The IRS will treat any “loan” with a below market interest rate (below the AFR) as a gift of the foregone interest from the lender to the borrower.  The amount of the foregone interest will be treated as though it was transferred from the lender to the borrower as a gift and retransferred from the borrower to lender as income on the last day of the calendar year.

How may this apply to the purchase of your Humboldt County business by your beneficiaries?

In making it easier for beneficiaries to purchase a business or other asset, owners often have unknowingly charged a below market interest rate to the beneficiary.  If the purchase comes to the attention of the IRS, the owner will be required to recognize the foregone interest as income and will be assessed interest and penalties on that amount.

However, the AFR is at a historically low level so the purchase of your business by your beneficiaries can be at interest rates that are more affordable to the beneficiary.   Coupling this low interest rate with the depressed values of many assets in today’s market, it is easier for a business owner to transfer a business or other asset to his/her beneficiaries at a cost and on terms more affordable to the beneficiary while still maintaining some stream of income to the owner.

While traditionally the interests of California’s corporate shareholders trumped all other corporate interests, benefit corporations can adopt environmental, social, or other public benefit policies as part of their legal charter.  This provides legal protection from claims that a corporation’s pursuit of social goals were decreasing stock values, and allows corporations to create and adhere to public benefit policies without converting to a nonprofit.

In addition to including environmental or social goals in their charter, benefit corporations must publish an annual benefit report on its social and environmental performance when compared to third party standards.  Fiduciary duties of corporate directors are also expanded to encompass environmental and social considerations.

Several advantages of benefit corporation form cited by supporters of AB 361, include broader fiduciary roles of officers and directors allowing them to pay greater attention to social and environmental considerations, greater access to certain investing due to increased accountability and established public benefit goals, and marketing opportunities arising from benefit corporations’ ability to distinguish themselves as truly committed to certain causes.

AB 361 represents a growing trend among states to aid corporations to commit and adhere to social or public benefit goals, as well as profit-based goals, and was modeled after similar successful legislation in Hawaii, Maryland, New Jersey, New York, Vermont, and Virginia.  AB 361 was signed by Governor Brown in October of last year, after receiving bipartisan support in the California Legislature.

If you or your business has questions about benefit corporations or other business entity forms, the experienced attorneys at Janssen Malloy LLP are available to assist.

You should plan for the succession to your business over a long period.   Primary concerns include determining your children’s interest in the business and their ability to run a business.

You may want to transfer an interest in the business during your lifetime.  This strategy may be particularly useful if you believe your business is substantially undervalued at the time of your transfer.

If retaining control of the business is an issue, you may want to consider a buy-sell agreement to address who will be allowed to receive shares in the business.

If you would like any assistance in developing a succession plan for your business, please contact us.

U.S. Copyright law protects “original works of authorship” in various forms, including literary dramatic, musical, artistic, and other media, by giving the copyright owner a number of exclusive rights. With respect to photographs, drawings, or other images that might be used in an organization’s newsletter, the copyright owner has the exclusive right to copy, reprint, display, or prepare derivative works based on the image.   These rights vest once the work is created, and are not dependent on publication of the work, registration with the U.S. Copyright Office, or display of the “©” copyright symbol.   Violation of any of the copyright holder’s rights without permission constitutes infringement.  While copyright law does not prohibit all use of images created by another, it does mandate using caution in doing so.

One major limitation to the rights provided to copyright owners is the doctrine of fair use as defined by section 107 of the 1976 Copyright Act. 17 USC § 107.   Fair use allows for certain limited use of a copyrighted work for specific purposes, including scholarship, research, criticism, comment, news reporting, and teaching.  There is no bright line distinction between infringement and fair use, and whether a given use falls within this exception depends on a number of factors and factual considerations applied by the courts.   While one of these factors considers whether the use was for nonprofit purposes, nonprofit status alone is not enough to avoid infringement.  Carefully evaluating these factors for each situation is essential.   Assuming that a given use constitutes fair use without making such an evaluation often results in infringement.

Copyright protection is not interminable, meaning many images are in the public domain and may be used freely because their copyright protection has expired.   Determining whether a copyright has expired can be complicated, and depends on several things, including what laws applied when it was created.   The chart available here demonstrates the complexity of this seemingly simple inquiry for works created within the last one hundred or so years.

This inquiry is complicated by the fact that more often than not, the information required to determine the legality of an image’s use is not available.   This is especially common when the image is pulled from another website or plucked from a page of image search results.   In such instances, the original author, source, date of creation, licensing agreements, and other basic pieces of information necessary to determine whether material is protected by copyright law are often unavailable.  This makes it nearly impossible to know whether using the image is permissible, or even to determine the proper party to ask for permission.

A common copyright misperception is that attributing a photograph or other copyrighted work to its author or copyright owner is sufficient precaution to avoid infringement.  This is not true. Simply listing the photographer or artist’s name next to a copy of her work is not a substitute for obtaining permission from the copyright holder.

Using a copyrighted image without proper authority can carry stiff civil penalties of up to $30,000 per incident, or $150,000 per incident in cases of willful infringement. 17 USC § 504. Without the explicit permission from the known copyright holder, it is safest not to use a potentially copyrighted image.  While obtaining the proper permission or licenses, creating new images, or finding suitable works in the public domain may be time consuming and cost intensive at the outset, it is often required to avoid copyright infringement and its potentially costly consequences.

Before selecting a business or product name, it is important to consider whether the proposed name might infringe on the trademark rights of another person or entity.  One of the primary goals of trademark law is to protect consumers by ensuring trademarks are helpful in identifying the source of goods or services. Thus, trademark law seeks to prevent the use of confusingly similar marks in commerce that might cause consumer confusion as to the origin or producer of a good or service.  Trademark law protects marks used in commerce and provides especially broad legal protection for well known, famous marks, preventing confusingly similar marks from being used on products even if the products differ greatly from those of the famous mark holder. As a result, business people must consider existing trademarks, registered and nonregistered, to minimize the likelihood of confusion with existing marks.

Business people might also consider whether federally registering their proposed business or product name with the United States Patent and Trademark Office is prudent.  Registration is not required to obtain trademark rights, namely the exclusive right to use a mark in commerce. Registration does, however, establish priority and provide notice to other businesses and individuals of the mark’s use in commerce.  Registration can also establish a rebuttable presumption that the mark is incontestable, and allows the use of the ® symbol denoting federal registration.

While federal trademark registration is not required, California law requires any person doing business for profit under a name other than their own to file a fictitious business name statement in the county where the business’s principal place of business is located.  This statement must be submitted with a filing fee, published in a local paper, and renewed prior to the date of expiration 5 years after its initial filing. This requirement not only puts the public on notice of who is serving as an officer or owner is operating the business, but may also provides protection for the business itself. A properly filed fictitious business name statement can provide the filer with the exclusive right to use that and other confusingly similar business names within the county of filing, assuming among other things, that the name does not infringe existing marks and that the business was the first to properly file such a statement.

Analyzing a proposed business or product name before using it in commerce and filing a fictitious business name statement when required are important steps in opening a new business or launching a new product.  Taking the time to do so can help protect good will associated with a business or product and can avoid cease and desist letters or costly infringement suits down the road.  If you have questions when preparing to open your own new business or launch a new product, please contact Janssen Malloy LLP to meet with a Humboldt County lawyer experienced in assisting new and developing businesses.

For those of you in Humboldt, Mendocino and Del Norte Counties who own family businesses, take heart.  A new study finds that by dealing with these family issues, a family business may have a significant competitive advantage over a non-family business.

In an article in Trusts & Estates (April 2011), under Family Businesses, entitled “Is Blood Thicker Than Water?”, the author reports that a family business’ special competitive weapon is its family culture.  The family culture can open communication, streamline decision making and create an environment with strong standards and values.

In this article, the author, David Thayne Leibell, a partner in the Stamford, Connecticut and New York offices of Wiggin & Dana, LLP, writes that stewards in family businesses are often motivated to serve organizational interests and as a result receive intrinsic satisfaction when the businesses  advance and succeed. Mr. Leibell cites a recent study published in the November 2010 issue of Entrepreneurship: Theory and Practice (Volume 34, Issue 6, pages 1,093-1116), “Is Blood Thicker Than Water?, A Study Of Stewardship Perception in Family Businesses”, by James H. Davis, Mather R. Allen and H. Davis Hayes.  In applying the concept of “stewardship” which emphasis that leaders should serve a greater good, rather than themselves, the study finds that in the case of family businesses, the greater good is the collective good of the family and the business. (Trust and Estates, April 2011, Family Businesses “Is Blood Thicker Than Water?”, page 12-14.)

So for those of you in family businesses, be it in Eureka, Arcata, Fortuna or other cities of Northern California, while you are considering which family member or members will ultimately own and manage the business, or how to provide for family members who may not be active in the business, take a moment, and recognize that being in a family business may give you an advantage: family owners and family employees are usually more willing than non-family owners and employees to work harder for the business because it is good for the family.

This legislation gave tax payers a 2-year income tax reprieve by extending into 2011 and 2012 the lower income tax rates and many of the other tax incentives that were enacted in 2001 and 2003. These were commonly called the Bush Tax Cuts.

In 2013:

• The highest federal tax rate on investment income (interest, rent) will increase from 35% to 43.4%
• The highest federal tax rate for wages will increase from 36.4% to 41.9%.
• The highest federal tax rate on dividends will increase from 15% to 43.4%.
• The highest federal tax rate on long term capital gains will increase from 15% to 23.8% in 2013.

In 2013, a new health care tax of .09% will apply to individuals who have over $200,000 of income ($250,000 on a joint return).

For federal income taxes, the lowest marginal tax rate will be increased from 10% to 15%.

For 2011, most workers will experience a 2% pay increase because of a temporary reduction of social security and self-employment taxes. The 6.2% rate that an employee pays on the first $106,800 of earned income will be cut to 4.2%, although employers must continue to pay the full matching 6.2% payroll tax. Self-employed individuals will also experience a tax cut from 12.4% to 10.4%. In 2012, the rate will return to 6.2%.

1.         What is the price and how was the price determined?  Is the price based on the seller’s opinion?  Is the price based on the opinion of a business valuation expert or accountant, and, if not,  should one be hired or consulted regarding the sales price?

In determining the sales price, you should also consider whether the price will be paid in cash and/or property, and,  if the payment is to be made over time, what assurances, if any, can be given to the seller that the payments will be made.

2.         Is the buyer going to assume all the seller’s liabilities including contingent or unknown liabilities, or will these liabilities remain as the seller’s responsibilities?

3.         Is the seller going to indemnify the buyer for any misrepresentations made in the transaction?  If the seller is going to indemnify the buyer, will there be a time limit to be applied for any claims and/or will the indemnity be limited to a certain dollar amount?

Other matters to consider include:

A.         Is the retention of the seller’s employees material to the agreement?

B.         Is there a need for noncompetition agreements with the seller(s)?

C.         Are there any pending or threatened litigation, claims or tax audits?

D.         Are there any relevant environmental issues or licensing issues?

So if you are thinking of buying a business anywhere in Humboldt County – be it in the Eureka, Arcata or Fortuna areas – these are a summary of significant issues that need to be considered before you enter into the transaction.  The Janssen Law Firm has an experienced business department that can assist you with questions you may have.

If so, do you have a Buy-Sell Agreement that provides for the transfer of your ownership interest if you die, retire, become disabled, or want to sell your interest in the business?

The purpose of a Buy-Sell Agreement is to provide for an orderly transition of ownership interest on the occurrence of any number of events.  In addition to those events mentioned above, a Buy-Sell Agreement can also be important when an owner files for bankruptcy, loses a required license or is voluntarily or involuntarily terminated from his or her employment in the business.

Typically, a Buy-Sell Agreement controls the circumstances under which an owner may sell his or her interest, who is a permitted buyer, and how the price paid will be determined.  A well drafted agreement will anticipate potential conflicts that may create an issue in the operation of the business when an owner desires or is forced to sell his or her interest in the business.

The Buy-Sell Agreement benefits the business and its owners by allowing the remaining owners to determine with whom they will work and share control of the business; preventing outsiders or heirs, whose interests may conflict with those of the remaining owners of the business, from obtaining an ownership interest; insuring the continuation of management and control by the remaining owners;  and providing for the orderly transfer of the owners’ interests in the event of death, disability, retirement or other forced or voluntary withdrawal.

A Buy-Sell Agreement can also create a market for the shares of the deceased, retiring, or withdrawing owner, and it can generate cash to pay for estate taxes and estate settlement costs.

The attorneys of the Janssen Law Firm are experienced in assisting clients in the preparation of these types of agreements, as well as providing advice with most issues that present themselves to small business owners.   If you need legal assistance in preparing a Buy-Sell Agreement, or in any other aspect of your business, please contact us

The Senate recently passed an amendment which would regulate credit/debit cards if it stays in the final version of the financial bill.   It would impose limits on charges to merchants and it would also change how merchants can charge consumers for paying with cards.
Merchants would legally be allowed to require minimum purchase amounts for using a credit card.   While some retailers already require this, they are acting in violation of their agreements with the credit card companies.  However, the new law would specifically allow businesses to impose such requirements.  New York Times Article
Businesses can only accept a credit/debit card pursuant to a contract it signs with the credit card companies.  They pay fees for using the electronic network and fees that are delivered to the card’s issuing bank (Chase, Bank of America, Citibank, etc.).  Generally between one and three percent (1-3%) of the purchase price goes to pay these fees.  What happens to this percentage?  Assuming that 2.25% of each transaction is taken and a customer charges $100 to a Visa card at a store, the store’s bank receives about $2.25 of the $100.  The store’s bank forwards about $1.80 — the interchange fee— to the customer’s bank.  Both banks then pay 10 cents each to Visa.  The store’s bank pays another nickel to a third-party processor and keeps the remaining 30 cents.  These funds kept by banks help finance the award programs customers have enjoyed in recent years.
Besides prohibiting minimum purchase requirements, California law also does not allow surcharges (or “convenience fees”) for using a credit/debit card.  Civil Code § 1748.1(a)-(c).  Violating businesses must return the money to the cardholder’s account within 30 days if they receive a letter demanding the refund from the consumer.    If they do not, the customer may sue and the retailer will have to pay three times the money wrongfully charged and will also be liable for attorneys’ fees in the action.
In addition to violating state law, the credit card acceptance contracts (at least for Visa and Mastercard which together control about 80% of the market) also do not allow merchants to charge extra for use of a credit card.  Under those contracts, a small business not following the contract terms could be penalized by the credit card companies themselves for breach of the agreements.
The good news for retailers trying to recoup costs is that existing law does allow retail businesses to offer cash discounts for consumers that choose not to pay with a card.  Civil Code § 1748.1(a); 15 U.S.C.A. § 1666f.  However, the cash price must be presented as a discount to the true price.   More information can be found here.

It is always wise to consult with an attorney if a business has questions regarding its interpretation of a contract.