PLANNING AHEAD: Does my limited liability company really need an operating agreement?

An operating agreement serves as an instruction manual dictating the governance and operation of your limited liability company, or LLC. The purpose of an operating agreement is to: (i) preserve the limited liability status of your entity; (ii) specify rights and obligations between members; (iii) provide the necessary structure, accounting and tax provisions; (iv) identify policies in the event of disputes, the death or divorce of a member; and (v) set out the organizational governance for the LLC.

Currently, if there is no operating agreement, Florida law states that an LLC is subject to the default provisions provided for under Chapter 605, Florida Statutes. The risk of relying upon the default provisions in Chapter 605 is that these standard, default provisions may not align with the goals you have for your LLC or the agreement between the members.

To avoid relying upon the default provisions of Florida Statutes, I highly recommend that new business owners allocate time prior to the beginning of their LLCs existence to adequately prepare and draft an operating agreement. A clear and unambiguous agreement will help provide concise policies for distributing profits and losses, establishing a management structure, defining appropriate voting control and decision procedures, as well as resolving unforeseen disputes among members. Clear procedures will only further assist in the smooth operation and growth of an LLC. Such policies are also beneficial for planned and unexpected challenges, and typically can eliminate any confusion or ambiguity which may arise if relying upon Chapter 605.

Like its members, each LLC is unique, with each newly created LLC having its own set of specific goals and objectives that its members would like to accomplish. A good operating agreement should be structured to align with the ideals and objectives of the members of the LLC. Certain essential terms, including the following, should be included in all operating agreements:

  • Specifications regarding ownership percent or interest;
  • The rights and responsibilities of each member;
  • How to distribute profits and losses;
  • Voting rights (i.e. voting and non-voting membership interests; majority, supermajority or unanimous decisions);
  • Management hierarchy (i.e. appointment and removal of managers);
  • Termination, or dissolution, procedures;
  • Dispute resolution provisions;
  • Transfer restrictions;
  • Guidelines and parameters for borrowing money; and
  • How to remove an unruly director.

Business owners may draft and implement their own operating agreements; however, given that an operating agreement is an important legal contract that binds the members and the governance of the LLC, it is best to consult with an attorney who has experience in formation of business entities.

Dan Rich is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland.  Questions can be submitted to thelaw@cclmlaw.com.

When Does a Hobby Become a Business?

By: Clark, Campbell, Lancaster & Munson, P.A.

Do you have a hobby that has become profitable on eBay, Etsy, or social media? If so, the IRS may consider your hobby a business, and certain income tax consequences may result.

Q: What is the difference between a hobby and a business?

The IRS has provided the following nine factors a taxpayer should consider:

  1. Is the activity carried on in a businesslike manner?
  2. Does the time and effort put into the activity indicate an intent to make a profit?
  3. Does the taxpayer depend on the income from the activity?
  4. Are the losses from the activity beyond the taxpayer’s control?
  5. Has the taxpayer made changes to improve profitability?
  6. Does the taxpayer have the knowledge to carry the activity as a successful business?
  7. Has the taxpayer made a profit from similar activities in the past?
  8. Does the activity make a profit in some years?
  9. Does the taxpayer expect to make a profit in the future due to an appreciation of the assets used in the activity?

Overall, the key issue is whether a taxpayer treats the activity as a business and whether the taxpayer has an expectation of profit from the activity.

Q: If my hobby produces income, is it considered a business?

Not necessarily. A hobby can produce income even though the taxpayer does not have an expectation to make a profit. For example, a taxpayer enjoys painting swans on the weekends and frequently posts pictures of her paintings on social media. Taxpayer’s friend offers to buy a painting for $100. Taxpayer usually does not sell her paintings, but decides to take the $100. Taxpayer likely has a hobby because the taxpayer does not have an expectation to make a profit when she paints. However, if the taxpayer were to advertise her paintings for sale on social media, then the taxpayer may have a business.

Q: What are the tax consequences of a hobby and a business?

Regardless of whether the taxpayer has a hobby or a business, the taxpayer must report any income received. Therefore, in our example above, the taxpayer should report the $100 as income. A taxpayer may deduct the ordinary and necessary expenses from a hobby or business, but a taxpayer may not deduct a loss from a hobby. In our example above, assume the taxpayer spent $150 on painting supplies. If the taxpayer has a hobby, then the taxpayer may only deduct up to $100 on painting supplies as ordinary and necessary expenses because she received only $100 of income, and may not deduct a loss of $50. If the taxpayer has a business, then the taxpayer may deduct the full $150, which will result in a $50 loss.

Generally, the IRS is reluctant to find that a hobby qualifies as a business since a business may deduct losses. However, if a taxpayer treats the hobby as a business, such as maintaining a separate bank account and budget, forming a business plan, and keeping books and records, then it is more likely the IRS will find that the hobby qualifies as a business.

Mobile Tech and ADA

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: Do I have to design my business’s website or mobile app to be accessible by individuals with disabilities?

 A: Depending on the type of business, yes.  The Americans with Disabilities Act (ADA) prohibits discrimination on the basis of disability in various establishments, from restaurants and movie theaters to doctors’ offices and law firms.  The ADA also requires that new or remodeled establishments since the law was passed comply with the standards to accommodate accessibility by those with disabilities.  Although perhaps not contemplated when the law was passed, courts and the Department of Justice (DOJ) have begun to grapple with the question of whether websites and mobile technology need to be reasonably accessible.  Target previously settled a class action lawsuit alleged that its website was not accessible to the blind.  Similar web technology lawsuits are bound to follow, with approximately 5,000 ADA accessibility lawsuits filed nationally each year.

The issue is that websites frequently serve the same purpose as the public accommodations that are governed by the ADA, such as selling goods and providing educational courses.  A number of disabilities can hinder access to the information and the services of these websites.  Visually impaired individuals have difficulty reading text or viewing images or videos.  Mobility impaired individuals may have difficulty navigating a website that requires a mouse.  Intellectually impaired individuals may have difficulty where timed responses are required.  Many individuals with disabilities have assistive devices, such as screen readers, but websites need to be designed in a way that these devices can do their job.

The federal courts interpreting the ADA split as to whether the ADA applies when the website has no connection with a physical store or location.  The Eleventh Circuit, which covers disputes arising in Florida, appears to take the more limited view for now that the ADA does not apply in such a circumstance (such as an exclusively online education provider or retailer with no physical location).  It is nonetheless apparent that the trend is towards requiring ADA compliance for websites that provide products or services to the public.  The Department of Justice agrees and has suggested rulemaking to that end and has already previously gone after, and settled with, at least one provider of online courses based on the allegation that the website was not fully accessible to individuals with disabilities.

Given the trend, websites owners and mobile app developers should begin to educate themselves and revise their web technologies.  Reading the Web Content Accessibility Guidelines (WGAC 2.0) and reviewing settlement agreements on the topic would be a good starting point.  This guidance will suggest many ways to comply with the ADA but also reach more customers, including adopting underlying code on the website to make the page accessible to assistive devices, removing website timeout limitations, providing text-to-speech, and reducing the “flashing” of pictures and other content (for individuals prone to seizures).

The September 22nd edition of “The Law” will discuss the use of criminal records in employment decisions.

Questions can be submitted online to thelaw@cclmlaw.com

Defamation and Copyrights in Hyperlinks and Blogs

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: Can my business get in trouble for sharing third-party content on its website and social media page?

A: Yes, in a few contexts.  In the event that the content was originally printed by a person who holds the copyright, reprinting the content on your own page is infringement.  You may be forced to remove the content and pay statutory amounts and other “damages,” including the profits lost by the copyright holder and the profits obtained by the infringement.

But perhaps less obvious is what happens when you share content that was itself wrongfully shared.  A common example of this would be third-party content that contains defamatory statements (i.e. damaging falsehoods).  More local businesses pop up on social media and elsewhere on the internet daily, frequently sharing and linking to third party content.  But the linking businesses have no control over the third party site, which might change without warning and contain defamatory or copyright-infringing content.

Courts are leaning towards protecting page owners who simply link to content as opposed to copy it.  Consider, first, a blog that offers commentary and frequently block quotes sources.  That blog reprints segments of other persons’ statements, whether made online or on other media.  One such segment, hypothetically, contains a libelous accusation.  Whether the blogger is reprinting the segment to support the accusation, prove that it is incorrect, or comment on a different portion of the quote, he has nonetheless “republished” the defamatory statement to a new audience.  Under the law of defamation, he might be held liable to the wrongfully accused person even though the blogger did not make the original statement and even though the blogger might have had the good intent to show the falsity of the statement.

On the other hand, if the blogger prints a more neutral segment of a libelous article or simply hyperlinks to it, he has not actually republished the false statement.  He has, in any event, called the existence of the statement to the attention of a new audience and provided an additional pathway to access the content.  Nonetheless, courts are concluding that such provision of attention and access to the existence of defamatory content is not itself the type of “affirmative act” of spreading damaging falsehoods that the law should prohibit.

Courts similarly tend to agree that merely linking to another website usually does not itself infringe copyrights nor give rise to the type of consumer confusion necessary for a trademark infringement claim.  However, if the linking page author has reason to believe that he is linking to infringing content, the court might venture into the land of “contributory infringement” to find liability.

Businesses should be careful to consider these issues when linking to and “sharing” content on their websites and social media pages.

The August 25th edition of “The Law” will discuss recovery of tax refunds for past years if you failed to file.

Questions can be submitted online to thelaw@cclmlaw.com

 

Overtime Law

By: Dan Rich
Clark, Campbell, Lancaster & Munson, P.A.

Q: What impact will proposed federal overtime changes have on me?

 A: In the summer of 2015, the Department of Labor proposed and began taking comments on widespread changes to federal overtime laws. The Department of Labor has until July of this year to issue a final rule. The proposed rule would raise the income level at which employees can automatically qualify for overtime eligibility and marks the first time the government has drastically addressed this issue since 1975.

Currently, employees who automatically qualify for overtime pay are those earning $23,660 or less and any others who do not fall within the so-called “white-collar exemption.” The white-collar exemption provides that salaried workers who fall above the current limit are entitled to overtime pay only if they are not classified as administrators, executives, or professionals. Statistically, the current $23,660 overtime limit figure covers less than 8% of full-time salaried employees and falls below the poverty level for a family of four.

The new rule would mandate that all salaried employees, regardless of title or duties, are eligible for overtime if they earn $50,440 or less. The Department of Labor estimates that approximately 4.6 million employees who are currently exempt would receive overtime protection under the new law. The Obama administration proclaims that the new limit is necessary in order to compete with inflation, which has increased while the overtime threshold has remained the same.

Opponents of the law say that it will lead employers to, among other things, reclassify salaried workers as hourly employees or cut employee wages and bonuses or reduce hours to avoid paying overtime. But the biggest criticism is that the new overtime law will hurt small and mid-sized business who will struggle to absorb the increased labor costs.

Proponents of the change say that raising the salary threshold will help give employees more power and flexibility over their labor and fairer compensation for their increased productivity. Supporters also allege that the proposed overtime threshold change will increase employment, not decrease it, because employers are likely to add jobs or spread hours to underemployed workers to avoid paying overtime wages.

Putting both arguments aside, one thing is clear: raising the overtime threshold for automatic coverage would mean that earning overtime would no longer be contingent on what kind of work or the label your boss gives you. Regardless of title or duties, all employees earning a salary of $50,440 or less would potentially now be entitled to overtime compensation.

The March 24th edition of “The Law” will discuss potential pitfalls of buying property from foreign persons.

 Dan Rich is an associate attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@clarkcampbell-law.com

Valuation at Buyout

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: How do I address dissenting non-majority shareholders who disrupt operations and threaten litigation if I don’t buy them out at an inflated price?

A: When you hold shares in a publicly traded company, you are free to sell those shares on the open market, but that luxury is not available for “closely held” businesses, where disputes can more easily become detrimental to operations. Luckily for the majority (i.e. controlling) shareholder or shareholders, that dissent should not disrupt operations during the ordinary course of prudent business, because the minority is simply outvoted. But minority shareholders can shake things up when, for example, the company is going through a merger or sale of business assets, the controlling shareholders are acting illegally or wastefully, or a deadlock in voting occurs. The first of these three scenarios can give rise to the right to be bought out, whereas the remaining scenarios give rise to the more dangerous remedy of dissolving the corporation. In a dissenter seeks to dissolve, the lifeline for those who remain in control is to elect to purchase the shares of the dissenting shareholders at fair value.

With regard to the right to be bought out (“dissenters’ rights”), as to closely held corporations of 10 or fewer shareholders, the dissenter often obtains payment based on an appraisal and his share of the company. For example, a shareholder who owns 30% of the corporation or 30 of the 100 shares would be entitled to $30,000 if the appraised value of the business is $100,000. Generally, this would be the maximum the minority shareholder could receive absent a court determining that misconduct by the controlling shareholders would dictate greater compensation.

The reality is that 30% of the shares of a company are usually worth less than 30% of the appraised value of the company, at least to an outsider. If you were to buy into a company for 30%, you receive a right to profit distributions but no control over the direction of the business. Buying 51% is often substantially more valuable than buying 49% because of control. Also, shares in closely held corporations typically face a much more limited market of buyers than shares in publicly traded companies. That is why an argument should be considered as to whether the dissenters should suffer a discount for lack of control and marketability when being bought out. For the specific dissenters’ right scenario above (with 10 or fewer shareholders), a Florida statute prohibits such discounts, but the discounts are at least arguably available for corporations with more shareholders or in the dissolution context mentioned at the end of the first paragraph above.

There are a number of ways to value a business, including by looking at the total value of the assets of the business or by applying a multiplier to the earnings or earning potential of the business. The applicable method varies greatly depending on the circumstances. The tips above will assist in negotiating with dissenting shareholders and in determining the likely outcome of litigation. If negotiation is unsuccessful and your business faces uncontrolled disruption, taking control by pursuing remedies in court with the advice of counsel may be the next step.

 

The July 30th edition of “The Law” will discuss employee pay for breaks, travel, and other “off the clock” time.

Questions can be submitted online to thelaw@clarkcampbell-law.com.

Board of Directors Liability

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: As a new member of a nonprofit’s board of directors, what liabilities am I undertaking?

A: Volunteer directors govern and manage the nonprofit organization and make decisions about its activities, policies, and affairs. Even if management is delegated to, say, a paid executive director, directors must still supervise the organization’s affairs to satisfy their fiduciary duties to the organization and the public.

The duty of loyalty requires directors to avoid transactions in which they would have a material financial interest and not to put their own interests ahead of the organization. The duty of care requires directors to act reasonably and prudently to avoid foreseeable risks. Directors also have a duty to comply with investment standards and invest in good faith. To avoid director liability under Florida law, directors must act in good faith, with reasonable and prudent care to avoid foreseeable risks, and in what the directors reasonably believe to be the best interests of the organization.

While a director is unlikely to be on the hook for an accidental slip-and-fall at the nonprofit’s campus entrance, directors are susceptible to claims for financial wrongdoing (including misuse of grant money, failure to identify improper spending, and commingling of assets), tax violations (including failure to deposit payroll or property taxes or failure to file necessary tax returns), and failure to inquire about questionable conduct of a few directors and officers. Although a director should actively and diligently get involved in reviewing budgets and other financial data, directors may reasonably rely on information, reports, and financial statements provided by any reliable and competent officer or employee or board committee, legal counsel or accountant.

Of course, self-dealing or criminal acts are not protected. Nor is a director protected if he personally and directly injures someone, guaranties a loan or other debt on which the nonprofit defaults, or commingles nonprofit and personal funds.

The lines are not always clear. Nonprofits should therefore invest in insurance for their volunteer directors and officers. To protect themselves and the nonprofit, directors should work to prevent and decrease liability for the organization, including establishing employment-related policies and developing a system for determining consistent and uniform application of those policies.

 

The June 18th edition of “The Law” will cover a new disclosure rule designed to protect home and land buyers.

Questions can be submitted online to thelaw@clarkcampbell-law.com.

Refunds and Store Credits

By Joseph A. Geary, Attorney
Clark, Campbell, Lancaster & Munson, P.A.

Q: “I returned merchandise and received a certificate from the store against future purchases. May the store impose time limits or other conditions on my use of the certificate?”

A: Generally, no. Under section 501.95, Florida Statutes, a “credit memo” (defined as “a certificate, card, stored value card, or similar instrument”) issued in Florida in exchange for returned merchandise, when the instrument is redeemable for merchandise, food, or services, may not have an expiration date, expiration period, or any type of postsale charge or fee imposed on it, including, but not limited to, service charges, “dormancy” (non-use) fees, account maintenance fees, or cash-out fees. Credit memos sold or issued by financial institutions or money services businesses, however, are not subject to these rules if the credit memo is redeemable by multiple unaffiliated merchants.

 

Q: “Are Florida retail establishments required by law to offer a refund, credit or exchange on goods sold?”

A: No. However, section 501.142, Florida Statutes, requires a retail establishment that sells goods to the general public and offers no cash refund, credit refund, or exchange of merchandise to post a “no refund” sign at the point of sale. The absence of such a sign means the store has a refund or exchange policy. A copy of the policy must be given, in writing, to a consumer upon request. A store that fails to comply with these rules must give the consumer, upon request and proof of purchase, a refund (not an exchange or credit) within 7 days from the date of purchase. The merchandise must be unused and in the original carton (if there was one) when the merchandise was purchased. Food, perishables, custom-made goods, custom-altered goods, or goods that are prohibited by law from resale are exempt from these rules.

 

Q: “Who enforces these laws? Are there penalties for non-compliance?”

A: The Florida Department of Agriculture and Consumer Services is principally charged with enforcing these laws. If the Department finds that a person has violated or is operating in violation of any of these laws, it may enter an order imposing a civil fine not exceeding $100 per violation and/or order the violator to cease and desist. Local governments may also issue a warning for a first violation and fines of up to $50.00 per violation for second and subsequent violations. An aggrieved consumer has no private right to sue at this time.

“Oh, You Shouldn’t Have!”

By Joseph A. “Jay” Geary
Clark, Campbell, Lancaster & Munson P.A.

Q: Do the gift cards I received during the holidays expire? Are there any charges or fees for use or non-use?

A: Generally, Florida law provides that consumer “gift cards” (i.e., instruments issued on a prepaid basis primarily for personal, family, or household purposes) are not subject to expiration dates or fees. However, as with any general rule, there are exceptions.

Florida law (§ 501.95(1) (b), Fla.Stat.), defines a “gift certificate” as:

* * * a certificate, gift card, stored value card, or similar instrument purchased for monetary consideration when the certificate, card, or similar instrument is redeemable for merchandise, food, or services regardless of whether any cash may be paid to the owner of the certificate, card, or instrument as part of the redemption transaction, but this term shall not include [theme park and entertainment] tickets * * * or manufacturer or retailer discounts and coupons.

Under Florida law, the general rule is that a gift certificate purchased in Florida may not have an expiration date or period, or any type of post-sale charges or fees imposed on the gift certificate, such as service, “dormancy” (i.e., “inactivity”), account maintenance or cash-out fees.

Nevertheless, a “gift certificate” may have an expiration date of not less than three (3) years if given as a charitable contribution, or not less than one (1) year if given as part of an employee incentive plan, AND, in either case, the expiration date is prominently disclosed in writing at the time it is provided. Gift certificates given by a financial institution or a money services business (for example, pre-paid Visa debit cards) may have expiration dates if redeemable by multiple unaffiliated merchants.

This article describes Florida law applicable to “gift certificates”. Certain federal laws also apply to gift certificates, gift cards, general-use pre-paid cards and to “loyalty, award, or promotional” gift cards. The last category of cards may allow the imposition of service fees, dormancy charges, and expiration dates, provided they are prominently disclosed when the card is issued. Federal laws exempt certain cards from the restrictions on expiration, fees and certain charges, including cards: for pre-paid telephone services; not marketed to the general public; and issued in paper form only.

The January 15 edition of “The Law” will cover liability for damage from your neighbor’s overhanging tree limbs.

[Joseph A. “Jay” Geary is a shareholder with the law firm Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@clarkcampbell-law.com.]

Civil Remedies For Worthless Checks

By: Clark, Campbell, Lancaster & Munson, P.A.

Q: My customer’s check bounced, and he won’t return my calls. What can I do to recover?

A Every day in Florida individuals and businesses receive payments for goods or services in the form of “payment instruments”, which include checks, debit card orders and electronic funds transfers. Unfortunately, many of these payments are “worthless”, because they have been dishonored by the drawee banks or credit unions for lack of funds, lack of credit, lack of account, or the maker has stopped payment. When a worthless payment is issued, and the maker refuses to issue a good check or make payment in another form, Florida law provides the payee with civil remedies that allow the payee to recover from the maker the amount of payment, bank fees and service charges. This article focuses on worthless checks, although the civil remedies discussed also apply to other “payment instruments”.

The payee of a worthless or “bounced” check is entitled to demand and receive from the maker the full amount (i.e., the face amount) of the worthless check, along with any bank fees incurred and a service charge. The payee must first send a written demand by certified mail that notifies the maker that the check was dishonored, lists the full amount owed, and that states the maker must pay the full amount owed in cash within 30 days from the date of receipt of the letter. If, after 30 days, the maker has not paid the payee the entire amount owed, the payee then may file a civil suit against the maker and seek three times the amount of the worthless check, plus bank fees and service charges, court costs, and reasonable attorney fees.

Because of the expense, and uncertain outcome of civil actions, including the possibility of an uncollectable judgment, payees should take the following precautions when issued a check, not only to ensure the check is valid, but also to ensure recovery from the maker if the check is dishonored. First, the payee should always confirm the full legal name and home address of the maker of the check through a government issued form of identification. Second, a payee should never accept a check that is post-dated or has no date on it since that may prevent criminal prosecution if the check is dishonored. Finally, a payee should never accept checks from third parties if the identity of the maker or whether the check was stolen or forged cannot be immediately confirmed.

The December 18th edition of “The Law” will discuss end-of-year tax issues. Questions may be submitted online to thelaw@clarkcampbell-law.com.