Category Archives: Private Equity

A Summary of the 2013 Texas Legislature’s Impact On Business Laws In Texas

The Texas legislature’s 2013 regular session produced a number of bills that amend or alter laws affecting businesses in Texas.  Below is a summary of key bills passed by this legislature that affect Texas businesses, some of which will be addressed in more detail in later posts.  There is also a list of other bills of interest at the end of the discussion.

Senate Bill 847: Amendments to the Texas Business Organization Code

SB 847 takes effect September 1, 2013, and made a number of amendments to the Business Organizations Code.  Below is a list of amendments in this bill:

  1. Removed the requirement that restated certificates of formation that make amendments identify by reference or description each added, altered, or deleted provision.
  2. Clarified that partnerships, limited partnerships, and limited liability companies have the right to limit or eliminate the liability of a governing person of the organization to the same extent as a corporation.
  3. Added a requirement that limited partnerships send written notice of the winding up to each known claimant against the entity during the winding up process.
  4. Added the authority for a limited liability company to grant rights to a person, including a person who is not a party to the agreement, in the company agreement.
  5. Added the authority for a partnership to grant rights to a person, including a person who is not a party to the agreement, in the partnership agreement.
  6. Clarified a number of rights for series LLC’s including:
    1. the right of a series to acquire and sell title to assets;
    2. exercise any power or privilege appropriate to the conduct of the activities of the series;
    3. the rights and powers of the governing persons and officers of a series; and
    4. specified that a series is not a separate domestic entity or organization.

     

Senate Bill 849: Social Purpose Corporations

SB 849 takes effect September 1, 2013, and authorizes for-profit corporations to include a social purpose in its certificate of formation.  The bill also states that directors and officers are entitled to consider social purposes identified in the certificate of formation when making business decisions.

Previously for-profit corporations and their directors were (presumably) required to make business decisions with the primary goal of increasing profit and shareholder value.  This bill follows a growing national trend that recognizes corporations can play an important role in promoting and supporting social issues that are not necessarily in contravention of their for-profit purposes.  It also recognizes that there is a growing social entrepreneurship trend through which entrepreneur’s attempt to affect change in a social purpose through business.

The permitted social purposes include promoting one or more positive impacts on society or the environment or minimizing or or more adverse impacts on society or the environment.

 

Senate Bill 953: Uniform Trade Secrets Act

SB 953 represents a significant addition to Texas law protecting trade secrets and is effective September 1, 2013.  This is a significant bill that will be addressed in detail in a later post here, but below is a summary of the bill.  Texas has not had a central law governing the protection of trade secrets prior to enactment of this bill.

SB 953 adopts a modified version of the Uniform Trade Secrets Act to provide consistent and predictable statutory language for trade secret protection.  The bill updates the definition of “trade secret” to reflect current business practices and technologies and also clarifies that certain business practices do not constitute misappropriation of trade secrets.  It provides easily applied standards for injunctive relief along with an avenue for recovering attorney’s fees against willful and malicious misappropriators.

 

Senate Bill 699: Modification to Assumed Name Certificate Requirements

SB 699, effective September 1, 2013, eliminates the requirement that an assumed name certificate include the registered office information for the filing entity because that information is included in the information on the original filing certificate.  The bill also clarifies the information required on the assumed name certificate regarding an entity’s principal office.

 

House Bill 1624: Naming Series LLC

HB 1624 provides that an assumed name certificate be filed for each series in a series LLC under the assumed name statutory framework.  This bill is effective September 1, 2013.

 

Other Bills of Interest

HB 194: Adds disabled veterans to the definition of economically disadvantaged persons in determining whether a business is a historically underutilized business for purposes of state contracting.  The bill also includes a requirement for the Comptroller to provide goals for increasing awards to qualifying disabled veteran-owned businesses.

HB 500:  Provides small business franchise tax exemption levels, across the board franchise tax reductions for 2014 and 2015 (with Comptroller’s certification), as well as a number of industry specific exemptions.  The bill also provides for a deduction of relocation costs for businesses moving to Texas. Effective January 1, 2014.

HB 1979: This bill addresses the right of a creditor and obligor to define the method of computing annual interest and the use of compound interest or payment-in-kind interest in commercial loan transactions.  Effective September 1, 2013.

HB 2918: Amends the current durable power of attorney form to change it from an opt-out type form to an opt-in type form.  Effective January 1, 2014.

HB 3714: Establishes the Office of Small Business Assistance Advisory Task Force to advise and assist the Governor, Lieutenant Governor, and Speak of the House by providing information in plain language to the public on issues related to small businesses. The bill also establishes reporting requirements.

SB 230: Addresses and modifies certain fund transfers that were removed from UCC 4A because of changes to definitions in the Electronic Fund Transfer Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Effective September 1, 2013.

SB 474: Modifies information required in financing statements and other secured transaction records to comply with changes to forms approved by the International Association of Commercial Administrators.  Effective July 1, 2013.

Obama Wins: What Does this Mean For the Business Owner?

This isn’t a political post and it isn’t just about President Obama’s re-election.  It’s also about the Republicans retaining control of the House and the Democrats retaining control of the Senate.  The net result is more of the same, so what does that mean for the business owner?

Now Is The Time To Sell

Between now and December 31st is prime time to sell your business or an interest in your business.  Why?  8.8%.

As things currently stand, the healthcare law’s 3.8% Medicare surtax on dividends, interest, and net capital gains goes into effect next year.  In addition, the top capital gains rate is set to increase from 15% to 20%.  This means a net loss to you of 8.8% in income taxes by selling next year instead of this year.

This doesn’t leave much time to realize those savings if you haven’t already started the process.

Now is this set in stone?  No.  The likely scenario isn’t as stark as this.  The healthcare surtax isn’t going anywhere but my guess is that the lame duck Congress will kick the 5% capital gains increase down the road along with the automatic spending cuts.  So come January 1st, you only lose the 3.8% surtax.

However, at some point around mid-year or possibly at the end of the year, that 5% will capital gains tax increase will come into effect.  There is just not enough interest to prevent that from happening given the current fiscal situation.

Finding a buyer often isn’t a quick or easy process.  My advice: if you are looking at selling your business or even a small interest in a company, now is the time to start.  The quicker you close the deal, the less of a hit you will take.

The S-Corp May Not Be All You Thought It Was

One of the biggest attractions, especially for toilers or people who work for their business in addition to owning it, is the S-Corp’s ability to limit the self-employment tax impact.  As long as the toiler receives a reasonable salary, the S-Corp can distribute the excess profit via dividends without incurring self-employment taxes.

At some point there will be a deal between Democrats and Republicans to resolve the “fiscal cliff” whether it occurs in the next couple of months or sometime next year.  The resolution will likely involve a compromise that raises taxes and cuts spending.  This S-Corp “loophole” is a prime target for both sides for a few of reasons.  The subject has been on the radar for years so it is ripe.  It only affects companies that qualify for S-status which means they tend to be small private companies, not large public companies.  It’s also inconsistent with the partnership treatment for pass through LLC interests although the intent of that section is to allow partnership treatment in a corporate structure.

My advice: limiting self-employment taxes should be a very small consideration in evaluating S-Corp’s during the choice of entity analysis for new ventures.  It’s easy to get in but hard to get out.  Legally, S-corps are easy to convert but the tax impact can be very complex and require re-characterization of transactions over years.  On the other hand, electing and converting to S-corp status for an existing company is a relatively simple process.  Wait for a resolution to the “fiscal cliff” issues before making that decision or consider an alternative structure.