FIDUCIARY DUTY OF DIRECTORS AND OFFICERS

By: Andrew Burrows

The legal requirements for the duties of directors and officers of a corporation in Michigan are not well understood by business owners. This article explains these requirements, known as fiduciary duty, and briefly details common requirements of directors or officers of corporations.  There are similar rules that apply to members and managers of limited liability companies in Michigan.

It is important to note that under Michigan law, all fiduciary duties are applicable to both officers and directors of the corporation.

What is a “Fiduciary?”

                                                            

A corporate fiduciary is an individual who is employed as an officer of the corporation or has been elected by the shareholders as a director to hold and exercise power on behalf of the shareholders. Under Michigan law, officers and directors have a basic obligation to act only in the best interest of the shareholders.

What Duties Are Owed?

Although fiduciary duties stem from common law principles, they are found in Michigan’s corporation law, which is the Michigan Business Corporation Act. These duties include: 1) the duty of loyalty to shareholders to only act in their best interest; 2) the duty of care; and 3) the duty of good faith. Corporate fiduciaries are protected by the “Business Judgment Rule” in the absence of a breach of one of the above-mentioned duties in their day-to-day operation of the company.

The Business Judgment Rule

The fiduciary rules do not provide that a director or officer of a corporation will be liable for all bad decisions they make while serving the corporation, since this would produce an absurd result, making any risk-taking by officers or directors off limits. The solution to this is the Business Judgment Rule which states that when a corporation suffers a loss from a lawful transaction, a director or officer is not liable when he or she acted in good faith, on an informed basis, and under the honest belief that the action was taken in the best interest of the company.

Duty of Loyalty

The duty of loyalty is one of the most common fiduciary pitfalls for directors and is especially magnified in the case of a closely-held corporation where directors are often also shareholders. The duty of loyalty is most commonly breached when the director either: 1) engages in a transaction on behalf of the corporation that constitutes “self-dealing”; 2) engages in a transaction that constitutes self-interest; or 3) engages in a personal transaction that rightfully belongs to the corporation.

Self Dealing

Self-dealing occurs when a director has a financial interest in both sides of a transaction. An example of this would be having the corporation purchase another company that the director personally holds stock in. Self-dealing essentially creates automatic liability for the director unless his or her financial interest in the transaction is disclosed prior to its acceptance by the rest of the board of directors.

Self-Interest

A director engages in self-interest when he or she will receive a personal benefit from a transaction that is not equally shared by the shareholders. This is not the same as self-dealing. An example of self-interest would be a director obtaining a large bonus from the company every year the corporation is extremely profitable, but engaging in an extremely risky transaction to attempt to reach the profit goal. This is known as the “Enron Pattern”.

Corporate Opportunity

Under the Corporate Opportunity Doctrine, a director breaches his/her duty of loyalty when he or she personally seizes a business opportunity for personal gain, which the corporation could have taken. This includes any opportunity the director learns of from his/her position in the company or any opportunity to engage in a business in which the company is engaged or expects to engage. Again, disclosure is the solution to potential corporate opportunity issues.

Duty of Care

Generally, a director has a duty to keep him/herself informed of the activities of the corporation. The duty of care is not often included in a lawsuit against a director because a corporation may indemnify its directors for breach of the duty of care under Michigan corporate law.

Duty of Good Faith

Since the duty of care is often subject to indemnification, the duty of good faith has somewhat replaced it in lawsuits against directors. The duty of good faith may be breached either by objective or subjective bad faith. This means that an officer or director must either consciously disregard his or her responsibilities or act with an intent to harm the company or its shareholders.

Action Step:

In order to ensure you are meeting your duties as a director or officer, or as member of a limited liability company, you should ensure your business has a corporate/business attorney to advise you and make sure you understand your fiduciary duties in the context of your particular situation. In addition, you should consult with your insurance agent to make sure you have directors and officers liability coverage under your business general liability insurance policy.

DO I NEED A LICENSE TO WORK IN MY TRADE?

By: Ashley Prew

In Michigan, individuals and businesses engaged in residential building and residential improvement or maintenance work need to be mindful of the licensing requirements for specific trades.   

This article will provide a brief overview of some of the issues surrounding licensing requirements, including examples of some of the “less obvious” trades that require licensing in Michigan, the consequences of engaging in a trade without a proper license, and the steps to take to obtain the required license. 

Does My Trade Require a License?

In general, a person or business who contracts with a property owner to do residential construction or remodeling on a project with a total value is $600 or more (including material and labor) is required to be licensed as either a Residential Builder or a Maintenance & Alteration Contractor under Michigan law.  The definitions of a Residential Builder and a Maintenance & Alteration Contractor are very broad in terms of what falls under each license. The differences between the two types of licenses are as follows:

Residential Builder License

A residential building license is required to operate as what most people think of as the typical construction contractor.  A residential builder may build a new home or do any kind of repair work.  It is important to note that even if a residential builder contracts for the whole job, there are separate licensing requirements for certain specialty areas included in such work, such as plumbing, electrical, heating and cooling, and ventilation work.  If the residential builder contracts for the entire job, the builder may use licensed subcontractors for the other areas of work.

Maintenance and Alteration Contractor License

A maintenance and alteration contractor need only be licensed for a specific trade(s) and may only accept contracts for completion of services in which they are licensed.  This requirement exists whether or not the building being worked on is a new build or a remodel.  The definition of a maintenance and alteration contractor is very broad and generally includes any repairs and most improvements or changes to a residential structure.   Some of the unique types of activities that require licensing are:

·         painting and decorating;

·         siding;

·         gutters;

·         tile and marble;

·         swimming pools; and

·         laying wood floors. 

Please note that this list is not comprehensive.  If you are unsure whether your trade requires a license, please contact us.   

What Are the Consequences if I or My Business Engages in a Licensed Trade Without the Required License?

The consequences of failing to obtain the proper license are harsh. In fact, engaging in a licensed trade without a license is a criminal offense.  In the case of a first offense, failing to be licensed when necessary is a misdemeanor punishable by a fine of not less than $5,000.00 or more than $25,000.00, or imprisonment for not more than one year, or both. 

In addition, an unlicensed builder or maintenance and alteration contractor cannot collect monies if they are not paid by a customer.  Examples of collection measures afforded to licensed builders are the use of construction liens, foreclosure, and the potential to obtain money damages through a collection law suit.  If an unlicensed builder or contractor attempts to use these measures, the contractor and their business may not only be subject themselves to the criminal consequences above, but may also be liable for civil damages and restitution.

How Do I Obtain a License?

Generally, the licenses discussed above require at least sixty hours of approved education courses and that the contractor must take and pass a required examination for the specific type of license.  It is important to remember that each profession, trade, and business entity has different license requirements.  If you have questions regarding licensure requirements, whether your profession requires a license, or the steps you need to take to become licensed, please, do not hesitate to contact us directly regarding your specific situation.  

COTTAGE LEGACY PLANNING

By: Tim Williams

Introduction

The real estate industry indicates that cottage ownership in Michigan is at an all-time high.  Cottage owners enjoy many benefits of ownership. Cottages often appreciate at a faster rate than primary homes.  The owners also receive the enjoyment of a getaway where they can relax, unwind, and, perhaps most importantly, where they create a natural social gathering spot for children, grandchildren, extended family and friends.

Cottage legacy planning ensures that the cottage remains in the family for future generations. Proper planning for the cottage can help avoid negative tax consequences for the parents and their adult children and provide for the orderly transition of the cottage to the children.

A baseline tool of cottage legacy planning is that the parents need to convey the cottage to one of their trusts during their lifetime. This will keep the cottage out of probate and will allow for an orderly plan for the transition of the cottage to the children.

The Challenges

The key challenges in cottage legacy planning are:

1. Avoiding an increase in the property taxes when the cottage passes from the parents’ generation to the children.
2. Avoiding capital gains tax upon the appreciation that occurred during the parents’ ownership of the cottage.
3. Simply and effectively providing for the payment of the annual expenses and taxes incurred through cottage ownership.
4. Having a system in place that distributes use of the cottage among family members.
5. Avoiding the threat to ownership that would result from a divorce, death, or disability of a child, tax lien, or judgment against a child.

Alternative Structures for Maintaining the Cottage in the Family

There are two primary alternatives for maintaining the cottage as a legacy during the life of the parents and following the parents’ passing. They are: 1) a trust; or 2) a limited liability company. The principal factors involved in selecting which of these alternatives should hold the cottage for the duration of the parents’ lives and following the parents’ passing include:

1. Parents are able to impart their wishes for how the property is to be handled after death.
2. Flexibility in changing the use of the cottage and other terms of the trust following the parents’ passing.
3. Avoiding an increase in the property tax on the cottage due to events during the parents’ lives and following the parents’ deaths. This increase in property tax is often referred to as uncapping.
4. Limiting the liability of the parents, the children, and the entity selected to own the cottage.
5. The ultimate capital gain tax on the sale of the cottage.

Trust

Use of a trust can be employed to continue the ownership of the cottage within the family, manage the expenses, and dictate use of the cottage.

The transfer by the parents of the cottage to one of their trusts during their lives would not result in an increase in property taxes. This is permitted under new legislation in Michigan which came into effect on January 1, 2015.

The cottage would remain in one of the parents’ trusts following their passing. Upon the death of one of the children following the parents’ deaths, however, property taxes could increase.

The trust would provide for the contribution by the children of a pro rata share of the expenses, including maintenance and improvements, property taxes, insurance and utilities. If a child did not share in the burden of the expenses, after a period of non-contribution, that child’s interest in the trust would forfeit. This is intended to be a strong incentive to encourage contribution as opposed to causing forfeiture. Another alternative would be for the parents to leave a portion of their assets to provide for the payment of the annual expenses of the cottage.

A use agreement is necessary, either within the trust or as a separate document.

The trust would also maintain a policy of life insurance to buy out a deceased child’s interest in the cottage.

There are certain disadvantages to using a trust in legacy planning for a cottage. The primary disadvantage is that trusts offer little capacity for flexibility following the death of the parents. The children would be unable to alter the terms of the trust following the parents’ deaths, although this may be desirable in certain situations. A limited liability company would provide for greater flexibility in this regard. Another disadvantage is that a trust offers no shield against liability.

Limited Liability Company

Use of a limited liability company is the other alternative to continue the ownership of the cottage within the family and manage expenses and use. The mechanics of this include the creation of a “springing” limited liability company during the parents’ lives. The limited liability company would spring to life upon the death of the second parent --. At that time, the cottage would be conveyed to the limited liability company out of whichever of the parents’ trusts owns the cottage. It is believed that this will not result in an increase in the property taxes.

The children would enter into an agreement that provides for the remaining children to purchase the interest of the Cottage upon the death, divorce, bankruptcy, etc. of one of the children.

The agreement would provide that the limited liability company would maintain a policy of life insurance to buy out a deceased child’s interest in the cottage.

The agreement would also provide for the contribution by the children of a pro rata share of the annual expenses, including maintenance and improvements, property taxes, insurance, and utilities. If a child did not share in the burden of the expenses, that child’s interest would forfeit. Again, this is intended to encourage contribution as opposed to causing forfeiture.

The death of a child following the deaths of the parents can result in an increase in the property taxes. Michigan’s rules provide that when more than 50% of the ownership in limited liability company changes, the property taxes will “uncap”.

ACTION STEP:

If you are a cottage owner or the child of a cottage owner, it makes sense to explore the alternatives available for passing the cottage to the next generation. Planning now is critical to avoid undesirable tax consequences and to provide for the orderly ownership, payment of expenses, and use of the cottage in the future.

THE IMPORTANCE OF ESTATE PLANNING IN BLENDED FAMILIES

By: Adrienne Knack

There are many reasons for placing your affairs in order. Some of the most important reasons include reduction of liability for estate tax, probate court avoidance, leaving a legacy for your family, and ease of administration. A very common situation we assist clients with is estate planning for a blended family.  Long gone are the days of The Nelsons, as blended families are much more common in today’s world.  Whether it’s due to a death or divorce, there are many reasons a blended family needs to have the proper documents in place.

There are many different types of blended families.  We often see families that consist of two spouses that each bring children into the second or subsequent marriage.  There are also families where one spouse has kids from a prior marriage and the other spouse does not have children.  Sometimes, that couple wants to have children together as well, or both spouses bring children into the marriage and then have a child together.  Furthermore, there are families that have both adult children and minor children.  Whatever the family dynamic, there are serious issues that need to be addressed.  It is preferable to resolve these issues before they become a crisis – say, before someone passes away or becomes incapacitated.  Failure to properly address these issues will result in a legal mess for a surviving spouse (and children).One very important question in blended families is what will happen to minor children.  A guardian and conservator needs to be named.  Often, there is another parent that needs to be taken into consideration.  Does the other parent share custody?  If so, it is unlikely that their ex-spouse can (or wants to) leave the children with anyone else.  If the other parent does not share custody, it is significantly easier to dictate that the minor children will stay with their step-parent (and usually their other siblings and/or step-siblings). 

Another important issue that needs to be addressed is how assets will be divided and distributed to children in a blended family.  Do assets get divided equally between all children of both spouses?   Do the children the couple had together get more than the other children?  Often, specific language is necessary to inhibit the surviving spouse from disinheriting  step-children.  Many things need to be taken into consideration here, including whether or not the children will receive anything from their other parent or their other parent’s trust or estate.  Perhaps there is one child (or more) that is estranged from the parent and who the parent may want to disinherit.  Some families wish for each parent’s individual assets to go to their own children only.  There are many moving parts and many issues at play.  The language addressing these issues needs to be very specific and is highly specialized on a case-by-case basis. 

Another complicated question is who will handle the administration of the parents’ affairs (wills, trusts, powers of attorney) after their death.  Some blended families appoint an adult child of each spouse to serve in a co-capacity. Preferably, these step siblings have a good head on their shoulders and are looked up to by the other children.  Some families want each parent’s own child to handle their own affairs and not their spouse’s.  Or, perhaps, the parents do not want to put any of their children in the position to be the fiduciary so as to avoid potential conflict with their siblings or step-siblings.  In that case, a non-child fiduciary makes the most sense.  Every family is different and these issues can be addressed by consulting with an experienced estate planning attorney and having the proper estate planning documents in place.

Action Step:

Failure to address these (and other) blended family questions can result in severe consequences.  If probate is needed, it will be guaranteed to be a long, expensive, and tedious process through the court system.  It also opens the door for fighting within the family, which can lead to hard feelings, family estrangement, and a parent’s assets going to children and stepchildren they did not intend.

Proactively addressing these issues will help eliminate some of the tension that can arise in blended families upon a death of one of the parents.

Why You Should Meet with an Estate Planning Attorney

By: Andrew Burrows

By having an estate plan, you can avoid placing a significant burden on your loved ones.  This burden includes deciding who will receive your property after your death and how your affairs will be administered if you are unable to carry on during life. Failure to plan ahead can result in high legal costs and a long, drawn out process associated with probate, both during your life and after your death. It is our hope that this article will inform people of some of the less obvious reasons to meet with an estate planning attorney.

1.  Placing your Affairs in Order is Much Less Expensive than Doing Nothing

One of the most common concerns associated with estate planning is the upfront cost. Although drafting a concise and effective set of documents is not without cost, it is far less expensive than not having a plan in place. An experienced attorney can ensure that your fees are kept as low as possible while drafting a personalized set of documents including a will, trust, powers of attorney, and the other documents that are required to meet your needs.

      2.   Michigan Law is Particularly Unforgiving for Those who Do Not Have an Estate Plan

      The law of estates and trusts varies greatly between the states. Michigan is a state that greatly benefits those who have a formal estate plan and punishes those who do not. When someone dies without a will, a decedent’s property passes through what is called intestate succession. Under intestate succession, a decedent’s property is distributed at a formal probate court proceeding to the decedent’s surviving spouse and/or heirs automatically, and in amounts determined by law. This proceeding is quite complex and requires significant attorney participation, which can get quite expensive.  Many individuals do not realize that even if they have a will, probate court is still required to administer the estate, assets, debts and expenses. By drafting an estate plan that includes a living trust, formal probate proceedings are avoided, and typically all the decedent’s property can be distributed without any probate court involvement whatsoever.

      3.  Estate Planning Addresses Life Events, Not Just Death

    Another common misconception is that healthy, young people don’t need an estate plan.  Estate documents address life events and death events. A well-designed estate plan contains documents that will allow a loved one to make medical decisions for you and prevent loved ones from having to guess what you would have wanted should serious illness or injury occur. The living trust and the power of attorney permit a family member, as opposed to the probate court, to help with decision-making and long-term care arrangements. In addition, all assets, income, expenses, insurances and other financial obligations can be handled smoothly and inexpensively.

Action Step

Determining an individual’s unique situation and what documents are needed is typically outlined with clients in the first meeting. It makes good sense for individuals and couples to contact an estate planning attorney to get the process underway sooner rather than later.

The Importance of Employment Applications, Employment Agreements, and Employee Handbooks

By: Ashley Prew

Employment applications, employment agreements, and employee handbooks are sometimes neglected by business owners who hire employees.  When used in together, a properly drafted employment application, employment agreement, and employee handbook can be effective tools to protect the Company and shield the business owner from some of the risks associated with maintaining employees. 

Employment Applications

An Employment Application provides the key information on a prospective hire and grants authority to investigate the prospective hire’s credit, criminal, civil and employment background.  In addition, it sets forth the Company’s at-will employment policy and permits the Company to discharge the employee if he or she falsified information in the employment process based upon after-acquired evidence.

Employment and Engagement Agreements 

An employment or engagement agreement is a contract used to establish the rights and responsibilities of both a worker and the Company.  Properly drafted employment agreements can protect the Company by establishing and addressing the following:

1. Whether the worker is at-will.
2. The relationship between worker and employee.  Specifically, the agreement should define whether the worker is an employee or an independent contractor.  If a Company decides to classify a worker as an independent contractor, it is important that the terms of the engagement and the terms of the agreement meet specific requirements under the IRS guidelines that allow the worker to be classified as an independent contractor; 
3. The responsibilities and duties of both the employer and the worker;
4. The payment structure for the worker. The agreement should also clearly establish how commission is earned and paid, if applicable;
5. The procedure for termination of employment or engagement by either employer or worker; and
6. Appropriate, non-disclosure, nonappropriation, confidentiality, non-solicit and/or non-compete provisions and work made for hire should be included to protect proprietary information, current customers and prospects of the business, and protect the Company from predatory business practices.  

Employee Handbooks

Employee handbooks help to provide a strong basis for defining the relationship between the Company and its employees.  Employee handbooks can benefit a Company in the following ways:

1. Provide an in-depth description of company policies and employee expectations beyond what is contained in the employment agreement;
2. Address industry specific, applicable federal and state laws, and protect the Company and employees by  articulating that the Company will adhere to these laws and regulations; and 
3.   Protect the company from potential disputes regarding the expectations of employees. 

Employment agreements and employee handbooks should be used together to establish employee expectations, maintain employer/employee relations, and to protect the Company and its employees.  An effective employment agreement often references the employee handbook or incorporates the handbook as part of the agreement by reference. 

Agreements and handbooks should always be specialized based on the type of business, the types of employees/independent contractors, and the culture and expectations of the company.  Therefore, we do not recommend using the internet to find a generic employment application, contract or handbook. Instead, working with qualified professionals such as a business law firm and a human resources firm ensures that the agreements and handbook are drafted to meet each specific business’ legal and human resources needs.  When properly drafted, used, and upheld, these documents can protect the business from potential issues with current and former employees.  

Buying a Franchise

By: Tim Williams

Franchising is a business model that companies use to expand their brand or system. If a company (the “franchisor”) is franchising to expand, it packages and sells its business concept – with varying degrees of support – to individuals (“the franchisees”).  The franchisees, in turn, initiate the franchise business and pay a franchise fee and royalties to the franchisor. The franchisor will have detailed written disclosures and contracts it uses to engage franchisees who wish to buy into the system.

During and immediately following the Great Recession, many people have concluded that they want to own and run their own business. This stems, in part, from individuals who were formerly employees who wish to have more control over their future. The workplace became, and to some degree still is, unstable due to a variety of forces, some of which are cultural.

Buying a franchise is a life decision that involves a variety of important factors including, but not limited to, suitability, financial, and legal issues. The key legal issues in considering whether or not to buy a franchise include:

1.             The “legal” and business reputation of the franchisor.

-       How has the franchisor dealt with franchisees in legal disputes?

-       Has the franchisor generally been compromise or combat oriented?

-      Talk to and visit recent franchisees to inquire into their experience with the franchisor.

A good legal and business workup on the franchisor will reveal much, which is important in advance of paying a significant sum of $100,000 or more for a franchise.

2.      Discover all the hidden costs, the franchisee’s finances and financial commitments,   understand the market, and the competition in your local area.

-       Is it a business which is easy or more difficult for others to enter?

-   Conduct thorough due diligence of the franchise you are looking to purchase, so you’re able to make an informed business decision.

3.             Know the franchise agreement.

-       Your franchise agreement will have a big impact on whether or not your franchise succeeds.

-       You should know how it’s drafted and whether it contains an exit opportunity.

-   You should know the proper disclosures, any territorial restrictions, fees, and obligations you have as a franchisee.

-        You should know what happens if there’s a breach of contract and your recourse for misrepresentations or failures on the part of the franchisor to provide support.

4.              What happens to your franchise if the franchisor is acquired by another company?

-       Can the acquiring company change the name of your business without your permission?

-       Who pays for all of the costs and lost business traction that results from a name change?

5.             Can you sell your franchise to a third party without undue restriction?

A franchise may be a good choice for some but not others. A thorough investigation will help you to sort through the issues and risks in relation to your own situation.

Precautions to Take When Sharing Confidential Business Information

By:  Adrienne Knack

Most businesses have important, confidential business information that needs to be protected.  This includes customer information, pricing, trade secrets, business practices, work product, copyrights, trademarks, service-marks, and other intellectual property and proprietary information.  There are many, everyday situations in which this information is shared, including with employees, independent contractors, distributors, and manufacturers.  Confidential business information is also shared during the process of buying or selling a business.  Often, such information is shared without realizing the dangers associated with its dissemination. 

Dangers of sharing confidential information

Employers expose much of their confidential information to their employees without hesitation.  Most of the time, it is imperative to the operation of the employer’s business to do so.  This is also true regarding pricing and business practices. Unfortunately, an employee who leaves the business may attempt to take this information to a competitor and use it against his or her former employer.  The competing business may then use this information to try to lure customers away from the business owned by the former employer, or for another predatory business practice.  Another danger is sharing too much confidential information when exploring the sale or purchase of a business.  A competitor may pretend like it is interested in acquiring a business simply for the fact that it may obtain proprietary information to use in its own business in the process.

Trademarks, service marks and branding are pieces of information that are used every day.  Businesses use these marketing tools to build the goodwill of their business.  Because this information is shared so freely, it is most vulnerable to being stolen.  If not properly protected, the livelihood of the business can be copied in an instant and used by a competitor to confuse and take customers.

Another relationship that leads to the sharing of proprietary information is when a business works with a manufacturer and/or a distributor.  Important trade secrets like recipes, packaging, and labeling are shared with the manufacturer or distributor out of necessity.  Without the proper safeguards in place, there is nothing that prevents a manufacturer or distributor from sharing this confidential business information with others.

Protections

There are certain steps that businesses must take in order to protect valuable confidential information.  A lot of these protections are encompassed in specialized and specific agreements, including:

1. Non-disclosure agreements;
2. Employee agreements;
3. Independent contractor agreements;
4. Licensing agreements;
5. Purchase agreements;
6. Consulting agreements;
7. Confidentiality agreements;
8. Non-appropriation agreements;
9. Non-compete agreements; and
10. Non-solicitation agreements.

Most of these agreements can either be freestanding or used in conjunction with one another.  Often, specialized clauses encompassing one or more of these ideas are contained within a single agreement.  For example, an employer’s agreement with its employees will often include non-compete or non-solicitation covenants, as well as non-appropriation and confidentiality covenants.

In addition to having these protective agreements in place with employees, independent contractors, potential purchasers/buyers, manufacturers, distributors, etc., there are other precautions a business must take to protect its confidential and proprietary information.  These precautions include having a properly formed business entity and consistent upkeep of the company’s corporate documents, registering trademarks and service-marks at the state and/or federal level, and registering copyrights and patents with the United States Patent and Trademark Office.

It is also very important to have these agreements and policies reviewed and updated frequently to ensure that the business is protected as the business environment evolves.  

VIRTUAL CURRENCY? THE PROS AND CONS OF ACCEPTING BITCOINS AS A SMALL BUSINESS

By:      Andrew Burrows

Since its inception in 2009 by an unknown inventor operating under the alias Satoshi Nakamoto, Bitcoin and other forms of virtual currency have gained significant ground as a valid payment option for consumers. For the uninitiated, Bitcoin is what is commonly referred to as a “cryptocurrency”, which operates on peer-to-peer software via the Internet and is created and held electronically, with the collective network taking the place of a central authority or bank to manage its transactions. With the rapid increase in e-commerce as a subset of total retail spending in domestic GDP in recent years, Bitcoin has gained viability; breaking away from its status as a mere topic of conversation for internet enthusiasts and tech gurus.  This positive press, however, has oftentimes been laced with skepticism and these cryptocurrencies still remain a topic of controversy. This is largely due to the recent use of the currency in online illegal activity such as the infamous drug trafficking scandal perpetuated by individuals via the Silk Road website. Despite the dark shadow that such activity has cast, Bitcoin can be an attractive alternative for small business owners who are looking to avoid the fees charged by credit card companies and desire to become more tech-friendly and hip to their customer base.

PROS

Cost

One of the most enticing benefits of Bitcoin as a small business owner is the ability to avoid the fees associated with credit card transactions. Bitcoin only requires a small fee (less than 1%) to pay people called “miners” who help run the Bitcoin network. The fee is only incurred by those who choose not to hold onto their Bitcoin, but rather to pay these “miners” to immediately convert the Bitcoins received into currency and deposit the funds into a bank account. When compared with the fees charged by credit card companies (an application fee, a surcharge every time a card is swiped, the cost of buying or leasing the equipment, and a percentage of total sales), Bitcoin looks very attractive to small business owners, especially low-volume businesses, as a way to retain more profit per transaction.

Speed

Bitcoin transactions are incredibly quick and can be completed in as little as 10 minutes. This is largely due to the absence of a bank as an intermediary, which speeds up the process of the transaction. Bitcoin is also held virtually and can be easily accessed through any device with an Internet connection by using a numeric “public key”. In addition, a business does not need to apply to start using Bitcoin. It merely has to download the necessary software to begin accepting the currency.

“Tech-effect”

Another advantage of Bitcoin is in the concept of virtual currency itself. A small business that accepts Bitcoin will be more tech savvy as a user of cutting-edge technology. While this may not impact the decisions of some small businesses to accept Bitcoin, the attention that can be gained from customers may be worth the effort.

CONS

Volatility

One downside to Bitcoin not being backed by any particular currency is that this makes its value increasingly volatile. Since the value of Bitcoin is not subject to interest rates and fluctuates on a daily basis, it largely derives its value from its use in transactions. Although the supply of Bitcoin is fixed, the currency would decline into worthlessness if people decided to stop using it. This risk is decreased, however, by the fact that businesses need not hold on to the Bitcoin they receive. They can convert it to their respective country’s currency at any time. Important to note, however, is that an unwillingness of users to hold on to their Bitcoin will inherently stymie its worth.

Reluctance of Large Companies To Accept Bitcoin

Although some members of the Fortune 500 have begun to accept Bitcoin as a method of payment, they do so by using a middleman to immediately convert that Bitcoin into US Dollars. Although the acceptance of Bitcoin by larger companies is a positive thing and a step in the right direction for the virtual currency, the current reluctance to take on the risk that holding Bitcoin represents is a sign that confidence in Bitcoin’s continuing success is not yet widespread.

Tax

The IRS has deemed that Bitcoin is property, rather than currency. As a result, US based businesses must report gains and losses on Bitcoin fluctuation as short term capital gains and losses. . At this point, a business owner would need to be meticulous in tracking their Bitcoin acquisitions and expenditures, tracking each transaction and the exchange rate for Bitcoin at that time.  Then, the business owner would provide this information to whomever prepares their taxes. Thus, although tax implications may be a somewhat daunting hurdle at the outset due to the relatively unknown nature of virtual currencies to a business owner, this process will surely become more routine as employers become comfortable and train their employees to account for these transactions.

TYPES OF JOINT PROPERTY OWNERSHIP IN MICHIGAN

By: Ashley Prew

Many people do not realize that there are multiple ways to own real property – or, real estate – together with another individual.  Each type of property ownership has different legal ramifications and the type of ownership is determined by the specific language on the deed transferring title to the property.   This article discusses the different types of property ownership and the legal implications of each type.   

Tenancy in Common

In Michigan, the statutory presumption is that if a deed does not specify a type of joint ownership, then the property is owned as tenants in common. Thus, if a deed says to Jane Smith and John Doe, without any language following it, it is presumed to be held as tenants in common.

Tenancy in common is an archaic type of ownership that allows each owner an undivided interest in the whole of the property, even if the percentage of interests are not equal  This means that each owner has the legal right to live in the property or to rent the property.  Problems with this type of ownership often occur if the owners do not agree on how to handle the use of the property.  Additionally, when one owner dies, the surviving owner does not automatically receive full title to the property.  Instead, the ownership interest of the deceased owner is passed to his or her heirs either through his or her estate plan or through probate.  This can potentially be very problematic for both the surviving owner and the new owner of the property interest.  If the joint owners cannot agree on how to handle or dispose of the property held as tenancy in common, the result will likely be an expensive and lengthy battle in court through a “partition action”.  This type of lawsuit seeks to divide the property interest through a sale of the property. The proceeds are divided between the joint owners based on their ownership percentages.    

Joint Tenancy with Rights of Survivorship

Joint tenancy with rights of survivorship is created by very specific language in the deed conveying title to the joint tenants.  Joint tenants with rights of survivorship must also acquire the property interest at the same time (through one deed) to create this type of ownership.  The main difference between joint tenancy and ownership as tenants in common is that with joint tenancy, if one owner dies, the surviving owner obtains 100% of the property ownership.  This type of ownership prevents the problems listed above by avoiding the transfer of a partial property interest.   

Tenancy by the Entirety

The final type of joint ownership of property in Michigan is only available to married couples.  Holding property in tenancy by the entirety comes with certain legal benefits and advantages.  First, tenancy by the entirety includes rights of survivorship for both parties, like joint tenancy with rights of survivorship.  Therefore, if one spouse dies, the other spouse continues to own the property as an individual but with a 100% interest in the property.  Additionally, tenancy by the entirety allows a married couple to own the property as a single legal entity.  The main benefit of this type of ownership is that creditors of an individual spouse may not attach and sell the interest of one of the spouses.  This also prevents a lien from being placed on the property if one spouse is sued as an individual and a judgment is obtained against that spouse. There may be exceptions to this, however, particularly when it comes to the IRS as a creditor.

It is important to realize that if an individual owns property and then marries, the marriage does not automatically create ownership as tenancy by the entirety.  If a couple purchases property and then marries, the marriage does not automatically create ownership as tenancy by the entirety. In both instances, they should meet with a qualified attorney to prepare and execute a new deed to themselves as husband and wife to create a tenancy by the entirety.

Conclusion

When individuals attempt to transfer property ownership on their own, either by sale, or to a family member, there may be unintended consequences on the type of property ownership that is created.  We recommend that individuals needing a property transfer work with qualified professionals to complete the transfer.  Even transfers through “for sale by owner transactions” should use a qualified title company and qualified attorney to complete the transaction in a way that suits the best interests of the property owners.