Practice Area: Business Law

High Swartz | April 19, 2023

What Do I Need to Start a Business?

Starting a business can sound like a pretty daunting task. It's true, there are many things to consider such as how your business is structured, contracts, and insurance. Below is a quick breakdown of specifics you will need to start a business. For this example, we have consulted with a Pennsylvania business attorney with regards to starting a business in the commonwealth state.

First and foremost you need to:

Choose the right business structure

Selecting the appropriate legal structure for your business is crucial for minimizing risk and liability. In Pennsylvania, common business structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. We've gone more in depth on those structure in our Legal Handbook for Starting and Running a Small Business.

Essentially, each structure has its own advantages and disadvantages, so choosing the correct structure is paramount. If you're still not sure, consult with a business attorney.

Develop sound contracts

Written contracts are essential to protecting your business interests and minimizing legal disputes. Whether you're entering into an agreement with a supplier, vendor, customer, or employee, it's important to have a clear, comprehensive contract that outlines the terms of the agreement, including payment terms, delivery dates, and dispute resolution mechanisms.

Here are 3 of the more important contracts to consider:

Partnership Agreement: If you are starting a business with one or more partners, you may need a partnership agreement that outlines each partner's roles and responsibilities, profit-sharing arrangements, and how decisions will be made.

Operating Agreement: If you are forming a limited liability company (LLC), you may need an operating agreement that outlines how the company will be run, including how profits and losses will be shared, how decisions will be made, and what happens if a member leaves the company.

Exit Strategy: A business exit strategy outlines how a business owner or investor intends to exit or sell their ownership stake in a business. It’s essentially a roadmap that lays out the steps and actions necessary to leave a company and realize the maximum possible value of the business. We have a whole chapter dedicated to it in our handbook.

Protect your intellectual property

If your business relies on products or services that are distinct to your operation, such as trademarks, patents, or copyrights, it's important to take steps to protect that property.

And with the advent of AI technology, it's appropriate to wonder whether certain intellectual property laws pertain to ideas that may have been discovered using it. Below is a quick breakdown:

Can I trademark or copyright ideas that came from ChatGPT or Open AI?

You may think that ChatGPT just gave you a one in a million business idea, but think again. ChatGPT or a similar open AI platform is not capable of inventing new ideas or concepts on its own.

Why is that?

Open AI was created to process and generate responses based on the input provided by the user. Therefore, any "original ideas or concepts" that may be expressed through AI responses are ultimately the property of the person that provided the input.

If you, as the AI user, have created an original idea or concept that you would like to protect, you may be able to obtain intellectual property protection through a trademark, or copyright, depending on the nature of the idea or concept. However, it's important to note that obtaining intellectual property protection can be a complex process and requires meeting certain legal requirements. We would recommend consulting with an IP attorney who is experienced in intellectual property law to determine the best course of action for protecting your idea or concept.

Comply with regulations

As a business owner, you must comply with a wide range of federal, state, and local regulations, including tax laws, employment laws, environmental laws, and more. Noncompliance can result in costly fines and legal penalties, so it's important to understand your obligations and take steps to ensure compliance.

What are the most important regulations to consider when starting or running a business in Pennsylvania?

The best advice would be to consider every business regulation as important, but of course, some could be considered more important than others. For example:

Businesses need to obtain various tax IDs, such as an Employer Identification Number (EIN) or a sales tax license. Business owners should consult with a tax professional to ensure compliance with tax laws and to minimize tax liability.

If your business has employees, you must comply with Pennsylvania-specific employment laws such as the Pennsylvania Minimum Wage Act and the Pennsylvania Human Relations Act. Federal laws that PA business owners need to adhere to include the Americans with Disabilities Act (ADA), Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). We've included links to each act above.

Business licensing and registration

Depending on the nature of the business, Pennsylvania may require business owners to obtain certain licenses or permits, such as a local business license or a professional license.

What are the specific business licenses and/or permits I need to get to start or run a business in PA?

It all depends on the nature of your business, your location, and other factors. However, here are some common licenses and permits that many businesses in Pennsylvania may need to obtain:

Pennsylvania Business License: This is all dependent on your business structure. You can read more on the specific structure best suited for your business here.

Local Business License: Some cities or counties in Pennsylvania may require businesses to obtain a local business license. Check with your local government to determine whether this is required for your business.

Below are a few cities in Pennsylvania that require a local business license:

Philadelphia: All businesses operating in Philadelphia must obtain a Commercial Activity License (CAL).

Pittsburgh, Allentown, Erie, Reading: Businesses operating within these cities must obtain a Business Privilege License (BPL).

Professional or Occupational License: Some professions or occupations in Pennsylvania may require this license. These may include doctors, lawyers, accountants, and others.

Data privacy laws

With the increasing prevalence of data breaches and cyber attacks, Pennsylvania businesses must comply with data privacy laws to protect sensitive customer information. The Pennsylvania Data Breach Notification Act requires businesses to notify customers in the event of a data breach.

There have been several businesses in Pennsylvania that have experienced data breaches and had to notify their customers. One of the most egregious examples came from a 2014 breach at the University of Pittsburgh Medical Center.

Essentially, UPMC experienced a data breach in which the personal information of approximately 62,000 employees, including names, birth dates, Social Security numbers, and tax information, was stolen. UPMC notified affected employees of the breach and offered free credit monitoring and identity theft protection.

In late 2018, the Pennsylvania Supreme Court decided that employees may sue employers for the release of stolen confidential employee data. The Court’s decision in the Dittman vs. University of Pittsburgh Medical Center, allowed UPMC employees to bring a class action lawsuit for negligence. Read more about the fallout and impact written by attorney Thomas D. Rees here.

Talk with a business attorney who can give you the right answers

It's important to note that this is not an exhaustive list of regulations that may apply to your business. Depending on the nature of your business, there may be additional regulations that you must comply with. Working with an experienced business attorney and other professionals can help ensure that you are aware of and compliant with all relevant regulations.

The above information is not to be taken as legal advice.

High Swartz | April 4, 2023

Legal Issues with Social Media

Datareportal reports that 4.7 billion people worldwide use social media, spending an average of two hours and 29 minutes on it a day. That's more than half the world. 

So, it's not surprising that social media law has emerged and includes criminal and civil aspects. Owing to the numerous legal issues with social media activities, many law firms now have internet and social media lawyers dedicated to counseling businesses and individuals on applying its laws on state and federal levels.

What is Social Media Law?

Social media law focuses on the legal issues associated with user-generated content. Some of its top concerns are the right to privacy, defamation, and intellectual property law covering trademarks, logos, and other copyrighted material.

Social media covers a lot of ground, and social networking is one key component. But it extends beyond that. It covers any technology allowing online communications. Facebook and Twitter immediately come to mind.

But there are also blogs, wikis, chat rooms, reviews, comments, and more. For example, a web page with a comments section is part of social media. In short, any website that involves interaction is social media.

The U.S. Department of Health & Human Services (HHS) has strict policies that govern social media use. You can read more about the policies and standards here.

Moreover, numerous state, federal, and foreign statutes apply to social media law. You can view some of the more critical laws here.

Top Legal Issues with Social Media

Some of the top issues are:

  1. Copyright Infringement
  2. Defamation
  3. Privacy and Confidentiality
  4. Misleading Information
  5. Business Contracts

Let's look closer at each of those potential legal concerns.

Copyright Infringement

It's easy to cut and paste content from sites on the internet. But using content from another site can result in criminal and civil liability.

Intellectual property laws govern the use of trademarks and copyrights. Copyright relates to the authorship of original works like art, books, music, and more.

Consequently, it's essential to have policies governing your business' online content publication. You should have someone review posts and messages for legal compliance before publication. When using third-party content, you should attribute the content to that party to avoid any copy infringement. A social media lawyer can help draft appropriate guidelines.

Defamation

First Amendment rights do not protect defamatory statements. Such statements typically fall under two categories:

    1. Libel: Tangible, written statements
    2. Slander: Spoken words or gestures

The criteria for either is that the statement was objectively false, seen or heard by a third party, and caused financial injury. The comment is also unprivileged by law.

It's always best to show caution when commenting about a third party. Social media platforms make those comments immediately viewable by millions of people and can quickly create a legal issue for you. Note that sharing or liking another person or business' defamatory comment can present a legal issue for you. And if you make an ill-advised comment while at work, you potentially put yourself and your employer at risk.

Two recent Pennsylvania employment termination cases give this same advice to adult social media users. In both cases, courts upheld terminations for employees’ mean-spirited off-duty social media comments.

Privacy & Confidentiality

Privacy laws govern the collection, use, disclosure, and storage of personal information. Moreover, you must inform individuals that you are collecting such information. And you cannot disclose that information unless it's for specific purposes. It's common to see businesses to require a signed agreement to use your NIL (Name, Image, and Likeness) in any social media content produced by the employer.

Europe implemented the General Data Protection Regulation (GDPR) in 2018. It spelled out rules to guarantee the protection of personal data. The United States has no such law, however, the California Online Privacy Protection Act (OPPA) approved legislation covering online privacy. So, if you're conducting business in the state, it's necessary to comply with its requirements.

Any personal data collected must be stored securely. As a result, data breach lawsuits have become commonplace, impacting businesses both large and small. For example, Equifax suffered a data breach exposing the personal information of 147 million people. The settlement included up to $425 million distributed to those affected.

Misleading Claims

It's best to substantiate any claims made on social media to avoid legal issues. Consumer protection laws prohibit businesses from making false, deceptive, and misleading claims about products or services.

The same goes for reviews of a company or service. It's common practice for companies to capture reviews through social media channels. But, of course, those reviews need to be legitimate and not falsified or misleading. The same holds for endorsements. Google and other search engines are getting better daily at identifying fake reviews, and will not hesitate to penalize company websites.

Business Contracts

Businesses of all sizes execute contracts, including non-disclosure agreements, confidentiality agreements, and non-compete agreements. Interestingly, On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to ban non-compete clauses. This has since been approved and has retroactively negated many of these clauses. That being said, social media communications can set the stage for breaches of the formerly stated contracts.

For example, employees must be aware of business contracts with non-disclosure agreements. Imparting essential knowledge detailed in such agreements can lead to a lawsuit. Here's another example. Let's say you recently hired an employee. A recently hired employee has a non-compete agreement from their former employer preventing him from contacting former clients. The employee then changes his status on LinkedIn, which sends out an update to clients, including some former clients. In the past, this scenario could open the door for a suit claiming a breach of contract against the former employee.

Tips to Avoid Legal Issues with Social Media

Even though social media focuses on sharing information and free expression, it's not without legal risks for businesses and individuals.

Here are some things you can do to mitigate your risks of legal action as a business owner:

  1. Social Media Policy: Work with an employment or business lawyer to create a policy document covering all aspects of social media communications. It's essential to document how employees use social media in the workplace and what they can say.
  2. Permissions for Licensed Content: Ensure you get explicit consent to use copyrighted materials such as images.
  3. Monitor Content: Establish standards for publishing content. Then monitor and moderate content and posts. If something seems inappropriate, remove it.
  4. Train Employees: Keep your employees and subsequently your handbooks and policies updated with the latest social media laws and regulations.

As an employee, you must understand that any comments you make on social media during the workday can impact your business. The same holds for you outside business hours. Your comments on social media can land you in hot water.

Talk to a employment or business lawyer If You're Facing a Legal Issues with social media

Social media and the laws governing it can substantially impact a business and its employees. Don't hesitate to contact us if you are in need of guidance.

Our law firm has offices covering Bucks and Montgomery Counties in Pennsylvania We have attorneys experienced in intellectual property law, business law, and employment law. We also have top litigation attorneys to support you with any lawsuit concerns, either presenting or defending a suit.

Thomas D. Rees | February 10, 2023

How Would a Non-Compete Ban Impact My Business? – 5 Things to Know

On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to ban non-compete clauses in employment agreements nationwide, except in very limited circumstances. If enacted as written, the proposed rule would supersede all contrary state laws that currently govern non-competes.

1. What is a Non-Compete Agreement?

A non-compete agreement is a restrictive covenant limiting your ability to work in a particular field or industry. Generally, the non-compete specifies the length and the geographic area of the restrictions.

Currently, state laws govern the enforceability of non-competes. Limitations on non-competes vary from state to state. For example, California, North Dakota, and Oklahoma, Montana and District of Columbia don't allow non-compete agreements. Pennsylvania and neighboring states limit (but don't prohibit) non-competes.

2. What Would the FTC's Proposed Rule Do?

If made final, the proposed rule would prohibit employers in every state from entering into or enforcing non-competes with workers (including employees, independent contractors, volunteers, interns, and any other individuals who work for an employer). The FTC rule states that non-competes are unfair methods of competition, which the FTC Act prohibits.

The proposed non-compete ban would require employers to rescind existing non-competes within six months. In addition, employers would have to provide individual notice to current and former employees that their non-compete clause is no longer in effect or enforceable.

The proposed rule does not prohibit non-competes that are part of the sale of a business.

3. When Could The Non-Compete Ban Take Effect?

The proposed rule is open for public comment until March 10, 2023. After that, public members may request more time to submit comments.

Once the comment period closes, the FTC may modify the proposed rule before deciding whether to reopen the comment period or whether to issue a final non-compete ban.

A final rule may face lawsuits challenging the rule's content or the FTC's authority to take away state authority to regulate non-compete agreements. Because of the likelihood of challenges, the timeline for any proposed rule is unclear.

However, the long-term trend among the states is to limit or ban non-compete agreements. State and federal courts have ruled against enforcement of non-competes where employers appeared to overreach. State legislatures have considered laws that prohibit or limit non-competes.

4. How Can I Protect My Business Without Using Non-Competes?

The proposed rule does not specifically ban other types of restrictive covenants, such as non-solicitation or non-disclosure agreements, which employers can use to protect their business interests. These are described below.

Non-Solicitation Agreements restrict ex-employees from asking customers, vendors, or other employees to move to the employee's new employer. The employee may work for a competitor but may not initiate contact with the former employer's customers, vendors, or employees to gain a competitive advantage. Like non-competes, non-solicitation agreements have a limited duration (typically one or two years).

Non-Disclosure/Confidentiality Agreements prohibit the employee from using confidential information acquired during an employee's tenure with the employer. Examples include customer lists, trade secrets, unique manufacturing processes, and product development initiatives. Unlike other restrictive covenants, confidentiality provisions need not include time limits.

Although the proposed non-compete ban does not prohibit non-solicitation or non-disclosure agreements, the ban would extend to de facto non-compete clauses. These are contractual provisions written so broadly as to have the functional effect of prohibiting workers from seeking or accepting new employment.

As such, business owners need to understand the terms of their employment agreements and avoid using overly broad language in them. Restrictive covenants should be written narrowly to protect legitimate business interests, such as confidential information or trade secrets, and shouldn't be any broader than necessary to protect those interests. Contact a business lawyer or employment attorney to review your current agreements.

5. What Else Can Businesses Do To Prepare for a Non-Compete Ban?

The FTC's proposed rule may or may not become law, and its final version may differ significantly from its current version. Nonetheless, employers should continue monitoring the status of the proposed rule and state law for any related legislative developments that may occur in the meantime.

While employers don't need to take any immediate action, business owners using non-competes should consider the enforceability of their existing restrictive covenants and determine if those restrictions are necessary to protect a business's interest.

Business owners may find it valuable to revisit and consider updating their existing employment agreements to best comply with the purpose of the proposed rule.

Talk to Our Employment Lawyers

It makes sense to have some restrictive covenants to protect your business if you're an employer.

Our business and employment lawyers can provide employers throughout Pennsylvania and New Jersey with sound advice and representation. Our employment law attorneys deal with workplace issues in an ever-changing environment and seek to minimize the risk of employee lawsuits for our clients.

If you'd like to learn more about enforcing a restrictive covenant or about creating an employment agreement for your business, call our Montgomery County and Bucks County law offices today at 610-275-0700.

The information above is general: we recommend you consult an attorney regarding your circumstances. The content of this information is not meant to be considered legal advice or a substitute for legal representation.

Tom Gabor | October 17, 2022

Michael A. Luongo Joins our Doylestown Law Office

High Swartz LLP is pleased to announce the addition of Michael A. Luongo, Esq. to the firm's Doylestown Law office. He will add his diverse skillset to the firm's business litigation, personal injury, criminal defense, and municipal practices. Michael joins High Swartz after practicing for 4 and a half years in the litigation department at a prominent law firm in Blue Bell, PA.

"I'm excited to be part of the litigation team at High Swartz. Their reputation in the Bucks and Montgomery region is well-respected and I look forward to contributing right away," states Michael.

Prior to his time there as a business litigator and criminal defense attorney, Michael served as an Assistant District Attorney in the Philadelphia District Attorney’s Office. Mr. Luongo litigated multiple high-profile criminal cases, including hundreds of bench trials and jury trials. He was the designated vertical prosecutor handling all press cases, non-fatal shootings and gunpoint robberies. He also conducted hearings for motions to suppress, bail, quash, discovery, reconsider, and consolidate prior bad acts. It was Michael's trial and prosecution acumen that garnered his promotion to Northeast Philadelphia's top prosecutor position.

Michael utilizes his strong business background in his work as a small and medium-sized business litigator in the Philadelphia region. He plans to also assist the firm's municipal group, consisting of attorneys who counsel multiple first and second class townships in the region as solicitors.

"What really stood out to me was the opportunity to work with High Swartz's municipal team. I look forward to gleaning from the many years of Southeastern Pennsylvania representation experience the group possesses," Mr. Luongo said.

While in law school at Rutgers of Camden, Michael served Philadelphia County's Court of Common Pleas judge the Honorable Rose Mare Defino-Nastasi as a summer law clerk. He earned a Master's of Business Administration from LaSalle University and also a Bachelor's of Science from Lehigh University. Michael also studied International Business during his time at Villanova University's Post Grad Program and worked at a marketing firm during his law school days.

Tom Gabor | October 1, 2022

Shari Gelfont Williams Joins the Firm's Family Law Practice

High Swartz is pleased to announce the addition of attorney Shari Gelfont Williams to the firm's family law practice. After working as a solo practitioner at her own firm in Huntingdon Valley, Shari will join our Doylestown office and serve both Bucks and Montgomery Counties.

Already established in the Philadelphia region as a strong family advocate, Ms. Williams will also assist the firm in criminal matters, PFA hearings, and other litigation. Furthermore, she will assist High Swartz's estate planning and business practices in drafting and litigation matters.

Pro bono work is extremely important to Shari, noted by her recognition by the Bucks County Bar Association for performing well in excess of her commitment. In 2018, she was deservedly awarded the Pennsylvania Bar Association’s Bucks County Pro Bono Award and the Bucks County Bar Association’s Arthur B. Walsh, Jr. Pro Bono Publico Award.

Ms. Williams advanced her legal experience at several stops along the east coast including Florida and North Carolina. In Charlotte, Shari managed an integral domestic violence legal representation project with United Family Services. Shari coordinated over 80% of the victims in obtaining permanent restraining orders. Most often these were cases that Legal Aid was unable to assist.

In Florida, Ms. Williams served as Assistant Attorney General while representing the Department of Children and Families and the Department of Revenue. Her work included modifying and enforcing child support and paternity actions before hearing officers and Circuit Court Judges.

While obtaining her paralegal certification at Penn State University, Shari obtained her Juris Doctor while attending Whittier College School of Law in Los Angeles. Shari states she is excited to join High Swartz and continue the tradition of excellent representation and assistance that the firm is well known for.

Joel D. Rosen | August 17, 2022

Choosing a Business Structure

Starting your own business can be rewarding and energizing. And yes, it can be a bit stressful. You have numerous essential decisions to make during the critical start-up phase. One of the most significant decisions is choosing a business structure.

It’s best to seek counsel from an accountant, business counselor, and business lawyer when deciding. Your business structure impacts day-to-day operations, taxes, personal liabilities, how you raise money, and more. So when choosing a business structure, do so wisely.

Factors That Determine Your Business Structure

You can choose several options when setting up your business, including a sole proprietorship, partnership, Limited Liability Company (LLC), or corporation.

The one you select depends on several factors:

  • Flexibility: Determine your expectations for business growth and ensure your structure provides ample flexibility to accommodate that growth. Generally, an LLC offers the most flexibility for growth potential.
  • Liability: You’ll need to examine the risks and your potential personal liability. You’ll also need to consider insurance, credit, and assets. For example, corporations offer the most significant liability protection.
  • Taxes: Sole proprietors, partnership owners, and S corporations classify income as personal income, while a C corporation separates business income from personal. Your structure impacts tax burdens because business income is taxed differently than personal income.
  • Operating Costs: Keeping updated records and paperwork can be costly, so you will also want to factor in these expenses. Sole proprietorships are usually the business type requiring the least amount of time and money invested in recordkeeping.
  • Fundraising: Your structure dictates how you raise funds. For example, sole proprietorships typically can’t offer stock, whereas corporations can.
  • Control: A sole proprietorship is typically the best route if you want complete control over the business. However, you also assume total liability for potential lawsuits, taxes, and losses.

If you need more information and guidance on the factors impacting choosing your business structure, talk to a business formation attorney in our Bucks County or Montgomery County law offices.

After Choosing Your Business Structure, Can You Change It?

The answer is yes. Actually, it happens quite often. For example, many businesses change from a simple structure like a sole proprietorship or partnership to a more complex structure like an LLC or corporation.

A business structure change can happen for any number of reasons:

  1. Personal Liability: As businesses grow, so do the risks. Consequently, the owner of a sole proprietorship may want to remove their liability by moving to an LLC or corporation.
  2. Taxes: Generally, tax considerations are the prime motivator for a business structure change. For example, the IRS views businesses as partnerships or corporations. The latter pays taxes on profits before distributing those profits to shareholders. However, the former is a pass-through entity where profits and losses go through the individual partners and require reporting on tax returns.
  3. Attracting Investors: Venture capitalists and angel investors prefer investing in C Corporations for tax purposes. In addition, a more formal structure like a corporation or LLC establishes the business arrangement upfront and what the options are.
  4. More Employees: As your employee numbers increase, liabilities attached to them do as well. So moving from a sole proprietorship to an LLC or C Corporation protects you.
  5. Financing: Many banks want to see a more formal business structure before providing funding.

Changing your business structure differs based on your initial business setup. For example, moving from a sole proprietorship to an LLC, partnership, or corporation requires registration with the state where you conduct business.

You’ll want to create an LLC operating agreement when moving to an LLC. Moving to a corporation requires selecting officers, a board of directors, and shareholder agreements.

You’ll want to involve a business lawyer to help you sort through the details and ensure you manage all the requirements for the business structure change.

What are the Types of Business Structures?

How to form your business legally is controlled by the law of the state where you create your business. Your decision must consider liability, taxation, and recordkeeping.

The most common forms of business structures are:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Companies (LLC)
  • Corporations

So, let’s take a closer look at which to select when choosing a business structure.

Sole Proprietorship

Generally, this option is the most simple and most common. With a sole proprietorship, your business is unincorporated and run entirely by one person – you as the owner. Although this structure entitles you to all the profits, you are also individually responsible for all debts and liabilities.

You obtain the necessary licenses and permits for your business when operating as a sole proprietorship. However, they vary by state and industry. Also, if you operate under a business name, you may legally have to file for a fictitious name.

In many states, such as Pennsylvania, registering a fictitious name does not protect the name or give you any right to block others from registering the same fictitious name. Instead, it serves only as a notice to the public that you are trading under that name. In addition, you must file with the IRS for an Employer Identification Number (EIN) if you hire employees.

Because you are the sole owner, your business entity is not taxed. Instead, you report the income and losses on Schedule C to Form 1040.

Partnerships

A business is legally structured as a partnership when two or more people share ownership. As a result, each partner contributes to aspects of the company, and both share liability and income.

In choosing this business structure, developing a legal partnership agreement is essential to document how you will make future decisions. In addition, the contract should include terms for dissolving the partnership if necessary. Although a legal agreement is not mandatory, it’s strongly encouraged since operating a business without one is risky.

If you choose a partnership structure, you can form a general partnership. Consequently, everything is divided equally among the partners. On the contrary, a limited partnership allows a partner to have limited responsibility.

You can register partnerships with the state with an established business name and all licenses and permits. The business must also register with the IRS and file an “annual information return” to report its income and losses.

The company itself does not pay income tax. Instead, profits and losses are “passed through” to the partners.

Limited Liability Companies

An LLC, or Limited Liability Company, is a legally recognized business structure combining corporate and partnership aspects.

To form an LLC, you must first choose a name that complies with state rules. The next step is filing articles of organization with your state’s business filing office, typically with the Secretary of State. These are generally short and simple documents that take only a few minutes to fill out.

After filing with the state, it’s imperative to work with a business lawyer to create an LLC Operating Agreement that sets legal rules for the ownership and operation of the company.

Finally, make sure to obtain all licenses and permits required. Also, some states may ask you to publish notice that you intend to form an LLC in a local publication.

Corporations

Becoming a legally recognized corporation is more complex. First, states determine the formation of corporations. In addition, corporations pay corporate income tax at the federal and state levels.

Certain small corporations can elect Subchapter S status and be taxed like a partnership, avoiding corporate taxes. In that case, profits flow to the shareholders as ordinary income.

In a corporation, the business becomes a corporate entity, and the corporation is taxed and held legally liable for all business responsibilities.

The business first needs to choose a corporate name not used by another corporation or limited liability company and prepare and file articles of incorporation to become a corporation in the Commonwealth of Pennsylvania.

Pennsylvania corporations also need an agent for service of process in the state that agrees to accept legal papers on the corporation’s behalf. However, a corporation with a Pennsylvania address need not have a separate agent to service the process.

To complete the legal requirements of forming a corporation, you must publish legal advertising, create corporate bylaws and hold an organizational, board of directors-style meeting.

You can learn more by reviewing A Guide to Business Registration in Pennsylvania.

Which Business Structure Do I Choose?

This answer depends on your business, current ownership structure, and goals. You should assess your individual needs and choose the proper business structure.

It’s best to talk with business experts and a business lawyer near you to guide your selection. They can also ensure you complete any required paperwork and file it appropriately.

U.S. News cited our law firm as a “Best Law Firm.” So, you can depend on our attorneys to provide the best advice, particularly as a Pennsylvania Business. Our firm can also support you with various legal services, including business litigation, intellectual property, restrictive covenants, and workers’ compensation.

The information above is general: we recommend you consult an attorney regarding your circumstances. This information does not represent legal advice or a substitute for legal representation.

 

 

Mary Cushing Doherty | August 10, 2022

How Will Divorce Affect My Business?

Divorce and business. For the owner, running the company can be never-ending and all-consuming. In many cases, the commitment and passion for it can contribute to strains in your personal life, leading to a struggling marriage and divorce. Consult with a divorce attorney if you own a business and are facing a divorce proceeding.

Will I Lose My Business in a Divorce?  

When a person facing divorce owns a business or is a co-owner, the question arises whether the divorce will force the company's liquidation. In most cases, the simple answer is "no."

However, courts will consider your business marital property valued as part of the financial analysis in the divorce.

Marital property is all income and assets acquired by either spouse during the marriage. It includes savings, real estate, stocks, bonds, debts, and business ventures. Marital property also covers compensation generated from the business in savings. Plus, courts divide any investments and retirement savings through the date of separation equitably.

The owner's spouse's income determines future child and spousal support.

Beware: With a business value based on excess earnings, you can argue the non-owner spouse cannot double-dip. For example, if the non-owner receives the value of the extra earnings as equitable distribution, you should remove them from the income available for support. A good business divorce attorney should be alert to this potential concern.

What is Marital Property as it Relates to Divorce and Business?

Since business and divorce focus on marital property and its distribution, let's take a closer look at what constitutes marital property.

If you formed your business during the marriage, it's marital property. That holds even if your spouse doesn't own any portion of your business. So, your spouse shares an ownership interest and has a claim against your company.

Even if the business is your property, your spouse may have a claim against increases in the company's value during the marriage. Generally, it's best to talk with a business divorce attorney to get a business valuation.

When determining whether or not your business is marital property or an individual asset, these factors come into play:

  • When you formed the business
  • Amount of time between business formation and your marriage
  • The success of the business before and after your marriage
  • Your spouse's involvement in business formation
  • Your spouse's contribution to business operations or growth
  • Changes in business valuation over time

Nine states view marital property as community property. As a result, they award each spouse a 50/50 split.

In other states, Pennsylvania included, courts use equitable distribution to determine what each spouse receives. You can learn about it here. So, again, you'll likely need a business valuation to support divorce proceedings.

Four Exceptions to Marital Property

As mentioned above, a variety of factors determine marital property. However, there are four exceptions:

  1. Gifts, Bequests, and Inheritances

    Any gifts, bequest, or inheritance one party receives from a third party, kept in a separate title, are not considered marital assets and are valued as of receipt. However, the increase in value is considered marital property.

  2. Property Acquired Pre-Marriage

    Marital property doesn't cover assets owned before the marriage kept in a separate title. Again, however, the increase in value during the marriage is.

  3. Property Acquired Post-Separation

    Any asset acquired after separation with non-marital funds is not marital property.

  4. Property Protected by a Prenuptial Agreement

    A well-drafted prenuptial agreement protects all assets acquired before and sometimes during a marriage. So, you'll want to consult with a family lawyer near you.

The business requires a valuation following a divorce filing when identified as a marital asset or with some marital component. The non-owner spouse has the right to know if it is marketable, if the business has significant assets, and if it successfully generates excess income for the owner.

In some circumstances, however, a business succeeds almost entirely upon the personal goodwill of the owner. As a result, it may have modest value to distribute. In most cases, the courts want the business to survive the divorce as an asset of the owner spouse, primarily where the family has been relying on the company to produce income.

Determining the Business Standard of Value in Divorce Cases

Often, a divorcing couple disagrees about the company's value, leading to a business appraiser defining the standard of value before proceeding with an appraisal. The standard of value presents a set of hypothetical conditions to determine the value.

There are three primary approaches to determining that valuation:

  1. Assets: In this approach, assets minus liabilities equals value. Assets include physical assets like inventory, equipment, and real estate. Intangible assets cover intellectual property, accounts receivables, etc.
  2. Market Value: Similar to a real estate valuation, appraisers value the business based on comparable companies sold.
  3. Income: The most common valuation method uses business history and various formulas to predict cash flows and profits for a business.

It's important to note that these standards may generate significantly different values. If you have a simple business model, it may be easier to determine a fair value. However, other cases require the services of a business appraiser.

Make sure you talk with your business divorce attorney for guidance on what comprises a particular standard of value. They can review past cases within a jurisdiction to uncover disallowed procedures or determinations. And that could benefit you greatly.

Other Considerations Involving a Divorce and Your Business

Typically, courts seek to limit damage to the business. So, they often accommodate a buyout over time of the non-owner's economic interest in the company rather than trigger financial hardship for the business owner.

If your spouse works in the business and isn't an owner, you should be wary of them actively hurting the company. For example, a spouse who calls customers or comes to the office and misbehaves may be at fault for trying to retaliate against you for personal reasons.

These actions could hurt the business asset's value and the source of future income. If you employ your spouse and they engage in this behavior, termination is an option.

Protecting Your Business from a Divorce

Although it isn't something you want to consider, 50 percent of marriages end in divorce. So, you should take steps to protect your business to survive a divorce. It's best to talk with an attorney near you to consider your options.

Here are some steps you can take:

  1. Marital Agreement

    An agreement, whether pre- or post-nuptial, allows you to designate your business or future companies as separate from the marriage. Although courts sometimes fail to uphold marital contracts, they protect your business in the event of a divorce.

  2. Buy-Sell Agreement

    This agreement controls when owners can sell their interest, who can buy their interest, and the price paid. It comes into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. In short, a buy-sell agreement is a sort of prenuptial agreement.

  3. Shareholder Agreement

    A shareholder agreement can define guidelines in the event of a divorce. For example, it can determine the mechanisms for valuing each spouse's interest in the company, assign business ownership with a divorce, and restrict ownership transfer.

  4. Business Structure

    In conjunction with a shareholder agreement, structuring the business as a partnership or limited liability company (LLC) can protect you from a divorce and your business.

  5. Employment

    Don't allow your spouse to work for or with you. As a married couple, it may seem like a good idea. But, it can lead to issues during a divorce.

  6. Trust

    In a trust, it owns the business, so your business doesn't count as a marital asset.

Another critical protection is remembering to pay yourself a salary versus investing cash flow into the business. Doing so prevents your spouse from claiming you deprived them of monies during the marriage.

Talk with a Business Divorce Attorney

The end of a marriage is stressful enough, but the fear of potentially losing one's livelihood at the same time can be frightening. Plus, there's the toll divorce litigation can play in allowing you to keep up the same pace of work.

Talk to a business divorce attorney immediately if you're facing a divorce. They can help counsel you on your best options to maintain your business with minimal damage. Apart from divorce lawyers, our law firm can support you with real estate concerns and marital agreements. We have law offices in Bucks County and Montgomery County, PA.

The information above is general: we recommend you consult an attorney regarding your circumstances. You should not consider this information as legal advice or a substitute for legal representation.

 

 

Joel D. Rosen | August 1, 2022

What is an LLC Operating Agreement?

An operating agreement is essential if you're forming a limited liability corporation (LLC). An LLC operating agreement, also referred to as an LLC agreement, establishes the business' financial and managerial duties, including rules, regulations, and provisions. In short, it governs the internal operations of the company.

As an LLC, the operating agreement addresses various issues typically governed by the law that enables LLCs in the jurisdiction of formation. In addition, these laws include provisions that protect members from personal liability for the business's debts.

Only California, Delaware, Maine, Missouri, and New York require an LLC agreement. Even though Pennsylvania has no requirements, if you're forming an LLC in the Commonwealth, it remains a worthwhile consideration during business formation.

It's best to talk with a business lawyer near you to ensure you create a sound operating agreement.

Basic Provisions of an LLC Agreement

At the very least, an LLC agreement should cover some essential elements:

  1. The name of the LLC, including the address.
  2. A statement of intent indicating the agreement is by state laws.
  3. The business purpose, including its nature.
  4. The term generally shows that the business will continue until terminated or dissolved.
  5. Treatment of taxes
  6. How new members acquire a business interest

Other Items Covered by an LLC Operating Agreement

An LLC operating agreement is generally brief, ranging from five to 25 pages. But it presses owners and members to agree on financial and operational arrangements.

The main goal of the operating agreement is to name members of the LLC and their percentage of ownership. Apart from that, most LLC operating agreements cover six critical sections:

  1. Ownership: Who owns the business, and what is their percentage of ownership?
  2. Management and voting: Does each member have a single vote, or is voting based on the percentage of ownership?
  3. Capital contributions of members: Is ownership based on the capital contributions of the members?
  4. Membership: What happens if a member elects to leave the LLC?
  5. Distributions: How will the organization share profits and losses? For example, if a member owns 25% of the business, will they receive 25% of the profits and losses?
  6. Dissolution: What happens if your business dissolves? Who is responsible for liabilities, and how will assets get dispersed?

Although these areas represent primary considerations, your agreement can cover additional areas such as business decision-making, selling interests, right of refusal, dispute resolution, meetings and meeting protocols, and more. Many also consider forming an LLC for an investment property portfolio. 

Why is an Operating Agreement Important?

At the very least, an LLC agreement provides proof of ownership for banks and investors.

More importantly, they help prevent future conflicts and disagreements about significant business decisions because the contract covers terms around most major functions and opportunities.

That's critical. For example, even if you feel you've already come to verbal agreements with co-owning members, misunderstanding may arise as years pass or complications occur. By having terms outlined upfront, you eliminate future conflict.

An LLC operating agreement also protects your company's status as a limited liability structure. Otherwise, your LLC might resemble a sole proprietorship or partnership. And that opens the door to personal liabilities for members.

Overriding State Rules for LLC Operation

Moreover, your state's default rules for how an LLC operates apply without an operating agreement. For example, every state has laws on LCC management, admitting new members, dissolution, and other aspects of governance.

Unfortunately, those rules focus on applying the least common denominator, leading to unwanted results. For instance, your state may, upon your death, default your business to a spouse or child.

However, if you want someone else to assume responsibility for your company following your death, your operating agreement needs to state that. You can override Pennsylvania's default rules by having an LLC operating agreement.

Do I Need a Business Lawyer to Draft the Agreement?

Thanks to the internet, free templates are available to draft an LLC operating agreement. Indeed, here's a resource for creating a PA operating agreement. But remember that the LLC agreement governs your company and its members, so it requires careful consideration.

At the very least, if you want to draft your agreement, take the time to run it by a business lawyer for potential issues. Or better still, have an experienced business lawyer draft a contract for your review. And make sure that the lawyer is familiar with Pennsylvania law.

Need Some Help Drafting an Agreement?

Ultimately, you should construct an LLC agreement to the needs of each unique business. Agreements should comply with the laws of the state where the company operates.

If you're forming an LLC or are already operating a company and need help drafting an LLC operating agreement, get in touch with our local law offices in Bucks County, PA, Montgomery County, PA, and Camden County, NJ.

Our business lawyers can support you with business formation and operating agreement creation. Our law firm can also help you with various other legal concerns, including workers' compensation, employment law, and real estate.

U.S. News recognizes High Swartz on the"Best Law Firm" List and cites 14 of our attorneys on the "Best Lawyers List."

For more information, contact Joel D. Rosen at (610) 275-0700. Visit his attorney profile here.

The information above is general: we recommend you consult an attorney regarding your circumstances. This information does not represent legal advice or a substitute for legal representation.

 

Tom Gabor | August 10, 2021

17 High Swartz Attorneys Named Main Line Today Top Lawyers for 2021

We are pleased to announce that 17 attorneys have been included in the 2021 Main Line Today Top Lawyers Around the Main Line and Western Suburbs List.

Main Line Today is a Southeastern Pennsylvania regional magazine focusing on the communities of the western suburbs of Philadelphia and surrounding Counties. The Best Lawyers of Chester County, Delaware County and Montgomery County are nominated through peer balloting then vetted through Main Line Today's editorial process.

2021 sees the addition of 3 High Swartz attorneys to the Top Lawyers list. New attorneys include family lawyers Chelsey A. Christiansen and Michael B. Prasad for Divorce and Family Law and Stephen M. Zaffuto for Real Estate Law. Congratulations to all winners!

Below is the full list of High Swartz Top Lawyers from Main Line Today in 2021.

  • Joel D. Rosen - Business Law
  • Kevin Cornish - Civil Litigation
  • Mark Fischer - Civil Litigation
  • Melissa Boyd - Divorce & Family
  • Mary Doherty - Divorce & Family
  • Elizabeth Early - Divorce & Family
  • Chelsey Christiansen - Divorce & Family
  • Michael Prasad - Divorce & Family
  • Thomas Rees - Employment Law
  • James B. Shrimp - Employment Law
  • David Brooman - Municipal Law
  • Gilbert High - Municipal Law
  • William Kerr - Municipal Law
  • Richard Sokorai - Personal Injury
  • Arn Heller - Real Estate Law
  • Stephen Zaffuto - Real Estate Law
  • Thomas Panzer - Workers’ Compensation

If you're looking for lawyers near you in Norristown, Doylestown, and the Greater Philadelphia area, get in touch with our law office. Our attorneys and lawyers are some of the best you'll find to handle all your legal concerns.

Joel D. Rosen | March 25, 2021

Should I form an LLC for an Investment Property?

So you want to invest in real estate, possibly buying one or more investment properties, but are not certain if you should buy them in your own name, as husband and wife or through some form of legal entity. The decisions you make now regarding the purchasing of the real estate could save you time and money in the future. That's why is pays to speak with a real estate attorney near you.

Should I buy rental properties in my own name or as a corporation?

There are various forms of entity to choose from, sole proprietorship, general partnership, limited partnership, limited liability company (real estate LLC) or corporation (C-corp or S-corp). Initially, it is best not to own investment real estate in your own name or a general partnership. In both cases, the individual owner and each general partner will be personally liable for debts/liabilities arising out of the real estate holding.

It is also preferable, in Pennsylvania, not to hold title in the name of a corporation as selling it triggers additional tax liability and the need for tax clearance certificates, which can delay closing on the sale.

LP or LLC? Which entity is best to purchase a rental property?

Eliminating individual ownership and general partnership essentially leaves you with either an LLC or a limited partnership. An LLC is cheaper and easier to set up and provides the same level of liability protection as a limited partnership as well as the same pass-through tax benefits to the members of the LLC.

A limited partnership requires the creation of a general partner, typically a corporate entity or limited liability company, which remains liable for the debts and liabilities of the limited partnership. The limited partners are shielded from liability. But that necessitates the creation of a limited partnership and a general partner. A limited liability company does the same work, with half the effort.

A real estate attorney can help you decide which is best for you.

Can I transfer the rental property title to the entity after it’s been purchased?

As a preliminary matter, whatever decision you make regarding the title to the property, make your final decision before buying the property. You don’t want to buy it as an individual and then after acquiring it transfer it to an entity you create. Such a scenario can create a double payment of real estate transfer tax, which can be significant depending on where you live. Thirty-eight states, including Pennsylvania, have taxes that are paid for transferring title to real estate.

In Pennsylvania, if you buy property in your own name (and pay the transfer tax on that acquisition) and then transfer it to a company you set up to hold title to the real estate, you have to pay transfer tax a second time. To avoid that, simply choose a form of ownership and stick to it. Check out our past articles on county-specific real estate transfer tax for Philadelphia and Montgomery County, PA.

In summary, many real estate companies take the form of real estate LLC for the reasons noted above. If you need assistance in forming an LLC for an investment property, talk to one of our real estate attorneys. Our law firm serves Bucks and Montgomery counties. Call today: 610.275.0700.