You and your business partner work great together and you’re building an amazing business. Will you be able to work as well with your business partner’s spouse? Ex-spouse? Adult children? A bankruptcy trustee? If not, you need a buy-sell agreement in place as soon as possible. A buy-sell agreement is the single most important tool for determining who will operate your business after the departure of one of the business owners or shareholders.
What is a buy-sell agreement?
A buy-sell agreement is a contract between business owner partners or shareholders that controls future ownership of the business. It is very similar to your personal will, only it is for your business. The agreement should spell out how the assets of the business will be divided in the event an owner departs the business suddenly, usually because of death, disability, or other life changing event.
Why do you need one?
The buy-sell agreement is necessary to preserve the continuity of the business ownership and to ensure that both the buyers and sellers’ interests are protected. The agreement also ensures that all parties understand their rights and obligations from the outset.
Like most things in life, it’s far easier to come up with a plan before catastrophe hits, rather than trying to come up with a plan when you’re in the middle of a stressful situation. For that reason, you should draft your buy-sell agreement when you form your business, or shortly thereafter.
What should a buy-sell agreement cover?
Each business’s buy-sell agreement should be specifically tailored to their individual business. A competent attorney paired with a tax professional can help you assess your specific needs and create an agreement that covers you.
There are three main topics that should be addressed in every buy-sell agreement.
Great! You drafted a buy-sell when you formed your business – it’s good forever, right?
Sorry, nope. The buy-sell agreement you drafted for your fledging company most likely won’t meet the needs of your growing business. When you were 25, you might have had a buy-sell agreement in place that entitles your older brother to buy your shares of your business. Fast-forward to when you’re 45, does that scenario still make sense now that you are married and have a child? What about when you’re 65, your older sibling has retired, and your adult child is now working in the business? You’re going to want to revisit and reevaluate your buy-sell agreement regularly, especially anytime a major event occurs or your goals have changed.
You should think of your buy-sell agreement as an opportunity to have periodic check-ins with your business partners about your changing goals for the future of your company. It is a great tool to start that candid conversation with your business partners.
Need to put a buy-sell agreement in place? Revise a long forgotten one? Erin loves helping businesses plan for the future.
IMPORTANT DISCLAIMER: This blog post is published for general informational purposes only. This is not legal advice, and it does not form an attorney-client relationship or constitute attorney-client communication. If you need legal advice on a buy-sell agreement, give us a call at 206-456-2579.
An observation by Amy
I was recently speaking to one of our super enthusiastic entrepreneurial clients who said, “I feel like I am on a space shuttle headed to the moon. We might not make it, the bolts could come out, the engine could explode, but right now we are rocketing into the atmosphere." I am sure many entrepreneurs feel the same. Launching a start-up (note the verb launch, also shared by rockets) is an exhilarating and terrifying journey.
Which is where your support team comes into play. Specifically, your attorneys. I spent some time chatting with this client on our role as attorneys, and then continued to reflect on the issue after our conversation. The conclusion I reached is that attorneys are your mission control on the ground. While they might be physically removed from the space shuttle, they are 100% invested in the success of the mission. They are there to see to a successful launch, and they assist with any problems that happen along the way. You can and should reach out to them when you hit a bump in your mission. Your success is their success.
Life lesson learned? Launching a start-up is scary, overwhelming, and amazing. Having the right team to support you is essential to making a successful go of it.
We recently hosted a lip-smacking lunch-and-learn about online content and copyright law with some of our favorite entrepreneur clients and friends. Here are a few highlights.
In an ideal, lawyer-approved world, you would never use someone else’s content without their permission. That said, we know business doesn’t work that way. So what do you do? Like many business decisions, you need to weigh the risk/reward scenario. When you are posting potentially infringing content for your business, think about:
Protecting Your Content
Protecting your own creative content can feel like an uphill battle. Manage the overwhelm by keeping a few points in mind:
Looking for creative counsel? Amy loves discussing copyright and artists’ rights, and initial consults are always free.
IMPORTANT DISCLAIMER: This blog post is published for general informational purposes only. This isn't legal advice, and it does not form an attorney-client relationship or constitute attorney-client communication. If you need legal advice on a copyright matter, contact us.
You invest time and money in developing high performing employees. They earn a fan base among your customers. When they leave, can you stop them from taking clients with them? Under your tutelage, their skills soar. Can you prevent them taking those talents to your competitor? Or launching their own business in direct competition with you?
The answer, of course, is it depends.
Generally, Noncompete Agreements are enforceable in Washington State when:
The best time to discuss post-employment competition is up front, when you’re negotiating employment. You’d be amazed at how much conflict can be avoided with open communication about expectations, followed by a well-crafted agreement that is clear and specific enough that the parties understand what they’re agreeing to. Documenting at the outset as part of the employment contract also helps ensure the court can find sufficient consideration for enforcement. Consideration means something of value has been exchanged.
All hope is not lost if you didn’t negotiate a Noncompete Agreement in the beginning. There are some valid reasons to contemplate one after employment is already underway – but it’s neither fair nor enforceable in Washington if a midstream agreement doesn’t include additional consideration. You’ll need to offer your employee something new and reasonable for their agreement to this change in terms, such as a promotion, raise, bonus, stock, or stock options.
Should you DIY? You can find some perfectly respectable contract templates online for free or no cost. When it comes to Noncompete Agreements though, be careful. Failing to tailor these to address the specific nature of your industry or business, or to analyze the reasonableness of the restrictions under Washington law, could cost you more in the end than a conversation with your lawyer in the beginning.
Most importantly, remember that being a great employer and running a smart business aren’t mutually exclusive. Our clients do both every day.
IMPORTANT DISCLAIMER: This blog post is published for general informational purposes only. This isn't legal advice, and it does not form an attorney-client relationship or constitute attorney-client communication. If you need legal advice on an employment matter, give us a call at 206-456-2579.
Every day, we work with entrepreneurs and change makers building great organizations. Here are a few common questions we hear, and the general answers to those questions.
Should I incorporate? It depends on what you want to do. There’s a range of entity types available to you in Washington state, from sole proprietorship to corporations. They vary in the degree of liability protection provided, and the levels of complexity and formality required. Sole Proprietorships are the easiest to form and offer the least protection for your personal assets. Limited Liability Companies are flexible and offer sufficient liability protection for many types of businesses. Corporations are more cumbersome to create and maintain, but offer a strong liability shield. The right choice depends on lots of factors, like what kind of business you intend to run, what regulatory schema it may be subject to, whether and how you plan to involve co-owners, and whether you intend to seek capital investments.
What’s the deal with Delaware? For the last century, Delaware has been a haven for US corporations because of its favorable corporate law and unique Court of Chancery. According to Delaware’s Division of Corporations, two-thirds of all publicly-traded companies in the US, including two thirds of the Fortune 500, are incorporated there. Delaware corporations seem to be the favored entity among venture capital firms. If your plans are to build a company that will seek VC investment and ultimately go public, you might want to consider a Delaware corporation. Otherwise, incorporating here in Washington where you run your business might make better sense.
Do I need a business license? Almost without exception, yes. Even if you’re a sole proprietor, you need a business license to do business in Washington state. You probably need a city license, too. Do not neglect these.
I need to build a team, but I don’t have my hands on any capital.
Should I trademark our business name or logo? Maybe. Are they unique, and are you worried that your customers could be confused if they see someone else using them? A trademark is a word, phrase, symbol, or design, or a combination of them, that identifies and distinguishes its source. If brand recognition is important to your business, you might want to consider registering your trademark for state or federal protection, and then developing a sustainable plan to manage them.
Remember, reading this blog post does not create an attorney-client relationship. We've shared some common answers to common questions, which are not offered as specific legal advice to you. If you have a question or want to figure out how any of these apply to you, contact us for a free consultation.
If you want to hear your fundraising team groan in agony, simply mention Donor Advised Funds.
It’s not that they’re not valuable. Last year, DAF grants to charities grew to $14.52 billion (yes, billion with a “b”). And with $78.64 billion in DAF assets nationally, DAFs are nothing to ignore.
It’s not that they’re hard to find. At least 1,016 charities sponsor one or more of the existing 269,000 DAF accounts. They are numerous, if not yet ubiquitous, in the philanthropic world. If your organization fundraises, your organization likely receives some DAF funds.
The problem with DAFs, and the source of your team’s angst, rests with the fact that the IRS still has not, as of 6:00pm on December 5, 2016, issued regulations ten years after the Pension Protection Act of 2006 created new DAF rules. That leaves unanswered questions that put your organization, and your donors, at risk of penalties like excise taxes, fines, and rejection of charitable deductions.
Frustrating, sure. But there’s no need to panic. Follow this donor-centered approach and a few simple steps to keep your organization and your donors out of trouble:
Distinguish your donor (legal donor) for tax purposes, from your donor advisor (donor in spirit) for stewardship purposes. If you received $5,000 from the Jane Doe Family Fund at the Wholly Philanthropy Community Foundation, your donor is Wholly Philanthropy. Contact them. Establish a relationship with a fund manager. Find out if they want to receive a tax letter every time you receive a DAF gift from them and manage accordingly. Ensure WP gets the hard credit for the gift in your systems. Jane Doe, on the other hand, is your donor advisor. Do NOT send Jane Doe a tax receipt. She is Wholly Philanthropy’s donor, not yours. Instead, try to send Jane an acknowledgment that can’t be confused with a tax receipt. It should say something like, “Dear Jane, We recently received a gift from Wholly Philanthropy based on your recommendation. Thank you for thinking of us again in your charitable giving!” Give Jane a soft credit in your system. The bottom line is, make Jane feel like a $5,000 donor to your organization, even though she technically isn’t in this situation.
Clarify what benefits you can – and cannot – provide in exchange for a DAF gift. Donors, donor advisors, and related persons cannot receive “more than an incidental benefit” in exchange for a DAF gift. A tax of 125% of the benefit value can be levied on the party who advised the distribution and the party who received the benefit. And the fund manager who allowed the distribution is subject to a tax of 10% of the benefit value, up to $10,000 per transaction. In the absence of regulations, assume that closely analogous private foundation rules against self-dealing apply. That means no DAF gifts for: event sponsorship (unless the table and other benefits are forfeited), event tickets, payments for tuition or services (like summer camp registration or daycare), donor clubs with benefits (like exclusive access to events and complementary parking where others would have to pay). Note, too, that this means no “bifurcation” of gifts where Jane Doe wants to join your Super Special Donor Club, advises one gift from the Jane Doe Fund, and pays the “non-deductible” portion out of personal funds. The simplest way to avoid such prohibited benefits is to keep it clean. Establish guidelines for your donors encouraging DAF gifts and grants for outright support, not payments in exchange (fully or partially) for something, and publish them for your donors to see like International Rescue Committee has done here.
Remember, donors can’t pledge DAF gifts or satisfy binding pledges with DAF gifts. Because DAF funds no longer belong to the donor advisor, she can’t actually commit them, and she can’t use them to satisfy a personal commitment. When your gift officers are talking with donors about promises to give, make sure they’re specifically asking how the donor wishes to fulfill the promise. A donor who expresses a desire to make a long term commitment through a DAF has given you an intent to give, NOT a recordable pledge. Set up your systems to manage both, and make sure fundraising and accounting staff can recognize the difference.
DECEMBER TO DO’S:
The information contained in this blog post is provided as a courtesy. Reading it does not create an attorney / client relationship, and nothing contained in it should be construed as legal advice. If you need that, or would like help reviewing your organization’s policies and practice, give us a call at 206.456.2579.
Now that you’ve reviewed your organization’s gift acknowledgment processes to make sure your donor is getting what they need from you, let’s take a look at another area in which your organization’s desires might sometimes get in the way of your donor’s needs.
PART TWO: GIFT ACCEPTANCE POLICIES
You love your donors. They are amazing people and companies and institutions. They do wonderful things to advance the mission of your organization. You love them the most when they donate unrestricted gifts of cash, but that’s not always the case.
Sometimes your donor wants to give you a boat. Or a parcel of land in Texas. Or a future interest in a business. To spend when you raise an additional one million dollars. When you expand your programs to Oregon. If you name a scholarship in their daughter’s honor.
You want to say yes! But . . .
When a donor approaches with an offer that isn’t a straight forward, unrestricted gift of money, a sound gift acceptance policy will help you negotiate a response without setting expectations you can’t meet, or leaving the donor feeling embarrassed or worse.
Here are some things that policy will help you decide long before you need it:
The policy should also guide your team to:
DECEMBER TO DO’S:
The information contained in this blog post is provided as a courtesy. It does not form an attorney / client relationship, and nothing contained in it should be construed as legal advice. If you need that, or help reviewing your organization's gift acceptance policies, please give us a call at 206.456.2579.
Next up: DONOR ADVISED FUNDS
You are the chief fundraiser for your charitable organization. Your year-end solicitation is out the door and results are rolling in. You’ve celebrated your team’s success and everyone has bought into next year’s goals. What next?
December is a great time to review your development plan to ensure your fundraising and stewardship activities don’t hide inadvertent tax or legal consequences for your donors or your organization. Why you? By focusing on understanding your donors’ needs, you just might catch things that others on your team could miss.
Here are a few places to look to make sure you’re getting your donors what they need so that they get the most from their support of your mission, and neither of you end up in hot water with the IRS.
PART ONE: GIFT ACKNOWLEDGMENT PROCESSES
You’re a great fundraiser, so you know what a great acknowledgment letter looks like. You’ve coached your team to personalize, convey impact, and tell a compelling story that leaves the reader wanting more. But if your letter doesn’t meet IRS requirements, it won’t do your donor much good when they try to claim a deduction for that gift. Here’s a quick review:
For gifts of $250 or more, your donor needs a contemporaneous (think “timely”) written acknowledgment that includes the name of the organization, the amount of the gift (if cash or equivalent) or description but not the value of a non-cash gift, the date of the gift, and a statement that no goods or services were provided by the organization (as long as that’s true).
For a gift of $75 or greater in which something was exchanged for the gift, the written acknowledgment must contain a statement to that effect, with a good faith estimate of the value of what was exchanged. One common scenario is a receipt for a ticket to your annual gala, in which the donor paid $250, and the fair market value of their dinner is $75.
This is a blog post with general information. It is not actually legal advice. If you need legal advice, call us at 206.456.2579 to set up a meeting.
Next up: GIFT ACCEPTANCE POLICIES