A corporation is required to file an annual report either in paper form with the Secretary of Revenue, or, at the option of the filer, in electronic form with the Secretary of State.  An annual report to be delivered to the Secretary of Revenue is due by the due date for filing the corporation’s income and franchise tax returns.  However, the due date to file electronic annual reports with the Secretary of State has changed: they are now due by the fifteenth day of the fourth month following the close of the corporation’s fiscal year.  The previous law was that electronic annual reports filed with the Secretary of State were due by the fifteenth day of the third month following the close of the corporation’s fiscal year.

An LLC is required to file annual reports with the Secretary of State similar to those reports required for corporations.  Under the change in the law, now the first annual report for an LLC is due by April 15th of the year following the calendar year in which the company files its articles of organization with the Secretary of State.  Subsequent annual reports are due each April 15th thereafter.  For example, an LLC that was formed on or after January 1, 2010, but before April 15, 2010, is not required to file an annual report until April 15, 2011.  This new due date is retroactive to September 1, 2001, filings.  This means that some LLCs may have filed “extra” reports if organized before April 15th of that year and filing annual reports under the old rules.  An LLC that has filed more annual reports than required under the new rules is not allowed a refund of the annual report filing fee paid for filing the unnecessary report, but will not be required to pay the annual report filling fee when filing the annual report due April 15, 2011.  If an LLC missed the first year’s annual report under the previous law, it will still need to submit an annual report in 2011 with fees.

April 15th is around the corner.  Are you ready to file your corporate or LLC annual report?

For more information or assistance on filing an annual report, contact The Business Practice at (336) 333-7907

So, you’re thinking about selling your business?  Here are a few observations gleaned from years of helping the owners of small and mid-sized businesses successfully sell their businesses:

1.     Start planning early.  The process of selling a business takes many months, even years.  Be clear about why you want to sell, your goals, and what you want to do after the sale.  Ask yourself the hard questions – do I want to leave this business?  Why?  Is this a “crisis” sale, or an ideal time?  What am I going to do after the sale?  Do I want to stay in this field?  Do I want to retire to a sandy beach, or start another business?  In order to sell effectively, you must be committed to sell, and not experience “seller remorse” in the middle of the process, so be clear about what you want.

2.      Know what your business is worth.  Not just what you want for it.  Be informed, and don’t have an unreasonably high (or low) sense of what your business is worth.  Sellers almost always think the business is worth more than buyers are willing to pay.  Consider a third party valuation.  Look at industry norms, not just what someone said John Smith down the road got for his business – rumors are not reliable.  An unrealistic asking price may drive away prospective purchasers, or it may mean you are asking less than the business is worth.  Be informed, and be realistic.

3.     Prepare the business for sale, well in advance.  Take a hard look at the business, from a potential buyer’s perspective.  Review the financial statements, correct accounting errors, look at the things that a buyer would look at – customer relationships, employees, supplier contracts, business leases, internal systems and procedures, sales force, etc.  Clean up the things you’ve been neglecting; document your business procedures and practices.  Also, where is the hidden value? – bring it to the surface.  (Closely held family businesses often do not show the full profit potential of the business on their financial statements, so the financial statements may need to be “re-stated” to reflect that value.)  There may even be opportunities for tax benefits by restructuring the company.  Ideally this process should begin several years in advance.

4.     Begin collecting information a prospective buyer would want to see.  Be prepared to respond quickly to the kinds of questions a buyer is likely to ask.  Start by asking yourself, “What would I want to know if I were considering buying this business?” If you don’t know what a buyer might want to see, ask your advisors about their experience; go on line and get some sample “due diligence” checklists.

5.     Know what and how much information to share with prospective buyers, and when to share it.   Consider requiring a non-disclosure agreement before disclosing sensitive information.  Disclose information in stages – macro first, more detail as the negotiations progress.

6.     Make sure all the information is accurate.  If you make estimates or assumptions, say so.  Credibility is essential – the buyer must be able to rely on what you give him.

7.     Retain an experienced team of advisors.   Certainly, you know your business, but you still need certain kinds of advice.  At a minimum, get on your team:  (i) a qualified attorney who is experienced in handling the legal issues in the sale of a business, structuring the sale and assisting in the negotiations; (ii) a tax advisor, such as a CPA or other tax professional; (iii) give serious consideration to engaging an experienced intermediary, such as an industry-specific broker or consultant.  Meet with them early in the process.  Listen to your advisors. You may be very good at running your business, but how often have you sold a business?  This may be the single biggest transaction you’ve ever done – should you go it alone?  There are no “do overs.”

8.     Educate yourself on the process of selling your business.   With the help of your team of advisors, educate yourself on the process – selling a business is different from running a business. Books are a good start, but the experience of your advisors is more valuable.

9.     Meet with the prospective buyers.   No matter what anyone says, the deal will go more smoothly if you establish a bridge of trust with the buyer.   Once you have a qualified buyer, face-to-face contact is essential.  Most sales require that the seller provide lots of information before the sale, as well as transitional help after the closing.  And, inevitably some kinks will arise that were not covered in the contract – mutual trust will make it all easier.

10.    Leave when it’s over.  Once you sign the bill of sale, it’s not yours anymore, so let it go.  You’ll probably be involved for a short time after the sale to help the buyer learn about your employees, customers, etc., but when they’re done with you, leave graciously – they’re entitled to run their own ship.  It was your dream, you built it and sold it – now let it be their dream.  Take time off to dream about the next phase of your life.

Conclusion:  This is probably your biggest asset, and selling the business is probably the most significant single event in your business (and perhaps personal) life.  You’ve maybe even never sold a business before – so plan it, get help, listen to your advisors, and prosper!

About the author:  Bruce counsels small and medium-sized businesses and their owners in the purchase and sale of businesses, organization of corporations and limited liability companies, business financing, planning for and resolving business problems, business insolvencies and restructuring, and personal asset protection planning. He is a graduate of Duke University (B.A.), George Washington University (M.S.), and the W.F. Law School (J.D.); Bruce is the past chair of the Business Bankruptcy Committee of the NC Bar Association Business Section, and past chair of the UCC Subcommittee of the Business Section of the NC Bar Association.

For more information, contact Bruce Connors @ 336-333-7907, or bconnors@connorslegal.com

When you look over those delinquent debts you may ask:

WHEN SHOULD I PURSUE ACCOUNTS BY LEGAL ACTION?

We are often asked this question. Our general response is that if you have exhausted personal contact and your firm, but friendly, written and oral requests for payments have been ignored, it may be time to take legal action. If no payments have been made in 6 months on the account, then, again, it may be time to take legal action.

Often, legal demand letters from an attorney’s office will spur a delinquent debtor to pay the debt in full, or, at least begin making debt payments, rather than incur legal costs or risk court action over an undisputed matter. We try to obtain Confessions of Judgment or signed promissory notes from the debtor, where appropriate, to confirm the arrangement.

Timely and diligent action mandates that you not wait too long. We have seen many cases over the years when clients were not paid because they waited too long.

Diligent efforts to collect, including prompt legal action, will increase the probability of being paid what you are owed and maximizing your return.

WHAT IF I HAVE OLD DEBTS – WHAT IS THE MAXIMUM LENGTH OF TIME I CAN WAIT TO COLLECT?

The applicable statute of limitations limits your ability to pursue the debt by legal action after 3 years from the due date, breach of contract, or possibly the date of last payment. GS Sections 1-52, 1-26

OTHER RECOMMENDATIONS:

If you intend to collect interest above the legal rate of 8%, you must have a signed account agreement with such a provision. Also, when dealing with a closely held business entity, if feasible, obtain individual personal guaranties on the account in writing from the principals. This will increase your chances of getting paid. If you have credit account agreements, remember to include an attorneys’ fee provision in regard to collection in the terms of the agreement.

Let’s roll the clock back to when the company began.  If you come to our firm at the inception of the business, we will recommend that any business starting up that has multiple owners have an operating agreement (if you are a limited liability company) or a shareholders agreement (if you are a corporation).  During the drafting of such an agreement, we invite the owners to discuss how the company will function in good times and in bad.  That sounds like what you hear in wedding vows, and that’s not a bad analogy.  You might remember what the pastor said when you first declared you wanted to get married: “I know you are in love, and there will be a honeymoon period, but how will you handle the problems in life that will come inevitably?”

The same goes for your business.  What will happen if the company needs money in the future?  Does everyone have to participate in capital contributions?  Can the owners lend money to the company?  What will the terms of those loans be?  Can an owner who lends money take a security interest in the assets of the company?  How will that affect the company’s ability to borrow from outside sources, like a bank?  Does each owner have to sign a personal guaranty on any company loans, leases, or franchise agreements?  What will happen if the company cannot service its debt or has to close down?  How will that decision be made?  What if the voting structure is that the decision to close down has to be a majority decision, but the one person with the most to lose votes no?  Can the other owners still shut down the business?  What happens if someone just wants out?

The point is that if you spend a little money up front to have a document that records what everyone agreed to in the beginning, you are much more likely to work things out in a civil manner than if you don’t have one.  And please, make certain that if you are an operating company (an active business) as opposed to a holding company (a passive investment — like real estate), you have an agreement that fits the type of company you have.

If you don’t have such an agreement, that doesn’t mean all hope is lost.  You may be able to restructure debt, get a rent reduction, re-negotiate franchise agreements, and get your company out of trouble — but you and your partners have to sit down at the table and decide what you want in order to work out your differences in a constructive manner and move forward.

We have been a part of some of those success stories, and we are here to help.

We talk to our new business clients about the importance of keeping up with annual reports, when they are due, and also that owners are required to keep the Secretary of State informed if their registered agent changes his or her address — so that the owners can get those notices from the Secretary of State BEFORE they are administratively dissolved, giving them time to catch up on those lagging annual reports.  But if you filed your articles of organization or incorporation yourself, you may not have realized that those are the rules!

Do yourself a favor now.  Mark your calendars (corporation annual reports are due by the due date for filing the corporation’s income and franchise tax returns, and April 15th for LLCs) or ask your tax accountant to prepare the annual report every year at the appropriate time.  You don’t want to be caught without your entity status, do you?

I often tell my clients that it may be difficult to ever truly ascertain the value of my services.  I am what I would like to call a “prophylactic” attorney — I try to draft contracts that protect you if you get into a dispute.  However, as I am also a business owner, not just a lawyer, I also understand that the contract has to work in the good times.  It’s a good thing to look at your contracts every once in a while to see if they protect you — and they work for you.

The information and opinions on this blog are made for informational purposes only and should not be considered legal advice. The transmission and receipt of information on the blog do not form or constitute an attorney-client relationship. You should not post any confidential information.  Persons receiving the information on this blog should not act upon the information provided without seeking profession legal counsel.

Participants’ rights in the plan are subject to a substantial risk of forfeiture under Code Section 83 if (1) is full enjoyment of the property, its condition on future performance of substantial services by any individual and (2) the possibility of forfeiture if the condition is not satisfied is substantial. Whether a risk of forfeiture is substantial is a facts and circumstances test.  There is little guidance from the IRS as to the types of services that will be considered substantial. However, the regularity of performance and the time spent performing the required services are an indicator of whether or not they are substantial. It is not clear how far into the future an arrangement must require substantial services in order to require “future performance.” Nevertheless, the regulations describe various arrangements requiring employees to work for periods as short as one or two years as imposing “a substantial risk of forfeiture.” Ordinarily a covenant not to compete is not considered a substantial risk of forfeiture, unless the particular facts and circumstances indicate differently.

A properly planed Deferred Compensation Agreement postpones payment for currently rendered services until a future date, with the effect of postponing the taxations of such compensation until it is received by the participant. Under a typical Deferred Compensation Agreement, an employer promises to pay an employee fixed or variable amounts for life or for a guaranteed number of years. When the deferred amount is received, the employee may be in a lower income tax bracket. Most commentators divide most non-qualified deferred compensation plans into two broad categories, pure deferred compensation plans and salaried continuation plans. The employer may pay deferred amounts as additional compensation or the employee may voluntarily agree to reduce current salary. The plan must provide that participants have the status of general unsecured creditors of the employer, and that the plan constitutes only a promise by the employer to pay benefits in the future. The plan must also state that it is the intent of the parties that it be unfunded for tax and ERISA purposes. The plan must define the time and method for paying deferred compensation for each event which entitle a participant to a distribution of benefits. If the plan refers to a Trust for other informal funding mechanism, additional rules have to be satisfied.

In the American Jobs Creation Act of 2004, Congress imposed additional requirements to avoid constructive receipt of benefits. Under Code Section 409 A, the participant may only receive a distribution of previously deferred compensation on the occurrence of one of six events, (1) Separation from service; (2) the date the participant become disabled; (3) death; (4) a fixed time specified in the plan at the date of the deferral; (5) change in the ownership or effective control of the corporation or the assets of the corporation; (6) the occurrence of an unforeseeable emergency,

Within the meaning of Code Section 409 A, the term “unforeseeable emergency” means a severe financial hardship to the participant resulting from an illness or accident of the participant, the participant’s spouse or a dependent of the participant, loss of the participants property due to casualty or other similar extraordinary and unforeseeable circumstances, arising from events beyond the participants control.

A separate set of new election rules allows participants to elect to delay distributions or change the form of distributions from a plan as long as the plan requires the new elections to be made at least 12 months in advance. In addition, any election to delay a distribution must delay the distribution at least 5 years from the date of the new election. An election related to a scheduled series of distributions made pursuant to a fixed schedule must be made at least 12 months in advance of the first such scheduled payment. Final regulations generally provide that each separately identified amount to which an employee is entitled to receive on a determinable date is a separate payment. A series of installment payments under a single plan will generally be treated as a single payment, but a plan may specify that series of installment payments is to be treated as a series of separate payments.

Tax deferral will not be achieved if prior to the actual receipt of payments the employee is in constructive receipt of those payments. Income is constructively received if the employee can draw on it at any time. It is not constructively received if the employee’s control of its receipt is subject to substantial limitation or restrictions. Some agreements contain contingencies that might cause the employee to forfeit future payments. So long as the employees rights are forfeitable there can be no constructive receipt; however, the IRS has ruled that an employee will not be in constructive receipt even though his rights are non-forfeitable if (1) the agreement is entered into before the compensation is earned and (2) the employers promise to pay is not secured in any way.

A Rabbi Trust is a vehicle for accumulating assets to support unfunded deferred compensation obligations. They are established by an employer with an independent Trustee, and it is designed to provide employees with some assurance that their promised benefits will be paid while preserving the tax deferral that is the key of unfunded deferred compensation plans. A Rabbi Trust is generally irrevocable, but the main characteristic of such a Trust is that it must provide that its assets remain subject to the claims of the employer’s general creditors in the event of the employer’s insolvency or bankruptcy. Securing or distributing deferred compensation upon the employers falling net worth or other financial events unacceptably secures the payment of the promised benefits. Under any such arrangement, compensation that is otherwise deferred is immediately taxable and subject to a 20% additional tax. Interest on the underpayment of taxes is due at the normal underpayment rate plus 1%. The combination of security and tax deferral offered by a Rabbi Trust had made them very popular. In fact, the Rabbi Trust is so popular that the IRS has released a model Rabbi Trust instrument to assist tax payers and expedite the processing of requests for advance rulings on these arrangements. The IRS model Trust is intended to serve as a safe-harbor for employers, and used properly, the model Trust will not cause employees to be in constructive receipt of income. Of course, whether an unfunded deferred compensation plan using the IRS model effectively defers compensation taxation will depend on whether the underlying plan effectively defers compensation. The IRS will continue to issue advance rulings on the tax treatment of (1) unfunded deferred compensation plans that do not use a Trust and (2) unfunded deferred compensation plan that use the model Trust. However, the IRS will no longer, except in rare and unusual situation, issue advance rulings on unfunded deferred compensation plans that use a Trust other than the IRS model. The model Trust language has all provisions necessary for operation of the Trust except provisions describing the Trustees investment powers. The parties involved must provide language describing the investment powers of the Trustee, and those powers must include some investment discretion. Proper use of the model Trust requires that its language be adopted verbatim, except where substitute language is expressly permitted. The rights of plan participants to Trust assets must be merely the rights of unsecured creditors. These rights cannot be alienable or assignable, and the assets of the Trust must remain subject to the claims of employers general creditors in the event of insolvency or bankruptcy. The Board of Directors and the highest ranking officer of the employer must be required to notify the Trustee of the employer’s insolvency or bankruptcy, and Trustee must be required to cease benefit payments immediately upon the company’s insolvency or bankruptcy.

Generally, the employer can take a deduction for deferred compensation only when it is includable in the employee’s income, regardless of whether the employer is on a cash or accrual basis of accounting. Likewise, deduction of amounts deferred for an independent contractor can be taken only when they are includable in the independent contractor’s gross income. When payments are actually or constructively received, they are taxed as ordinary income. Deferred compensation payments are wages subject to regular income tax withholding when actually or constructively received. Deferred compensation that is subject to constructive receipt and taxation under Code Section 409 A is subject to a 20% additional tax, and interest on the underpayment is imposed at the normal underpayment rate plus 1%. Payments made to a beneficiary are “income in respect of a decedent” and as such are taxed as they would have been to the employee. It is not clear whether the same withholding rules apply however. There are two timing rules for the treatment of deferred compensation amounts under FICA. The general timing rule says that amounts taxable as wages are generally taxed when paid or constructively received. The special timing rule applies to the amounts deferred by an employee under a traditional deferred compensation plan covered by FICA. The special timing rule applies to salary reduction plans and supplemental plans, funded plans and unfunded plans, private plans and Section 457 plans. Employees deferral amounts are considered to be wages for FICA at the later of the date when (1) the services are performed by the employee or (2) the employees rights to such amounts are no longer subject to a substantial risk of forfeiture.

John R. Morgan has served as Trustee for several non-qualified deferred compensation plans.