disregarded entity

Pros And Cons of Being a Disregarded Entity

/by

A disregarded entity is used by the Internal Revenue Service (IRS) for a specific set of single-member limited liability companies (LLCs) that don’t enjoy the benefits of being taxed as an entity separate from the owner. This taxation term is usually applied to an LLC with only one owner. The IRS essentially ignores or “disregards” the entity for income tax purposes.

If you are a new business owner, you should consult with an experienced business law attorney to understand the various ways in which a disregarded entity can impact your taxes.

How Does the IRS Determine Disregarded Entity Status?

A disregarded entity LLC is basically a separate entity whose status is ignored by the IRS for taxation purposes during a given tax year. LLCs in Alabama are usually created as separate entities at the state level. Based on this, the business is disregarded as being separate at both state and federal levels for the purpose of taxation. This makes the owner solely responsible for the taxes.

Single-member LLC (SMLLC) taxes are usually the same as what the sole proprietor would report on their personal income return. Real estate investment trusts (REIT) and qualified subchapter S subsidiaries (QSub subsidiary) are usually considered disregarded entities. S-corporation-owned single-member LLCs may also be qualified as disregarded entities.

You can make an exception by filing Entity Classification Election (Form 8832) to elect your LLC to be treated as a corporation. In relation to this, it’s in your best interests that you don’t lose your SMLCC status. This can happen if you don’t meet Alabama’s LLC requirements or include additional members to the LLC.

Pros of a Disregarded Entity

There are several benefits to getting classified as a disregarded entity by the IRS. These include:

Pass-through taxation

In pass-through taxation, the income and expenses of your LLC will pass through the company and to you as the sole proprietor. You will be required to report on your individual tax return. Income and expenses of an SMLLC when owned by a partnership or a corporation will be reflected as a division of the partnership or corporation’s tax return.

LLC members are not considered employees. They don’t need to pay employment taxes on their paycheck. Instead, you will need to pay employment taxes on your business income. You should get disregarded entity 1099 (1099-NEC) when you provide a W-9 to any of your clients.

Simplified taxes

LLCs considered disregarded entities don’t need to file a separate tax return for the entity. Instead, owners file Schedule C with Form 1040 to report taxable income on their individual tax returns. You will need to pay self-employment tax on all your business earnings for the year. Pertaining to this, you won’t need to file a corporate income tax return. This will allow you to save on the time and expense of filing a separate return for your LLC.

Liability protection

LLC is considered one of the better options for small businesses since it allows liability protection to the owners. An LLC is a legal entity. Owners are shielded from personal liability for any business obligations and debts. Personal liability protects your personal assets by keeping them separate from the business.

When you are the sole member of your LLC, it gets treated as a disregarded entity for taxation purposes. This means that you get to enjoy personal liability protection while benefiting from tax advantages. You can maintain an unincorporated business as a single owner. With a disregarded entity, you also get to enjoy liability protection.

Cons of a Disregarded Entity

While a disregarded entity has its advantages, there are a few reasons why owners don’t generally prefer this classification:

Excise and employment taxes

Disregarded entities are only recognized for the purpose of federal taxes. This means you will still be responsible for excise and employment taxes. This becomes relevant if your LLC has excise tax liability or you have other employees. You can file your LLC’s federal taxes by using the employer identification number (EIN) or the Social Security number. However, when you need to file the excise or employment tax, you can only use the EIN.

Self-employment taxes

Single-member owners of a disregarded entity are not released from the burden of paying their self-employment taxes. These taxes are in addition to income taxes. The amount paid is deductible up to the maximum cap. You will be considered self-employed since your compensation is through a share of profits from the LLC.

Self-employment taxes can be as high as 15.3%. This is more than you would have paid if you were working for someone else since your employer will pay a part of them. You can decide whether to maintain your disregarded status or have it taxed as a corporation at the time of forming the LLC or later down the road.

Choose a Dedicated Business Formation Attorney to Maximize Your Competitive Advantage

The seasoned business formation attorneys at the BHM Law Group can help you navigate the numerous complications and challenges of starting a business. Our attorneys will explain the comprehensive impact of a disregarded entity on your business and advise you on whether it is the right choice for you or not.

To schedule your free consultation, call us at (205) 964-9764 or fill out thi

independent contractor vs employee

Employee vs. Independent Contractor: What Employers Need to Know

/by

Classifying workers as independent contractors or employees is a complex exercise with the rules changing ever so often. In the recent past, the IRS has labeled nine clarifying factors while the National Labor Relations Board (NLRB) eliminated three factors to make clear the definition of an independent contractor.

As an employer, it can be difficult for you to classify your workers accurately and remain on the right side of the law with the frequent changes in regulations. A reputable employment business attorney in Alabama can help you stay abreast with the latest changes to prevent any costly misclassification errors from occurring.

Classifying Factors Set Forth by the Department of Labor

There is no single test or rule for classifying someone as an employee or independent contractor for the purpose of the Fair Labor Standards Act (FLSA) as per the US Supreme Court. But here is a set of factors that the Court has deemed significant in order to make this determination:

  • The permanency of the relationship.
  • Extent to which the services rendered are integral to the principal’s business.
  • Amount of the alleged contractor’s investment in equipment and facilities.
  • Degree and nature of control by the principal.
  • Alleged contractor’s opportunity for profit and loss.
  • Amount of foresight, judgment, and initiative in open market competition for the success of the claimed independent contractor.
  • Degree of independent operation and organization.

For the purpose of FLSA, the following is considered immaterial:

  • Place of work.
  • Absence of any formal employment agreement.
  • Whether the alleged independent contractor is licensed by the local or state government.
  • Time and mode of pay.

The biggest determinative factor is the degree of control. You can classify your worker as an independent contractor if they:

  • Choose the hours of work.
  • Are not supervised or monitored.
  • Do not receive performance evaluations.
  • Are not bound by a non-compete agreement.
  • Do not receive performance evaluations.
  • Are permitted to work for other businesses.

However, if the workers are working long hours (50 – 70 hours a week), have their work inspected, need to sign a non-compete agreement, or receive performance evaluations, they need to be classified as employees.

Employee Classifying Factors from the Perspective of the IRS

The IRS is more concerned about its tax base. You need to withhold income taxes while paying Social Security, unemployment taxes, and Medicare taxes where employees are concerned. These are the two key factors to keep in mind when classifying a worker:

  • Control: A business that controls the work accomplished and how it’s done is exerting behavioral control. If the business controls or directs financial aspects, it exerts financial control. In such a situation, the worker may not be classified as an independent contractor
  • Relationship: The manner in which a worker and employer perceive their relationship is necessary for determining worker status. If the employer provides the worker with an insurance plan, vacation, sick pay, and pension plan, the worker may need to be classified as an employee. Other aspects include written agreements, permanency of the relationship, and the extent to which the worker has unreimbursed expenses.

You can use Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding if you are unsure about classifying a worker as an independent contractor or employee.

National Labor Relations Board (NLRB) Test for Classifying Employees in Alabama

The majority of small business owners don’t have unionized employees making them unfamiliar with this test. These factors apply whether or not the workers are unionized:

  • Extent of control over the worker.
  • Whether the worker is engaged in a distinct business or occupation.
  • Whether the work is performed under the supervision or direction of an employer.
  • Whether specialized training, skill, or license is required.
  • Length of time involved in providing services.
  • Method of payment.
  • Responsibility for purchasing and maintaining tools, instruments, and supplies.
  • Whether the work is part of the employer’s regular business.
  • Whether the parties have signed an independent contractor agreement.
  • Whether the principal has a business.

Potential Concerns over Misclassification in Alabama

Businesses usually get in trouble for not paying overtime where worker misclassification is concerned. Employers routinely misclassify their employees as independent workers to save money. This is because employers don’t get sued for most discrimination laws, don’t need to pay taxes on independent contractors, and don’t need to deal with unions either.

Unfortunately, things can take a costly turn if you get caught. You will be on the hook for back pay, which can be an extraordinarily high amount. In most cases, if employers have misclassified one worker, they have misclassified the entire group. An experienced business law attorney can prove to be useful in such instances.

You need to understand that these are not your usual $2,000 settlements. Instead, they are sufficiently high enough for the company to go bankrupt. Misclassification of employees is also a federal offense with jail time. An informed business law attorney will pursue all legal options to find one that is the most helpful in the situation.

Our Trusted Attorneys are Here to Give You the Best Legal Advice and Support. Call Now.

If you are caught in an investigation for misclassifying your workers or not paying taxes and overtime – you can expect an investigation from other agencies as well. The strategy-driven attorneys at the BHM Law Group have the necessary experience, legal knowledge, and resources to provide you with robust legal representation, fight any potential claims against your firm, and protect your rights.

Our attorneys have helped numerous businesses in Alabama avoid getting into such situations entirely by following all the relevant rules and regulations while finding legal ways to maximize profits. To schedule your free and confidential consultation with our legal team, call us at (205) 964-9764 or fill out this online contact form.

backdating a contract

Is It Legal to Backdate a Contract?

/by

Backdating a contract is the practice of marking an agreement or contract with a date that is prior to the actual date. Backdating contractual documents is a complex issue that needs to be navigated in a delicate manner in order to stay on the right side of the law.

In general, you should try and avoid using backdated documents. While backdating isn’t necessarily illegal, it takes a dedicated and outstanding business contract attorney with a solid understanding of the law to ensure nothing is out of place.

Misrepresentation vs. Memorialization in Backdated Contracts

Whether or not a backdated contract is appropriate depends on the purpose and effect of the backdating. Obviously, backdating for perpetrating fraud (misrepresentation) is illegal and unethical.

On the other hand, backdating a contract to memorialize a prior event or activity is a necessary and legitimate business practice. Past events and acts need to be documented for a variety of reasons. You need to ensure the contract is backdated for memorialization purposes.

Backdating is also impermissible when the contract describes an act that occurred at a date different from the date on the document. This may be done to secure benefits that the party is not entitled to. The United States Court of Appeals for the Seventh Circuit has recognized backdating that memorializes as a legitimate practice.

Staying Within Bounds of Memorialization and Contract Law

It’s vital to stay on the right side of the misrepresentation-memorialization line. Ethical sanctions, criminal prosecution, and lawsuits are a few consequences of indulging in improperly backdated contracts. It can be difficult to determine when an agreement is reached between parties.

An agreement is usually the end product of several oral and written negotiations taking place over weeks and months. In the end, the terms of the agreement are usually clear, but the date is not. The law is ambiguous regarding this, and it may be a precarious arrangement to backdate a document for the purpose of formalizing an agreement.

If the agreement is reached at a date earlier than the document’s date, the purpose is to memorialize it; but if the agreement was not reached until the date, backdating is a misrepresentation. Seemingly innocuous backdating can become illegal and inappropriate fabrication because of this ambiguity.

Can Contract Backdating Cross Tax Years?

It’s never a good idea to backdate a document to cross tax years unless it is absolutely necessary, clear, and with evidentiary support. Otherwise, you risk having the timing of your contract disputed by the IRS. This is especially true if the backdating provides an irregular and improper tax benefit to any party to the agreement.

Backdating is part of everyday business. It is imperative that all parties are made aware of the backdated document. And it’s necessary to use it for a proper and legitimate purpose.

Backdating used for violating the law or deceiving a third party is always an improper fabrication and hence illegal. It’s recommended that the backdating be disclosed by utilizing “as of” dating or identifying the date of execution.

It’s also prudent to have an experienced business law attorney review the issue and ensure that everything is done as per the law if you choose to backdate a contract.

Pitfalls of Backdating a Contract’s Effective Date

It’s common for the simplest contracts, such as a Confidentiality Agreement to have the document made effective before it was actually created. It doesn’t necessarily mean that the involved parties did not have legitimate intentions. There are some potential drawbacks to backdating a contract, however, such as:

  • Liability issues may occur because of discrepancies between the signing date and the effective date
  • Potential breach of contract upon signing
  • Conspiracy issues
  • Confidentiality requirements may become applicable even before the signing parties are made aware of them
  • Assuming obligations that were not anticipated
  • Issues pertaining to compliance
  • Potential for a badge fraud
  • Prohibition in certain circumstances and jurisdictions

It is important to never assume that backdating is harmless. You should have your attorney carefully assess every situation to ensure the backdating is done thoughtfully with all the necessary disclosures.

Misrepresenting facts while backdating is an offense. You should never backdate a document that adversely impacts the rights of a third party or violates the law. This is even if there was no intentional ill will.

You should also never backdate a contract to memorialize a prior act unless you are absolutely certain the act actually occurred on that specific date. You should be aware of the legal and factual repercussions of backdating your contract before you go ahead and sign it. It’s strongly recommended that you have a reputable attorney examine the contract and all its aspects before signing it.

Legal Help is Here from Knowledgeable Business Contract Attorneys in Alabama

Backdating a contract is sometimes unavoidable in business, and it should be done only after consulting with a trusted business contract lawyer. The seasoned business law attorneys at the Birmingham Law Group have the required skills and expertise to help you in all legal aspects of running your business.

Our attorneys are focused and driven to find solutions to your legal problems. To schedule your initial consultation, call us at (205) 964-9764 or fill out this online contact form.

 

shareholders breach of fiduciary duty

What Is Shareholders’ Breach of Fiduciary Duty in Alabama?

/by

The shareholder’s breach of fiduciary duty suit is based on the principle that the shareholder acted outside the best interests of the corporation. This is despite being obligated to do so. A majority of these lawsuits are in the form of business torts and can result in compensation for the injured party.

You should consider working with an experienced and motivated business law attorney if you believe there has been a breach of fiduciary duty.

How does the Law Define Shareholders’ Fiduciary Duty?

Fiduciary duty refers to the legal obligation of acting in a certain way that benefits another entity or individual financially. The fiduciary owes the duty while the principal or the beneficiary is the one that benefits from the duty.

There are several state and federal laws touching on the subject of fiduciary duties. For instance, the Uniform Fiduciaries Act defines what a fiduciary and a fiduciary relationship mean.

In general, shareholders don’t owe any fiduciary duties to other shareholders in a corporation. Taking this into account, the situation may change in corporations where the shareholders serve as directors or officers.

The same holds true for closely held corporations as well. State law differs to the extent that the shareholders owe fiduciary duties to the corporation.

In certain circumstances, shareholders may owe fiduciary duties to other minority shareholders of the corporation. This occurs when a designated group of shareholders or a single shareholder owns a controlling interest in the corporation. The controlling shareholder, in such cases, may incur special duties to minority shareholders.

Elements to Prove a Shareholder’s Breach of Fiduciary Duty

Alabama Code Title 7. Commercial Code § 7-3-307 states that a corporation, partnership, principal, or any other beneficiary is owed a fiduciary duty from any director, officer, trustee, partner, or representative of the organization. The fiduciary agent is required to comply with certain rules and requirements. The agent is expected to do the following:

  • Act loyally toward the company
  • Be diligent while managing the financial affairs of the corporation
  • Exercise sound and unbiased business judgment while making financial decisions on behalf of the company
  • Avoid transactions that are self-dealing in which the assets or finances of the company are being used to benefit the individual instead of the corporation as a whole
  • Avoid the diversion of lucrative business opportunities to another entity that is owned or controlled by the fiduciary agent

The shareholder can be charged with a breach of fiduciary duty if it comes to light that they violated any of the above duties or responsibilities. Shareholders with a fiduciary duty cannot spend all their time pursuing their self-interests and keeping them ahead of the corporation.

Consequences of a Fiduciary Breach

Any entity or individual that is the victim of a breach of fiduciary duty may end up suffering reputational damage. This can cost the shareholder future business. There are various legal remedies available for a fiduciary breach victim. Other shareholders can decide to go to court. There can be monetary penalties for both direct and indirect damages, as well as, legal costs.

Equitable relief may be available as well, such as through an injunction against the responsible party. It’s recommended that you work with a qualified Alabama commercial litigation attorney. Owner disputes often affect the normal running of a business. A skilled attorney will be able to help navigate the legal hurdles for a swift resolution.

Proving a Shareholder’s Breach of Fiduciary Duty

You would need to prove certain elements if you suspect a shareholder to have participated in a breach of fiduciary duty. You can file a claim against the guilty shareholder if you can prove the following:

  • That the shareholder owed a fiduciary responsibility to other shareholders
  • That the duty was breached
  • That the breach entitles the victim to a remedy
  • The breach caused financial damages
  • The breach is the result of someone taking advantage of your trust

You may be able to pursue monetary and other remedies if you can prove these points to be true. The type of breach that occurred will determine the type of remedy that can be awarded. For instance, if a majority of shareholders diverted potentially lucrative business to one of their other businesses, then you may be able to claim monetary damages.

Breach of duty can be difficult to prove because of the various elements involved in it. An experienced business attorney in Alabama can help you determine whether there has been a breach of duty and advise on the next legal steps.

The burden of showing proof that a breach happened falls squarely on the claimant. You would need to prove that the shareholder took advantage of their position for benefiting at the expense of the company.

Legal Advice is Here from Knowledgeable Business Litigation Attorneys in Alabama

The seasoned business attorneys at the Birmingham Law Group can help you if you feel that you are the victim of a breach of fiduciary duty or are being accused of such a breach. We have helped numerous clients resolve such disputes in a timely and cost-effective manner. To set up an initial free case evaluation, call us at (205) 964-9764 or reach us online.

ambiguous language in business contracts

How Ambiguous Language Could Cost You in a Business Contract

/by

There are several challenges to owning your own business. Your clients, vendors, partners, and other stakeholders will have certain expectations from their business relationship with you.

Business contracts can be useful in avoiding disputes and financial losses and protecting your business interests. Based on this, ambiguity with regard to the terms and conditions in the contract may end up causing a business dispute and eventual losses for you. Working with an experienced business law attorney can help you protect your rights.

What Constitutes Ambiguous Language in a Business Contract?

Business or commercial contracts that can be reasonably subjected to multiple interpretations are considered to be ambiguous in nature. This can mean that the language used within the contract doesn’t clearly depict what all involved parties intend. Ambiguous contracts usually mean that a materially important word, term, definition, or phrase is unclear or vague.

Serious discussions are often required to resolve any disputes arising out of an ambiguous contract. In certain cases, the situation may end up in a legal dispute.

You may attempt to resolve any issues that crop up, but it is still possible that the other party may walk away after deciding to take their business elsewhere if they are unhappy with the vague terms used in the contract. Or worse, you may get entangled in a prolonged and expensive legal battle if the other party claims a breach of contract.

Complications Arising from an Ambiguously Worded Business Contract

A single business contract should not be used with multiple types of clients and vendors. This may not be in your best interests. Changing or chopping a template can prove to be risky. You may miss out on including vital information. Alternatively, you may leave sections within the contract that are not really required.

All clients don’t act with integrity. Rather than losing business, you may get stuck with a client that demands more than you signed up for. Having room within a business contract for exploitation can only spell trouble in the long run.

Business disputes end up being costly and time-consuming. You need to get the legal terms of the contract exactly right when outlining the terms of a relationship with a new client.

Ambiguity in the contract terms may make you seem unscrupulous or unreliable. Cautious clients may not want to enter into a business relationship with you.

Avoiding Ambiguous Language in Business Contracts

The best intentions may not be able to help you keep ambiguities out of your business or commercial contract. It’s recommended to always work with a capable business attorney or another learned professional while drafting business contracts.

These tips can help you avoid ambiguities to a certain extent:

  • Writing: You should always put all terms and conditions in writing within the contract.
  • Multiple interpretations: You should ensure that all phrases and terms that have multiple meanings, mean the same thing for all parties. You may also want to make a note of all alternative meanings.
  • Other documents: Attach all related documents to the contract that may be used at a later date for clearing disagreements.
  • Review: Each party should be allowed a full and complete review of the contract before assenting and signing off on it.
  • Legal advice: You should speak with an experienced contract attorney for professional advice. Have them review the contract before you present it to the client for removing any ambiguities that may cause future problems.

There are various types of free business contract templates available on the internet. It is recommended that you stay clear of them. In fact, you should not use these templates as a foundation as well.

The language used in these contracts is ambiguous and may cost you. The language used within a contract should always be explicit and not open to multiple interpretations.

These contracts intentionally use vague language to cater to a wide array of businesses. This type of language may leave your business open to disputes and lawsuits. The words used within the contract should reflect an accurate meaning. You should avoid bad-faith arguments and misunderstandings as well.

Seasoned Lawyers Can Create Airtight Business Contracts

There are several different aspects to a business contract. The best-written contract may contain ambiguous terms if you are an amateur. Contract attorneys can help resolve such issues.

You should consider involving them prior to the drafting and negotiating stages. Accomplished attorneys, who have seen every kind of legal predicament imaginable, will always keep your best interests at the forefront and represent you in court in case of a breach of contract lawsuit.

You cannot predict and write all possible situations in a contract. Trying to fill in too much into a contract can prove contradictory to your interests as well. The other party may find you untrustworthy if you try to cover all eventualities with precise, narrow, and descriptive language. They may reject the contract entirely.

An attorney can save you time, energy, money, and future potential business by avoiding both ambiguities and microscopic language.

Get Legal Help from an Experienced Alabama Business Contract Attorney

Ambiguity in your business contracts can prove to be costly in the long run. The skilled business lawyers at Birmingham Law Group can help ensure there are no vague terms or phrases used in the agreement or business contract. We can also help you with various other matters related to business law. To set up a complimentary initial consultation, call (205) 964-9764 or reach us online.