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From the Chair of the ABA Law Practice Division-Tom Bolt

This past month, September 2015,  the ABA Law Practice Division Executive Committee and staff joined for a team-building exercise during the ABA Section Officers Council Fall Leadership Meeting by attending a cooking school and preparing our own meal.

When you think about it, creating a successful team within the ABA Law Practice Division is a lot like cooking. We have to add certain ingredients to the pot—a little of this, a little of that, more of another thing to make it sweet or to add just the right touch of salt. The temperature and how long we cook it has to be watched carefully, otherwise we risk it coming out undercooked or burning it. Some people are naturals at cooking, others not so much. Some can’t cook to save their life.

So, is there a secret recipe for the ABA Law Practice Division to build a team this year? Absolutely not! There are far too many different ingredients (some limited in quantity). Often, we end up working with what we have. But we do have to pay close attention and make sure our ingredients (our team members) work well together.

For us to successfully “cook up” a team, we have to be good at a variety of things. Here’s a quick list:

  1. Know yourself. How well do you know yourself?  I’ve taken a lot of criticism and compliments over the years. I’ve spent countless hours reflecting on what I do well and what I don’t do well at all. It is important that we each understand our individual strengths and the value that we bring to the LP team table.
  2. Know other people’s strengths. This is sometimes quite difficult; I have erred on occasion by delegating the wrong tasks to the wrong people because I didn’t fully understand their strengths. We need to know what each of us does well, and how our individual strengths and weaknesses align with the goals we hope to accomplish for the Division this year.
  3. Develop resilience. One key trait of most successful people is they don’t waste time feeling sorry for themselves when something bad happens. We have to learn to deal with setbacks, failures and disappointments, and move on. If we put too much salt in a particular recipe, we learn from our mistake, mark it down, and use less salt next time.
  4. Learn how to work through conflict. In retrospect, I see where I have fallen short by not taking action when other members of my team had a disagreement. Sometimes it may seem easier to ignore a problem rather than to work it out. This is where many teams lose their most valuable members. There will be times when members of our team will disagree. This is a critical phase: if we get our team members through it, they will often become even more committed to LP. No one should quit at the first disagreement, and sometimes we have to help members of our team work through the conflict.
  5. Love them, help them, love them. Everyone makes mistakes. Heaven knows I have had my share. We have to allow people to make mistakes. Help them through it and then be sure to show the love again. People won’t stick their neck out for us or the team if they know we will cut it off. They will simply play it safe. And as Bob Young, our immediate past chair, has often said, if we want to grow the ABA Law Practice Division, its programs, its membership, and its service to the profession, we have to allow those that have been delegated the responsibility to make the decisions even if it’s not necessarily the one we would make.

If we remain focused on these things, the Law Practice Division team we cook up this year will be one of tremendous success to which we can all be proud. I look forward to building upon our past successes and enhancing our team this year as we have a bit of fun, get know each other better, and build a great Law Practice Division team.

About the Author

BoltTom Bolt is the founder and managing attorney of BoltNagi PC in St. Thomas, USVI, and is the chair of the ABA Law Practice Division.

DividendsNo one wants to pay more taxes, including corporations.

When a corporation turns a profit, portions will often be distributed to shareholders in amounts based on the total number of shares each individual holds—in addition to reinvesting some of the funds in the business itself. These distributions are called dividends (this classification applies to any payment of money or property to shareholders) and are supposed to be reported to the Internal Revenue Service for tax purposes.

Unfortunately, it’s somewhat common for corporations to try to avoid paying taxes when they can help it, and one way they try to do so is by disguising dividends as business expenses and deducting them from their taxes. When the IRS catches a dividend misclassified and declared as a business expense, the federal agency will reclassify the amount as a constructive dividend. A constructive dividend is a payment to a shareholder on which taxes have not been paid—and thus presents a situation the IRS will look to remedy.

The most common example of constructive dividends involves personal expenses unrelated to the company being classified as business expenses to avoid taxation for the business and the shareholder. For example, a company that pays a shareholder’s rent and writes it off as a business expense is likely to incur the wrath of the IRS once the agency digs deeper and discovers what has happened.

Be aware of the consequences

In general, regular dividends and constructive dividends are taxed in much the same way, but because regular dividends have been properly taxed and constructive dividends have not, it leads to tax trouble for both the corporation and the shareholder.

In addition to forcing adjustments to both their tax bills—that the amount owed will increase is basically a foregone conclusion—constructive dividends generally lead to the imposition of various fines and penalties, causing further financial headache to both parties. Finally, if the misclassification of constructive dividends was intentional, the company (and even the shareholders, if they knew about it) could even face criminal penalties.

Corporate tax law is complex, and opportunities for unintended mistakes—as well as intentional attempts to flout the law—present themselves seemingly at every turn. If your company has questions about the particulars of tax law, including what counts as a taxable dividend and what counts as a legitimate business expense, seek the counsel of a skilled and knowledgeable tax attorney. This will allow your business to abide by the law law and avoid harsh, unnecessary penalties from the IRS and other agencies.

BoltNagi is a well-established and widely respected business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.

VC ImageMany entrepreneurs have been there: they have an idea for a business they think could be wildly successful, but they don’t have the financial means to transform the idea into a functioning company. Not surprisingly, this is a frustrating situation—and has likely been the premature undoing of many potentially profitable startups in the U.S. Virgin Islands.

While obtaining a small business loan from a financial institution is one option for securing funds, the truth is that many banks are cautious about extending loans to startup businesses. This is why another option may have greater appeal: seeking and securing venture capital. This is a form of equity financing in which a firm puts up funding for a business venture in return for an ownership stake in the business.

For entrepreneurs starting out with little more than an idea and a plan, the opportunity presented by venture capital can be quite appealing.

What is it? And how can you get it?

Venture capital (and equity financing in general) holds a key advantage over traditional loan-based financing in that the money invested does not have to be paid back. Instead of receiving interest payments over a number of years, venture capitalists retain an ownership interest in the startups they fund, with the hope of reaping a share of the profits down the road. The other side of the coin, and another benefit for entrepreneurs, is that venture capitalists don’t just assume a share of the business’ success—they also assume a share of the risk. In other words, entrepreneurs don’t have to pay back the venture capital firm in the event that the business fails.

The process of obtaining venture capital is very similar to trying to get a startup loan from a financial institution. You have to make your case, and you do so by presenting a detailed proposal. It should indicate how much money you’re hoping to receive and a plan for how you will use it to benefit and grow your business. A strong proposal should also include a marketing plan and information about your existing finances, including other investors with a stake in your company. The venture capital firm will consider your proposal, likely conduct some additional research of its own and eventually make a decision.

If you manage to secure venture capital, there are still some legal processes you’ll need to complete, such as developing an equity finance agreement that details the investment and what control and benefits are being given to the investors. To ensure your protection and make this process easier, consult an experienced business attorney. A skilled lawyer will assist you during any stage of seeking and securing venture capital.

BoltNagi is a respected and well-established business and corporate law firm serving clients throughout the U.S. Virgin Islands.

Patent ImageSo you’ve got a great idea for a new product that’s going to change the world.

But as anyone who has ever not gotten credit for a great idea can attest, having your name attached to your innovation is the best way to ensure you reap the benefits of its implementation. Fortunately, for inventors in the United States and its territories, the patent process provides a means of protecting intellectual property from the consequences of theft or misuse—also known as “infringement”.

A patent grants an inventor the exclusive right to his or her invention for 20 years. This means others may not use it without the holder’s permission, lest they be subject to severe penalties. Given that receiving a patent grants considerable benefits to the inventor, however, the process of obtaining one is not especially easy. Here’s how it works:

The application process

The patent application, which is filed through the United States Patent and Trademark Office (USPTO), is a complex document in which the particulars of the invention are provided in great detail. Given the difficult nature of the information that must be conveyed in the patent application, along with the complexity of the document itself, having a patent application prepared or inspected by an experienced intellectual property attorney is a step no inventor should skip to ensure the accuracy of the application.

A key distinction worth noting is that many inventions are modifications of existing technology. This is why, in the patent application, you must clearly identify the new technology you’ve created and are hoping to protect with the patent.

Once the application has been submitted, a patent examiner who has expertise in the relevant field reviews it. The examiner’s job is to determine whether the invention already exists and whether it’s already protected through a patent and, if not, whether the technology has already been publicly disclosed. If the examiner sees a problem with the application, the inventor has several options for responding, including fixing any problems, making the case that the application is already sufficient and appealing the judgment of the examiner. Again, handling these situations is made easier by working with a knowledgeable intellectual property lawyer.

Limitations and problems

A patent issued by the USPTO is only valid in the United States and its territories. However, inventors may apply for patents in other countries as well, and also have the ability to prevent the import of products from overseas that would violate the patent in the United States if they were made here.

Inventors should also be aware that publicly disclosing their inventions prior to securing a patent is an extremely risky move. Although the USPTO provides a one-year grace period during which an inventor may file for a patent, many do not find the risk worthwhile.

Entrepreneurs and innovators who have questions about the patent application process or are wondering about the benefits of protecting their inventions through patenting should consult a knowledgeable intellectual property attorney for further guidance.

BoltNagi is an established and widely respected intellectual property law firm serving businesses and organizations throughout the U.S. Virgin Islands.

During the course of a business partnership, it’s not at all uncommon for one partner to leave to pursue other opportunities. However, leaving a partnership is not as simple as putting in two weeks’ notice and leaving on your last day, never to return. Rather, the terms under which one partner can leave a partnership are dictated by the original agreement.

A partnership agreement is a complex legal document that includes a variety of details related to the partnership, from the names of the partners to their obligations and contributions. In addition, it’s expected to include stipulations related to the departure of a partner, such as any distributions to which he or she might be entitled or, conversely, anything he or she might owe the remaining partners.

In general, upon exiting the partnership, a partner should be entitled to an amount equal to their fair share of the business, provided their exit doesn’t violate the terms of the partnership agreement in some way. Violating the agreement may leave the exiting partner liable for compensating the other partners.

General versus limited partnerships

The process for exiting a partnership may depend largely on whether the partnership is a general or a limited partnership, and if the partner in question is a general or a limited partner. General partners, for the most part, can exit a partnership at a time of their choosing, provided they give written notice, whereas limited partners typically must give significant notice (often six months in advance), unless the partnership agreement stipulates otherwise.

It’s important to remember that the departure of a partner must be reflected through the amendment of the written partnership agreement. In other words, the partnership agreement needs to reflect the actual makeup of the partnership. This doesn’t just make good business sense—it can also prevent the business from incurring fines and penalties resulting from any inaccuracy.

Finally, the effect of a partner’s departure, depending on the jurisdiction and the partnership agreement itself, may be that the partnership automatically dissolves. Whether such a clause appears in the partnership agreement is definitely something to discuss with an attorney.

While thinking about leaving a partnership may not be something you’re eager to consider when you’re still in the process of formalizing the partnership, it nevertheless makes sense to take this possibility into account when drawing up the partnership agreement. To discuss the particulars of your partnership agreement, either in the drafting stages or when a partner is preparing to exit the business, you may benefit from the input of a knowledgeable business attorney who can help you understand the law.

BoltNagi is a widely respected and well-established business law firm serving clients throughout the U.S. Virgin Islands.

StThomasHarborFor small businesses that are in the market to expand or to take up more permanent residency in a community, purchasing commercial property can be an effective and prudent option. But because most small businesses don’t have the cash on hand to purchase property outright, they need another means of funding the purchase.

This is where the commercial mortgage enters the picture. If you’re a business owner interested in owning property, a commercial mortgage allows you to make the purchase without having to pull together all the funds at once. In this way, it functions just like a residential mortgage.

A commercial mortgage, however, is likely to have some different restrictions and be more complex than a residential one, both during the application process and once it goes into effect. Here’s a look at some of the key factors involved in commercial real estate mortgage agreements:

  • Documentation: Perhaps unsurprisingly, getting a commercial mortgage involves a considerable amount of paperwork. First and foremost is documentation of your business’ earnings over the past few years. In addition, the lender may require other documents related to your business, including tax returns, leases and documents indicating the value of any business property you might have.
  • Debt coverage ratio: Obviously, whether your business will be able to pay back the loan is going to be the primary concern of the lender. Your debt coverage ratio—which takes into account your company’s monthly income and the amount you can reasonably be expected to pay each month toward your debt—is one of the key factors that will be taken into account when determining whether your mortgage application is approved.
  • Expectations beyond repayment: For most residential mortgages, simply repaying the loan is enough to satisfy the lender. But for commercial mortgages, there are likely to be other requirements you’ll need to account for. One of the most common is a stipulation that requires your business to earn a certain amount per month to ensure you stay on top of payments. Failure to do so can lead to penalties, with foreclosure being a worst-case scenario.
  • Unexpected expenses: In much the same way that buying a house often involves paying for things like inspections, getting a commercial mortgage rarely comes without additional charges. You’ll need to prepare to pay application fees and various banking charges, along with fees related to any surveys or appraisals that may be required.

Needless to say, obtaining a commercial mortgage is often a difficult and potentially time-consuming process, but it can really be worth it if you are committed to owning property for your business.

BoltNagi is an established and respected business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.

BluesIn an age of iPods and streaming audio, it may seem like the options for pumping music into your restaurant or bar are virtually unlimited. But while everyone loves to hear their favorite tunes during a round of drinks or a dinner out with friends, you’ll find it a lot less enjoyable as a business owner if you wind up being slapped with a fine or a lawsuit.

Unfortunately, this is precisely what has happened to numerous restaurant and bar owners operating in areas in which U.S. copyright law is in effect. Broadcast Music Inc. (BMI) and the American Society of Composers, Authors and Publishers (ASCAP), the dominant publishing rights organizations in the United States, file upwards of 400 copyright infringement lawsuits each year against food and drink establishments whom the organizations allege have failed to pay for the right to play their music in public spaces.

Serious consequences

BMI represents a number of top artists, from Lady Gaga and Taylor Swift to Michael Jackson, all of whom are likely to be heard in lively establishments frequented by tourists. ASCAP, meanwhile, represents Jay-Z, Beyonce, Katy Perry and a host of other big names. And while the publishing rights organizations offer annual subscriptions—BMI’s average restaurant subscriber pays around $650—that allow proprietors to play their music, many establishment owners attempt to flout the law, and get caught doing so.

Perhaps unsurprisingly, this is a scenario that is not likely to appeal to those who operate food and drink establishments in the U.S. Virgin Islands. But as attorneys representing ASCAP and BMI have been quick to note, if you believe your establishment can fly under the radar and avoid penalties for playing music for which you haven’t paid the appropriate licensing fees, think again.

That being said, BMI and ASCAP are not likely to greet you with a lawsuit right off the bat. Rather, their approach has generally been to contact businesses that have violated copyright law by playing unlicensed music and ask them to subscribe or risk being taken to court. For business owners, there’s really no way around it, and it doesn’t matter whether the music is coming from a jukebox or even the radio—if it’s playing in your restaurant or bar, you need to be paying for it.

To avoid a run-in with the music publishers—and potentially save your business thousands of dollars—consult an experienced law firm that understands the complexities of copyright law. A skilled attorney will help you ensure your business is compliant, help you negotiate a long-term licensing deal and keep the music flowing from your speakers.

BoltNagi is a well-established and respected intellectual property law firm serving businesses and organizations throughout the U.S. Virgin Islands.

FranchisingDo you have a successful business such as a restaurant, boutique hotel, or watersports company that you have built into a replicable format?  If you want to leverage your existing supply relationships, marketing methods, loyal management team, and cost structures to jumpstart new locations, then franchising might be right for you.

What does it take to franchise successfully a business that began life in the Virgin Islands or elsewhere in the Caribbean?  Start by evaluating these four critical areas.  If you feel that you are ready to move forward, contact an experience franchise attorney such as those at BoltNagi PC today.

  1. Don’t franchise unless you can devote adequate funds to the process.

Prospective franchisors’ number one mistake is starting the franchising process without devoting adequate capital and time to the process.  In order to franchise properly (and legally) you will incur legal fees to prepare the franchise disclosure document (FDD) and franchise agreements.  Additional legal fees can add up if you open in certain heavily regulated states like California, New York, Iowa, and others with annual registration requirements.  You’ll also need to set aside funds for accounting fees, because franchisors must be audited annually.  You’ll need to set aside several thousand dollars for filing fees to complete state registrations, and additional funds to set up numerous corporate entities – the LLC or single C-Corp. you have for your existing operations won’t cut it for national or international franchising.  Finally, don’t forget about the marketing expenses it will take to generate initial franchise sales.  Many franchisors have full-time sales teams, but you might be able to get by with a part-time staff or outsourced salespeople that regularly attend franchise or industry trade shows.  How much will it realistically take?  Depending on the complexity of the system and how many states you wish to sell in, count on $50,000-$150,000 to get started.  It is a HUGE mistake to launch a franchise system without adequate capitalization or without proper legal advice from an experienced franchise attorney.

  1. Be able to show your numbers.

Businesses without a multi-year, consistently profitable track record should not sell franchises.  In order to successfully sell franchises, you must be prepared to share your numbers as this is every candidate’s first question.  Federal Trade Commission (FTC) and state franchise laws prohibit franchisors or their salespeople from making any representations about actual or potential sales, or the income or profits of existing franchise units, unless the information is included in your FDD.   An experienced franchise law attorney can help you put together lawful financial performance representations that will entice prospective franchisees without landing you in court.  If you choose to omit financial performance representations altogether, you’ll generally be missing out on the majority of potential franchisees.

  1. Use an experienced attorney that knows the law.

Franchising, like the sale of securities, is a highly regulated type of financial arrangement.  FTC regulations and a litany of state laws restrict how and when you may sell, begin, or terminate a franchise; and many include substantive requirements for your franchise relationships.  In some cases, violating these laws can result in felony jail time, and even though you operate your franchise system as a business entity, you and your management could have personal liability for certain violations.  Franchising requires specific legal knowledge, so avoid general practitioners who spend some of their time defending criminal cases or personal injury matters, and select a business law attorney with expertise in franchising such as those at BoltNagi PC.

  1. Focus on the people.

Franchising is an entirely different game than running a hotel, restaurant, or service provider.  The people who helped you succeed at your core business, including your outside services providers like attorneys, marketers, and accountants, might not be the best people to build your franchise system.  You need to focus on recruiting the right people with relevant expertise in franchise sales, franchise law, franchise marketing, and franchise accounting.  Assemble the right team from the outset, and don’t try to do everything yourself.

The same principle goes for selecting franchisees.  Don’t necessarily choose the first ones to express interest in your brand.  Be selective with prospective franchisees—ensure they have the liquid capital, time, net worth, and experience to make a franchise of your system work.  Meet them in person, and ensure their geographic distance will not pose a problem while your system grows.  This issue is especially key in the Caribbean, where various languages and cultural impediments may make franchise expansion more problematic than elsewhere.

WhileTaxes its definition is malleable and open for debate, the “American Dream” remains a standard by which many people gauge perceived success and failure in various segments of our society—even in U.S. territories. The business world is no exception, as successful entrepreneurship and business management are regarded as prime drivers of upward mobility, economic progress and financial reward.

Unfortunately, an increasing number of influential people in the business world believe that the current corporate tax rate in the United States is hampering the ability of companies to effectively and productively operate in the country. With tax rates ranging from 15 percent to 39 percent, the country has one of the highest corporate tax rates in the world. On the other hand, thanks to tax breaks and a variety of legal financial maneuvers, the average corporation ends up paying even less than the minimum tax rate.

Nevertheless, with tax rates at their current levels and competition increasing in many lucrative business sectors, there is a growing tendency for corporations to move their money offshore, where it is treated very differently by the U.S. tax code. There are two key advantages to doing so. The first is that taxes paid overseas may be deducted from taxes to be paid to the Internal Revenue Service. For example, if a corporation is to be taxed at a rate of 20 percent, but has already paid taxes under a 10 percent rate elsewhere, it can apply that 10 percent to its U.S. tax return — thus paying a rate of 10 percent in the United States, as well.

The second advantage of setting up a subsidiary overseas is that U.S. corporations may hold off on paying taxes on foreign income through the deferral process. By recording profits as overseas profits under the control of a foreign subsidiary, a corporation is not liable for taxes on those profits until it decides to return them to the control of the parent company.

Escaping tax liability

One result of these tax practices is that there is considerable wealth being held overseas, protected from taxation. And although estimates vary, there seems to be broad agreement that the dollar amount can be measured in the trillions.

Many of these overseas tax havens are located in the Caribbean. In Bermuda, the Cayman Islands and the British Virgin Islands, for example, subsidiaries of U.S. corporations reported profits in 2010 that dwarfed the gross domestic product of those countries. Bermuda had a GDP of $6 billion that year, compared to $94 billion in profits reported by U.S. corporate subsidiaries.

While these practices have raised the ire of many groups that argue the American Dream is on the decline in the United States and call for alterations to the federal corporate tax code, the fact remains that these practices are legal and offer great incentives for companies to take risks and expand. If you have questions about how the corporate tax code applies to your business, contact a knowledgeable corporate law attorney today.

BoltNagi is a well-established and widely respected business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.

privatejetWhen it comes to leasing and financing civil aircraft, it’s incredibly important to understand the various liens and interests potentially involved, based largely on Federal Aviation Administration Aircraft Registry Reports. These reports have been mandated on airplanes so that individuals can somewhat easily find all of the possible claims and other legal interests attached to the aircraft in question.

But what you also need to know is that there are certain interests and liens that you will not find on these reports. The real problem is that some of these interests take priority over all else, including anything recorded on the Aircraft Registry Report. The most common exceptions are mechanics liens, which may take a variety of forms.

The root cause of this confusion stems back to 1981, when the Aeronautical Center Council ruled that mechanics liens only needed to be included on an Aircraft Registry Report if allowed by the law in the state in which the aircraft was currently registered. This is because the Federal Aviation Act does not supersede any aspects of state laws related to the creation, perfection or priority of mechanics liens. And, even if a mechanics lien is filed on an Aircraft Registry Report, it’s only enforceable if state or territory allows it to be.

In other words, recording a mechanics lien on an airplane’s Aircraft Registry Report will not necessarily mean it’s at all enforceable—creating yet another headache for those looking to sell or purchase a civilian aircraft.

Knowing the various mechanics liens

The three main types of mechanics liens on aircraft are possessory liens, floating liens and liens over equipment like propellers, engines, appliances and spare parts. This represents yet another point of confusion, as different state and territorial laws may be associated with different requirements depending on the type of lien and the circumstances involved. This makes it important to work with a skilled attorney with some background knowledge and experience in aviation law, especially when it comes to security interest in civilian airplanes.

In short, simply knowing the rules and regulations of the FAA’s Aircraft Registry Reports may not be enough to try understand all of the liens, interests and claims on any single piece of aviation equipment. Thus, due diligence for lessors, secured parties and creditors requires digging a little deeper—ideally with the assistance of an attorney—to look into the relevant state and territorial mechanics lien laws.

BoltNagi is a widely respected and established law firm serving individuals, businesses and organizations throughout the U.S. Virgin Islands.