In the excitement of planning a wedding or securing new business, it can be easy to treat contracts as little more than administrative paperwork. In reality, a well-drafted contract serves a much more important purpose. It establishes clear expectations, defines each party’s responsibilities, outlines payment terms, and addresses what happens if circumstances change unexpectedly. For vendors, a contract helps ensure they are compensated for their services and protected from last-minute cancellations or disputes. For couples, it provides assurance that the services they are paying for will be delivered as promised and identifies the remedies available if they are not.

Whether you are a couple coordinating with a caterer or a photographer managing a growing client base, a well-drafted contract is not merely a legal formality. It is the foundation of a professionally executed event and the first line of defense when something goes wrong. When questions arise regarding performance, cancellations, refunds, scheduling conflicts, weather-related disruptions, or unforeseen emergencies, the contract often becomes the most important document in determining each party’s rights and obligations. A clear, comprehensive agreement can prevent misunderstandings before they occur and provide a roadmap for resolving disputes if they do.

For Vendors: Your Contract Is Your Business

If you operate as a wedding photographer, florist, DJ, caterer, or event planner, your client agreement is among the most consequential documents in your business. A comprehensive vendor contract should address:

Scope of Services – Define with precision what you are delivering: hours, deliverables, staffing, and backup plans. Ambiguity in this section is among the most common sources of post-event disputes.

Payment Terms – Set forth the deposit amount, payment schedule, and consequences of a returned or dishonored payment. Do not rely on informal understanding when your compensation is at stake.

Cancellation & Rescheduling – COVID exposed critical vulnerability for vendors without clear cancellation policies; many absorbed significant losses with no contractual recourse. Your contract should specify the conditions, required notice, and financial consequences for cancellation or rescheduling by either party.

Force Majeure – Account for events outside either party’s reasonable control, such as extreme weather, venue closures, or public health emergencies. In Ohio, where weather conditions can shift dramatically throughout the year, this type of clause is more than just a precautionary measure. Proactive planning can provide critical protection and help avoid costly disputes when unexpected events disrupt carefully arranged plans.

Limitation of Liability – Define the boundaries of your legal exposure. Limiting liability to the total amount paid for your services is a reasonable and widely accepted industry standard; without it, you risk exposure to claims far exceeding the contract’s value.

A handshake or an informal email exchange may seem sufficient when everyone is on good terms, but those arrangements often leave critical details undefined. Without a clear written agreement, disputes can arise over payment terms, deliverables, deadlines, cancellation rights, liability, and each party’s obligations. When expectations are not clearly documented, resolving disagreements becomes significantly more difficult and expensive.

If a dispute proceeds to litigation, a professionally drafted agreement often provides the framework needed to enforce your rights and protect your interests. Well-crafted contracts establish clear expectations, allocate risk appropriately, and address potential issues before they become costly conflicts. In many cases, the difference between recovering what you are owed and absorbing a substantial financial loss comes down to the strength and clarity of the contract itself.

For Couples: Read Carefully Before You Sign

Signing a vendor contract creates binding legal obligations. Certain provisions warrant attention before you commit:

Vague Scope Language – Insist on specifics, including hours, deliverables, and timelines, as broad language will rarely be interpreted in your favor.

One-Sided Cancellation Clauses – Some vendor contracts allow cancellation with minimal notice and little financial remedy. This is not standard practice, and it is negotiable. Seek provisions that offer balanced, meaningful recourse.

Absence of a Substitution Clause – Without one, a vendor may send an entirely different person on your wedding day. Your agreement should give you the right to be notified of and approve any substitution in advance.

Deposit Forfeiture Terms – Non-refundable deposits are an industry standard, however, the amount and precise forfeiture conditions must be clearly stated. Vague language in this area is a common source of disputes.

The Bottom Line

A contract reflects a mutual, documented understanding of each party’s rights, responsibilities, and expectations, not a lack of trust. For vendors, it helps protect your business and livelihood. For couples, it helps safeguard one of the most important and meaningful events of your lives.

If you are a vendor relying on verbal agreements or outdated contract templates, now is the time to have your agreements reviewed. If you are a couple unsure about the terms you are being asked to sign, an attorney can provide the clarity, guidance, and protection you need before making a commitment.

For more information or to seek counsel from our Business & Corporate practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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Planning Well in Advance of a Transaction

From a tax and estate planning perspective, the most valuable opportunities often arise well before a business is formally brought to market. Early planning allows business owners to take advantage of strategies that may no longer be available once a transaction becomes imminent.

One key consideration is ownership structuring. Reviewing how the business is held, whether individually, through entities, or in trust, can uncover opportunities to improve tax efficiency and facilitate wealth transfer. For example, transferring minority interests in a business to irrevocable trusts for family members, when valuations are lower and before a sale is anticipated, may reduce future estate tax exposure. These strategies, often referred to as “pre-sale gifting,” can allow appreciation to occur outside of the owner’s taxable estate.

Trust planning also plays an important role. Properly structured trusts can provide asset protection, centralized management, and multigenerational wealth planning benefits. However, timing is critical. Once a letter of intent is signed or a sale becomes highly probable, the IRS may scrutinize transfers more closely, potentially limiting the effectiveness of these strategies.

From the deal side, “early” really means early. By the time a letter of intent is signed, the framework of the transaction is often set, and leverage begins to shift. Preparing in advance—cleaning up corporate records, evaluating contracts, and aligning ownership—can prevent delays and preserve negotiating strength.

Just as importantly, early coordination with tax counsel ensures that the business is positioned in a way that supports both marketability and tax efficiency. Buyers will conduct extensive diligence, and a well-prepared seller is better equipped to maintain momentum, avoid surprises, and command stronger terms.

Planning During the Transaction

Once a transaction is underway, the process moves quickly and becomes highly structured. Negotiations typically focus on key terms such as purchase price, representations and warranties, indemnification, and, critically, deal structure.

One of the most significant structural decisions is whether the sale will be an asset purchase or a stock purchase. Buyers often prefer asset deals for liability protection and tax benefits, while sellers frequently favor stock deals for cleaner exits and capital gains treatment. Navigating this tension is a central part of the negotiation process.

In addition, deal mechanics such as earnouts, rollover equity, and escrow arrangements can materially impact both risk allocation and overall value. These terms should be evaluated not only from a legal perspective, but also in light of their tax consequences.

That’s where tax planning continues to play a critical role during the deal itself. The structure of the transaction directly affects how proceeds are taxed, and careful analysis can help align the interests of both buyer and seller.

For example, in an asset sale, buyers may receive a step-up in tax basis, which can be highly valuable. However, sellers (particularly C corporations) may face double taxation. In a stock sale, sellers often achieve more favorable capital gains treatment, though buyers may be wary of inheriting liabilities.

Tax elections can sometimes bridge this gap. Certain elections allow the parties to achieve a hybrid result; providing buyers with basis step-up benefits while preserving favorable tax treatment for sellers. These opportunities require proactive analysis and close coordination with deal counsel.

A Coordinated Approach Delivers Better Outcomes

A successful transaction is not just about getting to closing—it’s about getting there efficiently, with minimal disruption and maximum value; and making sure you actually keep that value when it’s all said and done.

Together, a coordinated team of advisors can align transaction execution with tax efficiency and long-term wealth planning. Business owners who engage counsel early (and maintain that collaboration throughout the process) are best positioned to achieve a successful and well-planned exit.

For those considering a future sale, the takeaway is clear: start planning early, stay engaged throughout the process, and ensure your advisors are working together every step of the way.

For more information or to seek counsel from our Business & Corporate or Taxation practice groups, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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What Are Common Income Streams for Performers?

Artists, entertainers, musicians, and “road crews” may receive both W-2 wages as employees for stage work and Forms 1099 for their services such as coaching and teaching. The IRS has had much success in challenging these taxpayers in the following three areas: (1) deductibility of expenses; (2) worker classification; and (3) income sourcing.

As previously discussed in our first installment, expenses are only deductible if they are ordinary and necessary expenses paid or incurred during the taxable year in the carrying on of a trade or business. Expenses that will be denied include wardrobe, general makeup, hair styles for auditions, or to maintain an image for these taxpayers. Additionally, these taxpayers often find themselves violating rules related to deducting expenses that have a dual purpose (i.e., both business and personal). There is a general presumption that meals, entertainment, gifts, all expenses paid trips, boats, and non-deductible personal expenses are not deductible, unless the taxpayer proves otherwise. This presumption is not easily overcome and requires significant documentation to be provided by the taxpayer to show that these expenses were ordinary and necessary business expenses.

Deductibility of Business Expenses

Employees are not permitted to deduct business expenses. As such, artists, entertainers, and musicians who are employed by a company cannot deduct any of their expenses spent from their own personal funds. However, there is an exception for a qualified performing artist when the artist (1) performs services for at least 2 employers; (2) has allowance expenses that exceed 10% of the artist’s gross income from performing arts; and (3) has an adjusted gross income (“AGI”) not exceeding $16,000. This exception is not that helpful, because the $16,000 AGI limit is not adjusted for inflation, and most artists have an AGI higher than $16,000 per year. As such, if the IRS is successful in arguing that an artist, entertainer, or musician is not an independent contractor but rather than employee, the IRS and state agencies will be able to deny virtually all deductions that were taken by the artist, entertainer, or musician.

State and Local Tax Obligations

The third issue is a state issue that involves sourcing income to the applicable state or states. An artist, entertainer, or musician may create nexus with multiple states by performing in a variety of states during each year. Many states have non-resident return filing requirements and use duty days formulas to allocate income across the state jurisdictions. Many cities, like Cleveland, also have an income tax on performers doing a show within city limits. Many artists, entertainers, and musicians fall into the trap of only filing state income tax returns in the state where they are domiciled (i.e., reside, have a permanent home, etc.). Many states allow taxpayers to take credits for taxes paid in other states to avoid double taxation, but these artists, entertainers, and musicians may find themselves paying significant penalties for non-compliance and interest (to the extent tax was owed to the jurisdiction).

Planning Ahead to Avoid Costly Tax Issues

In conclusion, it is imperative that artists, entertainers, and musicians consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information, or to seek counsel from our Taxation or Business & Corporate practice groups, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Tax Talk: Artists, Entertainers, and Musicians appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Digital assets do not constitute a single collateral type under the Uniform Commercial Code (UCC), and perfection and priority depend on the manner in which the asset is held and its classification under the UCC.  As of 2026, analyzing the perfection of digital assets increasingly must take into account the 2022 UCC “emerging technologies” amendments, including the new Article 12, though adoption varies by state—for example, Ohio’s HB 195 remains pending. Consequently, a layered approach remains the most prudent strategy.

The following provides a high-level roadmap for evaluating most transactions.

Begin with Classification

Prior to considering filings or custody arrangements, address two fundamental questions:

1. Is the asset held directly (self-custody) or through an intermediary or custodian?
2. How is the asset classified—as a controllable electronic record (CER) under Article 12 in adopting states, as investment property in an Article 8 or 9 securities account framework, as a deposit account (limited to banks, and often relevant for proceeds), or as a general or payment intangible (the default category)?

This classification determines whether filing suffices or if control is necessary for robust priority.

The Baseline: UCC-1 Filing

A UCC-1 financing statement, filed in the debtor’s state of organization, remains the simplest and most cost-effective method for perfecting interests in general intangibles, particularly when classification is uncertain or control is unavailable.

Its strengths include providing public notice and establishing priority under the general “first to file or perfect” rule for various collateral types. However, it has limitations: It does not grant the lender operational authority to prevent transfers, and for certain collateral, a party with control may take priority over an earlier filer. Therefore, file promptly, but view it as foundational perfection rather than a complete solution when control is feasible.

Track A: Article 12 & Control for CER-Style Digital Assets

In jurisdictions that have adopted the 2022 amendments, Article 12 introduces controllable electronic records (CERs), where control serves as the functional equivalent of possession for qualifying digital assets. Control entails the ability to derive substantially all benefits from the record, exclude others from doing so, and transfer control, supported by identifiable records or systems—often achieved through key management, multisignature setups, escrow, or contractual mechanisms.

For secured lending, this is significant because, in amended states, perfection by control can yield superior priority compared to filing alone, depending on the collateral and structure.

Practical implementations include lender-controlled multisignature arrangements (preventing borrower transfers without approval), smart contract escrows linked to repayment or default conditions, or qualified custodian setups that grant the lender exclusive transfer authority upon default.

A note of caution: Article 12 is relatively new, with developing case law. Clearly document the control mechanisms (e.g., who can transfer the asset, under what conditions) to substantiate it if contested. 

Track B: Article 8 & Intermediated Investment Property Structures

The framework under Article 8 and Article 9’s investment property provisions is well-suited for assets held through a securities intermediary, where the custodian maintains a securities account and treats the asset as a financial asset (parties may opt in via agreement under UCC §8-102(a)(9)). For true investment property, control-based perfection is established and reliable, with priority rules favoring control.

Institutions prefer this approach due to its operational familiarity, including account control agreements, entitlement orders, and integration with existing compliance and monitoring systems.

Addressing Proceeds: Tracing & Perfection

Even when the primary collateral consists of cryptocurrencies, NFTs, or tokens, proceeds frequently manifest as fiat in a bank account. Lenders should prioritize proceeds by identifying destination accounts, employing deposit account control, and incorporating covenants for tracing and reporting to follow the path from collateral to disposition to proceeds. Under Article 9, perfection in proceeds can often attach automatically if the original collateral is perfected but enhancing it through targeted strategies is advisable.

A Practical Best Practice Framework

For most lenders, a layered strategy offers the strongest defense: (i) File a UCC-1 statement encompassing relevant collateral categories and proceeds;  (ii) Secure control where available and commercially viable, whether through direct methods, multi-signature, escrow, or intermediary arrangements;  (iii) Implement operational safeguards, such as covenants restricting transfers, ongoing monitoring, reporting requirements, default provisions, and clear remedies;  and (iv) Develop a proceeds management plan, potentially including controlled or blocked accounts.

This method aligns legal perfection with practical enforcement capabilities.

Final Considerations

Perfecting security interests in digital assets requires a tailored approach, influenced by classification, custody, and jurisdiction. The UCC’s modern tools, particularly around control, enhance options, but success hinges on demonstrating control effectively while supporting it with filings and proceeds diligence. This approach substantially mitigates priority and bankruptcy risks.

This post is general information, not legal advice. Digital-asset collateral structures are highly fact-specific and state adoption of UCC amendments varies.

For more information, or to seek counsel from our Business & Corporate practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Perfecting Security Interests in Digital Assets: Navigating UCC Options in 2026 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Many companies are already using AI without fully realizing it. It is embedded in software platforms, marketing tools, HR systems, analytics programs, and customer-facing applications. Even when a business does not build the AI itself, it remains responsible for how that AI operates, what data it uses, and what outputs it produces. If an AI system makes a mistake, discloses confidential data, or produces misleading or discriminatory results, the legal and financial consequences fall on the company.

AI & Data Privacy Are Now Inseparable

Modern AI systems rely on large volumes of data, much of which is personal, financial, or proprietary. That means existing privacy and data-protection laws already apply to AI, even where no AI-specific statute exists. Consent, notice, purpose limitation, data minimization, and security obligations all matter just as much when data is processed by an algorithm as when it is processed by a human.

Regulators increasingly view AI as an extension of data processing, not a separate category. When personal data is fed into an AI system, whether for training, analysis, decision-making, or otherwise, privacy obligations follow it. Companies that do not understand how data moves into and through their AI tools are exposed to compliance risk, whether they realize it or not.

AI Governance Is Becoming a Business Expectation

Across industries, regulators and counterparties are beginning to expect companies to know when and how AI is used in their operations. That includes having internal policies, employee guidance, vendor controls, and documentation that demonstrate responsible use.

This is not just about compliance. It is also about risk management. Without clear rules, employees may upload confidential information into public AI tools, rely on unverified outputs for business decisions, or use AI in ways that conflict with company values or legal obligations. Governance provides guardrails so innovation does not quietly turn into liability.

AI Raises Intellectual Property & Contract Issues

AI systems can generate reports, marketing materials, designs, code, and other business content, but ownership of that generated content is not always straightforward. Some platforms impose limits on how their outputs can be used. Others rely on training data that may include copyrighted or proprietary material, which can create infringement risk.

Businesses that rely heavily on AI-generated content need to understand what rights they actually have, what their vendors are promising, and where potential risk exposure exists. These issues belong in contracts, licensing terms, and internal usage policies, not just in the IT department.

Errors, Hallucinations, & Accountability

AI systems are powerful, but they are not reliable in the way traditional software is. They can generate incorrect or fabricated information that appears convincing. If those outputs are used in customer communications, advertising, financial reporting, or operational decisions, the company bears the risk. There is no legal concept of “the AI made me do it.” The business remains responsible for what it publishes, relies on, or communicates, even when it was created by an AI tool.

Using AI Responsibly Is Now Part of Running a Business

AI is here to stay. The companies that succeed with AI are not the ones avoiding it, they are the ones using it deliberately, with clear rules, strong data protections, and realistic expectations about what it can and cannot do. The challenge for businesses is learning how to use it in a way that supports growth while protecting the organization from legal, regulatory, and reputational harm. Balancing innovation with accountability in a rapidly evolving environment is key to success in the world of AI.

How We Can Help

If you have questions about how artificial intelligence is being used in your business, whether your current practices create risk, or how to put appropriate policies and contracts in place, now is the time to address them. AI is moving faster than the law, but regulators are paying close attention, and the law may soon be able to catch up. Working with counsel to evaluate and structure your AI use can help you stay ahead of problems rather than reacting to them after they arise.

For more information or to seek counsel from our Business & Corporate practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Businesses & Artificial Intelligence: Avoiding Hidden Risks appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Small Business Ownership can be incredibly rewarding. Few people know the satisfaction of growing something from nothing like a small business owner. There’s a certain satisfaction that comes from knowing that your success is the result of your own industriousness, ingenuity, or specialized expertise. 

We often hear from small business clients who are in the grind of “trying to do it all,” and they feel overwhelmed by the legal issues that touch their businesses. They often don’t have the time to proactively address the legal issues every business faces – from employment law compliance and drafting contracts to financing and succession planning. That’s why our approach is rooted in a simple truth: We get it. We really do. Because we’re a small business too.

We Know the Value of Every Dollar

At McCarthy Lebit, there’s a saying: “For our small business clients, every dollar they spend with us is a dollar that’s not in their pocket at the end of the year.” That mindset, inspired by Ken Liffman, guides our client interactions.  

When we provide legal advice, we’re always thinking about the return on your investment. We understand that every dollar counts and that legal services must enhance your business goals. We never want our clients to hesitate to involve us; we should be viewed as a resource, not a drain on resources. We accomplish this through practical, solution-oriented advice guided by your business’s unique goals and challenges. While some complex legal problems cannot be avoided, we are always mindful of the burden these situations place on our clients, and our lawyers work to deliver a great result that is pragmatic and as economical as possible.

We Move at Your Speed

Small businesses need responsive partners. When issues arise, you can’t afford to wait a week for a call back. As a mid-sized firm with small business in our DNA, we prioritize accessibility, clear communication, and timely answers. We know the importance of being available and nimble. 

We Understand Growth

Many of our clients are in growth mode – whether through mergers and acquisitions, adding talent, entering into real estate transactions, or raising capital. We’ve been there, and we, too, have grown deliberately over time. Our own experience, along with the insight we’ve gained from representing thousands of growing small businesses, informs how we counsel our clients through these transitions. 

Strategic. Proactive. Prepared.

Often, our clients involve us when problems arise, and in those instances, we are tenacious advocates, marshaling our years of litigation and dispute resolution experience. For our small business clients, though, our value isn’t just about solving problems after they arise. It’s about helping you build a business that’s resilient, well-structured, and positioned to grow and thrive.

If you’re a small business owner looking for a legal partner who truly understands your world, let’s talk. Reach out to request a consultation or call us at 216-696-1422.

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In celebration of National Small Business Month, we proudly recognize the contributions of small businesses in our community. McCarthy Lebit is committed to supporting entrepreneurs and business owners with trusted legal guidance through every stage of their journey, from formation to growth and beyond. As a law firm deeply connected to the small business community, we’re proud to serve as trusted advisors and advocates for business owners throughout the region.

This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Why McCarthy Lebit Is Right for Your Small Business appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Going to Market: Pros & Cons

The classic example of family business planning is going to market, or preparing for a sale or transition to new ownership. On one hand, sales of closely-held businesses are influenced by latent issues of valuation, financing, and other potential pitfalls. On the other hand, a sale provides a direct injection of liquidity, unlocking wealth and helping owners transition into another phase of life. A sale may be best for those who want to get out of a business and pursue new endeavors.

The business could also continue operating in the family — even without the daily operations of legacy owners. The power of restructuring allows legacy owners to step back from the day-to-day, remain involved, and add flexibility. Restructuring is an option for businesses with a strong management team that can continue profitable operations.

Customizing Your Transition

Transitioning the family business takes many forms. Advisers have a diverse set of tools and strategies to customize succession plans for different businesses. By keeping an eye toward tax, business and corporate considerations, they assist business owners in navigating the complexities of such changes. Transitioning could be from legacy owners to current management, intra-family or even a hybrid — all bearing unique considerations. Transitioning the business may be best for those owners looking to pass an income-producing asset onto future generations.

Navigating Your Options

Succession planning for the family business takes one of three main forms — selling, holding, or transitioning the business. In all circumstances, legacy owners can guard their visions with creative, yet comprehensive planning to keep their assets running in tip-top shape.

To seek counsel from our Business & Corporate group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Planning for Business Succession appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Facts

Crown C Supply is a closely held corporation owned by two brothers, Michael and Thomas Connelly. Michael owned 77% of the shares, while Thomas owned 23% of the shares. In 2001, the brothers, desiring to maintain control over the corporation in the event either brother died, entered a “redemption” buy-sell arrangement funded with life insurance policies to redeem either owner. The buy-sell agreement granted either brother a right of first refusal in the event the other died, but the failure to exercise this right created an obligation on Crown C Supply to purchase the decedent’s shares. Crown C Supply acquired two life insurance policies, one on the life of each brother to fund the purchase of shares of a deceased shareholder. While the buy-sell agreement provided an appraisal mechanism to value the corporation’s shares at either shareholder’s death, the parties did not follow the terms of the agreement.  Thomas, on behalf of the corporation and also in his capacity as fiduciary of Michael’s estate, agreed on a price of $3 million for Michael’s shares, which was less than the $3.5 million of life insurance proceeds the corporation received.

Michael died in 2013, and under the buy-sell agreement, Thomas declined to exercise his right to buy Michael’s shares, triggering Crown C’s obligation to purchase the shares. The redemption price was to be based on an outside appraisal. Rather than securing the appraisal, Michael’s son and Thomas agreed that the value of Michael’s shares was $3 million. Crown C then used $3 million of the $3.5 million of insurance proceeds to purchase the deceased brother’s shares. Thomas, as executor of Michael’s estate, filed an estate tax return valuing the shares at $3 million.

The IRS challenged the estate’s $3 million valuation of Michael’s shares. The IRS’ position was that the life insurance policies were a corporate asset that increased Crown C Supply’s value prior to the redemption. Connelly’s position was that the buy-sell agreement created an offsetting obligation to purchase the estate’s shares, a net neutral, where the receipt of the life insurance proceeds would be offset by the corresponding obligation. Both the Eastern District of Missouri and 8th Circuit Court of Appeals agreed with the IRS that the life insurance proceeds increased Crown C Supply’s value prior to redemption. The Connellys filed and were granted certiorari by the Supreme Court.

Court’s Decision and Reasoning

The Court framed the issue presented as one of valuation: is life insurance that funds a buy-sell Agreement a corporate asset? Unanimously, the Court said yes. The Court reached this conclusion by reasoning that the redemption was not a liability that reduced corporate value. The Court held that life insurance was a corporate asset since no willing buyer or willing seller would pay a depressed value when Crown C Supply had an influx of cash from life insurance proceeds. Therefore, because the life insurance proceeds were payable to the corporation, the Court held that life insurance proceeds were a corporate asset that increased the corporation value of Crown C Supply.

Consequences of Connelly

It is very common in closely held corporations in order to provide for orderly succession to plan for the death of a shareholder to maintain control within a family or those who are active in the business.  The parties together with the corporation typically enter into a buy/sell agreement to address that contingency with many cases as in Connelly the corporation being obligated to purchase the deceased’s shares through a redemption buy/sell agreement to avoid economic hardship including sale of the businesses or critical operating assets to fund that obligation, life insurance is used as a funding mechanism to address the obligation.

Connelly raises two key issues with life insurance funded by buy/sell agreements: corporations with existing life insurance arrangements, and prospective planning. First, all buy/sell agreements should be reviewed.  Before taking any precipitous action consider if the current agreement is appropriate and if not consider the consequences of the buy/sell agreement.  For example, if businesses transfer life insurance policies, the transfer for value rules may apply to curtail the tax-free receipt of life insurance proceeds. Future arrangements involving life insurance could include a cross-purchase arrangement, or potentially a special purpose life insurance LLC. All these options for existing and future arrangements require intricate planning. Further, while Connelly may seem to have the biggest impact on life insurance funded redemption agreements with individuals who have taxable estates, all closely held businesses with life insurance funded redemption agreements are affected by Connelly.

Consulting with experienced tax and estate planning attorneys will assist you in the development of an effective strategy if life insurance is anticipated to be a funding mechanism in the purchase of a deceased owner’s shares. If you have questions on the implications of Connelly for your business, please reach out to request a consultation with our Wealth Management Team or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Status of Life Insurance Funded Buy/Sell Agreements After Connelly? appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Shareholder agreements, which include close corporation agreements, operating agreements, and buy sell agreements, are an important part of any business strategy, providing a framework for sound governance and preventing misunderstandings that may result in litigation.

Close Corporation Agreements

A close corporation agreement, often referred to as a “shareholders’ agreement,” is a legal document that outlines the business’ ownership structure, management, and day-to-day operations. An operating agreement for limited liability companies functions in the same way. A well-crafted close corporation agreement or operating agreement will include mechanisms for decision-making, capital calls, voting rights, winding up and dissolving the entity, and dispute resolution.

Buyout Agreements

A buy-sell agreement, or “buyout agreement,” outlines the terms and conditions for the sale or transfer of shareholder or member equity. Buy-sell agreements may include an agreed upon formula, or a certificate of valuation, for a buy-out of one shareholder or member’s interest. Regardless of the buyout mechanism, it should be understood by all parties, with input from business valuation experts, accountants, and legal counsel. The buy-out mechanism should also be reviewed yearly to ensure it is up to date. Buy-sell agreements may also include rights of first refusal, call options, put options and drag along rights.

Having both a close corporation agreement and buy-sell agreement in place provides numerous benefits to the company and its shareholders or members. They create a framework for sound governance and dispute resolution, facilitate transparent business practices and common understandings, and prepare for the smooth transfer of ownership interest.

While incorporating these agreements into the family business plan would seem like a no-brainer, many closely held businesses operate without them, or with outdated agreements, which risks feuding, financial losses, and lawsuits.

Regular Review

Beyond having these contractual arrangements in place, shareholder or member agreements should be reviewed and updated frequently, especially as your company grows. Purchase price mechanisms should be assessed periodically to ensure that compensation paid upon the death, disability or departure of a shareholder or member is understood and fair to all parties. And life insurance should be maintained to fund a buyout of another shareholder or member’s interest and to fund ongoing business operations.

By referencing and incorporating legal tools and best practices, family run businesses can create a long-lasting foundation for their company’s ongoing success, now and in the future.

For more information or to seek counsel from our team of litigation attorneys, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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Take Inventory of Business Contracts & Review the Fine Print

Compile a comprehensive list of all your business contracts. This includes leases, vendor agreements, client contracts, employment agreements, and other legal documents. Organize them and keep them in a centralized location so they are easy to access for future reference. Check the expiration dates of each contract to identify any that are nearing renewal or termination. To avoid any disruptions in service or legal troubles, be sure to prioritize contracts that are close to their expiration.

Review the fine print of your service agreements to refresh your knowledge of service offerings, deliverables, and hidden fees. Staying up to date on this information will help mitigate unfavorable surprises down the line that could negatively impact your business.

Assess Contract Performance & Identify Risks

Evaluate the performance of each contract to determine if the terms continue to align with your business objectives. Consider elements such as pricing, deliverables, service quality, and any changes in your business needs since the contract was first established.

Identify potential risks linked to each contract, such as ambiguous language, insufficient protections, or failure to comply with regulatory standards. Proactively addressing these risks can significantly reduce the likelihood of encountering future legal issues. Additionally, it’s crucial to confirm that your contracts continue to effectively serve your business and contribute to its seamless operation.

Negotiate Contract Updates & Document Changes

Contact the other parties involved in the contracts to discuss any necessary updates or revisions. This could include renegotiating pricing terms, updating the scope of work, clarifying ambiguities, or adding provisions to address new risks or business needs. On the other hand, this could include terminating a contract if it no longer serves the best interests of the business.

Seek Legal Counsel for Contract Review

Consult with your attorney to review all proposed changes or updates to your contracts. Their legal expertise can offer invaluable insights to refine and enhance your contractual arrangements. Your attorney can also verify that your contracts are in compliance with relevant laws and regulations.

Monitor Contract Compliance

Finally, consider establishing and implementing a formal process to monitor ongoing contract compliance throughout the year. Consistently reviewing contract performance, tracking key performance indicators, and promptly addressing any deviations from agreed-upon terms can support smooth business operations and risk avoidance.

By setting aside the time to review your business contracts this spring, you can help protect your business, streamline operations, and set the stage for future success. With careful planning and attention to detail, you can ensure that your contracts continue to support the goals and objectives of your business.

To seek counsel from our Business & Corporate attorneys, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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