What will happen to your company if something happens to the owners? Too few have undertaken the process of preparing for such an event. Business Transition or Succession Planning is an area that is often neglected by business owners.
The biggest barrier to planning is the unspoken belief that at the right time a buyer will appear who is ready, willing and, most important, able to pay a fair price for the company. This rarely happens.
Unfortunately reality has a way of crashing in whether we want it to or not and often at a critical point in the life of the business. Only about 21% of family owned companies make it to the second generation.
Business transition planning is the process for planning and managing the orderly transfer of leadership and ownership of a company to a new generation while preserving its maximum value. The first step in the process is to secure the ownership of the company through a Buy-Sell Agreement. This type of agreement by the shareholders controls ownership of the company, which is a critical factor in the success of privately held companies.
The next step is to identify the successors. They may already be employees or family members. If not, a search process for appropriate successors will be required. When they have been identified, there is often a need to prepare them for the transition. This may require additional education and training.
Funding of the transition is another critical issue. Insurance is most often used since it has the ability to immediately deal with an unexpected death. Proper planning can also result in significant tax benefits both to the family of the decedent and to the surviving shareholders.
We have used a technique with a number of clients that combines a Buy-Sell Agreement with a Partnership owning the insurance policies. Placing certain types of policies in the partnership offers the opportunity to create a fund for buyout of an owner's shares at retirement. The contributed funds grow tax deferred with the partnership controlling the types and risk level of the investments. If properly structured, the retiring owner can receive these funds free of income tax.
The critical element is to start the process. It is not easy and a number of significant decisions will be required. The result will give the company the best chance of surviving and prospering in the future. Please let us know if this is an area that we can be of assistance to you.
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The Florida Division of Workers' Compensation has created a new database that allows monitoring of workers' compensation coverage called the Construction Policy Tracking Database. Contractors can register and list those they would like to monitor and the Division will send automatic e-mail notifications of any change in the workers' compensation coverage status of the listed contractors.
Access this database through the Department of Financial Services' website at http://www.fldfs.com or you can access the database through our website. Just click on the Contractor's Resources link and scroll to the Helpful Links and Information link.
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All workers' compensation exemption certificates expire on December 31, 2003 unless they have been renewed under the new statute. General contractors are the statutory employers of all workers on a job site. They have the obligation to see that all workers have either insurance coverage or exemption certificates. Without these, the job can be shut down and fines imposed.
Under the new law, exemptions are available only for a maximum of three officers of a corporation or LLC and each must own at least 10% of the corporation's stock. Even if you are already incorporated and meet the requirements of the new law, you still must complete and file the Re-issuance of Notice of Election to be Exempt form.
For contractors who incorporate to meet these exemption requirements, it will be necessary to apply for a change of status with the Construction Industry Licensing Board so that the license will reflect the name of your new corporation. A Qualified Business license must also be obtained. The deadline for obtaining the change of status and Qualified Business license is July 1, 2004.
Prior to July 1, 2004, a licensed contractor will still be able to obtain building permits even though the applications for change of status and qualified business license have not yet been approved.
Applications for change of status and Qualified Business license are available at www.MyFlorida.com/dbpr. The Re-issuance of Notice of Election to be Exempt form is available at www.fldfs.com.
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With the addition by the legislature of new requirements for contracts for residential construction, repair or remodeling, it is a good time to review all of the provisions that are required for such contracts.
1. Section 489.1425 requires the contractor to advise the owner of the Construction Industries Recovery Fund.
2. Section 713.015 requires a warning to the owner of the consequences of failure to follow the lien law. This must be in 18 point type, bolded and capitalized.
3. Section 489.119 requires that the contractor's license number or the Qualified Business license number be included.
4. SB 1286 - 2003 requires the contractor to advise the owner of the contractor's right to cure defects.
5. Section 501.1375 requires a provision dealing with deposits made for purposes of construction or purchase of a dwelling.
For those who are selling completed dwelling units there are additional and different requirements.
1. Section 501.1375 requiring a provision dealing with deposits is also needed on sale of completed dwellings.
2. Section 689.26 requires disclosure of any homeowners' associations. This disclosure may be required even if there is no association.
3. Section 553.996 requires that the purchaser be advised of the availability of an energy rating on the building (this applies to any occupied building).
4. Section 404.056 requires disclosure of the possibility of the existence of radon gas.
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We all know that under the Florida Statutes, contractors who perform work for which they are not licensed are subject to penalties that extend far beyond those that may be imposed by the Construction Industry Licensing Board. Unlicensed contractors have no lien rights. Further, contracts are unenforceable in law or in equity by the unlicensed contractor.
The strict penalties for unlicensed activities are intended to address the problems that consumers and the public face due to shoddy work by unlicensed and unqualified contractors. Based on that legislative intent, it would seem that the unenforceability of contracts by unlicensed contractors would apply only to those direct contracts between the contractor and the consumer. But what about contracts between general contractors and unlicensed subcontractors? Can a general contractor hire an unlicensed subcontractor and then refuse to pay on the basis that the contract is unenforceable?
In The Poole & Kent Company v. Gusi Erickson Construction Co., 759 So. 2d 2 (Fla. 2nd DCA 1999), a Florida appellate court addressed the issue. Poole & Kent entered into a contract with Hillsborough County to build a wastewater treatment facility and entered into several subcontracts with Erickson to construct various portions of the facility. As it turned out, Erickson did not have a qualifying agent until several months after the contracts were executed. When a dispute developed, Poole & Kent attempted to void the arbitration clause claiming the contracts were unenforceable. Poole & Kent also argued that it was not required to pay Erickson for its work. The appellate court expressed doubts that the legislature intended to allow a general contractor to avoid payment to a subcontractor who actually performed work on a project, stating that it is the general contractor's responsibility to assure that subcontractors are validly licensed. Consequently, the appellate court refused to treat the contract between Poole & Kent and Erickson as unenforceable.
It would seem that the Poole & Kent decision provides clear guidance. However, in Deep South Systems, Inc. v. Lester Heath d/b/a Quality Architectural Metal Sales & Service, 834 So. 2d 378 (Fla. 2nd DCA 2003), the same appellate court provided a seemingly contradictory opinion. In this case, Deep South, a certified licensed roofing contractor, entered into a subcontract under which Quality was to provide all labor, tools, and equipment for the installation of all roof, wall, and soffit panels for the construction project. Quality was not a certified or registered contractor when it entered into the contract with Deep South. The appellate court ruled that Quality was an unlicensed contractor and the contract it entered into with Deep South was unenforceable as a matter of law.
At first glance, it appears difficult to reconcile the Poole & Kent opinion with the Deep South opinion. However, upon close examination, we see that Poole & Kent entered into the contract with Erickson in 1996. At that time, the Florida Statute governing unlicensed activity stated: "In the event the contractor obtains or reinstates his license, the provisions of this section shall no longer apply." Since Erickson obtained a qualifying agent several months after the contracts were executed, the appellate court was able to rule as it did and denied Poole & Kent's claim that the contracts were unenforceable. However, in the year 2000, the provision allowing contractors to obtain or reinstate their license was deleted from the statute. Therefore, the Deep South court was not required to follow its previous Poole & Kent opinion. It is now clear that a contract between a general contractor and an unlicensed subcontractor is unenforceable.
What about a contract between an unlicensed general contractor and a licensed subcontractor? Can a general contractor refuse to pay a subcontractor, claiming it is unlicensed and, therefore, the contract is unenforceable? In Castro v. Jose Sangles, 637 So. 2d 989 (Fla. 3rd DCA 1994), a Florida appellate court answered this question in the negative. The court stated that one may recover upon an apparently illegal contract only if he himself has not been guilty of wrongdoing. Therefore, if the subcontractor is properly licensed and is not aware that the general contractor is unlicensed, it may still enforce the subcontract.
In conclusion, it is important that all general contractors thoroughly check that their subcontractors are properly licensed for the work to be performed. For subcontractors, make sure that you are properly licensed. Do not allow any gaps if a qualifying agent is to be replaced. We are available to advise and assist you with any licensing matters.
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