UBER: Independent Contractor or Employee

By Wendy Anderson

Uber lost a motion for summary judgment in a case in San Francisco that some of its drivers filed claiming they are employees and not independent contractors, as a matter of law. The Court found that the drivers are Uber’s presumptive employees because they “perform services” for the benefit of Uber. The Court further held that whether an individual should ultimately be classified as an employee or an independent contractor under California law presents a mixed question of law and fact that must typically be resolved by a jury. This is an important distinction for an employer, because an employer has to pay benefits to employees that they don’t have to pay to independent contractors. It is imperative that employers classify their works correctly. We can help employers with this determination. Call us at (407) 628-9081 ext. 111 for assistance!

Florida LLCs in Real Estate Deals

By Wendy Anderson

Florida limited liability companies (“LLC”s) are the vehicle of choice as the entity for taking title to real property, generally speaking. LLCs are increasingly being used more and more for real estate and other transactions, as they offer a more flexible structure, “pass through” taxation, exemption from Florida’s corporate income tax, the same limited liability protection for owners of corporations, and additional asset protection for multi-member LLCs.

The Florida Limited liability Company Act (the “Revised Act”) which governs LLCs became effective January 1, 2015 as to all Florida LLCs (it became effective January 1, 2014, as to LLCs formed on or after that date) and is a comprehensive rewrite of the Prior Act known as the Florida Limited Liability Act.

The Revised Act provides the ability to reduce but not eliminate fiduciary duties, permits new members with no participation interest, permits members to dissociate from an LLC, expands dissolution provisions, clarifies service of process, and liberally permits the entity to be combined with other entities by way of merger or conversion.

LLCs are established by filing Articles of Organization with the Department of State. The articles of organization can include the name and address of one or more of the managers or manager-managed LLCs, or the name and address of one or more members for member-managed LLCs. The articles of organization can also include a statement as to whether the LLC is manager-managed or member-managed, which establishes the party or parties who are authorized to act on behalf of the LLC.

Often the Manager(s) and member(s) are the same person(s), and it is generally best (and it is common practice) to be manager-managed so the LLC will disclose in State records who is authorized to act on behalf of the LLC, as it is required to do so, but not to disclose its ownership. This is generally preferable because of the deemed notice rules and provisions related to the delegation of rights and powers.

The terms manager-managed and member-managed are not interchangeable. The Revised Act clearly provides that a member does not have any authority to act for a manager-managed LLC, and the Revised Act does not empower a manager with any powers to act for a member-managed LLC.

The Revised Act allows LLCs to file a statement of authority to limit the apparent authority of one or more members or managers or to provide authority for a member, manager or other party to act on behalf of the LLC.

When an LLC sells property, the authority of the person executing the conveyance documents must be established. Prior to insuring any conveyance of title for marketability of title purposes, title underwriters are requiring confirmation that persons executing instruments to be insured have the authority to bind the LLC. This can be accomplished under a statement of authority filed with the Florida Department of State and recorded in the Official Records of the County where the property lies, or confirmation with the Florida Department of State that a person identified as a manager is in a manager-managed LLC or a person identified as a member is in a member–managed LLC, as applicable, and that there is no recorded statement to the contrary.

An LLC is a creature of contract, and a written operating agreement should be prepared setting forth the existence of the entity and members, whether the LLC is manager-managed or member-managed, as well as important agreements and protocol concerning rights, duties and indemnification, and many other provisions. The Operating Agreement should be tailored to the particular transaction and set forth the important aspects of the members’ understanding regarding the terms of their deal. The time to do this is when the LLC is established and the members’ relationship is in harmony. Thought should be given to a mechanism that would be used if the members reach an impasse in making a decision.

Not long before enactment of the Revised Act, the Florida Supreme Court in the 2010 seminal “Olmstead Case” ruled that a judgement creditor of a single member LLC could execute on the debtor’s entire right, title and interest in the LLC to satisfy a judgement (as opposed to a charging order on the members’ transferable interest). The Florida legislature adopted the “Olmstead Patch” in 2011 to clarify that the holding in Olmstead does not apply to multi-member LLCs, and the exclusive remedy for a judgement creditor of a multi-member LLC is a charging order on the member’s transferable interest. This has not been changed in the Revised Act.

As is the case in any business deal, when structuring a transaction for the purchase of real property or a business, you should consult with an attorney. Proper planning can avoid unwanted problems post-closing.

Unpaid Internships

By Mark Scheinblum

Businesses have long known that internship programs are one of the best ways to find young talent, to see if those interns have the skills the business is looking for, and and to serve as a pipeline for future employees. Similarly, college students frequently look to internships to gain industry experience, to determine their own professional interests, to grow their resumes and to get a leg-up on others in future employment. Internships are particularly popular in the summer, but are also common throughout the year, particularly in college towns.

Many businesses do not realize that there are strict guidelines that an employer must follow if an intern is to be considered a “volunteer” such that wage and hour laws - such as minimum wage and overtime rules - don’t apply. The U.S. Department of Labor specifically provides a 6-point test (based on prior court rulings) which for-profit businesses must follow to stay within the law for unpaid interns. The following bullet points include those rules as well as other guidelines for utilizing unpaid interns. Some states may also have additional requirements.

• Interns must be given tasks that are beneficial for them.
• Interns must not be asked to run personal errands for the employer.
• Interns must be closely supervised by a staff member.
• Interns must receive training similar to that which would be given in an educational setting.
• The intern cannot displace staff employees.
• The employer cannot directly benefit from the intern’s work.
• Both the intern and the employer must be made aware that the internship may not result in an employment offer.
• The internship should be for a fixed time period, established at the beginning of the internship.
• All parties understand the terms and job tasks of the internship.

The terms of the internship should also be in writing.

It is equally important for a business to understand its own specific needs, and to address those needs in any agreement with its interns. For example, any business that involves proprietary information should make the intern aware of those issues and include confidentiality and non-disclosure protections within its internship agreement.

We can help you put together an internship program that works best for your business while staying within the requirements of the law.

Florida's New LLC Act

(Reprinted from The Scheinblog.)

By Mark Scheinblum

On June 14, 2013, Florida Governor Rick Scott signed the Florida Revised Limited Liability Company Act (the “New LLC Act”) into law. The New LLC Act is a complete rewrite of the existing LLC Act in Chapter 608 of the Florida Statutes, based in part on the Uniform Law Commission’s 2006 Revised Uniform Limited Liability Company Act, which has been adopted, in modified forms, by seven states and the District of Columbia, and is currently being adopted or studied by many other states. The New LLC Act goes into effect on January 1, 2014 for all LLCs formed on or after that date.

The New LLC Act will also impact all existing Florida LLCs. LLCs formed prior to January 1, 2014, can continue to operate under the existing LLC Act until January 1, 2015. On that date, however, the current LLC Act is repealed and the New LLC Act will apply to all Florida LLCs. Existing LLCs may also make an election to be governed by the New LLC Act prior to January 1, 2015. Members and managers of existing LLCs should use this transition period to review their existing LLC Operating Agreements and determine whether the changes made by the New LLC Act require any amendments in order to properly give effect to the intentions of the parties.

Background

Since the introduction of the limited liability company in the 1980s, the LLC has become an essential part of the business landscape. The LLC provides flexible structuring, allowing for pass-through tax treatment (like a partnership) or, at the members’ election, corporate tax treatment, limited liability like that afforded to corporate shareholders, and the ability of members to structure the operations in almost any manner that best suits their needs.

Florida has a long but varied history with LLCs. Florida was at the forefront of the LLC movement, having adopted the nation’s second limited liability company statute in 1982, five years after Wyoming adopted the first LLC statute in the U.S. However, confusion over the IRS’s tax treatment of LLCs reigned for years, and no other state enacted LLC legislation until after 1988, the year the IRS issued a revenue ruling that Wyoming-style LLCs would be taxed as partnerships. Other states began enacting LLC statutes, and by 1996, most states had adopted their own LLC statutes.

Even then, however, LLC use in Florida lagged. Despite modifications in the Florida LLC statute in 1993, the application of Florida income tax to LLCs kept the use of LLCs on the sidelines.

When Florida’s corporate income tax was repealed for LLCs in 1998, Florida’s LLC statute was revised, and the new LLC act was adopted in 1999, with amendments to follow in 2002. That LLC Act, set forth in Chapter 608 of the Florida Statutes, has governed Florida limited liability companies until now. Today, LLCs are the entity of choice for business formed in Florida. There are over 700,000 LLCs currently organized in the state. In 2012, almost 170,000 new LLCs were formed in Florida, far eclipsing the number of corporations incorporated in the state.

The New LLC Act

The New LLC Act modernizes the LLC law in Florida, making it more flexible while also retaining provisions from the existing LLC act that had become important to Florida LLC users, as well as incorporating provisions from other influential LLC and corporate statutes. Key provisions of the New LLC Act include the following:

Electronic Signatures. Electronic signatures are expressly permitted. Section 605.0102(62).

Non-Waivable Provisions. Like the existing LLC act, the New LLC Act is a “default” statute, meaning that in most cases, the members of an LLC can agree in their operating agreement to an alternative framework which supersedes specific provisions in the statute. This remains the case under the New LLC Act, but the new law does expand the list of non-waivable provisions that may not be waived, altered or otherwise overriden by the LLC’s operating agreement or other agreements among the members. These new non-waivable provisions which will be enforced regardless of the provisions of the operating agreement include, among other provisions, (a) the power of a member to dissociate from the LLC; (b) the right of a member to approve a merger, interest exchange or conversion in certain contexts; and (c) any restrictions on the rights under the New LLC Act of any person other than a manager or a member. Accordingly, it will be important to update existing operating agreements to address these non-waivable provisions. Section 605.0105(3).

Binding Effect on Non-Signatories. Any LLC member is bound by the Operating Agreement even if it is not signed by them. Section 605.0106(2).

No Shelf LLCs. An LLC must have at least one member upon formation. Section 605.0201(4).

Dissociation by a Member. Under the New LLC Act, a member will have the non-waivable right to dissociate from an LLC, but the dissociation does not trigger a buy-out right. Instead, the dissociated member only will have the rights of an un-admitted transferee (with certain exceptions). Note, however, that an operating agreement may provide for conditions for dissociation such that dissociation in violation thereof is “wrongful,” and the member so dissociating from the LLC may be held liable for damages resulting therefrom. Section 605.0216.

Statements of Authority. The new statute permits “Statements of Authority” which provide constructive notice of an individual’s authority, status or position within the LLC, which can be filed with the state and is good for five years, unless revoked (by a statement of denial). Section 605.0302.

Creditor-Enforced Capital Contributions. Creditors will now have the right to enforce capital contributions by members. Section 605.0403(4).

Elimination of Manager-Members. The existing act allowed for “manager-members,” a designation that was fraught with confusion. This has been eliminated in the New LLC Act, such that an LLC must be “manager-managed” or “member-managed.” (By default, all Florida LLCs are considered to by member-managed onless otherwise set forth in the articles of organization or operating agreement.) Section 605.0407.

Non-Competition. Under the New LLC Act, managers of manager-managed LLCs, and all members of member-managed LLCs, will be subject to a non-competition covenant. This is a waivable provision, and LLC managers and members will need to take due care to ensure it is properly addressed or waived in operating agreements. Section 605.04091(2)(c).

Charging Orders. A charging order is the sole remedy for creditors of a multi-member LLC; for single-member LLCs, a creditor must establish that a charging order is not a sufficient remedy in order to be able to foreclose on an interest. Section 605.0902.

Transacting Business in Florida. Owning income-producing property will expressly constitute transacting business in Florida, such that qualification to do business in Florida will be required.

Appraisal Rights. Appraisal rights - rights to have a fair price for an equity interest determined by a judicial proceeding, and to have the entity purchase the interests at such price - are expanded by providing additional events which would trigger an appraisal, but such rights may be waived or eliminated in an operating agreement so long as such waiver or elimination is approved by the affected member or group of members. Section 605.1006.

Interest Exchanges. Interest exchanges will be expressly permitted. Section 605.1031.

Domestication. Domestication of non-U.S. entities will now be permitted under the New LLC Act. Section 605.1051.

Conclusion

Any new LLC should be formed in compliance with the New LLC Act. In addition, members of existing LLCs should consult with counsel in order to evaluate whether existing operating agreements should be revised in order to address the changes in the New LLC Act.

M&A Developments

By Wendy Anderson

Are you thinking of buying or selling a business? With the uncertain economic climate, the pent-up demand for high-quality companies, as well as ever-looming tax increases, current merger and acquisition deal structures are perhaps a little different from what has occurred in the past.

One recent changes is the use of representation and warranty insurance, rather than placing sale proceeds in an escrow account for a certain period of time. The buyer of a company can recover under the insurance policy if there is a breach of a representation or warranty. Such policies have been around for 10 years or so and are more readily available, as more underwriters are offering this product. It quantifies the seller’s exposure and allows him or her to walk away with the sale proceeds (minus the premium for the insurance).

Another change is sellers’ reluctance to take part in tax-free deals. In anticipation of the looming changes to U.S. tax law, the desire to defer taxes is not as strong as it used to be. Some sellers would rather complete a transaction in 2012 rather than risk paying higher tax rates at a later date. While there has been much speculation about tax hikes, there has been virtually no serious discussion about lowering the capital gains tax. Selling in 2012 would enable a seller to lock in their tax rate and avoid the risk of selling when taxes may be higher.

It is not unusual in a down economy for earn-outs to be part of a deal. Earn-outs help bridge the gap between what the seller is asking for a business and what the buyer is willing to pay. The buyer pays a portion of the purchase price up front and the remainder is paid out over time, as the acquired company achieves certain levels of sales or profitability. As is the case in most transactions, compromise will be necessary. The buyer will not have total control over the company initially, as the seller will want to be involved in the operation of the business to protect its earn-out potential. Of course, the seller is forced to take less cash at closing and wait for the balance of the purchase price, which hopefully will be forthcoming if the company proves its worth.

If you are contemplating selling or buying a business, the attorneys at Chief Legal Advisors, P.L. can help you structure the transaction in a way that works best for you.