Law Office of Gem McDowell, P.A, Author at Gem McDowell

Ever Wondered Why That Storm Drain is in Your Yard?

Have you ever wondered why that storm drain or telephone pole is in your backyard, or why the telephone company can come dig up your yard and you can’t do anything to stop them?

The answer: Easements. An easement is a right someone has over land owned by someone else.

Many easements are documented (and will be discovered in a title search when buying a piece of property) but others are not. When a party makes a claim on a land without permission for an extended period of time, it may result in a “prescriptive easement.” It’s up to the property owner to take action against someone making a claim on their land to prevent such an easement from becoming established.

That’s the central legal issue in a case that recently was decided by the Supreme Court of South Carolina, in which a Johns Island man took utility companies to court for claims on his newly purchased land. Before getting into the case, let’s talk more about easements first.

What Easements Are

Some examples of common easements are:

Right of railroad company to install railroad tracks
Right of utility company to install electric lines, water mains, etc.
Rights of way allowing others to enter or cross the property, for example to reach a beach or roadway

An example of a prescriptive easement may be when a trespasser gains rights to some land after occupying it in a manner determined by state statute.

These are examples of positive easements, which allows for something to happen. Negative easements prevent something from happening. For example, a light-and-air easement may prevent someone from building an addition to their house that would block the view of their neighbors.

How Prescriptive Easements Are Established in South Carolina

To establish a prescriptive easement in South Carolina, three things must be shown:

There was continued and uninterrupted use for a period of twenty years,
The identity of the thing enjoyed,
The use was adverse under claim of right.

To show adverse use, the use of the land must have been enjoyed “openly, notoriously, continuously, and uninterruptedly, in derogation of another’s rights.”

What does it mean to use land “openly” and “notoriously”? That’s one of the main legal issues in the case in hand.

Simmons v Berkeley Electric Cooperative

Roosevelt Simmons bought two parcels of undeveloped wooded land on Johns Island in 2003. Two previous owners had granted easements to Berkeley Electric, one in 1956 and one in 1972, to construct and keep transmission lines on the property.

In 1977, Charleston County authorized St. John’s Water to put in a water main along the road, using an “encroachment permit,” and the water main was completed in 1978. In 2005, Simmons found a water meter under some bushes on his property. He contacted the water company, who said they would not move the water main.

Simmons took action against Berkeley Electric and St. John’s Water over trespassing and unjust enrichment. Both companies moved for summary judgment, a judicial procedure commonly used when parties agree on the facts of the case and want to avoid or simplify the trial process, and received a ruling in their favor. The case went to the Court of Appeals, which also determined that Berkeley Electric and St. John’s Water had rights to use Simmons’ property, as both had established prescriptive easements.

A request for the Court of Appeals to rehear the case was denied, and the case was taken up by the South Carolina Supreme Court.

Failing the Test

In its decision (PDF), the Supreme Court agreed that Berkeley Electric had established a prescriptive easement. However, it didn’t agree that St. John’s Water had. That’s because St. John’s Water failed the “open, notoriously, continuously, and uninterruptedly” part of the test to establish a prescriptive easement.

Though the use was continuous and uninterrupted, it was not open and notorious. The water main was located in the ground and the water meter was discovered by Simmons under a bush, and therefore the use was not open. To be “notorious,” something “is actually known to the owner, or is widely known in the neighborhood.” The Court didn’t find clear and convincing evidence that neighbors or Simmons himself knew the location of the water main, which is what they would have had to prove.

Simmons did what any landowner who wants to protect their property rights should do – he took action. By ignoring someone else’s claim on your land, you may be helping them establish limited legal rights to it.

Contact Commercial Real Estate Attorney Gem McDowell About Your Property

Easements and property rights can be complex legal issues that need the advice of an experienced commercial real estate attorney. Gem McDowell has over 20 years of experience handling complex real estate transactions in South Carolina, including easements.

Call Gem McDowell Law Group in Mount Pleasant to reach Gem so he can help you with your commercial real estate transaction today. Schedule your free initial consultation today by calling (843) 284-1021 or filling out this contact form online.

Transmutation: When Non-Marital Property Becomes Marital Property

Consider this:

Sandra and James have been married for 25 years. Once they were married, she gave up her job to become a stay-at-home mom. When the kids were old enough, she began to work in her husband’s dental practice, which he established before they married, becoming an integral part of the business. If Sandra and James get divorced, does she deserve compensation for any part of the dental practice that she helped grow?

Marital And Non-Marital Property, And How Non-Marital Becomes Marital

Before answering that question, it’s important to understand the difference between marital and non-marital property. Marital property is property that belongs to the marriage, i.e., to both spouses. In a divorce, it is subject to equitable division by the court (if the couple has not come to an agreement about how to split up the property). A common example of marital property is a house that the couple purchases together during the marriage.

Non-martial property is owned by one spouse or the other, and is not considered to belong to the marriage. In a divorce, it will remain in the hands of its original owner. Examples of non-marital property include gifts made to one spouse only, inheritance, and assets that were brought into or existed before the marriage, such as cars, real estate, and investments, to name just a few examples. Property that was excluded through a pre- or post-nuptial agreement is also considered non-marital.

Although the law gives clear definitions of the two, the application becomes difficult in situations where non-marital property becomes marital property through the process of transmutation.

How Transmutation of Marital Property Happens

If non-marital property becomes “commingled” with marital property to the point that it can’t be distinguished, or it’s used by the spouses in support of the marriage, it can become marital property.

However, determining how much commingling is enough, or what use constitutes “support of the marriage” is not straightforward. The Supreme Court of South Carolina has heard a number of cases where application of the law has depended on how and when transmutation occurs.Here are three cases from the last few years as examples:

Case #1: Wife works in husband’s business and argues that it’s transmuted

Pittman v. Pittman (PDF), Feb. 2014

Gloria Pittman separated from husband Jetter Pittman after seven years together. Over the course of their marriage, she reduced her hours at her job as a nurse and instead spent more time working in her husband’s surveying business, until she was no longer eligible for health benefits or a retirement savings plan through her nursing job. Instead, she became an integral part of her husband’s business. When they divorced, she argued that the business, which her husband owned before coming into the marriage, had become marital property.

The Court agreed. A few key factors in the decision: the husband and wife agreed that she should essentially give up her nursing career to help with his business, the wife was involved in making major decisions regarding the business with her husband, and they structured her pay to benefit the two of them.

Case #2: Wife argues that husband’s inherited land is transmuted

Wilburn v. Wilburn (PDF), May 2013

Harriet and Paul Wilburn were married for over 30 years. They had a unique situation: he had a stroke in his mid-40s that left him partially paralyzed. He granted his wife power of attorney and she took control of some of his accounts. She later got breast cancer and then decided to seek divorce. In the split, she argued that a tract of land he inherited had transmuted and was marital property.

The Court disagreed. Although the Court found wife’s testimony that she had contributed to the management of the property to be credible, that wasn’t enough to establish transmutation. The Court also found that even though income from the land was used in support of the marriage, the property had not transmuted.

Case #3: Husband argues properties are non-marital

Conits v. Conits (PDF), Mar 2016

Peggy and Spiro Conits were married over 30 years before seeking divorce. He owned a number of properties prior to the marriage. She argued that the properties should be considered marital property.

The Court agreed. The income from a property he owned in the U.S. was used to support the marriage and to extinguish debts. He also owned a property in Greece, which the Court determined was marital property. In both cases, loans taken out on the properties were fully paid during the course of the marriage.

Keeping Marital and Non-Marital Separate

With the Court’s interpretation of what constitutes transmutation varying so widely between cases, it’s hard to know exactly what will and won’t qualify as transmutation. If you want to avoid transmutation of property, there are ways you can protect certain assets, for example, through a pre- or post-nuptial agreement.

For advice on protecting your assets, and on other issues of estate planning, contact estate planning attorney Gem McDowell at his Mount Pleasant office today. He can help you create a robust estate plan that takes care of your future needs and the needs of your whole family. Get in touch by calling (843) 284-1021 or by filling out this contact form online.

How to Determine 1099 or W-2 Status According to the IRS

Update, 02/15/2023: The Department of Labor’s Wage and Hour Division published a notice of proposed rulemaking on the subject of worker misclassification and how to correctly classify workers as employees or independent contractors; read more about this on our blog here. This rule would be in addition to the approach the IRS takes to worker classification described below.

In business, the term “1099” usually refers to someone in an independent contractor position. The term comes from the IRS; at the end of the tax year, a 1099 worker receives a 1099 form from their employer rather than a W-2 that employees receive.

Employers may prefer to hire independent contractors rather than employees whenever possible for the main reason that they often cost less to employ. That’s because for employees, employers have to pay Social Security taxes, Medicare taxes, unemployment taxes, and withheld income taxes to the IRS, and carry workers’ compensation insurance to cover them. Also, employers often provide benefits such as health insurance and retirement plans to employees, but not to independent contractors.

How does an employer know how the worker they’re hiring should be classified? While in many cases it’s clear, in others it’s complicated. Here’s how to determine whether a worker in South Carolina is an employee who should receive a W-2 or an independent contractor who should receive a 1099.

Federal Versus State Definitions Of 1099 Independent Contractors

To illustrate the difference between a 1099 and W-2 workers, imagine two plumbing companies hire two plumbers, Jack and Jane. By the terms of employment, Jack must come to the office every day from 9-1, use the company’s truck and tools, and is told which jobs to do and when. By contract, Jill may show up at the office if and when she wants, drives her own truck and uses her own tools, and is told about jobs but not told when she must complete them or how. In this scenario, Jack would be classified as an employee, and Jill an independent contractor.

How workers are classified is of interest to both the federal and state government. The federal government – more specifically, the IRS – cares because it wants to know who will pay the withheld income taxes, Social Security taxes, Medicare taxes, and unemployment taxes for each worker. The state government cares because it runs the state’s workers’ compensation program and needs to know who is responsible for paying for a worker’s injury sustained on the job – the employer (for an injured employee) or the worker themselves (for an injured independent contractor)?

Because the federal and state government have different reasons for wanting to know a worker’s status, they use different standards to determine whether someone is an employee (W-2) or independent contractor (1099).

The IRS’s Definition of 1099 Independent Contractors

The IRS proposes three common law rules for employers to consider when classifying a worker:

Behavioral: Does the employer control, or have the right to determine, how the worker does their job?
Financial: Does the employer control the business aspects of the worker’s job? How is the work paid? Are expenses reimbursed? Does the worker provide their own tools, or do they use the employer’s?
Type of Relationship: Are there written contracts or benefits? What is the nature of the relationship? Was the expectation upon hiring that the relationship would continue indefinitely?

If you’re still uncertain as to how to classify an employee, the IRS can make that determination for you. Fill out Form SS-8 (PDF) and the IRS will review it and make a determination in six months or more.

The Changing Definition of 1099 Independent Contractors in South Carolina

In South Carolina, the approach to worker classification relies on a four-factor model, which you can read more about on our blog here.

A 2015 South Carolina Supreme Court case, Lewis v. L. B. Dynasty (read it here), changed the standard for classifying a worker as an independent contractor, making it stricter in favor of the employee. As a result of this case, workers that previously had been classified as independent contractors may need to be reclassified as employees.

The background: An exotic dancer named LeAndra Lewis was injured when she was accidentally shot while working at the Boom Boom Room Studio 54 in Columbia, SC. She filed a claim for workers’ compensation for coverage of the medical costs of her injuries (which included the loss of a kidney) as well as temporary total disability.

Her claim was denied at first, as she was determined to be an independent contractor by both the single commissioner and the Workers’ Compensation Commission appellate panel. (Independent contractors do not have a right to workers’ comp benefits in South Carolina and employers do not need to carry workers’ comp insurance for them.) The Court of Appeals also affirmed this decision. The South Carolina Supreme Court, however, did not.

Taking the viewpoint that the law should be interpreted to be advantageous to the worker, the Court stated, “The question before the Court is a simple, fact-based consideration—did the Club exercise sufficient control over Lewis to create an employee relationship?” The Court looked at a variety of factors, including the right to, or exercise of, control; furnishing of equipment; method of payment; and right to fire to determine whether the worker should be an employee or independent contractor. Ultimately, the relationship was found to be of an employee nature. That meant Lewis was entitled to workers’ compensation for her injuries.

What The Supreme Court’s Decision Means For South Carolina Employers

South Carolina employers must be sure that their independent contractors meet the high standards the SC Supreme Court has set. The Court has said “we construe workers’ compensation law liberally in favor of coverage to further the beneficent purpose of the Workers’ Compensation Act.” In other words, it will tend to side with the worker and act in their favor rather than in the employer’s.

What happens if you’ve been treating a worker as a 1099 independent contractor when you should have been treating them as a W-2 employee? You may find an unwanted notice from the IRS stating that you owe back taxes for employees. Or your worker may become injured while on the job and sue you, leading to a long and expensive lawsuit. In short, it could cause a big headache and cost a lot of money. For many companies, either one of these scenarios could be devastating. It’s a good idea to review the nature of your independent contractors’ work and make sure they are truly independent contractors according to federal and state law.

Contact Mount Pleasant Corporate Attorney Gem McDowell for Advice

For advice on classifying employees, hiring and firing, contracts, and other aspects of starting or running a business, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group in Mount Pleasant, SC help businesses make smart and informed decisions in day-to-day and exceptional circumstances. Get in touch by calling (843) 284-1021 or by filling out this contact form online. Schedule your free initial consultation today.

Avoid the Pitfalls of Estate Planning in “Brady Bunch Marriages”

“Brady Bunch marriages” – in which spouses bring their kids from prior relationships into the new marriage – pose a number of potential problems when it comes to estate planning. Imagine the following scenarios:

Husband and wife sign an “I Love You will” which leaves everything to the other spouse upon death. The husband dies first, and all his assets go to his wife. When she dies, all her assets go to her children, as is very common in a simple will. In this case, the husband’s children get none of his estate; they were bypassed entirely.
Husband promises to “do the right thing” if his wife dies before him and ensure that her children get some of her money, even though he inherits it all. Upon her death, he decides to keep the money himself, giving her children nothing.
Husband wants to leave a third of his assets to his wife, a third to his children, and a third to his wife’s children. The wife wants to leave all of her assets to her children.

You can see how any one of these scenarios could lead to legal complications. More importantly, situations like these can tear apart formerly loving families and lead to resentment, disillusionment, and anger. How can they be avoided?

Be Deliberate About Your Estate Plan

If your family situation is complicated, you owe it to yourself and your family to have an estate plan that will carry out your wishes when you die. You have many options, but here are three possible choices:

Option 1. You split your assets up in your will and give some to your spouse, the rest to your kids.

Option 2. You and your spouse sign a waiver stating that there will be no claim to the spouse’s assets upon death, nor any right to them. The kids get everything. (See below for more information on this type of waiver.)

Option 3. You put your assets in a trust which your spouse can enjoy limited privileges from during their lifetime, and upon their death, the trust automatically passes to your kids. Note there are many different kinds of trusts, so make sure you’re getting the right kind for your particular situation.

Your assets are yours to distribute as you see fit and you can use wills, trusts, and other tools to make that happen. It’s smart to have an estate planning attorney review your documents regularly so you don’t experience any unintended consequences of bad estate planning.

Spouses Are Automatic Heirs, Unless You Disinherit Them

As a married person in South Carolina, your spouse has a very strong claim on your property in the case of divorce or death. If you die without a will, they get either all or part of your estate. Even if you die with a will that says you don’t want them inheriting any of your assets, the law may say otherwise. The reason is because you cannot disinherit a spouse without their consent.

In South Carolina, you have three ways to disinherit a spouse:

1) Sign a prenuptial agreement

2) Sign a postnuptial agreement

3) Sign a waiver of elective share before or after marriage

Both spouses must sign a waiver of elective share that waives their rights to their spouse’s assets upon death, in whole or in part. However, this waiver does not waive either spouse’s rights to the other’s assets upon divorce, so it’s different from a prenuptial or postnuptial agreement.

To get a waiver of elective share, both spouses must present an accurate picture of their financial status to the other, so the waiver is made with full knowledge of what they are waiving their rights to. In cases where there’s a large discrepancy in amount of money (i.e., one spouse has a lot of money while the other one has very little), it’s wise for both spouses to retain their own lawyers.

Waivers of elective share aren’t particularly common, but they’re worth considering if you are sure you don’t want your spouse inheriting your property upon your death.

Be Explicit in Your Estate Planning

To illustrate how strong the claim a person has on their spouse’s property, consider this example.

A couple decides to get divorced. They file for divorce on January 1st. On September 1st, they have a hearing. On September 25th, the court orders for divorce. Two days later, the husband dies. A few days after that, on October 1st, the judge signs the order for divorce. In this case, even though the couple was in the process of getting divorced, the surviving wife was entitled to a portion of her deceased almost-ex-husband’s estate because on the day he died, they were still technically married.

What if you’re going through a divorce and don’t want your spouse to claim any of your assets should you unexpectedly die? At this point, it’s highly unlikely that you’ll be able to persuade them to sign a prenup, postnup, or waiver of elective share. This is all the more reason not to delay in the divorce proceedings.

Work With An Experienced Estate Planning Attorney

As you can see, estate planning gets complicated once you factor in divorce and add children from previous marriages, children from new marriages, and second (and third and fourth…) spouses. If you’re in this situation, be sure to work with an attorney who has experience with estate planning for blended families, particularly with trusts and elective share.

If you’re in South Carolina, contact estate planning attorney Gem McDowell. He has extensive experience handling estate planning for “Brady Bunch marriages” and is aware of the pitfalls of standard estate planning. He are ready to help you with your complicated estate planning needs at their law office in Mt. Pleasant. Get in touch online or call them today at (843) 284-1021 to schedule your consultation.

Why a Judgment in Your Favor is Not as Great as You Think

If you’re awarded a judgment, don’t celebrate just yet – it may not be the windfall you think it is.

A judgment is a decision of the court that comes about after a lawsuit is settled or threatened. For example, let’s say Tony is driving and runs into Victoria’s house, causing a large amount of damage. She may end up with a judgment against Tony in the amount of $100,000 for the damage sustained to her property.

That’s great! $100,000 is a lot of money, right?

Yes, it is – if she can ever collect it.

A Judgment is Not a Guarantee of Payment

Unlike a settlement, which is money in the hand, a judgment is more like a mortgage, as it attaches to any real property of the person against whom the judgment is placed – in this case, Tony. Sometimes that money can be collected immediately, sometimes at a later date, and sometimes not at all.

The reason that money often can’t be collected is because of exemptions established in the law. If the judgment is against an individual (not a business), the law protects that individual’s property up to certain amounts, meaning the judgment can’t be taken from those assets up to those limits.

For example, the exemption amount for the primary residence for an unmarried person is $59,100, or $118,200 if married. If Tony is married and owns a $200,000 house, and has a $100,000 mortgage, Victoria can’t expect to collect her $100,000 even though it appears as though he has twice as much money as she’s trying to collect. It can’t be collected on because it’s protected.

Other assets are protected up to certain dollar limits. For the year 2016, these amounts are:

(Note that this list is not exhaustive.)

The dollar amounts for exemptions are updated in even-numbered years in South Carolina.

What Does it Really Mean to Have a Judgment in Your Favor?

Whether your judgment ends up being worth more than the paper it’s written on depends on the person you’re collecting against. Having a judgment in your favor means that the person it’s against does owe you that money, whether they end up having to pay it or not.

Also, judgments are mobile. A judgment is filed in the County where the incident or damage occurred, but the judgment can follow the debtor across county and state lines. A judgment can even follow someone to other countries, depending on the treatises the U.S. has with other countries. In short, if there’s a judgment against you, don’t think you can outrun it by moving to a different city, state, or country.

A judgment lasts for 10 years in South Carolina (each state has its own laws regarding judgments), so if in that time Tony sells or refinances his house, Victoria can collect the money she’s owed. Unfortunately, sometimes there’s never an occasion to collect. Maybe Tony never sells his house, or maybe his house is in his wife’s name only.

If the person you have a judgment against is very wealthy, and/or has a second residence, you can likely collect relatively easily. If not, you may have to work a little harder to get your money.

How Do You Collect a Judgment You Have Against Someone Else?

To “execute against the judgment,” you can have the sheriff try to collect. In the majority of these instances, the debtors say the same thing: “I have no money.” The sheriff returns with a nulla bona execution, which means “no good.”

After this, the next step you can take is to put the debtor on the stand and with the judge go through the debtor’s tax returns and other financial documents to see if they really do have the money to pay.

Need More Information on Judgments?

If you’re trying to collect on a judgment, or you’ve got a judgment against you and you want to know what your options are, contact Gem McDowell at Gem McDowell Law Group. You can reach Gem at their Mount Pleasant law office by calling (843) 284-1021 or by filling out this contact form online. Get in touch and schedule an appointment today.

Why You Need to Read the Fine Print: A Cautionary Tale

You know you should read “the fine print” of every contract and agreement you sign, but do you? We sometimes assume that there’s nothing truly important happening in the fine print, the section of a contract that’s characterized by small type and is often full of mind-numbing legalese , and so we don’t read it. We tend to trust that the person who wrote the contract is treating us fairly.

But that’s a mistake. Here’s a quick story that shows why you should always read the fine print.

What Was Buried in the Fine Print

This happened several years ago. Joe owned a piece of property that ran alongside a major road. Sam owned a billboard company and approached Joe about putting a billboard on the property. Sam would pay to construct it and would secure the advertisers; Joe didn’t have to do anything except let Sam put up the billboard and then collect a small amount of rent each month.

This arrangement worked perfectly for both parties – until Joe sold the property.

Joe sold the property to Harry, which included in it the lease for the billboard. What Harry and Joe didn’t realize was that the lease contained the following provision: Sam had the right of first refusal for any sale of the property by Joe. That is, Joe should have approached Sam first about the sale of the property rather than immediately selling it to Harry.

Sam seized the opportunity to demand that someone buy his right of first refusal for an astronomical fee. He sued both Joe and Harry for the money. He didn’t care who paid it, as long as he got paid.

Eventually the matter was settled out of court. Joe and Harry ended up paying a large amount of money to Sam. And Sam made a tidy sum for doing absolutely nothing.

How the Story Should Have Gone Instead

Here’s what should have happened to avoid this troubling situation:

Joe should have never signed the lease with the right of first refusal. He should have had an experienced commercial real estate attorney review the lease for him, or at the very least he should have read every word of it before signing.

Then Harry should have never bought the property with the billboard lease agreement as-is. He should have had an experienced commercial real estate attorney review the contracts for him, or at the very least he should have read every word of them before signing.

The solution is the same both times: read the fine print!

What You Can Do To Prevent Unwelcome Surprises

First of all, don’t assume that the contract you’re about to sign is written in a way that treats you fairly. People can be sneaky, and when it comes to contracts, you’ve got to look out for your own interests.

Then do what Joe and Harry should have done – read the fine print. If the print is literally too small for you to read, request that the contract be reprinted in a more legible font size and refuse to sign it until you are able to read every word. Once you’re able to read it, make sure you understand what it actually means, and what the consequences could be.

Even better than reading it yourself is having a lawyer review it for you.

If you need an experienced commercial real estate attorney to review contracts or give advice on a purchase or sale, contact Gem McDowell of Gem McDowell Law Group. He can help. Send us a message today at our Mount Pleasant office or call (843) 284-1021.

How South Carolina Courts View Covenants Not to Compete

On the surface, covenants not to compete look simple. One party agrees not to compete against another party – either by working for a competing company, or by starting their own competing company – for a specified amount of time and within a specified location. But as simple as they seem, covenants not to compete aren’t so straightforward.

When two parties end up disagreeing over a covenant not to compete, the matter sometimes ends up in the South Carolina Court of Appeals. That happened recently, in a matter called Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., as recorded in the May 4, 2016 Advance Sheets (pdf). This case shows how the courts of South Carolina view and enforce covenants not to compete, and why, as a business owner, it’s important to do everything you can to draw up covenants not to compete that are enforceable.

The Background: Seller’s Remorse

In 2007, Seller sold its mortuary transportation business to Buyer. Among other things, the two parties agreed that 1) Seller would not provide mortuary transportation services within 150 miles of the business for a period of ten years after the sale, and 2) Buyer would buy certain types of body bags exclusively from Seller (at discounted prices) for ten years.

The terms of the sale worked well for several years, but then two things happened.

First, in 2011, Richland County sent out an RFP (request for proposal) for mortuary services. As part of the sale, Buyer had bought an existing contract for mortuary transportation services with Richland County. The covenant not to compete would bar Seller from providing mortuary services to Richland County for 10 years from the date of sale, because it was located within the agreed upon 150-mile radius. However, Seller was interested in submitting an RFP.

Second, Seller accused Buyer of breaking their agreement by purchasing body bags from someone other than Seller. It was found that Buyer had purchased over $45,000’s worth of body bags from Seller since 2007, but had also purchased $478.50’s worth of body bags from a third party. Because Buyer was in breach of contract, Seller said, Seller was no longer bound by the rules of the covenant not to compete.

Seller ended up winning the contract with Richland County. Buyer wasn’t happy.

The case was tried in late 2013, and the judge (actually a court-appointed special referee) found in favor of Buyer. Seller appealed and the decision by the South Carolina Court of Appeals is recorded in the May 4th Advance Sheets.

The Court of Appeals’ Verdict: Throw out the Baby With the Bathwater

The Court of Appeals did not agree with the lower court.

The lower court held that the terms of the covenant not to compete were “reasonably limited” in time and geographic scope. The Court of Appeals disagreed, stating, “In our view, the 150-mile restriction was overly broad and did not protect the rights and interests of [Buyer] in a reasonable manner.”

The Court also wrote that “In South Carolina, our courts will generally uphold and enforce a covenant not to compete arising out of the sale of a business if it is (1) reasonably limited as to time and territory, (2) supported by valuable consideration, and (3) not detrimental to the public interest.”

So for a covenant not to compete to be enforceable in South Carolina, it must meet all three requirements. If it fails one of the requirements, the entire agreement becomes void. Some other states allow courts to “blue pencil,” which means a court can say something like “150 miles is too much, but 50 miles is acceptable, so the rest of the agreement remains intact except for this part.” Not South Carolina. It throws the baby out with the bathwater.

Because the covenant not to compete in question failed to satisfy requirement #1, the entire covenant is not enforceable.

What it means for the parties: Seller is free to provide mortuary services in South Carolina without the restrictions originally laid out in the terms of the sale. Buyer lost a valuable contract as well as a competitive advantage because the covenant not to compete wasn’t enforceable. What Buyer thought was a smart move – restricting business activities of Seller in the manner it did – didn’t end up working out.

Why 150 Miles Wasn’t “Reasonable”

The United States is a large country. From Washington, D.C. to San Francisco, it’s over 2,400 miles. So restricting a business within a 150-mile radius doesn’t seem like a large area. How could that be “unreasonable”?

But consider the State of South Carolina. If you buy a business in Columbia, is it reasonable to expect the seller to abstain from business within a 150-mile radius? Columbia to Hilton Head is 125 miles as the crow flies. Columbia to Myrtle Beach is also 125 miles. And it’s just shy of 100 miles to Greenville. The seller would effectively be barred from conducting business in the entire state.

Also consider that the State of South Carolina is just over 30,000 square miles. The area in a circle with a 150-mile radius (πrr) is over 70,000 square miles – more than twice the area of the State of South Carolina.

150 miles doesn’t seem quite so reasonable now.

How to Determine “Reasonable” Geographic Restriction

It would be helpful to business owners if the courts would give a firm number that’s reasonable. But it doesn’t work that way. Among other things, the nature of the individual business determines what’s reasonable.

One way to think of it is how far a customer would travel to patronize a business. Would a customer drive 20 miles to go to a convenience store? Unlikely. That’s like driving all the way from Isle of Palms to Avondale in West Ashley. The vast majority of people are not going to drive that far for a soda and a lottery ticket. So in this example, even a 20-mile radius would be too large.

Or think of it from the salesperson’s point of view. Could a company that installs pools expect to serve customers in both Summerville and Folly Beach (a distance of 35 miles)? Possibly, yes. In this example, a 20-mile radius might be perfectly reasonable.

What You Should Do

Before drawing up or signing any covenant not to compete in South Carolina, take time to see if it will satisfy the three requirements listed above. In particular, look at restrictions on time and geographic scope. Consider the nature of the business you’re selling or buying to determine what seems reasonable. Don’t be greedy; that’s often the underlying case of such disputes. Rather, be conservative. You stand a better chance of having an enforceable agreement if you do.

You should also seek out the advice of an experienced business attorney like Gem McDowell. Contact Gem at their Mount Pleasant office at (843) 284-1021 today.

What You Need to Know About Section 1031 “Like-Kind Exchanges”

Under Section 1031 of the US Code, you can sell a qualifying property, take the money from that sale, and buy new qualifying property of a “like-kind” without paying any federal income tax on the first sale. This is what’s known as a “1031 Exchange” or a “Like-Kind Exchange.”

For example, let’s say you own an investment property that you bought for $15,000 in 1965, which is now worth $250,000. You want to sell that property and buy a new investment property. If you simply sold the property, you’d need to pay income taxes on the gain of $235,000. At around 33% for combined federal and state taxes, you’d pay approximately $77,550 in taxes – a substantial amount of money.

But, under 1031, you’re allowed to exchange that property for “like-kind” property and defer paying taxes on the gain. (Note that you are deferring taxes, not eliminating them altogether.) It’s a great tool for businesses and individuals to use to reduce tax bills and manage cash flow during the year.

How Like-Kind or 1031 Exchanges Work

How does an exchange of like-kind property work under Section 1031?

Using the example above, you’d sell your property (the “Relinquished Property”) and the money would go into an account controlled by a neutral third-party agent (the “Qualified Intermediary”), often an attorney or CPA, someone who has not done any work for you in the past two years. You cannot touch the money from that sale, and neither can your lawyer or CPA. Otherwise, the money is disqualified and subject to taxation.

Generally, you have 45 days to find a Replacement Property from the date of sale of the Relinquished Property and 180 days to close on that Replacement Property. The Qualified Intermediary purchases the like-kind property (the “Replacement Property”) with the money from the account you never touched, puts the Replacement Property in your name, and the process is complete.

What does “like-kind” mean?

It means that the property that’s being exchanged is of the same character. You can trade livestock for livestock or investment property for investment property, for example. You cannot trade livestock for investment property under Section 1031. However, you may exchange property that “differ[s] in grade or quality,” meaning that you may essentially “upgrade” your property or assets. Determining what qualifies as Replacement Property is done on a case-by-case basis.

What type of property is eligible for like-kind exchange under Section 1031?

Most property that is solely for business use is eligible, including investment property, livestock, vehicles, machinery, equipment, and other items of tangible property. Intangible property such as copyrights and patents qualify, too.

What type of property is not eligible?

According to the IRS, “inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets” are not eligible. Real property for personal use, i.e., a personal residence, is not eligible. It must be used for trade or business only.

What if you do not spend all the money you made from the sale within 180 days?

Money left over at the end of the 180-day period is commonly known as “boot.” If you cannot locate property that costs as much as the property you sold, or you are unable to close within 180 days, you will need to pay taxes on the boot.

What if you receive money or other types of property that are not like-kind in the exchange?

“Boot” can also refer to the value of goods received in the exchange that are not qualifying. If your exchange results in boot, you’ll need to pay taxes on it. (Though if the exchange results in a loss, it won’t be recognized.)

What about property that has debt attached to it?

Let’s say in the example above, you don’t own the house free and clear but have borrowed $100,000 against it. You sell the house and now have $250,000. In the exchange, you need to buy a Replacement Property that has as much equity and as much debt as the Relinquished Property. Otherwise, the IRS sees that you’re better off after the transaction, which is not the intent of the code, and you’ll need to pay tax. You need to “roll” what you made and what you owe to your new property.

What about state taxes?

The laws on how states handle taxes vary from state to state. In South Carolina, the law recognizes like-kind exchanges and will defer taxes on exchanges as long as the Relinquished Property and the Replacement Property are both located within the state of South Carolina. If you sell Relinquished Property in South Carolina and buy Replacement Property in North Carolina, for example, you can defer your federal taxes on the sale under 1031, but you will be responsible for the gain earned on the sale of the Replacement Property to South Carolina.

Who is eligible to do a 1031 Exchange?

Any entity that is exchanging qualifying property used solely for business. A corporation, partnership, LLC, individual, or trust may take advantage of Section 1031 as long as the property qualifies. A business may exchange equipment, or an individual may exchange investment rental property, for example. Dealers are not eligible for Section 1031 treatment.

How much does it cost to execute a 1031 Exchange?

Some businesses shy away from 1031 Exchanges because they believe it will cost a lot of money. In South Carolina, you can carry out a Like-Kind or 1031 Exchange for around $1,500 or $2,000. This small amount of money could end up saving you or your business thousands or tens of thousands of dollars in taxes. In a large majority of cases, it’s a worthwhile investment.

Could your business benefit from tax deferral from a Like-Kind Exchange?

This is just the start; there are more nuances to exchanges under 1031. If you want to know whether a 1031 Exchange could be a good tool for your company, contact Mount Pleasant corporate attorney at Gem McDowell Law Group. Send us a message or call us today at (843) 284-1021 today.

How to Protect Your Interests With Enforceable Covenants Not to Compete

South Carolina is a state that values an individual’s freedom to work. Because of that, it does not look kindly on contracts that try to restrict a person from working.

This can be tricky for employers trying to protect their interests. Many employers require employees to sign covenants not to compete, which are intended to prevent them from taking trade secrets and sensitive information to a competitor and/or staring their own competing company. But if the covenant not to compete isn’t written correctly, it won’t be worth the paper it’s written on. So here’s how to write one that might hold up in South Carolina court – and a couple extra things to think about, too.

Three things to address in your covenant not to compete

The keyword is reasonable. You have to be reasonable about what, when, and where your employee can work after they leave your employ.

1) Scope

The scope of duties cannot be restricted in an unreasonable way. If one of your employees writes the company newsletter, you cannot restrict them from writing anything at all after leaving your company. The scope in that case is simply too broad.

2) Duration

A “safe,” reasonable duration is typically two years. Any longer might cross over into unreasonable territory.

3) Geographic Location

This one’s interesting. Many covenants not to compete contain seemingly innocuous clauses that say something to the effect that the employee cannot work at a similar company within a 50-mile radius. That doesn’t seem that unreasonable at first glance – surely that leaves plenty of potential customers and places to do business – but it is.

You’ll remember from high school geometry that the area of a circle is πr², which in this case equals over 7,854 square miles (3.14159*50*50). The state of South Carolina is only 32,000 square miles. Not so reasonable now, is it? A full quarter of the state is now off-limits. Even a 10-mile radius essentially covers all of Charleston County.

There’s no hard-and-fast rule here about what is considered “reasonable.” You’ll need to use your judgment, and get the advice of a business attorney, to draft a geography clause in your covenant not to compete that’s more likely to hold up in court.

How you, the employer, can protect your interests

As stated above, South Carolina is not known for looking kindly on strict covenants not to compete. But some states are. So a company may add a “forum clause” that says if disputes arise, they’ll be settled in a court in a state like Florida, which is more favorable to employers in these cases.

Another way to protect your interests and keep sensitive information out of competitors’ hands is to focus more on non-disclosure agreements (NDAs) and confidentiality agreements than on covenants not to compete. Because NDAs and confidentiality agreements don’t tend to restrict a person’s freedom to work, the South Carolina Court doesn’t enforce them so heavily in favor of the employee as it does with covenants not to compete. That is, the Court’s decision is likely to be more favorable towards you, the employer, rather than the employee. (The 2012 case Milliken & Company v. Morin set this precedent.)

Get advice on creating your reasonable covenants not to compete

Need help with your contracts, covenants not to compete, and other business documents? Contact business attorney Gem McDowell at their Mount Pleasant office at (843) 284-1021 today.

Did You Choose the Wrong Business Type?

Picking what kind of business you’re going to be – “choice of entity” – is one of the first and most important things you do when you start a business. It’s an area where many business owners can get into trouble because they don’t know what they don’t know. Beyond basic issues of personal liability and how many people are in your company, there are subtleties you may miss if you don’t know the law.

Here are some common business types, and why they may be the wrong choice for your business. (If you think you’ve already set up your business as the wrong entity, don’t worry; Gem and his associates can help you.)

Sole proprietors and partnerships

The benefits of sole proprietorship and partnerships

Many businesses default to these business types because they don’t require any formal federal or state paperwork to set up. (You should still look into whether you need licenses and permits, though.) If you start selling baby blankets online and making money, you’re automatically a sole proprietor. If you and your buddies start roasting coffee and selling it, you’re in a partnership. It’s very easy, which is why these are still very common business structures.

What to watch out for

The major drawback – and it’s a big one – of being one of these two types of business entity is that you have no liability protection. Your personal assets are not protected in case your business is sued or goes into debt. That means that you can lose your money, your home, your car, and any other assets you have if the business gets into trouble. For partnerships, you take even more risk, because you’re not just reliable for your own actions and debts you incur, you’re liable for those of your partners, too.

The bottom line

It’s better to choose a different business structure altogether than to accept the risk of putting your personal assets on the line.

Limited liability companies (LLCs)

The benefits of LLCs

The big benefit is liability protection. With an LLC, as long as you maintain a separation between business and personal accounts, you will be (in most cases) protected from being held personally liable for the debts of your business. An LLC is flexible because you can have a single-person LLC or an LLC with multiple people. For taxes, the income (or loss) “passes through” to the owners to include on their personal tax returns.

For all these reasons, the LLC is an ideal business structure for many companies.

What to watch out for

With LLCs, there’s more than meets the eye. Did you know that there are four ways to establish a limited liability company in South Carolina? Most people don’t. And when most people set up the business themselves, they inadvertently set it up as the wrong type of LLC.

An LLC can either be “term” or “at will” and can be “member managed” or “manager managed.” Let’s say you and your friend are in an LLC together and you don’t yet have a buy-sell agreement. If your friend dies, and your LLC is set up as “at will” instead of “term,” you have only a limited time to buy out their portion of the business, or the business dissolves.

Or let’s say you’re in an LLC with your business partner and your LLC is set up as “member managed.” Even if that person owns just 1% of the business, they can go to the bank and take out money in your company’s name, which you’re now on the hook for.

The bottom line

The LLC is a great business structure, but you need to make sure it’s set up as the correct type of LLC. There are four possible types of LLC, and only one is ideal.

Corporations

The benefits of corporations

As a business entity, the corporation is great because it’s robust and can grow easily with capital from investors. Most of the brand name companies you know are corporations. You can choose to be a C-Corp or an S-Corp depending on how you want to be taxed. This is a great choice for a company looking to grow with outside investors and shareholders.

What to watch out for

If you’re a regular corporation, you’ll be required to have a board of directors, hold regular meetings, keep meeting minutes, and have those minutes available to shareholders to review. Failure to do these things can lead to a Plaintiff’s lawyer asking a court to “pierce the corporate veil” when the company is sued. That is, blurring the line between what’s business and what’s personal. In the worst-case scenario, you could be personally liable and find yourself paying off the company’s debts with your own assets.

But you can sidestep these problems entirely by electing to become a “statutory close corporation” by filing with the State of South Carolina. Every corporation in South Carolina is eligible. You get the benefits of being a corporation, but you won’t be required to have a board of directors and hold meetings if you don’t want to.

The bottom line

If you’re already a corporation but your company is not meticulous about holding board meetings and maintaining minutes, look into becoming a statutory close corporation. And even if you are meticulous, it’s just one more layer of protection for you.

Get Help Setting Up Your Business

The majority of companies are not set up in a way that’s optimal for the business owner, says Mount Pleasant business attorney Gem McDowell. If you want to discuss choice of entity for a new or existing business, call Gem and his associates at (843) 284-1021 today. They can help you evaluate your options and choose the entity that’s right for your business.

What’s the Difference Between a C-Corp and an S-Corp?

Deciding what kind of entity you want to be is one of the first steps when creating a new business. If you’ve already decided that your business should be a corporation, rather than a limited liability company or something else, you still have to decide whether you want to be a C corporation (C-Corp) or an S corporation (S-Corp).

The Differences Between a C-Corp and an S-Corp

A C-Corp is probably what you think of when you think of corporations; the big ones, like GM and ExxonMobil, are C-Corps. They can have an unlimited number of shareholders, and anyone may buy shares, including other companies and people in foreign countries.

An S-Corp, however, has limits on how many people may be shareholders (currently 100) and who may hold shares, since corporations, partnerships and non-resident aliens may not be shareholders. (There are other differences between the two, and you can read more on the IRS website about C corporations and S corporations.)

The main difference is in taxation. A C-Corp is taxed at the corporate level and if dividends are distributed to shareholders, those shareholders are taxed on those distributions. S-Corps seek to avoid this “double taxation” by being taxed differently. Instead, the S-Corp’s income “passes through” to the shareholders, who pay taxes on the income only once. (Same for losses.)

How to Become an S-Corp

First you need to incorporate in your state as a corporation, which by default is a C-Corp. You don’t need to file anything with the IRS or the federal government to become a corporation. But you do need to file a Form 2553 with the IRS if you want to change your status to an S-Corp. What you’re really doing is asking the IRS to tax you under a different section of the code. (The C in C-Corp is because those corporations are taxed under Chapter 1, subsection C of the IRS code; S-Corps are taxed under Chapter 1, subsection S.)

Pros and Cons of Becoming an S-Corp

Assuming that you’re deciding between being a C-Corp and an S-Corp (and not an LLC or other business entity), the two main things to consider are taxation and shareholders. Electing S-Corp status will let you avoid corporate-level taxes but may also restrict the growth of your company by putting limits on who and how many may become shareholders. You will also have to be sure to follow the IRS’s guidelines so that you don’t do anything to lose your S-Corp status.

There’s no one-size-fits-all answer to this question, so it’s a good idea to speak with the other shareholders, a business attorney and an accountant to decide if becoming an S-Corp is the best option for your company.

Learn More About Becoming an S-Corp

Call 843-284-1021 to speak with business attorney Gem McDowell and his associatess at Gem McDowell Law Group in Charleston. They can advise you on the pros and cons of becoming an S-Corp and provide legal advice on a variety of other issues in business law.

How A Buy-Sell Agreement Is Like Monopoly

Imagine sitting down with someone to play Monopoly, and it’s the first time ever for both of you. What do you do first? After you each pick a token – the top hat, the Scottie dog – you read out the rules so you both know how the game works.

Pass Go, collect $200. Not $600. Not $800. Land on Free Parking, you get the money in the middle of the board. You don’t just take the money when you feel like it. The game works best when every player is aware of the rules and follows them.

Business is the same way.

When you start a business with other people, you all have to agree on “the rules of the game,” the way things will work in your business. Drafting corporate governance documents is the best way to do this. One of the most important documents is the buy-sell agreement.

The Buy-Sell Agreement Sets the Rules of Business in Advance

A buy-sell agreement is like a pre-nuptial agreement for the business. Instead of saying what will happen when you divorce, it says what will happen when a particular event arises, like a partner being convicted of fraud or becoming disabled.

With a solid buy-sell agreement in place, owners run the company knowing that whatever arises, there is a pre-determined course of action that will take place. It can prevent partners from panicking and having to figure out what to do on the fly or, in some cases, suing each other.

Every business with more than one owner should have a buy-sell agreement in place.

The 8 Parts of a Buy-Sell Agreement

When you prepare a buy-sell agreement for your business at Gem McDowell Law Group, you and your partners will be taken through eight parts. Together with Gem, you’ll create a document that is tailored to your business and meets your needs. That is to say, this is not a cookie cutter document. It’s created for your business alone.

Each one of the eight parts asks you to consider a potential situation and how you’d like to deal with it, should it occur. They are:

1. Borrow money against shares. When an owner or shareholder borrows money against their shares, it can have an impact on the business. Many companies only a partner to borrow against their shares if 75% or 100% of the partners agree to it.

2. Voluntary transfer. What if one of the owners wants to give some shares to his wife? Well, you agreed to be in business with him, not his wife. The buy-sell agreement can prevent that transfer from taking place. Partners can agree upon who can and cannot be given shares in the business through voluntary transfer.

3. Involuntary transfer. This could happen when a bank forecloses on a shareholder’s shares of stock, for example.

4. Discontented owner. Let’s say that in a company with 8 owners, 7 think that the 8th is untrustworthy and want her out. Your buy-sell agreement can make a provision where if a quorum wants that partner gone, she can be forcibly bought out.

5. Crimes of moral turpitude. This legal term refers to a variety of crimes contrary to community standards of justice, honesty or good morals. If an owner of the business is convicted of such a crime, it could be very bad for the company as a whole. For that reason, the remaining owners may decide that a partner guilty of such a crime can be forcibly bought out.

6. Buyout because of retirement. AKA, one of the partners is not working hard enough. The agreement can include a stipulation about how many hours each owner must work in order to be in good standing, and if they don’t work that many hours, what the consequences are. Each owner may have a different number of hours, if, for example, one partner contributes money rather than manpower.

7. Disability. What happens to the business if one of the owners becomes disabled and can no longer work?

8. Death. A buy-sell agreement can include the terms of the buyout of the deceased partner’s share, such as whether the buyout is immediate or part immediate, part later.

Creating a buy-sell agreement early on in your business is smart because you and your partners are more likely to think about each situation in a clear and fair manner. After problems arise, it’s more difficult to get everyone on board – it’s like trying to create the rules of Monopoly after someone has landed on Free Parking. It’ll be a lot tougher getting the other players to agree that landing on Free Parking means you get the dough from the middle of the board. At that point, you’ll wish you had agreed on the rules at the start.

“Do I Really Need a Buy-Sell Agreement?”

The only way it’s remotely close to being okay to not having a buy-sell agreement is if you’re the only person in your business. If you’re in business with someone else, you need to have this and other corporate governance documents. Even if they’re not required by law, it’s just smart business to have them.

Learn More About Buy-Sell Agreements

Whether you’re in the early stages of creating a new business or you’ve been in business for years, call the Charleston office of business attorney Gem McDowell at 843-284-1021 to discuss how he and his associatess can help you. They work with companies to create tailored buy-sell agreements, capital call agreements, non-disclosure agreements, covenants not to compete and more.

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