Tuesday, May 24, 2011

Employment Law Basics - For the Small Business Owner

1. The Big Bad Wolf - Employee Lawsuits.

The biggest fear of the business owner, other than losing money hand over fist, is being sued. And to make matters worse, the largest source of discontent in the business owner's company is likely to be a current or former employee. This, the employer reasons, is really adding insult to injury, rubbing salt in the wounds, adding fuel to the fire, twisting the knife, and is a slap in the face - why? because the owner hired this litigant, invited them into their family, paid them to stay, work - and to eventually, inadvertently, sue them.

But how afraid should the business owner be? Well, it depends on their size, to a certain extent. Some laws apply only to large or medium size employers based on the intent of the law.

2. Discrimination Laws

The first type of laws that I will describe are the employment anti-discrimination laws. Broadly, these provide that certain classes of people, those historically subject to improper treatment in hiring, promotion, and termination, are protected by law and given a cause of action to sue their employer for mistreatment due solely or partially because of their class status. For example, the employer that lays off his pregnant female employee, because, he reasons, she will take valuable company time for maternity leave and childcare. This employee is given the right to sue her employer under federal law.

Federal Anti-Discrimination Laws
Law Description Threshold

Title VII of the Civil Rights Act of 1964

Prohibits discrimination in employment based on race, religion, or national origin.

15 or more employees.

Equal Pay Act of 1963

Women must be paid the same wages as men for similar work.

Most employees.

Americans with Disabilities Act

Prohibits discrimination in employment based on disability

15 or more employees.

Age Discrimination in Employment Act

Prohibits discrimination based on age.

20 or more employees.

Pregnancy Discrimination Act

Prohibits discrimination in employment based on pregnancy or against new mothers.

15 or more employees.

Veterans Reemployment Rights Act

Prohibits discrimination based on military service.

All employers.

In addition, federal contractors have additional obligations (please call for details). Moreover, North Carolina has wage-hour and labor laws which dictate rules with regard to child labor, wage-hour issues, minimum wage, over-time pay, and right-to-work laws. Here is a list of the applicable state anti-discrimination laws.
State Anti-Discrimination Laws


Description Threshold

N.C. Equal Employment Practices Act

Forbids discrimination based on race, religion, sex, national origin, color, age, or handicap.

15 or more employees.

Persons with Disabilities Protection Act

Prohibits discrimination in employment based on physical or mental handicap.

15 or more employees.

Finally, employers are required to hang posters on a variety of labor issues for the purpose of informing employees of their rights

Sunday, May 15, 2011

Partnerships - Easy, But Limited and Potentially Risky

1. What are Partnerships? How are partnerships formed?

Why should the small business owner or start-up company care about S-Corporations, when a general partnership is so easy. Very little is needed to start a general partnership, aside from the intention of the partners to form a partnership for a business and to share profits. NCGS 59-36(a) states that a partnership is an association of two or more persons to carry on as co-owners a business for profit. Partners can agree in writing or can agree to a partnership orally. In the absense of a written agreement, Article 59 of the North Carolina General Statutes provides certain terms that are universal to any partnership formed in the state of North Carolina. Among them, that partners' share profits and losses equally and have an equal say in the management of the partnership. In addition, partners have equal rights in the partnership property, regardless of who contributed the property. Finally, upon dissolution, partners receive back an amount equal to their contribution, and any excess was divided equally among the partners.

But this describes only general partnerships, and doesn't include limited partnerships and limited liability partnerships. In a limited partnership, only the general partners are personally liable for the actions or debts of the partnership, while the limited partners only risk their investment in the limited partnership. In limited liability partnerships, none of the partners are personally at risk for more than their investment in the limited liability partnership. Of course, many times partners are required to personally guaranty loans or other obligations undertaken by the partnership by those loaning money or leasing equipment.

2. Partnership Taxation.

Partnerships file one entity level tax form with the IRS - form 1065. However, no tax is paid at the entity level and the form is merely informational. Instead, the partnership files form K-1 with the IRS when it files its IRS Form 1065 which allocates to each partner a share of the profits, losses, and/or deductions of the partnership in proportion to the ownership interests of the partners. For example, a partnership with $100,000 in partnership profit would allocate $65,000 to its partner who owns 65% of the partnership interests and 35% to the partner with 35% of the partnership interests.

3. Asset Protection.

Partnerships offer intermediate asset protection. Unless the partner is a limited partner, or a limited liability partner, the general partner's assets are personally at risk for debts or liabilities of the partnership. On the other end, if a debtor comes against the partner, are the partnership's assets at risk? A creditor who attaches the partnership interest of a partner/debtor is only entitled to a "charging order" entitling that creditor to receive the distribution that would normally accrue to the partner alone. So when distributions are alloted, the share of the partner/debtor is given to the creditor. However, the partnership, provided their partnership agreement provides so, can withhold the distribution of the partner so that the debtor will not receive it, meanwhile, the debtor must pay taxes on the amount of distribution that would have been paid.

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Monday, May 9, 2011

S-Corporations: What are they and why care? - Part 3

Part 3 - Transfer Restrictions - Buy-Sell Agreements

Typical for any S-corporation, C-corporation, limited liability company, or partnership, owned by more than one person, are certain provisions that govern who can be an owner and under what circumstances. For example, although your partner and you chose to work together, in the event of the death of one of the other owners, many business owners would not chose to work with the decedent-owner's inheritors. For this reason, legal restrictions called buy-sell provisions are typical in owner agreements. Partnership agreements are the easiest example, since there is broad discretion to restrict transfers, either voluntary or involuntary.

The shares of a corporation may be restricted for any reasonable purpose as long as it is not unconscionable. However, the type of restrictions are limited in their remedies to (1) obligate the shareholder first to offer the shares to the corporation or other persons; (2) obligate the corporation or other persons to acquire the shares; (3) require consent to the assignment if not manifestly unreasonable; (4) prohibit transfer to designated persons or classes of persons, if not manifestly unreasonable; or (5) contain any other provision reasonably related to an authorized purpose. In contrast, a LLC membership interest is freely assignable except as provided in the articles of organization or a written operating agreement. The assignee only becomes a member of the LLC if the other members unanimously agree or if the articles of organization or operating agreement otherwise provide.

A buy-sell agreement or provisions, whether it is contained in a shareholders agreement or operating agreement, provides transfer restrictions if a triggering event occurs. These triggering events typically include the death of an owner, the firing of an employee-owner, the retirement or disability of an owner, or the attempted sale or transfer by an owner. These buy-sell provisions often require the triggering event owner to sell to the remaining owners or the company itself at a set price or a price deduced by an accountant or using a formula. Typical valuation formulas for small or large companies include (1) books value, (2) some factor or multiple of gross or net revenue, or (3) liquidation values.

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