SHOULD YOU INCORPORATE YOUR BUSINESS?

Following fast on the heels of a decision to go into a particular kind of business is the decision about what kind of legal form it should take. The most common options are a sole proprietorship, a partnership, or a corporation. You may lean toward the corporate route because you like the sound of having “Inc.” after the company’s name, but there are some more practical, business-like considerations to take into account.
More so than with some of the other structures for a business, starting a corporation means complying with formalities required by state laws. Once the shareholders (owners) of the business agree on some basic matters, such items are embodied in articles of incorporation that must be filed with the appropriate state agency. These essentials usually include:
• a corporate name;
• the number of shares that can be issued;
• the number of shares each owner will buy and for what contribution of cash or property;
• the nature of the corporation’s business; and
• the identity of the directors and officers of the corporation who will handle day-to-day operations.
The fledgling corporation will also need bylaws, which constitute a procedural rule book for the company.

Decisionmaking
The bottom line here is that whoever holds a majority of the shares of a corporation has ultimate control over it. Usually it takes a majority of the shares to elect the board of directors, which is charged with making the “big picture” decisions. If a decision is momentous enough for the company’s future, such as a change in the articles of incorporation or whether or not to merge with another company, the shareholders usually have a more direct role in that they themselves must approve the decision by a certain margin of votes.
The board elects the officers of the corporation, typically including a president, vice-president, secretary, and treasurer. The officers may or may not be salaried employees or shareholders, and in some cases one person may hold more than one office.

Accountability
At or near the top of the list of characteristics favoring the corporate structure is the fact that, since the corporation is treated as a legal “person” separate from the people who own and run it, the shareholders as a rule are not personally liable for the corporation’s debts. Instead, their risk is confined to their investment in the company. To every rule there is an exception, however, and here the exception has the colorful legal name of “piercing the corporate veil.” If the owners do not comply with the statutory requirements for running a corporation, or if they blur the lines too much between corporate and personal finances, the legal fiction of the corporation as a separate entity is ignored and the owners are on the hook for the corporation’s losses.

Transitions
As a separate entity in the eyes of the law, a corporation does not go out of existence if one or more of its owners dies. Instead, a corporation stays alive until its owners decide otherwise. Transfer of the ownership of the corporation is accomplished by selling its stock. New owners are added either when existing owners sell some of their stock or the corporation itself sells more shares of stock. The smaller the enterprise, the more likely it is that the owners, for whom the corporation may be both their property and their employer, may agree to restrict the sale of the stock in order to maintain control.
The particular circumstances of each new business and the differences in the governing laws of the states make generalities difficult. That said, the factors on the debit side of the ledger for corporations include the costs of setting up the corporate entity, the need for a separate tax return, and the burden of “double taxation.” Double taxation means that the corporation is taxed on its profits, and the shareholders are then taxed on their dividends. On the credit side are limited liability for the owners and easy transfer of ownership.
Making the appropriate choice for a business form is one of the first, and one of the most important, decisions a new business will make. Whether choosing a corporate structure or some other form, make sure to consult with a qualified attorney.

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VALUATION DISCOUNTS FOR ESTATE AND GIFT TAXES

Upon the death of the owner of stock in a closely held corporation, the fair market value (“FMV”) of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded. Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock. The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent’s minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer’s lack of control over the company and by another 15% for lack of marketability of the shares. The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:
• nature and history of the business;
• outlook for the economy and the specific industry;
• book value of the stock and financial condition of the business;
• earning and dividend-paying capacities of the company;
• goodwill or other intangible value of the enterprise;
• sales of the stock and size of the block of stock to be valued; and
• market price of publicly traded stocks of corporations in the same or similar line of business.

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AEDS HELP TREAT HEART ATTACKS . . .

But Can Cause Legal Headaches

An automated external defibrillator (AED) is used to treat people suffering sudden cardiac arrest whose hearts have an irregular heartbeat. Since September of 2004, when the Federal Food and Drug Administration approved over-the-counter sales of AEDs, it has been possible for individuals and businesses to have AEDs on hand, instead of waiting for them to be brought by medical personnel.

The greater availability of AEDs has been a mixed blessing from a legal standpoint. Businesses most likely to put an AED to use (and what business cannot foresee that a customer might have a heart attack on its premises?) are now in the position of having to decide whether they should have an AED at their facilities. If they do not, there is a risk that a customer who needed an AED could cite the failure as negligence in a lawsuit. That is the "damned if you don't" part, but the rest of the saying may apply as well.

If a business--for example, a fitness center--decides that it would be prudent to have its own AED, it may be commended for preparing for an emergency, but it also may have created a legal headache. Under the right set of facts, the business could be liable for a range of acts or omissions, such as not training its personnel to properly use the AED, or even something as simple as not keeping fresh batteries in the AED. There are already lawsuits in which such allegations have been made, and court cases from the period before over-the-counter sales began suggest that businesses can be held liable if the AED is not kept in good working order or if the use (or non-use) of the AED is especially negligent.

Businesses with AEDs on premises should think in terms of having a comprehensive AED program, not just the piece of equipment. With a view toward quick and effective use of the AED, the program should include:

* good means of communication about emergencies requiring an AED;

* training of workers in the use of the AED;

* procedures for regular checking and maintenance of the AED, and;

* storage of the AED in an accessible location, identified by clear signs.

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EMINENT DOMAIN UPDATE

Landowner Loses the Battle but Wins the War
In one of the most controversial eminent domain decisions ever, the United States Supreme Court ruled in 2005 that a city’s exercise of its eminent domain powers to take private property in furtherance of an economic development plan satisfied the constitutional requirement that such power be used only for a “public use,” even though private developers stood to profit handsomely from the city’s actions. In reaction to that ruling, some state legislatures have been busy crafting legislation to limit the use of condemnation powers in such circumstances. For their part, the owners of property targeted for condemnation have considered how they still might fend off the taking, or, failing that, how to maximize the compensation that the government must pay.

In a recent case, a landowner was not able to defeat a condemnation initiated by a city so that a new hotel could be built on the property, but he did receive maximum compensation from an obviously sympathetic jury. The landowner was an immigrant who had spent two years and a lot of money renovating a warehouse and building a mail-order cigar business. When two private developers were unsuccessful in negotiations to buy the property as a site for a hotel, they instead reached an agreement with the city whereby the city would condemn the property for their desired use and the developers would pay the costs and fees associated with the condemnation.

When the city was first attempting to buy the property, it sent the landowner a toxic waste notice requiring him to investigate whether any toxins existed in the ground. The landowner tried to comply, but after spending many thousands of dollars he found no toxins. The city would later admit in the litigation that such an investigation was not really feasible so long as a building remained on the property. The toxic waste notice, and especially its suspicious timing, came to be seen as a tactic to put pressure on the landowner during the negotiations leading up to the condemnation.

Although the trial court ruled that the city could condemn the land for the hotel, in the subsequent trial before a jury for damages, the landowner fared much better. The jury awarded him the entire amount he had sought. The award included several million dollars each for the value of the property itself and for the loss of the goodwill associated with the cigar business. Damages for loss of a business are not typical in condemnation cases, but the landowner was able to show that there was no suitable alternative location for the business, so that he would have to start over from scratch. For good measure, the jury also awarded damages equal to the cost of the dubious toxicity study that the landowner had been forced to undertake.

SMOKE ALARMS: INEXPENSIVE GUARDIAN ANGELS