business contract review

...now browsing by tag

 
 

So You Want to Start Your Own Business

Monday, February 24th, 2020

1.Why incorporate?

The first question a Maryland prospective business owner may ask is “why should I incorporate?”  The reason to incorporate one’s business is to achieve limited liability, which means that a business owner is liable to third parties only up to the amount that the individual has invested in the business.  A person that owns a business individually puts all of his or her personal assets at risk in the event the business fails.  By incorporating, a business owner’s personal assets are shielded from creditors of the business in the event the business is unable to meet its debts as they become due.

2.What form should my business take?

After making the decision to incorporate, a prospective business owner must ask “what corporate form should my business organization take?”  Businesses can take the form of a corporation, partnership, or limited liability company (LLC).  (As an aside, LLCs are creatures of statute that are organized, not incorporated, and therefore are not considered corporations as the term is legally defined.  Nevertheless, LLCs do enjoy the same limited liability advantages as corporations and partnerships, and are therefore included as part of the discussion as what form a business should take.)

In order to determine what form your business should take, you should consult an experienced business accountant and corporate attorney, since each form of business has separate advantages and disadvantages, as well as differing tax treatment.  There is no exact answer for every business owner, as each determination can be made only on the unique facts of that business owner’s situation.

Once the choice is made as to corporate form, business owners can search the Maryland SDAT website for name availability at  www.sdatcert3.resiusa.org/ucc-charter/.

After determining whether a corporate name is available, forms for Articles of Incorporation (for corporations), Articles of Organization (for an LLC) and Certificate of Organization (for partnerships) can be found at www.dat.state.md.us/sdatweb/sdatforms.html#entity.  The Articles must be filed with the Maryland Department of Assessments and Taxation along with the appropriate fee.

3.Once filed and approved, a federal tax identification number will usually be required for the business.  You can obtain one electronically within 30 minutes in most cases at www.irs.gov.

4.Finally, with whatever business structure you choose, applicable corporate documents must be drafted to memorialize the agreement between the parties, ie a shareholder agreement for shareholders of a corporation, a partnership agreement for partners in a partnership, or an operating agreement for members of an LLC.  These agreements are a pivotal step in the start-up process, as it will in many cases be the only document that defines the exact business relationship between the parties.  Crafting such a document requires the expertise of a business lawyer.  Other tasks that a business attorney may perform at the outset on behalf of business clients are the registration of trademarks and service marks, as well as obtaining fictional (d/b/a) names.

 

So You Signed a Non-Solicitation/Non-Complete/Non-Disclosure Agreement, Now What??

Monday, February 24th, 2020

Business clients often confuse the above terms, each of which protect business owners from a different type of harm.  I will summarize the three types of agreements below.

Non-compete agreement:

A covenant not-to-compete is an agreement whereby a party agrees not to compete against another party: 1) in a specific line of business; 2) for a definite period of time; 3) in a limited geographic area.

A non-compete agreement is usually found as part of a broader contract, such as an employment agreement or franchise agreement, and will take effect upon termination of the contract.   Maryland courts allow a covenant not-to-compete to be enforced provided it is “reasonable” in the activity it restricts, as well as in its geographic scope and duration.   A typical non-compete looks something like the following:

“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from acting, directly or indirectly, as an owner, manager, operator, consultant or employee of any business or business activity that is in the business of providing services similar to or competitive with Company.”

Non-disclosure agreement:

A non-disclosure, or confidentiality, agreement (“NDA”), is an agreement whereby a party pledges not to disclose the confidential and proprietary information of another party.  NDA’s are commonly used to protect confidential information not generally made available to the public such as trade secrets, customer lists, business and marketing plans and strategy, and financial information, so that such information does not fall into the hands of competitors or even the public at large.  NDA’s can be found in many employment and independent contractor agreements, as well as agreements where businesses are performing due diligence on one another prior to some type of relationship commencing.

Unlike the situation where covenants not-to-compete must be reasonable in all areas, non-disclosure agreements will be enforced by Maryland courts unless the person or company that is alleged to have violated the NDA is able to show that it learned of the confidential information from an independent, outside source.  Whatsmore, an NDA need not contain any geographic or time restrictions in order to be valid and enforceable.

A typical NDA will look like this:

“Employee acknowledges that Company may, in the course of Employee’s employment, provide Employee access to Company’s trade secrets, customer lists, business and marketing plans, financial information, and other confidential information related to the business of Company, including access to Company’s Employment Manual (the “Manual”).  Employee agrees to retain all such information as confidential and may not use such confidential information on his or her own behalf or disclose such confidential information to any third party during or at any time after the term of Employee’s employment.”

Non-solicitation agreement:

A non-solicitation agreement is an agreement whereby a party pledges not to solicit the clients and customers of another party.  Non-solicitation agreements are generally found in employment and independent contractor agreements, as well as vendor arrangements where one party is granted access to the clients list of another party.

Like an NDA, a non-solicitation agreement need not contain any geographic or time restrictions in order to be valid and enforceable in Maryland.  A common form of non-solicitation agreement follows:

“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from soliciting business from, or performing services for, or inducing or attempting to induce, any customer or client of Company, its subsidiaries or affiliates, to cease doing business with Company, or in any way interfering with the relationship between Company and any customer or client of Company.”

Many business contracts will contain one or more of the above agreements.  It is therefore important to be able to distinguish among them, and draft contracts that are specific to your business needs.  Contact a business lawyer for advice.

 

Buy-Sell Provisions in Corporate Shareholder and LLC Operating Agreements

Monday, February 24th, 2020

I am often asked by clients who own their own businesses how to address the circumstances surrounding the transfer of ownership if one of the owners dies, becomes disabled, or whose employment in the business is terminated for-cause?  The answer is through the use of language addressing buy-sell situations that are included in an Operating or Shareholder Agreement.

A carefully drafted buy-sell provision will address the buyout of a deceased or disabled owner’s share of the business, usually through the use of the proceeds of life and disability insurance policies taken out by the business on the lives of the owners.  A buy-sell provision will also address termination of an owner’s employment with the business for-cause.  A sample buy-sell paragraph will read something like the following:

“Sale of Shares on Death, Disability or Termination of Employment.  If, during the term of this Agreement: a) a Shareholder dies or becomes permanently disabled (meaning the Shareholder becomes unable to carry out his duties as a Director or Officer of the Company for a period of 90 consecutive days or more); or b) a Shareholder who is also an employee of the Company has his or her employment terminated by Company for-cause, then the Company shall buy, and the Shareholder, his estate or the named representative of the Shareholder shall sell, the Shares of said Shareholder to the Company.”

A buy-sell provision will go on to address how to arrive at the price at which an owner’s shares may be sold for, as well as whether such price will vary depending on the circumstances surrounding the owner’s departure from the business.

A well-drafted buy-sell provision will also address an owner’s potential divorce, so as to prevent remaining owners from having to own and operate the business with the spouse or other family member of a former owner.

Every LLC Operating Agreement and Corporate Shareholder Agreement should address the buy-sell provisions referenced above.  This will go a long way towards solving many potential disputes involving circumstances associated with the transfer of ownership of a business before they arise.

 

Drafting Corporate Documents

Monday, February 24th, 2020

A Maryland corporation or LLC need only file Articles of Incorporation/Organization with Maryland Department of Assessment and Taxation in order be lawfully incorporated.  Once formed, it is advisable that every Maryland entity consult with a Maryland business attorney to discuss the drafting of a set of Bylaws, as well as a shareholders’ agreement or operating agreement.

Maryland law mandates that each Maryland corporation must have a set of Bylaws that lay out the procedures concerning the governance of the corporation.  A Maryland corporation’s Bylaws may contain any provision not inconsistent with law or the charter of the corporation for the regulation and management of the affairs of the corporation.

A Maryland corporation’s Bylaws usually set out the powers, duties, rights and obligations of its directors and officers, including how many directors the corporation may have, the procedure for calling shareholder and Board of Director meetings, how and where corporate records are to be maintained, stockholder reports, voting and proxy procedures, how stock may be transferred, how directors are elected and removed, how officers are appointed and removed, as well as numerous other matters related to the corporation as a whole.

A Maryland corporation may, but is not required to, have a shareholders’ agreement.   A shareholders’ agreement is an agreement between the stockholders of a corporation that governs the rights and obligations of the shareholders.  First and foremost, a shareholders’ agreement will state the individual equity in the corporation as held by the shareholders.  A shareholders’ agreement typically states how new shares of stock are issued, and addresses issues surrounding restrictions on stock repurchase and transfer, including how stockholders of a company may sell their shares, what happens to the shares upon the death or disability of a shareholder, whether other shareholders have the right to purchase another shareholder’s stock upon death or disability, what procedures are used in order to assign value to stock shares, and what happens to stock upon the breach of a shareholder agreement by a stockholder.

A shareholders’ agreement will also govern how the day-to-day operations of the company are managed, how a Board of Directors will be elected and terminated, what decisions require majority, super-majority or unanimous consent of the shareholders, how the Board will appoint Officers of the corporation.

The resolution of shareholder disputes through mediation, arbitration or litigation, or a combination thereof, may also be included in a shareholders agreement, as well as what law governs any dispute.

When you are in the start up and formation stages of your new business, consult with your business attorney regarding the drafting of Bylaws and a shareholders’ agreement.

 

 

Subcontracting Agreements / Master Agreements

Friday, October 26th, 2018

How do business owners handle subcontracting agreements when the subcontractor may work on several different projects for several different clients of the Contractor, simultaneously or over a period of years?  The answer is to tweak the standard Subcontractor Agreement to make it a “master” agreement, so that it covers not just the first project, but future projects as well.  Here is some language I add:

WHEREAS, Contractor and Subcontractor (the “Parties”) agree that for mutually agreed upon Clients, Contractor may choose to utilize Subcontractor with respect to certain Services specifically set forth herein and in any Statement of Work attached to this Agreement;

WHEREAS, Contractor and Subcontractor desire to enter into a master agreement that sets forth the terms and conditions pursuant to which Contractor and Subcontractor shall, for mutually agreed upon Clients, provide certain Services to one or more of Contractor’s clients;

Statement of Work.  The parties will memorialize the Subcontractor work in the attached Statement of Work (a “Statement of Work” or “SOW”) that is entered into between the parties and is incorporated into and made a part of this Agreement.  Contractor may issue a purchase order (“Purchase Order”) with the mutually agreed upon and signed Statement of Work attached for all work to be performed by Subcontractor under this Agreement.  A SOW, if and only to the extent then followed by a Purchase Order, constitutes the only authorization for Subcontractor to take any action that will result in any expense to Contractor.  Any SOW shall be substantially in the form of the representative SOW attached as Exhibit A to this Agreement and shall reference this Agreement and shall specify: (a) the overall project description and Subcontractor’s requirements for the services; (b) the services to be performed, including materials to be provided, by Subcontractor; (c) the charges or billing rates and payment milestones for the services performed by Subcontractor; (d) the location(s) where the services are to be performed;  (e) the acceptance criteria and warranty provisions for such work; (f) anticipated start and finish dates; and (g) any other information and/or associated terms and conditions that may be required by the circumstances of a particular Statement of Work.

Sample Confessed Judgment Note for Commercial Use

Thursday, October 23rd, 2014

CONFESSED JUDGMENT NOTE

[SAMPLE]

 Amount –

Date –

            The undersigned __________________________ (hereinafter referred to as “Maker”) hereby promises to pay ________________________________(“______________”), located at [Address], the sum of ___________________ ($_______________) to resolve a dispute over monies owed to ______________________ related to _________________________________.

 NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Maker hereby agrees as follows:

 1.   Payment by Maker Upon Execution of this Note. Maker agrees to pay the sum of $_________________ to ____________________ upon execution of this Note.

 2.   Balance of Sum to be Paid by Maker. Maker agrees to pay the balance owed of the Sum in the amount of $_______________ on or before _________________ (the “Due Date”).  

 3.   Default. Maker shall be in default of this Note should Maker fail to make any payment due to ______________ under this Note, or fail to pay in full all amounts owed under this Note, on or before the Due Date. Upon default, the Entire Sum owed to ______________ of $__________________ shall be then immediately due and payable by Maker, less any amounts previously paid by Maker to _______________ in settlement of this matter.

 4.     Prepayment. Maker may prepay the principal amount outstanding in whole or in part at any time without penalty. 

5.  Confession of Judgment. Should Maker default under this Note, Maker appoints _______________________ as its duly authorized attorney-in-fact with authority, in its name, place, and stead, to confess judgment in the office of the clerk of any Court of any city or county in the state of ____________________ against Maker, in the amount of the $________________, less any amounts previously paid by Maker to _________________ in settlement of this matter.

 6.  Waiver. Maker waives presentment and demand of payment. The failure of ______________________ to exercise any of its rights hereunder in any instance shall not constitute a waiver thereof in that or any other instance. Any notice to Maker shall be given by mailing such notice by first class mail, postage prepaid, addressed to Maker at ____________________________________, or to such other address as Maker may designate by written notice to _____________________. Notice of non-payment is not required by the terms of this Note.

 7.  Costs and Expenses. Maker shall pay __________________ for all costs and expenses, including, but not limited to filing fees, investigative costs and reasonable pre- and post-judgment attorney fees, incurred by __________________ in enforcing and collecting this Note.

 8.  Obligations and Benefits. The obligations and benefits of this Note shall be binding upon and inure to the benefit of the Maker, _____________________ and their respective heirs, successors and assigns.

MAKER

____________________________             

By: _________________________

Title: ________________________

Date: ________________________

 

Here is a Sample Document for a Corporate Supplier Diversity Program

Thursday, October 23rd, 2014

COMPANY NAME

Supplier Diversity Program

COMPANY NAME takes its social and environmental responsibilities seriously. A good example is our strong and longstanding commitment to a diverse supplier base.

The businesses we categorize as diverse suppliers are Minority-Owned, Women-Owned, Veteran-Owned, and Service-Disabled Veteran-Owned Small Businesses, as well as businesses located in Historically Underutilized Business regions (HUBZone) and Small Disadvantaged Businesses (SDB).

A business joins our Supplier Diversity Program by contacting _________ at ______________________ and requesting an application. Following a verification and screening process to ensure a good fit between supplier strengths and capabilities and our current and future requirements, we review the supplier information. The business then becomes a potential supplier who may be used in the procurement process as business needs dictate.

Use the IRS 20 Factor Test to Determine Employee or Independent Contractor Status

Thursday, October 23rd, 2014

Before your company can legally classify a worker as an independent contractor instead of an employee, serious research and analysis must be undertaken. Be sure to review and apply the IRS guidelines below to the specific job which you are considering independent contractor status for. Go through each factor and analyze the job on a step by step basis before arriving at a conclusion. Remember, this is a balancing act, so make sure the scale tilts significantly in your favor before solidifying IC status for your personnel:

IRS 20 Factor Test

  1. Instructions.  Workers who must comply with your instructions as to when, where, and how they work are more likely to be employees than independent contractors.
  2. Training.  The more training your workers receive from you, the more likely it is that they’re employees. The underlying concept here is that independent contractors are supposed to know how to do their work and, thus, shouldn’t require training from the purchasers of their services.
  3. Integration.  The more important that your workers’ services are to your business’s success or continuation, the more likely it is that they’re employees.
  4. Services rendered personally. Workers who must personally perform the services for which you’re paying are more likely employees. In contrast, independent contractors usually have the right to substitute other people’s services for their own in fulfilling their contracts.
  5. Hiring assistants. Workers who are not in charge of hiring, supervising, and paying their own assistants are more likely employees.
  6. Continuing relationship. Workers who perform work for you for significant periods of time or at recurring intervals are more likely employees.
  7. Set hours of work. Workers for whom you establish set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours.
  8. Full time required.  Workers whom you require to work or be available full time are likely to be employees. In contrast, independent contractors generally can work whenever and for whomever they choose.
  9. Work done on premises.  Workers who work at your premises or at a place you designate are more likely employees. In contrast, independent contractors usually have their own place of business where they can do their work for you.
  10. Order or sequence set.Workers for whom you set the order or sequence in which they perform their services are more likely employees.
  11. Reports.  Workers whom you require to submit regular reports are more likely employees.
  12. Payment method.  Workers whom you pay by the hour, week, or month are more likely employees. In contrast, independent contractors are usually paid by the job.
  13. Expenses.  Workers whose business and travel expenses you pay are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses.
  14. Tools and materials.  Workers who use tools, materials, and other equipment that you furnish are more likely employees.
  15. Investment.  The greater your workers’ investment in the facilities and equipment they use in performing their services, the more likely it is that they’re independent contractors.
  16. Profit or loss.  The greater the risk that your workers can either make a profit or suffer a loss in rendering their services, the more likely it is that they’re independent contractors.
  17. Works for more than one person at a time. The more businesses for which your workers perform services at the same time, the more likely it is that they’re independent contractors.
  18. Services available to general public.  Workers who hold their services out to the general public (for example, through business cards, advertisements, and other promotional items) are more likely independent contractors.
  19. Right to fire.  Workers whom you can fire at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contractual terms.
  20. Right to quit. Workers who can quit at any time without incurring any liability to you are more likely employees. In contrast, independent contractors generally can’t walk away in the middle of a project without running the risk of being held financially

MBE/DBE Certification – Know the Law Before You Apply

Thursday, October 23rd, 2014

Many clients come to me only after their DBE/MBE certification has been denied, or after the application has been filed.  Often times this is too late.  Nevertheless, Federal regulations provide you with a guide on exactly how to achieve MBE/DBE status.  All you need to do is follow it.   What follows is the key provision from the regs, 49 C.F.R. 26.69:

(a) In determining whether the socially and economically disadvantaged participants in a firm own the firm, you must consider all the facts in the record, viewed as a whole.

(b) To be an eligible DBE, a firm must be at least 51 percent owned by socially and economically disadvantaged individuals.

(1) In the case of a corporation, such individuals must own at least 51 percent of the each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding.

(2) In the case of a partnership, 51 percent of each class of partnership interest must be owned by socially and economically disadvantaged individuals. Such ownership must be reflected in the firm’s partnership agreement.

(3) In the case of a limited liability company, at least 51 percent of each class of member interest must be owned by socially and economically disadvantaged individuals.
 
(c) The firm’s ownership by socially and economically disadvantaged individuals must be real, substantial, and continuing, going beyond pro forma ownership of the firm as reflected in ownership documents. The disadvantaged owners must enjoy the customary incidents of ownership, and share in the risks and profits commensurate with their ownership interests, as demonstrated by the substance, not merely the form, of arrangements.
 
(d) All securities that constitute ownership of a firm shall be held directly by disadvantaged persons. Except as provided in this paragraph (d), no securities or assets held in trust, or by any guardian for a minor, are considered as held by disadvantaged persons in determining the ownership of a firm. However, securities or assets held in trust are regarded as held by a disadvantaged individual for purposes of determining ownership of the firm, if—
 
(1) The beneficial owner of securities or assets held in trust is a disadvantaged individual, and the trustee is the same or another such individual; or
(2) The beneficial owner of a trust is a disadvantaged individual who, rather than the trustee, exercises effective control over the management, policy-making, and daily operational activities of the firm. Assets held in a revocable living trust may be counted only in the situation where the same disadvantaged individual is the sole grantor, beneficiary, and trustee.
 
(e) The contributions of capital or expertise by the socially and economically disadvantaged owners to acquire their ownership interests must be real and substantial. Examples of insufficient contributions include a promise to contribute capital, an unsecured note payable to the firm or an owner who is not a disadvantaged individual, or mere participation in a firm’s activities as an employee. Debt instruments from financial institutions or other organizations that lend funds in the normal course of their business do not render a firm ineligible, even if the debtor’s ownership interest is security for the loan.
 
(f) The following requirements apply to situations in which expertise is relied upon as part of a disadvantaged owner’s contribution to acquire ownership:
(1) The owner’s expertise must be—
(i) In a specialized field;
(ii) Of outstanding quality;
(iii) In areas critical to the firm’s operations;
(iv) Indispensable to the firm’s potential success;
(v) Specific to the type of work the firm performs; and
(vi) Documented in the records of the firm. These records must clearly show the contribution of expertise and its value to the firm.
(2) The individual whose expertise is relied upon must have a significant financial investment in the firm.
 
(g) You must always deem as held by a socially and economically disadvantaged individual, for purposes of determining ownership, all interests in a business or other assets obtained by the individual—
(1) As the result of a final property settlement or court order in a divorce or legal separation, provided that no term or condition of the agreement or divorce decree is inconsistent with this section; or
(2) Through inheritance, or otherwise because of the death of the former owner.
 
(h)  (1) You must presume as not being held by a socially and economically disadvantaged individual, for purposes of determining ownership, all interests in a business or other assets obtained by the individual as the result of a gift, or transfer without adequate consideration, from any non-disadvantaged individual or non-DBE firm who is—
(i) Involved in the same firm for which the individual is seeking certification, or an affiliate of that firm;
(ii) Involved in the same or a similar line of business; or
(iii) Engaged in an ongoing business relationship with the firm, or an affiliate of the firm, for which the individual is seeking certification.
(2) To overcome this presumption and permit the interests or assets to be counted, the disadvantaged individual must demonstrate to you, by clear and convincing evidence, that—
(i) The gift or transfer to the disadvantaged individual was made for reasons other than obtaining certification as a DBE; and
(ii) The disadvantaged individual actually controls the management, policy, and operations of the firm, notwithstanding the continuing participation of a non-disadvantaged individual who provided the gift or transfer.
 
(i) You must apply the following rules in situations in which marital assets form a basis for ownership of a firm:
(1) When marital assets (other than the assets of the business in question), held jointly or as community property by both spouses, are used to acquire the ownership interest asserted by one spouse, you must deem the ownership interest in the firm to have been acquired by that spouse with his or her own individual resources, provided that the other spouse irrevocably renounces and transfers all rights in the ownership interest in the manner sanctioned by the laws of the state in which either spouse or the firm is domiciled. You do not count a greater portion of joint or community property assets toward ownership than state law would recognize as belonging to the socially and economically disadvantaged owner of the applicant firm.
(2) A copy of the document legally transferring and renouncing the other spouse’s rights in the jointly owned or community assets used to acquire an ownership interest in the firm must be included as part of the firm’s application for DBE certification.
 
(j) You may consider the following factors in determining the ownership of a firm. However, you must not regard a contribution of capital as failing to be real and substantial, or find a firm ineligible, solely because—
(1) A socially and economically disadvantaged individual acquired his or her ownership interest as the result of a gift, or transfer without adequate consideration, other than the types set forth in paragraph (h) of this section;
(2) There is a provision for the co-signature of a spouse who is not a socially and economically disadvantaged individual on financing agreements, contracts for the purchase or sale of real or personal property, bank signature cards, or other documents; or
(3) Ownership of the firm in question or its assets is transferred for adequate consideration from a spouse who is not a socially and economically disadvantaged individual to a spouse who is such an individual. In this case, you must give particularly close and careful scrutiny to the ownership and control of a firm to ensure that it is owned and controlled, in substance as well as in form, by a socially and economically disadvantaged individual.