If you want to form a new business or already have a business, you may be wondering what entity is right for you. Limited Liability Partnership (LLP), Limited Partnership (LP), General Partnership (GP), Limited Liability Company (LLC), S. Corp. and C. Corp. are common business entities in Pennsylvania and are generally used in different circumstances. Which entity is right for you depends on a number of factors such as taxation, liability for owners, control over business decisions and transferability of ownership. This article will briefly describe various business entities and when each entity may be right for a particular business, as well as how to form the entity and certain costs associated with forming and carrying on the business.

General Partnership (GP). Unless another entity is formed, whenever two or more people carry on a business for profit in Pennsylvania they are a general partnership. No document needs to be filed or signed for this type of entity to exist and, if there is no Partnership Agreement, Pennsylvania’s Partnership Act determines the rights of the partners. For example, if no writing is in place, then profits are shared equally between partners and losses are shared in the same manner as profits. This means if one partner has contributed significant money toward the partnership and the other has not, each partner will share equally in the profits, regardless of how unfair this might appear. The good news is that there is a lot of flexibility in creating Partnership Agreements to carry out the intention of the parties.

Continue Reading What Business Entity is Right for Me?

Do-it-yourself projects, like remodeling your bathroom or building a deck, can save money and provide a sense of accomplishment by doing something on your own that you would ordinarily hire another person to do. With any do-it-yourself project there are risks involved, such as increased cost if you have to hire a professional in the end or if your inexperience causes other damage. 

The internet has allowed individuals to perform some legal functions on their own. Many government websites, for example, offer forms with detailed instructions that can be very helpful for people seeking to help themselves with certain issues. There are also websites that offer forms and additional services for a fee. These websites are required to stop short of offering legal advice because they are not law firms, which is made very clear on LegalZoom’s website: "LegalZoom is not a law firm, and the employees of LegalZoom are not acting as your attorney….if you need legal advice for your specific problem, or if your specific problem is too complex to be addressed by our tools, you should consult a licensed attorney in your area." Because these sites are not law firms, they are also not subject to the rules that govern lawyers. This is why they are able to do things lawyers can’t do, such as use celebrity endorsements. 

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I recently read an article on MSNBC.com, Feds settle case of woman fired over Facebook comments, which discussed a settlement in Connecticut which will have a significant long-lasting impact on employers’ policies regarding their employees’ conduct on the internet. The National Labor Relations Board ("NLRB") reached a private settlement with American Medical Response of Connecticut, Inc. for the termination of an emergency medical technician who posted what the article called an expletive-filled posting which referred to the employee’s supervisor as the company’s code for a psychiatric patient. The ambulance company had an employment policy which prohibited employees from disparaging the company over the internet or depicting the company in anyway.

Continue Reading National Labor Relations Board Says Employee Facebook Posts About Employer Protected

A few months ago I wrote about a case I argued in the United States Court of Appeals for the Third Circuit. The case concerned whether an IRS regulation requiring taxpayers requesting equitable innocent spouse relief to request the relief within two years was valid. The effect of the regulation is that any request made after two years would be rejected, regardless of how inequitable it would be to deny the request, which I argued was contrary to Congress’ intent when the law was passed in 1998.

On January 17, 2011, the Third Circuit released its Opinion which leaves the issue ultimately still undecided. In the appeal, I argued that the IRS’s regulation was invalid because Congress intended the section to not have a statute of limitations, but if the regulation was valid, it was subject to "equitable tolling," which means that the statute of limitations would not bar a taxpayer from requesting relief if the taxpayer was prevented from discovering the liability or requesting relief within two years. The court held that the regulation was valid, with Judge Ambro dissenting, and the court sent the case back to the Tax Court to determine if equitable tolling applied to the regulation, and if so, whether the taxpayer was entitled to tolling in the case. I believe the court saw equitable tolling as the preferable result for two reasons. First, it has a similar effect to finding the regulation invalid. It allows taxpayers that file for relief beyond two years to still receive innocent spouse relief if they can show a good reason for doing so. Second, it allowed the Third Circuit to reach this result without disagreeing with the Seventh Circuit, which found the regulation to be valid about six months before our appeal.

Continue Reading Third Circuit Sends Innocent Spouse Relief Case Back to Tax Court: Mannella v. IRS

On October 27, 2010, Governor Ed Rendell signed into law Act 101 of 2010, which makes several amendments to Pennsylvania’s Adoption Act. The most significant change is that Pennsylvania will now enforce open adoptions, or voluntary agreements for continuing contact or communication, for the first time in Pennsylvania. 

Currently, adoptive and biological parents can make their own agreements about continuing contact or communication after the adoption, but unlike 23 other states with open adoptions, the contracts were not legally enforceable. The change to the current law now allows these agreements to be enforceable. If an agreement between the adoptive parents and birth relatives to allow continuing contact or communication between the parents or between the child and parents is breached, then the birth relatives can petition the court to enforce the agreement. The Act also requires parties to an adoption, including a child who is old enough to understand, to be notified about the right to have an open adoption.

Continue Reading Open Adoptions are now Legally Enforceable in Pennsylvania

In 1993 Pennsylvania signed into law the Plain Language Consumer Contract Act (PLA). The PLA requires any "consumer contract" to meet a test of readability, meaning it is easy to read and understand, which takes into account both the contract’s language, form and design. The Act covers any contract with an individual except contracts over $50,000, securities, insurance, real estate, commercial leases, and documents by financial institutions regulated by certain other state and federal laws. Notably included in the definition are residential leases. In addition to the requirement that language be easy to read and understand, the Act imposes certain other language requirements to be included in consumer contract. For example, a contract must state if the party doing business with the consumer retains a security interest, and that the consumer may lose certain property if he or she does not fulfill the obligations under the contract.

If a seller or lessor violates the PLA’s test of readability, the violation triggers several damages imposed by the Act. Damages include compensation equal to actual loss suffered by the consumer, statutory damages of $100 or if the contract is less than $100 the amount of the contract, court costs, attorney’s fees and "any equitable and other relief ordered by the court." 

Continue Reading Benefits of Preapproval by the Attorney General of Consumer Contracts

The primary benefit of incorporating your business or forming a LLC is limiting your liability to your investment in the business. In the event that a corporation or LLC is sued, the business can only lose its own assets and shareholders or members cannot be held personally liable for the debt. Limited liability is possible because the law perceives a corporation or limited liability company a separate legal person from its members or shareholders. Given this general rule, business owners might be surprised to learn that in some circumstances courts will disregard that separate entity and hold shareholders and members personally liable.

Courts will "pierce the corporate veil" where it perceives a business entity as being no more than an extension, or "alter ego" of the owners. Courts will consider factors such as lack of investment in the business, failure to adhere to normal corporate formalities, such as making bylaws, keeping corporate minutes, holding annual shareholder meetings, electing directions, and owners using corporate accounts to pay personal bills. In such cases the business looks less like its own entity and more like an extension of an owner.

Continue Reading Keeping the Liability of Your Business Limited After Formation

This blog has made several posts regarding covenants not to compete. Covenants not to compete are generally viewed as positive steps for businesses to protect their interests and prevent key employees from leaving and taking clients with them. A recent federal district court opinion, Howard v. United States, suggests that consideration of future tax ramifications for professional services providers that incorporate and subsequently sell their practices are now necessary.

On July 30, 2010, a federal district court in Washington held that a dentist’s covenant not to compete he signed with his own practice, a C-Corporation, converted his goodwill, which is ordinarily personal, into a corporate asset. The effect of converting his otherwise personal goodwill to a corporate asset was that upon sale of his practice, his goodwill was taxed at the corporate level, then taxed again when it was distributed as a dividend to him. If his goodwill had been considered personal it would have been taxed once as a long-term capital gain, which is currently taxed at a lower level than a dividend which is taxed as ordinary income.

Continue Reading Possible Tax Consequences of Covenants Not to Compete

In order to spur the struggling economy, the federal government passed the Hiring Incentives to Restore Employment (HIRE) Act of 2010 this year. The goal of the HIRE Act was to provide incentives for employers to add new employees to their businesses, specifically, employees that were previously unemployed. With the unemployment rate gradually increasing, offering employers incentives to add new employees is even more important than when the HIRE Act was passed.

The HIRE Act predominantly encourages hiring new employees by creating tax benefits for employers that hire previously unemployed and certain part-time employees. The Act exempts employers from its share (6.2%) of social security taxes for hiring new employees that either did not work in the last 60 days or worked 40 hours or less in the last 60 days. In addition, if the employee is kept for one year (52 weeks) the employer can receive up to a $1,000 tax credit for the 2011 tax year. For example, an employee that has not worked since April 2010 who is hired on October 1, 2010 and retained until October 1, 2011 would create a $1,000 tax credit for the employer filing its taxes in 2012 for the 2011 fiscal year.

Continue Reading Tax Benefits of 2010 Hire Act Still in Effect