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

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.

5 Ways A Business Lawyer Helps Grow And Protect Your Business

Business law, or corporate law, is the application of law to the business world. The two are completely intertwined at all times. For that reason, as a business owner you should plan to work closely with a business attorney throughout the life of your company, right from the very start. Here are 5 common ways a business lawyer can help you and your business.

1. A business lawyer will help you create your business.

This is called “choice of entity” and it’s a crucial step every business owner must take. Should you be an LLC? A corporation? If so, what kind? Both provide shelter from creditors to your personal assets, but the two entities are very different from one another. Furthermore, there are four ways to structure limited liability companies in South Carolina, and numerous ways to structure corporations.

An experienced business attorney can advise you on which entity is right for you and can tell you the potential pitfalls that you won’t read about on LegalZoom or other DIY sites.

2. A business lawyer can draft your corporate governance documents.

Corporate governance documents describe, govern and constrain activity of the business owners. They “set the rules” and tell everyone involved how things should go and what should happen when a particular occasion arises. They are unique to each business.

You absolutely should have these documents if your company has two or more owners/shareholders/partners (these terms will be used interchangeably through the rest of this article, though they are technically different). Here are some you might consider having:

Bylaws detail how the business is structured and give information on the board of directors, the responsibilities of the owners and more.

An Operating Agreement details how much each member owns in the company, how profits and losses will be allocated, what each member’s responsibilities are, how the company should be managed and more.

A Buy-Sell Agreement is essentially a “pre-nup” for the company. This document lays out what will happen in the event that one of the owners or shareholders dies, becomes ill, simply stops working, etc.

A Capital Call Agreement spells out what happens when the company needs to raise money and what happens when one of the partners can’t come up with their part. A partner who can’t contribute equally may lose voting rights, give up shares, or forego distributions, for example.

Non disclosure agreements (NDAs) and covenants not to compete are intended to protect your company against a former owner or employee running off with your trade secrets and your best customers, thereby hurting your business.

Question: Can you DIY? Should you?
Google these documents and you’ll find plenty of examples and templates you can download and fill in yourself – but don’t do it! Those documents might have been created in a different state, or before a significant change in the law, and they may not be valid. They were certainly drafted for a different business, for different people with different needs from yours. No two businesses are alike, and no two sets of governance documents should be alike.

Question: When is the best time to get these documents?
The best time to draft these documents is at the birth of your new company, when it’s likely that you’ll come up with documents that are fair to all parties. Imagine three years down the road, when one of your partners can’t come up with the money for a capital call – do you think they will want to sign a capital call agreement penalizing non-payment with a high rate of interest? Probably not. To avoid situations like that, it’s best to do it as early as possible, when all the owners feel goodwill towards each other. However, if you’re years into your business and still don’t have them, get something drafted now. Every single company faces issues that these documents address, so it’s not a matter of if but of when something will happen.

3. A business lawyer advises you on the best course of action and helps protect you from potential problems.

A lawyer is often referred to as “attorney and counselor-at-law.” A lawyer both applies the law and provides counsel on it. During a company’s growth, a business lawyer will be most helpful providing counsel on various issues that pertain to the law in order to deal with problems as they arise or, better yet, prevent them in the first place.

Contracts are the area in which you’ll probably need the most regular help from an attorney. As a business owner, you should have a lawyer familiar with your business draft your contracts and look over contracts given to you before signing. Other issues attorneys can help with may include long-range planning (see #4 on succession planning below), drafting terms & conditions for a website, advising on letters received, and, in the case of an attorney experienced in real estate law like Gem McDowell, rezoning or buying and selling land, to name just a few.

4. A business lawyer helps you with succession planning.

Succession planning allows all partners to come to an agreement about what will happen when one of the partners retires and leaves the company. Succession planning usually happens when one partner starts thinking about retirement.

5. A business lawyer represents you in litigation.

Working with a lawyer in the four situations above should hopefully reduce the likelihood that you’ll ever be involved in a lawsuit – and that’s really the point. Litigation is costly, lengthy and stressful for all parties. By being proactive and working with a business attorney from Day 1, you can sidestep the landmines that could otherwise destroy your business.

Learn more about how a business lawyer can help your business

Contact South Carolina attorney Gem McDowell and his associatess at their Charleston office at 843-284-1021 to discuss your company and its legal needs. Whether you’re thinking of starting a new entity or you’ve been running a thriving business for decades, it’s never too late to get legal advice from lawyers with experience in corporate law.

The Unintended Consequences of Bad Estate Planning

We always advise people to get estate planning done. If you don’t decide what will happen to your assets upon your death, the state will decide for you.

But sometimes, despite best intentions, an estate plan turns out to cause unforeseen problems. That can happen with bad planning, which is sometimes worse than no planning at all. To illustrate this point, let me tell you a story.

What John & Nancy Planned For

Imagine a man named John in the following situation. John’s wife of 50 years, Nancy, recently died. John and Nancy thought they were being smart when they got estate planning done many years ago – and they were. But it turned out to be bad planning, because it didn’t take into account the fact that laws, people, and family dynamics change over time.

When Nancy and John sat down and talked about what they wanted to happen to her estate when she died, they agreed that she would split the estate up: part of her assets would go to their children, and part would go to her husband.

First you need to know that the government allows an unlimited amount of assets to be left to a spouse tax-free upon death. But the government doesn’t allow you to leave an unlimited amount tax-free to heirs or anybody else. The amount it allows you to leave tax-free is called the “applicable exclusion amount” (formerly called the “unified credit”).

So together Nancy and John decided that they would create a trust, and into that trust would go the full amount of money up to the amount of the applicable exclusion amount, so that her children could get that money and not have to pay taxes on it. The key is that here, she didn’t specify the exact dollar amount to go into the trust, she only said that the trust was to be filled to the point of whatever the current exclusion amount was. Her husband was named as trustee to control the trust during his lifetime, and the full value of the trust would go to the children upon his death.

What was left over from her estate after the trust was “filled up” would go to John. No matter what amount that was, it would be tax-free, because they were married.

So far so good. This kind of estate planning is pretty common, and it’s a smart way to maximize the amount of money you pass on to future generations while reducing the amount of taxes paid to the government. It works out well – but not all time.

When John and Nancy made this plan, it seemed great. The applicable exclusion amount at that time was $600,000, which was the limit for many years. Her estate was worth a total of $2 million, so during the planning phase, they expected that upon her death, $600,000 would go into the trust for the children, of which John would be the trustee. The other $1.4 million would go straight to John, including her half of the house they owned together.

Had she died soon after completing the plan, it would have worked out just the way they intended. But that didn’t happen.

What John & Nancy Got Instead

By the time Nancy died in early 2015, the applicable exclusion amount was not $600,000, but $5.43 million – a much larger amount. The full value of her estate went into the trust for the children, and her husband got nothing free and clear. Not even the house.

This was not what Nancy intended. Because of bad planning, everyone is in a difficult situation. Not only are they dealing with the grief of having lost their mother and wife, the family members now have to deal with the consequences of the faulty estate planning.

As the trustee of a trust that will go to the kids upon his death, the wishes of the father are now at direct odds with the wishes of the children. John, who had no substantial assets of his own and was counting on having some of his wife’s estate when she died (which is exactly what they thought was going to happen), wants money from the trust to live on. The kids want the trust to stay as it is, so they get the full value amount upon John’s death.

John has some limited access to the assets of the trust during his lifetime. That is, he can get his hands on some of the money, but not all of it. He’s entitled to the income from that trust during his lifetime; plus a total of 5% of the value of the trust, or $5,000, whichever is greater; plus expenses related to his health, education, maintenance and support (sometimes abbreviated “HEMS”). He would ask the trustee – in this case, himself – for the money to spend on those things. If they were considered legitimate expenses, he could spend it.

But here’s the rub: whether something counts as a legitimate or not varies from person to person. The IRS determines this, and they base that on someone’s standard of living. Donald Trump’s expenses considered “legitimate” would be substantially different from those of someone who makes $30,000 per year and lives very modestly. And if the trustee (John) disagrees with the future beneficiaries (the kids) over what’s legitimate, then they have to go to court.

So if, for example, John says he needs to use money from the trust to go to France for a year because that’s necessary for his maintenance, and the children disagree, they have to sue him.

And if the father wants to sell the house to move somewhere else, he can’t do it easily because it’s not his free and clear – half of the house is in the trust. If he goes ahead and sells the house anyway, it’s likely that his children will sue him.

As you can see, the situation is very complicated and it’s begging for lawsuits.

You don’t want to be in this situation. But how can you avoid it?

Avoid This Situation With Good Estate Planning

Remember that estate planning should be based on you, your unique situation and your family. It should not be based on whatever pre-made forms an attorney has ready. It must be about you.

1. Know that you have options.

Nancy and John could have decided to do something else instead. For example, Nancy could have left everything to John, and he could have used a “disclaimer” to disclaim anything he didn’t want, and that would go into the trust for the children. That’s just one option, but there are others. The point is, you don’t have to go with the first estate planning option presented to you if it’s not what’s best for you and your family.

2. Ask a lot of questions.

You should ask yourself what you want to happen with your estate when you die, and you may include your family in those discussions if you wish. You should ask questions before choosing an attorney to help you draw up these documents. Has he done these kinds of things before? What examples can she give you of the most complicated estate planning she has done?

Ask “what if” questions about the plans you’ve created.

• What if by the time I die, the applicable exclusion amount is $20 million? What if it’s $0? What will happen to my estate and my family then?
• What if my spouse remarries after my death? Will any of my money go to the new spouse’s children?
• What if one of my children does something I disapprove of after I die, do they still inherit a portion of my estate? Can I include something in my will to prevent that from happening?

An attorney experienced in complex estate planning will be able to answer these questions clearly and will be able to pose additional questions you hadn’t thought of.

3. Review your plan periodically with an attorney.

As you’ve seen, family dynamics can be complicated, especially when children from different marriages are in the picture, and things change. The amount excluded from estate tax is not set in stone, but is determined by Congress and therefore can change in any given year. That alone could have a huge impact on how your current estate plan will play out in the real world.

Again, ask questions.

• With the way things are now, will my original intention be honored?
• Has anything significant happened in my situation (births, deaths, estrangements with family members) to affect my original intentions?
• What changes must I make to ensure that my estate is distributed the way I want?

Learn More About Personalized Estate Planning

So what about your estate plan? Is it customized to you? Would it honor your intentions? If the answer is no, or you’re not sure, contact South Carolina attorney Gem McDowell and his associatess at 843-284-1021 to discuss your own estate planning needs.

What to Know About Estate Taxes for Estate Planning

An estate tax is levied on an estate of a certain value. Because the tax rate is so high – up to 40% – it’s smart to do what you can through estate planning to reduce or eliminate the likelihood that your estate will be taxed at your death.

If someone dies in the year 2015 and their estate is worth less than $5.34 million, it will not be subject to estate taxes. If they die and their estate is worth $5.34 or more, it may or may not be subject to estate tax.

Here are some other things to know about estate tax.

Spouses and estate tax

Estate tax usually doesn’t apply if you are passing on your estate to your spouse. This is “usually” because in some cases, if your spouse is not a U.S. citizen, different rules apply. If your spouse is not a U.S. citizen, you will want to speak to an experienced estate planning attorney like Gem McDowell.

You and your spouse can combine your separate amounts together so you can freely pass $10.68 million to your heirs. And spouses can “share” the amount so as long as the couple’s combined assets are $10.68 million or less, they will not be subject to estate tax.

Remember that this amount can change so always check for the most current value when making your estate planning documents.

An experienced tax and estate planning attorney in Mt. Pleasant

This is a very simplified overview of estate taxes. To discuss your own estate, and how to best handle it to reduce or avoid taxes, contact Gem McDowell at his Mount Pleasant, SC office at (843) 284-1021. Gem is an estate planning attorney with experience in tax law, and he can work with you to develop an estate plan to meet your goals. Call today.

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