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Archives for October 2020

Top Three Things You Should Know About Forming an LLC in Texas

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Top Three Things You Should Know About Forming an LLC in Texas

The act of forming a limited liability company (LLC) in Texas is fairly straight forward.  All you have to do is file a Certificate of Formation with the Texas Secretary of State and pay the filing fee.  The Certificate of Formation form can be found here.  But before you get to that stage, consider and give real thought to these top three things about formation of LLCs in Texas:  the LLC name, management structure, and LLC operating agreement. 

Name of the LLC

Name Availability in Texas

For many businesses the company name is also their business name.  These are actually two separate concepts because it is entirely possible to have one company name and operate under a separate business name (like a DBA or doing business as).  In Texas, an LLC company name cannot be the same as the name of an existing entity formed or registered in the State of Texas. 

There are specific rules that the Texas Secretary of State follows in determining whether your proposed company name is the same as an existing entity name in Texas.  These rules can be found here. 

​If you don’t want to go through the hassle of reading administrative codes, then you can also call the Texas Secretary of State’s office at (512) 463-5555 to check on the availability of your proposed name or email the Corporations Section of the Texas Secretary of State at corpinfo@sos.texas.gov.  It is advisable to have a couple of backup names in case your first choice is unavailable.

Domain Names

If you want your website domain name to match or be similar to your company name, then you should also conduct a domain name availability search as part of the company naming exercise. 

For example, if you want your company name to be Best Ever Widget, LLC and your website domain to be www.besteverwidget.com, then you’ll need to see whether that domain name is available before you form the LLC. 

If matching the company name with the domain name is not that important to you, then this step isn’t essential.  As I mentioned earlier, it is possible to have a company name that is different from the business or brand name.  For example, Best Ever Widget, LLC can operate under the business name of Hi-Tech Widgets.  Which brings us to trademarks and branding.

Trademarks and Branding

Another consideration in choosing a company name is whether it will also serve as the business or brand name.  If you intend to use the company name as the business name or tradename as well, then you will need to do a broader name availability search.  This is especially important if your business has a broader reach.  If the business that the LLC will operate is local in nature, such as owning and operating a specific piece of real estate, a retail or manufacturing business serving the local market, or if you generally don’t intend to establish or register a brand name or tradename for the business, then this type of search may not be important.  

However, for those who may or intend to establish a unique business name, brand name or tradename that is similar or the same as the company name, then you should also do a trademark or tradename search by visiting the U.S. Patent and Trademark Office website and performing a trademark search, or just seek the professional advice of an attorney. If your company name is going to be Best Ever Widget, LLC and you want the domain name www.besteverwidget.com, then it’s best to make sure that www.besteverwidget.com is actually available.     

Member-Managed vs. Manager-Managed

During the formation process of filling out the Certificate of Formation, you must decide whether you want the LLC to be member-managed or manager-managed.  The biggest difference between the two is who makes decision for the LLC and has authority to bind and act on behalf of the LLC.

Member-Managed
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In a member-managed structure, then generally speaking each of the members (the owners of the LLC) by default has the authority to participate in the management and operation of the LLC, which includes being on bank accounts, signing contracts, etc.  Thus, this structure is suited for LLCs whose members want to or has to participate in the management and operation of the LLC. 

Manager-Managed

If there will be members who are more like investors, then generally speaking a manager-managed LLC is more appropriate.  Under this structure, the managers have duties and functions very similar to a board of directors of a corporation. 

Among other things, they make strategic decisions, set overall goals for the LLC, and manage and oversee the officers of the LLC.  The officers in turn are responsible for the day-to-day operation of the LLC.  Managers and officers can be hired, so they don’t have to be members of the LLC to serve these functions. 

​With a manager-managed LLC, members have very few decision-making authority, but the authority that members do have are generally of major (not day-to-day) importance, like incurring major debt, selling the business, dissolving the company, etc. 

 LLC Operating Agreement

Rule Book

An LLC operating agreement (also referred to as an LLC company agreement) sets out the rules, procedures, and processes for governing the LLC, the decision making on behalf of the LLC, and how the members (and managers, if there are any) interact with each other.  These rules, procedures and processes are important because if a disagreement arises on how to operate, manage, and make decisions on behalf of the LLC, then the members (and managers, if there are any) can turn to the LLC operating agreement for binding guidance.  These rules, procedures and processes essentially reflect the rights, duties, obligations, and responsibilities of the parties involved.  

The LLC operating agreement can include provisions on how managers are appointed and replaced, what authority do members have to make decisions, whether decisions have to be made by majority vote, unanimous vote or some sort of super majority vote, when and how members have to contribute funds to the company, and when and how the members can sell their ownership interests in the LLC.  The parties can be as creative and flexible as they want on setting these rules, procedures, and processes as long as they don’t violate the law or statute.

 Liability Protection

One of the main reasons people form LLCs to own and operate business ventures is for personal liability protection.  The LLC can own and operate the business under its own name, so if there is a liability claim against the LLC, then the members and their personal assets are not liable or at stake.  However, if members don’t have a guiding set of rules, procedures and processes for operating, managing and administering the LLC and its business, then it can be (and has been) argued that the business of the LLC is not being operated by a separate entity, but in fact by the members individually.  This is an argument for “piercing of the corporate veil” of the LLC, which tries to hold the members personally liable for the debt, liabilities and obligations of the business of the LLC.  

Having an LLC operating agreement and following the rules, procedures and processes for its operation, management, and administration is strong evidence that the members are taking the separate existence of the LLC seriously.  The LLC operating agreement can be used to defend against “piercing the corporate veil” attacks.      

Third Party Requirements

Sometimes, the LLC operating agreement is required to transact business.  Banks may require the LLC operating agreement for funding.  Governmental organizations may need an LLC operating agreement as part of licensing, permitting or certification requirements.  If the LLC seeks funding from investors, then investors may want to review (and possibly negotiate) the terms of the LLC operating agreement so they can understand or establish their rights, duties and responsibilities before making an investment.An Ounce of Preparation and Prevention Are WorthwhileIt is exciting to start a new company and get incorporated. As I know from personal experience and from my work with many Houston based new businesses, it is can be extremely rewarding. At the same time, failing to set up your company properly when starting can create huge headaches and even financial liabilities for you later on.

If you have any questions about the above or anything legal related to your new or existing business, know that I would be happy to see if I can help. Feel free to click below to schedule a complimentary initial call with me today.

CLICK TO SCHEDULE WITH TRI TODAY

About the Author:
Tri Nguyen has served as general counsel and company lawyer to businesses, executives, startups and entrepreneurs for over 18 years.  He particularly enjoys helping companies grow and achieve their strategic plan, and believes that every business needs a Chief Legal Advisor. He can be reached here or at +1-844-924-9529.

What You Need to Know About A Legally Compliant Internship Program

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What You Need to Know About A Legally Compliant Internship Program

Internship programs are extremely valuable to employers – they are an excellent framework for sourcing potential new hires and grooming innovative talent. However, as beneficial as they can be, it’s important that if you use unpaid or paid interns that you create an internship program that is legally compliant in order to avoid costly penalties and litigation down the road.

The Department of Labor moved from their “six-factor test” to a “primary beneficiary test” for employers to follow in 2018. The “primary beneficiary test” allows for more flexibility within company programs and increased opportunities for unpaid interns to gain valuable hands-on experience.

In order to comply with the DOL’s “primary beneficiary test,” unpaid internships must follow the seven guidelines as listed below:

  1. Both the intern and the employer must explicitly understand that there is no compensation for the internship.
  2. The program must provide hands-on training similar to an educational environment.
  3. The internship must be connected to the intern’s formal education either with coursework provided by the employer or program, or the intern’s receipt of academic credit.
  4. The internship must accommodate the intern’s academic schedule and commitments, which can be outlined in an academic calendar.
  5. The scope of the internship must be limited in time and duration, and during that period the intern must be provided with educational benefits and/or hands-on experience.
  6. The intern’s work should complement the work of paid employees, as a means of providing valuable educational benefits.
  7. The intern and the employer both understand that the internship does not come with a promise of a paid job at the end of the program.

As an employer, it’s important that if you run an internship program (especially unpaid) that it benefits the intern. The goal of any internship program is to create an environment where the intern can practice their skill. An employer should never implement such a program as a means for unpaid labor.

Of course, it’s important to always check with your state laws before creating an internship program for your business. Many states differ in their own wage and hour laws. As a precaution, the employer should create a one to two-page acknowledgement that describes the type of work that will be done during the internship and outlines the educational components of the program. The expectations of pay or no pay should also be put into the acknowledgement to ensure the intern’s expectations are managed.
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If the employer is still unsure whether their internship program complies with the DOL and state laws, it’s best to offer interns applicable minimum wage to avoid pricey penalties or litigation in the future.

In cases where employers have failed to follow the requirements necessary for an unpaid internship program, these companies ended up paying much more in attorney fees and lost time in comparison to the costs of paying the intern a minimum wage for the duration of the program.

DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney. 

Texas Independent Contractors vs. Employees – the Legal Difference

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Texas Independent Contractors vs. Employees – the Legal Difference

According to Texas and Federal law, independent contractors operate on a different legal basis in comparison to traditional full-time or part-time employees. An independent contractor is often thought of as a worker who is self-employed, and a person who enters with a company for compensation under the assumption that they are “free from control” in regards to the company who is paying for their services.

An employee is a person who is hired by a company to do a job and is expected to follow instructions from the business as to when, where and how they are to perform their duties. Misclassifying a worker as an independent contractor when he or she is an employee can result in serious problems for the company. Misclassification can cost the business in taxes and interest, and can result in a fine of $200 per worker if the employer is operating under a government contract. A written or oral agreement between the parties does not change the status of the worker.

Breaking Down Independent Contractor Engagement Law in Texas:
Typically, independent contractors work with various parties freely, using their own name or business name, their own equipment and in their own setting. The engagement between the independent contractor and a business is usually outlined in terms of an agreement between the two parties, and their duties may be limited in time and scope. While some independent contractors will use the company’s equipment or follow a specific schedule, still they’re classified as an independent contractor.

In Texas, the main difference between an independent contractor and an employee is based on the level of control that may be exercised by the employer. To summarize, an employer will have much less control over an independent contractor’s daily schedule or activities in comparison to an employee.

In addition to the level of control the company has over the independent contractor, a second differentiating aspect is the ability of the independent contractor to negotiate their own terms and work as an independent party.

For example, when an employer presents an offer to a potential employee that person can either accept or decline the terms — there’s usually little room to negotiate. As for an independent contractor, those terms are usually negotiated beforehand and then outlined in the agreement between the two parties.

Common Engagement Aspects of Independent Contractors:

  • Does not receive or follow daily instructions.
  • Uses their own methods and/or equipment.
  • Has investment in an independent business.
  • Is hired for a specific job.
  • Determines their own hours of work.
  • Is paid per job.
  • Works for multiple clients/companies.
  • Can choose their own location.
  • Can advertise their own business.
  • Cannot be terminated at will, if outlined in their agreement.
  • Is liable for a breach of contract or non-completion of work.

How Employers Can Misclassify Independent Contractors:
There are various reasons an employer may try to classify their employees as independent contractors – the biggest incentives are for monetary and/or tax reasons. This is because when employees are hired, an employer will have added expenses and accounting obligations, such as payroll taxes, overtime wages, unemployment benefits, workers compensation, hourly rates and/or salary rates.

Therefore, when an employee is misclassified as an independent contractor there are financial and liability issues that arise.
If an employee is misclassified as an independent contractor then that employee may be losing out on earned benefits, bonuses, overtime pay, unemployment access and workers compensation. An employee may have a claim against the business for such lost benefits.

IRS Guidance on Independent Contractor vs. Employee:
​Aside from potential penalties under Texas law, a misclassification may result in penalties and fines from the IRS. The IRS has its own classification criterion that are similar, but not exactly the same, as those of Texas. You can find the IRS guidance here.

As a business owner or manager, if you are unsure of the classification, then the conservative route is to classify the worker as an employee. If you need further assistance or clarification on the proper classification of a worker, then please contact us.

DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney.

Doing Business Out of State & Foreign Qualification

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Doing Business Out of State & Foreign Qualification

There are many reasons a company will expand its business to a different state. Whether it’s for tax or government concerns or your business is selling products or services outside of the state it was formed, you should familiarize yourself with the process of registering your company in a different state – known as foreign qualification.

What is foreign qualification?
Foreign qualification is the process of registering your company to do business in a state different from the place your corporation or LLC was formed. Typically, where you formed your business is the place where you do most of your business transactions. However, if you do business outside of that state, your business should consider a foreign qualification in those other regions.

What is considered a foreign transacting business?
If you are considering filing your business for foreign qualification, you should ask yourself the following questions:

  • Do you have a physical location (office, retail space, etc.) in that state?
  • Did you apply for a business license in that state?
  • Do you conduct in-person meetings in that state on a regular basis?
  • Does a large portion of your business’s income derive from revenue in that state?
  • Do you have employees working in that state?
  • Do you accept orders in the state?

If you’ve answered “yes” to these questions, then you may need to register your company for foreign qualification.

Understanding foreign qualification is especially important for tax concerns. When you register for a “Certificate of Authority” in the state where your LLC or corporation will be doing business, you pay the required state fees and perhaps even income taxes on revenue derived from that state.

When it comes to expanding your business or forming your business in a state different from where you are completing transactions for your business, it’s important to remember that your company may be required to submit ongoing fees and taxes in the states where you formed your company and the state(s) of foreign qualification.

When you don’t need foreign qualification:
Not every company who does business out of the state its LLC or corporation is registered in will need foreign qualification. An example of this would be if you are a consultant or an online business that primarily handles your work on the internet for clients in multiple states.

Even though you may be making revenue from clients in other states, this does not mean you are transacting business there and therefore may not need to register for foreign qualification in those states.
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Nevertheless, it’s important to consult an attorney and/or accountant when it comes to filing for foreign qualification.

Penalties for failing to register for foreign qualification:
It’s important to understand the consequences and penalties for neglecting to follow state law. Disregarding foreign qualification could take away the right for you to bring lawsuits in that state court – meaning you may not be able to enforce a contract or recover damages – or, your company could be fined for penalties and/or back taxes for the length of time your company has done or was doing business transactions within that state.

Before you file, it’s important to make sure your business is up-to-date on all of its taxes and fees, because many states will require proof that your company is in good standing in the state where your LLC or corporation was formed.

If you need further assistance or clarification on foreign qualification, then please contact us.

DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney.

Houston Small Businesses Excused from Performing Under a Contract – the Force Majeure Clause

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Houston Small Businesses Excused from Performing Under a Contract – the Force Majeure Clause

If there was ever a time when Houston small business owners worried about contractual performance – whether by them or a counter party – that time is now more than ever.  When the world shuts down due to a global pandemic, a small business owner’s world may literally be falling apart.  Small businesses may have passed from one generation to the next, or may have been built over a lifetime of grit, sweat and tears.  Now, everything about the small business is at stake.  Layered on top of concerns over employee and personal safety, drop in revenue, rent, and other operating costs are the small business’ contractual obligations, and what happens if a small business defaults

A doctrine called force majeure may be the solution –

​not as a way to terminate the agreement, but as a  way to allow a party to be excused from performance for a certain period of time (and usually without penalty or being in default).  Black’s Law Dictionary defines a force majeure as “[a]n event or effect that can be neither anticipated nor controlled”, and usually involves natural disasters or acts of God, like storms, earthquakes, tsunamis, etc.  Or events or circumstances can be man-made events, like riots, wars, terrorist attacks, governmental orders, strikes, etc.

Even though this doctrine exists, its specific application to a small business depends on the wording in the contract and the state and/or federal law that applies to the contract.  If a force majeure clause exists in the contract, then make sure to review it carefully and comply with it strictly.  It is best to review the entire contract, and not just the force majeure clause itself, because many times, other contractual provisions modify or elaborate on the the force majeure clause.  

If a force majeure clause is not specifically identified in the contract, then the concept may still be included in other parts of the contract; and look to the contract’s applicable law to decide whether impossibility or impracticability can be the basis to excuse performance of a contract.

  1. Does the force majeure clause cover the event?  Some force majeure clauses specifically reference pandemics, epidemics, and governmental orders as specific events that qualify as force majeure events, thereby allowing a party to invoke the force majeure clause to excuse its performance under the contract; and others have catch-all language like “other acts of God” or “events beyond the reasonable control of a party”.  If the clause specifically identifies pandemic, epidemic or governmental orders, then the argument is fairly straight forward (as it relates to COVID-19) to allow the affected party to be excused from performance.  If the clause does not list these specific events, then look to the contract’s governing law (which is usually a separate clause that identifies which state’s or federal law applies) for the interpretation and enforcement of the contract.  Cases, statutes or regulation in that jurisdiction may be helpful in determining whether COVID-19 (or any other event really) has been determined to qualify as a force majeure event.
  2. Is there a notice requirement to invoke the force majeure clause?  As stated above, strict compliance with the force majeure clause is important.  Many force majeure clauses have a notice requirement, and the party invoking force majeure must comply with it in order for the clause to be invoked.  There is usually a time component in the notice.  For example, the clause may require prompt written notice by the invoking party or notice within a certain number of days of having knowledge of the force majeure event.  Failure to meet the timing component can prevent a party from invoking the force majeure clause, so small businesses should be proactive and review its contracts to understand these requirements. 
  3. Is there a time limit on how long a party can be excused from performance?  Many force majeure clauses contain a time limit on how long a party’s performance may be excused.  For example, a party is excused from performance for only a certain number of days.  If there is such a time limit, then the invoking party will have to figure out what happens when the time period expires?  Can it get an extension? 
  4. Is the obligation to make payments under the contract expressly excluded as an excuse even if there is a force majeure event?  Some contracts contain a statement that the obligation to pay is not excused due to a force majeure event.  Thus, even if there is a force majeure event, a party cannot rely on it to avoid making payments under the contract. 
  5. Even if force majeure applies, is the invoking party required to comply with other obligations?  If force majeure applies, is the invoking party required to mitigate the impact of the force majeure event on its ability to perform?  If so, then to take advantage of continued excuse from performance or to avoid default liability, the invoking party must comply with this requirement. 
  6. Can the parties negotiate and agree to a course of action regardless of what the contract states?   Regardless of what the contract states, the parties can always mutually agree on a course of action.  After a good understanding of its rights and obligations under the contract, a small business can always negotiate with the counter party on a course of action that best suits them.    

Small businesses need to be proactive, understand its contracts, and plan accordingly to navigate these uncertain times.  The discussion above is intended to help analyze a small business’ options, but other actions and considerations may still be needed.  Seek good advice, as other issues include what sort of remedies a counter party has under the contract, what happens if a lawsuit is filed, etc., to help plan accordingly.   

About the Author:
Tri Nguyen has served as general counsel and company lawyer to businesses, executives, startups and entrepreneurs for over 18 years.  He particularly enjoys helping companies grow and achieve their strategic plan, and believes that every business needs a Chief Legal Advisor. He can be reached here or at +1-844-924-9529.