Business Litigation

by Chris Swiecicki

Choosing a Legal Ownership Structure for a New Business

In the early stages of a business, a lot is riding on every decision. Choosing the legal ownership structure, for example, can impact taxes, legal liability, and the business’s day-to-day operations. 

While it is possible to change the structure of a business after setting it up, that can involve unnecessary hassle. It is better to understand the pros and cons of each structure and its implications now and in the future—and start out with the most beneficial formation.

Choices For the Structure of a Business

Deciding on a legal ownership structure involves thinking about the business’s goals and potential future events. For example, an individual planning to sell homemade goods at farmer’s markets for a little extra cash does not need the same business designation as a multi-million dollar manufacturing company.

In general, a less formal structure will have few requirements to meet and straightforward everyday management. More formal structures typically offer tax advantages and personal protections but also have more rules to follow.

The structure of a business needs to be chosen before the owner can apply for a tax ID number, register it with the state, or obtain any licenses or permits. Let’s look at the definitions and considerations for the possible designations a business might pick.

Sole Proprietorship

A person can become a sole proprietor simply by deciding to go into business for oneself. They do not have to file any paperwork or register the business in any way, but instead can simply begin selling goods or providing services. 

Because the person is the business, revenue and expenses are recorded on the individual’s income tax return. Sole proprietors may choose a dba (doing business as) and open a separate bank account in that business name to keep things separate from their personal finances, but it is not required. 

The main drawback for sole proprietors is they assume all liability. This means that any debts or legal trouble can put their personal assets at risk. 

A sole proprietorship works well for someone selling crafts on Etsy or mowing lawns. The risk of someone suing these entrepreneurs is low. For other individuals, such as a childcare provider or the owner of a food truck, the possibility of an accident or other mishap could land them in court. Those businesses would receive more protection from another legal ownership structure, such as an LLC (limited liability company) which we discuss below.  

Partnership

If a business fits the description of a sole proprietorship, but there is more than one owner, they may choose a general partnership as the legal ownership structure. Like a sole proprietor, all revenues pass through to the partners and must be reported on their individual tax returns. 

General partnerships do not need to be formally registered unless the state requires paperwork to use a business name. But this structure does require a good deal of trust between owners. For this reason, every partnership, even a family business, should have a partnership agreement to make sure everyone is on the same page. This contract will spell out matters such as the division of profits and losses, who has decision-making authority, how conflicts will be resolved, conditions for ending the partnership, etc. 

Since general partners assume unlimited personal liability for something the business or the other partner does, an LLP (limited liability partnership) may be preferable. This protects partners from being completely responsible for their partner’s actions. In most cases, the amount of liability is limited by the partner’s contribution to the partnership rather than any personal assets. The articles of partnership will spell this out and may also restrict the amount of operational control of some partners. 

A good example of an LLP is a pair of attorneys or dentists practicing together. Both names may be on the door, and the partners may share day-to-day decision-making in the office. But neither is responsible if the other partner is sued.

Limited Liability Company (LLC)

An LLC’s main purpose is to shield its members from legal liability. LLCs can have one owner or several. For an individual whose business has a higher risk of legal action, this legal ownership structure is preferable to a sole proprietorship. An example would be someone making a product that could potentially harm someone, or in an industry where it might face a challenge for patent infringement. The LLC, not the individual, will take legal and financial responsibility for any mishaps.

Starting an LLC means registering the business entity with the Secretary of State. Because it holds business assets separate from the personal assets of its members, there must be meticulous record-keeping to keep revenue and expenses separate too. 

That said, an LLC is still a pass-through corporation and does not need a tax return of its own. Each member is required to report their earnings from the company on their tax returns. They are also considered self-employed and must also pay self-employment tax which goes toward Medicare and Social Security.

Individual entrepreneurs and large companies may both benefit from the protections of an LLC. One thing to consider, however, is owning multiple LLCs. Receiving income from several pass-through entities can create a tax burden that is greater than if the legal ownership structure was a corporation.

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Corporation

A corporation can be a C corp or an S corp. Both provide the strongest protection of its owners’ personal assets. Corporations are legal entities that are completely separate from their owners. As such, the company earns profits or suffers losses and files a corporate tax return. Profits are distributed to shareholders in the form of dividends. 

A C corp is subject to “double taxation,” because the company pays taxes on its profits, and the shareholders pay taxes on their dividends. This can be avoided by forming an S corp instead, which allows profits to pass through to shareholders without paying a corporate tax. Companies must meet certain IRS requirements to become an S Corp, however. 

There are many rules that corporations must follow. Setting one up requires articles of incorporation, a board of directors, annual shareholder meetings, and strict record-keeping and reporting. But there are many benefits as well. Corporations can sell stock and raise capital, and shareholders can sell their shares without affecting the corporate structure. 

Forming a corporation is beneficial to large companies with plans to grow exponentially, go public, or to be the subject of a merger or acquisition in the future. But it can be an appropriate structure for a small business too depending on the circumstances.

Which Legal Ownership Structure is Right for You?

In choosing the structure of a business, there are several aspects of the business and its owners to consider. 

Protecting Personal Assets. For an individual owner in a business where there is little risk of lawsuits or bankruptcy, a sole proprietorship is usually sufficient. But only LLCs, corporations, and some partnerships protect personal assets from liability. 

Control and Management. If day-to-day decisions for company operations are shared, a business should at the very least have a partnership agreement. Forming a corporation with articles of incorporation will formalize the details for larger, more complex companies.

Tax Implications. There is nothing wrong with a corporate structure with pass-through income unless the applicable tax rate results in a huge tax burden. A tax attorney can weigh the pros and cons of pass-through vs. a corporation’s double taxation.

Funding and Capital. If selling stock and raising capital is part of the current or future business plan, a corporation is the best structure option. 

Scalability and Flexibility. Big plans for the future, such as expanding to a new region or launching an IPO should be considered before deciding on a legal ownership structure.

Legal Requirements. If an LLC’s protections are sufficient, it doesn’t make sense to form a corporation and jump through all the hoops required with incorporation. Similarly, an individual with a low-risk business does not necessarily need to fill out the paperwork to become an LLC.   

Legal Advice for a New Business

The decisions you make about the legal ownership structure of your new business can have a huge impact on its future. The best way to determine the appropriate structure is to discuss it with a business attorney like Swiecicki & Muskett. 

Chris Swiecicki’s diverse experience helps identify each business’s unique needs when it comes to business law and taxation. Contact him today to discuss what will be best—and most profitable—for you.

by Chris Swiecicki

Is There a Statute of Limitations on Patent Infringement?

Does your business have a patent that another company has infringed upon? Or are you being blamed for stealing someone else’s idea or product? In either case, you may be wondering how long you have to take legal action. 

I myself have been co-counsel on a patent-infringement case having to do with a piece of technology (a parking app, to be precise). That said, it’s important to state: Handling a patent issue is something that should be done by someone admitted to the patent bar. So, if pursuing a patent case, make sure you have a patent attorney on board first.

While I am not a patent attorney myself, there is some readily available information that patent attorneys will commonly share with potential clients. This includes crucial information on the statute of limitations for patent infringement cases—and the timeframe you actually have for bringing forward a case.

The Ins and Outs of Patent Infringement

Patents are issued by the U.S. government to protect the invention or technology of an individual or business. When someone legally obtains a patent, they have the right to “exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” (35 U.S.C. §154)—at least for a set period of time.

Two types of patents offer intellectual property protection. Design patents cover an object’s design or unique appearance, and last for 15 years. Utility patents cover unique machines, processes, or chemicals. These patents last for 20 years.

An invention does not need to be completed in order to be protected. During the process of making it, inventors can apply for a provisional patent for one year, which means it’s in the “patent pending” phase. This gives developers time to refine details and determine if there is a market for their product while letting others know that their idea is in the works and that it can’t be copied.

After the provisional patent has expired, the owner can either move on with their invention and file for a non-provisional (permanent) patent or allow it to lapse altogether. After that time, competitors can file for a patent using that same idea. 

What is Patent Infringement?

Patent infringement happens when someone copies a patented idea to create a product without the patent holder’s permission. “Stealing from” a patented product can happen in a number of ways:

Direct Infringement 

Producing, using, selling or attempting to sell, or importing a patented item without first obtaining a license from the patent holder.

Indirect Infringement

Infringing on a patent, but doing so only after another company or individual has done so. For instance, if another business copies a patented product, and you distribute their product, you could be sued for patent infringement. 

Contributory Infringement

When an individual or company purchases or imports a part that goes into creating a product that’s already patented by someone else. 

Willful Infringement

When someone shows blatant disregard for the patent. For example, if someone else’s patented product is found within your business where you are making a similar product, you are willfully violating their patent.

Induced Infringement 

Aiding another infringer by providing parts or assisting in the manufacturing of the patented item.

Not all cases of patent infringement call for legal help. Sometimes, a patent holder who is aware of someone using their product can inform the offending party and ask them to stop. If that doesn’t work, it may require business litigation where a patent attorney steps in. 

The Statute of Limitations on Patent Infringement

In the United States, the statute of limitations for patent infringement is six years. This means from the time a person who has a patent learns that someone is using their idea, they have six years to file a lawsuit. Each year, about 5,000 patent infringement cases are filed, and 97% of them are settled outside of court. 

After six years have passed, the patent holder cannot take legal action or collect financial damages. This is why it’s so important to contact a patent attorney as soon as one knows their idea is being stolen (unless they’ve successfully asked the accused to stop). 

Defenses to Patent Infringement

From what other patent attorneys have confided in me, there is a range of cases of patent infringement, with different sorts of difficulties involved. In some cases, proving someone is using a patented idea is easy. But in more difficult situations, a lawyer must carefully formulate a plan to defend the accused. These means that there is no simple “cookie cutter” defense to be had.

However, some common defenses a lawyer might use in patent infringement cases are: 

Non-Infringement

In simple terms, the product or process in question is not the same as the patented one.

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Invalidity

The patent is invalid and should have never been approved, because another invention like it already existed prior to the patent, or it provides an obvious solution to a simple problem. 

Inequitable Conduct

The patent owner misled the examiner, withheld important information, or was dishonest. This defense also aims to prove the patent is not valid. 

First Sale Doctrine

The person accused of infringement is reselling an item that was legally sold to them. 

Licensing

The patent holder granted permission for the accused to use the patent, and that person used the invention in compliance with that permission.

Estoppel 

One of two forms of this defense may be used. File Wrapper Estoppel claims the inventor waived rights or admitted to limitations of rights in their patent application. Equitable Estoppel means the patent holder led the accused to believe the patent would not be enforced and allowed them to continue with the project.

Experimental Use

A patented invention can sometimes be used if related to the development of information. This exception is often granted to universities in their research.

Protecting Yourself From Patent Infringement 

The easiest way to avoid being charged with taking someone else’s invention is to research existing patents before beginning production. The Patent Public Search Tool on the U.S. Patent Office’s website (USPTO) lists products that are already patented. If a developer finds a similar invention listed but is unclear whether further development of the product would lead to patent infringement, an intellectual property attorney can identify the risks.   

Being found guilty of patent infringement can come with millions of dollars in fines, plus any accrued royalties. It is well worth the investment of hiring an attorney to avoid those costs.

On the flip side, if a business or product knows of someone who has violated their patent, they must take legal action immediately. Under the statute of limitations for patent infringement, there are six years to file a lawsuit. Waiting any longer could mean watching someone else profit from years of the originator’s hard work. A successful lawsuit will not only stop the infringement but could result in significant financial compensation.

To Patent Infringement Attorneys: It Pays to Have Someone Who Knows Business

Patent cases need to be handled primarily by an attorney admitted to the patent bar, of course. But these cases can get complicated, and it helps to have co-counsel with someone who understands the business contexts of these kinds of cases. This is especially true when technology is involved.

At our firm, we have extensive experience with business litigation, as well as with contract negotiation and corporate transactions. This means that we can put a patent infringement case within its broader context—for example, if a patent is in dispute after a merger, or as part of an employment contract.

So, if you are a patent attorney seeking co-counsel for a business case of patent infringement, we would be happy to help—just reach out.

by Chris Swiecicki

What Does a Business Litigation Attorney Do?

When starting a business, few owners expect to end up facing a lawsuit. But at some point during the life of the company, they may end up on either side of a legal dispute This could be with another business, customers, suppliers, lenders, employees, or a government entity. It can also be between the company’s business partners. These circumstances all call for legal help.

What does a business litigation attorney do for companies? They represent those facing legal challenges, negotiating and settling conflicts or litigating the cases in court. In addition, consulting with a business litigation lawyer before problems arise can often help a company avoid disputes altogether or at least reduce their impact.

Some businesses have in-house legal counsel to handle  litigation issues. Others hire a law firm when there is a clear need for legal guidance. A third option is adding a business litigation attorney to your team on retainer. Gaining a deeper understanding of the services litigation attorneys provide will help business owners know if and when to find one.

Situations That Call for a Business Litigation Attorney

Owners of small and medium-sized businesses may never need a business litigation attorney. Instead, they accomplish simple legal tasks like  obtaining licenses, permits,  and an employer identification number (EIN) with a bit of research. Even navigating an Internal Revenue Service audit is possible with the company’s accountant rather than legal counsel.

If circumstances threaten business interests in some way, or if there is a good chance that a situation may turn litigious, a business litigation attorney is a must. A lawyer in this role can defend the company’s rights if they are under attack. If the business litigation attorney’s client is the entity that has been wronged, counsel can see that it is made whole.

These are the most common issues that call for a business litigation attorney:

Contract Disputes

Companies may face breach of contract issues or disagreements about how to interpret a contract’s language that necessitate the help of a business litigation attorney. Contracts may involve explicit instructions, like a stock purchase agreement in a merger or acquisition, or something less concrete such as the implied covenant of good faith and fair dealing. The attorney may negotiate with the other party on behalf of the company or represent it if the matter ends up in court.

Employee Allegations

Human resource issues sometimes escalate to the point of litigation. A company may need a business attorney to defend against a former or current employee for wrongful termination, complaints regarding pay or working conditions, or claims of discrimination, sexual harassment, or a hostile work environment.

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Internal Disagreements

Disagreements between business partners sometimes turn contentious. A business litigation attorney can help resolve the situation and keep the partnership intact, or advise the parties on dissolving the partnership. Issues may also arise in public entities between shareholders and management about corporate control or the direction of the company. An attorney may be called upon to intervene.

Someone is Suing Your Business

A company can become the subject of a lawsuit for any number of reasons including:

• Product liability/class action suits
• Real estate disputes
• Intellectual property or patent infringement
• Breach of contract

Working toward a settlement or if necessary, going to court in one of these instances, is one of the most common reasons a company would hire a business litigation attorney. 

You Need to Initiate a Lawsuit

Just as an entity may be sued for the reasons above, it may also find itself as the plaintiff in one of these same cases. Perhaps a competitor is ripping off a product design.

When it becomes necessary to file a claim or initiate a lawsuit against an individual or another company, owners will need an experienced business litigation attorney.

Facing an Investigation By a Government Entity

Business litigation attorneys also represent companies in complaints or investigations brought by the federal, state, or local government. These cases can include compliance issues, a corporate mishap or disaster, or tax liability issues with the IRS.

The Role of Business Litigation Lawyers

For many companies, dealings with business litigation attorneys are largely preemptive. Owners or managers consult with lawyers to draft contracts, write policies, and make decisions with the specific goal of not ending up in litigation. For example, a company will hire a merger and acquisition attorney to structure a deal so the transaction goes smoothly.

When things turn litigious, a business litigation attorney helps negotiate a settlement that is acceptable to both parties. A lawyer may also advise their client through Alternative Dispute Resolution (ADR) procedures. The process of ADR can take the form of arbitration, where a judge decides a dispute for the parties, or mediation, where the parties come to their own agreement.

If the dispute ends up in court, what a business litigation attorney does is the same as what any other courtroom lawyer does. They prepare briefs, present motions, find and interview witnesses and experts, and present evidence. They will argue the case and defend their client in front of a judge and jury during trial.

Do You Need a Litigation Attorney on Retainer?

Companies and industries that are vulnerable to litigation often  employ full-time litigation attorneys. For example, utility companies with thousands of employees and customers, and strict government regulation, have in-house legal departments.

Other companies may only hire a litigation attorney if and when they need one. Or, they may have a consulting relationship with a law firm or independent attorney for issues as they arise. In some cases, companies with in-house counsel work with an outside litigation attorney with  specific litigation experience, leaving their corporate team to deal with day-to-day legal issues.

Whether a company has a legal department or hires an attorney on an ad hoc basis is often a matter of cost. Owners must ask themselves about the likelihood of ever needing legal representation. Some may never need a business litigation attorney. But if they do anticipate the need, and are weighing whether to have an attorney on retainer, they must weigh what a business litiation attorney does with being under-represented in what could become a very costly lawsuit.

What to Look For In a Business Litigation Attorney

Perhaps you will never need a business litigation attorney, but it is best to consider the possibility. At Swiecicki and Muskett , we have met many business owners who never imagined they would be sued or need to file a lawsuit to protect their business interests. This is why we suggest being proactive.

Find and form a consulting relationship with an attorney that you trust. Even if only called upon occasionally, they will be able to provide expert legal guidance. Their assistance with business basics like drawing up legally binding contracts and writing clear and compliant business policies will help you avoid unsettling legal disputes.

Even if your lawyer is not a business litigation attorney, or does not have experience relevant to your situation, they can refer you to someone they trust in the event that litigation expertise is needed. When interviewing litigation lawyers, look for superb writing and negotiating skills. Assess whether they can display the confidence in court necessary to argue your case effectively. And of course, they must be well-versed in state and federal statutes, case law, and legal precedents.

If you have questions about business litigation, schedule a consultation with Swiecicki and Muskett. We’ll discuss how best to protect your business interests and preserve what you’ve worked so hard to build.

by Chris Swiecicki

What is a Merger and Acquisition Lawyer? When Do You Need One?

Merger and acquisition lawyers help companies that are at a crossroads. They facilitate deals and advise owners who are looking to sell their business, buy another business, or combine assets and resources to create a new entity.

The merger and acquisition (M&A) branch of law brings together multiple disciplines, including accounting, tax law, real estate, government and industry regulations, and more. M&A lawyers must have a diverse skill set (or the ability to assemble a team of people with the appropriate expertise) to handle all of a transaction’s moving parts.

When Should a Business Hire a Merger and Acquisition Lawyer?

Buying or selling a company, or merging with another one, is not something that a business owner should attempt on their own. Even their corporate counsel might not be equipped to handle the transaction. An attorney with merger and acquisition expertise is necessary, and it’s a good idea to get them on board as soon in the process as possible.

The following scenarios will trigger the need for a merger and acquisition lawyer:

• Some small business owners grow their companies with the specific goal of one day striking a lucrative deal to sell it to a larger entity. They should consult with a good attorney early to ensure that their company, and their own compensation, is structured appropriately.
• Whether or not it was planned, potential buyers may start to show interest in a company. Consulting with a merger and acquisition lawyer can be helpful to assess the options, and whether or not it makes sense to entertain offers at all at that particular time. They can also advise on “poison pill” options to prevent hostile takeovers.
• Hiring a merger and acquisition lawyer is a good idea during succession planning if there is no plan to pass the company on to heirs or partners. The attorney can get the ball rolling to find potential buyers.
• When a company finds itself ready to expand and add to its portfolio by acquiring another business, a merger and acquisition lawyer can get the necessary resources lined up and begin to search for suitable candidates.
• A competitor or a company that fits well with a business may go on the market. A merger and acquisition lawyer can structure a viable offer.

Regardless of the circumstances of a sale, purchase, or absorption of a company, it is best to have an M&A lawyer at the earliest stages of the deal. Ideally, they should be the ones obtaining a valuation and crafting the agreement. These transactions are complex and have both internal and external consequences for all of the entities involved. Waiting until a deal is on the table and contracts are already drafted is too late.

M&A Attorney Responsibilities—The Basics

A merger and acquisition lawyer’s job is to advise and negotiate for their client. Throughout the course of the transaction, they will draft and file agreements that pertain to the business assets, employees, debt, and stock. The attorney will work with various accountants, real estate brokers, bankers, and opposing counsel as needed to set up the deal and see it through to completion.

First and foremost, M&A attorneys need to understand their client’s business objectives in order to craft a transaction that benefits the owners, stockholders, and employees. They will map out steps and a timeframe (which typically will take several months) and keep their client informed of the status and progress of the case.

Once the merger or acquisition is complete, the attorney will help to set up any new entities and continue to guide their client as they carry out the integration of assets, staff, and policies.

When the client is the target of a merger or acquisition, the M&A attorney will review the offer and help the company decide whether to accept it, refuse it, or negotiate further.

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Skills That Merger and Acquisition Lawyers Bring to the Table

Lawyers who specialize in mergers and acquisitions must wear many hats and understand a wide array of legal and business accounting topics. Those who routinely work in multiple disciplines can offer their clients the level of expertise necessary to reach the best outcome. Swiecicki & Muskett Attorneys at Law, for example, combine the practice areas of corporate law, taxation, and contract negotiations.

This type of multi-faceted firm can tackle the necessary parts of a corporate merger or acquisition. Whether these services are performed by the firm or outsourced, a skilled M&A lawyer is able to interpret the information and how it affects the proceedings.

Accounting and Business Valuation. Knowing what a company is worth through a business valuation is an essential part of any merger or acquisition. In addition, mergers and acquisitions require expert analysis of financial records and tax returns.

Tax Implications. Buying or selling a company can have a big impact on tax liability. It is necessary to understand the transaction’s tax implications and structure the deal accordingly.

Regulatory Obstacles. Government or industry regulations can prevent a merger or acquisition from moving forward. Antitrust, security, and investment laws are just some of the things that a merger and acquisition lawyer will need to navigate, to make sure their clients are in compliance.

Real Estate. The purchase or sale of a business can include the transfer of land, buildings, and other assets. Knowledge of real estate law and property valuations will help this part of the deal go smoothly.

Intellectual Property. Merger and acquisition contracts need to be clear about who owns or holds the rights to intellectual property. Placing a value on these items is important too.

3rd Party Contracts. Quite often, a company has contracts with lenders and other parties. An M&A attorney can obtain the necessary consent from those entities and deal with their concerns about how the business relationships will be affected by the transaction.

Human Resources. A merger and acquisition lawyer can make sure the agreements adhere to any applicable employment, compensation, and benefits laws. They will handle how various aspects are treated, such as payouts, employee stock options, retention agreements, terminations, and consolidation of offices.

Negotiations. A large part of the merger and acquisitions lawyer’s role is negotiating all aspects of the agreement between the entities. This can include the sales price, terms and payments, and any of the other items on this list.

Due Diligence. One of the most important jobs of a merger and acquisition lawyer is conducting due diligence. Private companies are not under the same scrutiny as publicly held ones, so this means conducting an in-depth investigation into the other company to ensure that things are as they claim. They will study their financial statements and other corporate documents, and assess the company’s obligations, litigation risks, and potential growth, among other things. They will look for evidence of sandbagging and ensure that everyone is holding to the implied covenant of good faith and fair dealing.

Finding the Right Merger and Acquisition Lawyer

When a company embarks on a merger or acquisition, it will need representation who can ensure that they meet the intended goals of the transaction. The terms should be clear to all entities and result in a legally binding agreement and a smooth transition for all involved.

At Swiecicki & Muskett, LLC, you will find relevant legal expertise with the breadth of knowledge necessary for a purchase, sale, or consolidation of companies. The firm’s unique combination of practice areas brings more to the negotiating table than the typical corporate counsel. In fact, Christopher Swiecicki teaches Business Acquisitions (M&A) and Corporations as an adjunct professor at Washington University School of Law.

Find out how Swiecicki & Muskett, LLC can help you navigate your merger or acquisition.

by Chris Swiecicki

What Business Legal Fees are Tax Deductible?

As a small business owner, you know how important it is to seek legal advice and services when needed. From drafting contracts to resolving disputes, legal fees can quickly add up. However, many types of legal fees are tax-deductible, potentially saving you money come tax season. Just which legal fees are eligible for tax deductions? And are there any tax advantages of legal services worth exploring?

What Types Of Legal Fees Are Tax-Deductible?

Certain legal fees incurred by you in the operation of your business are tax deductible, such as:

Startup Costs

Legal fees incurred during this process can be deducted up to $5,000 in the business’s first year if you’re creating or buying a business. This includes fees associated with creating legal documents or paying state incorporation fees. Any remaining startup costs must be amortized over time. This is important to remember when starting a new business, as the costs of creating or buying a business can quickly increase.

Defense Costs

Legal fees for defending or protecting your business from lawsuits can be deductible. This includes fees for attorneys, court costs, and other related expenses.

For instance, if a customer sues your company for a defective product or a supplier sues you for breach of contract, the legal fees for defending yourself in court can be deducted. (That said, this significant expense can often be avoided by having proper legal documentation in place—specifically, contracts and agreements.)

Tax Advice or Preparation

Legal fees related to tax advice or tax preparation are also deductible. This includes fees for tax attorneys, accountants, and other professionals who provide tax advice or prepare tax returns. This is a critical deduction to remember, as tax preparation and advice can be essential in ensuring your business complies with tax laws and regulations.

How Much Can You Deduct?

The amount a business owner can deduct in legal fees in a year depends on the type of legal expenses incurred.

Business expenses are defined as costs incurred “while operating a necessary and ordinary business.” These expenses are typically fully deductible on a business’s tax return. Examples of business expenses include rent, salaries, supplies, and utilities. The IRS allows businesses to deduct the total cost of these expenses from their taxable income, reducing the amount of tax owed.

The 2% rule applies to miscellaneous itemized deductions, meaning you can only deduct a portion of an expense if it exceeds 2% of your adjusted gross income (AGI). However, recent changes to tax rules have impacted which expenses qualify as miscellaneous deductions.

While some fees are fully deductible, such as startup costs, others may limit the amount you can deduct. This can make navigating the deduction process complex and time-consuming, which is why many businesses turn to professionals to ensure they maximize their deductions.

For startup costs, the IRS allows a deduction of up to $5,000 in the business’s first year. Any remaining startup costs must be amortized over time. You can deduct a portion of the startup costs each year until you’ve deducted the full amount. The amortization period typically lasts for 15 years, but there are exceptions for certain types of businesses.

There’s no limit to the legal fees you can deduct for defense costs. However, it’s important to remember these fees must be directly related to defending or protecting your business from lawsuits. Legal fees related to personal matters aren’t deductible.

For tax advice or preparation, the amount of deductible legal fees vary depending on the type of service provided. For instance, legal fees for tax preparation and advice are deductible in full. However, legal fees for tax planning, such as setting up a tax shelter or tax avoidance scheme, may be subject to limitations.

It’s important to note the IRS has strict rules about what legal fees are tax deductible. So, working with a tax professional or accountant is always a good idea to ensure you’re deducting the correct amount.

Additionally, documentation of legal fees is essential for tax purposes, so keep accurate records of all legal expenses incurred throughout the year.

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Which Legal Fees Are Not Tax Deductible?

It’s important to note legal fees related to personal matters, such as divorce or estate planning, can’t be deducted. Additionally, legal fees that aren’t directly related to your business aren’t deductible. This includes legal fees for personal lawsuits or disputes unrelated to your business.

For example, if a former employee is suing you, but the lawsuit has nothing to do with your business, you can’t deduct the legal fees for defending yourself against this suit.

However, these fees are deductible if the suit relates to a business dispute (such as an employee suing for unpaid wages).

The IRS also does not allow you to deduct legal fees for the following:

• Personal lawsuits or other legal disputes unrelated to your business.
• Legal fees for divorces, child custody issues, and similar matters.
• Legal expenses related to criminal activities.

Final Thought

Keeping track of your legal fees throughout the year is essential, as working with a tax professional or accountant to determine the tax advantage of legal services for your business. Deducting legal fees is a small but important way to keep your business financially healthy. For more on the intersection of legal help and tax law, contact us.

by Chris Swiecicki

Mergers and Acquisitions: The Perils of Breaking a Stock Purchase Agreement

At Swiecicki & Muskett, LLC, we often litigate interesting cases that illustrate just how important it is to follow the terms of a contract. One recent case involved our appeal of findings in favor of the seller of a business. We aimed to prove that the company breached its Stock Purchase Agreement (SPA) with the buyer, despite the original court ruling in the seller’s favor.

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