While many landowners, when asked to consider what their land consists of, would only think of the visible surface, this only encompasses one-third of their actual ownership. Through a concept known as cujus est solum, ejus est usque ad coelum et ad inferos (roughly, whoever owns the soil, owns all the way to the heavens and down to hell), ownership of the surface also gives ownership of the space below and above. While this doctrine has been impeded over time, most notably with the introduction of airplanes, it is still, in large part, intact.

Because of this doctrine, property owners are able to sell off portions of their land which still allow them to otherwise inhabit the surface, namely their mineral and airspace rights. Mineral rights have long been, and continue to be, a major concern for property owners, particularly where, as in Michigan, there is an abundance of oil and gas beneath the surface. But oil and gas are not the only things lurking beneath the surface.

The Backstory:

In 2005, Jerry and Robert Severson sold their ranch to the Murray family, but retained for themselves two-thirds of “all right title and interest in and to all of the oil, gas, hydrocarbons, and minerals in, on and under, and that may be produced from the [Ranch],” meaning that while both had the rights to the minerals, two-thirds of any profits would belong to the Seversons. However, what was found in 2006 was neither oil, nor gas, but instead several of the rarest, and most valuable dinosaur fossils ever found, including the unique “Dueling Dinosaurs” fossil, as well as one of only twelve completely intact Tyrannosaurus Rex fossils ever found (learn more about the fossils HERE). The Murrays were able to sell several of the fossils, with the T-Rex alone being sold for “several million dollars,” and the Dueling Dinosaurs being appraised between seven and nine million dollars. The Seversons, however, disputed the Murrays’ ownership, stating that the fossils qualified as “minerals” and, per the terms of the sale, they were entitled to two-thirds of the proceeds of the sale. When the Murrays were unwilling to part with the disputed monies, the Seversons filed suit. What followed was a case of Jurassic proportions.

The Science:

During the initial hearing at the United States District Court for the District of Montana, both the Murrays and the Seversons produced experts to testify as to the composition of the fossils. The Seversons’ expert testified that, while the bones of living vertebrates contain the mineral hydroxylapatite, during the fossilization process, that mineral would recrystallize into another mineral, francolite. Following tests on the fossils, the Seversons’ expert concluded that this recrystallization had occurred in these fossils, and because of this they qualified as “minerals.” Unsurprisingly, the Murray’s expert disagreed, stating that no recrystallization had occurred, and that the bones found in the soil were no different than a modern bison bone. The District Court, weighing both the scientific evidence, as well as what the District Court believed to be the definition of “mineral,” agreed with the Murrays.

The Legal:

The Seversons, disagreeing with the District Court’s decision, filed an appeal with the United States Court of Appeals for the Ninth Circuit, arguing that the plain definition of “minerals” included the fossils. In the Ninth Circuit, just as in Michigan, the Court noted that “words in a contract are interpreted ‘in their ordinary and popular sense unless the parties use the words in a technical sense or unless the parties give a special meaning to them by usage.” Here, to find the “plain meaning” of the word, the Court looked first to dictionary definitions of minerals, but found not only that dictionary definitions varied, but also that the interpretation of those definitions varied. While the Murrays argued that minerals only included items which were valuable because of their ability to be refined and used commercially, such as gold, diamonds, oil and gas, the Seversons argued that the fossils could also be used commercially, as evidenced by the Murray’s sale, and as such fell squarely within the Murray’s definition.  The Court, after weighing each of these arguments, along with several arguments specifically focused on Montana law, decided that dinosaur fossils fell inside the definition of “mineral,” and ordered the District Court to enter an order conforming with such a decision (Read the full decision HERE)

The Effect:

                While the Murrays may still appeal this decision to the Supreme Court, until such a time that they do so, and until the Supreme Court overrules the Ninth Circuit’s decision, the effect on landowners, both in Montana and around the country, is clear. Even though Ninth Circuit decisions are not binding upon cases in Michigan, as Michigan falls under the Sixth Circuit, as this is the only case which deals with fossils in the context of a mineral estate case, it would almost certainly be looked to for guidance. So, if you, or a friend, neighbor or family member, are looking to purchase or sell mineral rights, be sure to discuss whether or not fossils fall within the definition of “mineral,” so you don’t wake up with a pain in the neck big enough to bring down a brontosaurus.

Starting a new business can be a daunting and an expensive process for new entrepreneurs. Quite often, the sole focus of a new business owner is establishing the physical framework of the business, which may include essential building blocks such as finding a space in which to operate, creating a brand presence through a creative name and specialized product/service, and handling necessary employee and tax obligations. Often first-time business owners establish relationships with suppliers, marketing professionals, and accountants out of necessity to assist in the start-up process, but forego contacting a business attorney until after the first few years of their business venture.

 

By contrast, entrepreneurs who have past experience creating and running small businesses will contact an attorney prior to starting a new venture. There are several reasons why the knowledge and expertise of a business attorney will pay significant dividends to the business owner from the outset and will likely save the business significant legal costs in the long run.

 

Defining a Brand through Sale of a Product, Service, or Combination

 

Most new business ventures start due to some form of creative thought on the part of the entrepreneur. The business owner may have an idea for a new product, service, or a way to better provide an existing product or service to its target market. This new idea is at the forefront of business planning and represents the most significant “value add” to the fledgling business. Creating a brand or trade name for the new service or product is one of the most effective ways to garner notoriety for this new venture.

 

One of the most significant pitfalls for the entrepreneur who foregoes consulting a business attorney during this early process is failing to recognize that the legal rights to this branding concept may already belong to an existing business, or legally conflict with the name, slogan, or logo of another business or product line. Such a conflict can result in the new business owner realizing they are legally precluded from using their brand, but only after sinking significant funds in to its development.

 

Contacting an experienced business attorney at the outset of this process allows the business owner to ensure that state and/or federal rights to a trade name, logo, domain name, business name, or other brand identification (intellectual property) are available for the business and aligned with one another.  If the brand name is available for use, it can be adequately protected from use by competitors through state or federal registration.

 

 

 

Creating a Proper Entity

 

Whether it is through an accountant or from doing legal research through the internet, many new business owners properly identify the need to create a formal business entity out of which to run the business. The basic benefit of forming a small business entity such as a limited liability company (LLC) or an S corporation is two-fold. First, the business entity choice should protect the personal assets of the business owner from lawsuits or claims by creditors against the business. Second, the business entity choice should provide some level of tax benefit at an operational level to the business owner.

 

Despite these perceived benefits, if a business owner fails to consult a business attorney during this important step, these benefits may be diminished in value relative to another entity choice, or even fail to be present at all if the business owner fails to set up the entity properly pursuant to Michigan law.

 

First, in order to ensure a business entity will protect the personal assets of the business owner, the business owner must do a few things beyond simply forming the entity by filing the Articles at the state level. This includes creating proper entity documents as required by state law and maintaining proper separation between personal and business activities. If the creation of entity documents is attempted without the assistance of a seasoned business attorney, documents are very frequently drafted incorrectly or incompletely, resulting in additional cost to re-draft these documents properly. Similarly, pre-paid internet legal services that provide these documents often fail to address important state law, tax considerations, or provide documents that truly fit the scope and character of the new business.

 

Second, entity choice can play a significant role in the operational and long-term tax treatment of the business. Limited liability companies (which are taxed as partnerships by default) and S corporations (taxed under Subchapter S of the Federal Tax Code) provide unique business and tax planning opportunities to a business depending on a large number of different factors. These different tax treatments also create significant differences in the long-term tax treatment of the business, affecting choice in succession planning and the manner in which initial owners may form the business without incurring adverse tax consequences. As such, forming the proper entity for the specific product or service being provided at the outset is key in avoiding costly merger or conversion processes that may be utilized to alter initial entity choice after the business has already been formed.

 

Finding a Space

 

Unless a business owner is operating out of their residence, finding a space to purchase or lease is a necessity in starting a new business. Many business owners will choose to purchase or lease a space because of the physical layout or industry specific equipment present in a particular location. In entering into a purchase agreement or commercial lease, new business owners frequently gloss over significant obligations they are taking on in a rush to get their business open.

 

Unfortunately, many commercial leases and purchase agreements take advantage of restrictive and burdensome provisions that are not legally permissible in a purchase agreement or lease for residential property. This frequently includes requiring the new business owner to move in to the space accepting its current condition, without an inspection, no matter what potential structural flaws may exist. In the case of commercial leases, the agreement also often requires the tenant to pay for all necessary future repairs to the interior, and the obligation to replace all major equipment in the building, including any industry specific equipment, heating and cooling units, and utility related fixtures.  They also often state that any fixtures placed on the property become the property of the landlord.  Leases also often seek to take advantage of the excited, eager entrepreneur by asking the entrepreneur to individually sign a personal guaranty under the Lease, leaving their personal assets vulnerable.

 

It is also commonplace for the business owner to become aware of these obligations only after purchasing the building or becoming locked in to a lengthy lease. Contacting a business attorney prior to signing the document will allow a business owner to anticipate any potential issues with the space, be aware of their potential obligations for repair and maintenance, and allow the business owner an opportunity to negotiate these terms or simply find a different space if these obligations prove too daunting.

 

Creating Adequate Purchase, Employee, and Customer Agreements

 

The primary reason for delaying or altogether avoiding having a formal contract or agreement drafted by a business attorney is cost. Most frequently, the alternative is for the business owner to utilize a search engine to find a contract that appears to fit their industry. In other situations, business owners will skip the formalities and leave their business dealings to an oral agreement between themselves and the customer.

 

Despite the appearance of initial cost savings by repurposing an agreement from the internet or foregoing one entirely, a customer agreement that is not tailored to the product or service being provided to the public can create a catastrophic financial loss when a misunderstanding occurs with a customer. This can come from legal fees incurred through litigation and/or the judgment entered against the business in a lawsuit brought by a customer, or lost profits associated with a customer failing to pay and a business owner being unable to enforce its legal rights in collection. Frequently, these disputes arise because there is a difference in expectation between the business owner and the customer as to what was to be provided to the customer and when.

 

A well-drafted agreement will lay out all the material terms between the parties, and ideally leave no “grey area” for misunderstanding, or for the parties to dispute. In addition, in the event of a lawsuit against the business, provisions would be included in the agreement to benefit the business owner to the maximum extent possible under state law. In addition, any state or federal laws that enable the business to take industry specific collection efforts against a customer delinquent on payment would be in place to avoid loss of important cash flows.

 

At the end of the day, a well-drafted agreement will grant a business owner the maximum potential to negotiate a resolution without going to court, potentially saving the business thousands of dollars over and above the cost of drafting the agreement in the first place. Similarly, if litigation is inevitable, a well-drafted agreement gives the business solid footing on which to stand, rather than the shaky ground provided by an ambiguous, poorly drafted or incomplete contract. Unfortunately, once a dispute arises, there is no way to turn back the clock and draft an adequate agreement to avoid the dispute or aid in winning the resulting litigation.

 

Contacting an Attorney

 

Family and friends who own a small business, and other business professionals (financial advisors, CPAs, etc.) can be a great place to start for a referral to a local attorney who specializes in assisting start-ups and new business owners. Finding an attorney in this manner can be very valuable, as the referral is coming from someone who can either personally vouch for the expertise of the business attorney, or from another business professional who trusts the knowledge and integrity of the business attorney with their own clients.

When people ask me what type of law I practice, I tell them that we handle mostly business law, estate planning, and probate.  Because “business law” is so broad, I will often extrapolate on that and talk about how we assist entrepreneurs with everything from the start of the business to the end of the business and everything in between.  That includes entity selection and formation, corporate document drafting and review, contracts, intellectual property, and succession planning.  I was at my daughter’s friend’s birthday party and explained this to the hostess.  When I said “succession planning”, she said, “Oh, so you help businesses be successful?”  My initial reaction was to say no, that is not what that means.  But, actually, it kind of does mean that in a way.  It really got me thinking that a lot of people may not know what succession planning means.

 

The ideal time for us to meet entrepreneurs is at the inception of the business.  We can help them determine which entity structure is best for them from an operating, liability and tax perspective, and ensure they have the proper company documents in place, such as Articles, By-Laws or an Operating Agreement, Consent Resolutions, ownership interest certificates, etc.  We will research the proposed name for the business to ensure that it is not infringing on another business’s name or intellectual property.  Oftentimes, I will ask the entrepreneur what their goal is for the business and what will happen to the business if the principal becomes disabled or passes away, or what will happen when it is time for the principal to retire.  People are frequently taken aback by this line of questioning.  Why do we need to talk about the end of the business that is just getting started? 

 

It’s a fair question.  This discussion is important for several reasons.  Bad things happen and when a business relies solely on one person, the business can be destroyed quickly if something happens to that one person.  Is there someone that can step in and run the business?  The answer to this question is extremely important to the business owner(s), the business owner’s family members, employees, and perhaps most pressing, to the customers or clients of the business.  Additionally, we see too often a business owner in their seventies that is ready to retire but has no qualified retirement plan in place.  Most of the time, when this situation occurs, the business owner views their business as their retirement plan, but has no way to cash out of the business to sustain their lifestyle.  This can be catastrophic.  The business could be worth very little to an outside purchaser, or, even worse, there may be no one that wants to purchase the business.  As such, it is imperative that the business owner have a plan in place well before he or she is ready to retire.  This includes setting aside money for retirement and also having a business succession plan in place.

 

So, what is a succession plan?  A succession plan is just that – a plan for the future of the business beyond the career of the initial owner(s).  That means, it takes time to develop it and it needs to be in place prior to when it is needed.  It is a plan to address what will happen in the case of certain events.  If the principal becomes disabled or dies, there needs to be a plan in place for what will happen to the business.  There either needs to be someone who can run the business indefinitely unless and until the principal can return (in the case of disability), or there needs to be a plan to either sell the business or wind up the business and close down.  A succession plan needs to be developed to ensure continuity of the business if the principal is no longer in the picture due to disability, death, or retirement.  It is important to plan ahead so that the transition can be as seamless as possible.  Often, the plan includes family members who are involved in the business or trusted key employees that are well-versed in running the business.  This will make everything easier on the business owner, their family, the employees, and the customers or clients of the business.

 

Another key step in creating the succession plan is ensuring that the initial owner(s) can be sufficiently compensated for their ownership interest when the plan is put in to action. In the case of a sale to other existing owner(s) or to key employees of the business, if the sale is pre-planned, significant cost and tax savings can also be achieved. To accomplish this requires weighing and considering complex legal, financial, and tax factors surrounding the plan. Creating a team consisting of an experienced business attorney and business financial planner is the best way to ensure that all of these factors are accounted for so that the proper framework is put in to motion in enough time before the plan must be executed.

 

The hostess at the child’s birthday party wasn’t wrong.  Succession planning is helping to make a business successful - whether that be the retirement of the principal, a partial change in ownership, winding up the affairs of the business and closing down, passing the business to family members and/or key employees, or selling the business to a third party.  It is never too early to have a plan in place.

One common mistake made by business owners in either new or well-established businesses is that their company is set up as a limited liability company (LLC) with the State of Michigan and elects to be treated as an S corporation for Federal Income Tax purposes.  The result of this structure, or, for all intents and purposes, lack of structure, is that the entity is an LLC for state law purposes and a corporation in the eyes of the IRS.  We typically do not recommend this set up as there are pros and cons to each type of entity and it is important to maintain entity consistency on the Michigan and Federal Level.

In most situations, we do not favor LLCs for active, operating businesses. We do, however, recommend LLCs for rental and commercial real estate, and ownership and operation of capital equipment.

Why does State and Federal consistency matter?

The main purpose and benefit of setting up a business entity is to separate the liabilities of a business from the business owner’s personal assets.  In order for a business entity to properly protect the owner’s assets from liabilities of the business, the entity must be set up and operate as a valid business entity both on a State and Federal level.  The entity must also hold itself out to be a separate, valid, and lawful entity to customers and the public at large.  If a Michigan LLC is created but the company elects to be treated as an S Corporation with the IRS, an inherent disconnect between the operation, the tax filings, and the State corporate filings occurs.  If the business were to be sued, a plaintiff’s attorney may attempt to reach through the entity and assign liability to the business owner personally. This is particularly true for single-member LLCs, as historically they were not treated with the same liability protection as multi-member LLCs in some other states. Furthermore, the annual business activity of a single-member LLC is reported on the member’s personal tax return as a sole proprietorship. This is not a position that the business owner would ever want to be in when faced with a potential lawsuit.

In addition, there are certain tax-favored benefits afforded to the business owner in the operation, sale and merger of an S corporation that are not afforded to LLCs.  For example, if all of the shares of an S corporation are sold back to the company when a new owner buys in, the S corporation owner is afforded substantial tax benefits in the transaction.  These tax benefits do not exist for LLCs because the Federal Tax Code treats LLCs like partnerships. Rather than leaving the tax treatment of a sale or redemption of shares to be determined by the IRS on audit, it is far better to structure the entity as an S Corporation both on a State and Federal level from the inception, or at the very least, prior to the sale of the company. 

We also do not recommend that an LLC owning rental or commercial real estate or capital equipment elect to be taxed as an S corporation, as this election removes the tax benefits afforded to these types of LLCs under partnership taxation rules at the Federal level.

What do I do if my business is an LLC that elected to be treated as an S Corporation?

As indicated, this is a fairly common circumstance in the State of Michigan.  If a business has elected to be treated as an S corporation but is registered with the State of Michigan as an LLC, it signals to us that the entity is likely not set up properly with all of the required documents in place and therefore is not a valid LLC in Michigan.  Furthermore, even if it is a valid LLC, we highly recommend conversion to a corporation on the State level. 

If you have questions regarding the process for converting an LLC into an S corporation in the State of Michigan, please give us a call so that we can explain and assist with the process.

Most people will die with at least some debt to their name. The average total balance of debt for U.S. consumers in what is considered to be the “middle to upper middle class” is $290,000.

 

What happens to these debts when you die?

 

In short, when you die, debt incurred by you during life belongs to your estate and sometimes, your trust. When you die with enough assets to cover your taxes and debts, your taxes will be paid first. After your taxes are paid, your debts are paid. Your beneficiaries or heirs will receive what is left after those payments.

 

If there isnt enough to cover your debts, taxing authorities will get paid first. Creditors may then get some – but not all – of what they're owed. Michigan law provides an “order of priority” to determine which debts should be paid and the order in which debts are to be paid, if there are not enough assets to pay all of the debts.

 

In Michigan, family members generally don't become legally responsible for a deceased relative’s debts, but many worry they might. Regardless of this fact, creditors and debt collection agencies often contact family members to attempt to collect the debts of the deceased.  It is very important to discuss any of these collection attempts with an attorney before paying them on behalf of a deceased family member.

 

In Michigan, if you leave behind personal or business debts, when your estate is opened in Probate Court, your creditors have the right to file their claims against it. If a Probate Court case is not opened for you within a specific period of time, the creditors actually have the right to go into Probate Court and open your estate and file their claims against the estate. If you have a will and a living trust, this is much less likely to happen because there is not a clear target to bring claims against.

 

If there aren’t enough assets in your estate, under Michigan law, your trust may have to transfer funds to your estate to pay off debts and taxes. This is what is known as the “permeable membrane” between estates and related trusts.

 

Complicating Factors

 

There can be complex factors, though, depending on the type of debt and the value of your estate and trust.

 

  • If credit cards are held jointly, then the survivor on the account continues to be fully responsible for the debt.

 

  • Federal student loan debt is eligible for cancellation upon death, but private student loans typically don't offer cancellation. These lenders may collect from your estate and trust.

 

  • If other people live in your house, the house may be used to satisfy your debts — whether it's the mortgage or line of credit debt. The people who live there may have to qualify for a new mortgage or sell the home to pay off your creditors.

 

  • Debts incurred by you as co-signer or co-applicant can result in a claim against your estate. 

 

  • If you die with a financed or lease vehicle in your name, the financing company or leasing company may file a claim for the difference between what your vehicle brings at auction and the total remaining payments owed under the finance/lease agreement.

 

Protecting Beneficiaries

 

It is critically important to remember that estate planning is not just about you or what you want to have happen when you die. Its also about protecting those you leave behind, including protection from creditors and collection agencies.

 

There are ways to protect beneficiaries from certain debts and to plan for handling known debts that will remain payable upon death. Your estate planning attorney can help you with this planning and ensure these matters are handled properly.

 

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About Us

The Firm, deeply rooted in Livingston County, has its origins in 1994 when it was founded by Tim Williams.  After having practiced predominantly in tax law for many years with larger firms, Tim decided to start a new firm that centered around working with people rather than with only highly complex tax issues. The Firm is centered in working with entrepreneurs and individuals with a personal touch.  The goal of the Firm has always been to create a relationship-driven rapport with its clients to establish long-lasting, personal relationships.  From the time it was founded, the Firm has specialized in business law and estate planning and probate practice.  Many of the Firm’s clients rely upon its attorneys for business guidance as well as legal counselling. The Firm has always made it a priority to devote time to giving back to the Livingston County community and its residents by working with and giving to charitable and service organizations.  The firm plans to continue to grow its client base in Livingston County and the surrounding areas.

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