Pennsylvania Law Monitor : Pennsylvania Lawyer & Attorney : Stark & Stark Law Firm : Yardley, Philadelphia, New York, New Jersey

One of the most important decisions a business owner makes is to choose the type of entity that is best for their business (“C” corporation, “S” corporation, limited liability company, partnership). While it may have some drawbacks, it is not uncommon for business owners to elect to do business as a C corporation due to lower corporate tax rates and the feeling that a C corporation makes your business seem more substantial. However, there are disadvantages to the C corporation that should be considered before choosing the type of entity for your business. What follows is a brief examination of the tax differences in the sale of a C corporation and the sale of an S Corporation.

The majority of business sales are done as asset sales, meaning that the assets of the business such as hard assets (furniture, fixtures, equipment), good will, books of business and other tangible and intangible assets are sold to a purchaser. In a stock sale, the business is sold through the sale of the corporation’s stock from one or more shareholders to the shareholders that are purchasing the business. Other than the fact that when a buyer purchases the stock of a business he or she also assumes the liabilities to the corporation, a buyer in a stock sale is not allowed to take a step-up in basis of the assets when the stock is acquired.

In an asset sale, a business operating as a C corporation must first pay corporate income tax on the sale of those assets, and the remainder is then distributed to the shareholders of the corporation who pay capital gains tax on the sale proceeds. The same asset sale in an originally elected S corporation would only result in a tax at the shareholder level; there is no tax at the corporate level in an S corporation. In addition, the other drawback to the C corporation (other than the “double taxation”) is that the structure of most asset sales requires the seller to pay the corporate-level tax immediately, meaning the seller must have adequate reserves in order to pay the corporate level taxes at the time of sale.

Unfortunately, simply converting from a C corporation to an S corporation does not necessarily allow the seller to avoid the “double taxation” set forth above. A newly elected S corporation must wait 10 years (currently 7 years for C corporations sold in 2009 and 2010 pursuant to the 2009 Economic Stimulus Package) to avoid having to pay built-in gains at the corporate level tax on the sale of its assets.  However, after the S election is made, all future growth from the date of the S election is excluded from the corporate-level tax if a sale takes place before 10 (or 7 if the sale takes place in 2009 or 2010) years elapse. 

*This article is for general information purposes only and is not meant to constitute specific legal advice. A trusted attorney and accountant should be contacted to discuss the information contained in this article.  

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An Owner's Manual For Your Divorce is a 10 part podcast series presented by Joseph D. Visco, member of Stark & Stark's Divorce group. The series is intended to assist you in understanding the general process of a divorce from the initial discussions with your spouse to the post divorce follow-up.

The fourth installment will focus on whether to use fault or no fault grounds when filing for your divorce. The podcast will discuss the legal implications of filing for a fault or not fault divorce, and how Pennsylvania state law will impact the decision you make. You can download a copy of the installment notes here. (PDF)

You can download the fourth installment here. (2 MB)

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This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics' Liens in Pennsylvania, click here.

Often times, clients who own property will forward for attorney review pro se Mechanics’ Lien Claims filed by a contractor claiming non-payment by the owner or a prime contractor presented in a commonly seen, pre-printed form with fields in which the contractor scribbles in certain information about the claim.  Many contractors use these forms and circulate them in the industry to friends and associates in order to save on legal costs and fees. 

While these forms can affect a Mechanics’ Lien Claim that will disrupt a sale or re-finance of the property, they are wholly inadequate to make a proper Lien Claim for most circumstances, they invite the contractor with little or no substantive knowledge if Lien law to file Lien Claims that are not properly founded in law or fact, or that lead the contractor to file a Claim without all of the statutory elements for the kind of Claim, and which is therefore easy for the Owner to strike off.   At best, a Claim will be stricken off, but the pro se contractor could also be flirting with a legal disaster.

Some contractors will suggest that a contractor that performs work of any kind should always file a Mechanics’ Lien Claim if payment is delayed, and counsel that the contractor should leave it to the Owner’s attorney to move to strike off a claim for work if it is not properly lien-able, out-of-time, or otherwise barred by fact or law.  What these contractors may not realize is that Mechanics’ Lien Claims not based upon a sound, good-faith basis in both fact and law can expose the filing contractor to sanctions, award of attorney’s fees and costs of defense, and in certain cases, a separate action for abuse of civil proceedings and defamation of title.  In those cases where a Mechanics’ Lien Claim is found to be improper or unfounded and, before being stricken off causes a project delay, financing to be rescinded or a project to fail, a contractor could likely expose his business and his personal assets to liability exponentially greater than the amount of the amounts claimed due in such a follow-on suit by the Owner.

Contractors must beware that Mechanics’ Lien Claims are a hyper-technical species of legal remedy which Courts are likely to scrutinize for adherence to a very specific and very confusing set of requirements for filing, service, and perfecting.  Legal advice and free legal forms found on the street can often be much more costly than the cost of seeking out competent legal advice.

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Many times people open a new retirement account, obtain a new life insurance policy or open a bank account and fail to designate a beneficiary of the account because they think it’s not important or they just figure “I will designate someone later.”  It is important to designate a beneficiary when you open a new account or obtain a new insurance policy because chances are if you don’t designate a beneficiary when you open the account or obtain the insurance policy, you may never do it. Beneficiary designations are an important part of your estate planning process and your beneficiary designations should coincide with your desires found in your will.

Accounts that have beneficiary designations such as retirement accounts (IRAs, 401(k)s, etc.), insurance policies and annuities (to name a few) offer the owner of the account a simple way to ensure that the asset is transferred to the beneficiary of choice upon their death. Therefore, it is extremely important to complete the appropriate beneficiary designation forms upon opening an account and continually updating the beneficiary designation as your estate planning goals change.

So, why is it so important to properly designate a beneficiary for your various accounts? Because, in Pennsylvania, beneficiary designations control over your desires for the disposition of your assets found in your will. One of the most common estate planning mistakes people make is failing to coordinate their beneficiary designations in their various accounts with those found in their will. Because of this, a trusted estate planning advisor should assist you in reviewing your beneficiary designations, coordinating them with your will, and helping you address any change in circumstances that may affect your beneficiary designations going forward.

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On Thursday night, August 13, 2009, Lower Heidelberg Township Police were dispatched to the Gosselin residence in Wernersville, Pennsylvania.

As we all are aware, Jon & Kate have a custody arrangement wherein Jon spends a week with the children at the Wernersville home and then Kate spend a week with the children.  The agreement provides that each parent will have exclusive possession of the home - in other words the other party is not permitted to be there or interfere with that parent’s custody time.

Apparently Kate did not abide by the agreement.  Last Thursday night she returned, unannounced, to the parties home during Jon’s week with the kids. Jon would not let her in.  Kate called the cops.  The cops arrived and told Kate to leave.  Kate complied.  The end.

For now.

So why did Kate show up at the house in the first place?  Allegedly Kate was upset over Jon’s babysitter - 23-year-old cocktail waitress Stephanie Santoro.  It has previously been reported that Ms. Santoro often spends the night at the house for reasons other than watching the children. 

Jealousy, no mater how understandable it may be, is no reason for Kate to get the police involved.  However, giving Kate the benefit of the doubt,  it is possible she believed her children were not being cared for appropriately by Ms. Santoro.

Regardless of the reason, unless the kids were in physical danger or there was an emergency situation, Kate was out of line.  Kate must respect Jon’s “exclusive” time with the children and stay away.  Furthermore, calling the police for a routine custody dispute (although I imagine it escalated into Kate and Ms. Santoro exchanging choice words with one another) is never a smart decision. 

But it happens all the time.

Parents routinely call the police when they believe the other parent is violating a custody order/agreement.  If the order is clear as to which parent has custody of the children at that moment, then the police may assist in transferring the kids to that parent.  Absent that, the police are generally powerless to do anything (except as previously noted) and, as in the Gosselin’s case, usually just inform the parties their dispute is a “civil matter” and they need to deal with it in family court.  Further, judges do not look kindly on a party who involves the police for simple custody matters.  Most judges are quick to berate a parent in open court for using the police in that manner.  I’ve heard the courtroom lecture from Judge’s countless times: “Don’t you think the police have more important things to do then deal with your personal problems?!”  (Always directed at my adversary’s client of course).

If you read my previous blogs, you know the Gosselins have not filed for custody (see Jon minus Kate: What about the 8?).  If Kate is going to make an issue regarding Ms. Santoro’s continued care over the children or presence at the house then Jon & Kate may be headed to Berks County for a very public custody battle. 

Perhaps Jon & Kate could learn a thing or two from Madonna - a private, comprehensive, collaborative resolution seems ideal for their situation.

The high profile of Jon and Kate provides the public with a unique opportunity to explore issues that arise in contested divorce cases. Through this ongoing series I will offer comments and analysis of the proceedings and provide insight on how developments in Jon and Kate's case may occur in other divorces.  I am a Pennsylvania divorce attorney who is not involved in the Jon and Kate matter and the comments I present in this blog series are not case specific but rather intended to provide the public with helpful information on Pennsylvania divorce law.

Follow me on Twitter @jdvisco.

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According to Pennsylvania Law, shared custody is an order awarding legal and/or physical custody of a child to the parents in such a way as to assure frequent and continuing contact between both parents and the child. 

In making a custody decision, the court does not presume that either parent is naturally a better parent.  Instead, the court looks at all circumstances and decides on a particular arrangement that would be best for the child.

In shared physical custody, a child’s time is divided between each parent’s home.  The split is by a schedule that works best for the child.  This could be a 50/50 split however circumstances may exist which make it impossible to have a 50/50 split between mom and dad.  There are variations in shared physical custody schedules.  For example:

• In a situation where there is great distance between where the parents reside, it may best for the child to spend the school year with one parent, and summer vacation with another;
• When the parents reside in different school districts, it may be best for the child to spend weekdays with one parent, and weekends with the other parent;
• When the parents reside in the same school district, it may be best for the child to spend one week with one parent, then the following week with the other parent and continue that rotation;
• If a child is of pre-school age, the parents may alternate with a 2 day, 3 day, 2 day schedule. 

The above schedules can be successful if both parents work well together for the benefit of the child.  A schedule will also have to be developed that provides for holidays and special occasions.  Parents need to be flexible as the child grows older and work together when the schedule needs to be modified. 

Sometimes shared physical custody pursuant to a schedule, such as one of those described above, is just not practical and not in the child’s best interests.  Examples of those situations are:

• If the child is an infant and breast feeding;
• When one parent works nights;
• If the parents are in different school districts and because of distance a shared physical custody schedule cannot be accommodated.

Every child has different needs.  Every situation is different.  Every child custody order must be crafted to reflect the unique needs and circumstances of the families.

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The subject of attorney-client privilege is one that is commonly misunderstood by laypersons, including sophisticated businesspeople, and even many attorneys.  Unfortunately, many people get their information regarding the attorney-client privilege from popular media and the dramatized fiction of “Courtroom thrillers” which use the privilege as a storytelling device to great effect.

Contrary to the Hollywood depictions of attorney-client privilege that all communications between any person and a lawyer are privileged, in the non-fictional world attorney-client privilege is a much more narrow protection.  

In Pennsylvania, the attorney client privilege attaches only if the following four factors are present in any individual communication:  1)  the person making the communication is a client or seeks to be a client;  2)  the person to whom the communication is made is a lawyer and member of the Bar of a Court or his subordinate;  3)  the communication relates to a confidential fact of which the attorney was informed by the client, outside the presence of strangers, for the purpose of securing either an opinion of law, legal services, or assistance in a legal matter and not for the purpose of committing a crime or tortious act;  4)  the privilege has been claimed and not waived by the client or potential client.  Communications from the attorney to the client are subject to attorney-client privilege only insofar as they contain, and thus would reveal confidential communications from the client. 

In practical terms, what this means is that clients or potential clients should avoid airing their legal issues on the golf course or at cocktail parties in an attempt to solicit “free” legal advice or to test whether an acquaintance lawyer is interested in the potential client’s legal matter.  These communications may not be privileged, and the lawyer or others who are present during the communication may be called to testify in litigation regarding the communication.
 
The best practice is always for potential clients to schedule a meeting with the lawyer in the formal setting of the lawyer’s office so that there can be no mistake that the purpose of the meeting is for legal advice, and ensuring that the privilege will withstand scrutiny in future litigation.  Existing or recurring clients should always make it clear to the lawyer that they are seeking legal advice before revealing confidential information.

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A slip and fall is a generic term for an injury that occurs when someone slips, trips or falls as a result of a dangerous or hazardous condition on someone else’s property. It includes falls as a result of water, ice or snow, as well as abrupt changes in flooring, poor lighting or even a hidden hazard such as a gap or a hard to see hole in the ground.

Falls are responsible for more injuries and broken bones than any other type of accident. The most common fall-related injuries are fractures of the hip, spine and forearm. Slip and fall accidents may be caused by poorly maintained sidewalks, steps, floors, pavement, and other defects.

Property owners are responsible for injuries that occur as a result of a dangerous or hazardous condition on their property, which the owner knew about, or should have known about if they did routine inspections.

I recently recovered a significant settlement for an elderly person who tripped and fell in Philadelphia due to a defective sidewalk. I was able to prove that the property owner was aware of this dangerous condition and did not take the necessary steps to correct it and prevent injuries such as those incurred by my client from occurring.

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This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics' Liens in Pennsylvania, click here.

Often times, Demolition contractors and Landscaping contractors will ask whether their services and the materials used in their trades constitute a proper basis for a Mechanics’ Lien Claim in order to preserve a likelihood of payment.  Knowing what is, and what is not properly lienable work and materials is something that every contractor should be mindful of when assessing different jobs.

Mechanics’ Liens have been traditionally closely associated with the improvements (i.e. the buildings or like structures) to real property much more than the land itself.  Early cases found Mechanics’ Liens extinguished due to the accidental destruction of a structure in a fire or flood, reasoning that the improvements had been removed and with them the contractor’s right to a Lien for work performed.  Subsequent to these early cases, the Mechanics’ Lien procedure was codified by statute, which defined a contractor as “one who,  by contract with the owner, express or implied, erects, constructs, alters or repairs an improvement or any part thereof  .  .  .”   Therefore, the right to Lien does not traditionally attach to land per se. 

This concept is important in order to understand when attempting to figure whether certain work – including demolition, excavation, and landscaping falls within the above definition.  In an attempt to guide contractors, the Mechanics’ Lien Law provides that “erection, construction, alteration, or repair includes  .  .  . [d]emolition, removal of improvements, excavation, grading, paving  and landscaping when such work is incidental to the erection, construction, alteration or repair.”  Therefore, under this definition, demolition of a structure or part of a structure for the purpose of erecting a new structure or addition is most likely the proper subject of a Lien Claim, whereas the demolition of a structure simply to clear the property most likely cannot give rise to a proper Lien Claim.  Landscaping contractors will similarly find that their Lien rights are strongest when they provide services and materials to finish new construction, but that the very same services and materials around an existing structure probably will not give rise to a proper Lien Claim. 

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This is part three of a three-part series introducing different stock plans one should consider for their business. This is only meant to be an introduction; a trusted professional should be contacted to discuss what stock plan is right for your business. This third installment  focuses on employee non-qualified stock option plans.

A stock option is a written offer from the employer to sell stock to an employee at a specified price within a specified time period.  A non-qualified stock option (“NQSO”) is a stock option plan that gives the option-holder employee the right to purchase shares in the employer at the grant price (which is the fair market value of the shares as of the date of grant).  As the employer grows in value, the value of the stock option rises. Options are generally restricted to a vesting period before they can be exercised to purchase shares. This requirement helps the employer retain key employees.

Generally, if the stock option does not have a readily ascertainable fair market value at the time the option is granted, it is not taxable income to the employee at the date of grant.  Instead, the option is treated as taxable income when the employee purchases the option shares.  The amount of taxable income is the difference between the fair market value of the shares at the date of purchase and the option price (the amount the employee pays for the shares).  The employer does not receive a deduction when the option is granted but, instead, receives a deduction in the same year as the employee has taxable income as a result of exercising the option.  The amount of the deduction is the same as the amount of the employee’s taxable income.

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Many times a majority shareholder seeking to squeeze-out a minority shareholder will deliberately withhold information relating to the closely held corporation. Withholding information is usually coupled with another form of oppression. The reason for the same is by leaving the minority shareholder in the dark about the status of the corporations and the actions of its officers and directors the minority shareholder will be unaware of the other forms of oppression. For example, a majority shareholder may award herself an excessive salary without disclosing that it or the underlying financial data which would reveal the excessive nature of the salary.  By keeping the minority shareholder in the dark she will more often than not be in a position to complaint about it.

Unfortunately, unlike publicly traded companies which have disclosure and reporting requirements pursuant to federal securities laws, shareholders in a closely held corporation do not have such broad disclosure requirements. Nevertheless, state courts have recognized that a person who owns shares in a closely held company is a part owner of that company who is entitled for participation of their interest, to information about the company.  The problem is Courts differ on what shareholders are entitled to receive under their state’s laws and what obligations corporate managers have affirmatively to supply information.

Fortunately, the right of a shareholder to inspect corporate records has long been established in Pennsylvania common law. Simms v. Exter Architectural Products, Inc., 868 F. Supp.  668, 674 (M.D. Pa. 1994). That right was codified by the Pennsylvania legislature. 15 Pa. C.S. § 1508(B).   That statute requires the requesting shareholder to send a written request stating the purpose for the inspection of the company’s books and records. The request must request that the inspection occur during the usual hours of the business and provide the name of the person, agent or attorney who is going to conduct the inspection. A proper purpose is anything reasonably related to the interest of the shareholder.  15 Pa. C.S. §1508(B).  If the majority shareholder or company refuses to make the documents available for inspection, the requesting party has the right to file an action seeking the same.

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Henry E. Van Blunk, Shareholder in Stark & Stark's Business & Corporate group, and Thomas D. Giachetti, Chair of Stark & Stark's Securities group, authored the article An Overview of External Transition Planning for the Registered Investment Adviser for the July 2009 edition of the Charles Schwab Institutional Compliance Review.

The article discusses the critical need for advisers to establish a successful succession plan for their firm in order to be prepared for possible future transitions. Mr. Van Blunk and Mr. Giachetti warn that in the current economic climate succession planning is even more crucial to the longevity of a business. The article goes on to discuss the documents every business should have in place when planning and internal or external succession plan.

You can read the full article online here. (PDF)
 

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