REPORT FROM COUNSEL

SUMMER 2006 ISSUE

SHOULD YOU INCORPORATE YOUR BUSINESS?

By Jeffrey L. Rehmeyer II and Richard Hansberry

Following fast on the heels of a decision to go into a particular kind of business is the decision about what type of legal entity it should take. The most common options are a sole proprietorship, partnership, corporation, or a limited liability company ("LLC"). Traditionally, the corporate route enjoys an understanding of its concepts, and you may like the sound of having "Inc." after the company's name, but there are more practical, business-like considerations to take into account.

More so than with other structures for a business, starting a corporation means complying with formalities required by state laws. Once the shareholders (owners) of the business agree on some basic matters, such items are embodied in Articles of Incorporation that must be filed with the appropriate state agency. These essentials may include:

* a corporate name;

* a physical address (not a P.O. Box) within the state of incorporation;

* the number of shares that can be issued; and

* the nature of the corporation's business.

The proposed corporation will also need bylaws, which constitute a procedural rule book for the company. Similarly, LLCs include a name and address, but do not issue "shares" in the traditional sense. Ownership in an LLC is evidenced by membership units.

Decisionmaking

Majority rules. Whoever holds a majority of the shares of a corporation or LLC has ultimate control over it. Usually a majority ownership of shares is required to elect a board of directors (sometimes known as "managers" in an LLC), which is charged with making the "big picture" decisions. If a decision affects a shareholder's rights, such as a change in the Articles of Incorporation or whether or not to merge with another company, the shareholders have an equal role in that they themselves must approve the decision by a certain margin of votes.

The board elects the officers of the corporation, typically including a president, vice-president, secretary, and treasurer. The officers may or may not be salaried employees or shareholders, and in some cases one person may hold more than one office. LLCs can, but do not always, have officers.

Accountability

Near the top of the list of reasons to incorporate is the fact that, since the corporation is treated as a legal "person" separate from the people who own and run it, the shareholders as a rule may not be personally liable for the corporation's debts. Instead, their risk is confined to their investment in the company. However, an exception with the colorful legal name of "piercing the corporate veil"exists. If the owners do not comply with the statutory requirements for running a corporation, or if they blur the lines too much between corporate and personal finances, the legal existence of the corporation as a separate entity is ignored and the owners are on the hook for the corporation's losses. The same rules apply to owners of an LLC.

Transitions

As a separate entity in the eyes of the law, a corporation does not go out of existence if one or more of its owners dies. Instead, a corporation stays alive until its owners decide otherwise. Transfer of the ownership of the corporation is accomplished by selling its stock, or membership interests, in the case of the LLC. New owners are added either when existing owners sell some of their stock or the corporation itself sells more shares of stock. The smaller the enterprise, the more likely it is that the owners, for whom the corporation may be both their property and their employer, may agree to restrict the sale of the stock in order to maintain control.

The particular circumstances of each new business and the differences in the governing laws of the states make generalities difficult. That said, the factors on the debit side of the ledger for corporations include the costs of setting up the corporate entity, the need for a separate tax return, and the burden of "double taxation." Double taxation means that the corporation is taxed on its profits, and the shareholders are then taxed on their dividends. On the credit side are limited liability for the owners and easy transfer of ownership.

Making the appropriate choice for a business form is one of the first, and one of the most important, decisions a new business will make. Whether choosing a corporate structure or some other form, make sure to consult with a qualified attorney.

CGA Law Firm's business and corporate attorneys have extensive experience in entity formation, as well as other business counseling issues.

FIRM UPDATES

On Saturday, April 29, 2006, CGA litigator, Tina H. Ness became Mrs. Tina H. Fox. Best wishes to Tina on her nuptials!

Congratulations to attorney Mieke Walsh Driscoll on the arrival of her new son in April!

Events and Speaking Engagements

Lawrence V. Young and Craig S. Sharnetzka presented at the Middle District Bankruptcy Bar Association (MDBBA) Annual Bankruptcy Institute. They presented an annual review of Judge France's opinions. Judge France is the only Bankruptcy Judge in Harrisburg. Larry is the Immediate Past President of the MDBBA and is also on their Board of Directors.

Anne E. Zerbe presented a seminar to the Society of Human Resource Managers (YSHRM) on legal updates and trends regarding the Americans with Disabilities Act (ADA) and Family Medical Leave Act (FMLA), including interactions between these two and other leave laws.

Richard K. Konkel recently presented a seminar for members of the National Business Institute in Harrisburg on the topic of estate administration. Richard was part of a panel discussion and specifically presented on the topic of successfully handling estate litigation and probate issues.

Benjamin L. Pratt recently taught a class, Negotiations and Personnel Management in Public Schools at Shippensburg University. The class was made up of administrators from throughout the region. Ben provided information from the perspective of the chief negotiator.

Caryann M. Sculley presented on Professional Conduct Training for 150 hotel associates and managers of the Crowne Plaza Harrisburg. She focuses on business and employment law and provides various types of preventative training programs to employers and employees.

Honors, Awards and Appointments

CGA Law Firm is the top ranked full service business firm in York County. The firm was voted #2 in York County in a reader's poll conducted by the York Daily Record. First place this year went to a local personal injury/criminal law attorney. The survey polls readers on their favorite area businesses in a variety of categories, including restaurants, retail and services. This is the 4th year in a row that CGA has ranked at the top of the list for a full service firm. Thank you York County! We appreciate your confidence in our service and your trust in our firm.

Professional Development

Peter R. Andrews recently attended the 39th Annual Penn State Dickinson School of Law Uniform Commercial Code Institute in Chicago. This seminar draws attorneys and practitioners from around the nation and deals with legal issues regarding commercial and industrial finance.

Lawrence V. Young attended the Southeastern Bankruptcy Law Institute in Atlanta, GA. This is a 3-day seminar drew together top legal talent from around the country to discuss advanced practices in both consumer and commercial bankruptcies.

Tina H. Fox attended two recent training seminars offered by the Pennsylvania Bar Institute on the collection and enforcement of judgements under current PA statutes and regarding strategies for navigating the Appellate Courts.

Caryann M. Sculley attended the 12th Annual Northeast Regional Employment Law Institute. The program addressed important new developments in Employment Law in over 60 workshops.

Charitable Giving/ Sponsorships

Michélle Pokrifka is a Team Captain in the 2006 Memorial Hospital Healthy Kids Annual Giving Campaign.

CGA Law Firm contributed to a recent Leadership York project aimed at renovating Little Jimmy's Park on North Beaver Street in York.

CGA Law Firm sponsored the 1st Annual Voices for H.O.P.E. Banquet in May benefiting a southern York county-based non-profit all-volunteer organization providing free support services to cancer patients and their families. H.O.P.E. is actively supporting 394 families in 17 different states who are living with a diagnosis of cancer. Craig S. Sharnetzka and Anne E. Zerbe attended the event along with members of the healthcare and business communities and civic leaders. For more information about H.O.P.E. visit www.hopelifeline.com.

CGA Law Firm was a tournament sponsor of the York College Alumni Association 16th Annual Golf Outing. CGA attorneys Sharon E. Myers and Andrew M. Paxton are YCP alumni. Sharon serves on the Board of Trustees and Andrew is the President of the Alumni Association Board of Directors.

CGA Law Firm sponsored the 5th Annual Culinary Fare to benefit the Victim Assistance Center (VAC) of York in May. CGA attorneys Michélle Pokrifka and Christian J. Dabb are on the Board of Directors for the VAC. The event raised more than $18K to provide services to more than 18,000 children and adult victims of sexual assault and violent crimes.

CGA Law Firm will sponsor the 2006 Double Creek Tour and Run to benefit the Healthy Community Pharmacy, a collaborative pharmacy which provides uninsured families from area hospitals with prescription medication. Team CGA will include Anne E. Zerbe, Andrew M. Paxton, Greg Warner, Abbey Wagman, Jaimee Shue and Aggie Puleo on the Ride. Running for team CGA will be Mieke W. Driscoll and Sonja Comegna. Special thanks to Gary M. Gilbert, Frank H. Countess, Anne E. Zerbe, Mieke W. Driscoll and Tina H. Fox for their support of this event.

VALUATION DISCOUNTS FOR ESTATE AND GIFT TAXES

By Timothy J. Bupp

Upon the death of the owner of stock in a closely held corporation, the fair market value ("FMV") of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded.

Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock.

The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent's minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer's lack of control over the company and by another 15% for lack of marketability of the shares.

The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:

* nature and history of the business;

* outlook for the economy and the specific industry;

* book value of the stock and financial condition of the business;

* earning and dividend-paying capacities of the company;

* goodwill or other intangible value of the enterprise;

* sales of the stock and size of the block of stock to be valued; and

* market price of publicly traded stocks of corporations in the same or similar line of business.

CGA Law Firm offers extensive estate planning and administration services and counsel in tax matters.

CHILD SUPPORT UPDATE

By Michélle Pokrifka

Effective January 26, 2006, the Pennsylvania Child Support Guidelines were revised as part of the state's overall practice of periodically revising the Guidelines to keep up with economic changes. Pennsylvania's support calculations are based on the incomes of both parties, and little or no regard is paid to the individual expenses of the parties.

The law presumes that parents whose joint incomes are at a certain level should pay the same amount of support as other parents with the same incomes, whether or not their particular personal expenses are vastly different. This approach focuses on fairness to the child or spouse entitled to support rather than on the other economic obligations of the payor.

If you have an existing child support, spousal support, or alimony pendente lite order, you should consider requesting modification of your existing obligation. The 2006 revisions to the Guidelines tend to increase support obligations where the parties have one child and their combined monthly net income is under $6,000 per month. For parties with higher incomes, the revisions tend to reduce existing orders for one child. For parties with more than one child, the revisions vary.

Before requesting modification proceedings at your county support office, you should secure a calculation to confirm whether modification will benefit you. Sometimes a parent seeking a change in a support order is unpleasantly surprised to find that his or her request leads to a modification in the opposite direction. It is wise to explore the likely result before you actually file for a change in your order.

INSTANT MESSAGING ADMISSIBLE IN COURT

By Andrew M. Paxton

"Instant messaging," commonly abreviated "IM," is an increasingly popular and convenient means of communicating over the Internet. An instant message is a written communication that is instantly exchanged electronically between participants over computer networks, cell phones, or other wireless devices. A Pennsylvania court recently decided that printouts of instant messaging are admissible in court. A juvenile accused of assault was convicted based on trial evidence that included "instant messages" that he sent to the victim over the Internet.

The juvenile denied that he was the aggressor in a serious fight that occurred at a school bus stop. To prove motive, the prosecutor offered into evidence printed copies of the juvenile's instant messages in which the juvenile accused the victim of stealing from him and threatened that he would beat the victim physically. The juvenile's lawyer objected to the admission of the messages because no proof existed that the juvenile actually wrote or sent them himself.

The court declined to create a "whole new body of law just to deal with e-mails or instant messages." The court acknowledged that e-mails and instant messages are cloaked in anonymity--while they can be traced to a particular computer they usually cannot be connected to a specific author with certainty. Unless the purported author is actually witnessed sending the e-mail or IM, there is always the possibility it is not from the individual identified as the sender. The court agreed that anyone with the right password can gain access to another's e-mail account and send a message ostensibly from that person.

However, the court also noted that the same uncertainties exist with traditional written documents--a signature may be forged, a letter may be typed on another person's typewriter, distinct letterhead stationery may be copied or stolen. The court concluded that e-mail messages and similar forms of electronic communication, such as IM, can properly be authenticated within the existing framework of Pennsylvania law. There is a history in the courts of admitting writings into evidence if the circumstances surrounding the creation or delivery of the writing tend to prove the identity of the author. It is then up to the judge or jury to decide if the proof of authorship is clear.

Increasingly, Pennsylvania courts are recognizing faxed and e-mailed documents and signatures as binding. While it remains advisable to sign important legal documents by hand and to keep the original document, your use of electronic communications may be legally binding and/or will be admissible in court if all of the circumstances support the attribution of the document to you. Any time your e-mail or instant message account appears to be compromised by unauthorized use, you should immediately review the account activity and preserve any available evidence of the unauthorized use. Otherwise, unauthorized communications could be attributed to you.

Andrew Paxton practices business law with an emphasis on intellectual property and technology issues.