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Wisconsin Business Law Blog

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How the Tom Brady Arbitration Decision Affects Your Business

Posted in Business Litigation, News and Recent Decisions, Operating a Business

For those of you who follow professional football, you are no doubt aware that Tom Brady, the 4-time Super Bowl winning Quarterback for the New England Patriots, recently came back from a suspension for (allegedly) deflating footballs. But why would I bring this up on our firm’s business law blog? Beside the implications for your fantasy football team, the reason is because Brady’s suspension was in large part a result of something called an arbitration clause in his contract.

Brady is represented by the NFL Player’s Association (the “NFLPA”), a union that advocates on behalf of players (who are employees) through a collective bargaining agreement with the National Football League (the “NFL”). In negotiating some provisions of NFL player contracts, the NFL and NFLPA have agreed to submit all disputes between the players (the employees) and the NFL (the employer), to what is called arbitration. Arbitration is a common way for private parties to resolve any disputes instead of going to court, and the decision to arbitrate is typically agreed upon between the parties in whatever contract governs the parties’ relationship.

To many, arbitration is a preferable method of dispute resolution for a few reasons:

The parties can specifically choose arbitrators to resolve their dispute that are knowledgeable in the particular area of dispute, and avoid the risk of drawing a circuit court or federal court judge without the background in that area;

Arbitration is not necessarily subject to the stringent rules of evidence found in trial court; and

Except in limited circumstances, the decision of the arbitrators is final and binding upon the parties, meaning protracted litigation and appeals are unlikely.

In Tom Brady’s case, he tried arguing that one of those limited circumstances should overturn the arbitration decision against him. United States Courts and Wisconsin Courts have a strong policy of deferring to arbitration decisions and only overturning them in circumstances where it is clear that the decision was corrupted, there was some evident bias, where there is evidence and meaningful procedural misconduct, or where the arbitrator exceeded his or her power at some point in the arbitration.

Brady’s arbitration was unusual because the arbitrator was Roger Goodell, the Commissioner of the NFL. Brady’s argument was that Goodell acted with evident bias, that there was procedural misconduct, and that Goodell exceeded his power as an arbitrator. After having the arbitration decision overturned in circuit court in 2015, in summer 2016, the 2nd Circuit Court of Appeals (in New York) finally ruled against Brady, deciding that the actions of Goodell were not egregious enough to upset the policy of deferring to arbitration decisions. Ultimately, Brady accepted the suspension, foregoing an opportunity to take the case to the United States Supreme Court.


Ok, But What Does This Have to Do With Your Business?

            The Brady case is another illustration that contractually opting for arbitration is preferable for those who prioritize cost-effectiveness in dispute resolution. The law that defers to arbitration in the United States doesn’t just apply to high-profile athletes and employers bringing in billions of dollars in revenue like the Tom Brady and the NFL. Because of this, the likelihood of an arbitration decision being overturned is low for all parties who opt for it to resolve their disputes.

For all businesses, when entering into contracts with third parties like vendors, employees or customers, both parties have incentive to minimize the risks involved in your relationship, many of which are uncertain and unforeseeable. You can even agree how costs will be allocated based upon which party is successful. Where a dispute arises, opting for a cost-effective and time sensitive solution to limit the litigation through arbitration may be a preferred option over going to state or federal court.

Not every contract calls for an arbitration clause, however. Because of US Courts’ policy to not upset arbitration decisions, opting for arbitration to resolve your disputes also means that you will have to live with the consequences of the decisions, even when it goes against you. Accordingly, arbitration should be opted to only in strategic situations, and contracts containing such clauses should be drafted by an attorney who has knowledge of the risks prevalent in your particular industry as well as local contract law. If you have any questions about how you can manage your business’ risks through arbitration clauses, contact one of the business attorneys at Schober Schober & Mitchell, S.C. We would be happy to help.

We’re Headed to Overtime!

Posted in News and Recent Decisions, Operating a Business

Time is runningTime Clock out to plan for some big changes in overtime pay law. Last summer we wrote about a proposed “modernization” in the Department of Labor’s overtime pay rules. The rule has now gone through the required commentary period, and will now be effective December 1, 2016.

Currently, overtime law allows employers to be exempt from paying their salaried employees time and one-half for overtime worked if those employees are in “white-collar” positions and if the employee makes over a certain salary threshold. White-collar positions are defined as executive, administrative, or professional positions (and are defined more specifically by the Department of Labor). Right now, the salary threshold for the exemption is $23,660 per year or more. Starting December 1, 2016, however, the new salary threshold for the exemption will be $47,476 and above.

You may have heard the news that some states are suing to prevent the new rule from going into effect, and that the US House of Representatives just passed a bill to delay the effective date of the law for six months. But, if you were hoping that this would allow for a bit more time to plan for this new rule you are probably out of luck. Unless there is a stay on the new rule by the Supreme Court or if the president decides not to veto the Congress’ bill, both of which are unlikely, the new rule will take effect in just two months.

With that in mind, here are a few possible solutions to help ease the updated rule’s impact on your business:

  • Establish a policy (if you don’t already have one in place) requiring employees to track their time worked during the week and requiring approval before being allowed to work over forty hours in a week.
  • If you have employees who make more than the new salary threshold but don’t meet the “white-collar” position definitions, you could try transitioning the employee into a new role that makes them eligible for the exemption.
  • Lastly, if you have employees that are currently close to this new salary threshold and you know they often work more than 40 hours a week, depending on the situation, it may actually be more economical to give them a raise (or a bonus) to put them above the $47,476 threshold to be eligible for the exemption, and avoid paying 150% their salary for extra time worked.

This new rule change will have a large impact on many employers and employees across the country. With the effective date of December 1st quickly approaching, the business attorneys at Schober Schober & Mitchell S.C. will be happy to help you plan how to best comply with the new law.

Employment Law Update: Wisconsin Court Invalidates Non-Solicitation Agreement

Posted in Labor & Employment, News and Recent Decisions, Noncompete Agreements

In the spirit of Labor Day, I thought both employees and business owners in Wisconsin should know about a recent decision on restrictive covenants from the Wisconsin Court of Appeals. The case is important for you or your business because it affects whether certain employer-employee agreements are actually enforceable.

Many Wisconsin employer-employee relationships are governed by restrictive covenant agreements, which typically come in three forms:

  • A non-competition agreement (an agreement not to start a competing business or work for a competitor),
  • a non-solicitation agreement (an agreement not to hire, or help an employee poach the employer’s current employees or customers), or
  • a confidentiality agreement (an agreement to maintain the secrecy of an employer’s confidential information). We wrote on Confidentiality Agreements earlier this summer.

In many other states, these types of agreements are deemed to be illegal and unenforceable. Wisconsin, however, has a different stance, and by statute, allows employers to restrict an employee from competing against its business and protect its own business provided the agreement is “reasonably necessary for the protection of the employer.” What does that mean? Well, Wisconsin Courts have the ultimate power in deciding what is “reasonable” under the law.


The Wisconsin Court of Appeals Ruling

Most recently, the Wisconsin Court of Appeals ruled on the reasonableness of a non-solicitation agreement, in the case of Manitowoc Company v. Lanning. Lanning, the employee, was an experienced, well-connected engineer for Manitowoc Company, a company that manufacturers construction cranes and food service equipment. After working for Manitowoc Company in its construction crane division for almost 35 years, Lanning left to work for a competitor in the area. During his time with Manitowoc, he and Manitowoc Company had executed a non-solicitation agreement stating that Lanning would not “solicit, induce, or encourage any employee to terminate their employment with Manitowoc” or to take a new job with a competitor, customer or supplier. Manitowoc believed that Lanning was breaching this agreement by allegedly poaching some of their employees through his new employer, so they sued Lanning to enforce the agreement.

The Court of Appeals ruled that the non-solicitation agreement was unenforceable because the agreement allowed Manitowoc to restrict not only its own interests in restricting competition, but also some of its non-competitive interests. The court found that the agreement applied to Lanning’s poaching of any employee of Manitowoc. This could have applied to a high level executive or key employee in the division Lanning worked (which alone, may have been an enforceable restriction) or even an entry level employee or maintenance worker for the Food Service Division, a division in which Lanning never worked. If enforceable, this would have allowed Manitowoc to restrict Lanning’s ability to encourage any employee to find new work even if the termination of that employee would have had little to no impact on Manitowoc’s ability to compete. The Court noted the agreement would have allowed Manitowoc to enforce the restriction on Lanning even if he encouraged a young family friend who worked for Manitowoc to quit his job to pursue graduate studies and take a job as a barista at Starbucks, and that that would be too broad.

Even though Manitowoc is entitled to prevent an employee from poaching employees that actually affected their competitive interests under Wis Stat. 103.465, if any potential application of the agreement is not reasonably necessary, the entire agreement is void. Essentially, if Manitowoc would have drafted their non-solicitation agreement more carefully to avoid this broad application, their agreement would have been enforceable against Lanning.


The Bottom Line

It’s important that these types of agreements are carefully drafted. As this case shows, even if the actions that a former employee are competitive, a poorly drafted provision will not effectively restrict competition of employees and risks making the entire agreement void. Identifying which employees will actually have an impact on an employer’s competitive interests and inserting language in the agreement that limits the restrictions to those individuals is absolutely essential to an effective and enforceable restrictive covenant.

Whether you are an employer or employee subject to a restrictive covenant agreement, or even an employer thinking about entering into these types of agreements with your employees, this case adds some additional complications to the law on restrictive covenants in Wisconsin. With an employee’s or business’ livelihood on the line with these types of agreements, it is well worth it to have your agreement reviewed or drafted by an attorney with experience in the area to ensure it is effective. One of our business attorneys at Schober Schober & Mitchell, S.C. would be happy to help.

Wisconsin Foreclosure Law Aimed to Prevent the Zombie Property Apocalypse

Posted in News and Recent Decisions, Other Legal Issues, Real Estate

I’ve never really gotten on the Zombie movie and TV show bandwagon. I think it’s because they’re just so far-fetched, that it’s difficult for me to buy into the premise. When it comes to the reality of the Zombie Property Apocalypse though, it’s a completely different story. You may have read or heard about “Zombie Properties” in the news, but might not know exactly what the term really means.

Zombie Properties are partially a result of the subprime mortgage crisis that contributed to the housing bubble burst in the late 2000s, as many homeowners and lenders across the state of Wisconsin found themselves in court involved in foreclosure actions. In Wisconsin, a lender must foreclose on a property by bringing a law suit, where it must prove that the borrower defaulted on its mortgage obligations in order to get a judgment for foreclosure. Upon that judgment, the borrower has a specified period of time to redeem the property. Often, however, upon receipt of the foreclosure notice, borrowers just abandon their homes and don’t fight the foreclosure action in court, making it easy for a lender to obtain the foreclosure judgment. Seemingly, this would also make it easy for lenders to sell the property to get their money back from the loan it gave to the borrower. But, sometimes lenders won’t sell the property even if they have a foreclosure judgment. Upon a property being abandoned, properties  sometimes become subject to break-ins and other crime, making them unmarketable for sale, and often are of so little value that the lender has little incentive to incur the costs to sell. The lender will then just leave the property abandoned and dormant, putting the property in a limbo where it is neither dead nor alive; hence the term “zombie property.”

Zombie Properties have a negative effect on the marketability of sellers of other neighborhood homes and also decrease the availability of housing for buyers. In an effort to curb the problem in the state, Wisconsin enacted Act 376 earlier this year. The Act seeks to combat the Zombie Property problem in Wisconsin by making the time period for all foreclosures quicker and by deterring lenders from letting abandoned properties sit unsold for too long.

Shortened Redemption Periods

The first notable change under the new law is the reduction of redemption periods for owners of residential properties subject to foreclosure. In Wisconsin, when a lender wins a judgment of foreclosure against a borrower in default, the borrower has a chance to redeem the property by paying off the mortgage, executing a short sale, giving the lender a deed in lieu of foreclosure, or even filing for bankruptcy. Under the old law, if the lender opted to retain the ability to go after the borrower for any outstanding amount due on the mortgage, the borrower was given a year to redeem the property and to repay the deficiency. Also under the old law, if the lender opted to just have the ability to sell after the redemption period but waived its ability to go after the owner personally for the deficiency on the mortgage, the redemption period for the property was only 6 months. Under the new law, the redemption periods were reduced from 12 months to 6 and from 6 months to 3, for each respective situation. One caveat in the new law is that for this new 3 month redemption period, the owner of the property can extend the redemption period by a maximum of two months by showing that he or she has made a good faith effort to sell the property. The home owner can show a good faith effort by listing the property for sale with a real estate broker.  Though this reduction in redemption time affects all foreclosures on mortgages executed after April 27, 2016, the law reduces the likelihood of a home becoming a “Zombie Property” by reducing the amount of time that abandoned properties remain dormant.


Forced Sale of “Zombie Properties”

            The other notable change in the new Act is a rule that forces the hand of a lender to sell a property within a certain period of time if a court deems the property to be abandoned. Under the prior law, the Wisconsin Supreme Court had interpreted the statute as to require a lender to hold a sheriff’s sale of a property within a “reasonable” time after the expiration of the redemption period. In that ruling, the Wisconsin Supreme Court intended to curb the apparent Zombie Property Apocalypse by forcing lenders to sell abandoned properties after redemption periods expired. Despite the Court’s efforts to combat the problem, the Court’s ruling requiring a lender to sell an abandoned property within a “reasonable time period” was unclear.

The new law removes this lack of clarity by accomplishing two things: First, it requires that either the lender or the municipality where the property is located prove that the property is abandoned. Next, if a court rules that the property is abandoned, the lender must either sell the property or release the mortgage on the property within 12 months of the expiration of the property owner’s redemption period. If the lender does not do so after the expiration of the 12 month period, the municipality where the property is located or even the owner of the property can force the lender to sell the property at a sheriff’s sale. This change on forced sales of abandoned properties applies to foreclosure actions begun after April 27, 2016, without regard to whether the mortgage was executed prior to that date. By deterring lenders from sitting on abandoned properties for long periods of time, this change also reduces the likelihood that a property becomes a “Zombie Property.”

This new foreclosure process in Wisconsin is important to know for both lenders and all owners of real estate. For any questions on how this new law might affect you or your business, contact Schober Schober & Mitchell, S.C. at 262-569-8300 or email me at jmk@schoberlaw.com.

A Post Worth Sharing: How Wisconsin’s Digital Property Act Impacts Your Online Accounts

Posted in News and Recent Decisions, Other Legal Issues, Technology Related Topics

Social MediaIt’s incredible how much time we spend online. I recently read an article that the average person has close to 100 online accounts; whether it be social media accounts like Facebook, Twitter, or Instagram, other applications like Gmail and Amazon, online bank accounts, and yes, even the Pokemon Go app. Generally, posts, emails and other content contained on these accounts are considered to be a user’s “digital property.” Yet, what happens to these accounts when the user passes away or becomes disabled? Do they just disappear? Typically, website account providers require that users “sign” a user agreement upon creating an account, many of which are so long and dense most people don’t even take the time to read them. Often contained in these agreements is a provision that restricts access to the accounts to only the original user. In that case, if the user dies or becomes permanently disabled, the account may continue to exist and remain dormant without anyone having the ability to manage it. Because of the restriction to the original user, the account could not be accessed even if a loved one requested access from the website provider as a personal representative of the user’s estate or as the user’s power of attorney.

Wisconsin’s Digital Property Act

To address this problem, in mid-2016, Wisconsin passed the “Wisconsin Digital Property Act,” (codified in Wisconsin Statutes Chapter 711). The act empowers individuals to decide how their online accounts will be administered by their personal representative or power of attorney upon their death or disability.

One of the most important aspects of the new law is its provision allowing an individual to “opt-in” to have the law govern the individual’s digital property. The law creates a three tiered system for designating who may have access to the user’s digital property contained on the account. First, an individual can elect to use an “online tool.” An online tool is a setting established by a website or app provider like Facebook or Google that allows the user, right from their online account settings, to designate the person who they want to have access to their account in the event of their death of disability. Second, if the website does not have an “online tool”, an individual can designate who can access their account in an estate planning document such as a will or trust. If you opt-in to the law through either option, the website provider must grant your designated person access to the account to manage your digital property. Otherwise, the usually restrictive user agreement governs whether others can access your accounts to manage your digital property.

How the Act Affects You

I checked out Facebook’s online tool, one of the few sites that even has one. They call it a “Legacy Contact.” You can access it by going to Settings>Security>Legacy Contact. There is an option to designate someone to access your account, or alternatively, to have Facebook delete your account upon your death. For other sites that don’t offer such an option, the designation must be done in a will or trust.

The Wisconsin Digital Property Act is another example of the law adapting to our changing society.  Especially for people with many online accounts (Millennials, that’s you), this new law means it might be time to think about starting (or updating) your estate plan. If you have any questions about how to take advantage of the Wisconsin Digital Property Act, consult an attorney at Schober Schober & Mitchell, S.C. We’d be happy to help.

The Secret is Out: Congress Enacts Federal Trade Secret Law to Protect American Businesses

Posted in Business Litigation, Buying, Owning and Selling a Business, Labor & Employment, News and Recent Decisions, Noncompete Agreements, Operating a Business

top secretA long awaited Federal Law on trade secret misappropriation was signed into effect last month. The new law, titled the Federal Defend Trade Secrets Act, or “DTSA”, creates a Federal cause of action for businesses who own trade secrets against individuals who have misappropriated the business’ confidential information. The law creates a uniform definition of
trade secret; a definition that currently differs from state to state, and that has made litigation difficult for businesses with multi-state presences.

Many businesses’ livelihoods depend upon protection of trade secrets. Trade secrets include secret formulas, designs, ideas, and other forms of intellectual property that are the basis for the business’ competitive advantage in their particular market.  While other type of intellectual property like trademarks, patents, or copyrights require publicizing the particular information to mark it as the business’ own property, publicity of a trade secret risks hindering the business’ competitive advantage, giving the business incentive to keep that trade secret, a secret! A couple famous examples of trade secrets that are currently utilized by American companies are Coca-Cola’s formula for Coke, and Google’s search algorithm.

Of course, without protection of trade secret laws, businesses’ risk their trade secrets falling into the wrong hands. Necessarily, employees, independent contractors, and other individuals often become aware of trade secrets when becoming involved with a particular business. Because these individuals could exploit those trade secrets for their own gain, many states, including Wisconsin, have devised their own trade secret misappropriation laws to give businesses a right to recover damages from a person who gained access to the trade secret and then exploited it for his or her own benefit. However, with the increased nationalization (and indeed globalization) of the modern marketplace,  businesses should welcome a uniform definition of trade secret and a uniform forum in Federal Court for litigating trade-secret misappropriation. These changes in the DTSA ease the procedural and financial burdens that accompany state court trade secret litigation.

What this means for your business

One particularly important section in the DTSA is one affecting confidentiality agreements in business contracts, whether they be between the business and its employees, or between the business and independent contractors. The section requires that, as of May 16, 2016, in order for a business to have the full protection of the DTSA, any agreement regarding trade secrets must provide a specific notice to individuals signing those agreements of their rights and protections as whistleblowers in particular types of trade secret cases.

This recent development in trade secret law demonstrates the importance of keeping your business apprised and compliant with the latest changes to the legal landscape. Whether your business’ confidentiality agreements need review, updating, or need to be drafted in the first place, or if you have a former employee or contractor who you believe misappropriated your trade secrets, contact one of our business attorneys at Schober Schober & Mitchell, S.C. to discuss how we can help.

Interns: To Pay or Not to Pay, That is the Question

Posted in Buying, Owning and Selling a Business, Labor & Employment

Many businesses, including law firms and accounting firms, employ interns over the summer. There are a number of reasons such an arrangement works for both sides.

For the business, interns provide bodies that can fill voids in the work staff, since many people center their vacations over the summer. The internship also provides the business with an opportunity to get to know a prospective employee, creating a source of qualified future applicants. For some businesses, interns perform tasks that result in a positive cash flow for the company!

From the intern’s standpoint, the internship provides the coveted “experience” factor which enhances one’s resume. It provides a look into a company to see the company’s culture and determine whether it is a place the intern may be interested in working after graduation. For paid interns, it provides needed spending money, helping loosed the belt on a typically tight student budget.

DOL Position

Balancing the above factors has resulted in a mixed bag as far as internships are concerned: some are paid and some are unpaid. The real question here though is, “how does the government look at this? The Department of Labor leans toward paid internships. The DOL has developed a 6 part test:

The following six criteria must be applied when making this determination:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern.  This exclusion from the definition of employment is necessarily quite narrow because the FLSA’s definition of “employ” is very broad.

Final Thoughts

In a second circuit court of appeals case from 2015 (Glatt et al. v. Fox Searchlight Pictures et al.), the court ignored the above 6 part test and instead looked at “which party was the primairy beneficiary of the arrangement.”

With this matter now clouded, it would definitely pay to consult with a knowledgable attorney as to how to treat the compensation issue, as far as interns are concerned. We, at Schober Schober & Mitchell, S. C. would be glad to assist with any such problems.

Buyer Beware? Wisconsin Court says “Not So Fast!”

Posted in Other Legal Issues, Real Estate

Spring is almost here, and that means real estate sales in Wisconsin will soon be picking up! With that in mind, a recent Wisconsin Court of Appeals decision may have a large impact on future Wisconsin real estate transactions. In Fricano v. Bank of America, the Wisconsin Court of Appeals found that a buyer of a home had a valid fraudulent misrepresentation claim against a seller despite the fact that their purchase contract contained an “as-is” clause.

“As-is Clause”

“As-is” clauses are frequently used in real estate transactions to allow a seller to avoid liability coming from a buyer, usually when hidden defects are discovered after the sale closes. However, in Fricano, the sales contract also had a clause that stated the seller had “little to no direct knowledge about the condition of the property,” when in fact, the evidence showed that the seller had knowledge of a severe mold problem that had resulted from flooding of the home. The Wisconsin Court of Appeals found that where there is a deceptive affirmative representation, like the one the seller made in Fricano, an “as-is” clause cannot preclude the seller’s liability for fraudulent misrepresentation. Where there is evidence that a seller knew of a material adverse condition, it has a duty to disclose that to the potential buyer. The case is now being appealed to the Wisconsin Supreme Court.

This case demonstrates the importance of having well-drafted real estate documents and effective legal representation when you are buying or selling property. Whether you’re looking to buy or sell, consult an attorney at Schober Schober & Mitchell, S.C. to ensure your transaction goes smoothly.

This post is being submitted with the substantial research and writing help of Jeremy Klang, 3rd year senior at Marquette University Law School.

Fifth Circuit Rules that a C-Corporation’s S-Corp Affiliate’s Rents Cannot be Classified as Passive Income (Section 469)

Posted in Business Formation, News and Recent Decisions, Operating a Business, Real Estate, Tax

A Federal Appeals Court ruled earlier this month that an S-Corporation’s rental income from a leairs[1]se agreement with a C-Corporation with entirely common ownership with the S-Corp, could not be classified as passive activity income, and therefore could not offset the individual’s passive activity losses.

Internal Revenue Code section 469 was passed in the 1980s to close a tax code loophole that allowed investors to invest in real estate ventures that were likely to incur heavy losses in order to offset an individual’s income. The section requires that for trades or businesses in which an individual does not materially participate, the income or loss from that activity must be classified as “passive” and therefore can only be offset against income or loss from other “passive activities.” The section specifically lists individuals, estates, trusts, closely held C corporations, and personal service corporations as taxpayers that are subject to the passive activity re-characterization rule. The section does not, however, list S-Corporations as a taxpayer that is subject to this rule.

Where an individual has losses from passive activities in a particular year, the individual can only offset that against passive income, or else be forced to roll over the losses into future years in which the individual has passive income. Some individuals had attempted to “create” passive income by engaging in what is known as “self-renting.” Self-renting occurs where a business owner creates another legal entity that the owner also owns, transfers title of business real estate to that entity, and then leases back the business real estate to the originally owned business. This way, there is rental income, (which is always classified as passive) that passes through to the individual, who can then offset her passive losses with that passive income. The IRS prohibited this practice in one of its regulations, stating that where this type of arrangement is present, the rents are then changed back from passive income, to non-passive income, thereby disallowing the offset against passive losses.

While the self-renting practice has been prohibited in the IRS regulations since the enactment of section 469, there has been no binding judicial authority that has ruled that the rule applies where an S-Corporation is the taxpayer receiving the rental income. The IRS has released some memos on the subject, which only evidence the opinion of the IRS, and not the binding interpretation of a neutral judge. In Williams v. CIR, the taxpayers were owners of both a C-Corporation, the lessee, and an S-Corporation, the lessor. They argued that because S-Corporations are not listed as taxpayers subject to section 469, and because S-Corporations do not pay taxes as an entity, the self-renting rule did not apply. The Fifth Circuit Court of Appeals rejected that argument and upheld an additional IRS regulation that stated that S-Corporations are subject to all section 469 rules (including the self-renting rule). This rule gives significant weight to the self-rental rule as it relates to S-Corporations, and all other pass-through entities (LLC and Partnerships).

Schober Schober and Mitchell stays apprised of updates and changes in tax laws as they relate to you and your business. Please contact us for advice on the tax status of your business or structure and for any of your other business needs.

This article was contributed by Jeremy Klang, a third year law student at Marquette University Law School and law clerk for Thomas Schober.

Crowdfunding Regulations Finally Here!

Posted in Business Formation, Operating a Business

The SEC released its long awaited Final Crowdfunding regulations in late 2015. We wrote on this topic in the Summer of 2014, when Wisconsin had adopted crowdfunding rules that governed only the State of Wisconsin. Under those state laws, while Wisconsin businesses could rely on the SEC’s intrastate exemption from filing with the SEC when engaging in crowdfunding, a Wisconsin business wishing to crowdfund could not do so outside of the state. Now, however, the SEC has made its regulations final, allowing small businesses everywhere to crowdfund not only within their individual state, but also outside of their state. The SEC’s rule also overrules Wisconsin’s crowdfunding rules, so that Wisconsin law can no longer be relied on for crowdfunding offerings.

To be eligible for a crowdfunding public offering under the new SEC rules, your business must satisfy a few conditions:

  • Your business must be a what is called a “non-reporting company”; that is that your company cannot currently be required to file any financial statements with the Securities and Exchange Commission;
  • must be looking to raise less than $1 million over a 12-month period; and
  • must be willing and able to ensure that anyone who purchases equity in your company does not sell their stock in the company for more than one year.

All crowdfunding transactions must also be done through an internet portal intermediary that is registered with the SEC (such as gofundme.com). For those of you who are not only interested in crowdfunding for your business but also interested in investing yourself, the SEC’s rules also regulate how much investors can invest in a company depending on the individual’s income and/or net worth. All individual investors must verify their income and net worth through the intermediary site, so the site must have sufficient mechanisms to ensure that investors are honestly stating their income and/or net worth. The limits are as follows:

If an individual has an income or net worth of under $100,000, the individual can only invest a maximum of the greater of $2,000 or 5% of their annual income or net worth.

If an investor’s net worth and annual income is greater than $100,000, then the maximum an individual can invest is 10% of the lower number between the individual’s net worth and their annual income. For taking into account net worth, the value of one’s personal residence in not taken into account. Additionally, during a 12 month period, no individual investor can invest in more than $100,000 of crowdfunding offerings.

Companies must also disclose certain information to the internet portal so that the portal can provide investors with sufficient information for them to make an intelligent investment. A company offering a crowdfunding opportunity must disclose the following:

  • The price to the public of securities or the method for determining the price of the securities;
  • The target amount your business wishes to raise from the offering;
  • A discussion of the company’s financial condition;
  • If the offering seeks to raise $100,000 or less, the company is only required to provide a financial statement certified to be true and accurate by the principal officer of the company. If the offering seeks to raise more than $100,000, but not more than $500,000, financial statements must be reviewed by an independent accountant. If the offering seeks to raise more than $500,000, but not more than the $1 million cap, the company’s financial statements must be audited by an independent auditor.
  • A description of the business and what the business will use the proceeds for;
  • Information about officers and directors, and also owners of 20% or more of the company;
  • Certain related-party transactions;
  • Companies relying on the crowdfunding exemption are also required to file an annual report with the SEC and provide it to investors.

The crowdfunding exemption offers small businesses an opportunity to raise capital that many small businesses could otherwise not afford due to the complex and costly initial public offering process required by the SEC. However, if your business is interested in crowdfunding, there are still necessary documents and preparation required before you can do so. If you or your business are interested in taking advantage of this new and exciting crowdfunding opportunity, contact Schober Schober & Mitchell, so we can assist you in properly structuring your offering!

[This article is being provided by Jeremy Klang, senior Law Student at Marquette University Law School and Clerk at Schober Schober & Mitchell, S.C.]