Atlanta Business Attorney Blog

In Atlanta, Georgia, non-compete agreements are generally analyzed the same, but differing levels of scrutiny can apply. The level of scrutiny is determined based on the circumstances surrounding the entry of the non-compete and the roles of the parties. There are two main types of non-competes in Georgia: those an employee enters into with his employer, and those a business seller enters into with a business buyer.

When an employee enters into a non-compete related to the term of his employment, such non-compete will be assessed using strict scrutiny. Beacon Security Technology, Inc. et. al v. Beasley, 286 Georgia Appeals at 12 (2007). This means that courts will not rewrite or strike portions of unreasonable non-competes related to employment, regardless of whether such contracts contain severability clauses. Ceramic v. Hizer, 242 Georgia Appeals 391, 394 (2000). Instead, the entire covenant will be stricken. This rejected principle is referred to as the “blue pencil theory of severability.” Id. These non-competes deal with employers who want to prevent employees from competing directly with them for a certain period of time after the termination of employment.

Non-competes that are “ancillary to a sale of business” may be blue penciled, and are analyzed using a lesser degree of scrutiny. Habif, Arogeti & Wynne, P.C. v. Baggett, 231 Georgia Appeals 289-290 (1998). This means that courts have much more freedom to uphold and actually edit these non-competes if they were incorrectly drafted in the first place. These types of non-competes usually deal with a business purchaser who wants to prevent the business seller from directly competing with the business he’s acquiring for a certain period of time.

Now that the basic litigation terms have been defined, how does the process actually work in the business litigation context? One of the most commonly litigated issues is breach of contract. Here is an example of how the process would unfold.

First, the parties must enter into a contract.

Johnny and Penny have three small children and recently realized that they have outgrown their current residence. In order to purchase a larger home, they would first need to sell their current house. Unfortunately, in the current housing climate, they fear their house would sell for less than it is worth so they decide to finish their basement instead of purchasing a new home.

Johnny and Penny start interviewing contractors for the job. A+ Home Solutions puts in a bid, or an offer, to do the job for $30,000.00. Johnny and Penny submit a counteroffer, asking that A+ Home Solutions do the work for $25,000.00. The $25,000.00 counteroffer acts as a rejection of A+ Home Solutions’ initial offer. A+ Home Solutions accepts Johnny and Penny’s offer. Johnny and Penny wisely consult with their attorney who drafts a written contract for the project outlining each party’s responsibilities and duties. All of the parties sign the contract. In consideration for agreeing to finish the basement, Johnny and Penny gave A+ Home Solutions $5,000.00 to begin the work.

Continue reading "Georgia Business Litigation Terms - Example of use of terms" »

Georgia Business Litigation: Definitions of Common Terms associated with Business Law and Litigation:

Affidavit: Written testimony under oath - usually sworn to in front of a notary.

Alternative dispute resolution (ADR): Methods of resolving legal disputes without going to trial, in a less adversarial manner, such as through arbitration or mediation.

Appearance: Coming into court as a party to a case or voluntarily submitting to the power of a court. Usually this is not a physical act, but a lawyer filing a document.

Arbitration: Submitting a disputed matter for decision to a person who is not a judge. The decision of an arbitrator is usually binding and final.

Arrearage: The amount of money that is past due.

Attorney (at Law): An advocate or counsel employed to prepare, manage and try cases in court. Must be licensed by the state. Lawyer and attorney are usually synonymous.

Damages: Compensation sought by the party filing a lawsuit and awarded by the court for the loss or injury allegedly suffered.

Decree: The court's written order or decision.

Default: Failing to answer a petition or complaint. Failing to file an answer or appear in court as required can result in the court awarding everything requested by the filing party.

Deposition: Part of the discovery or information-exchanging process of a legal proceeding, in which the attorney for the other party asks you questions, you answer with your attorney present, and a transcript of the proceedings is prepared.

Continue reading "Georgia Business Litigation & Law Terms - Part 2: General Legal Terminology Used In Litigation" »

As a general rule, when a Georgia corporation (which would include a Limited Liability Company) is formed, it becomes a living entity that “exists” separate from its owners. The Georgia Corporate Code allows the corporation’s owners to operate a business under a legal “veil” of protection. That veil can provide certain layers of protection from certain kinds of liability.

There are three broad categories of potential liability: tort, contract, and tax. An example of a “tort liability” would be an employee causing an automobile accident while working for the corporation. Contract liability arises out of a breach of a contract between the corporation and an individual or another business. An example of a tax liability would be the corporation making a sale and it fails to collect the necessary sales tax.

If Georgia business owners take the right steps, they can shield themselves from a variety of liabilities by incorporating their business in Georgia. Incorporating, however, is just the first step. Many business owners fall prey to self-help incorporation services and find themselves in legal trouble later. Competent legal counsel can make sure that business owners do the right things to stay incorporated.

Most small business owners form what are called “pass-through” entities. Two examples of a “pass-through” entity are S-corporations and Limited Liability Companies. A pass-through entity means that, for tax purposes, the income of the business passes through to the business owners, and the business owners are taxed themselves. Large corporations such as Coca-Cola are generally C-corporations and the corporations are taxed on the profits that are generated, and then taxed again on the money that is passed onto the shareholders.

As a general rule, forming a Georgia corporation or LLC does not provide liability protection to its business owners for tax liabilities. This rule was made clear in the case of Littriello v. United States, 484 F.3d 372 (6th Cir. 2007). In this case, the Plaintiff, Frank Littriello, challenged the validity of the Treasury Department’s “check-the-box” regulations, 26 C.F.R. §§ 301.7701-1 to 301.7701-3. Littriello had incorporated several separate LLC’s, and he was the sole owner of each LLC. The operations of the LLC resulted in unpaid federal employment taxes totaling $1,077,000. Of course, the Internal Revenue Service brought actions against Littriello personally for these unpaid taxes. One of Littriello’s arguments to the Court was that the IRS had disregarded the separate existence of an LLC under state law. In their seven page opinion, the Court discussed the history of the “check-the-box” regulations and the difference between pass-through taxation and corporate taxation. After an extensive analysis, the Court found that the IRS may seek unpaid employment taxes from the sole owner of an LLC.

Despite the existence of LLCS for almost two decades, many Atlanta business owners still have questions about the extent of protection an LLC provides to its owners in contract disputes. Fortunately, Georgia appellate courts are upholding the corporate veil of the LLC. In the case of Milk v. Total Pay and HR Solutions, Inc., 634 S.E.2d 208 (Ga. App. 2006), Joseph Milk formed Burrito Joe’s Holding, LLC (“Burrito Joe’s”) to open a fast food Mexican restaurant in Canton, Georgia. Milk was the sole managing member and Jay McGhee and Frank Struck were to manage the restaurant without compensation with the goal of eventually becoming LLC members if the restaurant was successful. The managers entered into a client-service agreement on behalf of Burrito Joe’s with Total Pay and HR Solutions, Inc. (“Total Pay”). However, the restaurant never operated at a profit and was closed due to mounting financial difficulties. Total Pay brought suit in the trial court against Burrito Joe’s and Milk for damages. Fortunately for Milk, the Court of Appeals noted that LLCs have a legal existence separate from their owners just like any other corporation. As Milk’s signature did not appear on the agreement with Total Pay and no evidence was introduced on the record that Milk ever executed a note personally guaranteeing the payment of payroll services, the Court of Appeals maintained the corporate veil of the LLC in favor of its owner.

In this case, Milk never prepared a written operating agreement, and Total Pay argued that the Milk should be personally liable because he did not have a written operating agreement. The Court, however, reinforced its longstanding corporate law principle and applied it to LLCs, stating that Georgia officers and shareholders are not personally liable for corporate acts until such time that the corporate veil has been successfully pierced. The Court also found that the filing of the Articles of Organization with the Secretary of State were conclusive proof that all conditions of the formation of the LLC had been satisfied. There was no requirement for an operating agreement to be typed up and therefore, the lack of an operating agreement was not a proper basis to pierce the corporate veil.

From time to time, we receive calls from Atlanta-based sales representatives with a variation of the following problem: Potential Client is employed by Company A, which manufactures a certain product. Potential Client’s job is to contact retailers to secure orders of Company A’s product, and Potential Client gets paid on commission based on the amount of Company A’s product that he sells. Potential Client secured such orders, and then was fired by Company A. Company A is refusing to pay the agreed upon commission for Potential Client’s sales work. What is Potential Client to do?

In this situation, the sales representative statutes in the Official Code of Georgia may be helpful. These statutes, located at O.C.G.A. 10-1-700, et seq., define the circumstances in which a former sales representative can file a lawsuit against a former employer for the amounts they are owed, plus double the amount that has been wrongfully withheld. In order to qualify to use the statute, a potential client must fall within the definition of a sales representative while his former employer must fall within the definition of a principal.

According to O.C.G.A. 10-1-700, a principal is a person or entity who (1) makes or distributes a product, (2) employs a sales representative to make sales of the product, and (3) pays the sales representative for his work at least partially on a commission basis. Though the title of this section refers to “out-of-state principals,” no such requirement is included in the definition of principal, and there does not appear to be any case law on this matter. A sales representative is a person who tries to obtain wholesale orders of the principal’s product based on his agreement with the principal to be paid at least partially on a commission basis. All of the elements of these definitions must be met. (Please visit http://www.lexis-nexis.com/hottopics/gacode/default.asp to read the full text of the definitions).

Continue reading "Georgia Sales Representative Statute: Legal Remedies When an Employer Refuses to Pay Commission" »

If you are a Georgia Small Business owner, certain tax incentives have been created, extended or expanded in the way of business tax deductions and credits under the American Recovery and Reinvestment Act (ARRA), enacted in February. The bonus depreciation and increased section 179 deduction, for example—are only available this year, eligible businesses only have a few months to take action and save on their taxes.

Many Georgia small businesses that invest in new property or equipment may be able to write off most or all of these purchases on their 2009 returns. The new Act extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction. The Section 179 deduction is so named for the relevant section of the Internal Revenue Code. After 2009, Georgia businesses will only be able to recover these capital investments through annual depreciation deductions spread over several years. Until then, Georgia businesses are encouraged to make investments by enabling businesses to write the investments off more quickly.

Under the current Act, the bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service. The section 179 deduction enables Georgia small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

Bonus depreciation and the section 179 deductions are claimed on IRS Form 4562.