e- NEWSLETTER
December 2007/January 2008
Jessica M. Kirsch
Editor-in-Chief
Corporate Law
Can’t get a loan? Have you tried this?
Most small business
owners are surprised at the number of ways the government might actually be able
to help them
By
James D. Voigt
From equipment purchases, to start-up expenses, and even just to get through a temporary cash crunch, business often need to borrow money. But even before the upheaval of the lending market, small business owners often found it very challenging to get a loan at all. The ultimate solution was for the owners of the business to take out personal home equity loans in order to put more cash into the business.
Before doing that, though, you should be aware of some powerful borrowing tools available through the U.S. Small Business Administration, or “SBA”. In their various programs, the SBA does not usually lend any money. But the organization does back loans made through local lenders. To take advantage of their programs, you must identify which SBA programs you are qualified to use, and then find a local lender to work with the SBA to make the loan.
Basic 7(a) Loan Guaranty – This is the SBA’s most flexible loan program in which funds can be used for working capital, machinery and equipment, furniture and fixtures, land and building, and many other general business purposes. This program is best suited to start-up and existing small businesses. Loans are made through commercial lenders, and backed by the SBA, making is possible for small businesses to obtain loans even if they had previously been unable to qualify on their own.
Certified Development Company (CDC) – This is a 504 loan program to be used in purchasing real estate, or for machinery and equipment to be used in modernizing or expanding operations. These loans are generally made through a private sector lender holding a senior lien, a loan secured from a CDC funded by a 100% SBA-guaranteed debenture, with a junior lien covering up to 40% of the total cost. These loans typically require 10% equity from the borrower.
Microloan – This is a 7(m) Loan Program designed for small businesses and start-ups in need of relatively small loans up to $35,000. Proceeds of the loan cannot be used to pay existing debts. The SBA makes the loan to an intermediary lender, who in turn makes the loan to the small business. This program is not available in all areas. The lending institution making the loan often offers technical business assistance as well.
Loan Prequalification – Many small businesses have strong business plans, but simply cannot get a bank to take them seriously. Through this program, the SBA will review your loan application of up to $250,000, analyze its viability, and may even sanction the loan application before it is taken to lenders for consideration. The SBA will work with you to strengthen the loan application and increase the chances of its acceptance. Loans are ultimately delivered by commercial lending institutions.
If you are starting
a new business, or are running an existing business with cash needs, you should
take the time to investigate everything the SBA has to offer. Their website is
www.sba.gov. You should also feel free to contact our office with questions on
the best way to structure and document your new or expanding business.
If you have any questions regarding this article please feel
free to contact Jim Voigt at
jdvoigt@lavellelaw.com.
Business Law
Changing The Form Of Your Business Entity
By Kerry M. Lavelle
The best plans of sophisticated entrepreneurs may change as the business
enterprise matures. Therefore, periodic reviews should be made to evaluate the
tax and other costs and considerations as the business grows.
Be aware of the pitfalls that may arise from changing an
entity from a sole proprietorship to a corporation. Converting the sole
proprietorship into a corporation creates various issues. The Internal Revenue
Code provides an exchange of property for stock in a corporation as a nontaxable
event if certain requirements are met. With proper planning and documentation,
all such exchanges should be considered nontaxable with the use of IRC § 351.
This code section is fairly simple, but there are some complications that await
the unwary.
IRC § 357(a) generally provides that the assumption of
liabilities by the corporation is not treated as the payment of boot creating a
tax liability. Best is cash or property of a type different or in excess that
which is used to balance a non-taxable exchange. However, if the principal
purpose of the liability assumption is to avoid federal income tax on the
exchange, or if there is no business purpose for the debt assumption, the entire
liability is treated as boot. Under IRC § 357(c), if the liabilities assumed
exceed the total adjusted basis of the property transferred, gain is recognized
to the extent liabilities assumed exceed the basis of the property transferred.
There is a great deal of controversy over whether a personal note transferred as
property to the corporation can avoid gain under IRC § 357(c). Two courts have
concluded that a personal note did not avoid such gain. Further, transfers to
investment companies and transfers of nonqualified preferred stock need to be
addressed separately.
In a tax free incorporation, control is obviously critical.
Control is defined as the ownership of stock possessing at least 80% of the
total combined voting power of all classes of stock entitled to vote and at
least 80% of the value of all other classes of stock of the corporation. The IRS
will frequently apply the “step transaction” doctrine to allege that a portion
of the shares received from others for the corporation issued additional shares
are part of the total consideration received shortly after the transaction. To
the extent the transactions are related or there are binding commitments, the
likelihood increases that the step transaction doctrine will be imposed.
Unlike partnerships, the transfer of services in exchange for
stock creates a potential taxable event because past, present or future services
are not property. Therefore the promise to “do work” for the venture could be
taxable as income.
As should be expected, the long history of sole
proprietorship conversions to corporations means the procedures are straight
forward. Here are the steps to take:
1. A properly drafted set of
incorporation documents and shareholder agreements should be put in place, which
should include bylaws.
2. Issue the stock to the sole
proprietor upon the transfer of the assets and execution of the documents.
3. Obtain appraisals of all property
contributed to the entity or otherwise document the valuation of the property.
4. Document the starting basis of the
sole proprietor in the stock.
5. If appropriate, make an S
corporation election.
6. Determine whether any gain will
result if liabilities are assumed in excess of basis.
7. Prepare a final balance sheet and
income statement for the short period to record the beginning balances for the
new entity.
8. Make sure all state and federal
identification numbers have been applied for and received for the new
corporation.
9. If the corporation operates in
more than one state, make sure to register the corporation as a foreign
corporation in the appropriate states.
10. Have us review loan documentation
to make sure that the assumption of debt or the assignment of the debt is not at
default under your loan agreements.
If you have any further questions on this issue, do not
hesitate to contact Kerry Lavelle at
klavelle@lavellelaw.com, for further explanation.
Business Law
The Independent Contractor Trap
By Theodore M. McGinn
Many businesses operators often are
enticed by the significant savings they can achieve by characterizing certain
individuals to be independent contracts as opposed to employees. By classifying
an individual as an independent contractor, the business does not have the
financial obligation to pay certain employment taxes to the federal and state
governmental agencies. In addition, such business does not need to obtain
workers compensation and other benefits to such individuals. Naturally,
characterizing such individuals as independent contractors provides a
significant financial incentive. Home healthcare businesses often wrongly take
such action.
Under the law however, a business does not have the right to
determine whether such individual is an employee or an independent contractor.
The classification depends upon the level of control the business exerts over
the individual in questioned. Generally, if you have the right to control the
individual, such individual is an employee. On the other hand, if you allow the
individual to determine the means and methods of accomplishing the result, such
individual will be classified as an individual contractor.
In the arena of home health care, as a condition of
participation with the Medicare program, the home health care agency is required
to always have employees providing clinical services to its patients. Therefore,
the agency is required by law to treat such individuals as employees.
Characterizing such individuals as a independent contractor jeopardizes the
provider agreement of the agency. In addition, you expose the agency to
penalties, interest and taxes that are not withheld from the individuals pay
checks. Finally, recently the State of Illinois has targeted home health care
agencies who fail to maintain the proper workers compensation insurance for
their employees, and in particular their nurses. The State of Illinois has
levied significant fines against the agencies that are not compliant under the
Illinois statutes.
Businesses wrongfully characterizing individuals to be
individual contractors expose their business to significant penalties. Some
business may be lucky and avoid these expenses. Should there improper
classification ever be discovered, the amount of damages sustained could
be catastrophic. Accordingly, it is best to properly characterize those who
provide services to the company.
If you have any questions regarding this
article, please contact Ted McGinn at
tmcginn@lavellelaw.com.
Corporate Law
DON’T TAKE IT PERSONALLY
By Matthew J. Sheahin
Clearly, the main reason business people organize a company
for conducting their business activities - whether it is a C-corporation,
S-corporation, LLC or some other type of legally recognized business entity - is
to shield themselves from personal liability for business debts or obligations.
However, just organizing the entity does not shield you from personal liability.
You must maintain proper corporate integrity and file the necessary documents
with applicable state agencies in a timely manner. If you fail to maintain
corporate integrity, you could be found personally liable for a company
obligation.
In determining whether to disregard a corporate entity, the
court will not rest its decision on a single factor but will look at a number of
variables, including (1) inadequate capitalization; (2) failure to issue stock;
(3) failure to observe corporate formalities; (4) nonpayment of dividends; (5)
insolvency of the debtor corporation at the time; (6) nonfunctioning of other
officers or directors; (7) absence of corporate records; and (8) whether the
corporation is a mere facade for the operation of dominant stockholders. (Webb,
180 Ill.App.3d at 622, 129 Ill.Dec. at 524, 536 N.E.2d at 208.) The court may
also consider whether the dominant individuals commingled corporate funds with
personal funds or preferred themselves as creditors. ( McCracken, 149 Ill.App.3d
at 109, 102 Ill.Dec. at 598, 500 N.E.2d at 491; see generally 18 Am.Jur.2d
Corporation § 48 (1985).) When such variables are coupled with some element of
injustice or fundamental unfairness, the corporation will be considered as an
aggregate of persons both in equity and law and its officers, directors, and
shareholders will be held liable for the corporation’s debts and obligations. (
McCracken, 149 Ill.App.3d at 109-10, 102 Ill.Dec. at 598, 500 N.E.2d at 491.)
The main problem we see with clients is commingling of funds.
You must keep your personal finances separate from your corporate finances.
Furthermore, if you own or operate multiple companies, you must keep each
company's finances separate. Do not use Company A's funds to pay Company B's
debt. If such a dire situation arises, and Company B does not have sufficient
funds to pay its debts, then have your attorney draft a promissory note so
Company A can lend funds to Company B, and have it documented properly.
Another common way to open yourself to personal liability is
by failing to file your company's annual report and paying annual fees to the
Secretary of State. If this happens, the State will eventually dissolve your
company leaving you with no protection. Our office can reinstate the company and
bring it back into compliance, but it is obviously better to just file and pay
the fees timely and avoid this lapse of protection.
It is not difficult to maintain corporate integrity, but you
must stay on top of it. If you lose the protection that a corporation affords
you, you may suffer severe personal hardship that could have been easily avoided
with careful corporate planning and maintenance.
If you have any questions regarding this matter, please
contact Matthew J. Sheahin at
msheahin@lavellelaw.com.
Family Law
SPOUSE HAS A SECRET LOVER? SUE EM!
ILLINOIS LAW FOR ALIEN OF AFFECTION
By Amil Alkass
Many marriages end in divorce as a result of infidelity by
one spouse. Discovering that a spouse is committing adultery has a devastating
emotional and physical impact o
n the non-cheating spouse. Unlike many other
states, Illinois law grants relief to the suffering spouse of an adulterous
marriage by allowing lawsuits to be filed for “alienation of affection.”
Alienation of affection laws have been abolished in almost all states and were
originally enacted during the era of this country when women and wives were
deemed to be the “property” of the husband. As a result, the law allowed a
husband to recover for his property after it had been taken away.
In Illinois, alienation of affection suits may be filed
against the third-party individual who was involved with the infidelity.
Additionally, such suits may also be brought against other third-parties such as
in-laws and friends who may have enticed or caused the break-up of the marriage.
To prevail on an alienation of affection claim, the suffering-spouse plaintiff
must prove the following elements: (1) that prior to the involvement with the
third-party lover, the cheating spouse continued to have love and affection for
the suffering spouse; (2) that were actual damages, in other words, actual
financial loss as a result of the infidelity; (3) and there were overt acts,
conduct and/or enticement on the part of the 3rd party causing which have caused
the love and affection from the cheating spouse to end towards the suffering
spouse. In other words, the suffering-spouse plaintiff will need to prove that
the 3rd party lover “stole” the cheating spouse’s affections away from the
suffering spouse and caused a break down in the marriage. Meeting all of the
necessary elements may prove to be difficult. However, upon prevailing on an
alienation of affections lawsuit, the suffering spouse will be awarded “actual
damages” or out-of-pocket expenses as a result of the marriage breaking down and
will not be compensated for any emotional distress or pain and suffering.
Currently, alienation of affection lawsuits are not all that
common but remain in existence to allow a form of recourse to a suffering
spouse. For more information about alienation of affection lawsuits or any other
family law related matters, please contact attorney Amil Alkass at Lavelle Law,
Ltd. via e-mail at
aalkass@lavellelaw.com or via telephone at (847) 705-7555.
Federal Estate Tax
THE UNCERTAIN FUTURE OF THE FEDERAL ESTATE TAX
By Gillian L. Nagler
The federal estate tax system is in a state of flux. Under current law, estates
valued at less than $2 million are exempt from taxation, with amounts in excess
being taxed at a maximum rate of 45%. The exemption rises to $3.5 million in
2009 before the estate tax disappears altogether in 2010. It is then scheduled
to be reinstated in 2011 with an exemption of $1 million and a maximum tax rate
of 55%, unless Congress acts to change the law. Because of this uncertainty, the
estate tax is sure to be an important topic of debate in the upcoming 2008
presidential election.
Over the last several weeks, several of the country’s wealthiest people,
including Warren Buffet and Bill Gates, have encouraged Congress to retain the
estate tax. Various presidential candidates have voiced their positions on the
issue as well. Some, including Mitt Romney and Rudolph Giuliani, propose to
eliminate the estate tax. Hillary Clinton says that she would raise the
exemption to $3.5 million, while John Edwards would raise it to $4 million. And
John McCain proposed an increase in the exemption to $10 million, with anything
above that taxed at a flat rate of 15%. What will happen is anyone’s guess, so
stay tuned to our newsletter for further developments.
Let us help you navigate the muddy estate tax waters. For more information on
estate planning, please contact me at
gnagler@lavellelaw.com.
Taxation
CHANGES TO THE IRS NATIONAL STANDARDS
FOR ALLOWABLE EXPENSES
By Cameron R. Monti
The Internal Revenue Service (IRS) has recently released the
2007 allowable living expense standards. For taxpayers who owe federal taxes to
the U.S. Department of Treasury, this may be of particular interest. Allowable
living expense standards, also known as collection financial standards, are used
to determine the ability of a taxpayer to pay a delinquent tax liability. More
specifically, the national standards are used by the IRS and tax practitioners
to determine whether a taxpayer can qualify for and the amount offered under the
Offer in Compromise program, or the amount a taxpayer must pay under an
installment agreement. For pur
poses of federal tax administration the standards
went into effect on October 1, 2007.
The new “national standards” for allowable living expenses
have been redesigned to incorporate:
• a new category for out of pocket
health care expenses
• the elimination of income ranges
for national standards for food, clothing and other items
• a nationwide set of tables for
national standard expenses, eliminating separate tables for
Alaska and Hawaii
• an expanded number of household
categories for housing and utilities
• an allowance for cell phone costs
in housing and utilities
• equal allowances for first and
second vehicles under transportation expenses
• fewer Metropolitan Statistical
Areas for vehicle operating costs
• a separate nationwide public
transportation allowance
The Allowable Living Expense standards rely on data from the
Bureau of Labor Statistics, the Medical Expense Panel Survey and other
governmental surveys of actual consumer expenditures and provide a basis for
allowances. The IRS adjusts survey data for inflation according to the Consumer
Price Index. If you have a tax problem and would like to know how these
standards my affect you, or of you have a question concerning the new changes,
please contact cmonti@lavellelaw.com.
Foreclosure
FORECLOSURES ARE ON THE RISE
By Timothy M. Hughes
Newspapers’ headlines indicate the nation’s housing market is
in a deep recession, and further declines in new construction, sales and prices
are imminent. By the end of next year, falling home values, combined with rising
payments on adjustable mortgages, tighter lending conditions and, in all
probability, a faltering job market, could lead to two million foreclosures
cases being filed against homeowners.
Some members of Congress have a plan to help homeowners.
Illinois Senator Richard Durbin recently introduced a bill that would allow
bankruptcy courts to modify repayment terms on mortgages for primary homes. That
could keep an estimated 600,000 troubled borrowers in their homes, paying off
their mortgages, albeit over longer terms, at lower interest rates or on lower
principal balances.
The bill also undoes an injustice built into the recently
amended bankruptcy laws. Under current law, mortgages on primary homes are the
only type of secured debt that is ineligible for bankruptcy protection. Owners
of vacation homes, farms and commercial property can modify those debts in
bankruptcy court. However, your everyday homeowner can not under any
circumstances modify his mortgage, that double standard is being sought to be
eliminated.
The proposed modification to the law would allow more people
to protect their largest investment. Further, it is likely that the total
economic costs of foreclosure are much greater than bankruptcy-associated costs.
Therefore, the proposed modification would also help the beleaguered mortgage
industry.
Are you having problems making your mortgage payments or
anticipate a problem arising in the near future. If yes, please do not hesitate
to contact me at thughes@lavellelaw.com
to discuss your options.
Aviation
Is Your Aircraft Insured?
By Robert A. McKenzie
Most aircraft owners
don’t know that exchanging time with other owners can lead to uninsured flights.
Insurance policies always contain restrictions relating to the use of the
aircraft by the owner and other pilots; the common prohibition against
commercial activities can often be the cause of extensive and expensive
litigation.
Pilots think of commercial activities as the carriage of
passengers or cargo for hire. This definition was taught to us by our first
flight instructors and it is generally true. In aviation litigation, though, the
definition of com
mercial
activities is not so limited.
On October 30, 1996, a corporately owned Gulfstream G-IV
crashed on takeoff from Palwaukee Airport. Four people were on board: two
pilots, a passenger, and a flight attendant. The plane veered off the runway
during takeoff and struck a ditch. It managed to become airborne and cross a
road, but crashed immediately thereafter. Everyone on board died in the crash.
Prior to the crash, the owner and operator entered into an
interchange agreement under 14 CFR § 91.501(c)(2). This section provides for a
lease between owners of aircraft who agree to exchange equal time in each
other’s aircraft. There can be no charge except to account for the difference in
the cost of owning, operating, and maintaining the aircraft. The operator of the
accident aircraft was not using it to carry passengers or cargo for hire. The
sole passenger on the flight was an executive of the operator. He did not pay
for his seat.
Multiple lawsuits were filed relating to the crash, including
one between the owner and operator of the aircraft. They litigated over whose
insurance would be primarily responsible for paying damages resulting from the
crash. The owner argued that the operator’s use was specifically excepted by the
owner’s insurance policy. The owner also claimed that the use should be excepted
because it was commercial.
The Illinois Appellate court decided that the Owner’s policy
did except the use since the policy prohibited any flight service conducted by
persons or entities other than the owner. The Court also noted that the
exclusion applied regardless of whether the plane was being used for a
commercial activity.
Despite basing its decision on the language of the policy,
the Court went on to examine the meaning of the word commercial in the aviation
context. It determined that when a flight is conducted under an interchange
agreement it is necessarily a commercial activity. Since the interchange
agreement is a lease, it is by definition commercial.
The families that did not settle the related liability suit
were awarded approximately $19,000,000 in damages. The owner and operator were
both determined to be approximately 5% at fault. But, in Illinois the finding of
fault does not protect them from collection of the entire $19 million. In
Illinois, Plaintiff’s may generally collect the full amount of damages from any
defendant. This ruling was particularly troublesome for the operator whose
insurance policy was determined to be the primary insurer of the accident
aircraft. The operator will undoubtedly see a dramatic increase in the cost of
its insurance, if it can obtain insurance at all. Also, the operator may have to
file suit against the other defendants to collect their share of the damages.
This ruling was made in the context of corporate aircraft but pilots of smaller
general aviation aircraft should take note. It is not an uncommon for a pilot to
make an arrangement with a friend or family member to exchange time in the
other’s aircraft. In such a case, it is quite possible that a court could rule
that the borrowing pilot is leasing the aircraft and engaged in a commercial
activity. As such, the Pilot may not be covered by the owner’s, or his/her own,
insurance.
Owners and Pilots who wish to know more about protecting
their assets should feel free to call Robert McKenzie at (847) 705-7555 or email
him at rmckenzie@lavellelaw.com.
For past e-newsletter articles of interest, please visit the Lavelle Law, Ltd. website at: http://www.lavellelaw.com/newsletters/newsletter.htm.
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This newsletter is
a publication of Lavelle Law, Ltd. We attempt to highlight and
discuss areas of general legal interest that may lead to planning
opportunities. Nothing contained in this Newsletter should be construed as
legal advice or a legal opinion. Consultation with a professional is
recommended before implementing any of the ideas discussed herein.
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