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Protecting Your Company From Liability During Downsizing

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Your organization could resort to downsizing for many reasons, including cost-cutting, restructuring, mergers, and other factors. When you consider laying off employees, you must examine the risks of violating various state and federal laws. Furthermore, in the event of a layoff, several common law claims may be strengthened, and a mass layoff may expose you to multiple claims from several employees in a class-action lawsuit.

Successfully executing a layoff is one of the most challenging problems your company may face. However, a considerable body of best practices has been developed to aid management in carrying out the downsizing in a planned, legally compliant, and humane approach.

Legal Implications of Layoffs

An organization’s choice to downsize may violate several federal and state laws. Almost half of the states have their own notice laws. Some even go so far as to demand that corporations pay a modest severance package or continue to provide health insurance to employees for a limited time following the layoff. 

North Carolina, however, does not fit into either of these categories. Because North Carolina lacks its own layoff or plant closure statute, workers are solely covered by the Federal WARN Act.

Worker Adjustment and Retraining Notification Act (WARN)

The purpose of this statute (and its state law equivalents) is to reduce the harm caused by layoffs to workers and communities. WARN requires you to offer at least 60 days’ notice of a downsizing to the affected employees.

A “mass layoff” happens when at least 500 full-time workers lose their jobs within 30 days, or when at least 33% of workers at a single site of employment are laid off in 30 days, unless the percentage amounts to fewer than 50 people. A site of employment is a physical area where you run your business operations and could include a building, an industrial complex, or a campus. Physically separate worksites that are utilized for the same function, are in reasonable proximity, and share the same personnel and equipment may also be considered a single employment site.

The Federal WARN act is limited to larger firms. A large business has:

  • At least 100 full-time workers (those who work at least 20 hours a week and have been on the job for at least six of the previous 12 months prior to the notice) or,
  • 100 employees who work a cumulative of 4,000 hours or more each week.

Determining whether WARN applies to a given layoff can be challenging. It is advisable to seek legal advice in all instances, even in what may seem to be the most straightforward cases.

Notice Required by WARN

Employees who will lose their jobs during downsizing are entitled to 60 days’ notice. Individual notice is not available to unionized workers. Instead, the employer must inform its union representatives, who in turn notify the impacted employees.

The notice must include specific details regarding the impending layoffs, including whether they will be temporary or permanent or whether the employee will be given bumping benefits. It should also state when the layoffs are slated to begin and when the employee will receive a termination letter.

In some cases, you are not required to give any notice at all or can give less than 60 days’ notice.

No Notice Required

An employer is not legally compelled to give early notice of a mass layoff in some instances. They include:

  1. Temporary Projects: No notice is necessary if an employer releases personnel employed solely for a temporary project that has been completed or shuts down a facility that was only meant to be open for a limited time. This exception is only applicable if the employees were aware of the temporary situation during hiring.
  2. Strikes and lockouts: WARN does not apply if a closure or downsizing results from a workers’ strike or an employee lockout.

Shorter Notice Allowed

In select circumstances, you may offer less than 60 days’ notice. You must clearly explain in a written notice why you were unable to provide the mandated 60 days’ notice.

  1. Unforeseeable business conditions. A shorter notice period is permitted if the grounds for the downsizing or layoff were not reasonably foreseeable at the time, the employer should have given 60 days’ notice.
  2. Natural calamities. If a natural disaster causes a layoff, you may give less than 60 days’ notice.
  3. Faltering Enterprise: If your company is facing financial difficulties, it may give a shorter notice. You must, however, demonstrate that your business was actively seeking business or funding that would have enabled it to defer or avert the downsizing and that it reasonably believed that giving a 60-day notice would have gotten in the way of obtaining the necessary money or business. However, this provision is only applicable for plant closures, not mass layoffs.

What Happens With A WARN Violation?

An employer who breaches WARN may be held liable for all wages and benefits lost due to the violation, up to the full 60 days mandated by WARN. Any salaries or severance fees paid voluntarily by the employer are deducted from the sum. You may also be required to pay the legal fees and court costs of affected employees who win their lawsuits. 

Additionally, you may have to pay $500.00 in civil penalties for every day you fail to notify local authorities. However, if you deliver back pay to every affected worker within three weeks of parting, you can avoid the $500.00 civil penalty.

Because WARN stipulates that an employer’s maximum liability is limited to 60 days, providing your employees with full benefits eliminates any potential liability. However, no provision in WARN allows for payment in lieu of notice, and the laws do not recognize the concept.

Our North Carolina Business Attorneys Can Help

As seen from the above discussion, federal WARN and its state equivalents can be highly complex and technical legislation that should be considered whenever your business is having to downsize. 

If your company is considering layoffs or downsizing, the Wilson Ratledge North Carolina business attorneys can help you ensure compliance with all applicable state and federal labor regulations. Call them today at 919-787-7711 or fill out the form online to schedule a consultation!

Chapter 11 Reorganization in North Carolina

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There are many forms of reorganization and bankruptcy, but not all are available to – or make sense for – small businesses. Due to recent changes in the law, however, a Chapter 11 reorganization, which used to be somewhat challenging to access for many small businesses, has become much more accessible. 

Here, we discuss what a Chapter 11 reorganization is, the benefits of one to a small business, and the beneficial changes in the law that have recently been made. 

What is a Chapter 11 Reorganization, and What are its Potential Benefits?

In short, a Chapter 11 reorganization is a process that enables a business to reorganize and continue to operate despite financial struggles. More specifically, a Chapter 11 filing provides for the following:

  • Automatic Stay Protection: The automatic stay is a bankruptcy law mechanism that forecloses creditors from collecting on the small business debtor’s debts. Litigation is put on hold, lenders cannot proceed with foreclosures, and sales of business assets are also put on hold. 
  • Rejection of Unfavorable Contracts: A small business debtor can reject unfavorable contracts, such as a rental lease, allowing him or her to leave a rental location with above-market rent that is no longer financially feasible. 
  • DIP Loan access: A small business debtor can borrow money through access to a debtor-in-possession, or DIP, loan. These loans allow lenders to obtain super-priority liens, putting them first in line before the small business debtor’s existing lenders (making these loans very appealing to a lender and, therefore, opening up more credit availability to debtors).
  • Asset Sales: Further, a small business debtor can sell its assets (such as equipment, machinery, and other property) free and clear of liens and claims (liens will, however, attach to the proceeds of the sale).
  • Debt Reprieve: Finally, a small business owner facing financial struggles can find relief through a debt reprieve. This means that the business owner can seek to take a break from paying pre-bankruptcy debts. This allows the business to direct money to more urgent needs or to build up a cash reserve. While the debts will need to be paid back eventually, the temporary reprieve can offer breathing room for the business. 

The Small Business Reorganization Act of 2019 

While the benefits above may sound too good to be true, until recently, many small businesses have been unable to take advantage of a Chapter 11 reorganization because of certain restrictions and high expenses involved in a filing. 

The Small Business Reorganization Act (SBRA), which went into effect on February 19, 2020, aimed to address some of the issues preventing small businesses from taking advantage of a Chapter 11 reorganization. The SBRA created a sub-chapter V of the Bankruptcy Code, which has the main objective of allowing small businesses to quickly and inexpensively emerge from bankruptcy with a court-approved plan of reorganization. 

Here are just a few of the many changes the SBRA made:

  • Continued Ownership: allows small business debtors to retain a stake in the reorganized entity, so long as the ultimate reorganization plan is fair and equitable. The debtor’s management may also continue to operate the business. 
  • Plan of Reorganization Confirmation: holds that creditors no longer need to confirm a small business debtor’s plan of reorganization, as long as they meet certain requirements. This means that small businesses will no longer have to negotiate with creditors regarding payments, saving both time and money.
  • Appointment of a Trustee: provides that a trustee is appointed and will act to facilitate the reorganization and assist the small business debtor with following its plan of reorganization. 
  • Streamlined Process:  removes procedural hurdles and many of the costs associated with corporate reorganizations.
  • Delayed Payment of Administrative Expense Claims: provides that the small business debtor is no longer required to pay administrative expense claims on the effective date of the plan. Instead, business owners are permitted to pay these administrative expenses claims throughout the term of the reorganization plan. 

Further Benefits Implemented by the CARES Act 

The SBRA provided for a small business, which it defined as a business with debts in an amount not greater than $2,725,625, to restructure its debts through the more cost-effective Chapter 11 process. However, many small businesses did not qualify because they carried too much debt.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) amended the SBRA to increase the debt limit for debtors filing a Chapter 11 reorganization under subchapter V of the Bankruptcy Code. The debt limit was increased to $7.5 million, allowing for more debtors to take advantage of the streamlined Chapter 11 process. This debt limit will return to its prior limit of $2,725,625 after one year (unless further extended). 

Is a Chapter 11 Reorganization Right for Your Small Business?

A Chapter 11 reorganization is not the solution for every struggling small business. However, because of the recent changes to the Bankruptcy Code made by the SBRA and the further (temporary) changes implemented by the CARES Act, a Chapter 11 reorganization is now a more accessible option for many small businesses who find themselves unable to pay their creditors or afford their bills. 

Contact Our Experienced Business Law Attorneys     

There are many complex issues that you must address in the reorganization  process to ensure that you are taking the proper steps to protect your business. There is no one-size-fits-all solution, so it’s vital to consult an experienced business planning attorney who can advise you on the benefits, potential pitfalls, and challenges involved in this process. 

The attorneys at Wilson Ratledge regularly advises their clients on processes like business reorganization. As a small business, Wilson Ratledge is committed to helping business owners thrive in a post-pandemic climate. For questions or assistance, call one of the experienced North Carolina business attorneys at 919-787-7711 or via the contact form below. Wilson Ratledge looks forward to serving you and helping your business find its way back to success in a turbulent market.

Business Loan Options In North Carolina

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Raising money for starting or growing a business is one of the most challenging parts of being an entrepreneur or a business owner. You might have that revolutionary idea for a product or a service, but your resources aren’t just enough. So, where do you turn to get the financing for your business idea?

Thankfully, there are many loan options for you and professionals to help you get the best terms.  Various options are available, including state grants, crowdfunding, regional loans, and state-based loans.

In this post, you’ll learn how to get the funds to start your business or keep it running. Here are ten ways to fund your start-up business or get resources to realize your business goals.

#1. Bank loans

Many small and medium businesses are eligible for a bank loan if they have a good credit rating. Banks will need to look at your business’ financial health and your income to determine your eligibility. In North Carolina, many banks have programs designed specifically for small businesses to get off the ground.

#2. SBA loans

If you don’t qualify for a regular bank loan, you may still be able to obtain a Small Business Administration (SBA) loan. The SBA Guarantee Program helps small and medium-sized businesses that may not be able to get funding elsewhere. Working capital loans can last up to 10 years and up to $ 5 million.

The SBA reduces the risk to lenders by guaranteeing repayment of loans. Businesses have a wide range of SBA loans to choose from. Each type has its own parameters and stipulations on using the money and when to repay it.

#3. Private equity

Private equity is a large industry that invests in businesses that are not publically listed. Private equity firms participate in your business and generate operating profit that you can use to build your business.

They usually stay in your company for around four years before leaving. Private equity entities typically make money by selling their position to another investor or back to you.

Some individual investors are focused on many types of businesses. For example, venture capitalists tend to focus on early tech companies, while some focus on late consumer companies.

#4. Strategic partnership

Suppose other companies or organizations are ready to contribute to your success. In that case, they are probably prepared to invest in helping you support yourself.  If you can create opportunities for them, they may be interested in supporting your growth by building strategic partnerships.

This mostly happens if your business is up and running and can offer opportunities to potential strategic partners. Strategic partners can be vendors, suppliers, and other people you have a common interest and benefit from the partnership.

#5. Crowdfunding

Crowdfunding is a novel way for small and medium businesses to fund their activities. These platforms use technology to connect the right entrepreneurs and investors. 

Crowdfunding can save time and effort by successfully creating a single business environment for all potential investors using profiles. The most popular funding platforms in the United States are Indiegogo and Kickstarter.

Remember that crowdfunding forums differ significantly in terms of performance, features, and requirements. Therefore, it is best to determine which one best suits your goals.

#6. Angel investors

Angel investors invest in promising business ventures that need quick funding for a piece of the business.

Angel investment is quite similar to private equity though it functions differently. It typically focuses on the earliest stage of technology start-ups. If you’re an innovative start-up with a bias to technology, this is one of the best options for funding your business.

One of the issues with this is that you will need to provide the angel investor with equity in your company and, most likely, some power in decision-making. Therefore, the angel investor approach must align with your vision and the company’s purpose.

#7. Grants

Government agencies and charities provide grants to businesses in various areas. A business grant is money given to companies in need when repayment is not expected. The money you’re given is not a loan, and therefore no interest is attached.

Generally, businesses that qualify for grants will have to offer some form of ‘public good.’ There are research and development grants programs, environmental companies, social services, child care, etc.

#8. Business credit card

If you’re short on cash, a business or personal credit card can be good to use to help your new venture get off the ground. Be careful with these, though, as interest rates can be high and terms can be onerous.

#9. Short-term loan

Not all companies (or business owners) have good credit scores, but funding options are still available. You can get the funding or capital you need with a short-term loan. Generally, the repayment period is only a few months, and interest rates can be higher than other options.

#10. Invoice financing

If you charge a customer, you may have to wait weeks or months for payment to be made. However, you can get your money earlier with one of the many programs which offer invoice financing, which borrows money based on the value of unpaid invoices.

Our Raleigh Business Lawyers Can Help With Your Startup

Starting a business is hard – the team at Wilson Ratledge can help your firm with legal and startup advice to put you in the best situation as you launch your new venture. Call them today at 919-787-7711 or fill out the online form to schedule a consultation today!

The Mergers & Acquisitions Process In North Carolina

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People use the terms mergers and acquisitions interchangeably, but they have different meanings. In an acquisition, a company takes over another one and becomes the new owner. A merger refers to two firms, roughly the same size, that come together to do business as one company or a merger of equals.

For example, Daimler-Benz and Chrysler merged to become Daimler Chrysler. They surrendered their stocks and issued new company stock for the new company. Asset acquisition refers to the purchase of a company’s assets instead of its stock

A business acquisition describes when your company buys most or all shares in another company to get control of the company. When you purchase over 50% of a firm’s stock and assets, you can decide what to do with the assets without waiting for approval from the other shareholders.

Benefits of Mergers and Acquisitions (M&A)

A merger or acquisition can have several benefits for your company:

Better Economies of Scale

If you join forces with another company, the new and larger company has higher material and supply needs. When you purchase the necessary materials or supplies in larger volumes, your business improves scales with lower costs, and you can pass the lower costs to your customers.

Lower Costs of Labor

Mergers or acquisitions mean eliminating extra staff that might be doing the same job. It means lower wage costs and the maintenance of a more dynamic workforce. You can review the worker’s performance doing similar roles and choose the best one for each position.

Enhanced Market Share

When you merge your company with another in the same industry, the new company enjoys a better market share. The company taps into the resources both companies bring to the table.

Improved Financial Resources

When you get into an M&A deal, you pool your finances, increasing your new company’s financial capacity.  You may encounter new investment opportunities, and you can now reach a bigger audience because you have a more significant budget for marketing and more inventory.

Potential Pitfalls of Mergers and Acquisitions

Mergers and acquisitions also can have their pitfalls despite their many benefits. Carefully consider the pros and cons of M&A. Some of the pitfalls include:

Increased Expenses

You have to pay all the professionals involved in the M&A logistics. If you acquire another company, you have to pay a lump sum for its assets. This cost may be a disadvantage to your business.

Loss of Potential Opportunities

The energy, financial resources, and time that go into a merger or acquisition might mean your company and the other company have to forego opportunities that may arise during the process.

The M&A Process

Mergers and acquisitions are complex processes that require the help of professionals like lawyers, accountants, and risk management professionals to guide you towards a successful deal conclusion.

Contact An Experienced North Carolina M&A Attorney

This process is time-consuming and complex. You need experienced professionals who know how to navigate the process – Wilson Ratledge has the experience and expertise to guide you and your company through the challenging process of a merger or acquisition. Contact us today to schedule a consultation to talk more about your situation and how we may be able to help!

How Do I Close My Business In North Carolina?

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Whether you’re looking to retire or begin a new business venture, you may be in the situation where you need to close an existing venture. It may seem easy to just walk away, however, there are a variety of legal requirements that may make the process seem daunting at first. Here are a few important factors to keep in mind when closing your business.

Agree to Close the Business

Some businesses may need to formally decide to close the business. This is dependent on the business type and will vary whether it is a sole proprietorship or another business type. LLCs and corporations, in this case, follow the same guidelines.

Sole Proprietorships

Sole proprietors are allowed to make the decision to close their business on their own. Owners of a sole proprietorship can simply follow along with the necessary steps for business dissolution.

LLCs and Corporations

Voluntary dissolution of an LLC or corporation has more rules and regulations than a sole proprietorship. These rules are typically found in a company’s formational documents. If you own an LLC, you are covered under North Carolina’s LLC Act for an alternative route. So long as there is unanimous consent among all LLC members, there is no need to follow the procedures outlined in the formational documents. Either way, this decision requires written documentation to be valid.

File Dissolution Documents

In-State Registration

Businesses registered in North Carolina will need to submit the required forms in order to proceed with the dissolution. If the company does not have any shareholders, they can file Articles of Dissolution Prior to the Issuance of Shares. Companies with shareholders, on the other hand, must file Articles of Dissolution by Board of Directors and Shareholders.

Without legally dissolving your business, you may have to pay additional taxes and fees associated with filing requirements. As such, filling out the necessary paperwork is vital for a smooth dissolution process.

Out-of-State Registration

If your business is also registered in other states, you will need to follow those states’ regulations in order to close your business. Without this process, you may continue to incur fees and taxes from these states. Be sure to look up each state and fill out their required forms.

Cancel Any Business-Related Accounts

When closing a business, you’ll need to close anything related to the business as well. This includes registered names, permits, licenses, and so on. You will also need to send a letter to the IRS in order to close your business account.

Resolve Any Outstanding Obligations

Taxes

Taxes are conducted according to the IRS and are done in the calendar year the business is dissolved in. Companies must make final tax payments and list that it is their final return on their tax form. If for some reason there were issues with withholding income, Social Security, and/or Medicare taxes, these issues will need to be resolved as well. Otherwise, the IRS will issue the Trust Fund Recovery Penalty, which charges unpaid taxes plus interest. This is issued in cases of willful tax evasion only, however.

State taxes must also be resolved as well. While you do not need tax clearance to dissolve a business in North Carolina, you will need to pay any outstanding taxes regardless. It is better to complete this process sooner rather than later.

Employee Payments

You will also need to resolve employee payments. This has to be done within a certain timeframe, as The Worker Adjustment and Retraining Notification Act (WARN) requires that companies give a 60-day layoff notice to employees if they have over 100 employees. This has additional stipulations as well, so be sure to consult your business attorney for additional guidance on this. You will also need to give employees their final paycheck.

Notifying Creditors and Claimants

You should also notify creditors and other claimants. While this is not required per North Carolina law, it is recommended. You can either notify them through direct written notice or publish the notice in a newspaper. Either route has certain regulations and procedures, so it is highly recommended that you consult your business attorney on this matter.

Keep Records

Business owners must also keep records following the dissolution. It often takes years before these documents can be safely discarded. The IRS recommends keeping records of employment taxes for at least four years, although you may have to keep the documents longer. Ensure all documents are in a safe and accessible place post-dissolution so you can access them if needed.

Our North Carolina Business Attorneys Can Help

At Wilson Ratledge, we have over 60 years of experience helping business owners from formation all the way through exiting their businesses. We understand that no two businesses are the same, and we treat your situation with the attention and expertise you deserve. Contact us today to schedule a consultation with one of our North Carolina business attorneys to make sure your business dissolution goes according to plan.

How To Prepare Your Business For A Sale

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There are many reasons business owners choose to sell their businesses. It could be because they want to move to another state or city, they want to retire, sales are down and they don’t have the energy to continue, or they are just looking for a new challenge. 

No matter what reasons you have to sell your business, there are certain things you need to do to maximize your business’ value and have a smooth selling process. Here are the basics on how you should prepare to sell your business.

1. Prepare For The Sale In Advance

Poor preparation can lead to a waste of time and effort. You should start with your exit planning 18-24 months ahead of when you’d like the sale to close. Preparing for the sale earlier can improve your financial records and improve the business structure. Such improvements will make the transition easy for the buyer and potentially increase your valuation. Here are a few things you should do as you prepare your business for sale:

  • Increase Profitability – Investors want to buy a profitable business – identifying unnecessary costs and improving efficiency will make the business more valuable and attractive to buyers.
  • Update Processes – You’ll put buyers at ease when you create and document processes that will enable the business to function without you being involved. Think of the places you’re involved in the day-to-day operations of the business and document how it could run if someone were to step into your role.
  • Keep Your Team Happy – No investor will want to deal with businesses with high employee turnover and uncertainty. Keeping your team engaged and focused on the goal during the acquisition process is critical to a successful transaction.

2. Identify Tangible And Intangible Assets

As the date of the sale draws near, you should list all the physical assets, which include inventory, equipment, fixtures, and furnishings. It’s also crucial to consider intangible assets like customer relationships, contracts, and brand recognition. During the due diligence process, your buyer (or their attorney) will likely request all of these items so it’s useful to have the information collected beforehand.

3. Put Yourself In The Buyer’s Shoes

What is your buyer looking for? A business they can step into as an owner-operator? Are they a competitor looking to add to their book of business and merge your team into their business? Are they someone providing a product in an adjacent market and looking to add capabilities to their offering?

Putting yourself in your buyer’s shoes and marketing your business to them based on what they want can help you negotiate a better deal.

4. Create A Timeline

2-3 years is a reasonable time to prepare for your business sale. That’s enough time to build profitability for the business and ensure you are ready for the transition. You’ll get a maximum return when you show your business has increased profitability over the past few years. 

5. Get A Business Valuation

The next thing you should do is determine the value of your business. A business valuation helps you determine the right price for your business. Make sure you use a business appraiser to get the valuation. Having a professional valuation will help you gauge your buyer’s offers.

Through a business valuation, you can know about your financial situation, market position, and your organization’s strengths and weaknesses. You can get the valuation from regional business brokers, local accounting firms, or investment banking firms. 

6. Use A Broker

Depending on your situation, using a business broker can maximize the value you get for the sale, even after their fees. Ask around your professional network for recommendations and vet them thoroughly. Have they sold other businesses like yours? Check references and make sure the broker is providing consistent results.

7. Prepare Documents

You should also have your financial statements ready before you sell your business – bank statements, credit card statements, financial statements, and don’t forget the tax returns! Make sure you review any permits, incorporation papers, leases, licensing agreements, and vendor contracts as well.

8. Keep Employees Incentivized

Key managers can create a conflict of interest during the sale. Make sure to keep your key team members happy and engaged throughout the process to avoid any uncertainty during the sale. You may think you can rely on non-compete or non-solicit agreements, but it’s much easier to keep your team happy.

9. Find A Buyer

A business sale can take between six months and two years. It can be a challenge to find the right buyer. Buyers always look for business with good cash flow. They want to invest in a business that can increase their return on investment. If you build your company to provide the buyer with what they need, you will usually not have a problem finding a buyer. Often, a buyer will even come from the network you’ve built over the years of operating your business.

Raleigh Business Acquisition Attorneys

It’s important to have the right team on your side during an acquisition. The team at Wilson Ratledge has worked with many business owners to sell their businesses over the years, and helped them get to the next phase in their journey. We can help you too – call us today at 919-787-7711 or fill out our online form to schedule a consultation today!