Copyright
- A copyright is a form of protection provided by the laws of the United
States to the authors of "original works of authorship" including
literary, dramatic, musical, artistic, and certain other intellectual
works. This protection is available to both published and unpublished
works. The 1976 Copyright Act generally gives the owner of the
copyright the exclusive right to do and to authorize other to do the
following:
To reproduce
the copyrighted work in copies or phonorecords
To prepare derivative
works based upon the copyrighted work
To distribute
copies or phonorecords of the copyrighted work to the public by sale
or other transfer of ownership,, or by rental, lease or lending
To perform the
copyrighted work publicly, in the case of literary, musical, dramatic,
and choreographic works, pantomimes, and pictorial, graphic or sculptural
works, including the individual images of a motion picture or other
audiovisual work.In the case of sound recordings, to perform the work
publicly by means of a digital audio transmission
Ultimately, copyright
registration protects the owner/creator from other taking credit for
and reaping profits from their achievements. A copyright is infringed
when another entity reproduces the work of the owner of the copyrighted
material without the owner's permission. There is no set standard
regarding how much of a work can be taken without constituting copyright
infringement. However, with a registered copyright the owner of
the registration has a substantial advantage should a legal situation
arise surrounding the copyrighted material.
Fictitious
Name or d/b/a - A fictitious name is any name under which a person
or entity transacts business in the state other than his legal name.
A corporation desiring to operate under a name under than its legal
name must file a fictitious name registration. Failure to comply with
the requirements of Florida Law on fictitious names is a misdemeanor
of the second degree.
A fictitious name
registration is effective for a period of five years and expires on
December 31st of the fifth year.
Florida
Limited Partnership The limited partnership provides some of the
benefits of both a corporation and a general partnership by being a
pass-through organization but allowing certain participants who are
investors but are not active in the day-to-day operations of the business
to achieve limited liability by becoming limited partners. Under the
Tax Reform Act of 1986, however, any losses of a limited partner are
subject to the 'passive loss" and "at-risk" limitations.
Limited partnerships are commonly chosen to conduct real estate operations
and privately syndicated business operations.
A limited partnership
permits passive investors to invest capital and share in the profits
and losses of a partnership venture without being liable for more than
their capital contribution. Those who will be active in the day-to-day
operation of the limited partnership business, such as the general partner,
must remain fully liable. However the general partner may be a corporation
with limited shareholder liability.
To ensure taxation
as a partnership, the limited partnership agreement must be carefully
drafted to avoid being classified as an "association" and
taxed as a corporation
Limited
Liability Company (“LLC”)- The LLC is a hybrid entity
that is taxed as either a partnership or corporation, at its election,
while providing limited liability protection for all of its members.
For federal tax purposes, an LLC, like a partnership, is a pass-through
entity; thus, its income and losses are taxed only at the member level.
However, all members of an LLC, like the shareholders of an S corporation,
have limited liability for the LLC's debts and claims against the LLC.
No member will be burdened with the personal liability of a general
partner.
The LLC is much
more flexible than an S corporation. An LLC may have more than 75 members;
but as few as one. Its interests may be held by corporations, partnerships,
non resident aliens, trusts, pension plans and charitable organizations;
the LLC may make special allocations, thereby avoiding the single class
of stock requirement applicable to S corporation; and it may own more
than 80% of the stock of a corporation and, therefore, may be a member
of an affiliated group.
An LLC taxed as
a partnership may also have advantages over an S corporation with respect
to the amount of deductible losses. The amount of an S corporation shareholder's
deductible losses is limited to the sum of the shareholder's basis in
his stock and any loans from the shareholder to the corporation. In
contrast, a partner can deduct losses in an amount up to the sum of
his basis in the partnership interest, his allocable share of partnership
income, and his allocable share of qualifying partnership debt.
How the taxes work
is simple. For example, each of 10 individuals contributes $100,000
to a newly formed entity to acquire an office building. The entity borrows
from a bank an additional $5,000,000 as the balance of the building's
$6,000,000 purchase price. If the entity is taxed as an S corporation,
each shareholder's loss deductions are limited to $100,000. However,
if the entity is an LLC taxed as a partnership, each member can deduct
losses up to $600,000 ($100,000 basis plus $500,000 share of entity's
debt). These losses may then be used by the individuals to offset other
income they may have from other sources.
Purchase
of a Business One of the primary decisions involved in the purchase
of a business concerns the basic structure of the transaction. Various
factors will influence the manner in which the transaction is to be
structured, and the format will affect the legal issues, documentation,
operations and tax aspects. Transactions can be structured so that the
gain or loss on the sale is immediately taxed (taxable acquisitions)
or deferred (nontaxable acquisitions).
If the business
to be acquired is a sole proprietorship or partnership, the transaction
will automatically be structured as an asset acquisition. However, the
majority of businesses operate in the corporate form, and the acquisition
can take one of several forms, which can be broadly categorized as follows:
asset purchase, stock purchase, or merger or consolidation.
A.
Sale of Assets When assets are acquired, the purchaser buys all
or specified assets of the selling entity and may assume none, some,
or all of the liabilities of the business. Aside form tax considerations,
an asset purchase may be more attractive to the buyer, since the buyer
may be able to pick and choose the specific items desired and can
attempt to avoid assuming debts and liabilities of the selling entity.
An asset acquisition is also designed to reduce the buyer's exposure
to possible unknown or contingent liabilities. In some cases, however,
certain liabilities may follow the buyer.
In spite of the
general tendency of the purchaser to prefer an asset purchase, there
are some circumstances in which an asset acquisition will not be appropriate,
even from the purchaser's standpoint. For example, if there are certain
licenses, trademarks, leases, or various contracts, which are either
not assignable or difficult to assign, it may be advisable to purchase
corporate stock, rather than assets. Caution must be exercised even
in this situation, however, because many contracts, leases, and franchise
agreements, etc. treat a significant change in corporate stock ownership
as triggering a prohibition on assignment, and approval may be required
even in corporate stock purchase transaction.
When assets are
acquired, appropriate documents must be prepared in order to effectuate
the transfer of title to each particular asset, which is being transferred.
This can involve a great deal of paper work and may require approvals
and consents from various other parties, depending on the entity,
which is being purchased.
Certain corporate
formalities must be followed in an asset transaction, by both the
seller and the buyer. Approval of a majority of the board of directors
of the acquiring corporation is normally required. For the acquired
corporation the transaction is usually first approved by its board
of directors and then submitted to its shareholders for approval.
As previously
noted, one of the major advantages of structuring the transaction,
as an asset purchase is the ability of the purchaser to specifically
exclude certain debts and obligations of the seller. Although the
parties can contract to provide that the purchaser is not liable
for the seller's debts, there are several situations in which liability
cannot be avoided. If the purchaser makes payment for the assets
directly to the shareholders of the selling corporation, creditors
might argue that the corporation was thereby stripped of all of
the assets that would have been available for payment to creditors.
Also in cases
where the consideration for the acquired assets is composed of stock
of the acquiring corporation, and the stock is thereafter distributed
to stockholders on dissolution of the selling corporation, many
courts will permit unpaid creditors to assert their claims directly
against the purchasing corporation. The acquiring entity may be
liable for certain types of claims, such as product liability claims,
notwithstanding the fact that the transaction is structured as an
asset purchase.
As illustrated
above, an asset transaction will not always assure that the purchaser
will not be liable for the debts of the seller. Likewise, care must
be exercised so that the shareholders of the sellers involved in
the transaction do not lose their protection from limited liability.
The sale of assets will frequently be followed by a corporate dissolution
and distribution of the consideration received in accordance with
the Internal Revenue Code.
B.
Sale of Corporate Stock The purchaser can acquire control of another
company through the acquisition of the shares of stock owned by the
seller's shareholders. In this type of acquisition control of the
acquired entity is obtained through stock ownership, rather than a
direct acquisition of the assets. The legal and corporate status of
the acquired entity remains the same following the acquisition.
As a general
rule, a purchaser would rather structure the transaction an asset
purchase, while a seller would prefer a stock acquisition. Nevertheless,
concern over securities law compliance may affect the purchaser's
preference.
A stock purchase
is easy to accomplish since numerous separate conveyances of the assets
are not required, and the seller can completely separate himself from
the business (except to the extent that any warranties or any obligations
on which the seller might remain personally liable survive the closing).
As noted above
circumstances may arise where a stock acquisition is necessary or
preferable to an asset purchase, even for the purchaser. For example,
where beneficial carryover tax attributes are available, a stock transaction
may be desirable for the purchaser. When favorable insurance and employment
ratings can be retained, they may also be a consideration for a stock
transaction to the purchaser.
Although one
of the main nontax considerations for the buyer in desiring an asset
purchase is the risk of being saddled with unknown and contingent
liabilities, the impact of this problem can sometimes be ameliorated
by the establishment of holdback arrangements. Such arrangements typically
involve escrowing of funds, rights to offset payments on seller financed
promissory notes, execution of nonnegotiable promissory notes to evidence
seller financing, and provisions in the sale agreement in delaying
the payment of the full purchase price until certain contingencies
have been satisfied.
In a typical
stock acquisition the purchaser acquires the stock from the corporate
shareholders in exchange for cash, notes, stock, other property, or
a combination of these items. In most cases the buyer will want to
purchase the entire outstanding stock of the seller; however, there
may be situations where it would be advantageous to have a minority
shareholder retain an interest in the corporation being sold. For
example, if a key management figure has an ownership interest in the
corporation, it may be beneficial for the corporation for him to retain
that interest in order to maintain continuity of management and the
value of a key employee. The psychological and economic advantages
of having an important employee continue to own a stake of the business,
even after new ownership of the majority of stock, should be carefully
weighed.
Simplicity is
perhaps the key nontax feature of a stock acquisition. Since nothing
other than corporate stock of the corporation is transferred, the
often-cumbersome preparation and execution of documents of transfer
are not necessary. Although the selling shareholders must agree to
sell their corporate stock, no shareholder votes are necessary, nor
are there any shareholders' dissenters' or appraisal rights. The sale
of corporate stock will normally avoid sales taxes, although Florida
does impose a tax on the transfer of stock.
It must be emphasized
that the mechanical ease of accomplishing the actual corporate stock
transfer should not lull the purchaser into believing that an investigation
into the corporation is not necessary. To the contrary, the investigation
should be at least as, if not more, comprehensive than one undertaken
in the course of an asset transaction. It is perhaps most crucial
in regard to liabilities, since the person or entity acquiring the
stock faces the risk imposed by disclosed, undisclosed, fixed, contingent,
and unknown liabilities. Although the entity or person which acquires
the stock does not assume such liabilities personally, they nonetheless
run with the corporation and will affect the assets of the business.
The degree and extent of the risk associated with the transaction,
and the likelihood of liabilities which have not surfaced, should
have a direct bearing on the negotiated purchase price.
Stock
Options - An option to buy stock gives the holder the exclusive
right for a specified period of time to purchase stock at the price
and under the terms and conditions specified in the agreement.
Although the option
grantor is bound by the option and generally cannot revoke it, the option
holder is not bound unless he exercises the option. Options are regarded
as capital assets if the underlying property constitutes, or if acquired
would constitute, a capital asset in the hands of the holder.
The receipt of
consideration for the option is not taxable until the option either
is exercised or has lapsed. If the option is exercised, the consideration
is treated as part of the selling price and included in computing
the gain or loss in the sale of the stock. Since stock is generally
a capital asset, gain or loss on the sale would be entitled to capital
treatment, either long-term or short-term. The holding period for
qualification for long-term capital treatment is more than one year.
The seller’s holding period for the stock sold includes the period
during which the option is outstanding.
Upon the failure
of the option holder to exercise the option, if the consideration
is forfeited, the option grantor generally realizes short-term capital
gain, but income is not realized until the time of forfeiture.
An option holder’s
gain or loss upon a sale of the option, or loss upon a failure to
exercise the option, would be entitled to capital gain treatment.
The holding period of the option will determine whether long-term
or short-term capital gain or loss is realized. For this purpose,
if the loss is attributable to a failure to exercise the option, the
option is deemed to have been sold on the day it expired.
If the option
is exercised, the consideration for the option is treated as part
of the purchase price and is included in the option holder’s
basis for the stock purchased. The purchaser’s holding period
does not include the period curing which the option is outstanding.
Stock options
can be utilized very effectively by an entrepreneur, for example:
Stock is given
to an employee, but if he leaves the employ, the corporation has the
option to repurchase the employees stock at fixed or variable price.
Stock in the
corporation is sold to raise needed capital, but the corporation has
the right to repurchase the stock in the future.
For whatever
reason a person would like to be a shareholder in the corporation
but not now, an option to purchase stock is purchased from the corporation.
The stock option
can be an on-target management incentive or control device. Stock
options can be used in employment agreements, consultants agreements,
incentive agreements, as means of raising equity capital or borrowing
funds.
Trademarks
- A trademark is a word, name, symbol, phrase, slogan, or combination
of these items which is used to mark and distinguish goods or services
to indicate their source or origin. Trademark rights may be used to
prevent others from using the same or a similar mark. A service mark
is the same as a trademark, except that it identifies and distinguishes
the source of a service rather than a product.
The benefits of
registering a trademark include:
A name or logo
in many cases overtime becomes a company' s most valuable asset.
Registering
a trademark prevents others from adopting your name or design and
gives you very favorable enforcement powers.
Using an unregistered
trademark may provide only limited protection, if any, in a local
geographic region.
A registered
trademark allows you to advertise and promote your mark and build
name recognition and goodwill for your business with out fear of losing
the mark to another.
A registered
trademark will generally be eligible for statutory damages and attorney's
fees if litigation is necessary to prevent another from using your
mark.
Once you have
started the registration process, you may place the trademark symbol
"™" next to the mark. Once the trademark process
is complete and the United States Patent and Trademark office issues
the registration number to you, the "®" symbol may be
used instead.
Voting
Trusts - A voting trust is a device for combining the voting power
of shareholders. It is not unlawful for shareholders to combine their
voting stock for the election of directors so as to obtain or continue
the control or management of a corporation.
Florida Statutes
limit the duration of voting trusts to a period of ten years. In order
to avoid the invalidation of a voting trust, the applicable statutes
should be strictly complied with.
Sub-chapter S corporations
are the most tax advantageous corporations for citizens and permanent
residents of the United States. A regular “C” corporation
is subject to federal and Florida corporate income taxes. Therefore,
profits are taxed first on the corporate level and then again as income
to the shareholder’s to whom the profits are distributed. This
double taxation could result in a combined taxation rate of 70% or higher.
A sub-chapter S corporation is exempt from federal and Florida corporate
income tax, so that the net earnings of the corporation flow directly
to the owners and are only taxed at the shareholder level.
Federal
Tax ID Number
The federal tax
ID number is necessary to open bank accounts and report to the IRS as
well as other governmental agencies. Commonly known as an EIN (employer
identification number), the federal tax ID number is the equivalent
to an individual social security number.
Florida
Unemployment Tax Account Number
This number is
used to withhold Florida Unemployment Taxes from your corporation's
payroll. If you have any employees on the payroll, including yourself,
you will need this account number.
Florida
Sales Tax Number
This account number
allows you to buy goods for resale or export and not pay any State of
Florida sales tax.
501(c)(3)
Compliance and Qualification
If your non-profit
corporation is organized and operated exclusively for charitable, religious,
educational, or scientific purposes you may qualify for tax exempt status
under the Internal Revenue Code Section 501(c)(3). Section 501(c)(3)
status would provide your non profit corporation with the following
benefits: public recognition of tax exempt status, which is particularly
beneficial for obtaining grants; advance assurance to potential donors
of the deductibility of contributions; exemption from certain Federal
excise taxes; and even non profit mailing privileges. To obtain Federal
501(c)(3) qualification you must file the IRS’ Application for
Recognition of Exemption under Section 501(c)(3) of the Internal Revenue
Code, which involves a lengthy approval process, during which you will
have to provide the IRS with copies of your corporate records and information
regarding your corporation’s activities. Your Articles of Incorporation
must include the proper prohibitions and resolutions, to comply with
Internal Revenue Service Regulations.
