Source: https://www.jgschwartzlawblog.com/category/business-formation-planning/
Timestamp: 2019-04-19 00:21:44+00:00

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Business Formation & Planning Category Archives — Pleasanton Business & Commercial Law Blog Published by California Business and Commercial Attorneys — Law Offices of James G. Schwartz, P.C.
The California Transparency in Supply Chains Act (CTSCA), Sen. Bill No. 657 (2009-2010 Reg. Sess.), was signed into law in 2010 and took effect in 2012. It requires manufacturers and retailers doing business in the state of California to “disclose their efforts to eradicate slavery and human trafficking from their direct supply chains.” Id. Additionally, it gives the state Attorney General access to a list of businesses required to make these disclosures. It is important to note at the outset that most manufacturing and retail businesses are not subject to the CTSCA’s disclosure requirements. The law only applies to businesses with “annual worldwide gross receipts” of $100 million or more. Id. Its provisions are important for all California businesses to understand, however, as it is part of a series of laws targeting human trafficking and forced labor.
The federal Victims of Trafficking and Violence Protection Act (VTVPA) of 2000 defines “‘severe forms of trafficking in persons,” in part, as “recruit[ing], harboring, transport[ing], provi[ding], or obtaining…a person for labor or services,” using “force, fraud, or coercion” in order to subject the person to “involuntary servitude,” slavery, or other forms of forced labor. Pub. L. 106-386 § 103(8)(B) (Oct. 28, 2000), 114 Stat. 1470. It defines “involuntary servitude” as a condition in which a person believes that they must perform services in order to avoid “serious harm or physical restraint” or “abuse…of the legal process.” Id. at § 103(5), 114 Stat. 1469.
The Legislature noted in the CTSCA’s preamble that human trafficking is illegal under state, federal, and international law. It further noted that, while various legislatures have passed numerous laws imposing criminal penalties on traffickers and protecting the rights of trafficking victims, few laws have “address[ed] the market for goods and products tainted by slavery and trafficking.” S.B. 657 at § 2(f). Market forces generally drive demand for less-expensive goods, and the Legislature acknowledged that consumers are in the best position to influence the market through purchasing decisions. The goal of the CTSCA is therefore to make information about trafficking and forced labor available to consumers, with the hope that consumers will reward businesses that avoid goods associated with forced labor, or that take direct action to fight human trafficking.
The Office of the Chief Counsel of the Internal Revenue Service (IRS) issued a memorandum late last year addressing a question about the rights of shareholders in a corporation that switched from subchapter S to subchapter C and then switched back to subchapter S. IRS Chief Counsel Memorandum (“IRS Memo”) No. 201446021 (Nov. 14, 2014) (PDF file). C corporations face “double taxation,” in which the corporation pays tax on its net income, and shareholders pay tax on the same money when they receive it as dividends. Under subchapter S of the Internal Revenue Code (IRC), 26 U.S.C. § 1361 et seq., qualifying corporations can elect to be taxed much like a partnership, meaning that shareholders pay taxes directly on a pro rata share of corporate profits. Losing subchapter S status can result in the loss of tax benefits, as demonstrated by the IRS memorandum.
Shareholders in S corporations are liable for taxes on their share of corporate income whether they receive dividends or not. The IRC provides a way for shareholders to obtain this money, on which they have already paid income tax, from the corporation without any additional tax liability. S corporations must maintain an “accumulated adjustments account” (AAA), which consists of corporate profits already taxed to shareholders but not distributed. 26 U.S.C. § 1368(e)(1), 26 C.F.R. § 1.1368-2. The AAA comes into existence with a balance of zero on the first day of a corporation’s first year as an S corporation.
If a corporation’s subchapter S election is revoked, a “post-termination transition period” (PTTP) begins on the date of revocation and ends after one year or on the due date of the tax return for the corporation’s last year as an S corporation, whichever is later. 26 U.S.C. § 1377(b). A corporation can distribute the balance of its AAA to its shareholders during the PTTP as though it still had subchapter S status. 26 U.S.C. § 1371(e). The question presented to the IRS was whether an AAA survives the transition from S to C, then back to S. The IRS concluded that it does not.
The “one and only social responsibility of business,” according to the Nobel Prize-winning economist Milton Friedman, is “to increase its profits so long as it stays within the rules of the game.” Making money is the goal is just about any for-profit business, but a common criticism of much of American business is that acting to serve its own ends often fails to benefit society. Some business owners, in addition to making a profit, might want to work towards goals that have a social, economic, or environmental benefit. Several states, including California, have enacted laws allowing the establishment of “benefit corporations,” also known as “B corporations,” which let businesses balance goals related to “general public benefits” with the duty to maximize returns for shareholders. A nonprofit organization known as B Lab offers private certification for B corporations that maintain certain standards.
A B corporation is a for-profit business entity organized under state law. At least 27 states have enacted B corporation statutes, and another 14 states have pending legislation. The idea of the B corporation has gained popularity in recent years, as consumers who already seek out companies with compatible values have become more aware of issues like corporate responsibility. In some surveys, nearly half of all consumers have stated that they would boycott companies that they believed were not acting in society’s best interest. At the same time, the level of trust that consumers have in corporations is declining, and corporate campaigns aimed at one social issue or another might meet with skepticism as easily as support from consumers.
A lawsuit pitting two of the world’s most famous typeface designers against each other has brought a great deal of attention to an often obscure area of design. Choosing the right typeface has been an important part of marketing one’s business for about as long as printing has existed. Thanks to the internet and advances in digital technology, popular typefaces may generate millions of dollars in licensing fees. The parties in Frere-Jones v. Hoefler, No. 650139/2014, complaint (NY Sup. Ct., NY Co., Jan. 16, 2014), are considered superstars among typeface designers. The plaintiff is seeking $20 million in damages over an allegedly broken promise to share the business 50/50, and many valuable typefaces hang in the balance.
The words “typeface” or “font” refer to a set of symbols, including letters, numbers, and punctuation, with common design elements. Many well-known typefaces, such as Arial and Courier, are included with many computers and software applications. Typefaces are also available to license for use in marketing and other business publications. Licensing fees allow designers the opportunity to continue making money from their creations in much the same way that musicians receive income through royalty payments. Businesses may also commission typefaces for their own exclusive use. Copyright law generally protects typefaces, although trademark law may cover a specific use of a typeface in a logo or other design.
The plaintiff, Tobias Frere-Jones, claims in his complaint that he has designed more than eight hundred fonts during his career, which are used all over the world in more than 145 languages. The defendant, Jonathan Hoefler, is the founder of a New York design firm known as The Hoefler Type Foundry (HTF), which did business under the name Hoefler & Frere-Jones from 1999 until recently. Their firm has created fonts for newspapers like the Wall Street Journal, Barack Obama’s 2008 presidential campaign, and countless logos appearing on televisions, product packaging, and elsewhere. According to a description of the company in Bloomberg Businessweek, the two designers are like rock stars in the design world, with one colleague comparing their business partnership to the musical group Crosby, Stills, Nash & Young.
A federal court ruled in late January 2014 that the acquisition of a physician group by a large hospital system violated § 7 of the Clayton Antitrust Act, 15 U.S.C. § 18, as it left the hospital in control of a substantial majority of the physicians in a relatively small market. Two lawsuits, Saint Alphonsus Medical Center, et al v. St. Luke’s Health System, Ltd., No. 1:12-cv-00560, and Federal Trade Commission, et al v. St. Luke’s Health System, Ltd. et al, No. 1:13-cv-00116, were combined in the U.S. District Court for the District of Idaho. The case is reportedly the first antitrust lawsuit brought by the Federal Trade Commission (FTC) challenging the merger of a hospital and a medical group.
In its Findings of Fact and Conclusions of Law, the court addressed the high cost of healthcare in the U.S. and its relatively low quality as compared to other nations. It noted that St. Luke’s, which operates a statewide hospital system, identified a need to integrate primary care physicians and specialists in order to focus more on patient health. To this end, St. Luke’s began buying independent physician groups in order to create integrated medical teams with compensation based on patient outcomes.
St. Luke’s acquired a physician group, the Saltzer Medical Group, in Nampa, Idaho. After the merger, eighty percent of the primary care physicians in Nampa, a town of about 83,000 people, worked for St. Luke’s. St. Alphonsus Medical Center and other medical groups in the area filed an antitrust lawsuit against St. Luke’s in 2012. The FTC and the state of Idaho filed a similar suit in 2013. They alleged that the merger of St. Luke’s and Saltzer made St. Luke’s the overwhelmingly dominant primary care provider in the Nampa area, which would give it substantial leverage to bargain with health insurance companies and, ultimately, drive up costs.
Forum-selection clauses are very common provisions often contained in commercial contracts. These clauses not only make future litigation on a contract more predictable and allow parties to avoid the threat of hostile foreign laws, judges, and juries, but they also have the capacity to make litigation less expensive. This is especially the case for companies that do business outside their home state and country. Nevertheless, in some cases, despite the existence of these clauses, defendants are oftentimes still sued by plaintiffs in courts that are not the contractually selected forums. That is exactly what happened in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District Court of Texas, a case recently brought all the way to the U.S. Supreme Court and decided on December 3, 2013.
The contract at issue was a subcontract between a general contractor, Virginia-based Atlantic Marine Construction Co. Inc. (“Atlantic”), and its subcontractor, J-Crew Management, Inc. (“J-Crew”), a material and labor supplier based in Texas, for a construction project in Texas. Like many contracts, the subcontract contained a forum-selection clause stating that all disputes under the contract would be litigated in the Circuit Court for the City of Norfolk, Virginia or the U.S. District Court for the Eastern District of Virginia, Norfolk Division. Notably, the contract did not contain a choice-of-law clause. After a payment dispute developed between the parties, J-Crew brought suit against Atlantic. However, J-Crew elected not to follow the terms of the contract and sued Atlantic in the U.S. District Court for the Western District of Texas, where the project was located.
Atlantic thereafter requested that the District Court transfer the litigation to Virginia. The Fifth Circuit performed an analysis using factors relevant to the litigation, including the existence of the forum-selection clause in the contract, to determine the proper venue for the dispute. The court determined that, while a forum-selection clause is a factor identifying the intent of the parties at the time of the contract, the final decision of the proper forum rests with the court. The court thereafter determined that the matter was properly venued in Texas and that Atlantic did not meet its burden of showing a transfer was proper.

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