Examining legal issues crucial for new business: Budding entrepreneurs face questions about tax, incorporation, financing

Indus Entrepreneurs’ Resource Guide , October 15, 2001, page 17

By Robert A. Adelson

Entrepreneurs or consultants in business, advising on business or thinking of going into new business, or thinking of joining others in a new business face many difficult tax and legal questions.

These questions revolving around incorporation and costs, other choices besides corporations, tax effects, infringement protection and financing.

The following tax, legal and business issues must be considered.

  • Business Choices and Incorporation

A new business can operate as a sole proprietorship or general partnership, without filing, or as a limited partnership, corporation (profit or non-profit), or limited liability company (LLC) or limited liability partnership (LLP), where state filing is required.

The big benefits of a corporation or LLC are: (1) insulate all owners from personal liability, (2) give management continuity, (3) define rights of owners and those who deal with the business,(4) allow transfer of business interests.  This can add credibility to your business in the marketplace.

However, corporate or LLC benefits cost substantial money.  First, there is incorporation red tape: Articles of incorporation, bylaws, minutes, banking resolutions, shares, plus operation agreements for LLCs, with resulting lawyer’s costs and State fees.  Second, there is upkeep.

Creating a corporation or LLC is creating a new legal person.  To get legal benefits, you have to treat her (him) right.  That means transferring assets over to the new entity, so it owns something, and then keeping separate records, using corporate letterhead, checks, etc., so you act through this paper person.

  • Taxation /S Corporations or LLCs

Paperwork and dollar costs are reasons why startups often put off incorporation.  Another putoff is taxes.  As a new person, a new corporation or LLC files for its own taxpayer ID.  It must file its own tax returns and pay annual franchise taxes ($456 per year in Mass. for a corporation, $500 per year for an LLC).

Normally, corporations are also taxed on their income, but if a corporation files to be an “S Corporation”, it avoids income taxes.  Owners can also take losses on their personal tax returns, while the “S” is still a regular corporation in other respects.

LLCs offer these same S Corporation advantages, without some of the technical S Corporation restrictions.  LLCs also offer additional flexibility normally found in partnerships to split income, losses and capital disproportionately among members.

There are also disadvantages to S Corporations and LLCs – direct owner tax on all income, and loss of a chance for tax-free rollover or the 14% tax on sales of shares held 5 years or more. Additionally, the very flexibility of the LLC, so helpful in real estate and estate planning areas may be a drawback in a technology-based business where rights need to be clear.

  • Trademarks, Patents, Proprietary Protection

Care should be given in choosing a business name and logo as well.  Filing a state or a Federal trademark or service mark gives protection against those who would try to sell products or services under your registered name.

If a federal trademark is filed and approved by the Patent and Trademark Office, this can give you priority in all 50 states.  The mark can also be filed even before used in commerce.

Even more care should go to protect inventions, new products, trade secrets and information proprietary to the business.  This starts even before going into business: think about any documents signed with present or past employers; assure your rights in “intellectual property” and to transfer it “free and clear” to your new business.

Where feasible, filed patents should protect new inventions or improvements, or copyrights, expressions of ideas, and confidentially agreements, proprietary information and secrets.

  • Contracts for People, Products, Financing

Other issues for a new business, just as important, include:

* Supply contracts, equipment purchases, leases, terms

* Product development, Sales/Licensing, marketing/distribution

* Employees/contractors, compensation, benefits, stock options

* VC and angels, debt/equity deal terms, Securities law issues

International work can also involve other issues as well, including immigration issues for key employees.

The author is Robert A. Adelson represents businesses in fields such as software, biotechnology and emerging technologies.

Since 2004, Robert Adelson has been a partner at the firm Engel & Schultz LLP, 265 Franklin Street, Boston, MA 02110.  He can be reached at (617) 951-9980 or radelson@engelschultz.com

©2001 by Robert A. Adelson

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Employment Temination And Severance Negotiations

128 Innovation Capital Group / Blitztime,  September 24, 2009


By Robert A. Adelson, Esq.


At Will Employment and Exceptions

1. Massachusetts is at will employment jurisdiction

  • Employee may resign or Employer may                                  terminate employment at any time
  • With or without notice
  • For cause or reason or without cause or reason
  • With obligation to pay wages or accrued vacation pay and expenses through date of termination
  • No right to continued employment
  • No right to severance pay after termination
  • 2. Presumption employment is At Will

  • If nothing said or written and if no exception applies                      employment is at will
  • 3. Exceptions to At Will doctrine – Contract

  • Written Employment Agreement can supercede at will employment
  • Terms of agreement on term, severance will control

4. Exceptions to At Will doctrine – Implied contract

  • Offer letters
  • Employee handbooks
  • Policies
  • Practices
  • Oral promises
  • Promissory Estoppel – detrimental reliance

5. Vigilence of employers to avoid Implied contract

6.  Vigilence of employers to avoid claims for unemployment compensation for extended periods

  • Specific termination provisions in Offer letters
  • Specific termination provisions in employment contracts and Employee handbooks

 

Wrongful Termination by Statute

1. Termination for the wrong reason

  • At Will employee can be terminated for no reason or any reason
  • But cannot be terminated for an unlawful reason
  • 2. Discrimination

  • Age
  • Race
  • Gender
  • National Origin
  • Religion
  • Disability
  • Sexual Orientation
  • Military status
  • 3. Violation of Other Statutory Laws

  • Civil Rights
  • ERISA
  • Equal Pay
  • Family and Medical Leave Act
  • Invasion of Privacy
  • Plant Closings/ Takeovers
  • Sexual Harassment
  • State and Federal Tort Claims
  • Wages and Hours
  • Whistleblower Protections
  • Worker’s Compensation

 

Tort, Equitable and Common law Claims

1. Implied Covenant of Good Faith and Fair Dealing

2. Violation of Public Policy

3. Negligent Hiring and Supervision

4. Interference with Contractual or Advantageous Business relations

5. Assault and Battery, False Inprisonment

6. Misrepresentation, Deceit and Fraud

7. Infliction of Emotional Distress

8. Fiduciary Rights of Minority Shareholders in closely held Corporation

Damages in Employment Termination

1. Contract Damages

2. Tort Damages

3. Statutory Damages

 

Demand Letter

1. Factual Background

2. Legal Claims

  • Implied Contract
  • Discrimination
  • Other Statutory violations
  • Good Faith and Fair Dealing
  • Tort Claims

3. Demands

  • Additional Consideration
  • Changes from separation Agreement
  • Attorney’s fees

4. Litigation

  • Deadline or recourse to litigation
  • Notice to preserve electronic records

 

Employment Litigation

1. MCAD filing requirements for discrimination claims

2. Complaint – Claims made and their survival

3. Discovery – plan to gain information to enhance case

4. Motions and briefs

5. Trying the case

 

Negotiating Severance and

The Separation Agreement

1. Severance Pay and Benefits

  • Amounts and timing
  • Allocations to Emotional Distress, Attorneys fees and medical expenses to save taxes
  • Payments for attorneys fees, outplacement and other specific costs to enhance severance
  • Medical coverage
  • Other Employee Benefits
  • Duration of severance

2. Job Search and reputation

  • Outplacement
  • Office Space
  • Inquiries from contacts and potential employers
  • References
  • Confidentiality
  • Mutual non-disparagement

3. Releases

  • Mutual release
  • Legal rights
  • Rights to enforce settlement
  • 4. Enforcement
  • 5. Cooperation
ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980.        Fax (617) 951-0048. E-mail:radelson@engelschultz.com Website:  www.engelshultz.com Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of  Law Review.  He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.  Mr. Adelson is specialized in corporate, taxation, contracts and intellectual property law. His clients are (1) startup and early stage companies; (2) officers, employees and executives; (3) consultants and service providers; and (4) family businesses.  Working with employees and executives, in addition to issues of employment termination, wrongful termination and severance negotiations, Mr. Adelson drafts, negotiates and advises clients on Offer letters and employment agreements; Noncompete, confidentiality, restrictive covenants; Stock, options, SARs and phantom stock; Issues under IRC §409A; Relocation, tax gross-ups, recruitment issues; Change of control issues; Severance, retention, termination agreements; Consultant, director, service agreements.

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in litigation, real estate, family and probate matters.

Mr. Adelson is a frequent speaker at business forums and author of numerous published articles including articles on employment termination and employment negotiations. For articles, see http://www.engelschultz.com/index.php/category/publications/ For further information on Mr. Adelson’s background, see http://www.engelschultz.com/index.php/attorneys/partners/robert-adelson/

The speaker thanks Annette Reynolds, for the opportunity to speak and present to this meeting of 128 Innovation Capital Group / Blitztime on the subject of “Employment Termination and Severance Negotiations” from Boston, Massachusetts, on September 24, 2009.

The purpose of these materials is to to offer an outlines on the subject matter of the presentation to officers, executives and employees and ssome business owners on the issues of employment termination, wrongful termination and severance negotiations. Thus, it is hoped these materials will be informative to those in attendance.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.

(c) 2009 Robert A. Adelson

Sometimes, Cash Not Best Payment

Boston Herald , January 20, 1997, page 26

 

By Robin Lawson

 

Blackstone Marketing’s R.L. Pitcher of Boxboro calls himself a “turnaround specialist” who helps companies get onto a profitable track.  Because of the nature of his clients, it’s not unusual for him to accept alternative payment other than cash – in particular, stock or options to purchase stock.  Is that a wise route for other office-at-home businesses?

“I’ve made out well,” says Pitcher.  “There was only one instance when I couldn’t make it work.  But there is no magic formula to determining the right opportunity.  You must be in a position where you’re able to walk away from a client without making any money.  You’re rolling the dice and betting against yourself.”

In any case, he adds, the project should be exciting and interesting.  At the very least, you should be getting free training in a product or technology with which you have had very little experience.  Robert Adelson, a partner with the Boston law firm Lawson & Weitzen**, says experience may be reason alone to consider taking stock or options as payment.  “Evaluate the true currency of your compensation.  Your payment may be more than stock.  Perhaps your client is developing a technology which could lead you to other assignments.  Or there’s an opportunity to make worthwhile contracts with the company’s board of directors or advisers.”

Agreeing to be paid in stock is a strategic investment decision, says Adelson, who specializes in employment and consulting agreements.  Not every client will succeed.  “You should start the relationship feeling confident in the firm and your ability to make a contribution.  And make sure you have a solid commitment that places a real value on your services.  If not, you will undermine your standing with the firm and the overall value of your work experience.”

What type of stock should you accept?  As a consultant, you’re most likely to be offered common stock.  Adelson offers a rule of thumb:  if the stock has a high value, take options.  If it has a low value, take the stock now.  This has largely to do with tax implications:

A few things to watch for:

  • Make sure your contract protects against dilution – issuance of a large number of shares which deflates the value of the stock
  • Include cash-out protection.  If the company is acquired and there’s a change in control, you should be able to cash out your shares along with the people who hired you.
  • Incorporate some milestones into your contract which spell out when your shares can be vested.  Your objective may be tied to profits, for example, or to an initial public offering.

Valuing the stock, Adelson says, is never a clear science.  He says you should consider the company’s status, market share, products, capital and management savvy.  You should also consider where you rank within the company, and the expectations others have of your contribution.  The higher your rank, the higher the expectations, the more stock you should receive.  With a startup, you should receive more stock the earlier you get involved.  “Consider yourself, in effect, new capital coming in.  Don’t’ be bashful about asking for a significant amount.  Remember, your contribution will make everyone’s stock more valuable.”

© 1997 Boston Herald

Stock for Pay:  Follow-up Questions…

 

  • As an entrepreneur – How do you recruit top talent, using your company stock?

  • As a consultant or an employee – Is stock a good deal?

  • What terms do I include when I am being paid in stock for options?

For answers to these and other questions, contact information for the attorney mentioned in the above article is as follows:

Robert A. Adelson, Esq.

Engel & Schultz, LLP

265 Franklin Street, Suite 1801

Boston, MA 02110

Telephone: 617-951-9980

E-mail: radelson@engelschultz.com

** Since 2004, Robert Adelson has been a partner at the Boston law firm, Engel & Schultz LLP

Determining Which Tool Offers the Best (Intellectual Property) Protection

Copyrights and trade secrets can be important assets that can add value to your business. They are also an important protection for work of your creation.

Boston Business Journal , June 5-11, 2009, page 38

By Robert A. Adelson

Copyrights and trade secrets can be important assets that can add value to your business.

They are also an important protection for work of your creation or customer information, know-how and other business information developed over time or in current use and proprietary to you.

If properly used they can give you an edge over your competition in business and serve as a low cost, practical barrier to entry.

The best protection for inventions is utility patents, which offer a 20-year monopoly from date of grant. Even those who do not copy or independently develop are barred from use unless they license from the patent holder.

However, to gain patent protection, the invention must be a “useful process, machine, manufacture or composition of matter” or improvement of the same. It cannot be obvious and must be an advance over prior art, with the application filed within a year of first publication, public use or offer for sale. It must be fully disclosed and can take several years and generally $7,000 to $12,000 in filing and legal fees, and after vetting by the U.S. Patent and Trademark Office, it may prove be too narrow to protect against infringement.

Thus, if the invention is not intended for mass marketing, or if disclosure, time delays or costs or patent requirements raise concerns, then, copyright or trade secret protection may offer cheaper and more practical intellectual property protection.

Copyright filings:

Copyright is the exclusive right to copy and control publication of original expressive work fixed by the author in a written work, sketch, computer code, audio or video recording, architectural work or other tangible medium. Thus, copyright protects the expression but not the idea itself and bars against copying but not independent development.

Federal filing within three months of publication or prior to infringement is needed to gain statutory damages and attorney fees in later infringement actions to defend works. A deposit of materials is needed, but filing costs and expected attorney fees are a fraction of patent costs — generally, less than $1,000, even with compilation and serial filings, and sometimes even less than $500, with registration secured in months not years. Yet, duration is longer than patents — author’s or joint author’s life plus 70 years, or 35 years from author’s transfer, or 95 years from publication in case of “work for hire.”

Copyright protection for computer source and object code is also possible, where disclosure in the form of Copyright Office deposit blots out most of the source code.

Trade secrets:

A trade secret may consist of any formula, pattern, device or compilation of information used in one’s business that gives the owner an opportunity to obtain advantage over competitors who do not know or use it.

Thus, while trade secrets have the broadest scope in information covered, with novelty or even expression not required, they are the hardest to safeguard because they must be kept confidential and vigilance is needed.

State law and court decisions that uphold trade secrets look to these elements:

• Extent to which information is known outside business and within business.
• Extent of measures taken to guard the secrecy of information.
• Value of information to owner and its competitors.
• Amount of money or effort expended in developing information.
• Ease or difficulty to properly acquire or duplicate information by others.

Trade secret protection involves confidential information agreements with employees, contractors and sometimes distributors and clients as well — those with access to the information and further programs internally to demonstrate care and protection afforded information. Attorney fees for such work may be $1,000 or more, still far less than patent costs. Duration is as long as secret is maintained. Some continuing trade secrets have existed for centuries.

Robert A. Adelson is a corporate, tax and intellectual property attorney and partner at Boston law firm Engel & Schultz LLP.

© 2009 Robert A. Adelson


The above “Insider View” article – “Determining which tool offers the best protection” appeared in the Boston Business Journal, Issue June 5-11, 2009, page 38 in the BBJ’s  Intellectual Property Law focus section:

  • If you have any questions or comments on this article
  • If you or your company would like help to protect written materials you have developed in your business, or artistic, music, video or literary works
  • If you or your company would like help to protect confidential information from use in competition with your business
  • Or if you have other questions or issues involving or copyrights, trade secrets, trademarks or a service marks or other intellectual property

The author can be reached as follows:

Robert A. Adelson, Esq.
Engel & Schultz, LLP
265 Franklin Street, Suite 1801
Boston, MA 02110
Telephone: 617-951-9980 ext 205
E-mail: radelson@engelschultz.com

Massachusetts Data Privacy Laws And Regulations Including Written Information Security Program

Massachusetts data privacy laws require notice of security breaches, personal information disposal standards, and an owner written information security program.

Data Privacy Conference sponsored by New England Data Services,  Technical Support International, Exclusive Concepts

September 23, 2009

 

By Robert A. Adelson, Esq.

 

Massachusetts Data Privacy Laws

1. Data Security Problem in Massachusetts

  • 2007 Attack on TJX affected millions of customers
  • Since Nov. 2007, 450 breaches reported to state officials affecting 700,000 Mass. Residents (Boston Business Journal, March 2009)
  • 2. Mass. Gen. Laws chapter 93H §2 (2007)

  • State Office of Consumer Affairs and Business Regulation to adopt regulations for persons who own or license PI (see below)
  • MA state executive offices, Legislature, Judiciary, AG, Treasurer, Auditor to also adopt rules to safeguard PI
  • Objectives: security of customer information, protection against anticipated threats, unauthorized access or use of PI
  • Regulations take into account

(1) person or agency’s size

(2) scope,  type of business,

(3) amount of resources available to person or agency,

(4) amount of stored data,

(5) need for security and confidentiality of both consumer and employee information to insure security and protect against threats, unauthorized access

3. Mass. Gen. Laws chapter 93H §3 (2007)

  • Duty to report security breaches, unauthorized use of PI
  • Persons / agencies that maintain or store PI must report to owner and cooperate providing information on incident
  • Owner or licensor of PI must report to AG, Director OCABR, and affected resident
  • Notice to resident to include right to obtain police report & information on obtaining security freeze

4. Mass. Gen. Laws chapter 93I (2008)

  • Minimum standards set to dispose of records containing PI
  • Paper documents shredded, burned or destroyed; electronic erased with no possibility of reconstruction of paper or electronic records
  • Third parties who dispose must prevent unauthorized access

and unauthorized use

5. Mass. Gen. Laws chapters 93H and I – Enforcement

  • AG can bring action for violation
  • Added civil fines in 93I

Law Coverage: Personal Information

1. Personal Information (“PI”), as defined in the law

  • Mass. Resident’s name in combination with one of:
  • Soc. Security no., Driver’s lic., financial acct, credit or debit card
  • 2. Examples of those covered by the law

  • Employers with SS# of employees
  • Accountants and service providers with SS# of clients
  • Retailers with credit card information of customers

Actions required by March 1, 2010

1. Adopt a comprehensive written information security program (WISP)

2. Ensure the WISP protects personal information in both paper and electronic forms

3. Secure paper records, shredding those not retained

4. Actions for computers contain personal information

  • Provide that access is restricted
  • Provide protocols for secure user authentication
  • 5. Actions for laptops and other portable devices

  • Encryption of records on portable devices
  • Encryption of records transmitted
  • 6. Adopt standards to evaluate WISP
  • 7. Adopt standards to train personnel
  • 8. Adopt standards to discipline personnel for violations of WISP
  • 9. Bar access to information by any terminated employee

Written Information Security Program

1. Designation of employee(s) to maintain the security program

2. Identification and assessment of internal and

external risks to security

3. Development of security policies for employees with records outside office

4. Imposition of disciplinary measures for violations of WISP

5. Prevention of terminated employees access to records

6. Oversee third party service providers by steps to select and retainer providers capable of maintaining security measures to protect PI consistent with regulations

7. Restrictions on physical access to records and  storage in locked facilities, areas, containers

8. Monitoring to ensure operation of the program

9. Review of security measures at least annually and sooner if changes arise

10. Documentation of response to any security breaches

Additional Obligations for Personal Information on computers and laptops

1. Secure user authentication protocols

Control user IDs and passwords

  • Restricting access to active users only
  • Block access after number unsuccessful attempts

2. Secure access control measures

  • Restricting access to those with a need to know
  • Assign unique IDs and passwords to maintain integrity

3. Encryption of all transmitted records  containing PI

4. Reasonable Monitoring of system for unauthorized use

5. Encryption of all PI stored on laptops or portable devices

Actions required by March 1, 2012

1. Requiring third party service providers by contract to implement and maintain appropriate security measures for PI

2. Contracts with third parties entered by Mar. 1, 2010

ABOUT THE SPEAKER AND PRESENTATION

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980.        Fax (617) 951-0048. E-mail:radelson@engelschultz.com Website:  www.engelshultz.com Mr. Adelson is a graduate of Boston University, Phi Beta Kappa and Northwestern University Law School in Chicago where he was a member of  Law Review.  He also has an LL.M. degree in Taxation from New York University and is a member of the Massachusetts, New York and US Tax Court Bars.

Robert Adelson began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.  Mr. Adelson is specialized in corporate, taxation, finance, employment, intellectual property, commercial and technology contracting law.  In those areas, he frequently represents startup and smaller companies in software, c-commerce, and other technology-based fields.  He also represents executives or consultants in employment and severance negotiations, stock, options and stockholder arrangements, incorporation and liability protection, intellectual property protection, and in vendor, client and subcontractor contracting arrangements.

Mr. Adelson’s law firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in litigation, real estate, family and probate matters.

Mr. Adelson is a frequent speaker at business forums and author of numerous published articles including articles on employment termination and employment negotiations. For articles, see http://www.engelschultz.com/index.php/category/publications/ For further information on Mr. Adelson’s background, see http://www.engelschultz.com/index.php/attorneys/partners/robert-adelson/

The speaker thanks Chris Souza, for the opportunity to speak and present to this conference arranged by New England Data Services, along with Technical Support International and Exclusive Concepts on the subject of “Massachusetts Data Privacy Laws and Regulations” at Dedham Country and Polo Club, Dedham, Massachusetts, on September 23, 2009.

The purpose of these materials are to offer outlines on the subject matter of the presentation to aid companies, consultants and professionals trying to comply with Massachusetts privacy laws and regulations.. Thus, it is hoped these materials will be informative to those in attendance.  These materials are not legal advice and not intended as any substitute for professional advice or counsel in a particular case.