March 2010 BDC Newsletter

As a new entrepreneur it's extremely important to "know what you don't know" when selecting the appropriate legal entity for your business. As an attorney and small business advisor, I am shocked by the amount of conflicting and somewhat confusing information now available to first time entrepreneurs. Consequently, I am not surprised by the number of people that have put the "cart before the horse" by beginning their business without knowing the facts.

When selecting a legal entity for your business, it's critical to look at the following "Key Considerations" as they pertain to your specific individual needs and the short and long term impact on your business.

Management and Control:
The first Consideration is determining the appropriate management structure. How and by whom will the business be managed, and what rules, policies and protocols will be implemented for the success of the business? This is as much a business as legal consideration and consists of the following analysis. First, does the entrepreneur possess all of the knowledge, skill, client contacts and insight to operate the business by themselves, or do they need assistance from others who will provide different but complimentary resources (e.g. knowledge, property or cash)? Once this is determined, the business will need to establish a set of rules and protocols for managing the business operations. Issues associated with how daily decisions and disagreements are handled, what products and services the business will offer and what happens if the principle becomes unavailable, deceased, permanently disabled, divorced (life's unexpected circumstances) must be accounted for. Each legal entity has its own management structure and rules for governance set forth under Michigan law, it's not a "one size fits all". The trick is to identify the entity that provides the type of structure that resembles your business model and to have your operational documents "customized" to reflect the specific needs of the principles. This process is not rocket science but does require the input of a business professional that understands the effects of the desired structure and can help facilitate the process.

Liability Protection:
The second Consideration is the "foreseeable liability" that may be incurred by your business and yourself as a principle. Although liability is a concern for all businesses, not all businesses have the same foreseeable risks nor do they carry the same likelihood of being sued. The question is: given the nature of your business what are the foreseeable risks of liability and what can your business do to minimize the potential consequences. Generally, all legal entities (yes!-even LLCs and corporations) can be held unlimitedly liable for damages directly resulting from the acts and or omissions of its employees, officers or members. Therefore, if there are foreseeable risks of liability your business should at least explore the possibility of carrying some form of commercial liability insurance to insure against the loss of it assets in the event of a lawsuit. Generally, coverage will protect against those listed "foreseeable risks" and will provide limits to the coverage sufficient to cover the business's assets. Premiums should be based on the dollar value of the assets being protected and the likelihood of the risk.

Personal liability incurred by the individual principles, shareholders, officers or members is generally limited to their own personal contributions (money and or property) made to their business (the total capital contribution or investment) and therefore does not extend to their personal assets (residence, investment properties, personal property, etc...). Of course, the exception is if the individual principle is found to have been "grossly negligent", intentionally violated the law or committed some other form of intentional wrong-doing that causes others harm. These situations will cause the individual wrong-doer to be held unlimitedly liable for all damages, without the benefit of insurance coverage. Moral: every entrepreneur should review all potential foreseeable liability and determine whether they need commercial liability insurance to protect the value of their business assets, and to always use "reasonable care" when providing their products and services or working with other third parties.

Capitalization:
The next Consideration is the type and amount of initial capital or "working capital" (cash, property or services) that is needed and invested into your business. This generally refers to the "initial capital contributions" made by the individual shareholders, proprietors or members and is based on the initial capital needs of the business. The IRS allows individual entrepreneurs, regardless of the entity, to invest our "post tax dollars" or our "owned property" into our businesses in exchange for some percentage of the membership interests (LLC) or some number of shares of stock (corporation) as business equity. This transaction is generally tax exempt to the principles and business and determines the level of "tax basis" that each principle can use to offset their expenses. Since this transaction occurs with all entities it is more of a practical business rather than legal consideration. However, it is equally important to understand.

Taxation and Succession Planning:
Lastly, every business owner needs to consider how to minimize their tax consequences and plan for the future. As to taxation, there are two entity options: the "taxable entity", otherwise known as the "C" corporation, and the "pass-through entity", which may refer to the sole proprietorship, general partnership, LLC or Sub-Chapter S corporation. Traditional "C" corporations pay "corporate income taxes" on annual net profits, and after taxes, issue dividends to its shareholders who then pay taxes on the dividends. This "double taxation" is generally not favorable from a total tax consequence perspective. However, the pass-through entity is usually more favorable given all of the net profits and expenses (gains or losses) "pass-through" the entity and go directly to the principle (proprietor, member or shareholder). As a result, the entity does not pay any income tax instead the tax consequence is passed on to the individual principle who pays taxes on their percentage of the "distributions" or "dividends". The more you earn and receive the greater your tax consequence.

When it comes to planning for the future, every business should have a "short term and long term" plan. The short term plan consists of a set of processes and procedures that set forth how the business will be managed, pay distributions or dividends when it becomes profitable, handle all foreseeable expenses and costs, react to potential liability, elect an "alternate manager" to run the business in the event the initial managers or officers are unable and to deal with changes in its marketplace (same as the management consideration). In addition, every business should also have a long term plan for issues such as the principles "withdrawal" from the business, a principles "expulsion" from the business in the event he or she does something illegal or contrary to the interests of the business, the death or permanent disability of the principle and their personal bankruptcy, insolvency or divorce. The required processes, procedures and protocols for handling these short and long term issues are usually set forth in the business's "operational documents" such as the "operating agreement", for the LLC, the "partnership agreement" for the general and limited partnerships and the "by-laws" and "shareholder agreement" for corporations. My rule of thumb is that these documents need to be customized or tailored to meet the specific needs of the business and its principles. Therefore, I'm a big proponent of having them drafted by an attorney or other business professional who understands the drafting process as well as the other impacts.

Hopefully these Considerations will be accounted for before or sometime early in the business's life cycle. However as mentioned, it's not uncommon for many existing businesses to deal with these considerations after the fact as a result of some major change. In either case, they should be reviewed every 2-3 years regardless to make sure nothing major has changed, and if so, that the changes have been accounted for in the business's operational documents.

John T. Carter, Esq. is a member of Carter & Affiliated, PC law firm where they specialize in business law. John may be reached at jc@carterbizlaw.com.

The government provides contractors with two useful tools to understand the government's process for evaluating proposals and find out information about your competitors: debriefings and Freedom of Information Act ("FOIA"), 5 U.S.C. § 552, requests. This article will discuss how government contractors can take advantage of the debriefing and FOIA tools provided by the federal government to maximize their competitive advantage.

Debriefings

Although many government contractors understand the benefits of timely requesting a debriefing if they are an unsuccessful awardee and intend to file a bid protest, most contractors do not take full advantage of debriefings as a tool to enhance their proposal writing skills and provide themselves with a competitive advantage. Whether you are the successful awardee or an unsuccessful offeror, you should, as a matter of course, request a debriefing after a competition to gain insight into the agency's evaluation of your proposal. This insight will prove invaluable when responding to future solicitations.

The government is required to give debriefings to offerors who submitted a proposal in response to a request for proposal and timely submit written requests for debriefings. If an offeror has been excluded from the competition, the offeror can submit a pre-award request for debriefing by submitting a written request to the contracting officer within three calendar days after receipt of the notice of exclusion from the competition. FAR 15.505(a)(1). After the award of the contract, a successful or unsuccessful offeror can submit a post-award request for debriefing by submitting a written request to the contracting officer within three calendar days after the date the offeror received notification of contract award. FAR 15.506(a)(1). Note that the three days are calendar days, not business days. The government often awards contracts on Fridays, which means the contractor must submit the request for debriefing no later than the following Monday. If a contractor does not submit a timely request for a debriefing, the agency is not required to provide the contractor with the requested debriefing. FAR 15.505(a)(3); FAR 15.506(a)(4). The written request for a debriefing can be transmitted to the government by electronic mail, but make sure it is received by the government recipient.

If a contractor timely submits a written request for debriefing to the contracting officer, the agency has the option to provide a debriefing orally, in writing, or by any other method acceptable to the contracting officer. FAR 15.505(c); FAR 15.506(b).

For pre-award debriefings, at a minimum, agencies must include the following:

The agency's evaluation of significant elements in the offeror's proposal;
A summary of the rationale for eliminating the offeror from the competition; and
Reasonable responses to relevant questions about whether source selection procedures contained in the solicitation, applicable regulations, and other applicable authorities were followed in the process of eliminating the offeror from the competition. FAR 15.505(e).

For post-award debriefings, at a minimum, agencies must include the following:

The Government's evaluation of the significant weaknesses or deficiencies in the offeror's proposal, if applicable;
The overall evaluated cost or price (including unit prices), and technical rating, if applicable, of the successful offeror and the debriefed offeror, and past performance information on the debriefed offeror;
The overall ranking of all offerors, when any ranking was developed by the agency during source selection;
A summary of the rationale for award;
For acquisitions of commercial items, the make and model of the item to be delivered by the successful offeror; and
Reasonable responses to relevant questions about whether source selection procedures contained in the solicitation, applicable regulations, and other applicable authorities were followed. FAR 15.506(d).

For both pre-award and post-award debriefings, the agency need not include in the debriefing a point-by-point comparison of the offeror's proposal with those of the other offerors. FAR 15.505(f); FAR 15.506(e). Additionally, for both pre-award and post-award debriefings, the agency must not disclose during the debriefing information prohibited from disclosure under FOIA, such as trade secrets and commercial and financial information that is privileged and confidential. Id.

Debriefings are a useful tool to enable you to understand how the agency evaluated your proposal so that you can highlight the noted strengths and remedy the identified deficiencies or weaknesses in future procurements.

FOIA

Although contractors often view FOIA as an impediment to preserving confidential and proprietary information, contractors can and should take advantage of FOIA to improve their competitive position in procurements. Since 1966, FOIA has required federal governmental agencies to disclose "agency records" to a requestor unless one of the specific nine FOIA exemptions apply. The term "agency records" includes portions of the proposal submitted by a successful offeror in a competitive procurement as well as the contract awarded. Accordingly, FOIA requests can be used to access a copy of your competitor's successful proposal to enable you to compare such proposal to your own and therefore improve your competitive position for the next procurement.

Keep in mind, however, that the agency may not disclose competitors' proposals until after contract award and the agency may not disclose the proposals of unsuccessful offerors. Further, if your competitor properly marked its proposal as confidential or proprietary, the competitor will be given an opportunity by the agency to request that certain information be redacted from the proposal and/or contract prior to the agency's release of the record. Such confidential or proprietary information often includes line item pricing and technical information that is not otherwise made public by the competitor.

While you do not need to be an attorney, or retain an attorney, to make a FOIA request, there is an "art" to making an effective request to receive the documents in which you are most interested. Below are some practical tips:

Be clear that you are making a FOIA request, referencing both the Act and its U.S. Code citation.
Be as clear as possible regarding what you are seeking. If your request is general and all inclusive, it will take longer for the government to respond and you will have to sort through a large number of documents to find what you really want. Also, because there is a search and copying charge, more general requests will cost you more money.
Remember a FOIA request is for existing records or documents in the agency's possession; an agency does not have to create a record in order to respond to your request. Therefore, ask for documents, do not simply pose general questions.
State how much you are willing to pay to process the FOIA request (typically $50-$100) and then ask to be contacted if the cost will exceed that amount. This will give you an opportunity to "hone" your request to capture only what you are willing to pay for. Note it may be possible to get the fee waived, especially if you can show some type of public benefit because of the request.
If your FOIA request is denied (in whole or in part) the government is supposed to tell you why. If you disagree with the decision, exercise your right to appeal the denial to the next higher level in the agency. All it takes is another letter stating you are appealing and why.
You can request documents in paper or electronic form. If you request documents electronically, you may receive them quicker than if you request paper documents.

Each agency is responsible for processing its own FOIA requests and many agencies have FOIA request forms available electronically on their websites. Under FOIA, all federal agencies are required to respond to a FOIA request within twenty business days, excluding Saturdays, Sundays, and legal holidays. This time period generally begins when the request is actually received by the FOIA office of the agency component that maintains the records sought. An agency is not required to send the releasable documents to you by the last business day; it can send you a letter informing you of its decision and then send you the documents within a reasonable time afterward.

Maximize your competitive advantage by routinely requesting debriefings and submitting FOIA requests. Even though your access to information is not unlimited, debriefings and FOIA requests can still play an important role in your success as a government contractor.

George W. Ash and Erin L. Toomey are members of the law firm of Foley & Lardner LLP in Detroit, where they specialize in government procurement issues. They may be reached at (313) 234-7100.

Note: This update provides information of general interest presented in summary form, and does not constitute individual legal advice.