Buy-Sell Agreements

Buy-Sell Agreements are designed to ensure ownership succession upon certain triggering events such as the death, divorce, bankruptcy, disability, or retirement of a partner, or the sale of interests by one or more business owners. Buy-Sell Agreements are effective at providing a set of rules and procedures for resolving shareholder or partner disputes, providing liquidity to the heirs of a deceased partner, protecting any S election made by the business, and protecting the business from a shareholders creditors.

TYPES OF BUY-SELL AGREEMENTS

Cross-Purchase Agreements

Cross-purchase arrangements allow or require the remaining shareholders to purchase the shares of any shareholder leaving the company by virtue of death, disability or other triggering events. Cross-purchase agreements are typically funded with life insurance policies owned by each shareholder on the lives of the other shareholders. This is an unduly cumbersome arrangement when there are more than just a few shareholders.

Upon the sale of shares under a cross-purchase agreement, the selling shareholder will have a capital gain. However, if the event triggering the buy-sell is the death of the shareholder, the heirs will have a stepped up basis in the decedents shares and may avoid recognizing a capital gain.

Redemption Agreements

Redemption agreements allow or require the company to buy the shares of a shareholder upon certain triggering events. Redemption agreements are typically funded with life insurance policies owned by the company on the lives of the shareholders, unless the company has sufficient cash reserves to dedicate a sinking fund to the redemption of the shareholders shares.

Redemption agreements are simpler to administer than cross-purchase agreements because the company is the only policy owner.

Under a redemption agreement, the selling shareholder typically will report the sale as a capital gain. Again, if the triggering event is the death of the shareholder, the heirs will enjoy a stepped up basis, and may not recognize any capital gain.

There are certain tax pitfalls related to the redemption agreement. If the agreement is not structured and implemented properly, it is possible for the IRS to characterize the redemption as a dividend. In that case, the departing shareholder would likely be required to report the redemption amount as ordinary income. With proper planning and documentation, this can be avoided.

Unregistered Offerings of Securities

The offer and sale of securities in the United States is regulated by the federal Securities and Exchange Commission (SEC) and by each state under what are commonly known as the blue sky laws. Every offer or sale of a security must be registered with the federal and appropriate state agency unless the offering is subject to an exemption from registration.

Registration is very time consuming and expensive process that typically involves conducting a public offering through underwriters and the preparation of a prospectus. Registration should be avoided by early-stage start-ups, by issuing stock pursuant to an exemption from registration. Anti-fraud rules apply to all transactions involving the exchange of securities, whether or not the offering is exempt from registration under federal or state law.

Anti-fraud rules require that the persons offering securities disclose any material information about the business. Material information is anything that a reasonable investor would want to know prior to making an investment decision.

Promoters of securities offerings should be careful to comply with state and federal broker-dealer registration requirements.

Intrastate Offering Exemption

Section 3(a)(11) of the Securities Act provides an “intrastate offering exemption” from the registration requirements of the federal securities laws with respect to securities issued to investors within a single state. To qualify for the intrastate offering exemption, the issuing company must:

●   Be incorporated in the state where it is offering the securities; 

●  Carry out a significant amount of its business in that state; and 

●  Make offers and sales only to residents of that state. 

There is no monetary limit on the offering or the number of purchasers. If any of the securities are offered or sold to a single non-resident, the exemption may be lost. Thus it is critical to determine and document the residence of each offeree by means of an investor suitability questionnaire. If a purchaser resells any of the unregistered securities to a person who resides outside the state within a period of approximately nine months the entire transaction, including the original sales, may violate the Securities Act. Accordingly, the securities issued under this exemption should be treated as restricted securities and should bear a legend to that effect.

Private Offering Exemptions under Regulation D.

Rule 505. This rule exempts certain offerings from the registration requirements of the federal securities laws when the issuing company:

●   Does not sell more than $5 million of its securities in any 12-month period;

●  Sells the securities to an unlimited number of “accredited investors” and up to 35 other persons (who do not have to meet any sophistication or suitability requirements); 

●  Informs purchasers that they are acquiring “restricted” securities, (i.e, the securities cannot be sold for at least a year without being registered); and 

●  Does not use general solicitation or advertising to sell the securities. 

 Accredited Investors. For purposes of Rule 505 and Rule 506, discussed below, an “accredited investor” is:

●  A bank, insurance company, registered investment company, business development company, or small business investment company;

●  An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

●  A charitable organization, corporation or partnership with assets exceeding $5 million; 

●  A director, executive officer, or general partner of the company selling the securities; 

●  A business in which all the equity owners are accredited investors;

●  A natural person with a net worth of at least $1 million; 

●  A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or 

●  A trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person. 

Rule 505. Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings, including financials (i.e. a private placement memorandum). The company must also be available to answer questions by prospective purchasers.

Issuing companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC. However, such companies must file as “Form D” upon selling their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters.

Rule 506. Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption. Companies using the Rule 506 exemption can raise an unlimited amount of money. This safe harbor is available if the following standards are met:

●  The issuing company cannot use general solicitation or advertising to market the securities; 

●  The issuing company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment; Issuing companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. Issuing companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings (i.e., a private placement memorandum).

●  The issuing company must be available to answer questions by prospective purchasers; Financial statement requirements; and

●  Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them. 

 As with the Rule 505 exemption, issuing companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC. However, such companies must also file a “Form D” upon selling their securities, just as with Rule 505.

Latest International Redomestication: Cooper Industries

Cooper Industries Ltd.  appears to be the latest Houston company changing its place of incorporation. Cooper’s board of directors has approved a redomestication from Bermuda to Ireland. This follows a recent announcement by Accenture that it would redomicile from Bermuda to Ireland.

With the increasing tax burden on US domestic corporations and a crackdown on perceived offshore tax havens, there has been a trend of  companies redomesticating operations and headquarters from jurisdictions such as Bermuda to other taxpayer-friendly domiciles. With experience in US and international tax, and the tax and laws in Bermuda and Ireland, we can advise multinational companies about the legal issues and tax consequences of proposed corporate relocations or redomestications, or other outbound investment transactions.

This falls a recent announcement by Accenture that it would redomicile from Bermuda to Ireland as well.

Texas Creditor’s Rights FAQs

1.   I am owed money from a company that has filed bankruptcy.  What should I do?

If you are owed money for goods or services provided prior to the bankruptcy, there is a procedure for presenting your claim to the bankruptcy court.  When a company files for bankruptcy, it has to file a schedule of debts (i.e., who is owed money and how much).  If you are scheduled and the amount owed is correct, then you are not required to do anything.  If you are not scheduled, or the amount is incorrect, you must file a proof of claim.  Often, you will receive a notice of bankruptcy by mail that includes the proof of claim form.  Otherwise, you can generally obtain the form from the Bankruptcy Courts website.  The form will include instructions to help you properly fill out the form and provide supporting documentation for the claim.  Some creditors choose to file the proof of claim even if their claim is properly listed in the debtors schedules.  You may choose to hire bankruptcy counsel to help you in this process. 

2.   I filed a proof of claim with the Bankruptcy Court and have now received an objection to my claim.  What should I do? 

You will be required to file a written response to the objection and to attend the hearing on the objection.  If you do not file a response or do not show up at the hearing, the Court may grant the objection and expunge your claim.  In that event, you will receive no recovery on your claim in the bankruptcy court.  You can contact the objecting party (debtor or trustee) and negotiate your claim.  Objections to claims are often settled prior to the hearing.  

3.   I provided goods and/or services to a company in bankruptcy.  What can I do to get paid?  

You may be entitled to file what is known as an administrative claim.  A number of factors affect whether or not your claim is valid.  If the motion for approval of the administrative claim is approved, you will be paid before the unsecured pre-petition claimholders.  If you are providing professional services (e.g., lawyer, accountant), you will need to get court approval to be hired by the debtor.  

4.   I have been sued by a company in bankruptcy for recovery of preferential payments.  What should I do?  

You should receive a document called a complaint that is the official lawsuit filing with the bankruptcy court.  The complaint will set forth the nature of the allegations against you and how much money you allegedly owe.  The papers you received should also include a summons that indicates by when your written answer to the complaint must be filed with the bankruptcy court.  If you fail to respond timely, you may get a default judgment against you.  It is vital that you respond by the deadline and avoid a default judgment.   

By way of background information, the preference action is a claim that can be brought by the bankruptcy estate to recover payments the debtor made to you in the 90 days before filing bankruptcy for antecedent debts (note that the 90-day period is extended for certain insiders based on their relationship to the debtor).  For example, suppose you shipped the debtor a truck load of widgets.  Several weeks later, and within the 90 day period before the company filed bankruptcy, the company gave you a check to pay for the widgets.  This was payment for an antecedent (prior accrued) debt and may be recoverable by the bankruptcy estate.  The policy in play here is when a company is heading into bankruptcy, it should not be preferring (i.e., paying) certain creditors while not paying others. 

By requiring all of the money to be returned and then redistributed to all of the pre-petition creditors pro-rata (i.e., based on the outstanding amounts owed to the various creditors like yourself), every creditor is treated the same and none are preferred over others.  Without this procedure, a company heading into bankruptcy might pay certain creditors in full, ignore the others, and then file for bankruptcy, which the law sees as an unfair distribution of the assets.  Note that there are several potential defenses you may have that bankruptcy counsel can help you analyze.      

5.   I have been sued by a company in bankruptcy for recovery of a fraudulent transfer.  What should I do?  

You should receive a document called a complaint that is the official lawsuit filing with the bankruptcy court.  The complaint will set forth the nature of the allegations against you and how much money you allegedly owe.  The papers you received should also include a summons that indicates by when your written answer to the complaint must be filed with the bankruptcy court.  If you fail to respond timely, you may get a default judgment against you.  It is vital that you respond by the deadline and avoid a default judgment.    By way of background information, a fraudulent transfer does not imply fraud in the traditional sense (i.e., a misrepresentation).  Instead, what is meant is that assets of the debtor were transferred for less than their fair market value.  You can easily imagine a situation where a company knows it is going under so it sales valuable assets for pennies on the dollar, perhaps to family and friends of the companys owner, just prior to filing for bankruptcy.  This effectively loots the company of its value and diminishes the potential recovery of the companys creditors.  There are several potential defenses to a fraudulent transfer claim that bankruptcy counsel can help you analyze.  

6.  I have received a demand letter from a company in bankruptcy seeking to recover for preferential payments.  What should I do?   

Review the answer to question 4 above.  It is often advisable to get the assistance of bankruptcy counsel at this stage.  These sorts of claims are routinely settled prior to the actual lawsuit being filed.  This saves you money.  Bankruptcy counsel can help you analyze your potential defenses and draft a written response to the demand that sets forth the basis for the defenses you have and attempts to resolve the dispute.  If you ignore the letter, the debtor will sue you.  This will likely increase your costs and time commitment to get the matter resolved.  

7.  I have a judgment from a state other than Texas.  Can I collect on the judgment in Texas?  

Yes, Texas law provides for a procedure to domesticate the judgment.  The domestication process has the effect of giving you a Texas state court judgment that is enforceable in Texas.  A similar procedure is available for federal judgments.  After the judgment is domesticated, all of the various post-judgment remedies under Texas law are at your disposal to enforce the judgment against non-exempt assets located in Texas.   

8.   I already have a judgment.  How can I find out if the judgment debtor has assets in Texas?   

There are services available that can retrieve certain limited information about bank accounts and brokerage accounts.  Public records will identify the real property and vehicles (i.e., cars, boats, planes) owned by the judgment debtor.  Texas procedure also allows you to do post-judgment discovery for instance, a deposition and interrogatories of the judgment debtor to determine what assets are held from which the judgment may be satisfied.  In some instances, it makes sense to request that the court appoint a receiver to facilitate in collecting on the judgment.  A collections attorney will have various databases from which to retrieve information about the judgment debtors assets.  

9.   I already have a judgment and the judgment debtor has assets in Texas.  What sort of assets can I execute on and what assets are exempt from execution? 

Texas law protects certain property from execution.  For instance, the judgment debtors homestead (residence) is exempt from execution, subject to certain limitations to the amount of acreage.  Wages are exempt, cemetery plots are exempt, as well other property up to a certain value, including two guns, jewelry and livestock.  Chapter 40 of the Texas Property Code sets forth the contours of these and other exemptions.   

10. What is a garnishment?  

If a third party owes the judgment debtor money, a garnishment action can facilitate you collecting on the judgment by getting the money from the third party rather than directly from the judgment debtor.  For instance, suppose the judgment debtor has money in a savings account at a bank.  Essentially, that is money the bank owes the judgment debtor, and that money may be subject to garnishment to pay your judgment.  The actual garnishment procedure involves an order sent to the third party and requiring them to answer under oath whether they have any assets belonging to the judgment debtor or are obligated to provide money or goods to the judgment debtor.  The third partys answer has to be filed with the court, and based on the answer, the court may issue an order requiring turnover of the money or assets.  The garnishment procedure locks up the assets until the court makes a determination of whether they are subject to execution to satisfy the judgment. 

11.  What is a turnover? 

A turnover refers to an order from the court for the judgment debtor or another party to turnover assets to the Court that are subject to execution in order to satisfy the judgment.   

12.  What is a receivership?

In order to aid in the enforcement of a judgment, the court can appoint a receiver (typically an attorney) to try to collect on the judgment.  The receivers fees must be paid from what is collected and the fees must be approved by the court.  The receivers duty is to figure out what assets the judgment debtor has that are not exempt from execution and to try to get the various creditors paid.  A typical example of when a receiver is appropriate is when the judgment debtor owns real property that is not exempt from execution.  The receiver will, with court approval, hire a real estate broker to market the property, sell it, and approve the sale with the court, as a means of obtaining money to pay the judgment.   

13.  What is a sequestration?  

In Texas, this is primarily a procedure for foreclosing on vehicles (i.e., cars, boats, motor homes) that were used as collateral for a loan.  For example, when a borrower fails to pay their car note, the lender will seek a writ of sequestration to recover the car so that it can be sold and the money applied to the outstanding debt.  

14.   I already have a judgment.  Is there a process for garnishment of the judgment debtors wages?   

No, Texas law does not permit you to garnish wages.  Note that money paid for services may not be considered wages.  For example, fees due a lawyer from his client are not wages and can be garnished. 

15. I already have a judgment.  Is there a process for garnishment of bank accounts? 

Yes, this is a very common garnishment procedure.  Also see the response to 10 above. 

16.  I have a judgment against a company and it has sold or transferred its assets.  What can I do? 

If the assets were sold for less than fair market value, you may have a fraudulent transfer claim that would allow you to recover the assets.  The law attempts to prevent judgment debtors from selling assets at less than fair market value or giving them away in order to avoid their execution by a creditor to satisfy a judgment. 

17.  A company owes me money.  What can I do to collect the money before filing a lawsuit? 

It is important to make formal demand in writing to seek recovery of the money owed before spending money on litigation.  You should make every reasonable attempt to communicate with the company that owes you money.  If you hire a collections attorney, a letter from that attorney may also carry more weight and facilitate a resolution of the matter without having to go to court.  

18.  I have a judgment against a foreign country.  What can I do to collect on the judgment? 

Pursuant to the Foreign Sovereign Immunities Act and state post-judgment remedies, you may be able to collect on your judgment, particularly as to any assets in the United States.  These collections efforts have to be done in federal court, but certain state collections procedures (e.g., garnishment) may be available to assist you even though you are in federal court.  This is a specialized area of international law and assistance from a collections attorney with experience in this area will be needed.   

19.  I have a judgment against a non-domestic company.  What can I do to collect on the judgment?  

Depending on where the judgment was issued, you may be able to domesticate the judgment and enforce it in the United States in the same manner as domestic judgments.

How to Respond to a Texas Lawsuit

If you are sued in Texas, it is important to speak to an attorney to ensure that your rights are defended and your fully represented. Texas law requires plaintiff’s to follow certain procedures and meet various deadlines. The law also provides defendants with certain defenses, as well as remedies such as counterclaims or crossclaims. In some cases, a person or business may be improperly named as a defendant. If you contact us, our  trial lawyers can help you:

•           Determine your legal rights, and any available defenses, counter-claims and cross-claims,

•           Determine if you are subject to jurisdiction in the State of Texas, and

•           Develop a legal strategy to resolve the legal dispute and vigorously defend your legal rights.

UNDERSTANDING THE LITIGATION AND TRIAL PROCESS

Our litigators will help you and your business prepare a timely and appropriate response to lawsuits in Texas. We will help you understand the litigation process and procedures and give you an estimated schedule for discovery and trial proceedings. We will help you identify the risks and costs of litigation, as well as prepare a budget for legal fees for each stage of the litigation. At each stage of the process, we will provide you clear legal advice and keep you informed about the developments in your case.

REAL WORLD TRIAL EXPERIENCE

Our trial lawyers have represented clients at trial in various forums across the state of Texas. We understand that litigation costs are a burden on our clients’ businesses. So, where appropriate, we try resolve disputes before trial, provided that an out-of-court settlement the client’s best interest. However, as seasoned trial lawyers, we are always prepared to take cases to trial to ensure that your rights are fully defended.

 CONTACT US

 If you have been sued in Texas, please contact us at 713.650.9700. We will evaluate the merits of your case, as well as available defenses, counterclaims and crossclaims.

DOING BUSINESS IN HOUSTON, TEXAS

LEGAL AND TAX CONSIDERATIONS FOR CONDUCTING BUSINESS IN TEXAS

Texas is widely regarded as a business-friendly state that does not impose undue regulatory burdens on businesses. Unlike many other states, Texas does not impose a personal income tax. Texas imposes a 1% margin tax on gross receipts earned within Texas on businesses such as corporations, limited liability companies and limited partnerships. Overall, Texas is among the States with the lowest tax burdens on businesses.

In recent years, Texas enacted tort reform which has substantially reduced the number of lawsuits filed in the State of Texas, and limited the damages paid to plaintiffs filing lawsuits against companies doing business in Texas. Tort reform has been one of the factors in attracting investment and corporate relocations to the state. Texas is the second most populous State, and the nation’s leading exporter. In 2008, Texas ranked as the 18th largest economy in the world.

ESTABLISHING A BUSINESS PRESENCE IN TEXAS

Non-US companies seeking to expand their business operations by entering the U.S. market often create a U.S. subsidiary to segregate their liabilities and to avoid the complications of branch profits tax. The decision of what type of entity to form is generally based on tax considerations, qualification for the benefits of the applicable income tax treaty, the ability to limit liability and the nature of the activity to be conducted.

Alternatively, a foreign company (i.e., a company formed under the laws of any jurisdiction other than Texas) may conduct business in Texas directly by registering to do business in Texas with the Secretary of State. Until a foreign company has complied with the filing requirements established by the Texas Secretary of State, it may not transact business within the State or bring suit in Texas courts. “Transacting business” means engaging in intrastate transactions on a recurring basis. However, once it has complied with the Secretary of State’s requirements, a foreign company has the same rights and privileges as a domestic company. Common Business Entities For a foreign company to create a U.S. subsidiary, it must form the subsidiary under State law, rather than U.S. federal law.

For purposes of conducting business in Texas, it is common to form a company under Texas law.

● General Partnership—an association of two or more persons who join to carry on a business for profit. General partners share equally in assets, liabilities, and management.

● Limited Partnership (LP)—a partnership formed by two or more persons, with one or more general partners and one or more limited partners. General partners have unlimited liability, while limited partners have limited liability.

● Limited Liability Partnership (LLP)—a general partnership in which the individual liability of partners for partnership obligations is substantially limited. A partner is not individually liable, under some circumstances, for debts and obligations of the partnership.

● Corporation—one or more individuals, partnerships, or entities that join together to form a separate entity for the purpose of operating a business. A corporation offers limited liability of shareholders, centralization in management, and flexibility in capital structure.

● Limited Liability Company (LLC)—an unincorporated entity allowing its owners to obtain both a corporate styled liability shield and the pass-through tax benefits of a partnership. All equity shareholders of an LLC have the limited liability of corporate shareholders even if they participate in the business of the LLC.

State and Federal Taxes

At the time of this publication, the US Congress is still considering the first budget proposal of President Barack Obama. The President’s budget proposal would make a number of changes to US Tax law, such as offering a variety of tax credits for green energy and conservation efforts. While the budget proposal would raise the tax rates on individual income, President Obama has indicated that he may consider reducing the top corporate income tax rate. Subject to the caveat that these rates may soon change, here is a summary of the current Federal and State tax rates.

Federal Income Tax. The federal government imposes a progressive tax on the taxable income of individuals, partnerships, companies and corporations. Applicable tax rates range from zero to 35% of taxable income.

● Social Security Tax. A social insurance program funded through dedicated payroll taxes called Federal Insurance Contribution Act (FICA). This contribution or tax is 6.2% of an employee’s income paid by the employer, and 6.2% paid by the employee.

● Medicare Tax. This tax funds a health insurance program for the elderly and people who meet other special criteria. The tax is comprised of 1.45% of each employee’s income paid by the employee and an amount equal to 1.45% of each employee’s income that is paid by employer.

● Margin Tax. The “Margin Tax” is imposed on all business entities other than sole proprietorships, general partnerships wholly owned by individuals, and certain “passive entities.” The Margin Tax is generally 1% of a statutorily defined gross receipts calculation less either: (i) compensation or (ii) costs of goods. ● Sales & Use Tax. The State of Texas imposes a Sales & Use Tax on all retail sales, leases and rentals of most goods, as well as taxable services.

● Unemployment Taxes. All employers are subject to Unemployment Tax and must register with the Texas Workforce Commission.

● Property Taxes. If the business owns tangible personal property that is used to produce income, the property must be reported on a rendition form to the local county appraisal district. Business owners must report all inventories, equipment, and machinery.

● State Income Tax. There is no state income tax in Texas.

HOW TO FORM A 501(C)(3) TAX-EXEMPT ORGANIZATION?

INTERNAL REVENUE CODE SECTION 501(C)(3)

Internal Revenue Code Section 501(c)(3) provides an exemption from the federal income tax to qualifying non-profit organizations. Corporations, or a community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, cultural, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals may apply to qualify for a 501(c)(3) exemption.

CHARITABLE DEDUCTIONS

Internal Revenue Code Section 170 provides a federal income tax deduction for some donors who make charitable contributions to 501(c)(3) organizations.

HOW TO FORM A NON-PROFIT ORGANIZATION?

The first step in forming a non-profit organization is to organize a non-profit corporation or other eligible entity under state law. In Texas, this is done by filing a Certificate of Formation for a nonprofit corporation with the Secretary of State. Note that under Texas law, none of the income of a nonprofit corporation may be distributable to members, directors, or officers.

HOW TO APPLY FOR TAX-EXEMPT STATUS?

To be exempt from federal income taxation, most organizations seeking tax-exempt status must apply for recognition of exemption. Organizations applying for tax-exempt status must submit an application for an Employer Identification Number (EIN) and a lengthy application for recognition of exemption. The Application for Recognition of Exemption (Form 1023 or Form 1024) is much like like a tax return, but is based on projected fundraising, expenses and receipts. In addition, the organizers must file a Form 8718 and include a user fee as part of the application procedures.

A separate exemption from must be filed with the state in which the nonprofit organization will conduct its activities. In Texas, the organization’s tax exempt status is determined by the Texas Comptroller of Public Accounts.

APPLICATION & APPROVAL PROCESS

Each application for exemption must include the organizational documents which govern the nonprofit organization, along with detailed financial information about the current and preceding years, or a budget for upcoming years if the organization has not begun any activities. Incomplete applications, deficiencies in the governing documents, or applications which raise concerns that private individuals may be receiving benefits from the nonprofit organization may prompt inquiries from the IRS and cause delay in the application and approval process, or ultimately lead to a rejection of the application.

How to Franchise a Business in Texas

The recent credit crunch is sparking increased interest in franchising. From the perspective of the franchisor, franchising is one of the few ways to obtain investment capital without giving up control of a business. For the franchisee, franchising offers some of the opportunities of being an entrepreneur without some of the risks and uncertainties.

WHAT IS A FRANCHISE?

A franchisor is a business owner who grants an independent operator the right to distribute the franchisor’s products, use its trademarks and branding in exchange for a percentage of the franchisee’s monthly sales plus a royalty fee.

FRANCHISE LAWS

Franchising is regulated by both federal and state law. The Federal Trade Commission requires franchisers to disclose material information to potential franchisees through the use of a Uniform Franchise Offering Circular (UFOC). A UFOC discloses material information about the franchisor, including its officers and directors, litigation and history, initial and ongoing franchise fees, as well as other franchisor and franchisee rights and obligations.

THE FRANCHISE AGREEMENT

The franchise agreement is the contract that sets out the fundamental business arrangement between the franchisor and franchisee. While there are many common provisions in every franchise agreement, the particular franchise agreement should carefully express the business terms required by the franchisor. Our business attorneys can work with franchisors to prepare the offering of a UFOC and draft and negotiate the franchise agreement

M&A Outlook for 2009: Reasons for Optimism

According to a report issued by Thomson Reuters and the Association for Corporate Growth, the volume of announced mergers and acquisitions worldwide totaled $480.3 billion during the first quarter of 2009, a decrease of 28% over the same period last year. The report also indicated that transactions valued under $500 million, fell 48% compared to Q1 2008 to $98.3 billion.The slowed M&A activity stems from a number of factors, including: ●          Uncertainties in the financial markets, ●          Global economic slowdown, ●          Difficulties obtaining financing for acquisitions due to the credit crunch, ●          Significant differences between buyers and sellers on company valuations, and ●          Dramatic decline in private equity fundraising during Q1 2009. Glimmers of Hope Despite the poor conditions of the deal market, there is reason to hope that deal activity will increase in the second half of 2009. President Obama recently said the economy remains under severe stress, but he is starting to see “glimmers of hope”.  Likewise, there may be reason for guarded optimism about M&A activity for the second half of 2009 provided that: (i) credit markets begin to thaw, and (ii) more buyers and sellers come to a meeting of the minds on company valuations. Distressed Company Sales As the economic turmoil and credit crunch continues, more companies may find themselves in a distressed condition. This will pose opportunities for either financial or strategic buyers who have the means to acquire such companies and keep the businesses afloat through the economic downturn. Distressed sellers are more likely to: (i) be motivated to close a sale, and (ii) come to grips a realistic valuation of their company under the current economic conditions. Stimulated Sectors Shortly after taking office, President Obama signed the “American Recovery and Reinvestment Act of 2009” into law. The so-called “Stimulus Bill” calls for $787 billion of federal spending. Among the sectors receiving substantial federal funds from the stimulus package and the President’s FY 2010 budget proposal are Infrastructure, Healthcare IT, Renewable Energy, Education and Technology. With so much federal dollars in play, dealmakers may find niche opportunities in these sectors.

IRS Penalties Increased for Lack of Economic Substance

The Treasury Department’s “Green Book” outlining the tax provisions in the President’s FY 2010 Budget Proposal sets out the proposed codification of the “Economic Substance” judicial doctrine (discussed here). The Green Book also announces that the IRS penalty for failing to disclose a transaction which the IRS deems to lack “economic substance” will be increased to 30%. The current “accuracy-related penalty” is 20%.

The 30% penalty will give the IRS a powerful enforcement tool in IRS examinations.