Arkansas Estate, Business, and Property Law

One issue affecting many small business owners in Arkansas is the proper classification of employees versus independent contractors.  My Law Partner, Melanie McClure, has posted an informative article on her Blog, AREmploymentLaw.com, which you can find here.  As discussed in her article, many businesses have been guilty of misclassification, according to Department of Labor standards.

The Arkansas Department of Workforce Services published an official notice earlier this year concerning the issue, which you can find here.

Our Firm, Cox, Sterling & McClure, represents businesses of all sizes with respect to issues concerning commercial litigation, business reorganization, employment law, and business transactions.  For additional information please contact me at clcox@csmfirm.com.

When counseling parties who are drafting their Will and/or Trust, I often advise that they should consider writing a letter to their heirs, meant to be read after death, advising of specific issues that will help their family with the Estate.  This letter can also be used to accomplish the provisions of Ark. Code Ann. Section 28-25-107 (1987), an Arkansas Law which allows parties to make a list of personal items of property, with designated recipients, attached to their Will subsequent to its execution.  Specifically, the law allows parties, after they have completed their Will, to create a handwritten or signed list of items they would like to specifically pass to certain member of their family or estate.  Using this process, a person can move forward with drafting a Will even at a younger age, without having to worry about changing the Will in later years simply because they acquire property that may not have covered in the earlier Will.

Writing this letter may assist with even more important issues, as well.  The letter clarifies requests to be carried out upon your death and provides essential information, thereby relieving surviving family members of needless worry and speculation.  Below is an example of items you may wish to consider:

“Dear Loved Ones,

*(obviously the letter will likely start with an emotional message to your family.  Following these sentiments, the “business” part of your letter will begin):

Please allow this letter to serve as the correspondence contemplated by Ark. Code Ann. § 28-25-107 (1987), which allows me to make disposition of tangible personal property by attaching or associating with my Will subsequent to its execution a statement and list signed by me designating the devisees of items of specific tangible personal property.  I desire to leave my coin collection to my Nephew, ____.  I desire to leave all of my artwork in my home to my Wife, ____.  (You can list as many items as you would like, here, whether or not they were included in your Will).

Further, I direct my Executor to a list of passwords and computer related information left in my safety deposit box with ABC Bank.  This list also includes information concerning my various investment accounts, banking accounts, and other financial data necessary to probate my Estate.  (We live in a complicated world, and all of your electronic data will need to be accessed after your death. So, make sure you have  a list of websites, blogs, and any other electronic sources (with passwords) you frequently access, and leave this where your Executor can find it upon your death). 

My safety deposit box also includes copies of my will; birth, baptismal, and marriage certificates; communion and confirmation certificates; diplomas; military papers; naturalization papers; and birth certificates for my children.  It also includes copies of tax returns, leases, and additional personal financial data.  Finally, it contains paperwork associated with the two businesses discussed further below.

I am a one-third owner of XYZ Business located in Little Rock, Arkansas.  My Partners and I have drafted Articles of Incorporation and Bylaws which specifically detail how my interest in the business should be handled upon my death.   Please work with my Partners to effectuate the terms of these agreements, which allow for my partners to purchase the business from my heirs based upon a formulated value agreed upon by the partnership as a whole. The line of credit for the business should be re-financed to remove my name.  You will find additional paperwork associated with my business in the bottom left-hand drawer of the desk in my office. 

I own investment property in North Little Rock, Arkansas. It is owned in a LLC, and the co-owner and I have completed an Operating Agreement which states that in the event of my death, my family will receive a liquidated payment in an amount specified by the agreement.

I have pre-arranged funeral services with ABC Funeral Home.  It is my desire that I be buried next to my parents.   I would prefer that in lieu of flowers, donations are made to the Humane Society of Little Rock.  Please ensure that my obituary mentions by name all of my children and grand-children, including any that may have pre-deceased me. 

Please notify the following organizations to which I belong of my death:  Little Rock Chamber of Commerce, XYZ Professional Association, and the Board of Directors of the Humane Society.  Please cancel my automobile insurance policy, disability policy, and credit life insurance.  Also please cancel my credit cards with Generic Department Store and Generic Bank.  I have a life insurance policy with Generic Insurance Company of Omaha, Nebraska.  My spouse has a copy of the policy.  (Include a list of all accounts, company names, and addresses). “

Write your letter clearly so that even a stranger could understand it. Be sure to sign and date your letter.  As always, consult with our office concerning various additional ideas to be included with this letter, as well as to ensure you have a valid and complete Will, Trust, and effective agreements concerning your business and property holdings.  Email me anytime at clcox@coxandsterling.com.)

“Choice of entity” is terminology which references the legal form your business will take – legal creations which allow a business to take on an existence apart from its owners, even though the owners still control the business.  Potential choices for your business include corporations, partnerships, limited partnerships, limited liability companies, and Subchapter-S corporations.

One of the primary considerations in selecting a business organization is protection of the owners of the business from liability.  Other considerations include tax treatment (state and federal), management structure, future ownership, and capitalization.  This blog article discusses some of the issues you should consider when forming a new business.  The tax information provided is courtesy of Neil Denman of Denman and Associates, CPA.  http://www.denmancpa.com/.

Sample Business Entities Available in Arkansas

• Corporation (Sub-S or Sub-C)
• Limited Liability Company
• Professional Limited Liability Company
• Partnership
• Limited Partnership
• Sole-Proprietorship

Corporations

• The corporation exists apart from its owners or shareholders.  A corporation can buy and sell property, enter into contracts, sue and be sued.  Elected officers and the board of directors manage the corporation.  Requires Articles of Incorporation and Bylaws.
• Subchapter C Corporations – may have unlimited shareholders and may be traded publicly. The primary disadvantage to the C Corporation is double taxation, whereby (1) the corporation pays the taxes and net taxable profits and (2) its shareholders pays tax on all the money taken from company (income and payroll taxes).
• Subchapter  S Corporations – generally known as “pass through” corporations, whereby the net income of the corporation is simply reported on the personal tax returns of the shareholders.  There are limits on S corporation formation and ownership (one class of stock, may not have corporation shareholders, limited in number of shareholders) and it is difficult to deduct losses.  The income is not subject to self-employment tax and the shareholders must be paid a “reasonable” salary.
• Corporations engaged in professional services must be formed under the Professional Corporations Act.

Limited Liability Companies (LLC)

• Combines many of the features of a partnership with those of an S Corporation.
• Allows income reporting on personal income tax returns of the ”members,” but with the liability protection of a corporation.
• Lacks many of the restrictions that apply to S Corporations.
• Governed by an Operating Agreement.
• May be “Member Managed” or managed by an outside Manager.
• Allows members to engage in management without risk of losing their limited liability status.
• Tax Information:
  • Allows for tax flexibility, is easier to deduct tax losses and excellent for rental real estate.
  • Income and losses flow-through the LLC and are reported on the individual member’s tax return.
  • Operating earnings are subject to self employment tax.
  • Special tax elections may apply to Limited Liability Companies.

Partnerships

• A General Partnership is an unincorporated business allowing the owners no legal protection (see Sole Proprietorship).
• Anyone involved in a Partnership should consider a thorough Partnership Agreement.
• Does not protect the personal assets of the business partners from claims against the partnership.
• Shares its profits and losses among the partners according to their ownership percentage.
• Tax Information:
  • Partners are required to claim income or loss on their personal income tax return.  It is easier for a general partner to deduct tax losses.
  • Operating earnings are subject to self employment tax.
  • Like LLCs, partnerships offer flexibility for tax purposes and are excellent for rental real estate.
  • Special tax elections may apply to partnerships.

Limited Partnerships (LP) and Limited Liability Partnerships (LLP)

• Limited Partnerships consist of general partners and limited partners.  The general partner(s) manages the business and have no liability protection.  The limited partner(s) are usually investors that are not involved in the day-to-day running of the business and whose liability is limited to the extent of their investment.
• Limited Liability Partnerships are similar to Limited Partnerships, however all Partners often take an active role in the management of the business.  The members are provided some liability protection from actions of the other partners, but not from their own actions.  Generally utilized by groups of professionals such as doctors, lawyers, etc.
• Tax Information:
  • Like LLCs and Partnerships, Limited Partnerships and Limited Liability Partnerships allows for tax flexibility, are easier to deduct tax losses and are excellent for rental real estate.
  • All income and losses flow-through to the members and are reported on their individual tax return.

Sole Proprietorship

• The sole proprietorship is the default form of ownership for an unincorporated company with one owner.
• All aspects of the business are unavoidably personally associated with the owner of the business.  The owner and the business are indistinguishable.
• All income, debts, and liabilities exist solely against the owner.  Any legal action by or against the business will be in the name of the owner, personally, “doing business as” his company.
• The owner has sole control and responsibility of the business.  A sole proprietorship is easily formed, allows important decisions to be made quickly, and typically has fewer legal restrictions.  The business has limited life and cannot be transferred to others.
• State and local business licenses and permits are still required.
• Tax information:
  • All income and losses are reported on the owner’s personal tax return
  • All earnings are subject to self-employment tax.  Self-employment tax is equivalent to Social Security and Medicare taxes.  15.3% of income is subject to self-employment tax (7.65% employee and 7.65% employer).  Most credits will not offset the self-employment tax.

Corporate Formalities

Regardless of the choice of business entity, there are corporate formalities which must be followed pursuant to Arkansas law.

The Arkansas Code Annotated contains over 450 pages of legislative acts associated with corporate formation and governance.  The advice and assistance of a lawyer, CPA and additional qualified professionals is crucial to ensure compliance with applicable law.

* All tax information was provided by Denman & Associates, CPA, PA, 310 Natural Resources Dr., Little Rock, AR 72205.  Contact them by phone: (866) 362-3905, or visit their website here.

IRS Circular 230 disclosure:  To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.  Thank you.

Does your Arkansas business also conduct business in other States?  If so, you may need to register as a foreign corporation.  Most business owners know that in order to protect their assets it is advisable to properly incorporate their business as either a corporation, LLC, partnership, or additional corporate form available under Arkansas Law.  Future articles on this blog will discuss differences between the various corporate forms.   However, some Arkansas businesses fail to realize that after this step is completed, it is also important to consider whether their business should be registered in other States.

This process is called registering as a Foreign Corporation.  The term may sound misleading, since we are not referring to registering the company outside of the United States.  However, the term is used by most States when describing the process pursuant to which an out-of-state corporation is registered within the State.

Each State has separate requirements for registering your Arkansas company.  Most States will require that you submit a filing fee of several hundred dollars, a Certificate of Good Standing from the Arkansas Secretary of State, and an application detailing general information about your company, including your primary place of business in the State where you are registering.  Often the most difficult requirement is the listing of an “agent for service of process” for the new State.  You will be required to list a local agent, which must be a resident of the new State (or another corporation created in the State).  This might require you to retain a third-party company to serve as your agent, for an additional fee. 

Please consult our office or legal counsel of your choice prior to initiating the process, because depending on the State where you are registering additional requirements might apply.  Most States also have exceptions which may apply to your business and prevent the need to register.  Common exceptions, depending on the State of registration, may include: businesses conducting an isolated transaction, soliciting orders by mail or telephone only, and businesses selling through independent contractors.  Penalties and fines, including interest, may apply if you are conducting business in a State where you are not properly registered, so as always it is important to seek advice from your legal representative.

Unfortunately, a common problem with many Arkansas businesses involves unpaid invoices.  Many companies address the problem in Small Claims Court, or pursue other judicial alternatives to obtain a judgment.  Once the lawsuit is filed and a judgment has been obtained, the question becomes:  how long does the judgment last? 

The basic answer is 10 years.  In Arkansas, a filed judgment will act as a lien on all real estate owned by the debtor in the county where the judgment is filed for 10 years.  Careful planning will allow you to “revive” the judgment for 10 additional years, but you must act within the period subscribed by law to take advantage of the extra time.  What this means for business owners in Arkansas:

• Don’t be afraid to pursue bad debts through the Arkansas Courts.  10 or 20 years is a long period of time for the debtor to be affected by your judgment, and payment opportunities may arise.
• Make sure the judgment is properly filed in every county in Arkansas where the debtor may have assets.
• If you obtain a judgment, you need to have a long memory, because 10 years after it is filed you need to revive the judgment.
• Contact our office for additional information and assistance for all questions concerning Arkansas business law.   Please see our Business Law Page for additional information concerning businesses in Arkansas.

Recent Decision Concerning the Purchase of a Business

In Sunbelt Business Brokers v. James, 2009 Ark. 659, the Arkansas Court of Appeals ruled that the purchaser of a business was not defrauded due to information produced by the business broker and allegedly relied upon by the purchaser to her detriment.  The purchaser had acquired two Subway franchises pursuant to a transaction brokered through Sunbelt Business Brokers.  When the businesses ended up not being as profitable as she hoped, she sued under the theory that the cash-flow form furnished by the broker was erroneous.  The Court ultimately ruled that the purchaser did not “justifiably rely” upon the information, to her detriment, as required for a finding of fraud.  Of specific note was the fact that the purchaser was a financial-services advisor with extensive accounting experience, and that her husband was a Certified Public Accountant. 

Under Arkansas law, to prove fraud, a Plaintiff must show:  (1) a false representation of a material fact; (2) knowledge by the Defendant that the representation is false; (3) intent by the Defendant to induce action by the Plaintiff; (4) justifiable reliance by the Plaintiff, and (5) damages. 

Update on Small Claims Court Jurisdiction

In Arkansas, any dispute involving an amount of under $5,000.00 may be brought in Small Claims Court, more properly known as District Court.  In Small Claims/District Court, the filing fees are significantly less, and attorney involvement is rare.  The Arkansas Court of Appeals recently clarified that if attorneys’ fees are sought in the action, the amount of attorneys’ fees requested, when added to the amount of claim, must not exceed $5,000.00.   Piper v. Potlatch Federal Credit Union, 2009 Ark. App. 701.  Under Arkansas Law, you do not have to include interest when calculating the amount for jurisdictional purposes, however the Piper decision clarified that attorney’s fees must be included in the calculation.

Please visit the Business Law Page for more helpful information pertaining to Arkansas businesses.