Birmingham Corporate Lawyers

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How to Organize Your Business Tax Documents

Aside from being on the receiving end of a lawsuit, quite possibly one of the scariest things that a business owner can go through is a tax audit. Even if you do everything right, the IRS may decide that this tax year is your year to go under the microscope. If they do contact you, will you be prepared?

At Cloud Willis & Ellis, our Birmingham corporate law attorneys understand that a tax audit can be scary, but we also know that with the proper preparation, you can make the process so much easier on yourself. Your CPA is going to want a number of documents from you, documents that most business owners lose amidst all their other paperwork. The IRS, unfortunately, does not care if you “lost a document or two”—they want solid evidence of every claim that you made. If you are like most people and do not have a set place in which you keep all of your important documents, use this post as your guide from here on out.

Documents for LLCs

If you own and operate an LLC, you should keep the following in a single, safe place:

Articles of Organization: You should have two copies of this: the original, which should be stored in a secure place, and a copy, which should be stored digitally.
Members List: Keep a list of all LLC members that contains each member’s address, their percentage ownership, their role within the LLC, and their share of profits and losses.
Operating Agreement: This agreement is a contract that outlines how the LLC should be operated and how certain situations should be dealt with. Keep the original version in a safe place, and a copy of it stored digitally.
Meetings’ Minutes and Consent: Many businesses do not keep minutes of their own meetings, but they should, especially when big decisions are made. Minutes can prove that all members were involved in the decision making process if a dispute regarding the matter should ever arise.

Documents for Corporations

If you own and operate a corporation, you should keep the following in a single, safe place:

Articles of Incorporation: You should have two copies of this: the original, which should be stored in a secure place, and a copy, which you should store digitally.
Meeting Minutes and Consent: According to Section 10A-2-16.01., Alabama corporations are required to keep records of approval by all board members when major decisions are made. These approvals should be solidified via written consent. Shareholders must also present minutes from their meetings.
Bylaws: Bylaws act as an operating agreement and dictate how the business should be run. This agreement should detail matters such as the number of members on the board of directors, how meetings are to be conducted, and how often those meetings should occur.
Shareholders List: Like an LLC members list, the shareholder list must contain the names of all the shareholders of the corporation, as well as their contact information, their amount of shares, the value of their shares, and any disbursements.

Documents for a Partnership

If you own and operate a partnership, you should keep the following in a single, safe place:

Partnership Agreement: The partnership agreement details the responsibilities, roles, and salary of each partner of the organization. This agreement also acts like a set of bylaws in that it outlines what should happen when certain situations arise. The original document should be stored in a secure place, while a scanned copy should be stored digitally.

For All Businesses

All Alabama businesses should have the following readily available:

EIN: All business owners except for sole proprietors are required to have an EIN. However, we strongly recommend that sole proprietors get an EIN just so that, in the event that they do hire employees or contract out work, they can put their EIN number on the paperwork instead of their social security number.
Tax Returns: You may be audited for something that was on your return three years ago, or even five years ago. For this reason, we recommend that all business owners—and non-business owners, for that matter—keep their returns for the previous six to seven years.
Books: You should keep a full accounting of your finances for the past three to seven years for the same reason that you should keep your previous returns—to help in the event of an audit.
Property List: Have a list of all your business’s property readily available as well. This list should include a list of business properties, equipment, inventory, and supplies.

Keep a Birmingham Corporate Lawyer on Retainer

Businesses are subject to numerous requirements from multiple different entities, and it can be difficult to keep track of them all. For this reason, it is nice to have a Birmingham corporate attorney on retainer. A knowledgeable lawyer can help your business implement effective processes and procedures for keeping track of the numerous requirements so that should the need arise, you have all the necessary documents on hand and ready to show.

Get organized today, and call Cloud Willis & Ellis in Birmingham to schedule an appointment with a corporate law attorney now.

Resource:

http://alisondb.legislature.state.al.us/alison/codeofalabama/1975/10A-2-16.01.htm

How to Terminate Evergreen Contracts

Evergreen contracts are nice from a convenience standpoint, but from a practicality standpoint, they pose a few issues. Evergreen contracts are contracts that renew every year automatically without having to have either party resign the agreement. While they are convenient for busy business owners and partners, they can be frustrating when one or more parties are dissatisfied with the agreement. If that happens, the contract must be terminated and rewritten, but how do you go about terminating an evergreen contract?

At Cloud Willis & Ellis, our Mobile corporate law attorneys strive to help businesses both large and small avoid common legal errors made by business owners, one of which is failing to abide by contract law. If you are dissatisfied with the terms of an evergreen contract, you cannot just terminate it and hope that the other party does not ask any questions. There is a right and a wrong way to go about voiding an agreement. If you are the party that is dissatisfied with the contract, you have rights as well.

Terminating the Contract by Agreement

If you and the other party can agree to terminate the agreement then terminating an evergreen contract becomes a non-issue. Because a contract is a voluntary and mutual agreement, one can easily be terminated via voluntary and mutual agreement. If both parties wish to void the existing contract, they can agree to draw up a new one along with a separate termination agreement. Once signed, the termination agreement is valid and the contract is void.

Terminating the Contract by Default

Even if one party opposes the termination of the contract, the agreement can still be deemed void if one or both parties default on the contract. Some contracts have a clause that details what constitutes as a default and for how long a default must occur before a contract can be voided, but even without such a clause, termination by default is still possible. For instance, if your business contracts with an attorney who stops practicing law, any contract regarding legal services becomes void.

Termination by Lawsuit

In instances when neither party can agree to terminate the contract and neither party has defaulted, you may be able to negotiate new provisions. However, if even negotiation does not work, you may have to work with an aggressive Mobile corporate law attorney. The attorney can review the contract for any loopholes or illegal provisions that would automatically render the contract void. If everything seems sound, your attorney may be able to help you find another option for terminating the contract, such as suing the other party.

For an example of how a lawsuit to terminate an evergreen contract might play out, refer to Amber L. Tidwell v. Pritchett-Moore, Inc., and Tim Rutledge.

Turn to a Mobile Corporate Lawyer for Help

As a business owner, a good rule of thumb to abide by is to never try and terminate a contract on your own, and nor should you try to create a contract with the oversight of an attorney. What may seem like a fair and reasonable agreement at the time may end up causing you unnecessary frustration later on. To schedule an appointment with a knowledgeable Mobile corporate law attorney, call Cloud Willis & Ellis now.

Resource:

alabamaappellatewatch.com/uploads/file/2070966.PDF

The Legal Ramifications of Security Breaches for Large Companies

Recent security breaches experienced by high-profile companies—even those with in-house General Counsel, such as Yahoo—have many companies realizing that it may be necessary to work with experienced outside counsel on corporate law issues in order to ensure that a company is fully protected from the legal repercussions that a potential security breach could bring.

According to the company’s 10-K, information such as names, email addresses, birth dates, passwords, security questions and answers, and phone numbers were stolen from approximately 500 million user accounts during one of three security incidents between 2013 and 2016. The data breaches allowed hackers to access data for hundreds of millions of Yahoo users in 2013 and 2014; however, the company waited until 2016 to notify its users of the breach, arguably placing their personal and confidential information at risk.

According to a Yahoo filing in early March, the company’s legal team, specifically, had sufficient information to warrant substantial inquiry several years ago, and they failed to sufficiently pursue it.

Yahoo’s General Counsel has now resigned as a result, and both the Federal Bureau of Investigation and Securities and Exchange Commission are reportedly investigating the breaches.

Data Breach Notification Laws

Under most data breach notification laws, there is a legal obligation to notify affected individuals when unauthorized access of these elements occurs. These laws are specific to each state; however, most follow the same basic tenet that requires companies to immediately disclose a data breach to customers (usually in writing).

In this instance, Yahoo’s legal team reportedly had enough information to conduct a further inquiry back when this was initially discovered in 2014. However, they did not sufficiently pursue it, and in failing to do so, the company was inadequately advised with respect to the legal and business risks associated with the incident.

Important Steps to Minimize Risks

Many are now wondering whether this incident will permanently affect how companies approach data breach incidents in the future and, specifically, how the role of General Counsel within the company can help prevent legal violations like these. While some have commented that legal departments may seek to avoid any involvement in breach response or investigations of data breaches, it is likely that this won’t be a practical option for in-house corporate counsel.

In fact, there are steps that corporate counsel can take to minimize risks for a company; steps such as:

Engaging outside counsel skilled in privacy and data security law, and in preparing companies for data incidents;
Preparing written protocols so that the investigation process is clear; and
Retaining a forensic firm to ensure that resources are available to begin an investigation right away and apply the attorney-client privilege effectively.

Experienced Corporate Attorneys Providing In-House Counsel Services

At Cloud Willis & Ellis our experienced Birmingham corporate law and business litigation attorneys have assisted business clients in resolving a broad spectrum of issues such as the legal ramifications of a security breach. We specifically provide general counsel services, taking on responsibilities that are expected of in-house legal counsel. Contact our office today to receive guidance on how we can help you and your business.

Resources:

fortune.com/2017/03/01/yahoo-lawyer-cybersecurity-mess/

www.datasecuritylawjournal.com/files/2017/03/Yahoo-10k.pdf

Independent Contractor Agreements

Legally speaking, there is a big difference in Alabama between workers who are “employees” and those who are “independent contractors”. This distinction is critical when it comes to things such as determining eligibility for pensions and workers’ compensation benefits. Therefore, how your workers are classified can make a big difference to your business. But be warned, simply having a worker sign an independent contractor agreement does not make them an independent contractor. This article describes how courts in Alabama determine whether a worker is an employee or an independent contractor, and then discusses some pros and cons associated with employing independent contractors.

How to Tell if a Worker is an Employee or an Independent Contractor

According to Workerclassification.com, courts in Alabama determine whether a worker is an employee or an independent contractor based on a common law right to control test. This means that a worker should be legally classified as an independent contractor if he or she has the right to control the means and methods by which their work is performed. It is important to note that the worker does not actually need to exercise this right, they just have to be entitled to it.

Courts determine whether a worker has the right to control the means and manner in which they do their job on a case-by-case basis. Courts often consider a variety of different factors including the following:

Amount of instruction that the company provides to the worker,
Whether the worker is responsible for hiring, paying, and firing their assistants,
Whether the employer dictates the worker’s schedule,
If the employer provides the worker with tools and materials, and
Whether the worker is paid based on the time that they work or per project.

Pros and Cons Associated With Employing an Independent Contractor

While there are a variety of pros and cons associated with employing independent contractors, a helpful article from AOL lists some of the most important, including the following.

The upsides associated with employing independent contractors often include:

Tax Benefits: Employers must pay half of their employees’ Social Security and Medicare taxes, however, employers are not required to pay these taxes for their independent contractors.
No Need to Provide Equipment and Supplies: Independent contractors generally provide their own equipment and supplies, thereby saving your business money.
Provide Fewer Benefits: Employees generally receive many more employment benefits than independent contractors do. For example, employers generally do not provide health insurance, sick days, or pensions for independent contractors.
Staffing Flexibility: Independent contractors can be employed for a specific amount of time, or for a specific project. This can be very helpful for businesses with fluctuating workloads.
Reduced Legal Risk: Employees generally have more legal rights in the workplace than independent contractors do. While independent contractors certainly still have rights and are able to sue their employers, they have fewer rights than employees do and so employing them can help reduce your business’ risk of being sued.

The downsides associated with employing independent contractors often include:

High Fees: Independent contractors are often highly skilled and in many instances you have to pay more for their services than you would for an employee to perform the same job.
Intellectual Property: Independent contractors sometimes have a legal claim to the intellectual property that they create. However, this often depends on the terms of the independent contractor’s agreement.
Less Control: Employers have more control over employees than independent contractors when it comes to determining how and when work is completed.

Need Legal Advice?

If your business is located in Alabama and you are interested in drafting binding employment and independent contractor agreements, contact the experienced Birmingham business attorneys at Cloud Willis & Ellis, LLC today.

Are Non-Compete Agreements Valid in Alabama?

In contract law, a non-compete agreement, or a non-compete clause, is an agreement under which party A promises not to engage in business that competes with party B, generally for a specified period of time. Sometimes employers require new employees to sign a non-compete agreement that will go into effect when their employer-employee relationship ends. Although this type of agreement generally favors the employer, before you start drafting a bunch of non-compete agreements for your new employees to sign it is important to understand that courts in the United States are generally weary of these agreements because they can act as a huge obstacle to an employee’s ability to work in the future. However, each state has its own laws that govern non-compete agreements so be sure to consult with a competent corporate law attorney if you are interested in crafting a non-compete agreement for your company.

Alabama’s Non-Compete Statute

On January 1, 2016, Alabama’s updated non-compete statute went into effect. This statute is contained in section 8-1-1 of the Alabama Code and states the general rule that, “Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind… is to that extent void.” In other words, the general rule in Alabama is that non-compete agreements that contain restrictive covenants involving a legal profession, trade, or business are not enforceable.

However, there are six important exceptions to this general rule. A non-compete agreement can be valid in Alabama if the agreement is in writing, is signed by both parties, is supported by adequate consideration, and the agreed-upon restraint involves one of the following types of permissible restrictive covenants:

If the employee’s position is uniquely essential to the management or organization of the business,
If the agreement is to limit certain commercial dealings to deals between the contracting parties,
If the non-compete agreement is associated with the sale of a business,
If the agreement not to compete is limited to a specific geographic area and the restraint lasts for no more than two years,
If the agreement is to not solicit the business’ current customers and the restraint lasts for no more than 18 months, or
If the agreement is made between business partners in anticipation of the dissolution of their business and the restraint prohibits them from conducting a similar business within a specified geographic area.

What is the Difference Between A Non-Compete Agreement and a Non-Solicitation Agreement?

Non-compete agreements and non-solicitation agreements both contain restrictive covenants that are often executed between an employer and an employee, however, there are a few key differences. As discussed above, a non-compete agreement involves a restrictive covenant under which an employee generally agrees not to compete against their former employer for a specified period of time within a certain geographic area. On the other hand, a non-solicitation agreement contains a less restrictive convenant as the employee party under this type generally agrees not to solicit the former employer’s clients. While this distinction may seem subtle, it is an important distinction as courts often treats these agreements differently.

Need Legal Advice?

If your business is located in Alabama and you are interested in drafting enforceable non-compete or non-solicitation agreements contact the experienced Birmingham business attorneys at Cloud Willis & Ellis, LLC today. Our experienced corporate law lawyers would be happy to sit down with you and discuss your legal options.

Buy-Sell Agreements in Alabama

If you are a co-owner of a business, or are considering starting a business with a partner in Alabama, developing a buy-sell agreement is a very important step to take. A buy-sell agreement (BSA) is an agreement between business partners outlining what will happen to an owner’s share in the business if they leave for some reason. Owners leave their businesses for a variety of different reasons including death, disability, retirement, or the desire to pursue a different career. Because these departures are sometimes sudden, it is very important to have a buy-sell agreement in place that dictates the terms and conditions under which the remaining owners will be allowed to purchase the leaving owner’s share of the business. Working out a buy-sell agreement when a business is first formed is a very prudent thing to do because this can help the parties involved negotiate rationally in anticipation of issues rather than emotionally after issues arise. Involving an impartial corporate law attorney who can draft the agreement and help estimate the value of the company is also a great idea. You can also achieve some of the same results within the company’s operating agreement.

Why Create a Buy-Sell Agreement?

According to USLegal.com buy-sell agreements are generally created for three different reasons:

To establish the business’ value for death tax purposes.
To avoid continuing the business with a deceased co-owner’s heirs.
To prevent partial ownership of the business from falling into an “outsider’s” hands.

In order to realize these various objectives, buy-sell agreements come in several different forms. For example, a buy-sell agreement can take any of the following shapes:

Stock Redemption Agreements or Stock Retirement Plans: These buy-out agreements are formed between the business and the individual owners.
Criss-Cross Agreements: A buy-sell agreement between the owners of the business.
Third Party Business Buy-Out Agreement: These buy-out agreements are formed between the business’ owners and another key person, such as a family member.
A Combination: A buy-out agreement can also be a combination of the forms listed above.

Mistakes Commonly Made When Drafting Buy-Sell Agreements

Although buy-sell agreements are very commonly developed by closely held business owners, according to the Cannon Financial Institute there are several mistakes that are commonly made when drafting these agreements. A few of these mistakes include:

Waiting Too Long to Draft the Agreement: It is important to draft your buy-sell agreement well before it is needed. In fact, it’s never too early for your business to develop a buy-sell plan. However, it is important to remember that a business’ needs change over time and that you may need to change provisions in the agreement at some later date.
Using a Fixed Valuation: Buy-sell agreements often contain a fixed dollar amount that operates as a purchase price in the event that a triggering event occurs. This fixed amount will probably need to be updated every couple years as the business grows, and can be problematic as many business never actually update their buy-sell agreement.
Inadequate Funding: New business are often low on cash, and therefore buy-sell agreements are often not funded appropriately. While life insurance policies are often used to fund buy-sell agreements, it is important to make sure that the insurance coverage is sufficient, even after the business has grown.

What Can We Do to Help?

Drafting a buy-sell agreement that meets the individual needs of your business is critical to the long-term health of your organization. Employing a law firm that has experience drafting corporate documents, such as Cloud Willis & Ellis, LLC, will help ease your mind and ensure that the future of your company is safely in order. Our corporate law attorneys are happy to assist you and can be reached at our office in Birmingham (205-322-6060) or in Mobile (251-545-4844).

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