All posts by Waltz, Palmer & Dawson, LLC

NEW IRS REVENUE PROCEDURE MAKES FILLING LATE S-CORP ELECTION EASIER

contract formFor many people who are starting a new business, organizing an S-Corporation (“S-Corp”) offers the business owners many advantages. In addition to limited liability and protection of personal assets, among other things, stock holders have the benefit of pass-through, single-level taxation.

In order to obtain status as an S-Corp, after incorporation with a particular secretary of state, the corporation must elect to be treated as an S-Corp by filing the appropriate paperwork with the IRS. However, for various reasons, whether the owners forgot, thought an accountant was doing it, or merely wasn’t aware that an election needed to be made, a corporation may fail to make an S-Corp election. In an effort to provide relief to corporations that make late elections, the IRS has instituted a new revenue procedure for taxpayers to apply for relief from late elections. This new revenue procedure is effective September 3, 2013. While the revenue procedure applies to other similar elections, such as a Qualified Subchapter S Subsidiary election, this article will only focus on S-Corp elections.

For an S-Corp election be timely for a particular tax year, the corporation must file for the election on or prior to the 15th day of the 3rd month following the start of the year. So, for a company already in existence that wants to elect S-Corp status for a particular year, the election must be made on or prior to March 15 of that year. For a newly formed company, the corporation has until 75 days from the incorporation date to make the election.

Failure to file the election by the appropriate deadline would result in the IRS not treating the corporation as an S-Corp. Late, or nonfiling, corporations could remedy that situation by following what was previously a maze of procedures. The new revenue procedure supersedes the previous procedures and simplifies the method for taxpayers to apply for relief from a late election.

Under the new procedure, corporations that failed the make a timely S-Corp election may file their election within 3 years and 75 days after the date the election was intended to be effective. For example, if a corporation intended to elect to be taxed as an S-Corp on January 1, 2013 but failed to file its election, the corporation can obtain late relief by filing the election any time before March 15th, 2016.

Additionally, the new procedure provides that S-Corps that meet the following requirements are not subject to the 3 year 75 day deadline, but instead of have no time limit on requesting relief:

  • The corporation is not seeking a late corporate entity classification;
  • The corporation fails to qualify as an S-Corp solely because its election was not timely filed;
  • The corporation and all of its shareholders reported their income consistent with S-Corp status for the year the election should have been made and all later years;
  • At least 6 months have passed since the corporation filed its first S-Corp year tax return;
  • The IRS did not notify the corporation and the shareholders of any problem with the S-Corp status within 6 months after the return was filed; and
  • The completed election form includes statements from all shareholders from the date the election was to have been effective to the date of the filing stating that they have reported their income consistent with S-Corp status.

In basic terms, this means that there is no time limit on how far back a corporation can make a late S-Corp election effective, provided it has always filed taxes as an S-Corp, the shareholders have reported the income as if the corporation was an S-Corp, and the IRS had not notified the corporation that its election was never filed.

Please not that this is article is not intended as tax advice, and is merely a brief summary of one change to the IRS procedures for election by a corporation to be treated as an S-Corp.

Should you need assistance with your company’s tax election or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

To subscribe to our business e-newsletter, pleases send an email request to www.info@wpdlegal.com

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WHAT EVERY BUSINESS NEEDS TO KNOW ABOUT EVERGREEN AGREEMENTS

Evergreen AgreementsThere are many advantages to evergreen provisions for a business. An evergreen provision is an optional portion in a contract that makes is renew automatically, usually on a yearly basis. It usually provides that the contract will be renewed at the end of each year unless one of the parties notifies the other party or parties in writing during the 30 days before automatic renewal. This 30 day window is important, because it is the only time each year when the contract can be cancelled without paying damages to the other parties.

These provisions can benefit a company by essentially allowing them to have one contract that can be cancelled after one year if needed or can be continued indefinitely. In other words, it creates a long-term contract, while leaving some room to get out of the contract if things do not work out. But there is a downside. The window to get out of the contract is usually very short, and if you miss it, you can be stuck for another year until it comes back around.

What if you want to get out of a contract with an evergreen provision? In Illinois, evergreen provisions are generally enforceable if the contract is for a reasonable period of time. So if the contract is renewable each year automatically, but the whole contract automatically terminates after 5 years, the evergreen provision will most likely be enforced. However, if the contract does not have an end date (it could potentially go on forever), evergreen provisions are generally not enforced beyond a reasonable period of time.

So if you or your company is stuck in a contract like the ones discussed here, you may need to take another look to see if there really is no way out. Also, if you are a distributor, specific federal and state laws may affect your rights in regards to evergreen agreements, as well, potentially causing a different result.

Be aware this is a brief discussion of just a few laws and provisions that may govern evergreen provisions and contracts. Prior to entering into any evergreen provision or contract, you should be sure that the concept complies with all governing rules.

Should you have questions about your business contracts or compliance with other laws governing your company or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services.  Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

To subscribe to our business e-newsletter, pleases send an email request to www.info@wpdlegal.com

ARE YOU LIABLE FOR SELLING A COMPANY’S LIABILITIES? SUCCESSOR LIABILITY IN ILLINOIS

selleing companyIf you are considering buying another company’s assets, one important consideration is: what liabilities of the seller will I be taking on? This question generally only arises in an asset purchase, as a stock purchase will typically result in liability on the part of the successor company.

Whether a company that purchases the assets of another company can be held responsible for the seller’s pre-transfer obligations is the crux of the successor liability issue. In Illinois, the general rule is that a company that purchases the assets of another company is NOT responsible for the debts or liabilities of the selling company. However, several exceptions to this general rule exist.

Illinois case law recognizes four exceptions to the general rule of non-liability: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations. As the third exception is the most common and the most concerning for many businesses, this article will focus only on that exception in detail.

When considering the third exception, continuation of the seller, a court will focus on whether the purchaser company is merely a continuation or reincarnation of the selling company, or whether the purchaser maintains the same or similar management or ownership, but is merely wearing “different clothes”.

The test used most often is whether there is a continuation of the corporate entity of the seller – not whether there is a continuation of the seller’s business operation; meaning a court considers the ownership and management of the purchasing company compared to the ownership and management of the selling company, rather than merely asking if the purchasing company sells the same products or provides the same services as that of the predecessor. Courts emphasize whether the officers, directors and stock ownership of the purchasing company are similar to that of the selling company as the key element of a determining whether there is continuation. Absent continuity of stock ownership, courts typically determine that a finding of continuation is not warranted. Continuity of middle management employees absent a showing of common ownership has been previously decided by the courts not to be enough to establish a continuation.

Because of the viability of a purchasing company can hinge on whether that company is responsible for debts and/or liabilities of a seller, carefully structured transfers are prudently worded purchasing documents are necessary. While Illinois courts have provided much guidance regarding successor liability of purchasing companies, the analysis is often fact specific. A business owner would be wise to seek the guidance of an experienced attorney before commencing the purchase of the assets of any company.

Be aware this is a brief discussion of one aspect of successor liability as treated under Illinois law, and each circumstance can dictate different results. In some situations, companies should also consider implications under federal law. For example, the US Court of Appeals for the 7th Circuit recently decided that, despite language in a purchase agreement specifically stating the purchaser was not assuming the liabilities of the seller, absent a compelling reason to rule otherwise successor liability is appropriate in suits to enforce federal labor or employment laws.

If you have questions regarding successor liability or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

To subscribe to our business e-newsletter, pleases send an email request to www.info@wpdlegal.com

DO YOU HAVE NON-COMPETE AGREEMENTS WITH YOUR EMPLOYEES? BEWARE OF THE TWO YEAR RULE

Illinois employment situationsThe Illinois Appellate Court for the 1st District (Cook County) set out what it deemed a clear cut rule in Illinois employment situations: An employee must be employed for a minimum of two years after signing an agreement containing a restrictive covenant (i.e. non-competition or non-solicitation) in order for the covenants to be enforceable. The Court further set out that this rule will apply regardless of whether the employee is terminated by the employer or the employee resigns on his or her own accord; the rule also applies regardless of whether the employee signed the agreement prior to employment, or as a condition of continuing employment.

This case should serve as notice to employers that merely hiring an employee (or retaining an existing employee) is not sufficient consideration to enforce a non-compete or non-solicitation clause, and that if the employee must remain employed for a minimum of two years, regardless of whether that employee resigns or is terminated by the employer.

It should be noted, however, that this case (Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327) appears to only apply to employees who are “at-will” and makes no pronouncements regarding situations in which the restrictive covenant is associated with the sale of a business or the employment is not at-will. This case also does not address restrictive covenants in which the emploee receives additional consideration in addition to continued employment. While this case could be further appealed to the Illinois Supreme Court, as it currently stands the rule set out in this case currently governs restrictive covenants in Cook County.

Finfield involved a man that worked for an insurance administrator, which was then purchased by another company. Fifield was offered employment with the purchasing company, and as a condition of employment was required to sign a “Employee Confidentiality and Inventions Agreement” that contained a two year, post-employment, non-competition and non-solicitation provision. Fifield accepted the employment and signed the agreement, and then resigned 3 months later to work for a competitor. Fifield and the new employer then sued for declaratory relief that the restrictive covenants were not enforceable, which the district court awarded and the appellate court affirmed.

What this means for a business owner (at least in Cook County, for now) is that non-competition or non-solicitation previsions will be extremely difficult to enforce against short-term, at-will employees who are only offered employment or continued employment in exchange for agreeing to these covenants. Under the reasoning of this case, it appears that employees can breach these agreements as long as they resign within two years from their start date (or date an agreement is signed).

Employers who wish to have a higher likelihood of enforcing restricting covenants should consider offering additional consideration beyond merely employment. This may include monetary incentives, for instance raises, bonuses, or cash payments, or may also include other tangible benefits as consideration, such as access to confidential information or a promotion.

Be aware this is a brief discussion of just one aspect governing restrictive covenants. You should be sure that all aspects of your employment agreements comply with Illinois law to give you the best opportunity to enforce them at a later date.

Should you have any questions about non-compete agreementsor any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

To subscribe to our business e-newsletter, pleases send an email request to www.info@wpdlegal.com