Franchise Agreements & Personal Guarantees: Legal Roulette with your Personal Assets
2011 June 20 by admin
Would you go to Vegas, belly up to a roulette wheel and bet the deed to your house, your retirement account and your personal savings and assets on Red? Probably not. But that’s not a far cry from signing a personal guarantee when you sign a franchise agreement.
Requiring a corporate (or LLC) franchisee to sign a personal guarantee has become the norm. It’s not without reason. Franchisors are concerned that franchises which are newly formed corporations (or LLCs) can too easily file bankruptcy to get out of their obligations if the franchise does poorly – leaving the franchisor with nothing. So, by requiring a personal guarantee from the officers or shareholders of the corporation (or the members of the LLC), the franchisor gets a little of the franchisee’s “skin in the game.”
However, signing such a personal guarantee frustrates the whole purpose for establishing the corporation (or LLC) in the first place – to shield your personal assets from the debts and obligations of your business. The good news is that as long as you adhere to the required corporate (or LLC) formalities, this “side-stepping” of the legal liability protection will only apply to the franchisor. It will not allow the rest of the world (i.e. customers, employees, the general public) to seek damages against you personally. But, as to the franchisor, you’re betting it all on Red.
What can be done? First and foremost, have a franchise attorney review the franchise agreement, the personal guarantee and any other agreements required by the franchisor. Even if you don’t have a separate personal guarantee, comparable language can often be found couched in the text of the franchise agreement itself. Not uncommonly, franchisors will require that you sign the franchise agreement as an individual (thereby putting you personally on the hook for all of the obligations therein), and then transfer ownership/operation to your corporation (or LLC). The transfer agreement may very likely contain language specifically stating that you, the individual, are not relived of the obligations to which you agreed, regardless of the transfer. Personal guarantee language can also pop up in agreements to sell or transfer ownership to a third party, if you decide to sell your business. In no circumstance should you agree to guarantee the performance of a buyer of your business!
Once reviewed, you can try to negotiate the language and terms of the guarantee, or try to have it eliminated in its entity. Setting caps on recoverable damages, creating a list of “off-limits” assets, or even an expiration date for the guarantee are just a few options. Unfortunately, with most franchises, the agreements are “take it or leave it.” In that instance, you need to take what few steps you can to insulate your personal assets from the risk of exposure to your creditors, namely the franchisor.
In most states, you can file for a Declaration of Homestead for your primacy residence (some states apply this protection automatically by law). This will protect the equity value in your home, up to a set amount (i.e. in MA, your home is protected up to $500,000 if you file; $125,000 if you do not), and prevents a creditor from forcing the sale of your home to pay off your debt. Additionally, you can put investment or vacation properties into Real Estate trusts or Real Estate holding companies. Additional businesses that you may own should be held by separate business entities (corporations or LLCs).
In the end, your best bet is to avoid signing a personal guarantee whenever possible.
If you need more information or assistance with a franchise agreement, personal guarantee or other business contract, please call our office for a free initial consultation. 781-333-4182 Or visit us on the web: www.SigmanLaw.us
Employers Using Independent Contractors Beware – Part 1
2011 March 3 by admin
Recent developments in MA law have made it virtually impossible to be a true independent contractor in Massachusetts. Many Massachusetts businesses unknowingly misclassify their employees as independent contractors.
According to M.G.L. c. 149 Section 148B, a person is considered an employee unless all of the following are true:
a. the individual is free from control or direction in the performance of his or her duties
b. The service being performed by the individual is performed outside the usual course of business for the employer
c. the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed
These are factors and are weighed by a fact finder on a case by case basis. This means that should the classification of your workers ever be challenged, such a decision would be left to a judge after his or her careful review of the facts.
The misclassification of employees as independent contractors can carry severe civil and even criminal penalties. A willful misclassification is punishable by a fine of up to $25,000 or one year in prison. Even if you mistakenly misclassify an employee as an independent contractor, you can be subject to a fine of up to $10,000 and 6 months in prison. In addition to these statutory penalties, you can also be responsible for violating other state and federal statutes that have to do with minimum wage, overtime, income tax withholding, worker’s compensation insurance, employee record keeping, etc. In fact, failure to pay federal tax withholdings could lead to an audit by the IRS.
As you can see, it is often better to classify someone as an employee and pay the upfront costs than to be caught misclassifying employees further down the road. Many Massachusetts businesses have decided to convert their existing independent contractors to employees. However, this process can be a complicated process especially where a company’s workers have gotten used to a certain way of being compensated.
Please stay tuned for our next edition which will continue to educate business owners on the Massachusetts Independent Contractor Laws and some strategies to keep you out of trouble.
Four Reasons Why You Should Incorporate a Trust Into Your Massachusetts Estate Plan
2011 February 18 by admin
Four Reasons Why You Should Incorporate a Trust Into Your Massachusetts Estate Plan:
1. Assets Held In Trust Do Not Require Probate Court Administration. Probate Court administration is the process by which a decedent’s assets are re-titled and passed to his or her rightful heirs. A Last Will and Testament does not avoid Probate Court Administration, it only indicates your wishes to the Court.
2. Massachusetts Probate Administration is Expensive. Your estate could pay several thousand dollars in court filing fees, attorney fees, accounting fees, executor fees, and other costs.
3. Massachusetts Probate Administration is Time Consuming. The decedent’s records must be gathered. The Probate petition must be prepared and filed with the Probate Court. The Petition and ancillary documents must be reviewed by the Court. Notice must be given to all interested parties. The Court must again review the petition after notice has been given. Finally, if all goes well, an executor will be appointed. All of this routinely takes 3 months or longer.
4. It’s public. Massachusetts Probate administration is a public process. You likely keep your financial affairs private during your lifetime, but via Massachusetts Probate administration they become very public when you die.
If you have any questions regarding estate planning or probate administration, please do not hesitate to contact Michael J. Callahan, Esq. – Sigman Law Office, PC
Warning: Declarations of Homestead are Changing!
2011 February 14 by admin
Unsecured creditors (i.e. someone who is owed money and does not have collateral) often find themselves having to attempt to exercise their judgment or secure their repayment rights by way of securing their debt to a debtor’s home. For many of us, our home is our largest asset. But it can also be the most vulnerable asset in the event that we owe someone money. Any creditor acting reasonably will attempt to secure a debt by recording a lien on a home.
Luckily for homeowners, the Commonwealth of Massachusetts enacted the Homestead Act which allows a homeowner to receive protection for one of their most precious assets against attempts by creditors to force the sale of their home in order to satisfy a judgment or lien. It is a common misconception that the Homestead Act protects the home against creditors putting liens on a person’s home. This is not the case. The Declaration of Homestead prevents a creditor from executing a judgment or lien by foreclosing on the property and forcing the sale of the home. The Declaration of Homestead does not prevent the creditor from filing the lien. It just makes it so you won’t lose your home if a creditor tries to sell the house.
Previously, in order to obtain this protection, a homeowner would have to file a Declaration of Homestead in order to take advantage of this protection. This would afford an individual up to $250,000.00 of protection and $500,000.00 of protection for a married couple. On December 16, 2010, Governor Deval Patrick signed into law a revision to the existing homestead law which allows homeowners to essentially choose between automatic homestead protection and declared homesteads.
The law provides that an individual who acquires title to a property automatically received a homestead exemption in the amount of $125,000.00. If a homeowner decides to file the Declaration of Homestead, the homeowner and his or her spouse would receive an exemption amount of up to $500,000.00.
Another important change, is that the law now allows for beneficiaries of trusts that own real property to receive the homestead protection provided that it is the beneficiaries’ principal residence.
The new law also imposes an affirmative duty on closing attorneys to provide the mortgagor with notice of the right to declare a homestead. The notice must include the differences between the automatic and declared homestead.
New England Franchise Association Legal & Legislative Update 1/18/2011
2011 January 21 by admin
Follow the attached link to a .pdf file that contains briefs of the cases I discussed during the Legal and Legislative Update at the New England Franchise Association Meeting held on January 18, 2011:
Massachusetts SJC declares that snow and ice are neither natural nor unnatural
2011 January 18 by admin
As New Englanders, we all experience the joyful burden of removing ice and snow from our properties following storms. We shovel, plow, use snow blowers, and spread sand and salt on our driveways and sidewalks.
Everybody knows this universal truth about ice and snow: it is slippery. We have all slipped on it at some point in our lives. For over 100 years, in Massachusetts you could not hold a property owner responsible for failing to remove or adequately treat natural accumulations of snow and ice. If you sued someone for injuries as a result of slipping and falling on snow on their property, you could only recover damages if you could prove that the accumulation was unnatural.
In Papadopoulos v. Target corporation et al., the court held that property owners now have an affirmative duty to take reasonable measures to remove snow and ice from their property regardless of the nature or the source of the accumulation. This SJC decision overturns a line of case law that originating from an 1883 case in which the court held that a property owner is only liable for negligence in failing to remove “unnatural accumulations” of snow and ice. A natural accumulation of snow and ice was defined as an accumulation where there is no human interference. An accumulation was considered to be unnatural where it was impacted in some way by the act or failure to act of a property owner (i.e. a snow bank, ice accumulation caused by a gutter, or old snow compacted by foot traffic or tire tracks).
In reversing the a lower court decision in which the defendants were granted summary judgment based upon the old law, the SJC stated that “we now abolish the distinction between natural and unnatural accumulations of snow and ice, and apply to all hazards arising from snow and ice the same obligation of reasonable care that a property owner owes to lawful visitors regarding all other hazards.”
The court further defined the burden on property owners: “if a property owner knows or reasonably should know of a dangerous condition on its property, whether arising from an accumulation of snow and ice, or rust on a railing, or a discarded banana peel, the property owner owes a duty to lawful visitors to make reasonable efforts to protect lawful visitors against the danger.” In reaching this decision, the court held that the presence of modern snow removal technology helps alleviate the burden on property owners to use reasonable care in removing snow and ice accumulations on their property.
Whether this is a step in the right direction or not remains to be seen. One could make the argument that the rule will open the flood gates for slip and fall cases that result from winter conditions. Previously, many defendants (including the one in this case) could succeed on a motion for summary judgment merely by showing that the accumulation was a result of natural conditions. Now a plaintiff may have an easier time avoiding an unfavorable summary judgment and getting the case to trial.
It is unclear what is considered “reasonable.” Clarification will require the new case law to be tested in its application to various sets of facts as cases are tried. In its ruling the SJC did say that “snow removal reasonably expected of a property owner will depend upon the amount of foot traffic to be anticipated on the property, the magnitude of the risk reasonably feared, and the burden and expense of snow and ice removal….”
Commercial property owners should review their contracts with their snow removal vendors to ensure that the schedule and frequency of the snow plowing is reasonable. These snow removal companies should be properly insured. Your agreements with these vendors should contain strong and clear indemnification language that will protect you against claims that may arise. Remember the duty of reasonable care rests on the property owner not the snow plow company. In order to minimize the risk of exposure, Landlords should require strong language in the contracts with the snow removal service vendors indemnifying them if the vendors are negligent in their provision of services. Commercial landlords and tenants should review their leases to determine what the duties of each are with regard to snow removal. It is also important that to review property insurance policies to ensure that the coverage lines up with the new ruling.
One thing is clear: a property owner now has to be diligent in removing snow and ice. They now owe a duty of care to protect lawful visitors against unsafe conditions that result from snow and ice.
An accountant, an electrician and a plumber each walk into a bar…..
2011 January 7 by admin
…..each charges the landlord $600.00 for his services. This sounds like the beginning of a joke, but it is not. What do these three vendors have in common? Each of them needs to be sent an IRS 1099 form by the landlord.
Prior to the passage of Small Business Jobs and Credit Act of 2010 (H.R. 5297), most small landlords were not considered to be “conducting a trade or business” and therefore were exempt from certain tax reporting requirements by the IRS. The IRS previously only required businesses such as full-time property managers to track and report payments to vendors. However, the new bill expands the definition of “conducting a trade or business” to include all property owners. Section 2101 establishes that, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property”.
The new law requires that any person receiving rental income from real property must file a 1099 for all payments made to service providers in excess of $600.00. For larger landlords and rental property owners, this requirement to track payments to vendors is not new. H.R. 5297 now requires even owners of a single unit of rental property (such as a partially owner occupied multi-family property or as part of a self-directed IRA or other personal investment) to track and report payments to any vendor providing at least $600.00 worth of services or face stiff penalties. It is important to note that this is cumulative so if you hire someone to clean the property at a rate of $60.00 per month, the aggregate of the payments would exceed the $600.00 threshold.
H.R. 5297 does provide a couple of exceptions but they are naturally quite vague at this point. The exceptions are as follows:
1. If gathering the information and issuing a 1099 would be an undue burden or hardship.
2. If the rental is a temporary rental of your own residence.
3. If the income from the rental does not meet a minimum amount
The IRS hopefully will provide some guidance on what constitutes a hardship and the minimum income threshold. It is important that you stay up to date with these changes.
So for small landlords, you now have a legal obligation to obtain and keep certain information about your vendors. This information includes, but is not necessarily limited to, the name, address, and taxpayer ID of the vendor as wells as amount you pay them. Examples of vendors include electricians, plumbers, handymen, accountants, cleaners and pretty much any person or company that provides services to rental property owners.
As always, if you are running any sort of small business it is essential that you maintain detailed financial records. You should review your bookkeeping practices to ensure that you can accurately track payments made to vendors. It is also a good idea to have any vendor that you anticipate paying more than $600.00 this year provide you with a completed W-9 prior to beginning work on your property. Remember you will have until January 31, 2012 to issue a 1099 for those vendors so it is very important to be prepared ahead of time.
Legislative Update – Presented to the New England Franchise Association November 9, 2010
2010 November 10 by admin
RECENT LEGISLATION AFFECTING EMPLOYERS
Both new laws apply to all MA franchisors and franchisees who have employees. The legislation does not apply to franchisors with regards to the franchisee vetting process, since franchisees are not, by definition, employees.
1. Personnel Records & Record Keeping
A. Summary:
August 5th, Gov. Patrick signed into law “An Act Relative To Economic Development Reorganization,” which includes an amendment to the Massachusetts Personnel Records Statute (M.G.L. c. 149, §52C).
As amended, the statute now places an affirmative duty on employers to notify employees within ten days of placing information into the employee’s personnel record that “may” negatively affect the employee’s employment or could possibly lead to disciplinary action.
The amendment also limits the frequency of employee requests to twice per year. However, employees are allowed to review their records following notice of the placement of negative information in the personnel record. Such reviews do not count as one of the two annually permitted reviews.
While employees cannot sue for violations of the personnel records statute, the Attorney General enforces the statute and may seek fines of between $500 and $2,500 for each violation.
B. What to do:
Massachusetts employers of 20 or more employees to retain the complete personnel record of an employee without deletions of information from the date of hire to a date at least three years after termination.
All Massachusetts employers must provide an employee with an opportunity to review his or her personnel record within five business days of the employee’s written request (limited to twice yearly, plus any reviews requested after notice by the employer of negative information being placed in file).
C. Effective date
Although signed on August 5th, the law became effective, retroactively, as of August 1, 2010.
D. Enforcement
The definition of “personnel record” now includes all documents kept by an employer that are or have been used “or may affect or be used relative to that employee’s qualifications for employment, promotion, transfer, additional compensation or disciplinary action.” This definition is inherently vague, as is definition of “negative information.”
Although an employee may file a civil action for an employer’s breach of the personnel record statute, previous case law has indicated that the statutory remedy afforded to employees who have not had their full personnel records produced is limited to an order requiring the employer to produce the full record and to provide the employee with the opportunity to comment, correct, or expunge allegedly incorrect or false information.
As of September, the Massachusetts Attorney General has decided not to issue an interpretive guidance as to this vague amendment. Unofficially, it appears that the Attorney General does not intend to enforce the new mandate aggressively, rather, the Attorney General intends to try to help “work things out” between the complaining employee and his or her employer. Also unofficially, it appears the Attorney General will be concerned mainly that employees receive notice of the inclusion of documents that are likely to be used negatively.
2. “Ban the Box” – Criminal History on Job Applications
A. Summary:
August 5th, Gov. Patrick signed legislation overhauling the Commonwealth’s Criminal Offender Record Information (CORI) system meant to employment opportunities for reformed offenders. The legislation includes a “ban-the-box” provision, which bars both public and private employers from requiring applicants to check a box if they have a criminal history, as well a “notice provision” and a “policy provision.”
Exception to “ban the box”: employers may inquire about an individual’s criminal history on an initial job application if: (1) the applicant is applying for a position for which any federal or state law or regulation creates a mandatory or presumptive disqualification based on a conviction of certain criminal offenses; or (2) the employer is subject to an obligation under any federal or state regulation not to employ persons in one or more positions who have been convicted of certain criminal offenses.
Employers may ask an applicant about his or her criminal history during the interview process.
Employers may request CORI records from the commonwealth after an applicant signs an acknowledgement form authorizing the request and after the employer verifies the applicant’s identity by reviewing a form of government-issued identification.
The scope of CORI records available to most employers will be narrowed to include only: felony convictions for 10 years following disposition; misdemeanor convictions for five years following disposition; pending criminal charges. Employers whose employees interact with children or other vulnerable populations, such as the elderly and the disabled, will have access to complete CORI records.
B. What to do:
“Ban the Box Provision”: Immediately cease all requests for criminal record information on initial written application form.
Obtain authorization from and verify ID of applicant, prior to requesting CORI records.
“Notice Provision”: Prior to questioning an applicant or taking an adverse action based on criminal record information, provide the individual with a copy of any criminal records in your possession, whether those records were obtained through a CORI request or from an independent source.
“Policy Provision”: Any employer that annually conducts five or more criminal background investigations must establish and maintain a written criminal records policy. Additionally: (1) notify any applicant who is the subject of an investigation of the potential for an adverse decision based on the criminal records; (2) provide a copy of the criminal records and the policy to the applicant; and (3) provide information concerning the process for correcting a criminal record. These requirements apply even if an employer obtains the criminal background data from an independent source rather than through a CORI request.
Destroy CORI records seven years after an employee’s last date of employment or after the date of the final decision not to hire an applicant.
Retain an applicant’s signed acknowledgement form for one year from the date of any CORI request.
Document specific details about the dissemination of any CORI records in a dissemination log and must maintain the log for a period of one year following the disclosure of any CORI record.
C. Effective dates:
The “ban the box” provision became effective on November 4, 2010.
The remaining provisions are not effective until Feb. 6, 2012.
D. Enforcement:
The Massachusetts Fair Employment Practices Act bars an employer from asking an employee about arrests that do not result in convictions and convictions for certain misdemeanors. Available remedies to an aggrieved applicant could include equitable relief, compensatory and punitive damages, interest, and attorney’s fees.
Failure to provide criminal records to employee will subject employer to civil and criminal penalties.
What's a Trust?
2010 November 7 by admin
A trust is a legal arrangement where a “grantor” transfer legal title to property (e.g. real estate, investment accounts) to a “trustee.” The trustee holds the property for the benefit of the beneficial title holder or “beneficiary.” The trust sets forth the terms and conditions by which the trustee is to manage the property held in the trust. Most trusts have one set of beneficiaries during the grantor’s life and a different set after the grantor’s passing. Trusts can be established for a variety of purposes including avoiding probate, reducing estate taxes and providing creditor protection.
Understanding the FDD
2010 November 3 by admin
So you’ve decided that buying a franchise is right for you. Congratulations! Whether you are working with a broker (or consultant) or pursuing this opportunity on your own, you need to conduct your due diligence. This means, among other things, that you need to validate the model and verify the financial information. Towards the end of this due diligence period is a good time to have an attorney review the FDD and Franchise Agreement.
The FDD
The FDD is a formulaic document, required of all franchisors, by the FTC. Since not all franchises are the same, the standardized format of the FDD allows potential franchisees to compare apples to oranges (as much as possible). A good analogy is to consider the FDD as a federally regulated and mandated brochure.
Every FDD consists of 23 Items. Each Item must contain specific facts about the franchise and all material obligations and limitations that appear in the franchise agreement must be disclosed in the FDD, in the appropriate Item. Additionally, there will be a number of Exhibits accompanying the FDD, including a copy of the Franchise Agreement and ancillary agreements with the franchisor or specified vendors.
The FDD is not a negotiable document. It is a uniform disclosure of the required information, which must be provided to every potential franchisee. The FDD must be updated annually, within a specific number of days of the closing of the franchisor’s fiscal year – typically new FDDs are issued in April or May.
Some states require the registration of the FDD and franchise agreement, some do not, and some will allow an exemption from their registration requirement. Regardless, no governing body verifies the information, accuracy or truthfulness of the FDD. This is why it is imperative that you perform your due diligence in a thorough manner.
Despite the rigid disclosure requirements, not all of the terms of the franchise agreement are covered in the FDD. Do not rely on a review of the FDD as a summarization of your franchise agreement. Instead, use the FDD to help compare franchise opportunities as you narrow your decision, to help you in your validation process, and to orient yourself as to the specifics of a particular franchise.
Attorney Review
Why should you have an attorney review the FDD and Franchise Agreement? Can your real estate attorney or the attorney that drafted your will review it? An attorney familiar with the FDD format and requirements will read it with an eye to ensure that you are being fully disclosed and will be able to interpret information that you might otherwise just gloss over. Ideally, a legal review of the FDD will include a comparison with the terms included in the Franchise Agreement for consistency, confirmation that all required information is included, and notation of any “red flags” (such as incorrect start-up cost disclosures).
While any licensed attorney is capable of reading and digesting an FDD and Franchise Agreement, one that is not familiar with customary terms and language may be inclined to try to negotiate more favorable terms on your behalf. Only an attorney experienced in the review of FDDs and Franchise Agreements will know what terms, if any, are typically negotiable and when it’s acceptable to “push back” against the franchisor.