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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.

 

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.

 

 

Forming a Benefit Corporation/LLC in Maryland

Monday, October 29th, 2018

A Benefit corporation/LLC is formed to create a public benefit, in addition to creating profit for its shareholders. In Maryland, a company can be recognized by the state as a benefit corporation/LLC by stating in its corporate charter that it is a benefit corporation/LLC, getting certified as providing a public benefit, taking into consideration more than just profit, and submitting an annual benefit report to each stockholder or member.

How to Form a Benefit Corporation/LLC with Maryland SDAT:

1.  Draft or amend existing Articles of Incorporation/Organization by making reference to the election to be a benefits corporation/LLC at the top of the charter document, or the amendment to the charter document;

2.  State in the Articles or the amendment to the Articles that the corporation/LLC is a benefit corporation/LLC and has the purpose to create a general public benefit, defined as a “material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.”

3.  A business has the option of stating in the Articles or the amendment to the Articles a specific public benefit that the business seeks to provide, for example:

    • providing individuals or communities with beneficial products or services;
    • promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
    • preserving the environment;
    • improving human health;
    • promoting the arts, sciences, or advancement of knowledge;
    • increasing the flow of capital to entities with a public benefit purpose; or
    • the accomplishment of any other particular benefit for society or the environment

 

4.  A business may also change its name to “xyz, Benefit corporation/LLC” or “xyz, A Benefit corporation/LLC”.

5.  Also, the company must deliver an annual benefit report to each stockholder/member, which must include:

  • the ways the a general public benefit was pursued and to what extent one was created;
  • the ways the any specific public benefit was pursued and to what extent one was created;
  • any circumstances that hindered the creation of the public benefit; and
  • an assessment of the societal and environmental performance of the benefit corporation prepared in accordance with a third-party standard applied consistently with the prior year’s benefit report or accompanied by an explanation of the reasons for any inconsistent application.

The report must be delivered by the company to each stockholder/member within 120 days of the end of each fiscal year, and must publish it on the company’s public website.

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.

What You Need to Know About Service Disabled Veteran-Owned Business Certification

Thursday, October 23rd, 2014

Service Disabled Veteran-Owner Business (“SDVOB”) Certification Requirements:  

1. The service-disabled veteran must have a service-connected disability that has been determined by the Department of Veterans Affairs or Department of Defense

2. The service-disabled veteran-owned small business concern must be small under the North American Industrial Classification System (NAICS) code assigned to the procurement;

 3.The service-disabled veteran-owned small business concern must also be at least 51% owned by one or more service-disabled veterans or, in the case of any publicly owned business, at least 51% of the stock of which is owned by one or more Service-Disabled Veterans.

 4.Management and daily business operations of the service-disabled veteran-owned business concern must be controlled by one or more Service-Disabled Veterans or, in the case of a veteran with a permanent and severe disability, the spouse or permanent caregiver of such a veteran.

5. The service-disabled veteran must hold the highest officer position in the small business concern.

 6.Further:

 To be an eligible SDVOSBC the following must be met:

  • The management and daily business operations of the concern must be controlled by one or more service-disabled veterans.
    • Control by one or more service-disabled veterans means that both the long-term decision making and the day-to-day management and administration of the business operations must be conducted by one or more service-disabled veterans
    • The management and daily business operations of which are controlled by one or more service-disabled veterans or, in the case of a service-disabled veterans or, in the case of a service-disabled veteran with permanent and severe disability, the spouse of permanent caregiver of such veteran
  • Service-disabled veteran means a veteran with a disability that is service-connected.
  • Ownership must be direct. Ownership by one or more service disabled veterans must be direct ownership.
    • A concern owned principally by another business entity that is in turn owned and controlled by one or more service-disabled veterans does not meet this requirement.

GSA Certification as SDVOB:

GSA does not require formal certification, instead they allow a business to self-certify.  Go to www.sam.gov for more information. 

 SDVOSB program — bidding firm is responsible for self-certifying or representing to the contracting officer that it is a service disabled veteran owned small business concern.

 -Self-certification can be achieved through SAM

 -Under the SDVOSB program, the bidding firm is responsible for self-certifying or representing to the contracting officer that it is a service disabled veteran owned small business concern. A firm can do this by simply self-certifying through the government’s System for Award Management (SAM) – by declaring that it meets the definition of a service disabled veteran owned small business.

 Dept. of Veterans Affairs (“VA”) Certification

 Veterans First Contracting Program requires verification of veteran status and placement in VetBiz database.  Agencies cannot require certification by the VA.

 The Veterans First Contracting Program, which applies only to VA acquisitions and requires verification of veteran status through the VA in its Vendor Information Pages or VetBiz database. Agencies, other than VA, cannot require certification by the VA or placement in the VetBiz database.

 Veterans First Contracting Program:

 -Applies only to VA acquisitions

 -Provides sole-source authority to the VA and permits restricted set-asides to both SDVOSBs and VOSBs

 -Establishes contracting goals unique to the VA

 -7% for veteran owned businesses; 10% for service disabled veteran owned businesses

 -Requires veteran status to be verified by the VA

 

 

 

 

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.

 

Why a Single Member LLC Needs an Operating Agreement

Wednesday, October 6th, 2010

Maryland law does not require that a sole member limited liability company (“LLC”) have an existing, enforceable operating agreement on file. Nevertheless, there is an excellent reason to draft and execute one: by executing an LLC operating agreement, the single member of the LLC has drawn a line of protection guarding that person against personal liability for the business debts and obligations of the LLC.

Specifically, Maryland courts have held that the protection from liability that exists by virtue of the LLC’s formation can disintegrate if the LLC fails to observe certain corporate formalities. One of these formalities is the existence of a valid operating agreement. Having an operating agreement in place can protect the single member from liability when a third party attempts to sue the individual member in order to satisfy an obligation resulting from a debt of the LLC.

Without an operating agreement, it may prove more difficult for the sole member to avoid liability. Courts sometimes blur the line between a sole member LLC with its protection from liability for its individual owners, and a sole proprietorship where such protection does not exist. However, this line becomes more clear cut, and courts will as a result hesitate to “pierce the corporate veil” and hold an individual liable for the LLC’s debts, when corporate formalities like having an operating agreement are complied with.

Maryland Minority Business Enterprise (MBE) powerpoint presentation

Tuesday, August 24th, 2010

Click this link to view an excellent powerpoint presentation discussing the application process for Maryland Minority Business Enterprise status as found on the Maryland Transit Administration website:

http://mta.maryland.gov/business/advertisingwithmta/MBE%20Certification%20Power%20Point%20Presentation.pdf

Please contact me if you need assistance with your MBE certification.

Minority and Woman-Owned Business Certification in the State of Maryland

Tuesday, August 24th, 2010

If you are a minority-owned business, (at least 51% owned by a member(s) of one or more of the following groups: African American/Black, Female, Asian Pacific, Hispanic, Subcontinent Asian, American Indian/Native American?), and you wish to do business with Montgomery County, the State of Maryland, or the federal government, you should consider filing for MBE/DBE certification. The following is from the Maryland DOT website:

The Maryland Department of Transportation’s (MDOT) Office of Minority Business Enterprise has two primary functions: Minority Business Enterprise (MBE)/Disadvantaged Business Enterprise (DBE) certification for the State of Maryland and the administration and coordination of the MBE and DBE programs within the MDOT administrations.

To ensure that only bona fide MBEs/DBEs participate in the programs, Maryland has a comprehensive certification program. Only those businesses determined to be owned and controlled by socially and economically disadvantaged individuals are certified. A firm designated as an MBE and/or DBE will have its name appear in the MBE/DBE Directory, a reference document made available on the Internet to all State departments/agencies, the contracting community and the general public.

Recognizing that the potential for MBE/DBE participation is dependent upon several variables, each MDOT administration examines its respective contracts/purchase orders and establishes specific goals on a contract-by-contract basis. Procedures are followed to assure that an award of a contract is not made until a prime contractor has met the MBE/DBE goal(s) or has demonstrated a good faith effort to meet the MBE/DBE goal(s).

After a contract has been awarded, MBE/DBE participation is closely monitored by key personnel within each administration. Monitoring includes a review of the subcontract financial transactions, and visits to the job-site to verify actual work being performed by the MBE/DBE firm. The standards for MBE/DBE compliance are spelled out in the MBE/DBE Program Manual. Any deviation from compliance standards is documented and if it is not corrected, sanctions may be applied against the contractor and subcontractor(s). The MBE/DBE Program Manual identifies the sanctions which may be instituted.

Periodically, MDOT revises the MBE/DBE Program Manual for improvements and to include any applicable changes in federal and/or State regulations or laws. Persons having an interest in the program may find this guide helpful in understanding MDOT’s MBE/DBE Program. Copies of the complete Program Manual are available online in Adobe PDF format or at the following address for a nominal fee:

Maryland Department of Transportation
Office of Minority Business Enterprise
7201 Corporate Center Drive
Hanover, MD 21076
410 865-1269 or 1-800-544-6056
TTY 410 865-1342

http://www.mdot.maryland.gov/

To view the Uniform Certification Application to get certified as a Maryland minority-owned businesses, click:

http://www.mdot.maryland.gov/MBE_Program/Documents/DEEO-50%20Uniform%20Certification%20Applic.pdf

To see what documents need to accompany the application, click the following if you are a corporation:

http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-CORP0710.pdf

Click the following if you are a limited liability company (LLC)

http://www.mdot.maryland.gov/MBE_Program/Documents/Checklist-LLC0710.pdf

If you need assistance with your MBE application, please contact me.