Blog : Business Law

Michigan Corporate Income Tax and Business Entity Conversions

The new Michigan Corporate Income Tax (CIT), which replaced the previous Michigan Business Tax (which replaced the Michigan Single Business Tax) was applauded by the business community in Michigan as drastically simplifying the corporate tax system.  The CIT taxes C corporations at a rate of 6%, while federal pass-through entities (LLCs, S corporations, etc.) are not required to pay a business-level income tax.

While it may seem advantageous to avoid the 6% CIT by simply converting all C corporations to S Corporations or LLCs, there are many tax and non-tax considerations to think through before completing a business entity conversion.  To help C corporation owners and professional advisors decide whether or not to convert, the State of Michigan (in conjunction with the State Bar of Michigan) has created a comprehensive guide available at the State’s website:

Issues to Consider Before Electing to Convert From a C Corporation to a Limited Liability Company or Before Electing S Corporation Status

If you own a C Corporation and would like additional information about whether or not a business entity conversion makes sense for your company, please contact Jeffery A. Jacobson at 231.722.5405 or jaj@parmenterlaw.com

Municipal Indemnification: The Evolving Case Law

The Municipal Legal Briefs, a publication of the Michigan Municipal League, recently published an article written by Parmenter O’Toole attorney John Schrier, with assistance of summer clerk Colleen Healy, concerning a municipality’s ability to indemnify another party.  The article, “Municipal Indemnification:  The Evolving Case Law,” outlines how the courts have expanded a municipality’s legal ability to indemnify a third party in certain circumstances.  Here is a copy of the article if you are interested in reading it.

Municipal Indemnification

Parmenter O’Toole’s Public Sector practice group is prepared to assist municipalities on a variety of issues, including public finance issues.  For assistance call John Schrier at (231) 722-5401.

Michigan Court of Appeals affirmed Parmenter O’Toole’s trial court victory

Michigan Court of Appeals affirmed Parmenter O’Toole’s trial court victory.  Parmenter O’Toole was retained to defend several clients who were involved in state court litigation regarding stock redemption agreements.  The stockholders who were redeemed later claimed fraud and forgeries.  The trial court judge dismissed the plaintiffs’ claims and plaintiffs filed an appeal to the Michigan Court of Appeals.  In a 2-1 opinion, the appellate court ruled in favor of Parmenter O’Toole’s clients.

Commercial Real Estate Broker’s Lien

By William J. Meier, PARMENTER O’TOOLE

On October 5, 2010, Michigan enacted the Commercial Real Estate Broker’s Lien Act giving brokers the right to file a lien as collateral for commissions owed on the sale or lease of commercial real estate.  The new law only applies to commercial real estate and specifically excludes residential properties as well as vacant property zoned for single family use.

A lien recorded by a licensed real estate broker will be effective if the broker (1) has a written commission agreement; (2) has earned a commission pursuant to the agreement; and (3) the lien is recorded before the conveyance of the real estate.  There is an exception to the last requirement that permits recording for up to 60 days after a lease is signed if the commission is paid in installments following the lease.

There are numerous requirements that a broker must follow in order for a lien to be effective.  The Act includes a form with required information and a copy of the written commission agreement.  The lien must then be delivered by mail or in person to the owner of the real estate within 10 days of recording.

The lien will be junior to prior-recorded mortgages and other liens and will also be junior to a construction lien. This may be recorded after a broker’s lien but will relate back to the work performed before the broker’s lien was filed.  If the seller objects to the payment of the commission, the Act states that the parties can set up an escrow account for payment of the lien so the closing can occur.  However, if funds are not sufficient to place into escrow, the parties are not required to establish an escrow account.

Similar to a construction lien, the lien holder can file suit to foreclose on the lien up to one year following the filing of the lien.  As part of a foreclosure action, the Act allows the court to award the broker court costs and attorney fees.  It also awards the same to the property owner if the action is deemed frivolous.

In case a broker files a lien the day before closing, parties to commercial real estate transactions need to check the status of the title to the real estate through the date of closing.  The new law also leaves several questions unanswered and therefore buyers, sellers, brokers, lenders and title companies all need to be aware of the potential impact of the Act.  If you have any questions regarding this, please give us a call.

 

Changes in Michigan Business Tax System

By William J. Meier, PARMENTER O’TOOLE

On May 25, 2011, Governor Rick Snyder signed into law House Bill 4361, which eliminated the Michigan Business Tax (MBT) and replaced it with a 6% corporate income tax.  Other changes were made to recover the anticipated lost revenue including the elimination of certain business tax incentives, the inclusion of pension income for personal income tax purposes, and the cancellation of future income tax rate reductions.

Business Tax Changes

The MBT was primarily based on gross revenue instead of income.  This system led to results that many economists and business leaders considered unfair and harmful to Michigan businesses.  In particular, the MBT taxed businesses with higher sales and lower profits more than businesses with lower sales and higher profits.

The new 6% business income tax will apply only to Subchapter C corporations, which generally include publicly traded corporations and some privately held corporations.  The tax will not apply to Subchapter S corporations, limited liability companies, sole proprietorships or other business entities.  It is anticipated that most businesses will either pay no business tax or will see their taxes reduced.  A few may pay higher taxes.

To help offset the expected loss of revenue, the new tax plan eliminates or reduces certain business tax credits such as brownfield re-development, film, and renaissance zones.  Tax incentives that have already been approved will remain in effect as will the 21st Century Jobs Fund which are used to attract businesses to Michigan.

Planning Opportunity

Corporations that are currently taxed under Subchapter C may want to analyze whether converting to Subchapter S is beneficial.  There are several tax and legal issues involved in converting a corporation to Subchapter S. If you have any questions regarding this, please give us a call.

 

Requests for Employee’s Medical Information Restricted by GINA

Employers should ensure that their managers and human resources personnel are familiar with the requirements of the Genetic Information Nondiscrimination Act of 2008 (“GINA”).  The EEOC issued final regulations, effective January 10, 2011, clarifying this recent addition to the growing number of statutes protecting employees with which employers must comply.  GINA expanded the protections under Title VII of the Civil Rights Act, prohibiting employers from engaging in all forms of discrimination in regard to hiring, discharge, compensation, terms, conditions, or privileges of employment based upon genetic information.  Requesting, requiring or purchasing genetic information about employees or their families is prohibited, except in limited circumstances, under GINA.

New warning/notice language is mandatory when requesting that a health care professional conduct an employment-related medical examination on an employer’s behalf, including when an employer requests an individual’s medical information as permitted when administering requests for FMLA leave.  The final regulations provide the following “safe harbor” warning/notice language for employers to use when requesting medical information:

The Genetic Information Nondiscrimination Act of 2008 (GINA) prohibits employers and other entities covered by GINA Title II from requesting or requiring genetic information of an individual or family member of the individual, except as specifically allowed by this law. To comply with this law, we are asking that you not provide any genetic information when responding to this request for medical information.  ‘Genetic information,’ as defined by GINA, includes an individual’s family medical history, the results of an individual’s or family member’s genetic tests, the fact that an individual or an individual’s family member sought or received genetic services, and genetic information of a fetus carried by an individual or an individual’s family member or an embryo lawfully held by an individual or family member receiving assistive reproductive services.

This “safe harbor” provision should now be included in all requests to a health care professional conducting an employment-related medical examination on an employer’s behalf.  For additional information concerning your duties and restrictions under GINA, contact John C. Schrier at 231-722-5401.

 

Lean Business Start Up

The new way to start a business is to start out with a vision of making money and not spending it.  Try to create your vision with what you have and see if your customers will buy your products before going deeply in debt.  Borrowing money to try to cover all of the aspects that you believe your business could be creates more risk and uses resources that may be needed elsewhere. 

Check out this article on bootstrapping your business start-up efforts. http://www.inc.com/magazine/20110201/the-art-of-the-pivot.html

Jeffery A Jacobson

Why Should I Register A Copyright?

Copyright Protection:

What is a Copyright?

A copyright is the protection created under the United States Copyright Act which protects “an original work of authorship.” Copyrights protect music, photographs, video, films, works of art, software, buildings, and architectural drawings when they are put into a fixed form that can be copied and distributed.

What are the Advantages to Registering a Copyright?

A Copyright exists when the work is created by the author. It is created when it is in a form that can be copied and distributed to others. This “common law” copyright protects the author’s creation against unauthorized copying. However, the US Copyright Act preempts the enforcement of common law copyrights. Therefore, in order to sue to enforce the author’s copyright in his or her work, the copyright must be registered with the US Copyright Office. The following are advantages of registering your copyright:

  • You can immediately sue to enforce your copyright in your work;
  • You may be entitled to attorney fees;
  • The presumption that the registered owner’s copyright in the work is valid;
  • You can record your registration with US Customs and Boarder Protection to stop infringing products from entering the US.

Who is the Owner of the Copyright in a Work?

Generally, the author is the owner of copyright. If there are multiple authors, they may share the copyright and there may be several layers of copyrights in a work. For example, if one individual writes the text to a book and another does the illustrations, the author of the text owns that copyright in the text and the illustrator owns the copyright in the illustrations.

Ownership of a copyright right will reside in one who is not the author only:

  1. if the copyright has been assigned,
  2. if the work is a “work made for hire,” or
  3. the copyright is transferred by law, such as by will, descent, or bankruptcy.

A “work made for hire” is defined as:

  1. a work prepared by an employee within the scope of his or her employment; or
  2. a work specially ordered or commissioned in a signed writing for use as:
    • contribution to a collective work
    • a part of a motion picture or other audiovisual work
    • a translation
    • a supplementary work
    • a compilation
    • an instructional text
    • a test
    • answer material for a test
    • an atlas

Courts have ruled that this definition is narrow. Even if the parties expressly agree in a written instrument that the work shall be considered a work made for hire, it may be determined by the court that the work is not one of the defined “works made for hire” as described in the statute. Therefore, care must be taken to make sure all rights are assigned to the correct party in writing.

Protection of copyrights based on several levels of the same work can be complicated. When multiple individuals are involved in the creation of the work, various levels of ownership need to be discussed and reviewed carefully. It is important to have an experienced copyright attorney involved throughout the process of creating the work to highlight any issues early in the process. This can save you headaches and money in the long run.

Our intellectual property lawyers take the time to assess, discuss, and guide you through copyright ownership, licensing copyrights, copyright royalties, confidentiality agreements, and, when necessary, copyright litigation. An original work of authorship often represents years of hard work. Securing that work with copyright protection is essential to protect your rights.

If you have questions regarding copyrights or other intellectual property, please contact Jeffery Jacobson.

Michigan Business Tax Relief to Contractors

The Governor recently signed an amendment to the Michigan Business Tax Act (MBT) to revise the definition of “Purchases from other firms” as it applies to general contractors, heavy construction contractors, and special trade contractors.  “Purchases from other firms” now includes payments for materials that were deducted in determining the cost of goods sold.  Therefore, these payments are excluded from the calculation of the gross receipts tax base required by the MBT.

The MBT is in part a tax imposed on the modified gross receipts tax base, after allocation or apportionment to the State at a rate of 0.8%.  The tax base is a taxpayer’s gross receipts less purchases from other firms before apportionment.  Specifically, the amendment allows the following to be included in “purchases from other firms” for the contractors:

  1. Payments to subcontractors for a construction project under a contract specific to that project;
  2. To the extent not deducted under other provisions of the act allowing deductions for materials and supplies, payments for materials deducted as purchases in determining the cost of goods sold for the purpose of calculating total income on the taxpayer’s federal income tax.

Payments to subcontractors for a construction project under a contract specific to that project are limited to contractors that do not qualify for a credit under Section 417 of the MBT.  Section 417 allows a credit against the MBT for any taxpayer with gross receipts that do not exceed $20 million and with adjusted business income minus the loss adjustment that does not exceed $1.3 million as adjusted annually for inflation.

Payments for materials deducted as purchases in determining the cost of goods sold are limited to the extent the payments were not deducted under provisions allowing deductions for materials and supplies.  This could include repair parts, fuel, and inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price for that inventory.

This bill would be retroactive and effective for taxes levied after December 31, 2007.

* Jeff Jacobsonis an associate attorney with Parmenter O’Toole in Muskegon, Michigan.  Parmenter O’Toole is a full-service business and real estate law firm with extensive experience in the area of construction law.  The comments in this article are not intended to be a substitute for legal guidance or advice for a specific situation.  You should obtain informed legal counsel to assist in your decisions relating to any issues which may be raised in this article.  For additional information regarding the above topic, or any other legal issues you may have, Mr. Jacobson can be reached at (231) 722-1621 or jaj@parmenterlaw.com.

When is a signature not really a signature?

We have all had documents shoved in front of us with the rushed command, “Just sign here.”  But how many times do we really stop and think about the effect of our signature?

As an example, a building supplier has a form credit agreement for new customers that includes individual guarantee provisions.  When a new building contractor business opens an account with the supplier, one of the supplier’s employees has the contractor scribble his signature once at the end of the form and sticks the form in a file without thinking twice about it.

It is now months later, the contracting company is behind on payments owed to the supplier and will be ceasing operations.  When the supplier informs the contractor that he is personally responsible for the bill, the contractor disagrees and claims he never individually guaranteed the debt.

Is the supplier or contractor correct?

According to the Michigan Courts, the contractor DID NOT personally guarantee the debt because “an individual officer is not liable for his corporation’s engagements unless he signs individually, and where individual responsibility is demanded the nearly universal practice is that the officer signs twice – once as an officer and again as an individual.”  Livonia Building Materials Co. v. Harrison Construction Co. (Michigan Court of Appeals, 2007).

Every time you or a customer signs a legal document, there are consequences to that action. It is important that you have an attorney specializing in business and real estate transactions review your agreements and provide advice regarding potentially unintended consequences.