Maryland’s State Department of Assessments and Taxation (SDAT) now accepts certain business filings online through its web portal, available here. This web portal permits registration of a new business, registration of trade names, and establishing Maryland business tax accounts. Users can now complete these documents without having to go in person or use SDAT’s fax system. You should note that the expedited filing fees are charged for using this web site.
The following is my presentation file from the annual Maryland State Bar Association meeting. I was a panelist on the topic of Cloud Computing: Fact or Fiction on June 15, 2012. My presentation discussed some of the basic issues about cloud computing, such as what it is, the cost savings that may be possible by moving to the cloud, some of the security issues with computing, and some of the ethics issues that practicing attorneys face when making decisions about computing systems.
If you have any questions about this presentation, please feel free to email or call me to discuss them. Thanks.
Entertainment businesses operate like many other business enterprises: ultimately, the business must make a profit in order to survive. One way to help sustain and protect an entertainment business is to document the business relationships through written entertainment contracts between parties that participate in the providing of services to clients.
For example, if several people are business owners, having a written agreement between those owners is an essential ingredient to the business’ success. Such an agreement will vary based on the business entity, but generally, the agreement should describe each owner’s ownership interest, how management decisions are made, how owners join and depart from the organization, and how the business finances will be managed.
The forms of these agreements will vary based on the kind of business. If the entity is unincorporated and there are two or more owners (“partners”) who share in the profit or loss of the business, the entity is likely a general partnership and would be governed by a partnership agreement (and, in its absence, state law for partnerships). If the entity is an incorporated limited liability company, the owners (“members”) would typically enter into a membership agreement. If the entity is a corporation, the owners (“shareholders”) would enter into a shareholders agreement. The absence of such written agreements can make things much more expensive later should disputes arise among the owners.
For entertainment businesses that act as a booking agent for performers, having a written agency agreement with the performer is an important document. This contract would clarify the procedures for scheduling and booking performances, might determine whether the agent is exclusive for the performer, what geographic area the agent would book the performers within, how the agent is compensated, among other considerations.
Also important to an entertainment business are the individual performers that work for the entertainment business. Whether or not these performers are employees or independent contractors is an important distinction with substantial legal and tax implications for the business. Employers understand that an independent contractor can potentially be less expensive than a full time employee because employers can avoid paying certain payroll taxes for independent contractors (shifting the tax burden to the contractor). However, if the business mistakenly determines a staff member to be an independent contractor, the business may quickly face some very costly back taxes and penalties.
Independent Contractor vs. Employee
Determining whether a performer is an independent contractor or employee is highly fact specific. There are a series of factors that are used to determine this distinction; these factors may vary by state and by the regulating entity. However, at its roots, an employee is a person over whom the employer controls both the results of the work performed, and the methods and tools to achieve the result. According to IRS Publication 1779, the IRS looks at three basic areas to determine if a staff person is an employee or independent contractor: (a) behavioral control, (b) financial control, and (c) the relationship of the parties.
Generally, the more control the business exercises over how the job is done (not just what results are expected), the more the staff person is likely to be viewed as an employee. With regards to financial control, if the staff person can incur a profit or loss from his/her activities, you have a significant investment in the work that you do, and/or you pay your own business expenses, you are more likely to be viewed as an independent contractor. And on the relationship of the parties, if the business pays benefits for you (like health insurance, pensions, and paid time off), and there is no written agreement between the parties, the IRS is more likely to view you as an employee. Independent contractors typically are able to work for several businesses providing similar services within their field.
In Maryland, the Department of Labor and Licensing also considers whether the business retains the right to discharge the staff member, and whether the business provides the tools, materials and the place to work for the staff member. Typically, the independent contractor would have his/her own tools and materials, and would work from his/her own office or location. DLLR also indicates that independent contractors are usually in a business that is different from the hiring business; professionals like lawyers, dentists, and public accountants are commonly independent contractors in business for themselves.
There may be other factors to consider besides the ones noted above. In the entertainment business, musicians are may be independent contractors because they (a) have their own tools (e.g., instruments), (b) they may work for more than one business or band, (c) they typically have a fair amount of time and money invested in their education and equipment to be musicians, (d) the business they work for tends to exercise control over the result (the performance), rather than the specific methods of how the work is performed, and (e) typically organizations that schedule or coordinate performances are in a different business from the performers. In some cases, performers take a percentage of ticket sales, and won’t get paid if either no one shows up for the event or if the event is canceled. In those cases, a performer is more likely to be viewed as an independent contractor.
However, there are also factors that might tend to make a performer an employee: (a) benefits for the performer like paid sick or vacation time or health insurance, (b) the exercise of control by the busiess over practice times and location and how a particular musical piece is performed, and (c) the lack of a written agreement between the parties, suggesting that the business may terminate the relationship at will with the performer, without further obligation.
If you aren’t sure if the performer is an independent contractor or employee, you can request that the IRS provide a private letter ruling through filing Form SS-8. An attorney in your state may also be able to advise you on the state-specific factors and your circumstances.
There may be other relationships for an entertainment business (such as licensing and royalty agreements for the licensing of copyrighted works, contracts with merchandise distributors, record label and publisher agreements, venue agreements, just to mention a few). The more that can be documented, the more likely it is that you will get paid and the less likely it is that parties will have disputes.
Documenting relationships in the form of formal, written agreements at the beginning of the relationship can help save headaches and costly mistakes down the road. Consulting with an experienced attorney can help you to craft effective and binding agreements.
 In close cases, the written agreement may determine that the staff person is an independent contractor.
Second Life, (click here for their main web site) an online virtual worlds system, has become the center of a recent copyright controversy involving, yes, virtual sex toys. Apparently, there are not enough legitimate or inexpensive sex toys for all the denizens of Second Life, so some residents have elected to make knock-offs. Just like the real-world controversies surrounding real-world goods made by companies like Tiffany and Louis Vuitton, Eros LLC has filed suit against the alleged infringers and Linden Labs, for housing and supporting the alleged knock-offs. (See Wired Article)
Vicarious and contributory liability for copyright infringement are recognized by the courts as a cause of action under federal copyright law. This kind of liability has been raised in recent years against the various music file sharing services that came and went, such as Napster (originally a file sharing service without any copyright licensing from the music companies that owned the music being shared), Gnutella, and Limewire. Each of these services were held to be liable for the file sharing of their users, in part based on the notion of vicarious liability. Cases prior to Napster et al. that addressed this kind of liability have developed along two lines: landlord-tenants where the landlord exercised no control over the leased premises, and dance-hall cases where the operator of the hall controlled the premises and obtained a direct financial benefit from the infringing performances. Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996). Under common law, landlords have not been held to have copyright liability where dance-hall operators have infringed the copyrights of others.
In Fonovisa, the defendant Cherry Auction operated a swap meet where it rented stalls to individuals who were selling unlicensed copies of bootlegged music owned by the plaintiff. For the swap meet operator to be liable, the plaintiff had to prove that the operator controlled the marketplace and obtained a direct financial benefit from the sales of infringing works. The Court sided with the plaintiff in Fonovisa, even though the defendant Cherry Auction did not receive a commission from the sales of the infringing materials.
Unlike the auction house in Fonovisa, Second Life does allow users access to their information system without making a payment. Anyone can download a copy of the Second Life client, establish a username, and log in to the system. Users start to rack up fees when they purchase virtual real estate within the system. In addition, Linden Labs provides a virtual currency of Linden Dollars that allow for the exchange of virtual goods within the system. Linden Dollars can be exchanged for U.S. dollars using the credit card or paypal account associated with your Second Life account. As a result of this connection with the physical world, there are a number of users that make an actual living in Second Life producing virtual goods for their fellow Second Life denizens. The last time I visited, about 17 million worth of linden dollars were exchanged into real dollars on the Linden Labs exchange system in a day. Linden Labs is generating a significant amount of commerce in spite of the national recession.
According to Eros Products LLC, his SexGen products line has sold about 1 million (that’s U.S. dollars) of product within Second Life over the past five years. (A copy of the Complaint is here). Competition being fierce in the digital world, others have been making sex toys that look a lot like Eros’, with some likely being copied straight from the source and resold. This is possible in Second Life because Second Life provides “builder” tools to its users. Included in the toolkit are functions to allow for the upload of image files. In addition, there are apparently tools available from other software makers that allow a Second Life user to copy images within the system.
Assuming that Eros Products LLC (and other plaintiffs that may join the suit should the court certify this as a class action) can prove that they are the valid owner of the copyrighted works, the question for the court is whether Linden Labs can meet the standard for contributory liability. Linden Labs is a virtual landlord in the sense that users of Second Life pay an annual subscription in order to own virtual real estate within the virtual world. The right to own this virtual property is limited by payment of the subscription. You will note, however, that there are plenty of users that do not acquire any virtual real estate in Second Life – and for them, there is no fee to participate.
However, Linden Labs also charges fees for the conversion of Linden Dollars into U.S. Dollars through the Linden Exchange. For infringers seeking to sell pirated works in the virtual world, the real benefit to them is the ability to take the proceeds of those sales and convert them back into hard currency for use in the real world. Approximately 250 Linden Dollars are worth a U.S. Dollar (the trading in this currency fluctuates). In order to convert Linden Dollars back to U.S. Dollars, Linden Labs charges a fee of 3.5% of the value of the transaction. So, indirectly, Linden Labs benefits from the sale of infringing goods every time that the infringer converts his Linden Dollar proceeds to hard currency.
There is a question, however, of whether Linden Labs is merely a landlord who relinquished control to his infringing tenant. Eros Products LLC claims that Linden Labs did exercise control over the activities of its users because all of the virtual worlds within Second Life are ultimately housed on servers controlled by Linden Labs. Pl.’s Complaint at ¶ 127-128. And furthermore, Linden Labs has ultimate control over its software that operates Second Life, and I suppose that Linden Labs could alter its software to prevent copyright infringement if it wished to do so (how, exactly, is another story). Factually, however, I think this is going to be tough to prove. Unlike Grokster, who marketed itself as the successor to Napster for those looking to willfully infringe on the copyrights of others, Linden Labs has not marketed itself as a safe haven for willful copyright infringers. On the contrary, Linden Labs gave some thought to copyright in its license agreement, granting its users rights in the works they create in-world. (See Terms of Service here at section 3.2)
Maryland law provides for how to properly form a Maryland LLC. Title 4A of the Maryland Corporations and Associations Act governs the formation and operation of limited liability companies (“LLC”) registered in Maryland. A Maryland LLC, when properly formed, provides limited liability for all members of the LLC for debts incurred by the LLC during normal operations. For example, if a member of a properly formed LLC opens a business credit card in the name of the LLC (and does not otherwise personally guarantee the debts of the LLC), the members are, generally, not personally liable for paying the credit card bill. This is also true for other contracts entered into between another party and the LLC. If the LLC or a person working for the LLC fails to perform under the contract, the LLC and not its members would be liable to the other party.
Owners of the LLC are referred to as “members” and own an interest in the LLC, generally proportionate to their capital contributions to the LLC. Members can contribute cash or equivalent to the LLC as a capital contribution, or members can contribute services in lieu of cash. For example, an accountant could contribute his time in his professional capacity in lieu of actually writing a check to the LLC, and the members could agree to value his time as a capital contribution to the entity. In addition, through the operating agreement, members of an LLC can agree to a different interest distribution from the proportion each invests in the LLC through capital contributions. This is common in smaller LLCs where the owners wish to remain equal owners, but one of the members contributes more money or time to the effort than the other members.
Step 1: Articles of Organizations
To register an LLC, a person files Articles of Organization with SDAT, and pays a registration fee. SDAT’s web site provides a form that can be used to file Articles of Organization. SDAT will accept Articles of Organization for filing by mail, in person, or by fax. SDAT charges additional fees for expedited registration of an LLC (and it also charges higher fees for faxed Articles).
By law, an LLC must have a name that is distinguishable from other entities already registered with the Maryland Department of Assessments and Taxation (“SDAT”), including names that have been reserved with SDAT, and assumed names of foreign entities. In addition, the name of the LLC must have the words “limited liability company,” “LLC,”, “L.L.C.,” “LC,” or “L.C.” within the name registered with SDAT. SDAT may refuse to register an LLC that does not comply with the naming requirements.
Step 2: Written Operating Agreement
Once SDAT has accepted the Articles of Organization, the LLC is formed under Maryland law. Title 4A does not require that an LLC’s members enter into a written operating agreement. However, a written agreement can help to organize the company and ensure that all of the members have similar expectations about how the company will be operated, who will provide what money or services to the company, and how decisions about the company will be made. If an operating agreement is not entered into by the members, Title 4A provides the legal defaults for rights and remedies of the members of the LLC.
Step 3: Register for Federal Employer Identification Number (FEIN)
Once the LLC is formed, it exists under Maryland law as a business entity. However, the LLC is also governed by the federal tax code, and is subject to taxation by the Internal Revenue Service. Generally, LLCs provide owners with pass-through taxation, which means that the profits of the LLC are distributed to each member of the LLC according to their proportionate share of the LLC, and the individual members then pay taxes on that profit as a part of their personal tax liability.
An LLC, however, must still report its earnings to the IRS on an appropriate tax form (usually form 1065 for partnerships), and will file Schedule K’s for each member indicating their proportionate share of the profit or loss of the LLC. To do so, the LLC must have an FEIN. To register for a FEIN requires completion and filing of form SS4, which is available on the IRS website.
Step 4: Open an LLC Bank Account
Most LLCs will require a way to receive money and make payments in order to operate. Members of the LLC should therefore establish a business banking account in the name of the LLC. Your bank will generally require that a member come in and provide a copy of the Articles of Organization and Operating Agreement of the LLC in order to establish an account.
Step 5: Establish an Accounting System
To operate, most LLCs will need to keep track of profits and expenses, along with capital contributions made by the members. Doing so by computer helps the LLC file its tax returns promptly, and also helps the members to manage the company’s finances. If none of the members are able to handle the financial bookkeeping, the LLC may consider hiring a bookkeeper or accountant to help the LLC in this area. Strong fiscal management is not required by law but is an essential ingredient to the success of any business.
Step 6: Establish Maryland Tax Accounts
The LLC may need to establish one or more tax accounts with the State of Maryland, including a sales and use tax account, an employer withholding account, an unemployment insurance account, and other accounts, depending on the nature of the LLC. In addition, each of these tax accounts requires regular reporting to the responsible state agency, and payment of tax monies on a regular basis determined by the responsible agency.
Maryland law also requires that LLC’s file a personal property tax return annually, and pay property taxes owed to the State and county in which the LLC is operated. A failure to do this may cause a forfeiture of the LLC’s charter, which essentially prevents the LLC from operating in Maryland or seeking redress in a Maryland court.
For more information, see the MarylandTaxes.com website.
Step 7: Establish a Principal Office
The LLC needs to operate from a physical location which is zoned by the county for the activity to be engaged in by the LLC.
Step 8: Other Licensing
If the LLC needs a business or trader’s license (generally for the sale of goods), the county in which the LLC does business will determine which Circuit Court Clerk will issue the license. Professionals, like accountants and lawyers, also must maintain a license to practice their profession which is issued by a state agency. See the Maryland Business and Occupations Article, and see the Maryland Judiciary website for more information.
There may be other considerations for forming an LLC in Maryland. If you have questions about the process, seek the advice of an attorney admitted to practice in your state, or contact us for Maryland legal questions.
What constitutes “meaningful use” of an electronic health record system has been updated by the Centers for Medicare and Medicaid (CMS) and the Department of Health and Human Services (HHS) in volume 75, number 144 of the Federal Register, page 44565, as of July 28, 2010. These new definitions for stage 1 meaningful use are to go into effect as of September 27, 2010. Under the original rule that was published at the end of 2009, there were a total of 25 standards that needed to be met by an EHR user to qualify as a meaningful user. Under the final rule published July 28, the list has ben somewhat shortened, so that there are 15 “core” standards that must be met, under § 495.6(d), and an additional 5 standards from the list of 10 found in § 495.6(e) for those who qualify as eligible professionals under the regulation. In parallel, eligible hospitals and critical access hospitals must meet the core standards in § 495.6(f), and 5 additional standards in § 495.6(g).
Under § 495.6(d), the following are the fifteen mandatory standards for eligible professionals:
(d)(1) use computerized provider order entry for medication orders for at least 30% of patients seen
(d)(2) implement drug-drug and drug-allergy interaction checking
(d)(3) main an up to date problem list
(d)(4) e-prescribing for at least 40% of all permissible prescriptions
(d)(5) maintain active medication list
(d)(6) maintain active allergy list
(d)(7) record particular demographics
(d)(8) record specific vital signs, including BMI and capability for growth charts
(d)(9) record smoking status
(d)(10) report ambulatory clinical quality measures to CMS or your State Medicaid EP (though the specifics are not provided here)
(d)(11) implement a clinical decision support rule
(d)(12) provide an electronic copy of health information to patient on request
(d)(13) provide patient clinical summaries at each patient visit
(d)(14) prove capability to exchange key clinical information electronically by performing at least one test of this capability
(d)(15) protect protected health information by complying with the risk assessment and risk reduction guidance in the HIPAA security rule, at 45 CFR § 164.308.
Eligible professionals also must pick and implement five of the following:
(e)(1) implement drug-formulary checking
(e)(2) incorporate lab test results into EHR
(e)(3) generate patient lists by specific conditions for quality improvement, research, outreach
(e)(4) patient preventive care reminders
(e)(5) provide patients with timely access to their health information
(e)(6) provide patients with patient-specific education resources
(e)(7) perform medication reconciliation when a patient is received from another setting of care
(e)(8) provide summary of care for patients referred or transitioned to another care setting
(e)(9) prove ability to exchange immunization data with an electronic registry
(e)(1) prove ability to exchange surveillance data with an electronic registry.
Some of the above are new, and some of the previous draft standards were dropped (such as a requirement to use electronic insurance eligibility or submit claims electroncially, which are typically under the purview of a practice management system, but not typical of an EHR).
Prospective EHR vendors should be able to show you how they will aid you in complying with these requirements, and a reputable EHR vendor should be willing to put its compliance efforts into its contract for sale and implementation. If you already have an EHR vendor that you use today, now is the time to start the conversation on compliance with these requirements. Expect more news on this very important regulatory topic soon.
Do you own your own business? Having a plan for your business is important to your business’ success in the market. Part of your planning should involve what will happen to your business when you retire or die, particularly if income from your business supports your loved ones. If you haven’t planned for business succession, or you haven’t reviewed your plan in a while, now might be a good time to talk with a professional for help.
There are several parts to consider when planning for business succession. First off, under Maryland law, people that die without a will leave their assets to family members based on the Intestate Succession Statute, which is codified in the Maryland Estates and Trust Code Ann. § 3-101 et seq. Generally, a married spouse with children will leave assets titled in their name, including business interests, to the wife and kids. If you are married, but have no kids and your parents have pre-deceased you, then your spouse will inherit those assets.
Now, individuals that die with a will are said to die “testate,” meaning that they have written down how they wish the things they own to be transferred to others at death. Some business owners have a will and plan which they have duly executed, which describes how they wish their assets, including the business, to be distributed. In many cases, the testator drafts his/her will to benefit a primary group of people or a single individual, such as a wife, child or other relative. It may be that the owner of a business wishes to leave the business to his wife or children.
However, there are a number of problems for an owner to simply leave his/her business interest with a spouse and/or children. For example, can your spouse or children operate the business in your stead? If you own the business with other people, do those other owners wish to continue the business with your relatives as an owner of the business? In addition, it may be that your family depends on the cash value of the business that you, as the owner, are able to draw out of the business (either by salary or by profit distributions). If those family members cannot effectively work for the business to generate income or maintain the profitability of the business, the value of the business may decline rapidly after you die.
For some small businesses, the value may be mostly tied to the business owner and his/her relationships with the business’ clients. Should the owner die, the clients may quickly decide to find another business to buy the product or service from, which means that the business value may quickly diminish as sales and revenue dwindle. If the surviving family was counting on the value of the business to continue after the owner’s death, this may come as a rude awakening, particularly in the wake of the loss.
A buy-sell agreement may be an appropriate way to solve these problems. The buy-sell agreement is a way for you, ahead of time, to agree that the people that inherit your interest in the business will sell, and the business itself or the surviving owners will buy, your business interest in exchange for money. Such an agreement typically involves the purchase of an insurance policy, and a discussion around how to value the business (such as based on book value, or based on the sale of similar businesses in the same market). The contract in combination with the insurance policy ensures that your business interest is transferred to those that value and can utilize it, while also providing a cash benefit to your family or other beneficiaries of your estate.