Now is a Good Time for a Legal Checkup of Your Business
By Caleb Williams
SAALFELD GRIGGS PC
Before the current economic downturn, most businesses experienced a number of years of prosperity and expansion. During periods of prosperity, business owners tend to be so busy serving customers or clients that they often did not take the time to hone their own business. As business has slowed, business owners are now taking time to re-evaluate many aspects of their business in order to successfully weather the economic downturn and be prepared for the prosperity that is sure to follow. Now that the economy has our attention, I suggest that it is also the time for business owners to undergo a legal checkup.
Two reasons immediately come to mind for undergoing a legal checkup with your legal counsel: (1) an economic downturn increases the risk of disputes with vendors, customers, employees and fellow owners, any of which could turn into costly litigation, and (2) adequately planning now may enhance the success of your business when the economy turns around.
MORE THAN FORMALITIES
The statutes that create limited liability for the owners of corporations and other limited liability type entities require that certain formalities be followed to take advantage of that limited liability. Failure to comply with these requirements may give rise to a challenge of an entity’s validity. If such a challenge is successful, the limited liability shield may be pierced, resulting in personal liability to the owners of the company. As in past down periods in the economy, our firm has seen a significant increase in the number of legal disputes facing our clients. Fulfilling even the most basic corporate formalities can help business owners avoid personal liability for company obligations.
We have previously discussed on these pages the benefits of annual meetings with a business’s advisors. Fulfillment of the statutory requirementsmentioned above is often assured when business owners and management hold meetings and properly keep minutes of those meetings. Corporations are required to have no less than one meeting each year of the shareholders and board of directors. In the meeting, directors are elected and officers appointed for the coming year, and management generally summarizes the past year’s activities for owner approval. It is also important to have meetings of the shareholders and board of directors to consider and approve any transaction between the corporation and a shareholder or a member of the board of directors. Such a transaction could include a loan, the employment or compensation of owners, or the lease of real property or equipment from owners by the corporation.
Although limited liability companies are not technically required to have annual meetings of their members or managers, we recommend that limited liability companies hold meetings to approve actions and transactions that would typically need to be approved by the shareholders or directors of a corporation. This is particularly important when the limited liability company is purely family owned. The Internal Revenue Service is becoming increasingly aggressive in challenging the validity of limited liability companies that are used in conjunction with an estate plan. Holding meetings of the members to discuss the activities of the family limited liability company, and adequately documenting those meetings, can provide evidence of the business nature of the company, which supports the Company’s validity.
Due to the drastic losses that many have experienced in their retirement accounts this past year, older owners and key employees may have no choice but to delay retirement. Now is the time to carefully evaluate the plans for the retirement of key employees, as well as the transition plan for ownership of the business. In small companies, key employees are often also the owners, and so evaluations go hand in hand. With careful planning now, a business can better transition the ownership of the business in the future with minimal interruption.
AGREEMENTS AMONG OWNERS
Not often enough when businesses are started, do the owners consider and agree upon the terms on which those owners may leave the business. Similarly, restrictions on and process for a transfer of stock or an ownership interest in a company to a third party, whether a child, a spouse or some unrelated party, is often overlooked until a transfer is imminent. More likely, owners are concentrating on getting a new business off the ground. As you may have experienced, disagreements happen among business owners, and sometimes these disagreements can lead to a desire for owners to go their separate ways. Without previously agreed upon terms and procedures for a separation, concluding a separation can lead to unnecessary expense and distraction.
To address this potential situation, owners of every company, whether it is a limited liability company, a corporation, or a partnership, should agree upon terms of a buy-sell agreement. A buy-sell agreement typically restricts the transfer of ownership in the company to a third party. These agreements may also address what happens to an owner’s interest in the company after the owner’s death, disability or bankruptcy. Making the investment of time and money with advisors and carefully considering such an agreement among owners now is less expensive than attempting to sort out these issues when a dispute or unforeseen circumstance forces the issue upon the owners. Moreover, if you already have a written agreement among the owners, now is a good time to dust it off and determine if it remains consistent with the expectations of the owners.
If any of these topics could apply to you or your business, please contact one of the attorneys in our Business & Taxation Practice Group.