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Regulatory Bear Trap
Be sure your marketing plan doesn’t run afoul of government regulations.
Joe was a successful entrepreneur. He ran a small business out of his home, connecting businesses that had too much inventory with people who needed the excess product. After finding someone who needed product Joe knew was available, he would purchase the items and have them shipped directly to his buyer, to whom he had already sold them for a small profit.
One day Joe found a hotel that had an excess of carpet it would use to patch areas that had been damaged or stained. The hotel was changing its décor, and no longer needed the excess carpet. Over the years, Joe had compiled a list of fax numbers for contractors near where the hotel was located. Looking for potential buyers, he sent out a mass fax advertising campaign telling the contractors that he had some high-quality carpet if they were interested in purchasing it at a discount.
Unfortunately for Joe, one of his faxes made its way to an attorney who promptly sued him for violating the federal Telephone Consumer Protection Act. The TCPA prohibits the sending of unsolicited faxes, and sets penalties as high as $1,500 per fax. Joe had sent thousands of these kinds of faxes, and was looking at potentially millions of dollars in fines if the court certified a class action lawsuit. Luckily, we were able to negotiate a settlement that resulted in only a payment of a few thousand dollars—much more manageable for his business.
For better or worse, we live in a highly regulated world. And more often than not, most business owners do not even know what regulations are out there, let alone how to avoid them. Next time you are thinking of making a change to your business—for example, a new marketing campaign—give us a call to make sure that you’re not putting your foot into a regulatory bear trap that could kill your business.
Some industries have regulations that apply only to them.
Jane owned an art gallery. Much of what she sold was of her own creation. But occasionally she met a talented young artist whose work she liked, and agreed to sell it on consignment. In those circumstances, she always had the same terms—the artists could keep the work there for as long as they wanted, so long as she didn’t need the space for her own work. And she reserved the right to remove art from the gallery, in which case she’d store it in the basement until another space opened up, or the artists could come and get their works from her. In fifteen years, she’d never had any problems with this arrangement.
Last summer, Sam came into the gallery and started talking with Jane. He said he was looking for a place to sell his newest set of paintings, and she offered some space that was coming open the next week. Things seemed to be going well, as they always had for Jane.
But that didn’t last long. Sam had big debts, and had problems keeping track of his money. Shortly after his first painting sold, Jane followed her general practice of mailing him the proceeds after having held out her portion for the consignment. It didn’t take long for Sam to come barging into the gallery, accusing Jane of cheating him, and that she owed him more money. One week later, she received a letter from Sam’s attorney, accusing her of all manner of terrible things.
Sam’s attorney eventually filed a lawsuit against her, claiming she had improperly handled the consignment. Knowing how erratic Sam could be, and having dealt with some small-claims matters before, Jane was sure that she could handle the situation herself and that Sam would be more of a hindrance than a help for his attorney. She was both wrong and right. Although the judge ruled that she had properly paid Sam under their oral agreement, the court found that she had violated the Illinois Consignment of Art Act and awarded Sam $50 in nominal fees and (here’s the kicker) all of his attorney’s fees, which amounted to close to $5,000.
Jane came to us wondering what went wrong—how could she owe Sam so much in attorney’s fees when she in fact had paid him all that he was due. We had to explain to her that the act requires that all consignment contracts be in writing to ensure that artists are not cheated by art dealers. So while she had acted properly on the oral contract, the judge wanted to send a message reminding dealers that they had to jump through all the statutory hoops. And unfortunately for Jane, the decision to award attorney’s fees is generally discretionary, and therefore incredibly difficult to overturn on appeal.
Jane had been operating her business right over a regulatory bear trap, and didn’t even know it was there. Don’t make the same mistake. Give us a call and schedule an appointment to discuss whether there might be similar traps in your industry that are waiting to snag you.
Businesses must report expired gift certificates in Illinois.
Illinois law allows businesses to issue gift cards or gift certificates to their customers. Those cards may have expiration dates, but any card issued after January 1, 2008, cannot contain an expiration date sooner than 5 years from its issuance. If the card expires and the business does not have a written and posted policy of honoring expired gift cards, the business must escheat the value of the gift certificates to the state after they have expired. Cards that do not expire, however, do not have to be escheated.
If you are using gift certificates or gift cards in your business, call us today and schedule an appointment to see if your practices conform with the Illinois statutes.
Don’t let your corporate existence dissolve for not filing the annual report.
Paula owned a consulting business for which she was the sole shareholder. Paula knew about the corporate veil and had incorporated her business when she first started doing business many years ago. Since then, she had been very successful and had never had any significant business disputes that she could not work out with her employees and clients.
One day she asked us to review the consulting agreement she used with her various clients. She sent us two or three different versions she had used in the past, and we noticed that each of them used a slightly different spelling of the business name. In checking the Secretary of State database to get the precise spelling, we noticed that her corporation had actually been dissolved for over five years for failure to file the annual report that year.
When we discussed this with Paula, she said that around the time that the report would have been due, she had moved from an old location to a new one. Her best guess was that the report sent to her as the registered agent just got lost in the shuffle.
We were able to work with her and the Secretary of State to make sure that her incorporation was reinstated. We also (with Paula’s approval) had ourselves named as the corporation’s registered agent so that we could check in with Paula each year and make sure that this didn’t happen again.
Paula was lucky that she didn’t get sued during the five years that she was unincorporated. If she had been, she may not have had the benefit of the corporate shield and could have been exposed to personal liability for anything that had happened during that time period. Don’t be caught in the same situation. Give us a call today to discuss the status of your corporation and to make us your registered agent.
Cross-marketing with other businesses can unknowingly create a joint venture and cause you to lose your corporate shield.
Maria was an independent insurance agent who operated her business (Maria Insurance Inc.) in an office suite with two other professionals—an accountant named Kim who owned Kim’s Accounting P.C., and an estate-planning attorney named Joe who owned Joe’s Planning LLC. They often referred business to each other, and all got along very well.
To help get a bigger footprint in the area, Maria, Kim, and Joe decided to cross-market themselves as “The Map Makers” and used the tagline “Helping You Chart Your Course.” They put together a joint website that had a unified color scheme, a logo (map and compass), and that described the group as a “community of professionals helping individuals plan their paths through life.” They also had business cards printed that used the logo and bought a telephone system that people could call into. The message on the phone system said, “You have reached The Map Makers, helping you chart your course. Please leave us a message and we will call you back. For Maria, press 1. For Kim, press 2. For Joe, press 3.”
Maria’s profile on The Map Makers’ “About Us” web page explained that she was a licensed insurance agent, described her work, and listed the kinds of insurance she sold. Also, at the bottom of the profile it said, “Click here to learn more about Maria Insurance Inc.” The link then took the viewer to her business’ individual website, but The Map Makers’ website had no more information about her insurance company, and did not describe the relationship of her or Maria Insurance Inc. to Kim and Joe. Similarly, Kim’s and Joe’s “About Us” pages said nothing about whether they had their own entities, nor did they have separate websites for their own businesses.
One day, Kim was sued by a client of hers (Bad Co) for negligently preparing the corporate tax return and causing it to owe an additional $100,000 in fees and penalties to the IRS. Bad Co’s owner was introduced to Kim one day at The Map Maker’s offices when he was meeting with Bad Co’s insurance agent, Maria. Looking for other pockets from which to recover its damages, Bad Co also named Maria and Joe personally claiming that they were a joint venture with Kim and that because The Map Makers was not incorporated, each had liability for the other’s errors.
To make matters worse, when Maria and Joe called their malpractice insurance carriers looking for someone to defend them, they each received denial-of-coverage letters. The insurance companies argued that they had insured (respectively) Maria Insurance Inc. and Joe’s Planning LLC—not The Map Makers joint venture. Maria and Joe, then, were left to defend the lawsuit on their own. And then after the Court found that The Map Makers was, in fact, a joint venture, each of their personal assets were on the chopping block, notwithstanding that Maria and Joe thought they had the protection of the corporate shield by having formed their respective entities.
Don’t get caught in an accidental joint venture. Give us a call to discuss whether you have properly protected your corporate shield and whether your marketing plan has put you at risk.
Using an unregistered assumed name could allow a creditor to pierce your corporate veil and reach you individually.
Jacob had worked for many years as a baker and cake decorator in a large supermarket chain. One day he decided to open his own bakery. He found a small building, but because he had not yet decided on a business name he bought the building himself. A few weeks later he opened a corporation that he called “Jacob Inc.” as a placeholder until he came up with a better name. He also opened a bank account for “Jacob Inc.”
By the time he was ready to open, Jacob had decided to do business as “Jake’s Cakes.” He hired a couple of employees to help him run the shop and to deliver the cakes, turned his old family mini-van into a delivery truck on which he painted the “Jake’s Cakes” name and logo, and put those names and logos on the building and all of his advertising. He never did a formal lease between the corporation and himself (as the owner of the building and the van), but his employees all received their payroll from the “Jacob Inc.” bank account.
Things were going well, until one day his delivery man got into a car accident. The driver of the other car was seriously injured, and eventually filed a lawsuit against Jacob individually. She claimed that “Jake’s Cakes” was just an unregistered assumed name for Jacob personally and that the business was really a sole proprietorship—the van and building were his personal property and he had not leased them to “Jacob Inc.”
Even worse, when Jacob tried to tender defense of the case to his insurance companies, his corporate insurer denied coverage claiming that the business had not been sued, and his personal homeowners and car insurers denied coverage claiming that those policies did not cover business ventures. Jacob, then, had to sue both insurance companies to get coverage, while at the same time defending the car accident lawsuit on his own dime until the fights with the insurance companies were resolved.
Much of this could have been avoided if Jacob had just registered his assumed name “Jake’s Cakes” when he opened his business. He could have also done simple leases making clear that the van and building, while owned by him personally, were being used for corporate purposes and were being insured under the corporate policies.
If you are doing business with an assumed name, or if you are using personal assets as part of your business, call us today to make sure that you haven’t blown the corporate shield.
E-commerce retailers need to understand when (and when not) to charge sales tax on shipping and handling charges.
In 2009, the Illinois Supreme Court issued a ruling that has broad implications for online retailers. In Kean v. Wal-Mart Stores, Inc., the Court answered the question of whether sales tax should be charged on the shipping and handling charges for sales made to Illinois customers. There, a purchaser bought various products from an online store and claimed that the store improperly charged her sales tax for the cost of sending the products to her. The store argued that the tax had to be calculated on those charges because they were part of the costs of goods.
The Court held that, because the purchasers “could not submit their internet orders unless and until they selected a shipping option,” there was “no separate agreement for transportation.” As a result, the costs of shipping and handling were part of the “selling price” and therefore were subject to shipping and handling charges. The Court went on to explain that the tax may not have applied had the purchasers been given “the option of buying the product on the internet and picking it up at a brick and mortar [store], or buying the product on the internet and having delivery made for an additional charge.”
While the proper calculation of tax is an important issue when dealing with the Department of Revenue, it is a bigger deal in dealing with private attorneys. Under the Illinois False Claims Act, a person or business that makes a false statement to the State of Illinois may be liable to the State for the amount of money at issue, plus penalties, court costs, and the attorney’s fees of whomever brings the issue to light (someone called a “Relator”). The Relator also recovers a portion of whatever he or she collects on behalf of the State as a private Attorney General.
Recently, attorneys in Chicago have been purchasing products from online retailers, and then checking the receipts to see if the businesses have properly charged sales tax on the shipping and handling costs. If not, those attorneys then file suit against the retailers–both large and small–claiming they are in violation of the False Claims Act.
Lofgren & Wentworth, P.C. recently defended a client against just such a suit. On a potential tax liability of under $3,000 the client ended up paying almost $10,000 to the State, the Relator, and the Relator’s attorneys. The client had a decent chance of not paying anything if the case went to trial; the business had been audited by the Illinois Department of Revenue and the auditor had mistakenly approved that the way the client was calculating the tax. But even though these facts would likely not have resulted in any liability under the False Claims Act, the cost of fighting the claim to its conclusion was potentially much greater than the cost of settling before getting too far into litigation.
Charging tax on all sales, however, is not necessarily the solution. The problem there is that, if the tax is charged when it shouldn’t be, then the business has exposed itself to a potential claim under the Illinois Consumer Fraud Act. Indeed, that was the claim made in the Kean case to begin with.
If your business is an online retailer, if you are an accountant advising online retailers, or if you are a web designer setting up e-commerce web-stores, call us today to discuss whether Kean covers your situation and how to best limit your and your clients’ potential liability for these issues.
Not properly categorizing and paying your employees can have BIG consequences to your bottom line.
The Federal and State Departments of Labor often investigate whether employers have properly categorized their workers as employees rather than independent contractors. Failing to do so can have big consequences, resulting in payments of fees and penalties for each of your employees back as far as three years.
Small things that you require your workers to do can affect whether you are paying them properly. Here are three of the biggest mistakes we see:
First, courts have held that if your workers are required to put on protective gear as part of their work, they may be entitled to be paid for that time. If you do not have your employees “clock in” until after they are dressed and ready to go, and then they clock out before changing out of their protective clothing, you may be improperly not paying them for overtime that they are due if their “clothed” work hits the 40-hour-per-week mark.
Second, some businesses require their workers to expend their own funds to complete their work (for instance, to wash and maintain their uniforms or to drive their cars if they are delivery people). Oftentimes this is because the business owners mistakenly classify them as “independent contractors” rather than “employees.” If they are in fact employees, then they must be paid enough to still reach minimum wage after these costs are deducted from their paychecks. If they are not, then the Department (or the employees themselves) may have a claim against the employer for violation of the minimum-wage and overtime laws.
Third, we frequently see businesses pay their employees in cash in an effort to avoid paying payroll taxes. This, again, causes big problems if and when the Department of Labor finds out.
Don’t get caught in minimum-wage and overtime bear traps. If you have employees, or if you have tried to classify workers as independent contractors to avoid minimum wage and overtime payments, call us today to discuss whether your employment practices comply with the State and Federal wage and overtime regulations.
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