› THE CHOICE OF BUSINESS ENTITY
› PROTECT YOUR LIEN RIGHTS
› NOTES ON LEGAL LIABILITY FOR BUSINESS OWNERS
› SHOULD I HAVE A WILL OR A LIVING TRUST?
› KEEPING THE FAMILY BUSINESS GOING (PLANNING SUCCESSION)
› EMPLOYMENT LAW, WHAT EVERY EMPLOYER NEEDS TO KNOW

The information below is general in nature and is not intended, and should not be construed, as legal advice or opinion provided by the author to the reader. The reader is also cautioned that this material may not be applicable to, or suitable for the reader's specific circumstances or needs, and may require consideration other factors if any legal action is to be contemplated. The reader should contact his or her own legal counsel prior to taking any action based upon this information. The author assumes no obligation to inform the reader of any changes in the laws or other factors that could affect the information contained herein.

THE CHOICE OF BUSINESS ENTITY

By: Francisco Ramirez, Attorney and Counselor at Law

One of the first decisions an entrepreneur has to make when starting a new venture is the type of legal entity for its business. Such decision may not be so easy and can get quite complicated. Particularly, the possibilities can be mind boggling, if you take into account the number of potential legal entities available, the possible different combinations of such entities, and the fact that the business can be formed in any of the 50 states or even in jurisdictions outside the United States.

In making a choice of entity for his or her business, the owner has to take many considerations into account. One of those considerations is the tax treatment at both federal and state level, some legal structures may be conducive to double taxation or to a less favorable tax treatment than others. Another consideration is the legal liability exposure, some business entities may offer more protection from actions performed in the operation of the business than others. Other major considerations are the capitalization and insurance requirements, type of management, transferability of ownership, life of the entity, and distribution of profits.

As general information, the following is a brief summary and description of some of the legal entities available in Texas.

General Partnership (GP): The owners of a general partnership business are its partners. In general, each partner may be held liable for the obligations of the business and for the acts other partners acting in the ordinary course of business of the GP. Typically, the taxes flow through from the partnership to its partners.

Limited Partnership (LP): It is an entity with at least one general partner and one limited partner. The general partner may be liable as in the GP, but the limited partner is only liable to the extent of his/her investment unless otherwise agreed. An LP offers a flow-through tax treatment to its partners similar to the GP.

Registered Limited Liability Partnership (LLP): This is a general partnership that offers limited protection to the partners from certain acts by other partners or employees of the business. LLP’s also provides a flow-through tax treatment to its partners.

Limited Liability Company (LLC): This is an entity that has characteristics of both corporations and partnerships. Like a corporation, the LLC owners may not be personally liable for the obligations of the business. An LLC is similar to a partnership in that its members receive a flow-through tax treatment.

Corporations: The owners of a corporation are its shareholders. In general, the shareholder’s the personal liability for the obligations of the corporation is limited to its investment. Besides the regular corporation, Texas allows several other types of corporations: close corporation, non-profit corporation, professional corporation. Additionally, if the corporation meets certain requirements, the shareholders may elect to be taxed as a small business (S Corporation) under Subchapter S of the Tax Code.

PROTECT YOUR LIEN RIGHTS

By: Francisco Ramirez, Attorney and Counselor at Law

A mechanic’s or materialmen’s lien is one of the powerful tools that suppliers or contractors have at their disposal under the Texas Property Laws to recover money rightfully owed to them. According to Texas Laws a "persons that labor, specially fabricate materials or furnish labor or materials for improvements to real estate are entitled to lien subject property." Perfecting a lien is a vital step in getting most of the protection available under the law. Although generally favorable to those furnishing materials and labor, the lien statute imposes a strict set of guidelines and deadlines that if not properly followed may cause the supplier or contractor to unwittingly waive the rights to lien a property.

The following information, far from being comprehensive, is only a general outline of the most salient issues and deadlines that suppliers and contractors should be aware to protect their hard-earned money. For illustration purposes we will assume a second tier claimant (i.e. suppliers and subcontractors contracting directly with an original or prime contractor) for a private construction project.

The first step in the process of perfecting a lien is to send a notice of the unpaid balance to the owner (Notice of Claim). According to the Texas Statutes, such notice must be sent "no later than the 15th day of the second month following each month in which all or part of the claimant’s labor was performed or material was delivered." What this means is that if 30 days go by after finishing your work and you have not received payment you should be sending your notice of claim letter shortly thereafter, but not later than the 15th of the following month. Such notice should be sent certified return receipt to both the prime contractor and the owner. In addition, the notice should contain a statement authorizing the owner to withhold funds from payments owed the prime contractor.

The next step is to file the Lien Affidavit. A person claiming a lien must file an affidavit with the county clerk where the property is located. The filing has to take place not later than the 15th day of the third calendar month. Additionally, the law requires that a copy of the Lien Affidavit be sent to the owner by registered or certified mail to the owner no later than one business day after the lien is filed.

To further clarify our example, assume that the work was performed in January, then the last date to send the Notice of Claim is April 15, the last day to file the Lien Affidavit is May 15, and the last day to send a copy of the affidavit to the owner is May 16.

The illustration above is just one generic situation and does not cover all the language and procedures required for perfecting a lien. Subcontractors and suppliers may find themselves dealing with government property, bonding companies, or even being a prime contractor themselves; each case requires a careful review by a professional to insure that all the requirements of the law are met. As always, the readers are cautioned not to rely solely on this information and to seek professional help that would take into account their own particular set of circumstances to assure the protection of their lien rights.

NOTES ON LEGAL LIABILITY FOR BUSINESS OWNERS

By Francisco Ramirez, Attorney and Counselor at Law

Ignorance of the law is not a defense. This is one of those axioms of legal wisdom that most of us know just by reason of living in this very litigious society. However, there are a multitude of obligations that are not so well known and which a person might be bound by law or justice. Some of such obligations are encompassed by the general term "legal liability."

There are three general areas of rights and obligations under the law that should be of special interest to entrepreneurs and business owners: tort liability, contract liability, and the obligations to act in accordance with a statute, which are generally enforced by government agencies.

Tort liability is defined as a civil wrong for which the courts provide remedy in the form of damages. Basically, there are two types of torts: intentional tort, where a person intended the wrong complained of, and unintentional tort or negligence, which is based in the principle that we have a duty to exercise reasonable care to avoid injuring others. This negligence liability exists independently of any contract obligation or government regulation. Further, the standard of care to determine negligence, is rather flexible and depends on the circumstances and on the average knowledge and ability of persons similarly situated. So a supplier or contractor may be held liable for failure to act with the average knowledge and skill for his or her profession or trade even though neither the contract nor a government statute specify that they do so, provide something, or do a specific act.

Contractual liability is determined by the terms and conditions of the agreement. Such terms and conditions are generally evidenced in a written contract; however, agreements where there is no written document, such as oral contracts, have been found to be legally enforceable by the courts. For instance, if you verbally ask one of your suppliers to fabricate and ship an item custom made to your specifications, and that supplier relies on your word and proceeds on the basis of your verbal authorization. You may be bound to your end of the bargain by law regardless of whether you issued a purchase order or any other contractual document confirming the agreement.

The statutes and laws passed by Congress impose obligations that regulate many aspects of the work place and how companies may conduct business. The following employment related laws should be of special interest to business owners: Civil Rights Act, Title VII, 1964 & 1991, enacted to bring about equality in hiring and job opportunity, makes it unlawful to discriminate on the basis of race, color, religion, sex, or national origin. The Age Discrimination in Employment Act (ADEA) prohibits discrimination on basis of age. Equal Pay Act of 1963 prohibits wage discrimination on the basis of gender. Americans with Disabilities Act (ADA) protects qualified individuals against discrimination because of a person’s disability. Although some of these regulations may not apply to business that have small number of employees, some may have a broad application that may subject employers to liability for failing to comply with certain legal requirements. All business owners are well advised to consult with counsel regarding the applicability of these laws to their own particular work place to avoid running afoul with the law. Remember that you will not be able to claim ignorance as a defense.

SHOULD I HAVE A WILL OR A LIVING TRUST?

By: Francisco Ramirez, Attorney at Law

As we all know, we can not take property with us after death. Since our property has to remain on this Earth after we are gone, it is wise to make some decisions as to what happens to our earthly possessions while we are alive, otherwise the State will be making those decisions for us. Providing for a legal and orderly transfer of property is generally referred to as estate planning.

Two of the most commonly used estate planning devices for the transfer of property are wills and living trusts. A will is a legal instrument that states how the property of an individual is to be distributed after his or her death. After the testator dies, the will is "probated" and the legal title to the property passes on to the heirs in the will (assuming that the will was a properly drafted document and that there are no legal challenges to it). A living trust is a device by which a person can transfer all or substantially all of that of her property into a trust while the person is alive. The trust should have specific instructions to provide for the transfer of property should the person die or become incapacitated. Generally, the trustee or manager of the trust is the same person; therefore, nothing changes except that the person will no longer conduct her business under her name (i.e., Ms. Jane Doe), but under the name of "the Jane Doe Trust" or the "Doe Family Trust."

Deciding whether a will or a trust is appropriate depends on each person’s particular circumstances. Below are some of the most common differences between a will and a living trust. Each individual should weigh the advantages and disadvantages before deciding on one form or the other.

Probate: wills are subject to probate proceedings. Out -of-state property requires probate proceedings in that state, as well. Living trusts are not subject to probate proceedings. If there is out of state property, you save on the cost of a second state probate proceeding.

Court Supervision: court supervision is required for handling beneficiary challenges and creditor disputes in a will. No automatic court supervision is required to deal with disputes in a living trust.

Privacy: there is less privacy with a will because it becomes public record at the time of your death. A living trust remains private.

Tax Savings: similar tax saving provisions are available for both wills and trusts.

Management of Assets: a will requires the use of a Power of Attorney or Conservatorship to allow for management of assets should the testator become incapacitated. A trust allows you as the grantor to manage the Trust assets as long as you are willing and able; also, trusts generally have provisions for a successor trustee to take over in your place.

Costs: costs less to prepare a will than a Trust. The costs to prepare, fund and manage a trust can be substantial. However, the cost to probate a will can also be substantial, particularly, if there is property in other states.

KEEPING THE FAMILY BUSINESS GOING (PLANNING SUCCESSION)

By Jerry Scheff and Francisco Ramirez, Attorneys at Law

Only 3 in 10 family businesses survive the retirement or death of their founder. The most common reasons for this high rate of failure are: remaining family members don’t work well with one another, businesses lose their focus and direction without the driving force of their founder, families can’t pay estate taxes without selling off the assets, competitors seize the chance to get a bargain when the business is weakest.

Business succession planning offers help for those who want a family business to continue, or who want to get the most money when the time comes to sell. Succession planning should start early. A business owner who waits too long misses important planning opportunities.

Begin Planning for Yourselves

Prepare a clear RETIREMENT PLAN for you and your spouse. If you don’t make retirement plans, you may never be able to retire. Even if you think you want to go on working forever, you may change your mind, become interested in new things or take ill. If everything you own is tied up inside your business you have NO CHOICES. Good retirement planning leaves you in control of the decision whether to go on working or stop--based upon what you want to do.

Bring Others Into The Picture

Write down your BUSINESS VISION. Where do you picture your business will be in 5 or 10 years from now. Why do it? Succession is a period of transition. Your business is in a position where it can lose its way and begin to break up. Competitors can even see this as a good time to attack your business. Businesses grow when the owners and employees can clearly see and share in the vision that the owner has for the business. Your business vision offers guidance to the people who work with you – just ask the people who started at Microsoft or Apple.

Groom Someone to follow you

Pick and train your successor. Know what you want your successor to be and to do, and create a plan for the person you select. Family business owners are good at what they do, but may have trouble teaching someone else to do it–so you may have to get help to train your successor. Why do it? Preparing your successor means training a person to know and to do the things needed to keep your business growing. Successors do best when they know what you expect, have been trained to do it, and are held accountable.

Hand Over the Reins

The people who work for you recognize your authority and power to run the business. If you don’t make it clear that you are giving that authority to your successor, uncertainty and in-fighting can cause your business to fail. Others can get confused about who is in charge. They may want the power for themselves. It is very important to give your successor the power necessary to keep your business running smoothly. The authority you give your successor will give the successor time to earn the loyalty of your employees.

Plan Wealth Transfers

An ESTATE PLAN spells out who will get your assets and how they will be protected. A good estate plan will address fair treatment of your spouse and children, and will keep estate taxes as low as possible. Before you choose different estate planning tools (wills, trusts, gifts, Employee Stock Ownership Plans) decide the different things you want to accomplish, and how important each one is to you. Estate Planning very often makes you to trade off some of one goal to meet another that is more important to you. An estate plan is very important because, squabbling between family members and high estate taxes are the two most frequent reasons that businesses fail.

Plan Business Transfers

An estate plan is usually NOT a good device to transfer ownership of your business. The ESTATE PLAN can get ownership of your stock or partnership interest into the hands of the people you choose–but it CANNOT help them run the business they then legally own. It also may not provide added operating capital that businesses often need when the founder takes ill or dies. Why do businesses need more money under such circumstances? Often, the business must support the founder’s family after the founder is no longer around to generate cash flow or other income. If the founder is not the sole owner of a business, business succession planning will decide how the owners will "buy one another out."

Keep Peace in the Family

A good plan spells out the rules for family involvement in the business. How will family members be employed, compensated and supervised? Who will be the boss? When a spouse and descendants take over, each one believes they are in charge, and a power struggle can erupt that can destroy your lifetime of work. The desire for money and power can destroy both the family business and the family itself. If everyone KNOWS how things will operate, you can avoid a disaster.

Six out of Ten Family Businesses have NO SUCCESSION PLAN–and succession planning may be the next most important thing you do beyond starting your business. Look for professional help–and START EARLY!

EMPLOYMENT LAW, WHAT EVERY EMPLOYER NEEDS TO KNOW

By Francisco Ramirez, Attorney at Law

All employers should have a working knowledge of employment laws at both the federal and state levels. Since ignorance of the law is not a defense, failure to be informed is risky business and could be very costly for the employer. At the Federal level, employers should be aware of the numerous regulations affecting the workplace environment and the employment relationship and how these laws impact their businesses, particularly those with the well-known acronyms such as OSHA, ADA, ADEA, COBRA, FLSA, FMLA, IRCA, among others. Due to the extent of the subject, we will address federal labor laws some other time and will limit our discussion to a few of the major legal issues at the state level.

AT-WILL EMPLOYMENT
Texas is an at-will employment state. Employers should not confuse the concept of at-will employment with the fact that Texas is also a right-to-work state. Right-to-work refers to collective bargaining and labor union issues. At-will means that either party to an employment relation­ship can, in the absence of an employment con­tract, end the relationship with or without cause and with or without notice. However, terminating an employee for reasons other than cause, i.e. misconduct, means that the employee could file a claim for unemployment insur­ance. An unemployment claim carries the potential for higher unemployment insurance payroll taxes. Additionally, there are numerous exceptions to the At-will Employment Doctrine to be considered in any termination situation. Gener­ally speaking, it is bad practice to fire or discriminate against employees for exercising their rights. For example, the law prohibits termination of employee for filing a workers' compensation claim, serving on a jury, being called to military duty, voting or taking time off to vote, joining or participating in a union, exercis­ing minimum wage and overtime compensation rights, refusing to take a polygraph exam, etc.

PROBATION PERIOD
Firing an employee during the probationary period does not necessarily protect the employer from lawsuits. Dis­crimination claims, unemployment claims and wage claims can be filed by employees who have been fired while on probation. According to the Texas Workforce Commission (TWC) regulations, when an unemployment claim is filed, wages from the calendar quarter in which the claim is filed and wages from the calendar quarter that precede the filing quarter are excluded from determining the claimant's monetary entitlement to unemployment. The four calendar quarters that precede these two excluded quarters that are used to calculate benefits and which expose an employer to the potential risk of tax rate increases. Thus, many employers mistakenly believe that a 90 day probation period means an unemploy­ment claim or other claims can't be filed. Depending on why the employee was terminated and when that former employee chooses to file an unem­ployment claim, an employer may be subject to a rate increase. However, it is true that the more wages an employer pays to an employee the greater the potential rate increase. For this and other reasons, it doesn't hurt to have a hiring probation time frame. Just remember it doesn't bar unemploy­ment claims, discrimination complaints, and lawsuits.

CONTRACT LABOR
The fact that a person is hired on a temporary basis does not also necessarily mean that individual is an independent contractor. A person can be an employee even if they only work an hour (or less). To be an independent contractor, the person must be free from the employer's direc­tion and control. Most workers are employees, not independent contractors. Failure to properly classify workers as employees can lead to tax problems with the Texas Workforce Commission and the IRS, as well as potential wage claims.

EMPLOYMENT DISCRIMINATION
State and federal law prohibit em­ployment discrimination. Gener­ally speaking, the law prohibits discrimination in hiring, firing, and other terms and conditions of employment on the basis of race and color (this includes reverse discrimination), national origin, age, gender, religion and disabil­ity.

WORKERS' COMPENSATION
Unlike most states, workers' compensation is optional in Texas. However, going “bare", whether by choice or because of financial circumstances, can seriously change an employer's legal rights. Employers who choose to opt out of the system must give notice to the TWC and to their employees. Employers who choose to be non-subscribers to the system should seriously consider pro­viding other types of insurance benefits to their employees. This will be help to deter lawsuits and can offset damages if an em­ployee sues for personal injury.

WAGE CLAIMS
TWC enforces the Texas Payday Law, the Texas Minimum Wage Act and the federal Fair Labor Standards Act (FLSA). Basic provisions of these laws require that exempt employees be paid at least once per month and that non-exempt employees be paid at least twice per month. Terminated employ­ees must be paid within 6 calen­dar days. Employees who resign must be paid by the next regu­larly scheduled payday follow­ing the resignation date. Almost every employee is covered by the federal minimum wage, employers should know what the current minimum wage is and pay their employees accordingly. Overtime at the rate of time and one-half the regular pay rate is due when an employee works in excess of 40 hours per week. Exempt employees must be paid a salary and be a professional, executive or ad­ministrative employee.

OTHER TYPES OF EMPLOYMENT LITIGATION
There are other types of employment related lawsuits that employers need to know about. For example, it can be risky to make certain statements about former employ­ees when giving employment references to other employers. Many attorneys recommend giving nothing more than dates of employment, job title and salary. This cuts down on the risk of being sued by a former employee for defamation of character (libel or slander). On the other hand, always check references from new applicants and try to obtain information from their former employers. This may protect you against lawsuits for negligent hiring. Employers should be aware that employees are entitled to an expectation of privacy unless the employer advised them that certain things at work are not private. Advise employees in writing in advance if you plan to do any monitoring of phone calls, email, voicemail, etc. Don't continue to monitor a phone call once you know the call is personal. Don't search an employee's desk, locker, purse, etc. unless you have given them advance notice through company policy of your right to do so. Try to have them present if you must perform a search.