Category Archives:News

In many criminal or family law cases, such as a custody or divorce action, drunk driving (DUI), or personal protection order (PPO), it’s necessary to obtain a copy of an incident or police report involving you, another party or witness.  In fact, it’s often one of the very first things you will want.  To do so, determine the county in which the incident occurred (i.e. Grand Traverse, Leelanau, etc.), and whether it was the sheriff or police department who handled the investigation.  You will need to fill out and submit a Freedom of Information Act (FOIA) request with the relevant sheriff or police department. Below are links to a few agencies, or contact our office.  We’d be happy to help!

The Supreme Court has agreed to hear 2 cases.  The first:

In one of the cases the court agreed to hear, the federal appeals court in Boston in May threw out evidence gathered after the police there inspected the call log of a drug dealer’s rudimentary flip phone.

The second case:

That case arose from the arrest of David L. Riley, who was pulled over for having an expired auto registration. The police found loaded guns in the car and, on inspecting Mr. Riley’s smartphone, entries they associated with a street gang.

A more comprehensive search of the phone led to information that linked Mr. Riley to a shooting. He was later convicted of attempted murder and sentenced to 15 years to life.

http://www.nytimes.com/2014/01/18/us/supreme-court-to-consider-limits-of-cellphone-searches.html?_r=0

One of the first considerations  when filing for divorce is deciding where to file?  To grant a judgment for divorce a court must have jurisdiction over the parties, otherwise the judgment is meaningless.  To get jurisdiction you must file your complaint in the proper court.

To file a divorce case in  Michigan, you must reside in the state for 180 days before the date of filing.  You must also reside in the particular county   for at least 10 days before filing the complaint.  The question here is what is the legal definition of “residing”?

The key factor to establishing that you have resided in a place is your intent to stay there.  Presence in a county, even for long periods of time, will not establish residency if the court doesn’t believe you intended to make the place your domicile.  One example is a prisoner who intends to leave the county he is imprisoned in after the incarceration ends.  He would not have met the residency test and the court in the county where the prison is located would not have jurisdiction over a divorce case if brought there.  Even property ownership within the county where jurisdiction is being sought would not be enough to establish residency if the intent test wasn’t met.

If this requirement is not met, then issue of subject matter jurisdiction has not been satisfied  That means that even after a final judgment, a party could raise this defense on appeal for the first time and have the trial court’s judgment dismissed (most issues may not be raised on appeal if not objected to in the trial court).

What if each party to a divorce files their own complaint in different counties?  The rule is that the court who received the complaint first will have jurisdiction.  How about two different states?  Either state has jurisdiction.  Of course, the residency test must be met first for both of these situations.

There is also an exception to the 10-day rule.  If the court has information allowing it to reasonably conclude that there is the possibility that the parties’ minor children could be taken outside the U.S. and that they could be kept there by the non-filing party(who is not a U.S. citizen) then the court may waive the county residency rule.  This exception to the rules is intended to insure that the children are not improperly removed from the country.

If you wish to file your complaint seeking divorce in a particular county then it is important that you are aware of, and follow, the residency requirements.  Otherwise  you could spend a great deal of time and money on a case that could ultimately get thrown out, sending you back to the start of the entire proceeding.

I’d like to follow up on something that was briefly discussed in last week’s blog: when a stock redemption will be treated as an exchange under § 302 of the Internal Revenue Code.  Because tax season is right around the corner it’s important to know if you’ve planned properly before filing your 1120.  At first blush, one might ask, “why does it matter if a stock redemption is treated as a dividend or an exchange since both are taxed at preferential rates?”  The answer is that when the shareholder gets exchange treatment they can back out the basis of their stock¹ before determination of the taxable gain and the gain can be offset by any capital losses which are otherwise only allowable up to $3,000.

Now, I realize this topic is rather technical, but I’m going to spare you the pain and suffering required to navigate the rule (far too much information for a “blog”) and simply give you a brief overview so you can be aware of how these transactions can develop into a tax deficiency.  Much of the information is especially relevant to closely held and family owned corporations, which is therefore relevant to many Northern Michigan businesses.

Say you own stock in Corporation C.  C has 100 shares of outstanding common stock and you own 20 of these.  Four other individuals own the other 80 shares equally.  You decide you’re going to get out of the business so C buys all 20 shares from you.  Capital gain, right?  Reduce the gain by backing out your basis in the stock and potentially use up some of those capital losses you incurred.  If you’ve planned well you’ll avoid any tax at all this way. Unfortunately, if certain other aspects are present in this transaction (for example, the other shareholders are certain family members), then the IRS has other ideas.  Since the development of corporations and therefore the development of the double tax on dividends, shareholders have been inventing ways to avoid dividend treatment on money they extract from corporations.  This was especially important when dividends were taxed at ordinary income rates (which, by the way, could theoretically happen again when the preferred rates on dividends expire, making these transactions even more important).  Enter § 302, promulgated by the Service in response to repeated attempts by taxpayers to avoid dividends.  Unless the requirements of this Code provision are satisfied, your redemption will be taxed as a distribution (dividend) under § 301.

It is especially important to be aware of the attribution rules governed by § 318 when seeking capital gain treatment.  Under § 318, stock owned by your spouse, children, parents, and grandchildren, some trusts, and even by certain partnerships and corporations you own, can be attributed to you and will affect your § 302 treatment.  If stock is attributed to you because other family members own the corporation, you’ll essentially be required to wash your hands of any involvement in the corporation for the 10 years following the redemption of your stock.  Otherwise the IRS can re-categorize your redemption as a dividend.

Sound confusing?  We can help you with any issues arising under this provision and many more.  If you have any questions or concerns regarding the legal needs of your business, please don’t hesitate to contact us.

¹ excluding from the conversation, for simplicity, §301(c)(2), where distributions in excess of E&P can also reduce basis

Starting a new business is one of the most stressful events in a person’s life.  Where do I begin?  What do I sell/make/provide?  How much is it going to cost?  How do I finance it?  What type of business entity do I form?

While we’re available to help you with any and all of these questions, today we’ll give you a brief overview of the different types of entities available to help ease the burden of deciding which one best suits your business.

SOLE PROPRIETORSHIP

The simplest option is the sole proprietorship.  A person who undertakes a business without any of the formalities associated with other forms of organization has created a sole proprietorship. No state filing is required and no separate tax return is prepared.  The minimum amount of paperwork required is filing a DBA if you are operating a sole proprietorship under a name other than your personal legal name. The business owner reports their income and expenses on a Schedule C attached to their 1040 so no separate tax return is necessary.  The individual and the business are one and the same for tax and legal purposes.  This is good for tax purposes, but it also means that if the business is sued, then the personal assets of the owner (car, house, personal belongings) can be taken to satisfy an adverse judgment.  The risk of losing personal assets must be weighed against the simplicity of starting your business as a sole proprietorship.

PARTNERSHIP

Technically, partnerships are just as easy to form as sole proprietorships as all it takes is two or more individuals to “carry on as co-owners of a business.” Also like sole proprietorships, if the business is not in the name of one of the individuals, a DBA must be filed with the County Clerk’s office to register the business’ official name.  Unlike a sole proprietorship however, a partnership is considered its own legal entity, meaning it exists separately from its owners.  Be aware that a signed, written agreement is not required to form a partnership.  Two or more people acting together to run a business will be viewed by the court as a partnership.  Again, similar to sole proprietorships, partners are personally liable for any and all debts and obligations incurred by the partnership and furthermore, partners are jointly and severally liable.  This means that one partner could end up paying all the obligations of the partnership, even if incurred by one of the other partners.  Partners are individually taxed on the income of the partnership, but a separate tax return must be prepared to determine each partner’s share.  Many partners often believe that if they do not take any money out of the partnership that they will avoid income tax.  This is not the case.  A partner is taxed on the earnings of a partnership whether or not the partnership makes a distribution.  Lastly, it is important for all partnerships to have a partnership agreement.  While not required, if one does not exist, then the Revised Uniform Partnership Act will provide all the rules that govern the partnership.

CORPORATION

Corporations are the most regulated business entity, meaning there are many organizational formalities that must be followed in order to be recognized.  Like partnerships, once formed they are a separate, distinct legal entity.  The primary downside to forming a corporation is the concept of “double taxation.”  This means that profits are taxed twice, once when earned by the corporation and again when distributed to the shareholders.  For many closely-held corporations this is not necessarily an issue as they typically do not distribute “dividends.”  However, there are instances when certain transactions will be treated as a dividend even if not intended to be as much and will therefore be subject to taxation.  One of the corporation’s advantages and unlike sole proprietorships and partnerships, the owners of a corporation are not personally liable for any debts or obligations incurred by the corporation.  There is an exception to this known as “piercing the corporate veil” where in certain situations owners can be held personally liable.  Sub-S corporations are a popular option because they incorporate some of the advantages of partnerships, such as “flow-through” taxation while maintaining liability protection for the owners.  There are specific requirements that must be met to gain Sub-S status that may limit some business from utilizing this option.

LIMITED PARTNERSHIP

To form a limited partnership you must have at least 1 general partner and 1 limited partner.  General partners participate in management and are personally liable for the debts of the limited partnership.  Limited partners are not personally liable (there are, of course, some exceptions) and typically have no voice in the management of the business.  A good way to plan around this is to have a general partner be a limited liability entity such as a corporation that the general partners own.  This corporate entity manages the business, shielding the owners from liability, but the limited partnership recognizes the profits, thus avoiding the corporate double taxation.  Limited partnerships must file a certificate of limited partnership with the state.

LIMITED LIABILITY PARTNERSHIP

LLP’s require a filing with the state to be valid.  Practically, it’s very similar to a general partnership in that its primary advantage is flow-through taxation but offers limited liability by protecting each partner from the tortious conduct of any of the other partners.  Mostly professional service providers create LLP’s in order to shield themselves from their partner’s tortious acts.

LIMITED LIABILITY COMPANY

An LLC has organizational features that are part limited partnership and part corporation.   The first LLC was formed in Wyoming in the 1970’s and they are currently a very popular option.  The LLC differs from a limited partnership in that all participants may actively take part in control of the business without restriction and without personal liability for business obligations. A member-managed LLC is similar to a general partnership, minus the personal liability of partners for partnership obligations. Alternatively, LLC’s can be manager managed, similar to how corporations are managed.  LLC’s are only taxed once on their earnings as opposed to twice like corporate earnings are.  Similar to corporations, the LLC “veil” can be pierced and members can be found liable for obligations incurred by the business.  Another difference between an LLP or LP and LLC is that an LLC can have a single owner whereas an LP or LLP requires at least 2 owners.  Since LLC’s are relatively new, it is very important to examine the laws regarding operation and formation of an LLC in the governing jurisdiction as they can differ widely.  To form an LLC, Articles of Organization must be filed with the state.

CONCLUSION

Every business is different and it’s crucial to pick an organizational structure that best helps you obtain your goals.  The above information is a very basic introduction into some of the different options you have.  Speak to other small business owners about what works for them.  Talk to an accountant.  Talk to your lawyer.  If there was one last piece of advice to give it would be: make sure you have an operating agreement that defines how you want the company to be run.  Picking the right entity is meaningless if you don’t specify how it is going to be managed, and in most instances, if you’re operating agreement doesn’t cover a topic, there’s a law out there that’s going to fill in that gap, and it may not be beneficial to you.  Ultimately, proper planning prior to beginning business can save lots of stress and lots of money down the road.

As always, we are available to answer any questions you may have regarding the above material or any legal or business related inquiry.  Please don’t hesitate to contact us.

This information is designed for general informational purposes only.  The information presented in this site should not be construed to be formal legal advice nor as the formation of a lawyer/client relationship.

We’ll be using this blog to keep you updated with the latest news and court decisions regarding our practice areas.

We’ll also try and slip in a post every so often about fun stuff to see and do in Leelanau and Traverse City.