What if my Business Partner is Stealing from our Company?

6th StForming an LLC or a Corporation for your business is a good idea. It shields you personally from liability and creates potential tax advantages, especially as to entitlement taxes for those opting for S-Corporation status. However, incorporation carries with it an often misunderstand effect, the company as an LLC or Corporation is an entity in and of itself. This means that if someone has impugned the company’s rights, it is the company that has a claim, not the shareholders or members. This manifests itself as especially confusing when, in a closely held company, one member steals money from the company. Read more

What are my rights as a minority member of an LLC?

Waves-Crashing-2-300x174The governance of Limited Liability Companies (LLCs) in Wisconsin is governed by Chapter 183 of the Wisconsin statutes. Those statutes set out the default rules regarding management and membership in an LLC. In an LLC, the owners are called members and have a membership percentage, rather than shareholders with shares of stock like a corporation. While any of these items can be modified by an operating agreement for an LLC (the written agreement between the members), the basic rights of a minority member (less than 50% ownership) are as follows: Read more

WDFI Warns of Corporate Records Service Scam

The Wisconsin Department of Financial Institutions has said in a news release on Thursday that numerous business owners have been receiving a solicitation for information and credit card numbers to pay a fee to “Corporate Records Service.” The form comes pre-filled with very specific corporate information (available on-line) which makes it seem official.

The WDFI confirmed that it is not affiliated in any way with Corporate Records Service.

If you receive this form, be sure you know what service you are paying for, as it does not appear to be related to any annual registration requirements or anything related to the WDFI.

You can see the JS Online story here.

Do I need a license for my business in Wisconsin?

There are a number of different regulations and licenses that a small business has to deal with. The most often overlooked is the requirement from each city for specific licensing.

The State of Wisconsin requires licenses for a number of businesses from Accountants and Acupuncturists to Wild Rice Harvester and X-Ray Services. You can see the complete list here. However, each city or municipality also has its own set of license and business requirements that need to be complied with. Often times these are much more specific than the State requirements. Read more

Why do I need an Operating Agreement for my LLC?

There are two key documents with regards to forming an LLC in Wisconsin. The first is the Articles of Organization, which is filed with the Wisconsin Department of Financial Institutions (WDFI). The second is the Operating Agreement, which outlines the agreement between the members (which could be thought of as the “partners” in the business.)

What purpose does the Articles of Organization serve?

The Articles of Organization is what is needed to actually create and register your LLC with the State. It is in effect putting the world on notice that you have created a separate and distinct entity, and as long as you follow the rules to ensure liability protection (see “Are you actually getting the personal liability protection from your LLC or Corporation?“), if there is any dispute regarding the business, it is between that person and the LLC, not the members personally.

What purpose does the Operating Agreement serve?

This document is what I describe as the internal agreement between the members. It sets out all sorts of important things such as

  • who owns what percentage of the LLC?
  • What percentage vote is needed to make certain decisions? (ie- hiring and firing, borrowing money, signing contracts, etc.)
  • What happens if a member dies, or gets divorced, or files bankruptcy and a trustee is looking to take over their assets?
  • How is the sale price of the membership interests determined?
  • When can someone sell their interests? To whom?
  • Do the other members get the right of first refusal?

A well drafted operating agreement will address a myriad of other issues that are best to be resolved in advance and in writing.

As has been mentioned in many articles on this website, it is always best to make sure your agreements are in writing before a dispute arises (See “Anatomy of a Contract“). An operating agreement, if properly drafted, will serve two purposes. One, it will help avert any potential disputes because the parties will have addressed some of the stickier issues associated with business ownership in advance, and two, in the event of a dispute, it will aid the parties in resolving said dispute as hopefully it will address the very issue at hand.

While getting the LLC filed with the WDFI is great, and creates the liability protection between the members and the public, a well drafted Operating Agreement is equally as important as it protects the members from each other. Halling & Cayo S.C. offers flat rates for many business formation services, if you have any questions be sure to call and ask for Attorney Sean M. Sweeney.

Representing your LLC yourself- Owners and Managers Beware

A fascinating and enlightening article by Renee M. Mehl in the March 2009 edition of the Wisconsin Lawyer presents some interesting and note worthy observations about the law in Wisconsin regarding LLC’s and its members or managers representing the entities themselves.

You can see the entire article here

For whatever reason the legislature has never expressly addressed whether or not the members of an LLC can represent the LLC themselves. 

For Corporations, the officers or owners are not allowed to represent the corporation without the risk of violating the unauthorized practice of law statute, as a Corporation is its own separate entity. 

LLC’s provide the same type of liability protection as a Corporation, and it could be argued that therefore it is a separate entity and its members cannot represent it themselves. 

At the end of the day, if you choose to represent your LLC you may run the risk of not only violating Wisconsin’s unauthorized practice of law statutes, but also risk having any answer you submit being deemed invalid allowing the opposing side to obtain a default judgment against your LLC.

Be Careful When Granting the Power to Terminate a Contract Early

It seems quite often you see contracts that contain provisions similar to the following:

Either party may cancel this contract at any time by giving the other party 60 days written notice.

This always sounds like a good idea when you discuss it. Basically it is the back-out provision, if things are going badly, you can get out before it gets worse. While this may be appropriate in some cases, in many cases it ends up destroying the entire reason for the contract.

The point of most contracts is to set a series of provisions out defining what each party is responsible for. Most of the value comes from the fact that both parties know they are tied to each other for a certain amount of time as long as both parties live up to their end. If you provide a get out of jail free card, with one of these provisions, then you do not have a 1, 2 or 3 year contract, all you really have is a self renewing 60 day contract.

There is nothing wrong with 60 day self renewing contracts, if that is what both parties want, but more often then not, when these provisions are used it is not the case.

Always be sure that what you contract for is what you intend. As my father always said to me “Say what you mean, and mean what you say.”

The Benefits of a Joint Venture

There are many situations where two existing businesses, or two just starting entrepreneurs want to jointly take on an endeavor, but do not want to be so tied to each other as to be the same entity. This is where a joint venture can come in handy. It creates a legally binding relationship, and if done correctly all of the fiduciary duties of being in business together with out all of the red tape when it is time to go your separate ways.

Like any contract, it is important to ensure that it is well written and extremely explicit as to what each person’s duties and responsibilities are. Some more explanation of the importance of well drafted contracts can be seen in my “Anatomy of a Contract” series.

Probably the two most important things to ensure that are included, other than what the contract is about, are that each member has a fiduciary duty to the Joint Venture (this means they have a duty to put the best interests of the Joint Venture first) and that you properly indemnify all parties from each other’s potential wrong doings that occur outside of the Joint Venture. The whole point of the Joint Venture is that you are not tied, lock stock and barrel to the other party, not being properly indemnified ends up defeating that purpose.

Where is the real value? In the Company or the Employees?

Often, when a company is looking to acquire another business, it looks at all of its gleaming equipment and its wonderful balance sheet as the reason to purchase the company, but in reality all of that success is probably more tied to the employees that work there then the systems or equipment associated with the business. Both Buyers and Sellers of businesses need to keep this in mind from the very outset of negotiations.

A business, as a buyer, needs to be aware of where the value lies and ensure that it is receiving that value when it purchases the company. This may be through opportunities to retain the current employees as well as non-compete agreements for after the sale commences.

For sellers it is extremely important to ensure that there is an agreement that the potential buyer will not simply hire away the sellers most valuable employees. When negotiations begin the potential buyer is given access to the inner workings of the sellers company, and thus may realize that the real value lies in a handful of employees. If there is not a Letter of Intent or other agreement prohibiting the hiring away of that top talent, the buyer may simply call the deal off and acquire the most valuable part of the seller’s business without paying the seller a dime. Courts in Wisconsin will generally up-hold Non-Solicitation agreements for up to 2 years.

From a buyer’s standpoint it is important to be diligent and ensure that the valuable part of the company comes with the deal, and conversely it is in the seller’s best interest to protect that valuable commodity until the deal is finished.

Difference between an Asset Purchase and a Stock Purchase

There are two mainstream ways that Businesses go about acquiring other businesses. This is through either an Asset Purchase or a Stock Purchase. There are advantages and disadvantages to both approaches, taking a look at what you want to accomplish will go a long way towards helping you decide which method to take. Read more

Why Employee Stock Ownership Plans (ESOPs) Are Not Just for Big Companies in Wisconsin

What is an ESOP? An ESOP is exactly what it sounds like, an Employee Stock Ownership Plan, the employees literally hold the stock to the company. The better questions are how do you go about implementing an ESOP? and what are the benefits? While a small percentage of ESOPs (which get most of the news coverage) are large publicly held companies that utilize the vehicle to stop a take over or to buyout a failing company, an overwhelming majority of ESOPs are enacted by smaller, closely held companies as a contribution to its employees. This can serve to motivate and empower your employees, but it can also serve to help in the borrowing of money for acquiring new assets in pretax dollars. Read more

Why Doing Everything to Avoid Business Taxes may Hurt Your Bottom Line

Everybody hates to pay taxes, but Small Business owners seem to hate it the most. Small businesses will go to great lengths, both legally and illegally to hide their income from the IRS, and thus have a lower tax bill each year. While this may seem ideal for the present, is this practice hamstringing your companies overall goals if you ever go to sell?

If you want to get full market value for your company, a key component is showing a profit. It can’t just be this month or last quarter either, you have to make a commitment 2-3 years before selling your business that you are going to have your books show a profit. This means no longer hiding income or taking “questionable” deductions. As an Attorney, I would say you should never do these things, but everyone knows that they happen. If you will not stop those activities for fear of the IRS, then stop them when you want to sell your business because the added return on that sale will be well worth the additional tax hit you may incur.

What Happens when one Partner Leaves a Partnership?

In a January 2007 decision, Estate of James H. Matteson v. Robert R. Matteson et al. , the Wisconsin Appellate court takes the time to further clarify its decision from Lange v. Bartlett , 121 Wis. 2d 599, 602 which stated

[W]hen one partner leaves a partnership and allows the other to continue the business, the departing partner is entitled to receive, in addition to a share of the value of the business, a share of the profits until the business is wound up. We also held that the continuing partner is entitled to be compensated for work done during this time.

In this case, Robert and James had a partnership in a radio sales and service business. In 2001, James left the partnership, but Robert continued the business as an LLC. They never agreed how James should be compensated for his half of the partnership, and unfortunately soon thereafter James died. His estate filed suit and 3 years of litigation ensued. Read more

Are you actually getting the personal liability protection from your LLC or Corporation?

Unless you are making all other parties actually aware of your business entity, you may not be. A recent Wisconsin Appellate decision Black v. Bach, 2005AP3010 reminds us that agents (this means anyone, employees, owners, or anyone acting to bind the LLC or Corporation) need to take steps to ensure that everyone they deal with know the specifics of the entity and its liability protection, or that protection may vanish when it matters most. Read more

The Problem with On-Line Form Contracts

If you are looking to start a business in Milwaukee, Wisconsin, or already own a business in the Wauwatosa or Milwaukee area, you might think, “I can save some money on using contracts and business formation services from an on-line website.” And this is true, you will certainly get a cheap alternative. Of course, as in all things in life, you get what you pay for.

Every well written contract can be broken into three main parts. These three parts I like to call Information, Action, and Insurance. You can read more about this in the three part series of posts “The Anatomy of a Contract” The information part of the Contract simply describes what the contract is about: who is involved and what they are contracting for. The on-line contracts, with your input, can usually cover the Information portion of the Contract pretty well. At the end of the day, if you fill in the proper blanks, you have at the very least an outline of what each party is looking to accomplish. Read more

How will the bailout effect businesses in Milwaukee?

It really remains to be seen what the actual effects will be, but I am optimistic that things are moving in the right track. Regardless of your political leanings and whether you feel it was “deserved” or not, the bailout was necessary because the flow of money had seized up. You can think of the banking industry, and the flow of money through the economy as an engine, and cash is its fuel.

Lending money is not a zero-sum game, it is not simply a transfer of wealth from one to another, when banks lend money, money is actually created by making those dollars available in multiple places at the same time, Read more

Why choose an LLC? All of the benefits without a lot of the hassle

LLCs in Wisconsin have become the entity de-jour for new businesses in Milwaukee and the rest of the state. The real strength of the LLC is its ease to set up and maintain and its versatility. 

An LLC provides all of the liability protection of a Corporation. The same rules generally apply about piercing the corporate veil. In order to maintain the liability protection an LLC affords you have to be sure that you follow the requirements of maintaining your LLC as well as keeping all personal and business money separate. Read more

Business Valuation and Tax Ramifications

Buying a business can be more complicated and have greater tax ramifications then one may first realize. Generally speaking there are two different values to a company, the book value and the actual value. When you are buying a company with significant assets there will be significant research, perhaps by a business valuation company, into the value of the company and all of these ramifications will hopefully be taken into account.

Where the interesting situations arise is when there is purchase of a company that has limited assets or is not valued very high. Read more