Articles Posted in Organization: Inc./LLC/Sole Proprietor

file000848283744.jpgTwo corporate officers, who are also the sole shareholders and employees of their business, may be personally liable for alleged copyright infringement, after a federal district court in Illinois denied their motion to dismiss. Asher Worldwide Enterprises, LLC v. Incorporated, et al, No. 1:12-cv-00568, mem. op. (N.D. Ill., Aug. 26, 2013). Courts may find corporate officers personally liable for claims made against the business, known as “piercing the corporate veil,” in situations where a director willfully participates in the conduct that gives rise to the claim. The court in the present case considered the size of the defendant corporation, and found the individual defendants’ direct involvement in the alleged infringement to be a reasonable inference.

The plaintiff, Asher Worldwide Enterprises (AWE), sells “discount commercial kitchen and restaurant equipment” through a website. The defendant,, was a direct competitor. According to the court’s opinion, AWE created original product descriptions and other content for its website, and registered all such content with the U.S. Copyright Office. The defendant allegedly published about one hundred and fifty of AWE’s descriptions on its site from March to October 2010. Internet searches for AWE’s website during that time allegedly returned pages on the defendant’s site. AWE claims that after it redesigned its website in September 2010, the defendant republished at least two hundred more of its product descriptions.

AWE initially sued in a Washington federal court, claiming copyright infringement, 17 U.S.C. §§ 501 et seq.; and false designations of origin, false description, and dilution under the Lanham Act, 15 U.S.C. § 1125(a)(1). The Washington court determined that it did not have personal jurisdiction over and transferred the case to Chicago. After the transfer, AWE reportedly found that’s corporate officers were winding down the business and attempting to deplete any remaining assets. It further found that the address provided as the corporation’s headquarters was a UPS Store, leaving it unable to obtain service of process. It amended its complaint to include the two individuals as defendants.
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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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800px-New_York_Harbor.jpgThe New Jersey Legislature passed sweeping reforms of the laws governing limited liability companies (LLC) in September 2012. The changes to the Limited Liability Company Act will take effect in March 2013, affecting newly-formed companies immediately. LLCs already in existence will continue to be governed by current LLC law until March 2014, when the new law becomes applicable to all LLCs in the state. The new law represents a major departure from current law, which is based on Delaware’s LLC laws. The Revised Uniform Limited Liability Company Act (RULLCA) forms the basis for the new law.

The new law began in the Assembly as AB 1542, where the RULLCA was introduced in January 2012. The Assembly passed it on May 24, 2012 by a vote of 77 to 1. The Senate passed a counterpart, SB 742, on June 21, 38 to 0. The Governor signed it into law as P.L. 2012 on September 19.

The RULLCA is the work of the National Conference of Commissioners on Uniform State Laws, commonly known as the Uniform Law Commission (ULC). The ULC prepares model statutes for a variety of purposes and proposes them to state legislatures in an effort to develop a standardized set of laws. It first developed the RULLCA in 1996, when LLCs were still a relatively new idea, and modified it in 2006. The New Jersey law is largely based on the 2006 version.
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1375057_40170684.jpgStartup businesses in New York and New Jersey always begin with enthusiasm and excitement. A new business is an opportunity to create and explore, but also requires careful planning and attention. Certain risks, if not managed effectively, can sink a new business before it has a chance to succeed. Here are five errors that new businesses often make, and tips on how to avoid them.

1. The Wrong Business Entity. Identifying the right type of business organization is critical to a company’s success. Owners must consider how they want business income to be taxed, and how they want to handle the liabilities of the business. Corporations, limited liability companies (LLCs), and partnerships each offer unique advantages. “C” corporations and “S” corporations offer similar liability protections, but different tax advantages. Partnerships offer tax benefits in some circumstances, as well as flexibility in the company’s governance. LLCs offer a great deal of flexibility, but may not be right for fast-growing companies.

2. Insufficient Planning and Agreement Among Owners. Business owners must consider not only how to start their business, but also how they plan to either end or exit it. They must plan for contingencies, like the early departure or death of an owner, with regard to how the company will handle that owner’s equity share. Any promises or contingent offers regarding additional stock or equity should be in writing. Agreement among owners at the start of the business is no guarantee of continued harmony.
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1109016_48841117_03012012.jpgA proposal from the Obama administration to reduce the federal corporate tax rate has not generated as much enthusiasm among small business owners as might be expected. Small business advocates claim that the proposed reduction, while seemingly beneficial at first glance, would actually only help a small percentage of companies. The proposed reduction would lower the top corporate tax rate from thirty-five to twenty-eight percent. For manufacturers, the rate would top out at twenty-five percent. The problem is that the proposed reduction only applies to C corporations, the corporate structure used by most large businesses and very few small ones.

According to the Associated Press, only twenty-five percent of small businesses use the C corporation structure. Other small businesses are organized as S corporations, limited liability companies (LLC’s), partnerships, or sole proprietorships. The primary difference between a C corporation and a S corporation is the way in which they pay taxes. C corporations pay federal income taxes on net revenues, and shareholders pay taxes on dividends received from the corporation. This is sometimes known as “double taxation,” since the corporation and the shareholders both pay income tax on what is essentially the same money. In a S corporation, income “passes through” to the shareholders, who pay the income tax. Tax laws set specific restrictions on who can be a shareholder in a S corporation, and the total number of shareholders is capped.

Other types of businesses, like LLC’s and partnerships, also usually do “pass-through” taxation, although they may sometimes opt to pay tax like a C Corporation. Sole proprietorships are typically just a legal alter ego for the business owner, so taxes are paid through the individual’s tax return. According to the National Small Business Association, up to eighty-three percent of small businesses pay taxes at the level of the owner’s personal income.

While larger corporations may see a reduction in their taxes, small businesses may not see any change, or may even see an increase in some circumstances. The Wall Street Journal reports that people with total income of more than $250,000 per year will see an increase in their personal tax rates if the Bush tax cuts expire on schedule at the end of 2012. This would have the effect of raising the tax rate on small businesses whose taxes are tied to their owners. Several small business advocates quoted by the Wall Street Journal promote reducing the personal income tax rate along with the corporate rate in order to more effectively help small businesses and the self-employed.
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