New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

There are a number of different factors one must consider in forming an entity in New Jersey, chief among them: (a) how the entity will be taxed, (b) management, and (c) to what extent does the entity offer protection from personal liability.  What follows is a brief description of entity formation in New Jersey, focusing on the above considerations.
 

“C” and “S” Corporations
Perhaps the most well known form of business entity is the “C” corporation. Companies such as Pepsi and Ford are “C” corporations. A “C” corporation is an entity that is separate and apart from its owners. What this means is that the earnings that are distributed to the owners are taxed both at the corporate level and at the personal level.  The “S” corporation is a corporation with more favorable tax treatment. The profits and losses of a “S” corporation pass through to the shareholders of the corporation, and are therefore taxed only once. An “S” Corporation is not without its drawbacks.  The current tax laws limit the number of investors, classes of stock, and have strict residency requirements. Shareholder liability in a corporation is limited to the shareholder’s investment in the corporation.
 

New Jersey’s corporate management structure is similar to that found in most states. Generally, New Jersey corporations are managed by a board of directors, who are elected by the shareholders. The directors stand in a fiduciary relationship to the corporation and must perform their duties in good faith. The board of directors of the corporation elect officers to handle the day-to-day affairs of the corporation.
 

Partnerships
General partnerships and limited partnerships enjoy “flow-through” tax treatment for tax purposes; the entity is not taxed and the partners report profits and losses directly on their personal income tax returns. Unless an agreement between the partners provides otherwise, each partner is entitled to share equally in the management of the partnership and has the authority to bind the partnership.  The drawback of the general partnership is lack of limited liability protection. In contrast to a general partnership, limited partners in a limited partnership do not participate in the management of the partnership. A limited partnership must have at least one general partner and at least one limited partner. The general partner assumes personal liability for the debts and obligations of the partnership. The limited partners do not have any personal liability beyond the capital contributions they contribute to the partnership.
 

Limited Liability Companies
Like general partnerships and limited partnerships, limited liability companies’ (“LLCs”) profits and losses “pass through” the entity and are reflected and taxed on the individual tax returns of the members. LLCs can be managed by the members or one or more elected managers. The default rule in New Jersey is that the members manage the LLC. In this scenario, each member has the authority to bind the LLC.  If the members opt to have the LLC managed by a board of managers, the members may appoint one or more managers to operate and control the business. In this instance, each manager is vested with the authority to bind the LLC.
 

Unlike a limited partnership, there is no requirement that at least one member of the LLC be responsible for the liabilities of the company. Furthermore, members are not liable for the debts of the LLC solely because they are members. Because of the ease of formation and its favorable liability treatment, the LLC has become increasingly popular in New Jersey.

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Allen M. Silk, Chair of Stark & Stark’s Business & Corporate Group, will serve as panelist for the Agudath Israel of New Jersey’s Legal Workshop. The workshop will take place at the Park Terrace Hall in Lakewood, New Jersey on Thursday, November 12, 2009, from 5:30 - 8:30 PM.

The workshop will focus on issues affecting not-for-profit organizations or institutions and will cover topics under both federal law as well as New Jersey state law. The topics that will be discussed will include: organizational structure and the kinds of activities in which an organization may (and may not) engage; the taxability of unrelated business income; tax exempt qualification and activities that may jeopardize such qualification; record keeping requirements; filing requirements, including a discussion of the yearly 990 filing; required corporate formalities; criminal law issues including money laundering, tax evasion/tax avoidance, benefits fraud and the “know your customer” requirement; required filing of forms for cash deposits and suspicious activities; and banking & licensing requirements including activities that may require an organization to be licensed as a bank, money service business, money transmitter, and check casher.

For additional information contact the Agudath Israel of New Jersey at ykupfer@agudathisrael.org or call 212-797-9000 ext. 306.

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Model A Fitness of Boonton, New Jersey has sued Retrofitness for fraud, consumer fraud, breach of contract, and violations of New Jersey’s Franchise Practices Act. Retrofitness Enterprises and Retrofitness Corp. owns, operates and franchises body building, health and fitness facilities under the “Retrofitness” trademark. The Retrofitness lawsuit is being watched by franchisors and franchisees alike.

Retrofitness franchises have been steadily increasing in number over the last few years.  Back in November 2005, Retrofitness entered into a license agreement with Model A’s owners for the development of a facility in Boonton, but Model A alleges in its Complaint filed in New Jersey Superior Court that Retrofitness’ principal, Eric Casaburi, enticed them into the license agreement through a series of false promises and misrepresentations, and then attempted to coerce them into signing a franchise agreement on far less favorable terms for the owners.  When the owners refused, Retrofitness terminated the license agreement and, according to the Complaint, opened a new location up the street which unfairly competed with Model A. 

The case is being watched because it raises significant issues under the Franchise Practices Act, and also because it will test the applicability of New Jersey’s Consumer Fraud Act generally to franchises.  The Complaint filed in New Jersey Superior Court can be viewed online here.

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Adam J. Siegelheim, member of Stark & Stark's Business & Corporate and Franchise Groups, authored the article Small Business Owners Need to Plan for Tax Increases in 2011 for the September 2009 edition of Mercer Business Magazine.

The article discusses the differences, and advantages, between an S Corporation and a C Corporation. Mr. Sigelheim points out that although S Corporations currently receive tax breaks which were put in place by former President Bush, President Obama’s proposed budget for 2011 does not include the renewal of these tax cuts, and therefore, in the future it may be more profitable to operate as a C Corporation. 

You can read the full article online here.

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Cary S. Kvitka, member of Stark & Stark’s Business & Corporate and Franchise Groups, will present a seminar entitled, Key Legal Considerations when Buying an Existing Business, Buying a Franchise, or Starting a Business From Scratch, for the Greater Princeton Area SCORE. The seminar will be held Wednesday October 21, 2009 from 6:45 – 8:45 PM at the Princeton Public Library.
 

The seminar will discuss the legal implications, benefits and detriments of buying an existing business, buying a franchise, and starting a business from scratch.  Mr. Kvitka will also address the issues which commonly arise with new businesses, including how to structure the transactions, due diligence, intellectual property issues and how to negotiate a commercial lease.

 
To register for the seminar, contact SCORE at: info@scoreprinceton.org, or by phone at 609-393-0505.

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Adam J. Siegelheim, member of Stark & Stark’s Business & Corporate and Franchise Groups, will participate as a panelist at the 2009 New Jersey Organization and Sale of Small Business seminar, as part of the New Jersey Institute for Continuing Legal Education’s Skills & Methods Course. The seminar will take place Wednesday September 16, 2009 from 6:00 – 10: 00 PM at the Grand Versailles Quality Inn in Maple Shade, New Jersey.

For almost 50 years, the Skills and Methods Course, a nationally renowned “bridge the gap” program, has helped prepare thousands of attorneys for the transition from either law school to practice, or practice in other states to practice in New Jersey. Mr. Siegelheim will join with other attorneys from the state of New Jersey in presenting the New Jersey Organization and Sale of Small Business seminar. You can access additional information on the Skills & Methods Course offered by the NJICLE online here.

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Adam J. Siegelheim, member of Stark & Stark’s Business & Corporate and Franchise Groups, will present a seminar entitled, How to Start a Business, for the Greater Princeton Area SCORE. The seminar will be held Tuesday September 8, 2009 from 6:45 – 8:45 PM at the Princeton Public Library. Mr. Siegelheim will present the seminar along with Jack Armstrong, President of Franchise Network of New Jersey and CFO of FranNet LLC.

The seminar will discuss the pros and cons of three business startup options:  buying an existing business, purchasing a franchise, or building your own business.  It will also cover how to negotiate commercial leases and vendor contracts for maximum protection. 

To register for any of these seminars, send an email to info@scoreprinceton.org, or call SCORE at 609-393-0505.

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Copyright law is often the first and best line of defense against unauthorized reproduction of the products of the creative mind. As important as the law is to the work of so many firms, such as advertising agencies, software developers, artists and music publishers, it is a frequently misunderstood law. The following illustrations highlight a few of the important pillars of federal copyright law everyone should know:      

1. You recently wrote a scholarly article for a trade journal, and shortly after it was published discovered that a substantially similar article appeared in another journal.  Unfortunately, you never registered the work with the U.S. Copyright Office, nor did you put any copyright notice on the article.  Do you have any rights?

Yes.  Under the Copyright Act of 1909, copyright owners forfeited their rights when they failed to mark each copy of their work with a proper copyright notice (name, date and copyright symbol).  Under the 1976 and 1988 amendments to the statute, however, the formalities of the earlier law have been all but eliminated.  Now, for all works first published after March 1, 1989, no copyright notice is required to secure protection for the author (although it is still recommended and used widely).  Moreover, contrary to popular myth, registration affects only the enforceability, not the existence, of copyright.  Copyright arises upon creation of the work, and registration merely gives the author certain additional rights, such as the right to sue to enforce the copyright and the right to claim enhanced damages.

2.    You discover that someone first copied and sold your computer program ten years ago, and is continuing to infringe the work to this day.  Can you pursue such a claim even though it is so old? 
Yes.  Although the Copyright Act contains a three-year statute of limitations, most courts hold that either:

1) the statute does not begin to run until the date of the last act of infringement; or

2) the statute permits recovery of all damages occurring within the three-year period preceding suit, even if some acts of infringement occurred beyond that period. Therefore, you can probably still pursue much of the claim.

3. You are the owner of an advertising agency, and your creative director tells you that she had no idea that employees were making unauthorized use of copyrighted material for the benefit of the agency.  Is this a defense?
No. Innocent intent, good faith, or even subconscious copying are not defenses to copyright infringement.  Although it may have a great bearing on the issue of whether the infringement was willful (subjecting the company to enhanced damages), the copyright owner only needs to prove that unlawful copying occurred.  The company itself may be liable if it provided the means for its employees to commit the infringement, and had or should have had knowledge of the infringing activity (known under the law as “contributory” infringement), or if it had the right to control the employee's conduct and received a financial benefit from the infringement (known as “vicarious” infringement).
 

4. You have a great idea you want to copyright, and it involves a new system for processing customer orders.  You have written down your ideas in a concise document.  Will a copyright registration protect this idea?
 Probably Not. Unlike patents, copyrights do not protect ideas, only the expression of those ideas.  Moreover, the rights granted by Congress to copyright holders in the Copyright Act are not unlimited.  The statute grants a copyright holder certain exclusive rights, including:

1) the right to reproduce;

2) the right to prepare derivative works;

3) the right of public distribution;

4) the right of public performance; and

5) the right of public display. 

The Act does not give the owner a monopoly on the ideas embodied in the work, and in fact the statute is explicit in stating that "[i]n no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery...."  This is the famous "idea/expression" dichotomy of copyright law.   Therefore, even if you file a registration, the scope of protection may be quite limited. 

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As times are getting tougher for businesses, and the State of New Jersey is getting more hungry for tax revenues, we are seeing a crackdown by the State on enforcement of the bulk sale notification requirements.  The statute containing those requirements, N.J.S.A. 54:32B-22(c), provides as follows:
 

(c) Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.
 

Whenever the purchaser, transferee or assignee shall fail to give notice to the director as required by the preceding paragraph, or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, in addition to being subject to the liabilities and remedies imposed under the provisions of the uniform commercial code, Title 12A of the Revised Statutes of New Jersey, shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act."
 

In 1995, I co-wrote an article with my former colleague, Susan Inverso, entitled "What Secured Lenders Need to Know About Notice Requirements and Tax Liabilities Before Repossessing Personal Property"   This topic is becoming more relevant today, as more lenders are repossessing property and taxing authorities trying to make up shortfalls in State budgets by action to collect delinquent taxes.
 

The State of New Jersey has made clear that they intend that statute to apply not only to transfers of personal property, but also to real estate if the real estate is the principal asset of the seller. 
 

The statute also applies to any transfer, regardless of the dollar amount.  This means that even if the transfer is for no consideration, the buyer or transferee must comply with the bulk sale notification procedures.  If the seller owes taxes, either the seller or buyer must come up with the escrow amounts.  Otherwise, the buyer will be liable for the seller's state tax obligations. 
 

Before accepting the transfer of any property outside of the ordinary course of business, you should confirm that all requirements, such as the New Jersey Bulk Sale Transfer Notice requirements, are met, so that no unforeseen liabilities result from the transfer.

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Thomas D. Giachetti, Chair of Stark & Stark's Securities group and Henry E. Van Blunk, Shareholder in Stark & Stark's Business & Corporate group authored an article for the July 2009 edition of the Charles Schwab Institutional Compliance Review entitled An Overview of External Transition Planning for the Registered Investment Adviser.

The article discusses how important it is for advisers to implement a succession plan for their firm in order to prepare for possible transitions in the future. Mr. Van Blunk and Mr. Giachetti state that due to the current economic climate, implementing a successful succession plan is even more crucial to the future success of a business.

You can read the full article online here. (PDF)

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