Overview of the Professional Entity

In Michigan, persons in a learned profession requiring a license or other legal authorization to practice, including but not limited to, physicians, dentists, attorneys, and certified public accountants, must incorporate as a professional entity rather than a general business entity.  The choice of professional entity will depend on a variety of factors, including tax considerations.  The most popular professional entity choices are the Professional Limited Liability Company (“PLC” or “PLLC”) and the Professional Services Corporation (“PC”).

Unlike general business entities, there are certain restrictions on Professional Entities.  Both Professional Corporations and Professional Limited Liability Companies are required to operate for the specific purpose of providing one or more professional services.

Generally, all shareholders of the Professional Corporation or members or managers of the Professional Limited Liability must be licensed persons in one or more of the professional services the Professional Entity renders. However, persons in certain professions must comply with additional requirements when structuring their professional entity.  For example, all of the members or shareholders of certain health and legal professional entities must hold the same professional license.

A shareholder or member that wants to transfer or sell his or her shares or membership interests cannot do so except to another licensed person who is eligible to be a member of the PC or PLC.

Another important aspect of the professional entity is that it provides protection to its shareholders and members from personal liability for the PLC or PC’s acts, debts or other obligations.  However, the professional shareholder or member may still be personally liable under common law for his or her negligence or malpractice, or the malpractice of others under the member or shareholder’s direct supervision and control.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

What is a Franchise?

The sales and operation of franchises are heavily regulated under both federal and state law, but do you know what makes the business relationship between two companies a franchise?

There are three criteria that establish whether a contract is a franchise agreement.  All three criteria must be present for there to be a franchise relationship:

1.    The franchisor grants the franchisee the right to engage in a business of offering goods or services under a marketing plan or system prescribed by a franchisor. This requirement is satisfied if the franchisor prescribes in a substantial way how the franchisee must operate its business.  For example, McDonald’s franchisees operate their restaurants in the same way. A Big Mac is the same from one store to the next.

2.    The franchisor grants the franchisee the right to use a trademark, service mark, tradename, logo or other symbol designating the franchisor and its affiliates.  The McDonald’s golden arches are a well-known example.

3.    The franchisee is required to pay a franchise fee, either directly or indirectly.  This is typically an up-front fee and/or monthly royalty payments.  However, it can include “indirect franchise fees” when the franchisee is required to pay other amounts to the franchisor, such as being forced to buy goods in excess of a bona fide wholesale price, being forced to buy products beyond the franchisee’s needs, or being forced to buy tickets to events.

Whether the business relationship between two companies constitutes a franchise often becomes the focus of the parties’ attention when there is a dispute.  There can be serious consequences for a company that is determined to be a franchisor if it failed to comply with the complex federal and state franchise laws.

Before two companies enter into a business relationship, each side should consider whether the relationship constitutes a franchise agreement.  If it is a franchise agreement, then the parties need to consult with an attorney that is familiar with franchise laws.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm. Click here to view his professional resume.

Michigan Leads the Way With a New Corporate Form – The L3C

As of January 2009, Michigan is one of the few states to offer a new form of business entity.  If your business is for profit, but its primary focus is to accomplish socially beneficial acts, you may want to organize as a low profit limited liability, or an L3C.

The L3C is structured like any other limited liability company, with all the flexibility and advantages of a normal limited liability company, including being treated as a “pass through” entity for federal tax purposes.  However, the L3C must satisfy certain criteria to prove that its main goal is not to make a profit.

L3C’s are designed to qualify as a recipient of Program-Related Investments, or PRIs.  PRIs are IRS-sanctioned investments made by private foundations to support a charitable project or activity.  As a result of their charitable purpose, PRIs receive special treatment under federal tax law.

Historically, foundations have been reluctant to invest in for-profit businesses through the use of PRIs because of complex and costly IRS requirements to do so.  The L3C removes many of these hurdles and costs.

Hopefully, the L3C will make it easier for foundations to invest in Michigan’s community and economic revitalization.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm. Click here to view her professional resume.

Leaders tout Entrepreneurship | Detroit Free Press

The Detroit Free Press (Freep.com) has been following all of the developments at the National Summit this week in Detroit and posting the latest to their blog (See excerpt below).  This morning the hot topic was the recent rise in entrepreneurship.

It is essential that new businesses have all of their ducks in a row so that they are protected personally from the debts and liabilities of their new ventures, they take the best advantage of tax laws, and so that they are prepared for future success.

We advise contacting an attorney, as opposed to going it alone.  Demorest Law Firm, PLLC provides these services and can help you start your new company, and then help it to grow.

Excerpt from Freep.com Blog

11:42 a.m. | According to several business and academic leaders at the summit this morning, now is the time to start that business you’ve always dreamed about.

“Entrepreneurism is going to be the key to the economic recovery not just in this country but in the world,” James Turley, CEO of Ernst & Young LLP, declared at a town hall this morning.

Nearly a decade after the dot com bust, becoming your own boss is hip again.

Mary Sue Coleman, president of the University of Michigan, boasted to the audience that 15% or 6,000 of the students recently admitted to the school had started a business during high school.

“We’re in the perfect time in the history of this country to encourage this,” she said. “Let them loose.”

U-M now provides 100 courses that are in some way engaged in entrepreneurism, Coleman said.

What exactly does being entrepreneurial mean?

One panelist, Eva Chen, CEO of Internet security firm Trend Micro Inc., had the perfect Twitter-like response: “Using limited resources to create something that you want.”

By Katherine Yung

via Leader: Ford ready to compete | Freep.com | Detroit Free Press.