A number of years ago John Drane, owner of Drane Plumbing & Supply, executed a Power of Attorney (POA) naming his eldest daughter LaTrina Drane as his attorney in fact. John’s debilitating stroke last weekend risks placing him in rehabilitation for months. Determined to continue the family business that offers its customers “Let Us Drain Your Swamp,” LaTrina dusts off John’s POA. Will Latrina have any problems? Continue Reading Returning “Power” to the Power of Attorney
Spurred by the frenzy of mid-century modern furniture of the 1950s and 1960s returning in popularity, a growing number of collectors are investing in and holding vintage furniture. Capitalizing on that craze, N. Stile Sune’s start-up Mothbalz Antiques cannot grow fast enough to meet demand. To buy more old warehouses and re-fit them into climate controlled spaces, N. Stile must raise over $2 million and is willing to give his investors an equity interest. Can N. Stile use crowdfunding or must he go the old fashioned route of a private placement memorandum (PPM)?
Due to Sune’s $2 million in capital needs (and more) crowdfunding is not a viable option.
The JOBS Act 2012 (Jumpstart Our Business Startups) was designed to encourage funding of U.S. small businesses and to ease various U.S. securities regulations affecting business investment. Enticingly entitled the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012,” Title III of the JOBS Act had visions of giving small individual investors access to early-stage investment and the enhanced ability to raise money beyond “friends and family,” through social media and from unknown investors like other sites such as Kickstarter.
When compared to other forms of private placements, crowdfunding is not a feasible option for our friend N. Stile Sune and Mothbalz Antiques. As explained in Forbes, here are ten reasons why:
- Issuers are capped to raising $1 million in any 12-month period.
- Shares issued are subject to a one-year restricted period.
- Crowdfunding is capped over a 12-month period at amounts depending upon net worth / income.
- Crowdfunding must be done through a registered broker-dealer or registered “funding portal.”
- The disclosure document (PPM) must be filed with the SEC prior to first sale and N. Stile Sune would have to file audited financial statements.
- Unlike JOBS Act changes affecting accredited investors, crowdfunding does not allow advertising except in narrow exceptions.
- Annual reports and possibly more frequent reports must be filed with the SEC.
- Legal prospectus liability applies to disclosures.
- Extensive due diligence is required, including background checks on management and large stockholders.
Tilting the Scales in Your Favor
Beware. Crowdfunding is far from a start-up fund raising panacea. You can still be sued for fraud for an actual or perceived misrepresentation or omission. One of the best ways to legally protect yourself and your business is also one of the most effective means for garnering serious investor interest. Disclose as much information as possible about your business, ensuring that if things begin to fall apart and investors threaten to sue for securities fraud or other issues, you can use your disclosure as a powerful defense – through the traditional Private Placement Memorandum – or PPM for short.
Growth in the DFW metroplex is booming, and the City of Flourish is one of the driving forces. Unfortunately, the City has had a difficult time keeping up its infrastructure with the growing population. Recently the City selected a bid from Slab Mixer Co., a concrete pipe manufacturer, for culverts for a project widening some of the City’s streets. After the City and Slab signed their contract, a group of Flourish citizens, concerned with how the City’s spending might affect their taxes, requested a copy of the contract under the Texas Public Information Act (TPIA). When the City notified Slab of the request, Slab asserted that some of the terms in the contract needed to be redacted because they would give Slab’s competitors an advantage in future contracts. Does Slab have the right to do that?
Background on the Texas Public Information Act
The Texas Public Information Act provides the public with the right to access information the government collects, subject to approximately 60 exceptions. Tex. Gov’t Code §§ 552.221, 552.101-.154. One exception is “information that, if released, would give advantage to a competitor or bidder.” Id. at § 552.104(a). Historically, the Texas Attorney General’s Office, which is charged with interpreting the Act and maintaining its uniformity, has taken the position that this exception only protects the governmental body, and not a private party. In other words, the AG believed the Act only allowed a governmental body to protect information that would place it at a disadvantage with other governmental bodies inside and outside of the State of Texas.
Do Private Parties Have a Right to Protect Their Bid Information?
Yes. In 2015 the Texas Supreme Court in The Boeing Company et al. v. Paxton held that “a private party may assert the exception to protect its competitively sensitive information.” The Court found that the plain language of the exception was not limited to a governmental body’s right to protect that information. It also noted that the governmental body had the right to defer to the private party to assert its competitive interests were at stake and request that the competitively sensitive information be withheld. Thus, Boeing had standing to assert the exception, but would have to show that the information requested, “if released, would give advantage to a competitor or bidder.”
What about Citizens’ Right to Know How Much Their Government is Spending?
Some have claimed the Texas Supreme Court’s decision in Boeing has given governmental bodies a carte blanche loophole to avoid turning over any information about their contracts. According to these critics, the Court’s decision allows the governmental bodies to assert that disclosing that information would give an advantage to the successful bidder’s competitors in the future.
While it’s a superficially appealing position from a taxpayer’s perspective, it ignores another argument that the governmental bodies assert to protect disclosure of this information. As mentioned above, the governmental bodies have asserted the exception protects disclosure of sensitive information that the body believes will give other governmental bodies an advantage.
For example, the Boeing case points out that the Attorney General ruled the exception protected disclosure of information concerning the Texas Governor’s marketing meetings with businesses in other states because the State is competing with other states to recruit those businesses to relocate. The release of that information would give other states the advantage to approach those businesses with competing or better incentives.
Companion bills (HB 792 and SB 407) have been filed in the Texas House and Senate to address the Texas Supreme Court’s decision in Boeing. If enacted, the legislation would make clear that the exception only allows a governmental body to protect information that it believes would harm its competitive interests. It would also apply an “exception to the exception” that would require governmental bodies to disclose that competitive information after the body awards the contract. HB 792 was recently referred to committee. SB 407 was referred to committee, where it was discussed but not voted upon yet.
Tilting the Scales in Your Favor
That depends on how your business has been affected by the competitive bidding process. If you have won bids in the past, and your proposals contain proprietary information that gives you a competitive advantage, you should ask the governmental body to redact that information if anyone requests it under the TPIA. On the other hand, if your business has consistently lost out in the bidding process, you may want to press the Legislature to pass HB 792 and SB 407 this session so that you can see your competitor’s proposals and try to figure out how you can match, or beat, them in the future.
Riding her beloved Packers late-game win against the Dallas Cowboys, Allfer Funn, owner of Con Genial, is polishing her cheese head hat and dusting off her Super Bowl Squares Pool from last year in anticipation of the Big Game in a couple of weeks. Electing not to “Reinvigorate [Her] Super Bowl Office Betting Pool” as some have suggested, she does, however, decide to up the ante from $10 a square on her 10 x 10 grid to $20 a square. Just good clean office fun to build morale, right? It’s not illegal… or is it?
The Legal Reality?
Yes, it’s illegal in any number of ways. It’s illegal gambling in Texas. And, for Allfer, organizing the Pool is likely “bookmaking” – receiving more than 5 bets in a 24 hour period. Under the gaming laws of all 50 states, it’s a bet with a prize that is won or lost solely by chance. Because squares pools involve randomly assigned numbers, the contest is entirely based on chance and thus illegal unless (in a state other than Texas) it falls within a state-specific “recreational gaming exception.”
And there’s more.
Beyond Texas, the federal Professional and Amateur Sports Protection Act of 1992 also prohibits gambling, specifically on professional and amateur games. Should Allfer Funn or her employees elect to bet online there’s always the federal Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) which Tilting commented upon in 2011 that prohibits nearly all types of online gambling.
Notably, the UIGEA exempts most fantasy sports competitions, classifying them as games of skill rather than games of chance – except for the Super Bowl. A fantasy football competition is based upon a single game with a limited number of outcomes as well as a limited number of players/teams from which participants can choose, whereas the Super Bowl is viewed as a game of chance rather than a game of skill.
The Practical Reality?
As reported in a Houston KTRH NewsRadio 740 interview last year by Tilting’s own Cleve Clinton, “It’s illegal. Now, realistically and practically, is anybody going to do anything about it? No.”
In the same interview, Clinton told KTRH that Texas law has such a broad definition of gambling, that technically any betting pool violates state law. Whether or not the state chooses to enforce that depends on a few factors.
“The first thing you really want to look at is how big of a pool are we talking about, the second thing is who’s running it, and the third, will someone (the organizer) profit by it,” says Clinton.
Allfer may want to reconsider and not increase the pool size from a total of $1,000 to $2,000.
Good Clean Fun?
Notwithstanding that gambling on the Super Bowl is illegal, Allfer Funn should be wary of potential retaliation and hostile work environment claims from employees either excluded from or uncomfortable with office gambling. What happens if an employee snitches? The Texas Penal Code seems to offer “testimonial immunity.”
Tilting the Scales in Your Favor
While Texas does have strong laws against gambling, most low-stakes office pools should be all right, as long as they are run by an individual and not the company, and nobody takes a profit or fee off the top for organizing or running the pool. “It risks becoming a problem when you get out of bounds on size or (scope),” says Clinton. It is best for Allfer Funn that she not manage the Super Bowl pool. And, she should check Con Genial’s employee manual to make sure that she is not stepping out of bounds of her own company policy. Finally, Allfer should be cognizant of the objection of any employee and respond accordingly. Go Packers!
Tilting the Scales articles: Internet Gambling in the U.S., March Madness Basketball Gambling, Wanna Bet? Betting About Baseball Returns to the News
Gunner Gunter employs dealership manager Sayles and computer technician H. Packard (“Pack”) at Falconaire’s Fine Ford and pays these “white collar” employees $40,000 per year. In busy sales months, each averages 50-60 hours a week without paid overtime. Do the new FLSA regulations affect Gunner?
Yes. Effective December 1st, Sayles and Pack must either be paid for their overtime hours or to avoid this mandate, their minimum annual salary must be $47,892 (up from the current $23,600 minimum per year) assuming they are Fair Labor Standards Act “white collar” employees (i.e., executive, administrative or professional) under the exemption, and not otherwise entitled to overtime pay.
The Labor Department estimates the new rules affect some 5 million exempt workers, predominantly in Texas, California, Florida, Illinois, New York and Pennsylvania, which have the largest number of newly eligible workers – 200,000 or more in each state. Of those numbers, hardest hit are lower-wage businesses and service industries like hospitality and retail, which identify the new rules as “Career Killers.” Rather than increasing salaries, many business may elect to reclassify professionals as hourly workers and reduce hours, adjust or remove existing benefits and flexibility (including loss of their more prestigious titles) or cut base salaries. “Comp time” (working overtime for future days off) is not an option for these newly eligible overtime workers. Even with labor reductions, the projected additional administrative costs to businesses to track hours of more employees and updating payroll systems are estimated to cost $745 million.
Employers who fail to comply after December 1st risk Department of Labor (DOL) investigation. More daunting, perhaps, is the threat of private litigation, including class action litigation – a risk with substantial downside potential.
Tilting the Scales in your Favor
Evaluate your current employees and salary levels to assess your company’s possible DOL exposure. If you elect to reclassify employees from “overtime exempt” to “overtime eligible”, develop comprehensive plans to (1) determine new hourly rates for impacted employees; (2) revise or update current timekeeping programs and policies to reflect the changes; and (3) implement training for both managers and employees addressing the changes. Congress may attempt to redirect these changes with legislation, but it’s more likely that the results of the November election will dictate whether that momentum is sustained. Consider using a Checklist.
For more insight on cutting edge employment issues, including federal changes to overtime exemptions, visit the Texas Employer Handbook blog, written by Gray Reed employment partner Michael Kelsheimer.
Over the summer, Brad Bevos’ company relocated him from Austin to Springfield, Illinois. A University of Texas alum and huge Longhorn football fan, the move bummed Brad because he won’t be able to attend home games this season. Because hotels are scarce during home game weekends, and other special events at UT, Brad decides to list his downtown Austin apartment for rent on VRBO instead of selling it. Brad manages to rent the apartment for 12 nights during the season for $2,400. Brad doesn’t include this income on his tax return, and when he gets audited the IRS finds out about his side business. Is Brad in trouble?
Issues to Look Out for When Renting Your Home
Many people now rent out their homes on VRBO or Airbnb websites to make extra income. Before entering the rental industry it’s best to understand how renting will affect your:
- income taxes;
- local taxes (do you owe hotel occupancy taxes?);
- property taxes (do I keep my homestead exemption?);
- homeowner’s insurance (does my policy cover me for tenants?); and
- whether you are complying with your HOA’s rules.
Do you owe the IRS?
It depends on how often you rent out your home during the year. The IRS has an exception – dubbed by some as the Master Exception for homeowners who rented out their Augusta homes during the Masters golf tournament – that permits you not to report rental income if:
- you rented the home for 14 days or less during the year; and
- you used the property yourself for 14 days or more during the year, or for more than 10% of the total days it is rented.You may be able to deduct some of your expenses to offset your rental income, so discuss with your tax advisor.
Does Brad owe the IRS?
No, because Brad rented out the house for less than 14 days, and he had lived there for more than 14 days before he was relocated. But, Brad will likely owe income taxes in future years if he rents for more than 14 days, or didn’t visit Austin for at least 14 days.
Tilting the Scales in Your Favor
Before getting into the rental business make sure you have a full understanding of the financial implications. If you are renting out a second home, you should consider hiring a rental management company who can handle day-to-day issues that arise, such as maintenance.
This is the second installment of a series discussing potential pitfalls of which closely held business owners should be wary when they are trying to sell their business. Here’s a link to our first installment.
After a lifetime of pouring time and energy into growing and expanding, Pawlenty Energy, JR and Sue Ellen Pawlenty are ready to sell their business and retire. Having never sold anything of this magnitude, JR and Sue Ellen have no idea where to start to try to sell their company. Even more challenging is that, until the money exchanges, they must continue to run their business. Marketing to sell their company will be a hassle that could negatively affect their operations, their personnel and their reputation both with their customers and with their vendors. Their friend Nancy Noitall recommended that they hire a business broker to assist them in handling the sale. Is this a good idea?
Benefits of a Business Broker
Business brokers can provide a valuable resource to sellers. For example, a business broker can mass market a company when the seller does not already have a prospective buyer lined up. The broker also serves as the seller’s spokesperson, allowing the seller to concentrate on running the business instead of dealing with the daily distractions that arise from trying to get a deal done. This includes screening prospective buyers to ensure they can afford the sales price. A broker can also come up with a market value for the business based on the sales prices of similar businesses.
Risks of Using a Broker
Sellers face some risks using business brokers. Because a business broker is the seller’s spokesperson, the seller would likely be liable if the broker misrepresented the business to a buyer. Business brokers also typically use form agreements for each transaction. If there are unique aspects of the transaction, or the business, that are a material part of the sale, form agreements may not address those issues and create the potential for litigation between the buyer and seller down the road.
Should I Involve Other Professionals?
Yes. If you have an accountant, he or she can help you get your financial statements in order before you advertise your business for sale. If your accountant did not previously do so, he or she may be able to audit your financial statements, which will improve your business’s value. If you hire a broker, your broker can deal directly with your accountant on any questions from potential buyers about the company’s financials.
You should also involve an attorney who can review and advise you about the broker agreement. Your attorney can also review and revise the broker’s form sales contracts to try to protect you from certain risks if the sale fails.
What Should I Look For in a Broker?
If you want to hire a broker, you should look for someone who has a proven track record selling similar businesses, or who has experience in your industry. The broker should be willing to work with your financial and legal advisers. Most importantly, you want a broker who puts your interests ahead of his or her fee.
Tilting the Scales in Your Favor
Whether you use a broker to help you sell your business depends on your personal circumstances. If you choose to use a broker, conduct a thorough background check, including references, of all potential candidates before hiring one. You also need to make sure you have a clear understanding of how the broker is compensated under the broker agreement – which you should have an attorney review with you.
After stepping down from running the family oil business (see last month’s article), Jed Clampett runs Mama’s Fried Pies, his late wife Rose Ellen’s fried pie business. With business booming, Jed decides to hire Elly May as the Vice President of Marketing so he can spend more time in the kitchen rather than sales. If Elly May remains with the company for a full five years, she will receive a base salary plus a $50,000 bonus, payable in $10,000 increments over five years with each increment vesting at the end of the calendar year (e.g., the first $10,000 vests on December 31, 2015) but not payable until the following June 1st. Does this retention bonus structure risk additional taxes to Elly May and Mama’s Fried Pies?
Internal Revenue Code Section 409A
Yes. Mama’s Fried Pies’ bonus agreement with Elly May does not comply with IRS Section 409A because the payment is not made by March 15, 2016. The vesting 2015 bonus must be included in Elly May’s 2015 taxable income when it vests. Worse yet, Elly May owes regular taxes plus a 20% excise tax ($2,000) on the bonus amount, plus interest at the underpayment rate plus one percent. Under the Internal Revenue Code Section 409A, Mama’s should have paid the vested retention bonus (a) on a predetermined date; (b) pursuant to a fixed schedule of payments; or (c) no later than March 15th of the calendar year following the year of vesting.
Tilting the Scales in Your Favor
To ensure that your bonus plan – either as an employee or paid by you as the employer – complies with the Internal Revenue Code, confer with your tax attorney or accountant to avoid the penalties of an IRS illegal bonus plan. Executives and employees receiving a retention bonus should confirm the legality of the arrangement before agreeing, and then consult with their employer. Likewise, employers must conform their bonus plans with the Internal Revenue Code to avoid conflicts, and possible litigation with their key employees. Now is the best time to review these bonus plans. Recently, the Internal Revenue Service ruled that if a bonus plan does not meet Section 409A’s requirements, but the company corrects the bonus plan no later than the year before the bonus first vests, the plan will be compliant.
Kudos to Jason Luter, ERISA and deferred compensation expert at Gray Reed, who just authored a client alert on this issue and assisted in editing this article.
Knowing that his old high school friend Iman Dedbeet had just been taken to the cleaners by his ex-wife Goldilocks in a nasty divorce, Johnny Clueless decided to help Iman out by hiring him as his general sales manager at Clueless Automotive. Johnny knew that Goldilocks got full custody of Dedbeet’s kids and that Dedbeet owes Goldilocks back child support. Nevertheless, when Clueless handed Dedbeet the IRS Form W-4 to complete, Dedbeet urged Clueless to make him an independent contractor and pleaded, “You know what I need Johnny. Goldi doesn’t deserve another penny.” Relenting, Clueless classifies Dedbeet as a 1099 independent contractor. Is Clueless getting taken for a ride?
Employers Must Report New Hires. Within 20 days of hiring a new employee Employers must report the new hires to the Texas Attorney General’s Child Support Division. However, this requirement is limited to new personnel classified as employees. An employer is not required to report new hire independent contractors, allowing new hires to avoid having child support withheld from their paycheck.
Employers Are Liable for Falsely Reporting a New Hire’s Status. Johnny Clueless should know, however, that Texas law subjects employers to a $500 fine for conspiring with a new hire to fail to submit a new hire report, or submit a false report. By agreeing to Dedbeet’s pleas Clueless risks sharing Iman Dedbeet’s responsibilities because he knew that his new hire wants to avoid the possibility of having child support withheld.
Proposed Legislation Would Remove Loophole Senate Bill 1727 currently before the Texas Legislature would add “independent contractor” to the definition of “employee” in Texas and close the loophole used by some to avoid child support withholding.
Tax Issues Both Clueless and Dedbeet also create tax issues by misclassifying Dedbeet as an independent contractor. Clueless will not pay FICA. Instead, Dedbeet will have to pay the Self Employment tax on a quarterly basis.
Tilting the Scales in Your Favor Although misclassifying employees may not look overly penal, it will cause a substantial disruption in your business when you have to deal with the Attorney General’s investigation and, is it worth it? It’s easier (and the law) to classify the employee correctly before the hire for any number of reasons. If a new hire asks to be classified as an independent contractor, and particularly if you know the hire owes child support, make sure that the hire is truly serving as an independent contractor – which means the hire provides all of their own tools and equipment, and has complete control over the manner in which it performs tasks.
Debbett Runnup Partnership, a Texas general partnership, was sued by Widgets R Us in 2010 for failing to pay Widgets R Us invoices. Judgment was granted to Widgets in 2012 against Debbett Runnup for $300,000. After chasing Debbett for over three years, Widgets’ lawyer Plinn T. Agreshun realizes that Debbett is penniless. Knowing that partners are also responsible for partnership debts, Agreshun sues Cash Kau, a multimillionaire Debbett partner. Cash’s army of lawyers argue that the Widgets R Us lawsuit is too late and barred by the statute of limitations. Can Widgets R Us collect from Cash Kau almost five years after the invoices were sent?
Partners Are Liable for the Partnership’s Obligations. Yes. Texas law generally makes a partner jointly and severally liable for all of the obligations of the general partnership. However, Widgets R Us must sue and get a judgment against Cash Kau because a judgment against a partnership is not, by itself, a judgment against its partner. To do so, Widgets R Us could have named Cash Kau as a defendant in the lawsuit against the partnership, or in a separate lawsuit. Widgets R Us must get a judgment against the partnership, and the judgment must go unsatisfied for 90 days before Widgets R Us may seek to satisfy from Cash Kau.
A Creditor’s Claim Against a Partner Accrues After Judgment Against the Partnership But what about the Texas statute of limitations of four years? Widgets R Us slides under the wire. The Texas Supreme Court recently considered whether a creditor’s claim against the partner accrues (i.e., starts the limitations clock) at the time the partnership breached, or on the date the creditor obtained the judgment against the partnership. The court held that the limitations clock does not start running against the partner until the creditor can actually proceed against the partner’s assets, which is 90 days after the judgment, or 2012. The court concluded that Texas partnership law does not require a creditor to sue a partner in the same suit as the partnership, and the creditor could not proceed against the partner until after the 90 day period.
Tilting the Scales in Your Favor. Luckily for Widgets R Us the Texas Supreme Court sided with its interpretation of the statute of limitations. Claimants against general partnerships are better served by naming all of the partnership’s partners as defendants in the collection lawsuit. Doing so also leverages settlement negotiations because the partners probably want to avoid having a judgment rendered against them personally. Additionally, the partners must be careful not to transfer or dissipate assets because those could be considered fraudulent conveyances.
Finally, if you are a partner in a general partnership, strongly consider converting to a limited liability partnership, a limited liability company or a corporation. A valuable aspect of any entity is the shield it offers owners of these entities from personal liability for the entity’s obligations and liabilities.