 amendment to the New Jersey Equal Pay Act, businesses employing fifty or more people within the state must provide an official notice to their employees of their rights under federal and state law regarding gender equity. The New Jersey Department of Labor and Workforce (NJDOL) published the final forms for these notices on January 6, 2014. The 2012 legislation required employers to provide the notice to their employees within thirty days of publication, making the deadline February 5. The NJDOL has not specified any penalty for failing to comply with the deadline, nor did the legislation itself provide for penalties. While the notice requirement does not apply to businesses with a small number of employees, the guidance it offers to federal and state employment law is nevertheless useful.

The New Jersey Assembly passed A2647 in June 2012, and it became law on September 19 of that year. The law amends the New Jersey Equal Pay Act, NJ Rev. Stat. §§ 34:11-56.1 et seq., to require notices to employees in a form prescribed by the NJDOL regarding their rights against gender inequity and discrimination under state and federal law. It does not expand workers’ rights in any substantive way, but simply mandates specific forms of notice regarding workers’ existing legal rights.

The law sets a deadline of thirty days after publication of final forms by the NJDOL. NJ Rev. Stat. § 34:11-56.12. This publication occurred on January 6, 2014. For employees hired after the February 5, 2014 deadline, covered employers must provide the notice by the next December 31. Employers must provide a written copy of the form to each employee, and obtain a signed acknowledgment of receipt and understanding. They may distribute the notice form via email; via printed materials delivered to employees with their paychecks, new hire packets, or employee manuals; via flyers delivered to individuals employees; or via a website or company intranet, provided employees receive adequate notice of how to access the site. The notice form is currently available in English and Spanish, and the NJDOL may make it available in other languages as needed.
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file531278556409.jpgA New York court recently addressed the fiduciary duties owed among managers of businesses involved in a venture together. A group of real estate investors sought to hold an individual liable for multiple business torts, all of which were allegedly committed by his son. Halpern, et al v. Kuskin, 2013 NY Slip Op. 32005(U) (N.Y. Sup. Ct., Aug. 26, 2013). The father took over the operation of several business entities from his son, and the plaintiffs argued that the father was liable either for the allegedly tortious acts themselves, for aiding and abetting said acts, or for attempting to shield his son from liability. The court held that the plaintiffs failed to plead any facts directly alleging the father’s liability. It also addressed the question of the father’s fiduciary duty to his son, as part of a family business, versus any fiduciary duty he might have owed to the plaintiffs.

Two plaintiffs signed an operating agreement with Brad Kuskin, according to the court, in March 2008 for a limited liability company (LLC) intended to purchase investment property in Crested Butte, Colorado. The two plaintiffs, along with a third plaintiff, signed another operating agreement with Kuskin for an LLC whose purpose was to purchase property in Crystal Springs, New Jersey. The plaintiffs invested substantial funds, including about $1.1 million by the lead plaintiff, in the two LLCs. The plaintiffs alleged that Kuskin used the invested funds to purchase the Colorado property in another company’s name, and otherwise mismanaged the funds.

Gary Kuskin, Brad Kuskin’s father, took over operations of various businesses from his son, including the company or companies involved in the deals with the plaintiffs. In their lawsuit, the plaintiffs alleged that Brad Kuskin fraudulently induced them to invest money with him. They further claimed that Gary Kuskin “attempted to make Brad Kuskin judgment proof.” Id. at 3. The suit, which only named Gary Kuskin as a defendant, included causes of action for tortious interference with a contract, aiding and abetting fraud, and breach of fiduciary duties. It essentially sought to hold Gary Kuskin liable for intentional torts committed by his son through their business.
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file551263252097.jpgA partner in a general partnership based on an oral agreement could unilaterally withdraw from the partnership, the New York Court of Appeals held, because the partnership agreement did not define a specific duration or objective for the business. Gelman v. Buehler, 2013 NY Slip Op. 01991 (N.Y. Sup. Ct., Mar. 26, 2013). New York law allows any individual partner to withdraw and trigger the dissolution of a partnership if the underlying partnership agreement does not identify a “definite term or particular undertaking.” N.Y. Pship L. § 62(1)(b). The court rejected the plaintiff’s argument that a general goal, defined in stages, was sufficient to meet this legal standard. Business lawyers often advise their clients to put agreements in writing, and this case demonstrates one possible outcome if business partners fail to do so.

According to the court’s opinion, the plaintiff and defendant agreed to form a partnership in 2007 shortly after graduating from business school. The plaintiff would later describe their business plan in seven stages:
1. Raise money to start the partnership’s operation;
2. Find a business to purchase;
3. Raise additional money to buy the business;
4. “Operate the business to increase its value”;
5. Reach the “liquidity event,” the point when they could sell the business at a profit;
6. Identify a buyer for the business; and 7. Sell it at a profit.
Gelman, slip op. at 4.

The two partners reportedly anticipated a four- to seven-year time frame for their business plan. They spent several months looking for investors, but the defendant withdrew from the partnership after a dispute with the plaintiff.
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761822_61461701.jpgFor businesses with a unique product or service, keeping their ideas, designs, and plans secure is critical to their success. During business formation, a business owner must consult with numerous people, from designers and marketers to accountants and business attorneys. Once a business has begun developing its product, it needs employees and contractors. Non-disclosure agreements are often effective in the protection of trade secrets, but a business needs some form of recourse in the event of misappropriation of proprietary information. Most states, including New Jersey, have enacted the Uniform Trade Secret Act (UTSA), which enables holders of trade secrets to recover damages for breaches, and to restrain others from disclosing confidential information.

The term “trade secret” refers to information in any form that has actual or potential economic value, in part because it is not widely known or easily discoverable by others, and which would have economic value to someone who did discover it. The information must also be subject to reasonable efforts by its holder to keep it secret. N.J. Rev. Stat. § 56-15-2. This may include data, formulas, drawings, designs, business plans, techniques, processes, or prototypes. “Misappropriation” includes any means of obtaining secret information by a person who knows or should know that it is secret, or the unauthorized disclosure of such information to others. Id. It does not infringe on someone’s trade secret rights to discover the same information entirely independently, or to reverse-engineer information from a legitimately-obtained product. Unlike patents and other forms of intellectual property, no official procedure exists to register or declare something a trade secret.

The Restatement of Torts § 757 defined the tort of improper use of disclosure of a trade secret belonging to another. It provides that a person is liable for using or disclosing a trade secret if the person knows that it is a secret, regardless of how the person learned about it. Keeping trade secrets secure is critical to the viability and success of many businesses, and theft or disclosure of trade secrets results in substantial business losses.
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file00066095512.jpg“Family business” typically refers to a business owned by members of the same family, but it also often means that family members run the business. Many “family” businesses may need to take on some employees who are not family members, and these businesses should take care to treat family and non-family members of the business equally and fairly. This is important to a business’ continued competitiveness and success, but also for compliance with federal and state employment laws. A recent column written by business journalist Randy Myers and published in Entrepreneur discusses how family businesses can take care of their unrelated employees.

“Part of the Family”

The culture of a family business is probably the most important element in attracting and retaining employees, or as Myers puts it, family businesses should make all employees “feel like part of the family.” Family businesses can achieve this in any number of ways, from involving non-family employees in the central operations of the company, to offering benefits and other incentives that encourage employees to stay with the company. This keeps employees “energized,” according to Myers, and allows the business to maintain the culture that the family had created while benefitting from the knowledge and skills of others.
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Discrimination-Diversity-01.jpgThe Equal Employment Opportunity Commission (EEOC), the federal agency that enforces employment anti-discrimination laws, issued a revised set of guidelines for employers in late April regarding criminal background checks on job seekers. The EEOC addressed how employers can use information on job applicants’ prior arrests or convictions in making employment decisions without violating federal anti-discrimination statutes. New York and New Jersey small business owners may not fall under the jurisdiction of federal statutes if they have few employees, but the guidelines are important for all employers to understand. Employers of any size do well to abide by the spirit of the anti-discrimination statutes, even if they are not bound by the letter.

Title VII of the Civil Rights Act of 1964 governs many common aspects of anti-discrimination law. It prohibits discrimination in employment based on “race, color, religion, sex, or national origin.” Discrimination may include decisions related to hiring, firing, layoffs, promotions, salary or pay rate, raises, assignment of job duties, benefits, or any other “privilege of employment” based on these characteristics. For job applicants, the law prohibits employers from “fail[ing] or refus[ing] to hire” someone based on the person’s membership in a protected category. Employers, when interviewing prospective employees, may not ask certain questions pertaining to the protected categories. They must also exercise caution when investigating applicants’ backgrounds in order to avoid revelation of privileged information that could, however inadvertently, put the employer in violation of the statute.
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Colearn Social MediaSocial media is no longer an optional feature for most businesses. Consumers expect to find businesses online, not only on a company website, but also on popular social media platforms like Facebook and Twitter. Many businesses use these platforms to market products or services, but some use them simply to engage with their customers. These forms of media offer varying degrees of benefits and opportunities for different types of businesses, but all companies using social media face certain potential legal risks and liabilities. As small business lawyers for New York and New Jersey, we have seen how social media can get companies into trouble, but we have some suggestions for what to do.

1. False or misleading advertising: Advertisements put forth through social media must adhere to the same rules as any other kind of advertising. New York and New Jersey’s consumer protection laws prohibit businesses from making false or misleading statements to consumers about their products or services, and the penalties can be quite harsh.

2. False or defamatory statements: Social media, particularly Twitter, lends itself to short, quick bursts of information, often without the thought and consideration that might go into a longer marketing piece. Statements about a competitor or any other person or business, even limited to 140 characters, could expose a business to liability for defamation. Several recent lawsuits, including one against musician Courtney Love, indicate that Twitter is a viable medium for defamatory speech.

3. Bad publicity: Social media, perhaps for the first time in history, offers a two-way street between companies and consumers. A disgruntled customer can cause havoc for a company’s reputation through social media. A company’s response can make the difference between allowing the dust to settle and causing the dispute to “go viral,” giving it far greater exposure than it might have otherwise had (often known as the “Streisand Effect.”)
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Pregnant777Pregnant job applicants and employees have strong protections under the federal Pregnancy Discrimination Act of 1978 (PDA), including protection from discrimination in hiring, job duties, promotion, and termination. Federal law also protects caregivers with responsibility over children, elder relatives, and disabled adults from discrimination in employment, although the law is less explicit in that area. Municipal ordinances prohibit New York City businesses from discriminating against employees and job seekers on multiple bases as well.

Small businesses need to understand their obligations to their employees under anti-discrimination statutes. They must particularly take these responsibilities into account when building their team. Federal and New York laws prohibit businesses from discriminating in employment based on race, gender, age, and other factors. Federal laws, led by the Civil Rights Act of 1964, apply to businesses with fifteen or more employees, while laws in New York City apply to businesses employing at least four people. Small businesses can avoid major complications and legal repercussions by understanding and following these laws.

A public meeting held by the Equal Employment Opportunity Commission (EEOC) on February 15, 2012 addressed the intersection of discrimination based on pregnancy and discrimination based on caregiving responsibilities. While laws like the Civil Rights Act and the PDA have long protected pregnant employees, discrimination continues to occur quite frequently. In addition to pregnant workers, people with caregiving responsibilities over children or elders report harassment and discrimination from supervisors and co-workers, but their legal rights are not as well-defined. Several panels explored changes in social norms and demographic conditions in the more than thirty years since the PDA became law. The commissioners concluded that several federal laws may provide protections for caregivers, including the PDA, the Family and Medical Leave Act (FMLA), and the Americans with Disabilities Act (ADA).
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