You are proud of yourself. You went on-line at the Secretary of State’s website and filed your Articles of Organization. This means that you have limited your personal liability right? Well … maybe.
People rarely understand that what they do AFTER filling Articles of Organization is as important as the filing itself.
You are living under a rock if you think that one of your creditor’s attorneys will say this:
“Oh, my, she has an LLC. I guess there’s no way to hold her personally liable.”
There will be a search to see if you have maintained the appropriate separation between you and your company. You formed an entity, and now the question is whether you acted like an entity. If not, you’ll be a target … personally.
What must you do to protect yourself? Keep these reminders handy:
In Missouri, if you are a sole owner/member LLC, you MUST have a written “operating agreement.” Must I have an agreement with myself, you ask? Answer: yes. You must have written document that spells out the organization of your company, despite the fact that you may fill most, if not all, of the responsible positions in the company.
NEVER run your LLC out of your personal bank account. Be certain that you have a separate bank account for your LLC. Best if you get an EIN for your new LLC (see below).
NEVER mix your personal funds and your LLC’s funds. If you have to support your new venture with personal funds, then be certain that you transfer/deposit your personal funds into your LLC’s bank account. Then make certain that you enter this deposit as a capital contribution or a loan on the company’s books.
NEVER deposit monies from a company customer into your personal bank account. Even if you are paying yourself back for something, never by-pass your company bank account with incoming revenues.
NEVER sign company contracts or documents with your name only. If you are manager managed you should sign all company items: “Superior Company, LLC, by: Bob Smith, Manager” (or other title). If you are member managed, then you should sign: “Superior Company, LC, by Bob Smith, Member.” In all cases, if you just sign as “Bob Smith” then you may be personally liable.
NEVER take money or property from your LLC without documenting its purpose. If the company loans you money, enter it as a loan. If it’s compensation, book it as compensation. Ditto for profits/dividend distributions.
NEVER use a name that is different from the name in your Articles of Organization unless you file a fictitious name registration with the Missouri Secretary of State’s office. For example, don’t use “Superior Company” instead of “Superior Company, LLC” unless you register that shortened version. Here’s the link.
AVOID, in marketing and print ads, using references to you personally instead of the company. Better to say that the company performs great work, e.g. our company has the best painters in St. Louis … not “I’m the best painter in St. Louis.”
Apply for an EIN even if you are taxed as a sole proprietor and have no employees. If you are taxed as a sole proprietor and do not have any employees you are not required to apply for an EIN, which means that you must use your social security number for various tax related identifications. But do you want to routinely disclose your Social Security Number?
Add your spouse as an owner/member. Sole Members in most states (including Missouri) do not have charging order protection but members of a multi-member LLC’s do. Of course “multi” means more than one. So, you and your spouse as members of the LLC will qualify for charging order protection. Do not issue your spouse a 1% ownership interest. This is as transparent as it appears. My advice: not less than 20%.
The Contents of a Well Drafted Non-Competition Agreement
What Can You (the Employer) Include in a Non-Compete Agreement?
Non-competes are often mis-understood and viewed as dreaded creatures designed to punish or put people out of work. But they need not be so fearsome. They can be simple and fair. Remember the purpose is not that complicated. It’s to prevent a former employee (or independent contractor) from hustling your customers. It should be designed to give you time to readjust and keep your customers in the fold without interference or stress from a disgruntled former employee.
Non-compete agreements may include four restrictions:
***If you terminate an employee without cause (2) cannot be enforced.
Can you get damages for violation? Yes, but proving them may be very difficult. So, the critical element of any non-compete is the right to stop the violator, quickly. A well written non-compete should allow you, the employer, to: (1) swiftly obtain a court restraining order stopping the violator and, (2) have the violator pay your cost of enforcing the agreement. Lastly, be certain that your non-compete agreements includes a penalty that extends the non-compete period if there is a violation. It may take time for you to discover the violation and the violator may just stall you to see if he can run the clock out. The extension penalty prevents the violator from using your time against you.
Use a reasonable time and distance. Don’t be greedy, and explain the purpose to your employee/independent contractor. Caution to you: forms from the internet are not your friend. Non-completes are not expensive and can be drafted by an attorney to fit your business.
Non-Competes for Employees and Independent Contractors
In the first article we talked about non-competes in the sale of a business. In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. But for employees (or independent contractors) no such “purchase” is necessary. In Missouri (as in most states) an employer may say “sign this non-compete agreement or you are fired;” and contrary to what many think, these agreements are valid. Repeat … they are enforceable.
If you, have a key employee (e.g. a sales manager), where do you think he/she will go after leaving your employment? That’s right, your biggest competitor and your customers. You have every right to protect your customers with a non-compete agreement designed to give you a legitimate unfettered right to keep a good relationship with your customers before a former employee tries to “steal” them.
But you say “it’s illegal to prevent someone from getting a job.” A non-compete agreement that is reasonable in time and distance is enforceable. So, what’s “reasonable” you ask? It depends on the employer’s geographic customer base. Let’s say that you sell shoes in St. Charles, Jefferson and St. Louis counties. Could you enforce a non-compete in those counties for the sale of shoes, i.e. prevent your former salesman from being employed as a shoe salesman in those counties? Yes, absolutely. Does it prevent your former salesmen from getting a shoe sales job outside of those three counties … no. Protecting your customer base in Missouri is not preventing your former employee from gainful employment under the law of non-competition.
Click HERE for Part 3, The Contents of a Well Drafted Non-Competition Agreement.
Ever hear this?
“Non-compete agreements are not worth anything.”
It astounds me how many people believe this. Because just the opposite is true. Repeat … the opposite is true. Non-compete agreements are commonly used in two contexts:
Non-compete agreements are a routine part of any business sale. If your business is a corporation or an LLC, then you, as the key employee and owner/shareholder, will be expected to sign a non-compete agreement. If you are the buyer, you have every right to expect a strict non-compete from your seller’s shareholder/owner(s); and in larger transactions the key employees may be required to sign one as well.
In a business sale, the non-compete must be separately purchased, i.e. the person who agrees not to compete must be paid directly for that commitment. Therefore, if you are a buyer, be certain that a separate check goes to each person who signs a non-compete. If you purchase from an entity (i.e a corporation or LLC) remember that the shareholder/owner/employee who agrees not to compete is not the seller. Therefore, you need a separate non-compete agreement with each of those people individually even if your purchase contract is with a sole shareholder/owner.
As the seller, you may think, “I’ve heard these non-compete agreements aren’t worth anything, so I’ll just sign it to ‘go along.’ ” Then you discover a year later that your buyer didn’t keep all of your employees (as he promised) and he’s started selling inferior products or services. A couple of customers call and tell you “it’s not the same; we need you back.” You can’t stand “your” business being run that way. You never treated your customers like this! You need to get back into the market to put “honesty” back into the industry! That non-compete agreement shouldn’t keep you on the sidelines while your old customers are being cheated right? …. WRONG. Courts have absolutely no sympathy for former owners who have a change of heart. Non-compete agreements are enforceable.
Click HERE for Part 2… Non-Competes for Employees and Independent Contractors.
Every commercial lease has a sentence that reads like this: “… at the end of the lease term, the Tenant must return the leased premises to the Landlord in the same condition as when the lease term began, normal wear and tear excepted.” Sounds pretty simple. But what about all of the improvements you made, like cabinets, lighting and partitions”? Those improvements weren’t there when you signed the lease. So, returning to the “same condition” may not include those improvements. Who pays to remove them and return your space to it’s original condition”? Most likely, it’s you.
Did you sign a personal guarantee? That guarantee likely reads something like this … “ owner guarantees the Tenant’s full performance of all the terms and conditions in this Lease…” Which means that you, personally guarantee that the space is returned to it’s original condition.
What to do:
Be certain that your lease says: “Tenant must return the leased premises in the same condition as found at the beginning of the lease term, EXCEPT: …………” Spell out what you’re not required to remove or repair.
It’s really that simple.
WAKE UP CALL – make certain that you limit the obligations in your personal guarantee or items like this will be enforced against you personally. More on that in future articles.
You just formed a new LLC and your attorney says, “We recommend an annual retainer. For this retainer we serve as your registered agent and assure that you meet the necessary “company formalities”.” Before you write that check allow us to give you a little education on this often misunderstood subject.
Why can’t you be the registered agent? Why would you pay an attorney to be your registered agent? Well, the law firm proposal often goes like this: “if you ever get sued, the sheriff will serve us [the law firm] and not you … which will save you from being embarrassed by a sheriff’s visit.” First of all, you’re not so friendly plaintiff has no legal obligation to serve the registered agent, i.e. the law firm. The plaintiff may always serve you at your office regardless of who is the registered agent. Secondly, are you expecting so many lawsuits that you need a separate agent for service? Fearing that the sheriff will be a regular visitor? If so, maybe you have a deeper problem than the selection of your registered agent. Answer: there is absolutely no reason why you (an owner) can’t serve as your company’s registered agent.
What about those “company formalities”? Corporations, by law, must meet certain “corporate formalities.” For example, corporate shareholders and directors are required to hold a formal meeting at least annually. “Formal” means with prior written notice and written minutes of actions taken at the meeting. In addition, many shareholders or directors actions throughout the year require formal meetings or recorded documentation of decisions. An empty minute book may = loss of limited liability (i.e. the owners become personally liable for the corporation’s liabilities). But what about “formalities” for LLC’s ? Missouri LLC’s have no such requirements imposed by law. Members (i.e. owners) and managers may act informally, i.e. without formal meetings and without documentation. So, if you don’t need to hold meetings or document your decisions why would you pay a law firm retainer for advice on “formalities”? Answer: You shouldn’t.
Helpful hint: your operating agreement should make it clear that decisions by members and/or managers may be made informally and that neither formal meetings nor documentation of ordinary course decisions are required. Consider requiring formal meetings (and documenting the decisions) for certain actions, such as: amending your operating agreement, borrowing money, tax decisions (e.g. S Corporation election or §754 election), encumbering property, sale of assets, or admitting a new member. But mandatory regular or annual meetings should be avoided. Talk with your attorney about what actions he/she recommends for formal consideration/documentation.
A “Registration of Fictitious Name” isn’t really a registration. It’s just a disclosure of a “fictitious” name. The purpose of this “Registration” is to alert the public to people doing business under an assumed name.
Let’s start with the basics … What is a “fictitious” name? Anyone can do business under his/her own “given” name without anyone’s permission (unless your name is Ozzie Smith and you aren’t the real Ozzie Smith … but that’s another subject). So, you can do business as Bob Smith’s Dry Cleaners and you don’t need anyone’s permission. But if Bob Smith wants to do business as “Superior Dry Cleaners” then he’s doing business under a name that isn’t his own. The name Superior Dry Cleaners is a “fiction” i.e. a fictitious name.
What about corporations and limited liability company’s ? Do entities have “given” names … yes indeed they do. Here’s the key: a corporation or a limited liability company’s “given” name always includes the corporate or LLC identity tag that’s required by law. For a corporation the required “tags” are: Incorporated (Inc.)., Corporation (Corp.), Company (Co.) or Limited (Ltd.). For a limited liability company they are: “LLC” or “LC.”
So, if your entity name is Superior Dry Cleaners, LLC you may NOT do business as “Superior Dry Cleaners, ” i.e. without the tag LLC, unless you file a fictitious name registration for that name. Doing business without the “tag” is illegal in Missouri, because it’s not your given name. Typically, this comes into play with your website and your business cards. By the way, you should also register “Superior Dry Cleaners.com” just to be safe.
Let’s back up … why does the law require these entity “tags” anyway? Answer: so that you, the customer, will know that you are doing business with an entity and not a person. Unlike we humans, entities have limited liability, i.e. you may be doing business with an entity that does not have the capacity to compensate you if it damages you, e.g. it doesn’t deliver the product you ordered.
Penalty for Failure to File:
A fictitious name must be registered within 5 days from its first use. Failure to register a fictitious name is a crime.
These “registrations” are deceptively simple. Here are a couple of common mistakes, with serious consequences.
Filing personally instead of your entity –
People often file a Fictitious Name Registration for their entity (i.e. LLC or corporation) and list themselves personally, as the owner. But the owner is the entity not you personally. Be certain that you list your entity as the 100% owner of the “person” using, the fictitious name being registered. Listing yourself personally means that a plaintiff’s attorney can rely on the public filing and sue you personally … not your entity. BE CAREFUL.
Assuming that a fictitious name filing protects the name –
Remember, filing a fictitious name registration does not “register” anything. It’s merely a disclosure of the name you are using. Many people think that this is tantamount to a trade name or trademark registration, and thus provides some protection for your name. Wrong! This filing is neither a registration nor a protection for your name. It’s just a data base of names at the Secretary of State’s office, and has nothing to do with the law protecting your name … which is the law of trademarks.
Brand names ARE Fictitious Names –
Remember that a brand or brand name is a fictitious name, so you need to register it.
In summary … BE CAREFUL. Mistakes can be costly.
By: James R. Stein, Guest Contributor
When you consult a lawyer to plan your estate, one important topic is the Durable Power Of Attorney. Although sometimes considered a mere afterthought, it can in fact be even more vital than a Will itself. In many cases, a DPA can prove to be a crucial piece of the estate planning puzzle.
Unlike a Will, a DPA works during your lifetime. It appoints someone you choose to handle your financial affairs in your stead, either for convenience or out of necessity in the event you can no longer do so yourself.
Incidentally, “attorney” does not mean lawyer. It simply means representative or agent. A lawyer is an attorney-at-law. Any competent individual of age 18 or more may serve as an attorney-in-fact.
Historically, a power of attorney was automatically revoked if the principal (i.e., the person making the DPA) became incapacitated. Fortunately, the law now permits durable powers of attorney. The term “durable” means that it becomes or remains effective, or endures, in the event of disability or incapacity. After all, this is when it is typically needed the most.
There are generally two types of DPAs. The first takes effect when signed and remains in effect if you should become disabled or incapacitated. The second only becomes effective if and when you are deemed to be in such a condition. Until then, it cannot be legally exercised. The first type is often referred to as “presently effective.” The second is known as a “springing” DPA, because it springs into effect upon proof of your disability or incapacity. Which type is appropriate for you is a personal matter, and you should discuss the pros and cons of each one with your lawyer.
It is important that a DPA be customized to your needs. Your lawyer can and should tailor the scope of a DPA to meet your situation, including anticipated potential future needs. This is not the time to download a standard form from the Internet. For one thing, Missouri law mandates certain language that must be included, in substance, to make a DPA truly durable. Moreover, some powers that can be vital in certain cases, such as the ability to make gifts or change estate planning or beneficiary arrangements, can be disastrous in other circumstances.
Choose your attorney(s)-in-fact with great care. It is an unfortunate fact that DPAs are sometimes abused, with tragic consequences for a too-trusting principal.
Note that the person making a DPA must be the person on whose behalf the attorney-in-fact is to act (the principal), and not the attorney-in-fact himself or herself. Sadly, lawyers are often called by a spouse or adult child to prepare a DPA after the intended principal is already legally unable to sign one. In such cases, a DPA is no longer an option. A probate guardianship and/or conservatorship may then be the only avenue available. Not only does this mean a costly and ongoing court process, but there are other drawbacks as well. Acts that could have been authorized under a properly drafted DPA may be unavailable, because they would require approval by the local probate court. Some courts will simply not allow certain actions in a probate conservatorship. For example, the opportunity to qualify the principal for Medicaid (known as “MO HealthNet” in Missouri) through a properly planned gifting program and/or purchase of a qualified annuity may simply be lost.
Finally, please note that Missouri also permits a durable power of attorney for health care decisions. This is a separate document, authorized under a different section of the law. It is beyond the scope of this article, but it is another subject that should be discussed with your lawyer. It can prove invaluable in the event of a catastrophic medical event or condition, and its potential for possibly sparing your family from agonizing doubts and disputes cannot be overstated.
James R. Stein is a pre-imminent estate planning, elder law and probate attorney. InNovare Law, LC relies on Jim as our “go to” counsel for special needs trusts, probate and ever challenging medicaid issues. Here is the link to Jim’s website: https://www.attorneyatlawstpeters.com/
You’ve decided to buy instead of rent. You found a building you couldn’t refuse in today’s market. Now you can stop paying the landlord and generate some equity. But who should own it? It sounded simple when you decided to buy, but suddenly there are a lot of questions.
Your banker wants to keep it simple and just have your business buy the building. Your accountant likes the idea of you and your wife owning the property to benefit from the “at risk rules.” An estate planning website suggests you put it in your revocable trust. Lastly, a financial planner tells you to protect the building with a separate entity. How do you sort through it all?
First fork in the road – should you own the property inside or outside of the business? It’s not likely that you will want to put the property in your business entity since it puts the real estate at risk for all of your business debts and liabilities. Yes, it may bring a nice “bankable” asset to your balance sheet. But, in the beginning you’ll also pick up a hefty mortgage/liability on that same balance sheet and the net won’t really mean much. The bank won’t eliminate the loan personal guarantees just because your business owns a building (with a mortgage). If your business is taxed as an S-Corporation, you’ll be passing up serious tax advantages under the “at risk” rules. The better option is holding the building outside of your business.
Second fork in the road – who should be the “outside” owners? The most important factor is who owns the going business. Are you and your spouse the only owners, or do you have some other co-owners? In either event, do NOT own the building in you and your spouse’s name (or your revocable trusts) or with your co-owners as individuals. That will subject your single largest “business” asset to the creditors of each owner. The solution? Put your building in a separate limited liability company (NOT a corporation) where it’s shielded from the business debts and liabilities (and perhaps from your personal debts as well). The LLC may be owned by some or all of the business owners (and spouses). Be certain that your building LLC is taxed as a partnership (not as an S Corporation).
If the property doesn’t belong to the business, how does the business benefit? Answer: you rent “your” building to the business entity and life continues as usual. It’s perfectly fine to use your mortgage payment as a base for the monthly rent. Most importantly, you can allocate expenses between the landlord (you) and the business (remember all of that pass through stuff your landlord made you pay?). Think taxes here. Who can use the tax deductions the most? Hint: you’ll likely pass most of the building expenses on to the business (as the tenant), where you have income to offset them. The key is your commercial lease. Do NOT take a form off of the internet. The lease must be carefully drafted and a commercial attorney will be worth the investment. This is not your college student apartment. It’s a commercial building. You must document an arm’s length transaction to satisfy the tax code, and this is no time to play lawyer. Similarly, consult your CPA, and get a good insurance agent who understands commercial leases. This may not be the agent who handles your car and homeowners insurance.
Lastly, make sure your banker offers the SBA 504 loan program which is specifically designed just for you to purchase real estate. http://www.sba.gov/content/cdc504-loan-program. Want help? Contact any local EDC (http://www.jeffcountymo.org/SmallBusiness.aspx)
. Having your revocable trust as a member of your LLC is not “wrong” but it may require you to disclose your trust documents to outsiders, e.g. your lenders. Therefore, I prefer you hold your membership individually. To avoid probate, your membership in the LLC should transfer on death to your revocable trust. This is accomplished by a beneficiary designation. You’ll need an experienced attorney for this. New article coming on this topic soon.
So, your family business has been a corporation forever. All these years you’ve been dutifully filing your annual report with the Missouri Secretary of State’s office along with your annual fee; and filing the mandatory annual franchise tax return (even though you don’t owe any such tax). You know about “corporate formalities” and you’ve been putting some boilerplate shareholders and directors meeting minutes in your corporate minute book each year (even though you’ve rarely had a formal meeting). Or maybe you pay the big bucks annual retainers to your CPA and attorney for all of the above.
If you were operating as an limited liability company, none of the above would be necessary. None of those “corporate formalities,” public reports, fees, and retainers are necessary in an LLC. Imagine never having to file a franchise tax return or an annual report with everyone’s name and address. Imagine not having to worry about those fictional meeting minutes (and the attorney fees). Most importantly, an LLC provides more creditor protection to you and your co-owners. Yes, I said more protection from your personal creditors.
Understanding LLC Creditor Protection
Let’s assume that you own 51% of your corporation’s voting stock. Let’s further assume that while taking the kids home from school (unrelated to the business) you negligently run over and kill a brain surgeon. This is followed by a successful lawsuit against you for $10 Million; immediately followed by the surgeon’s estate levy on (i.e., taking possession of) your stock in the corporation. As the new controlling stockholder the surgeon’s estate elects a new board of directors who then take action to sell the company for cash, which is discounted for quick sale. You not only lose your company, but your job as the chief executive i.e., your salary. All of your other stockholders are equally out in the cold.
What if you were doing business as a limited liability company? Lawsuit, no change. Collection … completely different. The surgeon’s estate would be entitled to a “charging order” against your economic interest only. Understand that in an LLC, your economic interest (i.e., profits) is separate from your governance interest (i.e., voting and management rights). So, when the charging order takes your economic interest, it does not remove your voting and management rights.
Result: (1) there is no forced sale of the company, (2) you continue as the chief executive, with your salary, and (3) all of your other owners, officers, and employees remain in place.
Think About Converting
There may have been very legitimate reasons for choosing to incorporate way back when. But the rules and options have changed; and in most cases, there is no justification for keeping that corporation (other than your attorney protecting his/her retainer).
Forming or converting your existing corporation to an LLC should have no impact on your income tax status; and better yet, it’s inexpensive. Caution: there are many attorneys who can’t grow out of the corporation way of life and do not follow the new LLC world. Caveat: don’t try to do this yourself. Professional help is critical (but find an attorney who “gets it”).