Additional CARES Act SBA Loan Programs and Montgomery County Relief to Help Your Business


The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law late last week.  As a result, small businesses have spent this past week scrambling and reaching out to their banks and advisors to submit loan and grant applications with the hope of saving their business and avoiding bankruptcy.  On April 3, 2020, the Small Business Administration (SBA) will begin accepting applications for the CARES Act’s Paycheck Protection Program (PPP) (as detailed in a post earlier this week), despite prevailing uncertainty and unanswered questions over the specifics of the law and how they apply to unique and distinct circumstances.

While the PPP offers small businesses a lifeline for surviving the COVID-19 pandemic as well as the subsequent economic fallout, it is not the only option that the CARES Act offers businesses to protect them from this sudden and unexpected disruption. 

How the CARES Act Works

Under the CARES Act, the Economic Injury Disaster Loans (EIDL) program offers loans of up to $2 million to small businesses severely impacted by COVID-19.  Similar to PPP loans, EIDL funds may be used to cover payroll, rent, utilities, health care benefits and other operating expenses.  However, EIDL funds may also be used to pay fixed debts and other bills and accounts payable that cannot be paid as a result of the pandemic.  The APR on EIDLs is 3.75% for small businesses (2.75% for nonprofits), and principal and interest is deferred at the Administrator’s discretion, based on the borrower’s ability to repay. 

The highlight of the EIDL is the immediate advance of $10,000 in emergency relief that is funded within 3 days of submitting an application.  The $10,000 is fully forgiven and not required to be repaid, irrespective of whether the EIDL is approved or not. 

Eligibility is similar to the PPP loans.  Businesses must have less than 500 employees, and they include certain nonprofits, sole proprietorships (whether with or without employees), independent contractors, cooperatives, employee owned businesses, and tribal small businesses. 

How to Apply for Assistance

The SBA is accepting applications now.  Businesses may apply via the SBA’s website, and by clicking “Apply for Assistance.”

Businesses that apply for and receive an EIDL may also apply for a PPP loan.  However, if a business ultimately receives a PPP loan, they will need to roll their EIDL into the PPP, and the $10,000 advance they received would be subtracted from the amount forgiven in the PPP (the details of loan forgiveness under the PPP are detailed in our previous post).  For businesses that have loans from both EIDL and PPP, that business may not use EIDL funds for the same purpose as its PPP loan, and vice versa.

In addition, for businesses located in Montgomery County, Maryland, the County Executive and the County Council have approved the Montgomery County Public Health Emergency Grant (PHEG) program.  The PHEG program sets aside $20 million in funding to support businesses and nonprofits that have suffered an adverse economic impact from COVID-19.  The County Executive is currently developing a system and regulations for the implementation of the PHEG program, but there is no other information available at this time.  When information relating to this program is released, we will provide updates accordingly.

Please contact Chris Young with any questions you may have about the CARES Act, or with assistance in obtaining Emergency Injury Disaster Loan for your business.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.





CARES Act: Your Business Should Not Go Bankrupt Due to COVID-19


Last Friday, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law.  The CARES Act is aimed at mitigating the economic fallout resulting from the COVID-19 pandemic.  Congress authorized the infusion of $2 trillion into the United States economy.  Of that $2 trillion, $500 billion has been allocated to businesses to help to alleviate the calamity caused by quarantines and social distancing.  With both essential and non-essential businesses facing severe restrictions, as well as with the uncertainty surrounding the duration of the pandemic, anxiety over business survival is at the forefront.  To stymie the potential influx of business closings and bankruptcies, the CARES Act seeks to make cash immediately available to businesses with loans on borrower-friendly terms and conditions as they seek to wade through the pandemic and the economic aftermath.

Paycheck Protection Program
While the CARES Act provides several attractive tax highlights, including the availability of an employer tax credit and the deferral of the Social Security tax portion of the employer’s share of payroll tax, a key component of the aforementioned $500 billion is the Paycheck Protection Program (PPP).  The PPP offers businesses with immediate cash to fund payroll, health care benefits, rent, utilities, and interest on mortgage obligations, among other business operating costs.  The PPP loans are 100% federally guaranteed and, generally, businesses with no more than 500 employees that were in operation during February 15, 2020 and June 30, 2020 are eligible to apply.  

A highlight of the PPP is loan forgiveness.  Specifically, as long as a business maintains its payroll and thereby retains its employees, the amount spent by the business during the eight (8) week period after the loan’s origination will be forgiven.  It is the intent of the CARES Act that employers maintain employees on their payrolls during this crisis period.

The size of the loan that businesses are eligible to receive is equal to 2.5x the business’ average monthly payroll costs for 2019.  Seasonal businesses may use the period between February 15, 2019 and June 30, 2019 as their average monthly payroll.  If the business was nonoperational during that period, then the size of the loan is 2.5x the average monthly payroll costs between January 1 and February 29, 2020.  In addition, the maximum term for PPP loans, if they must be repaid, is ten (10) years, with a maximum interest rate of 4%, and there are no SBA loan fees or prepayment fees.

SBA Loans
In addition to the PPP loans, the CARES Act provides that small businesses may apply for certain SBA loans such as 7(a), 504 and microloans under friendly terms and conditions.  Under the CARES Act, the SBA will cover all loan payments, including principal, interest and fees, for such SBA loans made six (6) months before the Act’s enactment, and for loans made within six (6) months of the enactment.  To be eligible, businesses must meet SBA “small business” criteria.

To apply for a PPP loan, or any of the other loans available under the CARES businesses may reach out to current SBA 7(a) lenders for assistance. Businesses have until June 30, 2020 to apply. Click here to find an SBA Lender.

Maryland Business Relief Grants
In addition to the CARES Act, the State of Maryland is offering relief to small businesses through loans and grants.  Specifically, the Maryland Small Business COVID-19 Emergency Relief Loan Fund offers businesses with fewer than 50 employees with up to $50,000 of cash.  Much like PPP loans, Maryland is offering borrower-friendly terms to assist businesses with navigating this crisis.  Indeed, under this loan program, interest on the loans run at 0% for the first 12 months, and 2% for the remaining 35 months; and there is a deferral of all payments for the first 12 months, and straight amortization beginning in the 13th month through the end of the loan period.  To be eligible, businesses must have been established prior to March 9, 2020 and be in good standing.  Also similar to PPP loans, loaned fund may be used for operating expenses such rent, mortgage payments, and utilities.  To qualify, businesses must establish the lost revenue resulting from the COVID-19 pandemic.

The Maryland Small Business COVID-19 Emergency Relief Grant Fund offers grants of up to $10,000 not to exceed 3 months of cash operating expenses to businesses of 50 or fewer employees.  Like the state’s loan program, businesses must be established prior to March 9, 2020, and be in good standing.  To qualify, businesses must produce financial documentation that reflects that its annual revenues do not exceed $5 million.  Similarly, businesses may use the grant for ordinary business operating costs such as working capital to support payroll expenses, rent, mortgage payments, and utilities.

Applications for Maryland’s Emergency Relief Loan Fund are found online HERE. Applications for Maryland’s Emergency Relief Grant Fund are also found online, and can be accessed HERE.

Please contact Chris Young at 301.762.5212 with any questions you may have about the CARES Act, with assistance in obtaining a Paycheck Protection Program loan for your business, or with the State of Maryland’s grant or loan programs.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

 





Four Incentives the SECURE Act Gives Small Business Owners


The “Setting Every Community Up for Retirement Enhancement” Act (“SECURE Act”) was signed into law at the end of 2019. The SECURE Act takes small, but impactful, steps towards addressing this country’s retirement crisis by incentivizing small business owners to sponsor retirement plans for their employees.

If you are a small business owner who has considered, or wanted, to offer a retirement plan for your employees but declined to do so because of costs or administrative burdens, now may be a good time to revisit this valuable employee benefit option. Below are four significant incentives the Act provides:

1. Broader Access for Employers
Historically, the cost, administrative burdens, and liability risks of running a sponsored retirement plan have been difficult for smaller companies to manage. Multiple-Employer Plans (MEPs) are appealing to business owners because they can reduce these problems, but many employers were left out due to the “common interest” requirement. Beginning in 2021, the “common interest” requirement will be removed and unrelated companies will be permitted to participate in and run MEPs through a pooled plan administrator. The SECURE Act also eliminates the “One Bad Apple” rule. Previously, this rule provided that a violation by one MEP participant disqualified the entire pool – this made employers understandably uneasy about joining a MEP. As a further boost, small business owners will see a substantial hike from the previous $500 tax credit offered to defray retirement package start-up costs. The tax credit has been increased to $5,000 a year for the next three tax years!
 
2. Incentives for Automatic Enrollment

Automatic enrollment is a great way to increase employee participation by encouraging them to start - and continue - saving. There is no doubt that lawmakers are pushing employers in that direction. An employee’s auto-enrollment contribution rate for certain plans used to be capped at 10%, but the cap has now been increased to 15% after an employee’s first year. By waiting until the employee’s second year for the increase, the SECURE Act is expected to reduce the number of individuals who drop out of plans due to high initial contribution amounts. The legislation also introduced a new tax credit (up to $500 a year for three years) for employers who launch new 401k and SIMPLE IRA plans with automatic enrollment.
 
3. Greater Inclusion for Part-time Employees
Many small businesses are staffed by part-time personnel, who, until now, had been essentially excluded from participating in their employer’s retirement benefits. Prior to the SECURE Act, part-time employees were required to log a minimum of 1,000 hours per year in order to qualify for their employer’s sponsored retirement plan. Beginning in 2021, a part-time employee will be allowed to participate in the retirement plan so long as they have worked at least 500 hours annually for three consecutive years. Although it may seem like an additional cost to add more individuals to a retirement plan, the SECURE Act does not require an employer to offer the same 401(k) benefits to a part-time employee as it would to a full-time worker. For example, an employer can choose to make matching contributions for its full-time employees, but opt to not offer matching to its part-time staff.
 
4. Safe Harbor for Annuities
While the benefits of annuities have been widely debated, some advisors find them to be helpful investment tools for retirement because they can provide a consistent stream of income at a future date. However, for the most part, annuities have been ignored in company-sponsored retirement packages due to the potential legal liability an employer could face in the future. Under prior law, an employer remained liable if an insurer didn’t follow through with making guaranteed payments to the employee - leaving the employer vulnerable to a future lawsuit. The SECURE Act now shifts this liability risk back to the insurance company (but only if the employer selects an annuity provider that meets several requirements). This feature now makes annuities a friendlier option for employers to include in a benefits plan.

The bottom line is: The incentives provided by the SECURE Act should encourage employers who may have been considering sponsoring a retirement plan, or were hesitant to look into it in the past, to take action.

David A. Lucas
is an attorney in Miller, Miller & Canby’s Estates & Trusts and Business & Tax practice groups. Give David a call today at 301-762-5212 to discuss how your business may benefit from the new provisions of the SECURE Act.

To learn more about Miller, Miller & Canby's Estates & Trusts practice click here.

 





Three Liability Planning Tips for Business Owners


The risk of liability is a very real concern for today’s business owners.  There are employment-related issues including wrongful termination, sexual harassment, and discrimination; careless business partners and employees; and contractual obligations that may include personal guarantees, leases, business agreements, etc.  There are also personal liabilities like divorce, vehicle accidents, and rental real estate.

Unfortunately, our litigious society necessitates that a broad range of people, including business owners, board members, real estate investors, private practitioners and retirees, should protect their hard-earned assets from a variety of liabilities. We have outlined some strategies for business owners and practitioners that may help provide protection from risk.

Key Take-aways to Protect Yourself from Risk:

●    Types of liability insurance you need to have in place;
●    State exemptions that will protect certain assets from the claims of creditors; and
●    The role of business entities in liability planning.

Tip #1 – Insurance is the First Line of Defense Against Liability

Liability insurance is the first line of defense against any claim.  Liability insurance provides a source of funds to pay legal fees as well as settlements or judgments.

The types of insurance you should consider include:

●    Homeowner’s insurance
●    Property and casualty insurance
●    Excess liability insurance (also known as “umbrella” insurance)
●    Automobile and other vehicle (motorcycle, boat, airplane) insurance
●    General business insurance
●    Professional liability insurance
●    Director and officer insurance

Planning Tip:  Never rely on insurance as your sole means of liability protection since the cost of a comprehensive policy may be prohibitive, and each type of policy has numerous exceptions to coverage.  Instead, you should use insurance as one of a multiple layer of strategies designed to place a barrier between your business and personal assets and the claims of a plaintiff.  Moreover, it is important to work with an insurance professional who can explain the purpose of each type of coverage, make recommendations for liability limits and deductibles, and help you consider the most cost-effective coverage on an annual basis.

Tip #2 – State Law Exemptions Protect a Variety of Personal Assets from Lawsuits

Each state has a set of laws or constitutional provisions that partially or completely exempt certain types of assets from the claims of creditors.  While these laws vary widely from one state to the next, in general, the following types of assets may be protected from a creditor seeking to enforce a judgment against you:

●    Primary residence (referred to as “homestead” protection in some states)
●    Qualified retirement plans (401(k)s, profit sharing plans, money purchase plans, IRAs)
●    Life insurance (cash value)
●    Annuities
●    Property co-owned with a spouse as “tenants by the entirety” (only available to married couples; and may only apply to real estate, not personal property, in some states)
●    Wages
●    Prepaid college plans
●    Section 529 plans (“college savings plan”)
●    Disability insurance payments
●    Social Security benefits

Planning Tip:  If you reside in Maryland or the District of Columbia, Miller, Miller & Canby’s attorneys can help you determine which exemptions are available to you and how much protection they provide.  Our business and estate planning attorneys can also help you understand the pros and cons of each type of exemption.  For example, while tenants by the entirety co-ownership of real property between you and your spouse is simple and may make sense in the short term; in the long run, if you divorce or one spouse dies, the protection provided by tenants by the entirety co-ownership ends, thus making it completely useless.  As with liability insurance, exemption planning is best used as one layer of an overall asset protection strategy.

Tip #3 – Business Entities Protect Business and Personal Assets from Lawsuits

The various types of business entities include partnerships, limited liability companies, and corporations.  Business owners need to mitigate the risks and liabilities associated with owning a business. Business entities can also help real estate investors mitigate the risks and liabilities associated with owning real estate.  The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.

Business entities can also be an effective tool for protecting your personal assets from lawsuits.  In many states, in addition to the protections offered by incorporating, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner.  Depending on the type of business entity and the state of formation, the personal creditors of an owner may be prevented from taking control of the business.  Instead, the creditor is limited to a “charging order” which only gives the creditor the rights of an assignee.  This is beneficial to the owners, because an assignee generally only receives distributions from an entity if, and when, the distributions are made.
 
Planning Tip:  Creating a business entity that protects your assets from lawsuits involves much more than just filling out some forms with the state and paying an annual fee.  Business formalities must be observed and documented, otherwise a creditor can attack the entity through “veil piercing” or “alter ego” arguments, which could result in personal liability for your business’s actions or debts.  Additionally, state laws governing business entities vary widely and are constantly changing due to legislative action and court decisions.  As a result, it is critical to properly chronicle business activities and modify the business’s governing documents as applicable laws change. 

Miller, Miller & Canby’s business law attorneys can help you remain in compliance to thwart any potential challenges to your entity.  And remember, as with liability insurance and state law exemptions, the use of business entities is just another layer of an overall asset protection strategy that should coordinate with other asset protection strategies.

Protecting Your Assets

We highly recommend that liability insurance, state law exemption planning, and business entities be used together to create a multi-layered asset protection plan.  The business & estate planning attorneys at Miller, Miller & Canby are experienced with helping business owners, real estate investors, board members, retirees, physicians, practitioners, and others create and maintain effective liability protection plans.

David A. Lucas
is an attorney in the MM&C's Estates & Trusts and Business & Tax practice groups, focusing his practice in Estate Planning, and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning. To learn more about Miller, Miller & Canby's Estates & Trusts practice click here

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





Commercial Property Owners Have Until February 10th to Appeal New Maryland Property Tax Assessments


At the end of December, the Maryland Department of Assessments and Taxation (SDAT) issued new Assessment Notices to owners of one-third of all commercial and residential properties in Maryland. For instance, in Montgomery County, commercial properties in Bethesda, Potomac and Germantown were reassessed.  In Anne Arundel County, commercial properties in Annapolis, Glen Burnie and Linthicum were reassessed. In Frederick County, commercial properties in and around downtown Frederick were reassessed. In Prince George’s County, commercial properties in Beltsville, Laurel, Clinton and Upper Marlboro were reassessed.

Property owners have 45 days from the date of the Assessment Notice to challenge these new assessments.  Based on the notices we have seen this cycle, the appeal deadline is February 10, 2020, although this could vary depending upon the notice date. The “first-level” appeal takes place at the local Assessment Office. If the assessor refuses to reduce the assessment, the owner may file a further appeal to the county’s Property Tax Assessment Appeals Board (PTAAB).  This Board will consider the evidence and issue a written decision, usually within two weeks. If the property owner is still dissatisfied, another appeal may be filed to the Maryland Tax Court.

Miller, Miller & Canby has been challenging the assessments of various types of properties in Maryland for more than 30 years and has obtained substantial reductions in real property assessments for our clients. Our litigation attorneys regularly represent clients before the local Assessment Office, PTAAB and the Maryland Tax Court.  We have successfully appealed the assessments on office buildings, retail stores, senior living centers, warehouses, industrial sites, casinos, apartment buildings and cemeteries.  Let us help you reduce your Maryland property assessments in 2020.

Michael Campbell
is a partner in the litigation group at Miller, Miller & Canby.  In addition to trial and appellate advocacy, his practice focuses on real estate litigation and property tax assessment appeals. Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for property tax guidance or to help reduce your commercial Maryland property tax assessment.  For more information about the firm’s Maryland property tax appeals practice and representative cases, click here.





Miller, Miller & Canby Announces Five Attorneys Named as 2020 Maryland Super Lawyers


Miller, Miller & Canby is pleased to announce our attorneys who have been named to the list of Super Lawyers in the state of Maryland for 2020. Attorneys James Thompson and Donna McBride have been once again selected for this honor, and attorneys Diane Feuerherd, Callie Carnemark and Christopher Young have been named to the 2020 “Rising Stars” list, which recognizes attorneys under the age of 40. 
 
2020 marks the 14th year that James (Jim) Thompson has been named to the list. He has led Miller, Miller & Canby's Litigation Group for more than 25 years, concentrating his practice in eminent domain and real estate valuation litigation, as well as in property tax assessment appeals. For more than a decade, Mr. Thompson represented Maryland in the Owners’ Counsel of America, a national network of property rights attorneys with demonstrated excellence in this area. In 2018, Mr. Thompson was recognized with the President's Citation for Outstanding Service by the Montgomery County Bar Association. He was also selected as the Senior Lawyer of the Year by the Maryland State Bar Association. 
 
Donna McBride
has been a named Super Lawyer since 2014, and has been a partner in Miller, Miller & Canby’s Litigation practice since 2009. She focuses her practice in litigation in the following areas:  business and commercial, employment, estates and trusts, personal injury and insurance, as well as real estate. In 2019, Ms. McBride was admitted to the American College of Trial Lawyers as a Fellow. In addition to her background as a trial lawyer, Ms. McBride is a member of the Court of Appeals Standing Committee of Rules of Practice and Procedure, where she was appointed to serve a second 5-year term beginning in 2018. She is also a member of the Trial Court's Judicial Nominating Commission, the Montgomery County Inn of Court, a former co-chair and current member of the Maryland State Bar Association's Judicial Selections Committee and has volunteered as a mediator for the District Court since 2008. In 2018, she was elected to serve as Treasurer for the Montgomery County Bar Association, to serve the 2018-2019 term. She currently serves as Treasurer for the Montgomery County Bar Foundation. 
 
2020 is the fifth year that attorney Diane Feuerherd has been named to the Super Lawyers “Rising Stars” list. She has successfully represented individuals, property owners, and businesses in a wide variety of matters, ranging from administrative hearings before the Board of Appeals, to jury and bench trials in state and federal courts, and to appeals before the Court of Special Appeals and Court of Appeals. In addition to her work, she is active in state and local bar associations. She serves as a co-chair of the Maryland State Bar Association's Judicial Appointments Committee, Blog Manager of the Maryland Appellate Blog, Board Member of the Maryland Bar Foundation and a past Fellow of the MSBA's prestigious Leadership Academy. 
 
2020 is the second year that attorney Callie Carnemark has been recognized as a Super Lawyers “Rising Star.” An associate in the Litigation group, she focuses her practice on real estate and business litigation as well as the firm’s appellate practice. Ms. Carnemark is a member of the Montgomery County Inns of Court, the Montgomery County Bar Association and the Maryland State Bar Association. She is a graduate of the Montgomery County Bar Association Leadership Academy, Class of 2017. She is a member of the Executive Committee of the Montgomery County Bar Association, and Co-Chair of its New Practitioner Section. She is also a member of the Montgomery County Women's Bar Association. 
 
2020 is also the second year that Christopher Young has been recognized as a “Rising Star.”  An associate in the Business & Tax Practice Group, he works with business clients and individuals to resolve tax disputes with the Internal Revenue Service and state agencies. He works with corporate clients on issues related to corporate disputes, governance, formations and restructurings, as well as drafting and reviewing corporate documents such as contracts and purchase agreements, operating agreements and partnership agreements. He also advises clients on matters related to foreign financial account reporting and compliance.
 
These five attorneys join other Miller, Miller & Canby attorneys previously named Super Lawyers including Joe Suntum, who practices in the field of eminent domain and commercial litigation, Pat McKeever, whose practice focuses in real estate law and Jody Kline, whose practice focuses in Land Use and Zoning. 

Super Lawyers, part of Thomson Reuters, is a research-driven, peer influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement.

The annual selections are made using a patented multiphase process that includes:
•    Peer nominations
•    Independent research by Super Lawyers
•    Evaluations from a highly credentialed panel of attorneys

The objective is to create a comprehensive listing of exceptional attorneys who have attained a high degree of peer recognition and professional achievement, to be used as a resource for both referring attorneys and consumers seeking legal counsel. Attorneys are selected from more than 70 practice areas and a variety of firm sizes, but are limited to no more than 5% of attorneys practicing in any given region (2.5% for Rising Stars). The lists are published annually in leading city and regional magazines and newspapers nationwide. 

View a PDF of the press release by clicking Download below.





Merging Businesses Beware: MD Court Case Demonstrates Importance of Signed Legal Corporate Documents


A recent decision by the Maryland Court of Appeals serves as a cautionary tale for business owners in Maryland.  In MAS Associates v. Korotki, the parties intended to merge their businesses with an existing limited liability company (LLC), but never signed the requisite corporate documents to solidify their intention. When a dispute arose, two of the owners claimed a partnership existed while one disagreed.  Taking their dispute to the courts, the Court of Appeals ultimately determined that, while intent can be explicit or based on the parties’ conduct and the surrounding circumstances, there was insufficient evidence of a partnership here. Thus, the failure to document the relationship proved fatal to the argument of the majority owners.

Background

During the economic recession of 2009, Harry Korotki sought to initiate a merger with the mortgage lending company he owned, Savings First Mortgage, LLC ("Savings First"), and two other licensed mortgage entities: Greentree Mortgage Corporation ("Greentree"), owned by Joel Wax ("Mr. Wax"), and MAS Associates, LLC d/b/a Equity Mortgage Lending ("MAS"), owned by Saralee Greenberg ("Ms. Greenberg") and Ken Venick ("Mr.Venick"). Post-merger, the three companies were to operate as one, with MAS absorbing Greentree and Savings First, and becoming the surviving entity.

In an effort to memorialize their merger, each party was represented by its own counsel.  However, due to complex regulations governing mortgage companies, the parties selected an independent regulatory counsel to navigate the merger process. At the time of the pre-merger negotiations, it would have been impossible to combine all 3 businesses without some interim steps for the purposes of licensing.  Accordingly, the independent regulatory counsel prepared an "Issues Outline," which served as an outline for an "Interim Agreement." It included arrangements, obligations, and the structure of the business prior to the completion of the merger.

During the fall of 2009, the independent regulatory counsel drafted a new agreement between the parties, memorializing their intention to "ultimately change the membership of [MAS] and the membership percentages . . ."  However, the parties intended for this agreement to take effect once the requisite regulatory approvals had been obtained, which was slated to be three years or more.  The agreement was intended to provide time for each jurisdiction to process such approvals, namely MAS’ change in ownership paperwork, and to act as a limitations period to insulate MAS from potential creditors.

The independent regulatory counsel circulated the initial draft agreement to the parties and their attorneys for review. Two days later, regulatory counsel forwarded the parties a draft Operating Agreement for the new MAS.  Negotiations over the terms of the agreement and the Operating Agreement lasted for several months. However, an agreement over the language of the documents was not finalized, and the parties decided to proceed with business operations without executing the agreement. The parties concluded, because they were not generating revenue, it was not financially sound to continue absorbing legal fees with the regulatory counsel. Rather, they decided to proceed without signing any documents (except for a lease between Wax Properties and MAS).

By summer 2010, the combined mortgage lending business had finally begun turning a profit. Shortly thereafter, the parties agreed to start receiving a salary of $10,000.00 per month each. At that time, they informally agreed that all business decisions and day-to-day executive functions of MAS were to be unanimously approved between them.

At the end of the year, the three men divided MAS's profits evenly among themselves, each receiving $120,000.00. The next week, they each made an additional contribution of $125,000.00 to the business. Then they drew a second profit distribution, totaling $64,500.00 each.  Thereafter, as MAS began to grow, so did its need to secure additional lines of credit. As collateral to secure a line of credit, Mr. Greenberg and Mr. Wax agreed to pledge their own, personal resources. However, Mr. Korotki refused to be personally liable for any amounts exceeding his one-third share; which eventually led to the unraveling of the venture.

In the spring, Mr. Korotki informed Mr. Greenberg and Mr. Wax of his decision to quit. When Mr. Greenberg and Mr. Wax allegedly refused to negotiate the terms of his departure and buyout, Mr. Korotki filed a complaint in the Circuit Court for Baltimore County for breach of contract and declaratory judgment under RUPA. After several years of litigation and the associated legal costs, the trial court ruled that the parties intended to form a partnership.

The appeal by MAS Associates was elevated to the Maryland Court of Special Appeals.  The ruling at the Court of Special Appeals affirmed the trial court.  Specifically, the Court of Special Appeals ruled that the parties entered a “joint venture” in the short period of time between not signing the agreement and when they couldn’t agree to the terms of the merger.  

MAS Associates appealed to the Maryland Court of Appeals and Judge Adkins reversed the lower court, holding: “The party asserting the existence of a partnership bears the burden of producing sufficient facts to conclusively demonstrate the parties’ intent to form a partnership. Intent can be explicit or based on the parties’ conduct and the surrounding circumstances. Sharing profits and losses, equal management authority, making capital contributions, and whether the parties were concurrently seeking to form another type of business entity can all be factors the courts consider when evaluating intent.

Here, the trial court made an error of law when it concluded that Harry Korotki’s $275,000 in payments to Saralee Greenberg were capital contributions for a new entity, and to the extent that it applied a presumption of partnership based on receipt of profits, it also made an error of law. As for the other factors and evidence, taken together, the record lacks competent material evidence to conclude the parties formed a partnership and the trial court was clearly erroneous in concluding that they did.”


The Court of Appeals concluded that the parties, throughout the course of their business relationship and dealings, demonstrated that they never abandoned their pursuit of acquiring the membership interest in MAS.  Specifically, the Court ruled that it is a contradiction of Maryland law to simultaneously sustain the dual intention of acquiring an existing LLC’s membership interest and of forming a partnership or joint venture. The Maryland Court of Appeals reversed the Court of Special Appeals (and the trial court).  

Important Factors for Businesses Considering a Merger

  1. Hire Business Law Counsel 
    The parties in this case hired independent regulatory counsel to guide them through the merger as well as personal business law attorneys.  The regulatory counsel devised a plan whereby the parties would eventually become members of the LLC. 

  2. Negotiate and Execute Agreements
    The regulatory counsel drafted documents per the instructions of the parties, the parties just couldn’t come to an agreement with certain aspects of the agreements – so instead of resolving them, they just never signed them and conducted business without certainty.

  3. Understand the Risk of Operating a Business Without Executed Agreements
    Independent counsel warned the parties and their representatives that it would be difficult to determine their rights and obligations without signed agreements.  While the parties disagreed over some points, namely liability, had they executed the agreements or more effectively communicated with regulatory counsel, it could have protected their interests as it related to their business relationship with one another.  Instead, the parties conducted business activities as though an agreement was executed – in other words, they didn’t let the lack of a signed business contract get in the way of transacting business.  Despite their regulatory counsel’s repeated recommendations and warnings, they ignored his advice. 

  4. Trusted Business Law Advice May Reduce Your Future Legal Fees
    The lesson here is that your actions and conduct today can potentially be used either against you, or in your favor, in the future.  In the absence of signed agreements, the Court had to look to the actions and conduct of the parties.  The parties ignored the independent regulatory counsel’s warnings and advice because they didn’t want to pay the legal bills (based on the testimony of one party).  A trusted business law attorney makes sure their clients understand that they are looking out for their best interests.  Clients are better served by paying legal fees to structure their business appropriately, rather than incur problems and costly litigation later.

Chris Young is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. He may be reached at 301-762-5212 or via email.  View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

Michael Campbell
is a partner in the litigation group at Miller, Miller & Canby. He focuses his practice on commercial, real estate and construction litigation.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for an inquiry.  For more information about the firm’s litigation practice, click here. For more information about the firm’s business and contract law practice, click here.





Does Your Small Business Have a Succession Plan? 6 Key Factors to Consider


After years of blood, sweat, and tears, you have built a successful small business, but have you considered what will happen to your business when you retire or pass away, or in the event you become disabled? It is often hard to fathom an event that may not occur for many years, but it is critical to put plans in place in advance. Failure to plan for the inevitable could result in the eventual loss of the business. All small business owners should genuinely consider the following factors in making plans for the future of their business.

  1. Identify a successor. Many small business owners plan for the eventual transfer of their business to a child or children, or even grandchildren. If you have more than one child or potential successor to the business, it is essential to consider which of them has an interest in stepping into your shoes and whether the successor(s) has the skills needed to do so successfully. For example, you should not assume that control of the business should automatically go to the oldest child. The continued success of the business requires that the member(s) of the next generation who will take over the reins will have the business acumen and commitment needed to run it well.

  2. Train the successor. Consider participation in the business by the next generation before transferring ownership and management duties. For the continued success of the business, your successor(s) should know the ins and outs of the business and be able to run it before you depart. Training the successor can occur over several years, after which you can start the process of transferring management and ownership of the business. Some business owners choose to transfer management control of the business to the next generation first, while staying involved to a limited extent as an advisor. Then, after some time has passed, transferring ownership of the business can be completed.

  3. Determine whether to transfer the business by gift or sale. Each family must make its own decision about how the transfer should occur and the circumstances of when that might happen. Many business succession professionals recommend that the members of the next generation have an economic stake in the success of the business by purchasing at least part of their ownership interest. If your successor does not have the money to pay a lump sum for the business, the sale can occur as a buyout that happens over several years. Alternatively, the next generation can work for the company at a reduced salary to earn ownership interest in the business. Transfer of the ownership interest in the business can happen in several ways. If the transfer happens due to a sudden illness or death, have you considered the need for an income stream to support a surviving spouse?  The business and estate planning attorneys at Miller, Miller & Canby can help you explore options best suited to your particular circumstances.

  4. Create a structure for multiple successors.  If more than one successor is well-suited to run the business, put a business structure in place that enables a smooth transition to multiple successors with minimal conflict. Incorporate provisions facilitating a smooth transfer into your partnership agreement or LLC operating agreement. If one or more family members are not interested in participating in the ownership of the business, consider providing an inheritance for them from other assets or making them the beneficiary of a life insurance policy.

  5. Think about your own needs for your retirement. Will you need a continuous stream of income during your retirement years? If the answer is yes, consider continuing to play a limited ongoing role in the business, for which you receive a salary. Another option is to require the next generation to purchase the business; this would provide the funds needed for your retirement.

  6. Plan with an eye toward minimizing your tax liability. Many business owners choose to transfer ownership in the business gradually by making gifts of shares in the business to family members each year that are equivalent to the amount of the annual federal gift tax exclusion (currently $15,000). Our estate planning attorneys can help you establish a gifting plan to accomplish the transfer of your business in a way that minimizes your income, gift, and estate tax liability.

You have invested time, effort and collateral in making your business a success and it may be difficult to think about relinquishing ownership or control of it. Nevertheless, advance planning is of utmost importance in creating a lasting legacy for your family. Miller, Miller & Canby’s business, tax and estate planning attorneys can work with you to put a plan in place that helps you pass your business on to the next generation and takes into account your financial needs in retirement. Contact our office today to set up a meeting by clicking here.

David A. Lucas
is an attorney in Miller, Miller & Canby’s Estates & Trusts and Business and Tax Practice Groups. David has focused his practice on helping families preserve their financial wealth and legacies for future generations through the use of Trusts, Wills, Powers of Attorney, Advance Medical Directives, Living Wills, and other estate planning strategies. David is committed to providing his clients with a well-crafted estate plan so they may avoid probate, protect their assets and legacies, and provide for the security of their loved ones. He takes a special interest in ensuring that the dreams parents have for their children and grandchildren are not lost to taxes, poor planning, or procrastination. He speaks frequently on a variety of estate planning topics to both the general public and private groups.

Contact David
to discuss your estate plan to take advantage of the laws available today and ensure flexibility for future changes. For more information on Miller, Miller & Canby’s Business and Tax Practice Group, click here.
 





Maryland Holds the Line on Property Tax Rate; But Buyers Should Consider Total Tax Burden


Recently, the Maryland Board of Public Works voted to keep the state property tax rate at its current level.  The Board is composed of the Governor, Comptroller and State Treasurer.  Governor Larry Hogan, a fiscal conservative, announced that holding the rate was part of his commitment to “prudent capital spending.”  As a result, the state tax rate will remain at 11.2 cents per $100 of assessed value, or 0.112% of total value.  That means a property assessed at $1,000,000 will incur a state tax of $1,120 annually.

While this might suggest good news for Maryland property owners, the state property tax is only a small portion of the overall tax burden on properties.  Each non-exempt property is also subject to county property taxes and, in some jurisdictions, municipal property taxes as well.  For instance, in Montgomery County, a D.C. suburb and the most populated county in the State, the current county tax rate is 0.9927%, which adds another $9,927 in taxes for a $1,000,000 assessment.  Further, a person owning property in Takoma Park, located inside Montgomery County and on the D.C. border, would pay an additional municipal tax of 0.5291.  Consequently, a non-exempt property assessed at $1,000,000 in Takoma Park is subject to a total property tax rate of 1.6338%, equaling $16,338 in annual property taxes.

Other Maryland municipalities that impose a third layer of property taxes include Frederick City (0.73%), Hyattsville (0.63%), and Annapolis (0.54%). When considering the location and timing of purchasing property in the Maryland, buyers should consider the total property taxes imposed annually.  Moreover, if the pre-purchase assessment is lower than the purchase price, the buyer can generally expect the assessment to increase up to the purchase price for the next triennial assessment cycle. The local assessment offices track sales of properties and will pick up the sale price when issuing new assessments.

Miller, Miller & Canby has been challenging the assessments of various types of properties in Maryland for more than 30 years and has obtained substantial reductions in real property assessments for our clients. We have successfully appealed the assessments on office buildings, retail stores, senior living centers, warehouses, industrial sites, casinos, apartment buildings, golf courses and cemeteries. 
Michael Campbell
 is a partner in the litigation group at Miller, Miller & Canby.  In addition to trial and appellate advocacy, his practice focuses on real estate litigation and property tax assessment appeals.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for property tax guidance or to help reduce your commercial Maryland property tax assessment.  For more information about the firm’s Maryland property tax appeals practice and representative cases, click here.





Truly the Season of Giving: IRS Gives the Green Light for Gifting


As explained in a prior article, the sweeping tax reform bill, commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA), temporarily doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption from $5 million to $10 million (adjusted for inflation after 2011). For 2018, the exemption is $11.18 million per person.  The exemption will increase to $11.4 million in 2019. This doubled exemption will adjust for inflation each year and will remain in effect until December 31, 2025. If Congress doesn’t act before 2026, the law will sunset and the exemptions will revert back to the $5 million level (adjusted for inflation).

Shortly after passage of the TCJA, questions arose regarding taxpayers who utilize the doubled exclusion during their lifetime and then die in 2026 or later, when the exclusion reverts to the former $5 million (adjusted for inflation). This could lead to inconsistent tax treatment arising as a result of the temporary nature of the increased exemption amount. Therefore, the statutory sunset of the higher exemption amount and reversion to the lower amount could retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts. This scenario has been dubbed a “clawback” of the exemption.

“Clawback” Example
Jim is about to retire and has an estate worth $15.18 million. In 2018, Jim decides to gift $11.18 million to Dynasty trusts for his 3 grandchildren. Jim will rely on the remaining $4 million, social security payments, and his pension to get him through his retirement years. Jim would owe no gift tax in 2018 because his combined gift and estate tax exemption is $11.18 million.

Jim then dies in 2026, when the combined gift and estate tax exemption has reverted back to $5 million (adjusted for inflation). We can assume that the inflation adjusted exemption amount will be about $6 million in 2026. If Jim still has $4 million in assets at death, his gross estate would be $15.18 million after adding in the $11.18 million taxable gift that Jim made in 2018. Would Jim’s estate owe tax on $9.18 million, the difference between his taxable estate ($15.18 million) and the 2026 exemption amount ($6 million)?  If yes, then Jim’s estate would be hit with an estate tax bill of approximately $3.67 million! On November 23, 2018, the IRS published proposed regulations to address the “clawback” problem.  The Regulations indicate that the IRS will not seek to “clawback” into the estate the taxable gifts that the decedent made when the exemption covered those gifts.  These proposed regulations apply to gifts made after 2017 and the estates of persons dying after 2017.

So, in Jim’s example, his estate would not owe estate tax on the amount he gifted in 2018.  Of course, in 2026, he would not have any remaining exemption to use for his $4 million in assets, so his estate would owe tax on the entire $4 million remaining at death – a tax bill of about $1.6 million. It is easy to see that these new Regulations are quite favorable to the taxpayer!

Estate Planning Opportunities: What Clients Need to Know
With the uncertainty of “clawback” soon to be removed, we recommend that clients with taxable estates consider making large gifts to reduce the size of their estates and take advantage of the increased federal exemption amounts. This is especially important for clients in Maryland and the District of Columbia. These jurisdictions have stand-alone state estate taxes with exemption amounts lower than the federal exemption, and do not impose a gift tax; which makes these gifts of even greater importance.

However, prior to making any gift, it is vital to conduct an analysis of the income tax consequences of the gift. This is crucial because a recipient of gifted assets takes the donor’s basis for federal income tax purposes (a “carry-over basis”). Whereas, the basis of assets which are subject to the federal estate tax, and received as a result of a person’s death, is equal to fair market value at the date of the decedent’s death (a “stepped-up basis”).

Finally, clients should know that time is of the essence and should consider taking advantage of the increased exemption amount sooner rather than later because Congress could change the law again prior to the sunset date and those who have not used the larger exemption amount will have lost the opportunity to do so. Keep in mind also that large gifts often take some time due to planning, appraisals, and preparation of trusts and other documents.

David A. Lucas
is an Attorney in Miller, Miller & Canby’s Estates & Trusts and Business and Tax Practice Groups. David is committed to providing his clients with a well-crafted estate plan so they may avoid probate, protect their assets and legacies, and provide for the security of their loved ones. He takes a special interest in ensuring that the dreams parents have for their children and grandchildren are not lost to taxes, poor planning, or procrastination. He speaks frequently on a variety of estate planning topics to both the general public and private groups.

David has focused his practice on helping families preserve their financial wealth and legacies for future generations through the use of Trusts, Wills, Powers of Attorney, Advance Medical Directives, Living Wills, and other estate planning strategies.

Contact David
to discuss your estate plan to take advantage of the laws available today and ensure flexibility for future changes. For more information on Miller, Miller & Canby’s Estates & Trusts Practice, click here.





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