Paycheck Protection Loan Program

Paycheck Protection Loan Program

Paycheck Protection Loan Program: Establishing Historical Payroll Costs will be a Key Part of the Process

The Paycheck Protection Program, which was recently established by the CARES Act, provides for emergency loans to help small businesses meet payroll and certain other current expenses. The maximum amount available under the Program is the lesser of $10 million and 250% of the borrower’s average total monthly payments for ‘payroll costs’ during the 1-year period prior to the date the loan is made plus (if applicable) the outstanding amount of any EIDL loan that the borrower may have received from the SBA since January 31, 2020.

Payroll costs are defined as the sum of payments of any compensation to employees fitting within the following categories:

  • Salary, wage, commission or similar compensation;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical or sick leave;
  • Allowance for dismissal or separation;
  • Payment for group health care benefits including insurance premiums;
  • Payment of any retirement benefit; or
  • Payment of state or local taxes assessed on the compensation of employees.

Payroll costs expressly exclude the following items:

  • The ‘compensation of an individual employee’ in excess of $100,000;
  • Federal withholding for FICA, Railroad Retirement Tax Act and Federal income tax;
  • Compensation to any employee whose principal residence is outside of the US; and
  • Qualified sick and family leave payments eligible for credits under the Families First Coronavirus Response Act.

The timetable for when the SBA and SBA certified lenders will begin to process applications under the Program remains uncertain – likely the end of this week or early next week. Exactly what documentation lenders will require also remains uncertain. But the backbone of the Program rests on establishing a business’ monthly payroll costs for the past 12 months.  Gathering written records to support your business’ recent payroll cost history will save valuable time when the SBA and lenders open for business.

Contact our business legal team with your questions at 574.232.3538. We are open 8 a.m. to 5 p.m. Monday through Friday, and all our attorneys are available to assist you via phone and virtual meetings.

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Author: Pete Gillin is a seasoned transactions attorney whose experience includes advising middle-market and closely-held businesses. Practice areas include business counsel, business formation, business transactions, business acquisitions, succession planning, partnership agreements, financing agreements, contract review, and intellectual property matters.

You can contact Pete by calling 574.232.3538 or email pgillin@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.

The CARES Act Provides Funds to Help Your Small Business to Stay Afloat

The CARES Act Provides Funds to Help Your Small Business to Stay Afloat

Any Port in a Storm: The CARES Act Provides Funds to Help Your Small Business Stay Afloat

Friday afternoon, Congress approved the Coronavirus Aid, Relief and Economic Security Act (or CARES Act). In part, the CARES Act moves $350 billion to the Small Business Administration (SBA) to underwrite a loan program aimed at helping small businesses make payroll and cover operating expenses. The section of the CARES Act outlining this small business loan program is being commonly referred to as the Paycheck Protection Program. The Paycheck Protection Program will be administered by SBA.

Loans made under the Paycheck Protection Program will only be available through June 30, 2020. Loans will be styled as Economic Injury Disaster Loans (EIDL) under Section 7(a) of the Small Business Act. The Program is intended to provide borrowers with cash flow assistance during the emergency caused by the Covid-19 crisis. Key elements of the Paycheck Protection Program include:

  • Businesses and many non-profits employing 500 or fewer persons will be eligible to participate
  • Proceeds from EIDLs may be used for payroll support, employee salaries, mortgage payments, rent, utilities and other debt obligations incurred prior to the onset of the pandemic
  • Loan amounts will be capped at the lesser of 250% of a borrower’s average monthly payroll costs for the 12 months preceding the date of the loan and $10 million
  • Borrowers may apply for an emergency advance of up to $10,000 which the SBA will distribute on an expedited basis while EIDL loan applications are processed
  • Interest rate will be capped at 4%
  • Maturities will be up to 10 years
  • Loans will be made available through SBA-certified lenders and be guaranteed by the SBA
  • Fees to establish loans will be waived as will any penalties for prepayment
  • For employers that retain and continue to pay their employees through June 30, 2020, the portion of the loan used to cover payroll and payments on pre-existing debt will be forgiven.

The Act also offers relief to borrowers with existing 7(a) or 504 loans.  For these loans, the SBA will cover principal, interest and any fee payments due for a six-month period beginning on the date of the next payment comes due.

The window to participate in the Paycheck Protection Program is limited. Given the size and scope of the Program, there will be challenges in administering it. The hope is that the SBA and SBA-certified lenders will be ready to process applications as early as the end of next week.  The business attorneys at Tuesley Hall Konopa are ready to help navigate the Economic Injury Disaster Loan process and help you determine whether the Paycheck Protection Program may be a good solution for your business needs.

Contact our business legal team with your questions at 574.232.3538. We are open 8 a.m. to 5 p.m. Monday through Friday, and all our attorneys are available to assist you via phone and virtual meetings.

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Author: Pete Gillin is a seasoned transactions attorney whose experience includes advising middle-market and closely-held businesses. Practice areas include business counsel, business formation, business transactions, business acquisitions, succession planning, partnership agreements, financing agreements, contract review, and intellectual property matters.

You can contact Pete by calling 574.232.3538 or email pgillin@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.
Corporate Opportunities Doctrine: Potential Trap for the Serial Entrepreneur

Corporate Opportunities Doctrine: Potential Trap for the Serial Entrepreneur

South Bend business transaction attorney, Peter J. Gillin, Partner, Tuesley Hall Konopa, LLPYou are the majority owner of a sales and distribution business. You’ve been working diligently to land new customers and grow sales. You’re growing increasingly frustrated that the minority owners are not putting in the same effort. A contact from your network reaches out to let you know about a producer looking to bring on a new distributor to cover your area. You know this opportunity will be lucrative for whoever lands the work but that it’s going to take real effort to make it pay off. You’re up for the extra work. But you have doubts about whether your partners share the same hunger to succeed. What do you do?

Corporate governance issues do not tend to be front of mind for most owners of closely-held businesses. Corporate formalities are viewed as irritants and, as such, tend to be limited to cursory annual consents electing board members and appointing officers. Decisions (big and small) about the business are most often discussed and then made informally by the group. When the owners, directors, and officers are focused on making the business as profitable as possible, if corporate governance issues crop up, they tend to be hashed out amicably over a cup of coffee. Interests are aligned. The system works smoothly.

Whether and how to pursue a new business opportunity may take more than a cup of coffee. Interests may no longer be aligned. That misalignment tends to cause friction. In the hypothetical above, you want to pursue this new opportunity because you believe it will be profitable. However, you can’t help but feel frustrated that your partners are not matching your effort; effectively freeloading off of your labors. As a result, you harbor concerns that if you share the opportunity with your partners, the same dynamic will take hold. You will perform the lion’s share of the work but not earn a fair return off of that effort. You would prefer to exploit this opportunity without your partners to prevent this source of frustration from getting worse.

The law governing closely-held businesses imposes ethical obligations on business owners, board members and officers requiring them to treat the business and the other business owners fairly. These obligations, commonly referred to as fiduciary duties, flow in part from statutes and in part from case law. These duties are commonly referred to as duties of loyalty, care, and good faith. The hypothetical above touches upon the duty of loyalty which obligates fiduciaries of a business to act in the best interest of the business and their fellow business owners when addressing matters that relate to the business. Depending on how closely related a new opportunity is to the scope of the existing business, decisions regarding whether to pursue an opportunity and how to pursue the opportunity may raise a question as to whether you have fulfilled your duty of loyalty to your partners.

The ‘Corporate Opportunities Doctrine’ evolved as a framework for assessing whether principals have an ethical obligation to share a new business opportunity with the other principals in the business before seeking to capitalize on it. The analysis begins with an assessment of how closely a new opportunity relates to the existing business. The more closely related, the more likely a corporate opportunity would be found to exist. The more removed from the existing business, the less likely a corporate opportunity would be found to exist. If no corporate opportunity exists, a principal has no duty to present the opportunity to the other principals. If a corporate opportunity exists, the options are more limited. A partner has an obligation either to present the opportunity to the other partners for consideration or to decline the opportunity. Failing to disclose the opportunity to your partners but pursuing the opportunity separately from the existing business would open you up to a breach of fiduciary duty claim under the Corporate Opportunities Doctrine. Frustration with a lack of effort by your partners will not justify an attempt to exploit the opportunity on your own.

Planning opportunities exist which may help entrepreneurs avoid or dampen the impact of the Corporate Opportunities Doctrine which may present themselves in the future. As the name implies, the doctrine evolved from cases exploring the nature and scope of fiduciary duties owed by officers, directors, and stockholders to the corporations they serve. Until recently, the statutes and laws governing the formation and operation of corporations did not allow principals forming corporations the flexibility to modify the scope of the fiduciary duties owed to others. With the increasing popularity of the limited liability company form, which allows greater flexibility to waive or modify these duties, forward-looking states like Delaware have begun to allow corporations to address issues like the scope of corporate opportunities in their charter documents. If the prospect of future conflicts is an issue of concern to you as an organizer, the jurisdiction in which you form your business entity is an important consideration.

As the title ‘Indiana Business Flexibility Act’ implies, the limited liability company form offers organizers greater latitude to address issues like how to handle future business opportunities should they arise. Limited liability companies are very much creatures defined by contract. A limited liability company’s operating agreement can be tailored to address when (if ever) an owner, manager or officer would be required to present a new opportunity to the company or other owners. Serial entrepreneurs are wise to consider these issues and possible solutions in advance of the next opportunity presenting itself.

 

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.

Contract Manufacturing Agreements

Contract Manufacturing Agreements

Contract Manufacturing Agreements:  The Importance of Allocating Outsourcing Risk Fairly

Businesses increasingly look to contract manufacturers (CMs) as a way to improve efficiency in their production processes. The allure of outsourcing all or part of a manufacturing process is the chance to lower the cost of bringing a product to market. For CMs, contract manufacturing engagements represent an opportunity to utilize their capital and workforce more productively. Competition among CMs to land lucrative contract manufacturing engagements can be fierce. And the drive to land an engagement can influence how aggressively a CM pushes back on contract terms and conditions proposed by potential customers. Understanding key contract terms and how they allocate risks between parties to contract manufacturing relationship can help a CM’s management make better decisions regarding its contract manufacturing commitments.

When a business explores outsourcing the production of a product or component of a product, the analysis tends to focus on how the decision will affect quality. Because the quality of a business’ products is integral to a business’ brand, it should be no surprise that contract provisions addressing the quality of deliverables are reflected throughout the terms and conditions. Terms and conditions address the risk that a CM relationship will affect the quality of products delivered in two primary ways: risk mitigation; and risk transfer.

Risk mitigation provisions are designed to limit proactively the chances of problems occurring in the future. In a contract manufacturing agreement, risk mitigation provisions tend to describe reporting requirements, product inspections processes and auditing of production methods and environments. The goal being to identify possible problems in manufacturing processes or the output from those processes prior to product hitting the market. While these sorts of provisions tend to be located in the ‘boilerplate’ of contract manufacturing agreement forms, giving thought to the balance between the costs associated with these sorts of quality assurance protocols and the benefits gained from increased initial product quality can be an opportunity to achieve greater efficiency. Even with thoughtful quality control measures reducing the risk of future problems, the potential for product defects remains a concern.

Risk transfer provisions allocate responsibility between the parties if a problem arises. In a contract manufacturing agreement, key risk allocation terms include the warranty and indemnity provisions. At their simplest, a warranty is an assurance regarding the quality of a deliverable and an indemnity is a mechanism to ensure that an injured party is made whole if a warranty proves to be untrue. Warranties may be implied at law and or given expressly through written contracts.  Where warranties regarding the quality of products are implied at law, the Uniform Commercial Code (state statute) allows written contracts between businesses to expressly disclaim enforcement of any implied warranties. For CMs, the warranties in their agreements with their customers plus any implied warranties created by state law form a measuring stick against which the quality of the products they deliver are measured.

Translating an understanding of how warranty and indemnity provisions allocate risk between parties into better contract terms for a CM is more art than science. Ideally, warranty and indemnity terms would only hold a CM responsible for failures that are within the CM’s reasonable control. For example, if a customer provides a CM with a set of specifications for a batch of deliverables and the CM’s deliverables meet those specifications in all respects, does it make sense to hold the CM responsible for product liability or product warranty issues which may arise when the deliverables are ultimately introduced to the market? Unless the warranty provision distinguishes between compliance with specifications and deviations from those specifications and the indemnification provision allows for the indemnification of the CM where the proximate cause for defects is in the specifications themselves, the CM has exposure for aspects of the relationship it does not control.

The more thoughtfully terms and conditions spell out (1) who bears responsibility for which elements of the manufacturing process and (2) who makes who whole in the event something goes wrong, the more smoothly the relationship should run when problems arise. Tailoring contracts for each relationship takes time and money. And managing a supply chain with a set of highly tailored contract manufacturing agreements can increase administrative costs for the business customer. So, many times CMs are faced with the choice of accepting broader risk under a customer’s standard form contract terms and potentially missing out on a key piece of business. Pricing the additional risk into the CM’s cost of manufacturing the contract deliverables being sold is critical to ensuring a successful contract manufacturing engagement. Not fully appreciating how the risks are allocated between the CM and its customer can sour an otherwise profitable contract manufacturing engagement very quickly.

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Author: Pete Gillin is a seasoned transactions attorney whose experience includes advising middle-market and closely-held businesses. Practice areas include business counsel, business formation, business transactions, business acquisitions, succession planning, partnership agreements, financing agreements, contract review, and intellectual property matters.

You can contact Pete by calling 574.232.3538 or email pgillin@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.

Could Your Business be at Risk?

Could Your Business be at Risk?

Business Entity Reports – Changes to Administrative Dissolution / Reinstatement Process

Could your business be at risk of dissolution because you unknowingly missed filing your business entity reports with the State of Indiana?

Indiana companies are required to file business entity reports with the State every other year. The due date for when an entity must file is established by reference to the date the entity was formed. A nominal fee is charged at the time of filing. The form of the report is short and can easily be completed without outside help. For convenience, the State allows businesses to file electronically at https://inbiz.in.gov/business-filings. The penalty for not filing is the administrative dissolution of the business entity by the State. Recently, the Secretary of State’s office advised business owners that advances in technology infrastructure will allow it to render administrative dissolution decisions within 5 months of a business entity report filing becoming delinquent. Dissolution Revocation.

What does administrative dissolution mean for a business? Administrative dissolution is a process by which the State takes away the right, power, and authority of a business entity to conduct business within the State. In practical terms, administrative dissolution means that a business entity cannot access the court system to resolve disputes, cannot have a merger or other business reorganization recognized by the State, and equity holders cannot rely on the business entity to shield their personal assets from liabilities of the business. Administrative dissolution does not mean that officers from the State are likely to storm a business’ offices and forcibly shut down its operations. Many times, business owners remain unaware that their business entities have been administratively dissolved for a period of months or even years, especially if their business operations do not bring them into contact with the State for an extended period of time.

Until recently, Indiana has not restricted the opportunity for business owners to seek reinstatement as a remedy for administrative dissolution. Reinstatement typically involves filing missing business entity reports and paying fees and penalties associated with those missing reports. Earlier this year, Indiana adopted legislation limiting when reinstatement may be sought. Reinstatement Outreach. Under the new approach, business owners will have 5 years from administrative dissolution to file for reinstatement. After 5 years elapses reinstatement will not be available as a remedy. When reinstatement is not available, business owners will have no meaningful choices but to wind down the business entity, cover its outstanding liabilities, and distribute out any remaining assets. Where the business entity that has been dissolved remains a going concern, very likely that will mean forming a new entity and transferring the assets and liabilities of the business to that new entity. That transfer, the structuring of which will be limited due to the transferor’s status as administratively dissolved, will have tax consequences.

For companies that currently find themselves administratively dissolved and that have been administratively dissolved for 5 or more years, the new legislation offers a grace period. To take advantage of the grace period, entities will need to submit applications for reinstatement to the State by July 31, 2018. After that, reinstatement will no longer be available to these companies.

Filing business entity reports used to be a nuisance with limited adverse consequences. If a business owner missed a filing or two, there would always be an opportunity to seek reinstatement to fix the situation. That has changed. Business owners who ignore the obligation to file business entity reports for too long will now face serious consequences that are not easily remedied.

Author: Pete Gillin is a seasoned transactions attorney whose experience includes advising middle-market and closely-held businesses. Practice areas include business counsel, business formation, business transactions, business acquisitions, succession planning, partnership agreements, financing agreements, contract review, and intellectual property matters.

You can contact Pete by calling 574.232.3538 or email pgillin@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.