December 10, 2008
Dreir LLP and the the New York LLP provisions
I recently blogged about possible partnership-by estoppel issues in claims against the Dreier law firm non-equity partners. After further reading, the firm appears to be structured as an LLP, so that changes things. An LLP is still a partnership, so that implies more than one partner. Assuming that the non-equity partners were in fact partners of the LLP, the focus shifts to the variety of LLP used in the New York Statute.
Under Section 26(b), a New York LLP is a "full-shield" LLP, with the usual exception ("cutout") imposing liability for a partner's own torts or those of persons under the partner's "direct supervision and control". Sec. 26(c)(i). In addition, Section 26(d) allows a majority of partners, unless otherwise agreed, to agree to liability of "all or specified partners ... for all or specified debts, obligations or liabilities" of the LLP. Of course, and partner can agree"to act as a guarantor or surety for, provide collateral for or otherwise be liable for, the debts, obligations or liabilities" of the LLP. Id.
posted by Gary Rosin
Non-Equity Partners in Law Firms
I don't know if you have heard of the "Dreier" law firm and its financial structure. In an article published in 2007 in the national Law Journal, "How to Find Professional Fulfillment Outside the Equity Partnership Model," Marc S. Dreier touted the advantages of a law-firm structure with only one equity partner. As described by Dreier, the structure is not particularly unusual. There is one equity partner. Each of the other members of the firm--which he refers to as "partners"--get a base compensation, plus a bonus based on a share of the gross revenues attributed to business done or generated by that member. No profit-sharing.
Now there is nothing particularly unusual about this structure; just another variant of "Eat What You Kill." At least in Texas, many small firms are structured in the same manner. Sometimes there are a few equity partners, rather than just one; everyone else gets a share of gross revenue. Sometimes the others get "advances"--implying a debt"--against future allocations. The IRS considers the other members to be employees, and their advances salaries subject to withholding and employment taxes.
What made the Dreier firm different was that he was the only equity partner in a 175-member firm (at the time of the article).
The firm's primary lender, Wachovia, has sued the firm and all the no-equity partners for default on an aggregate of $14.5 million in money loaned to the firm. In today's article, Zach Lowe of the American Lawyers also raised the possibility of liability to clients should it turn out that client trust funds have been misapplied.
Putting aside the questions of personal responsibility under ethics rules, and possible personal assurances given by a non-equity partner, the answers may turn on partnership-by-estoppel (New York still operates under a UPA-based statute) or the "purported partner" provisions of the RUPA (2001).
- Are the non-equity partners held out as "partners" in firm literature or letterhead?
- If non-equity partners described as such, do clients and creditors even know what that means? (I suspect that Wachovia did).
To make matters worse, in some satellite offices, the name of a non-equity partner was added to the firm name to
capitalize on the reputation and goodwill of [local] partners, who are widely recognized as leaders in a particular field or region.
Perhaps we'll get a published estoppel opinion out of this. And those are hard to find.
Hat-tip to Zach Lowe and Daniel wise (New York Law Journal).
Update: As noted in my next post, the Drier firm is an LLP, which changes things. I'm leaving this post up for those small firms that may might not have adopted a limited liability structure. GSR
posted by Gary Rosin
March 12, 2007
Small Business And Energy-Efficient Upgrades
An article from BusinessWeek.com (Mar. 7) discusses a new program for small businesses that allow them to install energy-efficient upgrades without paying any upfront costs. The program, called on-bill financing, works in the following way: with assistance from a state’s energy efficiency fund, a utility company finances the energy-efficient upgrades by giving the small business an interest-free loan. The loan payments then appear on the small business’s monthly bill as a line item. The utility company divides up the loan payments according to the amount that the business saves each month on its energy bill. The effect, then, is that the amount of the energy bill remains the same and once the loan is paid off the bill goes down. While only a handful of states currently have on-bill financing programs, the idea is catching on quickly, and there is a push for Congress to extend on-bill financing throughout the country.
To read more about on-bill financing in the BusinessWeek article, go here.
March 02, 2007
Small Business Lobbyist Groups Rally To Oppose Tax Gap Proposals
A recent article in Forbes discusses how small business lobbyists are strongly opposing some of the proposed measures to narrow the so-called tax gap purportedly caused in part by the underreporting of income by small businesses and sole proprietors. As the article explains, the National Federation of Independent Business, the U.S. Chamber of Commerce, the Small Business Council, and numerous other groups have created the Coalition for Fairness in Tax Compliance, which plans to block proposals that the Coalition says would unfairly burden small business owners and self-employed taxpayers by imposing onerous reporting requirements. The IRS estimates a tax gap of $345 billion, with $148 billion of that amount representing underreporting of income by individuals. Many of the proposed measures to close the gap involve a major expansion of reporting requirements for third party “middlemen.” For instance, stock brokers would be required to report not only what a customer sold his stock for but also what he paid for it, i.e., his or her taxable income, and auction sites such as eBay would have to report sellers who conduct more than 100 transactions per year. Finally, one of the proposals most vehemently opposed by the Coalition is a proposal that would require businesses that pay other businesses more than $600 a year to report the payment on a 1099, thus adding to the already current requirement that businesses report payments of more than $600 a year to unincorporated sole proprietors.
To read the Forbes article, go here.
March 01, 2007
Study Says Small Businesses Remain Optimistic About Economy But Worry About Their Own Cash Flow
According to a recent survey by Discover Card, small businesses owners remained confident about the economy in February, but they expressed concerns over their cash flow, with 40% reporting concern about their cash flow, as compared to 24% in January. Small business optimism remained fairly steady between January and February, with Discover’s Small Business measure falling from 114.3 in January to 113.4 in February. According to the survey, 17% of small businesses reported that they planned to hire more workers in February, as compared to 14% in January, and 39% plan to invest in business development, as compared to 35% as reported in January.
To read a CNNMoney.com article about the survey, go here.
And to read the highlights from the Discover Small Business Watch, go here.
February 28, 2007
Article On Use Of LLCs For Anonymity In Real Estate Transactions
There is an interesting article in a recent issue of The Washingtonian discussing how the rich and famous often try to hide their pricey real estate transactions by placing the properties in LLCs. The article notes the recent example of the sale of presidential candidate John Edwards’ $5.2 million Georgetown home to Paul and Terry Klaassen, founders of Sunrise assisted-living centers. The Klaassens attempted to hide their identities by creating P Street LLC to act as the buyer, but reporters just as quickly figured out who the real buyers were. Despite that the Edwards never knew the identity of the buyers, the story gained some traction in the press because the Klaassens are involved in a government inquiry related to accounting practices and stock options that they and other company insiders had exercised. They are also the target of certain legal complaints by certain labor unions from which Edwards seeks support in his presidential campaign.
To read the article in The Washingtonian giving numerous other examples of the use of LLCs in real estate transactions for other high-profile people, go here.
And to read a Washington Post article about the sale of the Edwards’ Georgetown home to the Klaassens, go here.
February 26, 2007
Co-Working Facilities: The New Trend For Entrepreneurs
A recent article on BusinessWeek.com discusses a growing trend among small business owners and start-up companies to enter into office-sharing arrangements where each participant pays a flat daily or monthly fee for use of office space. For instance, a company in San Francisco called the Hat Factory offers a desk and basic office amenities, including a shared kitchen and lounge, for a fee of from $10 a day to $170 a month. The Hat Factory’s web site describes itself as “community office space for geeks and media hackers . . . a group of open sourcers, video bloggers, Drupal developers, and more who are tired of working from coffee shops and home every day.” Community office space arrangements such as this one are cropping up all over the country and throughout the world. Indeed, in a recent report titled “The Future of Small Business,” Silicon Valley’s Institute for the Future recently named co-working as a significant trend that will continue to grow over the next decade.
To read the BusinessWeek.com article, go here.
And to read another article on “The Future of Small Business,” go here.
February 25, 2007
Small Business Health Insurance Bill Likely To Be Revisited In 2007
A recent article on CNNMoney.com reports how it is likely that Congress will soon revisit legislation for small business health insurance that was introduced and rejected last year. The bill, introduced last year by Health, Education, Labor, and Pensions ranking member Senator Michael Enzi, allows businesses to share the risk of costs by pooling together to purchase health insurance for employees. When the bill was introduced last year, pro-consumer groups largely opposed it, arguing that because the legislation allows employers to deviate from state requirements for coverage, this could lead to denial of coverage for certain illnesses such as diabetes and breast cancer. Critics also warned that the bill would raise costs for services not covered under the policies.
To read the article about the small business health care legislation, go here.
February 20, 2007
New York Times Article On Fast Food Franchise Owners Paying The Costs Of Food Poisoning
The New York Times ran an article in its small business section Monday (Feb. 20) about how the food-borne illnesses striking restaurant chains such as Taco Bell can be devastating to the small business owners that own the individual franchises. For instance, the article explains that when the latest food-borne illness outbreak occurred at Taco Bell, all but four of the 90 stores that temporarily closed were individually owned franchises. Individual franchises can also be held liable for outbreaks based on strict liability as the food server, and the franchisees are ultimately dependent on the parent company for bringing sales back up through marketing and campaign ads after an outbreak.
To read the full article, go here.
February 19, 2007
House Approves $1.8 Billion In Tax Cuts For Small Businesses
On Friday (February 16), the House overwhelmingly approved $1.8 billion in tax cuts for small businesses by a vote of 360-45. As I mentioned in an earlier post, the Senate’s version of the bill was $8.3 billion, so now it is up to Congress to see if it can meet somewhere in the middle and also agree on a raise in the minimum wage. The House bill would offset the tax cuts by ending a loophole in the tax code that allows wealthy taxpayers to shift their income to their children and avoid higher capital gains taxes.
Not everyone is pleased with the House bill. According to an article in BusinesWeek.com, Sen. Charles Grassley (Rep. Iowa) described the House package as “puny,” and small business advocate group National Federation of Independent Businesses supports the larger Senate package.
To read more about the Senate and House bills, go here.
February 17, 2007
New York Times Article On Big Prizes For Innovation
The New York Times ran an article Friday (February 16) about how some venture capital firms are taking cues from the hit show “American Idol” by considering contests in which engineers and entrepreneurs can win multi-million dollar prizes for creating innovative technologies. The idea will be launched at a fundraiser for Google in March as part of an effort to raise a part of the $50 million needed to operate the non-profit X Prize Foundation. Prizes would be given for innovation in areas such as medicine, reducing poverty, and automotive fuel efficiency.
As the article notes, prize-giving for innovation is not an entirely new idea and there are current contests already in place—for instance, the announcement last week from former Vice-President Al Gore and Virgin Airlines billionaire Richard Branson of an award of $25 million to the person who comes up with a new technology to reduce greenhouse gases.
To read the New York Times article, go here.
And here is the X Prize Foundation’s website.
[Gregory M. Duhl]
February 15, 2007
Chinese Businessman Sentenced To Death For Investment Fraud Scheme
A Chinese court sentenced Chinese businessman Wang Zhendong to death this past week based on his role in a fraudulent investment scheme involving ant breeding. (In certain parts of China, black ants are bred and sold to be used in medicinal remedies. The ants are steeped in tea or soaked with liquor for relief of ailments such as arthritis.) Zhendong had promised up to 60% returns for investing in the purchase of ants and breeding kits from two companies he ran. The court found that Zhendong defrauded more than 10,000 investors out of about $385 million. Other participants in the scheme, specifically 15 managers at the companies, were fined and sentenced to prison terms from 5 to 10 years.
To see an article about the case on FoxNews, go here.
February 13, 2007
House Ways And Means Committee Unanimously Approves Small Business Tax Relief Act
On February 12, the House Ways and Means Committee gave unanimous approval to the Small Business Tax Relief Act of 2007. The legislation would give about $1.335 billion in tax breaks to small businesses and was originally offered as leverage for the Democrats' hopes of raising the federal minimum wage. The current legislation is much less ambitious than the $8.3 billion package that Senate Democrats attached to a minimum wage bill in January. The proposed legislation includes, among other things, an extension through 2008 of tax breaks encouraging the hiring of traditionally unwanted employees such as high-risk youths and ex-felons. The legislation would also extend through 2010 provisions allowing small businesses to write-off up to $125,000 of initial investments in equipment and would ensure that restaurant owners continue to enjoy the same tax credits as they currently do if their employees earn more than the minimum wage with tips added to their base pay.
To read a New York Times article about the legislation, go here.
Also, for links to various relevant legislative documents, go to the February 13 entry about the legislation on Tax Prof Blog here.
February 11, 2007
Outsourcing to China Not Always Good Business Move For Entrepreneurs
According to a recent article from BusinessWeek.com, even savvy entrepreneurs—that is, those who are very familiar with China’s language and business customs—are getting fleeced more and more by widespread counterfeiting that the Chinese government has yet to rein in. According to the article, here’s how it works: a business initially cuts its production costs by outsourcing its manufacturing to China. Within a few years, however, counterfeiters are cutting into the business’s profits by offering knockoffs in the U.S at lower costs than the originals. With China’s continued slack enforcement of the country’s intellectual property laws, the business has limited recourse against the counterfeiter.
To read the BusinessWeek.com article, go here.
February 07, 2007
Study Says Immigrant Entrepreneurial Spirit Has Significantly Contributed To Recent Economic Growth In Nation’s Cities
A recent study finds that immigrants have greatly contributed to the recent economic growth in the nation’s largest cities through their entrepreneurial efforts. According to the study, released by the Center for an Urban Future in New York City, foreign-born entrepreneurs are starting more businesses in major cities than are native-born entrepreneurs, contributing to substantial economic growth in many sectors, ranging from food manufacturing to health care. The study’s subtitle proclaims that “[i]mmigrant entrepreneurs have emerged as key engines of growth for cities from New York to Los Angeles . . . .” For instance, the study found that in 2000, foreign-born persons made up 36% of New York City’s population, while they accounted for 49% of all self-employed workers in the city. And in Los Angeles, first-generation immigrants created at least 22 of that city’s 100 fastest-growing companies in 2005.
To read an article in BusinessWeek.com about the study, go here.
And to read the study, go here.
February 01, 2007
Matching 401(k), Health Insurance, Two Weeks Vacation, And . . . Skydiving?
Today’s (Feb. 1) New York Times Business Section contains an interesting article about how small business owners are beginning to offer unusual perks to their employees, ranging from sky diving to pet sitting services to luxury cruises. The Times article reports that, according to human resource specialists, workplace perks have increased more than 20% in the past decade, and apparently, in this tight labor market, employers are getting much more creative in thinking of ways to attract and keep good employees.
To read the New York Times article, go here.
January 30, 2007
Quality Of Life More Important Than Paycheck, Says Survey Of Small Business Employees
According to a recent survey of small business employees by Salary.com, 62% of those surveyed prefer the benefits of working for a small company over the heftier paycheck they might bring in at a larger company. Survey respondents reported that working for a smaller business offers them the advantages of working fewer hours, having shorter commute times, feeling more loyalty to their employers, liking their bosses better, and maintaining better relationships with their co-workers. More specifically, 46% of respondents said that they continued to work for a smaller company because of the work/life balance it offered. Additionally, 38% reported having a shorter commute, 35% said that loyalty was a motivating factor, 31% reported liking their boss, and 30% reported having good relationships with co-workers as an incentive for working at a smaller company.
To read an article about the survey, go here.
January 29, 2007
Small Business And Illegal Immigration
A recent article on CNNMoney.com discusses how some small businesses have begun to file lawsuits against their competitors for hiring illegal aliens rather than waiting for the federal government to take action on illegal immigration. For example, L.A.-based Global Horizons is in the business of supplying seasonal agricultural workers to apple, blueberry, and potato growers. When Global Horizons lost one of its clients to rival J&A Contracting, Global Horizons brought a lawsuit against the former client and J&A, alleging that J&A was able to supply cheaper labor than Global Horizons by using illegal workers. The complaint alleges claims for breach of contract, intentional interference with economic benefit, and violations of California’s general antitrust law called the Cartwright Act, Bus. & Prof. Code 16720. Plaintiff’s Cartwright Act allegations are that the former client and J&A “engaged in an illegal trust to restrict trade or commerce and conspired to restrain trade or commerce and lessen competition by Defendants’ use of illegal immigrant labor and violation of California wage and hour laws to those workers, the effects of which restrains and directly affects Plaintiff’s ability to compete in the marketplace.”
To read the article on CNNMoney.com, go here.
And to read the complaint, go here.
January 24, 2007
Survey Says Many Small Business Owners Were Loners As Kids
Financial software maker Quickbooks recently surveyed 1300 small business owners to learn more about small business trends. The survey concluded among other things that many of them were loners as children. Here are some of questions and responses from the survey:
How would others describe you as a kid?
Nerd 25% ; Bully 1%; Jock 11%; Clown 20%; Loner 43%
If you had a job as a kid, what did you primarily do?
Mowed the lawn 8%; Babysat 25%; Ran a lemonade/food stand 1%; Did chores around the house 9%; Held a newspaper route 12%; Various after school jobs 29%; A unique job that I created 7%; I did not have a job 11%:
What’s your birth order?
Oldest 43%; Youngest 24%; Middle 22%; Only child 11%
What was the most influential factor for starting your business?
Needed a job to supplement my income 10%; Saw need for business in market 9%; To turn my passion into a business 23%; More flexible hours 10%; To be my own boss 40%; Spend more time with my family 4%; Better pay 3%
What’s the number one characteristic that’s most important to be a successful entrepreneur?
Risk taker 16%; Visionary 19%; Hard worker 37%; Good with people 18%; Optimistic 6%; Process oriented 4%
What level of education do you have?
High school diploma 21%; Associate degree 15%; Undergraduate degree 25%; Graduate degree 29%; Trade degree 5%; No degree 4%
How old were you when you started your first business?
Under 25 16%; 26 to 35 29%; 36 to 45 30%; 46 to 55 18%; 56 or older 7%
What´s your overall business outlook for 2007?
Bleak 10%; Optimistic 56%; Status quo 34%
What’s your main New Year’s business resolution?
Spend more time with family 19%; Manage my finances better 22%; Grow my business 40% ; Better compete with competitors 5%; Other, please specify 15%
What’s the number one issue facing small business in 2007?
Employee compensation 3%; Employee benefits 13%; Competition from big business 16%; The economy 39%; Taxes 18%; Other 10%
To read more about the survey, go here.
January 20, 2007
Mayor Bloomberg Vows To Reduce The 4% Unincorporated Business Tax In NYC Through Deductions And Credits
With New York City expecting a record budget surplus for 2007 due in part to the thriving real estate economy, city leaders are planning to institute $1 billion in tax relief, including providing relief to small businesses from the city's burdensome 4% unincorporated business tax. In his 2007 "State of the City"; speech on January 17, Mayor Bloomberg said the following about his intentions to relieve small businesses from the burden of the UB tax:
So, my preliminary budget will include $1 billion of tax relief. This is a broad-based package of tax cuts, designed to pump money back into our neighborhoods, create jobs, lower the burden on property owners, and make New York an even more attractive place to live and work. First I will propose to the City Council that we lower the property tax rate -- for one year -- by roughly 5%, or by $750 million. I've always said I wanted to cut property taxes and this year we can. It would be great if we can extend this in the years to come, but we can't know that we'll be as fortunate in the future with our revenues and expenses so right now it would not be fiscally sensible to commit to doing so. Because the best way I know to have the good times continue is to act responsibly now. We will also seek permission from the State Legislature to continue the $400 property tax rebate. We expect they will approve our request since the original law said the rebate would be continued only if the city reduced the overall rate - exactly what I am proposing today. The other $250 million in tax relief we propose will be included in three other measures. One: we will seek to help small businesses grow by reducing the Unincorporated Business Tax through a combination of deductions and credits. This tax hurts our ability to attract and retain small businesses; reducing it will strengthen our long term business climate. And remember, one of every two people working in New York are employed by small businesses. Two: to create the jobs that will continue to fuel our economy and to benefit businesses large and small. We will also propose three targeted reductions in the General Corporate Tax, including a credit to owners of small, or "S," Corporations, as Speaker Quinn has championed. And three: to make sure that shoppers and visitors continue to flock to great stores in all five boroughs, we will totally eliminate the City sales tax for all clothing and footwear. And as to the rest of our surplus, we will be prudent and dedicate it to reducing future deficits.