Untaxed Entity – Both the S Corporation and the LLC allow the business owner to avoid
“double taxation.” Gains and losses “flow through” to the owners, and there is no federal or income
tax owed by the business entity.

The S Corporation does require filing of a federal and state corporate income tax return,
although no tax is owed. LLCs with more than one owner must file a partnership return; single
person LLCs simply include their gains and losses on a “Schedule C” just as if they were not
incorporated.

Transferability, Control, Active/Passive/1099 – Both S corporations and LLCs provide
very similar benefits in terms of the usual and customary benefits of operating as an incorporated entity rather than an unincorporated entity. This includes transferability of units; centralized control, if desired; active roles for workers versus passive roles for investors; and more. (See Should You Incorporate Your Business?)

II. Advantages of an S Corporation over an LLC
Avoiding Social Security Taxes – A primary reason to choose an S corporation over an LLC
is that an owner can often elect to take some of the gains of the business as “dividends” as opposed to “salary.” Both dividends and salary are subject to federal and state income taxes; however, true dividends on S Corporation stock paid from the earnings of the corporation are not subject to Social Security taxes. As Social Security taxes are becoming one of the most burdensome taxes, this fact alone makes the S Corporation the entity of choice for many businesspersons.
Because the LLC is not technically a corporation and has no “stock,” it cannot declare
dividends. Gains flow to the owner as “earned income,” and therefore all gains are subject to federal and state income taxes and Social Security taxes.
Costs and Fees – The S Corporation generally costs less to form than an LLC. And, in North
Carolina, the Secretary of State currently charges $35 per year in fees for the S Corporation and,
inexplicably, $200 per year for LLCs.

III. Disadvantages of an S Corporation
Restrictions on S Corporations – Although the S Corporation form of entity is generally
available to most citizens, not every business qualifies to be an S Corporation. To qualify as a “small business corporation:”

• The entity must be a domestic corporation;
• The entity must have no more than 75 shareholders
• Shareholders must either be individuals, an estate, or certain trusts (and not another corporation);
• Shareholders may not be non-resident aliens;
• Only one class of stock is permitted
• The corporation must have a tax year ending December 31 or ending at another date approved by the IRS for a valid business purpose;
• All shareholders must consent to the election

There are additional requirements named in the governing section of the Internal Revenue Code.
IV. Advantages of an LLC over an S Corporation
What is an LLC? An LLC has been described as “a partnership that has been given limited
liability.” In recent years, sole proprietorships have similarly been given the right by statute almost magically to change to an LLC and thereby secure limited liability. However, to understand the LLC, it is important to think “partnership” or think “sole proprietorship.” As it is not a corporation, it does not have stock, it does not have dividends, and it does not have stockholders. It has percentages of ownership or “units of ownership.” Owners are generally referred to as “members.” Control is generally in the “members” just as in the case of a partnership. If desired, control can be placed in separate managers, and corporate officers can be elected just as in the case of a corporation.
Absent such special provisions, an LLC operates much like a partnership.
Set it up and Forget it – One of the primary advantages of the LLC is the “single person
LLC.” For those who like simplicity, the single person LLC is a thing of beauty. An attorney files
“Articles of Organization” (Not “Articles of Incorporation”) and prepares an “Operating
Agreement.” Thereafter the owner may never again deal with organizational minutes, boards of
directors, officers, bylaws, stock, corporate tax returns, annual meetings, special meetings,
resolutions, and the like. Furthermore, at tax time the owner files the same “Schedule C” to his or her tax return as if he or she had never formed an LLC.
For a multi-party LLC (including a husband and wife), the primary difference is that a
partnership tax return—federal and state—must be filed for the LLC. No taxes are owed by the
entity; the partnership return is for information only.

LLCs can be used for almost any business purpose. They are particularly attractive for
passive investments—ownership of rental real estate, for example. Furthermore, LLCs do not face the detailed S Corporation restrictions—in particular the requirement that no “owners” be a
corporation. Therefore, a corporation, which cannot own a S Corporation or stock in a S
Corporation, can readily set up an LLC and limit its liability when starting a new venture that poses new or additional risks to the existing corporation.
Additional Limited Liability –When confronted with an actual judgment-creditor, the LLC
can offer greater protection of assets than other business entities. For example, the judgment-creditor of an individual who has set up a corporation can, if unable to locate other assets, seize the corporate stock and sell it, just as other assets of a judgment-debtor can be sold. However, this cannot be readily done in the case of an LLC. Because an LLC is treated “like a partnership,” in North Carolina and some other states a judgment-creditor of the owner cannot simply attach and sell the “units of ownership” just as he could not attach assets of a partnership when he only had a judgment against one partner. Instead, the judgment-creditor is limited in his or her remedies to obtaining a “Charging Order” and directing only that the income being distributed to the owner be delivered over to the judgment-creditor. Because an LLC may not have any “income” (it may pay all income out as salary or only invest in rental real estate with no available income, or it may simply choose not to make distributions to partners), a judgment-creditor of the owner of an LLC simply cannot reach the assets in the LLC in many instances. Because the LLC is a relatively new phenomena there is not a great deal of case law addressing how judgment-creditors can pierce LLCs to get at assets of judgment-debtors.
On balance, the LLC, when compared to the S Corporation, appears to offer considerable
additional protection against judgment-creditors of the owner of the entity.
V. Disadvantages of an LLC
The primary drawbacks to the LLC are:

1. It generally costs a little more to set it up,
2. The North Carolina Secretary of State currently charges a fee of $200 per year rather than a fee of $35 per year for S Corporations, and
3. There is no opportunity to avoid Social Security taxes as with the S Corporation.

5. SALESPERSON VS. CREDIT DEPARTMENT – Strive to achieve a proper
balance between salespersons (who almost always want to make the credit sale) and the
credit organization (that often wants only risk-free credit sales.)
6. BANKRUPTCY LAW – Develop considerable knowledge of bankruptcy
law. Expect a significant number of customers to file bankruptcy–Chapter 7, Chapter 11 and
Chapter 13, and plan to deal with that in terms of price, security, guarantees, and otherwise.
7. KNOW YOUR CUSTOMER – Experienced bankers say “banks lend to
people, not to collateral.” It is the person, not the collateral, who is expected to repay the
loan. Smart bankers know their customers. The Internet, Beacon scores, and many good
information services and software programs make it much easier today to know more about
the customer than ever before.
8. MONITOR EXISTING CUSTOMERS, TOO – Many, many companies
suffer serious financial losses because they fail to have any mechanism in place to do follow
up checks on customers who were in the past approved for credit and who may in fact have
been credit risks for many years. The warning signs are often there; the customer has been
slower and slower in paying, going from net 30, to net 45, to net 60, to net 75. The customer
has been returning merchandise, making warranty claims, and not ordering as much. In some
cases, a valued customer has switched suppliers and no longer needs you—and no longer
feels the need to pay your bills. Sometimes, on the very eve of filing bankruptcy, the
customer will pay one of his or her 3 or 4 outstanding invoices, place a large order, and then
file bankruptcy shortly after you delivery the final order “net 30.” Had you had in place a
mechanism to pick up on the red flags or routinely rechecked even your good customers, this
large financial loss and months of dealing with a bankruptcy court might well have been
avoided.
9. AVOID “PROFESSIONAL DEADBEATS” – Question: How much money
does a deadbeat make when he buys goods net 30 for $10,000 and sells them for $12,000
cash? Answer: $12,000 (when he never pays the $10,000 and not just $2,000). There are
many people who simply do not feel any obligation to pay for goods or services—especially
services—purchased on credit. These people are often easily identifiable because they have
low Beacon score, prior repossessions, prior bankruptcies, prior evictions, and large credit
card balances with very few payments. They may also have prior “NSF” checks, excessive
warranty claims and returns, and other evidence of nonpayment of bills. Take care, too, that
they may use aliases or set up shell corporations, limited liability companies, or simply
operate under an assumed business name—“D/B/A” (“Doing Business As”).

10. CORPORATIONS AND LIMITED LIABILITY COMPANIES (“LLCs”)
– Special care is required when dealing with small businesses that have incorporated or
formed an LLC. Just an the IBM salesman who sell you a computer is not personally
obligated to make it or stand behind it, the President of ABC Company, Inc. is not
responsible for the goods or services ABC Company, Inc. agreed to purchase from you for
$1,000 on credit (net 30 sale). Unless you require the President to sign personally—not just
on behalf of the corporation—or personally guarantee the debt of ABC Company, Inc., you
will have a claim against only the corporation for the $1,000. You should be guided
accordingly in extending credit, having contracts signed, and in having credit applications
signed.
11. CREDIT CHECKS, ETC. – Do up-front credit checks, become a member of
the local Credit Bureau, subscribe to Dunn & Bradstreet, or a similar service, check Beacon
scores, use Internet resources, and so forth. Place the burden on the would-be borrower;
decline to make credit sales (net 30 sales) until and unless the potential buyer satisfies you
that he or she is creditworthy or can provide security or the guarantee of a creditworthy
person.
12. CREDIT APPLICATIONS; REFERENCES – Use detailed credit
applications that are well-drafted, up-to-date, thorough, require references, and are signed
under penalty of perjury. CHECK THE REFERENCES! Preferably, a customer’s
signature should be witnessed by your employee or by a Notary Public. Credit Applications
should provide for a) interest at one and one-half per cent (1½ %) per month for late
payments, b) attorney fees upon default; and c) personal guarantees for small corporations
and LLCs. In North Carolina, the proper use of the word “Seal” will give you ten (10) years
rather than three (3) years to collect on a debt, and that can be a substantial sum when interest
is accruing at 1½ % per month. Some well-drafted credit applications recite that sales are
made on the seller’s terms and conditions, including limited warranties and limited remedies.
For reasons that should be apparent, you should have an experienced collection attorney
review or assist in developing your form, especially if you deal with consumers.
13. PERSONAL GUARANTEES – As discussed in connection with small
corporations and LLC buyers on credit, you should require well-drafted personal guaranties.
In some states you need to restate the right to attorney fees, even though it is contained in the
contract being guaranteed. It is often best to insist that the spouse also sign because a) the
home is often the most valuable asset a family may own and it is usually owned “by the
entireties” and cannot be reached by a creditor of only one spouse, and b) assets have a way
of “belonging to the other spouse” when a collection case is commenced or bankruptcy is
filed.

14. SALES AGREEMENT; FORMS – Use well-drafted sales contract forms,
updated periodically with input from an experienced collection attorney. See above
comments under CREDIT APPLICATIONS about provisions for a) interest at one and onehalf
percent (1½ %) per month for late payments, b) attorney fees upon default; c) personal
guarantees for small corporations and LLCs; and d) in North Carolina, the proper use of the
word “Seal” to give you ten (10) years rather than three (3) years to collect. Needless to say,
the sales forms should address far more than collection matters. However, nothing is more
important to the seller who sells product or services on credit than the critical issue of getting
paid. Accordingly, expert advice and assistance should be obtained at the outset; do not wait
until your company has at risk millions of dollars in contracts and Accounts Receivable
before doing all that is reasonable to insure your company will get paid and paid in timely
fashion.
15. AVOIDING FRIVOLOUS COUNTERCLAIMS — On a very related matter,
because collections actions can often be thwarted by frivolous counterclaims, it is important
to anticipate counterclaims in contracting. It helps to provide limited warranties and limited
remedies and require prompt written notice of warranty claims to avoid belated, frivolous
“warranty” claims and counterclaims that occasionally show up only when suing to collect
on old debts. See Uniform Commercial Code Section 2-607. That statute contains a
provision designed to invalidate “late” defenses and counterclaims that surface for the first
time when a creditor attempts to collect on a delinquent account. The applicable language,
dealing with the effect of acceptance of a tender of goods, is as follows: “Where a tender has
been accepted, the buyer must within a reasonable time after he discovers or should have
discovered any breach notify the seller of breach or be barred from any remedy.” Where the
contract involves the sale of goods, this statute should be utilized to full advantage. Where
the contract involves services or the UCC does not otherwise apply for some other reason,
the Court should be asked to apply the statute “by analogy.” In any event, a well-drafted
contract should create or preserve this right for the seller.
Consider also that the seller of goods is permitted by the Uniform Commercial Code,
Section 2-725(1), to reduce the statute of limitations to one year and thereby avoid stale
counterclaims in that fashion. The question then is: Has the seller also limited the seller’s
right to bring a collection action to one year?
16. CONTRACTING PROCEDURES – All too often a company has very good
forms but very little in the way of procedures for getting forms signed or retaining signed
forms to deal with collection problems that arise years later. Use good contracting
procedures, updated periodically, detailed, in writing, with adequate training of key
personnel, and index and store contracts and guarantees properly.

17. SECURITY IN GOODS SOLD – When selling goods having substantial
value and worth retrieving should the customer fail to pay, add a provision in your sales form
retaining a purchase money security interest whenever practical. Perfect by filing when
practical and/or should the buyer default.
18. MISCELLANEOUS

• Monitor accounts for changes—slow pay, reduced orders, excessive returns, personnel changes, and so forth.
• Develop and rely on a “tickler” system to keep track of delinquent accounts.
• Promptly follow up on delinquent accounts and keep steady pressure until paid.
• Go to the customer’s physical site. Perhaps the single most effective collection techniques is simple to show up unannounced and wait for your check. You may also learn a lot from the visit.
• Use the telephone. Telephoning is much more effective than letters, which are easily ignored. Telephoning also provides feedback and information.
• Listen to any claims or defenses raised by the debtor, without any way encouraging the debtor to raise any such claims.
• Seek oral admissions that the debtor owes the sum sought.
• Obtain oral admissions regarding the “non-quality” reasons why the debtor has not paid (business downturn, health problems, etc.)
• Record excuses in a detailed log stating dates, responses and reasons.
• Send confirming letters reiterating non-quality reasons for not paying.
• Determine the disputed portion of a debt if such a claim is made. Where a debtor acknowledges that the debtor does not dispute 90% of the debt, ask the debtor to pay the other 90% while you investigate the disputed portion.
• Promptly sue and aggressively pursue collection activities; use a good law firm experienced in debt collection.

COLLECTIBLE OR NOT—YOUR CHOICE – The contracts businesses make every day
more or less dictate the outcome of future litigations. In that sense, the collection aspects
of contracts are no different.
Scenario 1: A business brings the collection attorney a contract that is signed,
guaranteed, and has the right to reasonable attorney fees and interest at 1½ % per
month. The attorney collects the entire debt plus the attorney fee and a substantial
amount of interest. Furthermore, the attorney is able to prevail at a summary
proceeding without trial or indeed able to convince the debtor to pay the full amount
owed without a long, costly trial. Why? Because the debtor does not want to have
to pay the creditor’s attorney fees and the 1½ % per month interest.
But, change the facts slightly:
Scenario 2: The same sale of goods is involved, but no written contract was used.
There is no personal guarantee, no right to attorney fees, and no right to high interest.
Indeed, there is no particular reason for the corporate buyer to settle as suit will take
a year of more, interest is accruing only at the legal rate of 8% non-compounded, and
the seller cannot recover attorney fees. Indeed, the owner of the corporate buyer can
collapse his company and set up a new one in a week for only $125. Result: after a
six month legal battle and threats of bankruptcy, the seller-client settles for 20% of
the debt, receives no interest, has to pay his own attorneys fee, and is lucky to get
anything at all.
The choice is yours.

1. In writing,
2. Entered into at the time and as part of the contract of employment,
3. Based on a valuable consideration,
4. Reasonable both as to time and territory embraced in the restrictions,
5. Fair to the parties, and
6. Not against public policy.

See Forrest Paschal Mac. Co. v. Milholen, 27 N.C. App. 678, 220 S.E.2d 190 (1975); Brooks
Distrib. Co. v. Pugh, 91 N.C. App. 715, 373 S.E.2d 300 (1988), rev’d on other grounds, 324
N.C. 326, 378 S.E.2d 31 (1989); Hartman v. W. H. Odell & Associates. Inc., 450 S.E.2d 912
(N.C. App. 1994).
Must be Tailored – All too often the problem with the typical noncompetition is that
it was drafted for one purpose and used for another. A noncompetition agreement intended
to be used by an engineer or research scientist is often not proper for use by a salesperson or
project manager. All too often companies attempt to do a “one size fits all” variety of
noncompetition agreement/clause.

Primary Purpose: Protect Customer Base – The primary purpose of a
noncompetition should be to protect the employer’s customer base. Its primary purpose
should not be to stifle competition or to deny the employee the right to make a living in his
or her chosen profession. However, because the law in North Carolina and a number of
states evolved over many years, including horse and buggy days, there are requirements to
be enforceable that a noncompetition contract contain “time and territory” restrictions. This
is true even though an employer’s customer base may be spread all over the United States.
Noncompetition law in North Carolina does not adequately address the fact that “time and
territory restrictions” do not provide adequate protection to employers when valued
customers are nationwide or worldwide. For example, if a noncompetition prohibits an
employee from competing anywhere in the state of North Carolina, the employee can
sometimes simply move to another state, set up a competing business, and take all or most
of the customers of his former employer. If instead, the employer uses only a customer
restriction, that would violate the requirement to have a “reasonable time-and-territory”
restriction. As noted below, some courts have enforced a “customer only” restriction with
no stated territory.
“Time and Territory” – Under North Carolina law, to prove that a geographic
restriction in a covenant not to compete is reasonable, an employer must first show where its
customers are located and that the geographic scope of the covenant is necessary to maintain
those customer relationships.

Hartman v. W. H. O’Dell and Associates, Inc., 450 S.E.2d 912
(N.C. App. 1994). “A restriction as to territory is reasonable only to the extent it protects
interest of the employer in maintaining [its] customers.” (Emphasis added.) Hartman, supra,
quoting from the language in Manpower of Guilford County, Inc. v. The Hedgecock 42 N.C.
App. 515, 523, 257 S.E.2d 109, 115 (1979). (Emphasis added.) See also Carolina Pride
Carwash, Inc. v. Kendrick, 618 S.E.2d 875 (N.C.App. 2005).

As a general rule, when a covenant not to compete is overly broad, North Carolina courts will not save it by “blue penciling” the agreement to make it “reasonable.” Hartman, supra. There are some very limited exceptions. From the foregoing, it is important that an employer not simply adopt a “50-mile” or “200-mile” restriction, but make a concerted effort to determine where the
employer’s customers are actually located. Regarding “time,” courts often uphold one year
and often look hard at more than two years. However, a small territory can be paired with
a longer time, and a short time period can be paired with a larger territory.
North Carolina courts also appear to have recognized customer-based restrictions as
a substitute for territorial or geographic restriction. See Wade S. Dunbar Insurance Agency,
Inc. v. Barber, 147 N.C.App. 463 (N.C.App. 2001), 556 S.E.2d 331 (No. COA01-345) and
cases cited therein as well as Market America, Inc. v. Christman-Orth, 135 N.C. App. 143, 520 S.E.2d 570 (1999) and cases cited therein. The courts have enforced noncompetition
agreements that did not contain a geographic territory restriction but contained restrictions
on soliciting existing customers of the employer.
Noncompetition Agreements: Not Favored; Must Be Reasonable –
Noncompetition agreements are generally enforceable only in a) employer-employee
relationships, and b) buyer-seller relationships where a business is sold. The annotations to
N.C.G.S. Chapter 75 Monopolies, Trusts, etc., and specifically N.C.G.S. §75-1,
“Combinations in restraint of trade illegal” recite that agreements not to compete are not
favored in law. Quoting from cases construing the statutes: “An individual’s voluntary
contractual restraint on his right to carry on his trade or calling is prima facie illegal and must
be shown to be reasonable by the parties seeking to enforce it.” (Citations omitted.) In
Hartman v. W. H. Odell & Associates. Inc., 450 S.E.2d 912 (N.C. App. 1994), the Court
stated:
“Accordingly, to prove that a geographic restriction in a covenant not to compete is
reasonable, an employer must first show where its customers are located and that the
geographic scope of the covenant is necessary to maintain these customer
relationships.”
“A restriction as to territory is reasonable only to the extent it protects the legitimate
interests of the employer in maintaining [its] customers. Hartman, Page 917. “The
employer must show that the territory embraced by the covenant is no greater than
necessary to secure the protection of its business or goodwill… if the territory is too
broad, “the entire covenant fails since equity will neither enforce nor reform an
overreaching and unreasonable covenant.”
In the case of Manpower of Guilford County, Inc. v. Hedgecock, 42 N.C. App. 515,
257 S.E.2d 109 (1979) the Court stated: “Where the alleged primary concern is the
employee’s knowledge of the customers, if the territory should only be limited to areas in
which the employee made contacts during the period of his employment.”
Overly-Broad Restrictions – Employers should take care to avoid using unnecessarily broad language in restricting what an employee may do upon termination of the employee. Courts may refuse to enforce prohibitions such as a requirement that an employee refrain from “engaging in any conduct or business in competition with” the employer’s business rather than simply stating the employee will not engage in the employer’s business. Although the maker of a soft drink may have a legitimate interest in precluding a former key employee from working for a soft drink company, that is not justification for prohibiting the employee from working for all the companies that make products that satisfy the need of thirsty customers—water, orange juice, milk, and so forth. In like fashion, an employer should avoid broad restrictive language such as a prohibition against going to work for “any company that designs, manufactures, or distributes” in a situation where such a restriction is simply not necessary. For example, if that language were used in an effort to preclude a toolmaker from designing or manufacturing tools for another toolmaking company, there would be no good reason to deny the toolmaker the right to work as a sales clerk for Sears or Wal-Mart simply because those companies also “sell and distribute tools” as well as many other products.
In Electrical South, Inc. v. Lewis, 96 N.C.App. 160, 385 S.E.2d 352, (N.C.App.
1989), the Court refused to enforce a territorial restriction that reached beyond the employer
and also added that “the employee will not, directly or indirectly own… or be connected in
any manner with… any concern… which competes directly or indirectly with the company”
within the territory. The net effect would have prohibited the employee (or his family) from
working for a company anywhere in the world if that new employer also worked “in the
territory.” Thus even if the employee move thousands of miles from the former employer,
he could not work for a large company that competed in his former territory. The Court of
Appeals criticized the “shotgun” approach to drafting noncompetition provisions and refused
to enforce it at all.
“Covenant of Good Faith and Fair Dealing”—Jury Trial – “In every contract there
is an implied covenant of good faith and fair dealing that neither party will do anything which
injures the right of the other to receive the benefits of the agreement, and each party is
deemed to have agreed to act in good faith in performing the contract.” Bicycle Transit
Authority, Inc. v. Bell, 314 N.C. 219, 228, 333 S.E.2d 299, 305 (1985), North Carolina
Pattern Jury Instructions Civil 501.01. Contracts – Issue of Formation. If coupled with
questionable conduct on the part of an employer, this covenant could be fertile ground for
an employee to raise jury issues about the fundamental fairness of actions and inactions of
an employer who makes promises to an employee to induce the employee to sign a
noncompetition agreement and then unreasonably denies the employee the right to pursue his
or her chosen field of employment.
Independent Contractors – Many companies seek to impose noncompetition
requirements on “1099 employees” or, more accurately, independent contractors. It is
abundantly clear that the language quoted above under Elements, “at the time as part of the
contract of employment” envisions that there is in fact an employer-employee relationship.

Even more importantly, the entire concept of “independent contractor” envisions
“independence.” For example, a distributor who sells a number of lines acts independently
of any one manufacturer. Furthermore, an agreement by a distributor to sell only one
manufacturer’s product is often the very “restraint of trade” that Chapter 75 and anti-trust
laws generally are designed to prohibit. The North Carolina Court of Appeals has allowed
a six-month noncompetition agreement to be enforced. See Market America, Inc. v.
Christman-Orth, 135 N.C. App. 143, 520 S.E.2d 570 (1999). However, the Court of Appeals
in Market America, Inc. relied on an earlier decision, Starkings Court Reporting Services,
Inc. v. Collins, 67 N.C. App. 540, 313 S.E.2d 614 (1984), which actually refused to enforce
the particular noncompetition agreement as being an unreasonable restraint on competition.

Proprietary Information – Employers can also use clauses to protect customer lists,
pricing strategies, trade secrets, and much more. This includes marketing and sales
information as well as technical information. As courts will often protect proprietary data
when they will not enforce a noncompetition clause, employers should always have a
“Proprietary Information” clause in the employee’s contract when it is appropriate to do so.
Risks to and Rights of New Employers – Under established North Carolina case
law, interference with contract is justified if it is motivated by legitimate business purpose,
as when plaintiff and defendant are competitors. See Embree Const. Group v. Rafcor, Inc.,
30 NC 487 (411 S.E. 2nd 911 (1992) See also People’s SEC Life Ins. Co. v. Hooks, 322 NC
216, 367 S.E. 2nd 647 (1988), in which the Court recognized that a competitor is privileged
to hire away employees even in the face of noncompetition agreements. (See, to the contrary,
United Laboratories, Inc. vs. Kuykendall, 322 N.C. 643, 665, 370 S.E.2d 375, 389 (1988)).
Quoting the Court in Hooks:
“The motion under Rule 12(b)(6) should be granted when the complaint reveals that
the interference was justified or privileged… Numerous authorities have recognized
that competition in business constitutes justifiable interference in another’s business
relations and is not actionable so long as it is carried on in furtherance of one’s own
interest and by means that are lawful.”
Risks to Employer: Enforcing an Invalid Agreement – An employee improperly
denied a new job because of his or her prior employer’s attempt to enforce an invalid
noncompetition contract can sometimes sue the former employer for “tortious, intentional
interference with contract,” being the contract with the new employer. See American Marble
Corporation v. Crawford, 84 N. C. App. 86, 351 S.E.2d. 848 (C.A 1987). That decision is consistent with the view that a competitor is privileged to hire away employees even in the
face of noncompetition agreements. See the Peoples Security Life Insurance Co. v. Hooks
case sited above. According to the courts, the benefits of competition outweigh any claim
by the former employer to some “right” to hold onto customers forever. In American Marble
Company v. Crawford, the Court of Appeals reversed the trial court for granting summary
judgment against the employee’s claim for wrongful, malicious interference with contract
rights where the employee’s evidence tended to establish that a valid contract existed between
him and his new employer, the former employer had knowledge of the contract, the former
employer intentionally induced the new employer not to perform its employment contract
with the employee, the former employer’s acts caused the employee actual damages, and the
former employer acted without justification in that the former employer was seeking to
enforce a covenant not to compete that was legally invalid as an unreasonable restraint of
trade.
Stated otherwise, American Marble Company v. Crawford holds that an employer
who interferes with an employee’s new employment relationships in an attempt to enforce
a covenant not to compete does so at the employer’s peril. If in fact the covenant not to
compete is determined to be invalid, the employer may be liable to the employee for
wrongful or malicious interference with contract rights for its actions in attempting to enforce
a covenant not to compete that by law constitutes an “unreasonable restraint of trade.”
Evolving Law; Choice of Law – The law pertaining to noncompetition agreements
is not static but continues to change and evolve. In addition, a number of states have enacted
statutory noncompetition laws with “savings clauses” to avoid the all-or-nothing approach
of many courts. Equally important is the issue of choice of law, choice of forum and
conflicts of law and whether a state court will enforce a “home state” choice of law. An
excellent analysis appears in the November 3, 2011 Order entered in a North Carolina
Superior Court case, Azko Nobel Coatings, Inc. v. Rogers, 2011 NCBC 41 (The Order can be
viewed online at www.ncbusinesscourt.net/opinions/2011_NCBC_41.pdf). It is a good idea to
have an expert in the field review company noncompetition forms, clauses, and procedures
every few years, even if an experienced attorney approved the initial form used by the
employer.

Perhaps the best reasons to incorporate a start-up business or an existing business are:

1. Limited liability—Limit your personal risk of loss or being sued;
2. Tax savings and tax planning;
3. Avoiding partnership risks; and
4. Flexibility, transfer-ability, credibility, anonymity, and more.

1. Limited Liability—Limit Your Personal Risk of Loss or Being Sued – Think
poker. In the game of poker, you risk only what you put in the pot. Surely you would never
put all of your assets—furnishings, cars, clothing, jewelry, and so forth “at risk” when you
play a hand of poker. As a general rule, a corporation allows you to limit what you are
willing to put “at risk” in a business venture.
Claims and lawsuits – If your business is sued for breach of contract or breach of
warranty, you can avoid liability if you have incorporated and your corporation signed the
contract or made the warranty. Many business ventures do fail. When that happens, there are
often monies owed to suppliers, landlords, advertisers, telephone companies, utility
companies, and much more. Unless you have personally guaranteed those obligations, they
are the obligations of the corporation, not your obligations as the owner of the corporation.
2. Tax Savings and Tax Planning
Save on Social Security Taxes – The use of an “S” corporation, with proper
planning, can avoid substantial Social Security taxes. Social Security taxes are fast becoming
the most onerous tax of all. Sometimes an owner can easily save $3,000 to $4,000 per year
in Social Security taxes with very little planning or paperwork.
Medical Expense Reimbursement Plans; Medical and Life Insurance – As a
general rule, a “C” corporation can offer better benefits in this area. However, you must be
careful to avoid “double taxation” when dealing with a “C” corporation as the entity itself
must pay taxes before it pays dividends to you—which dividends are taxable (again) in your
hands.

Should You Incorporate Your Business?

Additional Tax Write-offs; “Presumption” re Expenses – If you are doing a startup
business that was begun as a hobby, the simple act of incorporating will increase your credibility with customers as well as the IRS. Having a corporation, a corporate bank account, and expenses paid by the corporation greatly increases the likelihood that the IRS will believe you are in a business and entitled to write-off items and expenses the IRS might otherwise challenge. And, your customers no longer will be required to send you (and the IRS) a 1099 each time they pay you more than $600 in one year.
Tax Benefits to the “Capital Partner” are More Assured – Buying stock in a
corporation or having a “capital account” in an LLC is much easier to do and much less likely
to lead to confusion than the typical partnership. Indeed many partnerships are little more
than oral agreements that can present serious title disputes when a partner leaves. The LLC
is particularly well suited for “unequal contributions of control.” It allows for example, two
“partners” each to own 50% of an LLC, but one, say, has a “capital account” of $100,000 and
the other has a zero balance in his capital account, having put in only labor and having never
put any capital in the business.
3. Avoiding Partnership Risks – If more than one person is involved, the roles and
ownership interest are more clearly defined if you incorporate or form an LLC. Partnerships
and loosely-defined joint ventures place your personal assets at risk. Under partnership law,
all of your assets can be placed at risk because your “partner” makes a bad deal or has an onthe-job accident. Incorporation better facilitates a distinction between the “investor” who
merely puts up capital and the “worker” who only puts up labor.
4. Flexibility, Credibility, Transferability, Anonymity, and more – A corporation
easily allows for multiple owners, multiple roles (active versus passive, capital contributor
versus labor contributor), transferability of interest, differing risks to stockholder, and so
forth.
For small business ventures, the creation of a corporation or LLC enhances credibility.
Furthermore, many large corporations prefer not to deal long-term with unincorporated
entities as they are required to provide IRS Form 1099 to unincorporated entities. They also
run the risk that, with a long-term relationship, the small-business “doing business as” or in
the individual’s name can be considered an employee under labor law, federal income tax
withholding laws, state income tax laws, pension laws, worker’s compensation laws,
negligence law, and more. For these and other reasons, your business customers often prefer
to deal with incorporated entities and LLCs.
Collection Actions; Counterclaims – Business owners often worry about the risk of
being sued. However, many times it is your own need to sue to collect on accounts that can
be an equally important reason to incorporate. When you yourself face the need to collect
from others, suing in the corporate name rather than in your own name is much preferred, for
reasons of anonymity and in case of potential counterclaims. Minority/Female Business Qualification – It is often easier to qualify as a minority or female-owned business by incorporating and clearly defining ownership and control.
Employee Problems—Sexual-harassment Suits, Discrimination, etc. – Many of
these risks can be substantially reduced or avoided altogether by incorporating. Many a
million-dollar claim has been stymied by the fact that the owner, who did nothing wrong,
simply collapses the corporation or LLC and starts another business.
Who should incorporate my business? Because of the complexities involved in the
choice of corporate form and the many issues discussed above and elsewhere, statutory law
in many states declares it unlawful for anyone other than a licensed attorney to incorporate
a business. Attorneys take courses in incorporation, contracts, tax law, property law, and
much more, and many spend hundreds of hours perfecting forms and dealing with the issues
addressed above. Many attorneys charge relatively low fees to do all that is required to
incorporate and are quite competitive with non-attorney offerings that are not actually
permitted in many, perhaps most, states. Unless you are prepared to devote similar amounts
of time and attention to becoming an expert in these matters, not only should you have an
attorney do your incorporation, but you should insist that the attorney you select have
substantial experience in corporate matters. Many, many small businesses improperly
incorporate or “partially incorporate,” only to learn later they made critical errors. When
years later they get sued or otherwise need the protections offered by a corporation, they learn
that mistakes made at the outset permit creditors or others to “pierce the corporate veil” and
deny to the owners most or all of the benefits of incorporation. (See Most Common Mistakes
in “Self-Incorporating”)
Costs to incorporate – For initial consultation and advice; tax analysis and advice;
name reservation; certificate of incorporation; filing with Secretary of State; By-Laws;
Minutes; Organizational Meeting of Board of Directors; issuance of initial shares; capital payin; authorize opening of bank accounts; corporate book with seal, shares, and sample minutes.
Approximately $200.00 in filing fees, taxes, corporate kit, and expenses, and $475.00 in legal
fees. Total cost: $675.00 in most cases. (The Secretary of State charges an additional
$100.00 to $200.00 for expedited filing, when a very prompt turn-around is needed.) The fee
for a Limited Liability Company (“LLC”) ranges from $875.00 up, depending on the amount
of tailoring required, persons involved, and so forth.

Harry G. Gordon
Attorney At Law

1. No Organizational Meeting the Board of Directors;
2. No Bylaws adopted defining the roles of officers, directors and much more;
3. No Directors ever elected and no Officers ever elected, and those who act for the corporation in fact have no authority to act on behalf of the corporation;
4. No shares of stock ever issued, and therefore there are no shareholders;
5. No stock ledger ever purchased or completed showing the ownership of the corporation
6. No “S corporation” filing was done with the Internal Revenue Service—which must be done within 75 days of issuing stock. As a consequence, the corporation is a “C” corporation subject to federal and state income taxes and double taxation for failure to file a simple, one-page “S corporation election.” Most Common Errors in “Self-Incorporating” and Non-Attorney Incorporations
7. No bank account ever authorized by the corporation;
8. No monies ever paid in as capital stock, critical to the right to “limited liability;”
9. No minutes ever prepared reflecting the organizational meeting of the Board of Directors or other corporate activity.
10. No assets are actually transferred to the corporation; no Bill of Sale ever prepared containing a list of assets and transferring assets from the unincorporated business over to the incorporated business;
11. No corporate kit ordered containing stock certificates, corporate seal, stock ledger, and more;
12. Violate S Corporation Restrictions – The Corporation or a shareholder violates one or more of the S. Corporation requirements, resulting in unplanned “double taxation,” both federal and state.

One or more of the foregoing items can result in denial of corporate status for tax
reasons or for purposes of limited liability in the event of a lawsuit or counterclaim. The
consequences can be disastrous when claims are presented by creditors, worker’s
compensation claimants, customers, employees, landlords, utility companies, advertisers,
federal and state taxing authorities, and others.

e) Negotiate the Rate – Attorneys often will negotiate their rates. Fees are generally 1) per hour, 2) flat fee, or 3) contingency fee. In a contingency-fee arrangement, the attorney generally receives an agreed percent of the amount recovered for the client , with no attorney fee due
if there is no recovery. The client is responsible for costs. Fees can also be some combination of
the foregoing. Any one of these arrangements may be negotiable, especially if a) you make it clear you are willing and able to assist with the work; b) you pay up front or pay a retainer and allow the attorney to bill against the retainer; c) you agree to pay promptly upon billing; d) your contingency fee case is especially attractive in terms of amount, liability, or solvency of the defendant; e) you tell the attorney you need a break; or f) you are simply a good negotiator or you use a good negotiator. Take care, however; no attorney (or doctor, architect, plumber, etc.) wants to deal with clients who nitpick invoices or imply the services are not worth the charges. And, you do not want your matter receiving last priority because you negotiated a rock-bottom price from an attorney who is much in demand.
Do not assume or accept as fact that all personal injury cases are “one-third contingency fee.”
If your case is high-dollar with a lock on liability and a solvent defendant, you may be able to
negotiate an even better contingency-fee arrangement than a person with a small claim with disputed liability and a defendant with little or no assets. And, if you have already organized the facts before going to see your attorney, your attorney should realize your efforts will reduce both the attorney time and staff time required to handle your case. When going over rates, discuss whether you will be billed for secretarial or paralegal time and the billing rates. Establish a good working relationship with law firm support-persons, as they can often answer your questions about the status of pleadings, dates, deadlines, and much more. If your question does not require a legal answer from an attorney, by all means ask the attorney’s secretary instead of the attorney. Flat fee arrangements work reasonably well for routine matters such as certain wills, title searches, uncontested divorces, demand letters, certain contracts, and other matters that are predictable and lend themselves to forms and/or can be handled by trained staff. One major problem with the use of flat fees in other areas is that client demands and client conduct can be impacted by the fee arrangement. A given task handled on a per-hour basis and assistance and reasonable demands on the attorney. That same task offered in a flat fee basis may result in excessive demands and little client coordination in fact-gathering and other matters. f) Litigation Support Team – For complex legal matters that will require a great deal of discovery, document production and review, and many months (or years) to resolve, have the company President or the Board of Directors set up a “Litigation Support Team.” Select competent, knowledgeable in-house persons to work closely with the attorneys and to do much of the document review and fact-gathering that the attorneys and paralegals would otherwise have to do. Be careful to coordinate closely with and under the direction of the attorney or law firm that takes responsibility for the case or matter.
Much has been written about the shortcomings of per-hour fee arrangements. Much could
also be written about the many shortcomings of contingency-fee and flat-fee billing. On balance, the fairest way for both the client and the attorney may be to deal honestly on a per-hour basis with an attorney experienced in the field, have the client do the parts that do not require lawyer skills, deal in good faith, and keep communications open. It is often impossible for the attorney or client to predict all of the twists and turns a litigation or other complex legal matter will take, and honest perhour billing can be the fairest billing method for both the attorney and the client. Many people prefer the flat fee or contingency-fee arrangement, and if that is your preference, be prepared to convince the attorney that your case is a matter that can be understood and resolved without the need to devote hundreds of hours of attorney time to it. Otherwise, the attorney will either not take your case or quote a hefty fee to deal with the expected time and effort to resolve the matter. g) Attorney-Client Privilege – It is important when assisting your attorney or law firm that documents you create and summaries you provide to your attorney be protected by the attorney client privilege. This protects your work created for your attorney from disclosure to the other side when the work is intended only for the eyes of your attorney. As the attorney-client privilege applies to communications to your attorney for the purpose of seeking legal advice, it is a good idea to use transmittal letters that begin with the words: “For the purpose of obtaining legal advice, I prepared and am herewith providing to you the following information. . .” It is also important to use the words “Prepared for Counsel” when preparing documents and drafts for your attorney and it is suggested that you put your attorney’s name with the word “Attorney” to avoid inadvertent disclosure of protected materials and information. h) Stay in Control; Avoid the “Orphaned Litigation” – All too often companies (and some individuals) turn a litigation over to a law firm and simply abandon the matter. Some litigations last for years, employees change jobs, and on occasion the law firm is the only entity that seems to care what happens to the case. (Thus the term “orphaned litigation.”) It is up to the client to keep in touch and keep in control, especially as time goes by and personnel changes. i) Benefit from the Litigation – Depending on the nature of the litigation, the client can also use the litigation as an opportunity to reassess its internal practices regarding quality assurance, employment practices, extensions of credit, the need to update contracts and contracting proceedings, and much more. All too often a small business extends credit (sells on a “net-30″ basis) without realizing its forms and procedures are woefully inadequate, a loss in an early collection litigation can be the catalyst needed to correct the problem early on, before a great deal of credit has been extended. Many times “preventative law” can easily meet the “ounce-of-prevention-equals-aton-of-cure” test.
j) Non-litigation Matters, Contracts, Planning, Etc. – Many of the foregoing matters
apply equally well to transaction law and non-litigation matters. Never simply have a law firm “redo our contract” or “update our employee manual.” Take charge or assign competent employees to take charge of the project and do the significant “nonlegal,” fact-gathering and company policy portions of the project. Then work in close partnership with an experienced attorney, allowing him or her to exercise professional judgment and do the part that truly requires doing by a licensed attorney experienced in the matter.