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Entries in operating agreement (3)

Tuesday
May072013

California LLCs Singing a New Song – The Laws They Are a-Changin’

 

by Robert A. Hull

One of the most sweeping changes to the California law governing limited liability companies is set to go into effect January 1, 2014, when California’s Revised Uniform Limited Liability Company Act (“RULLCA”) will displace the provisions of the Beverly-Killea Limited Liability Company Act (the “Beverly Act”), which presently governs California LLCs. RULLCA is based on revisions to the Uniform Limited Liability Company Act (the “Revised Uniform Act”), which was adopted by the National Conference of Commissions on Uniform State Laws. RULLCA contains some modifications to the Revised Uniform Act to include some existing California law.

RULLCA applies to LLCs (both domestic and registered foreign LLCs) in California starting January 1, 2014. It applies to all actions of members/managers commencing on that date, though the Beverly Act still applies to such actions prior to that date.

Presently-existing LLCs will not have to file any additional documents in order to comply with RULLCA. RULLCA, in its present form, does not address Series LLCs.

LLC members and managers should have an understanding of RULLCA’s impact.

 

Some notable provisions of RULLCA:

 

  • The Operating Agreement will prevail over provisions of the Articles of Organization as to members, dissociated members, transferees and managers (though the Articles prevail as to other persons to the extent those persons reasonably rely on the Articles).

  • RULLCA’s provisions regarding non-liquidating distributions generally conform to the provisions of the Uniform Limited Partnership Act of 2008 and largely follow the Beverly Act, with certain exceptions. For example, if the Operating Agreement does not otherwise provide, such distributions under RULLCA are made based on the value of the LLC contributions of the LLC members while the Beverly Act looks to the members’ capital contributions and the allocation of profits.

  •  New language is added concerning which provisions can be overridden by the Operating Agreement, and which provisions cannot be. Provisions an Operating Agreement cannot vary are set forth in Sections 17701.10(c) and (d) of RULLCA.

  • RULLCA limits how Operating Agreements may change the fiduciary duties of members or managers. In addition, RULLCA establishes limits for LLCs regarding the indemnification of members and managers from liability for money damages arising from breaches of certain duties.

  • Most of the Beverly Act’s liability protection from the claims of third parties from LLC activities remains intact.

  • RULLCA provides specific provisions on notices, quorums, actions and consents, in the event these are not addressed by the Operating Agreement.

  • Expect more explicitly defined consequences to an LLC member who chooses to dissociate from the LLC.

All members and managers of LLCs will want to consult counsel to determine whether amendment of their present Operating Agreement is advisable to avoid unexpected or unwanted consequences.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.
Wednesday
Jul252012

Business Succession Planning: The Shareholder, Operating or Partnership Agreement

 

by Robert A. Hull

 

For many of us, one of our most valued assets, is our business. What happens when you or one of your business partners becomes disabled, divorces, retires or passes away? Will your business continue to function smoothly?  Will there be infighting between owners or spouses/estates/children of owners?  

Hopefully, you established procedures for some of these scenarios when you started your company. If you didn't, you need a business succession plan. Here's a hypothetical to illustrate why:

You co-own a custom wing-nut company that manufactures state-of-the-art custom wing-nuts for almost any industry that uses this type of fastener, with a partner who is married with three children. You are also married, with three children.

However, you've never gotten along with your partner's spouse, who you think is spoiled, grasping and just plain annoying. Worse, your partner's three kids all embody many of the same negative traits.

To further complicate matters, your own spouse worked from home throughout your own marriage, raising three mostly good kids . . . a great parent, but not in the least bit business minded.

Your kids are a mixed bag. Two work for your company. One is creative – he came up with the brilliant idea of fluorescent wing-nuts which are selling like proverbial hotcakes. The other is financially-minded, the one who ensured you made the biggest profits possible on the project. The third kid just likes to head off to Las Vegas a lot. Frankly, you're a little worried.

Some of the questions you should be asking at this point are:

  1. What happens to your company if your business partner passes away or becomes disabled, divorced or simply wishes to sell his or her share of the business? Will you suddenly be partners with his or her annoying spouse and three, bratty children or with a stranger?

  2. What happens to your own interest and your company if you should become disabled or pass away?

It is crucial that you put into place a plan to address the above scenarios before any of them manifest.

Business succession planning may sound complex, but it's really a lot less difficult than leaving everything up to fate or "crossing those bridges when you come to them." No good comes from kicking the can down the road.

 

The Shareholder/Operating/Partnership Agreement – Defining Intentions and Handling Disputes

 

Business Succession AttorneyA Shareholder Agreement (for a corporation), Operating Agreement (for an LLC), or Partnership Agreement can provide some answers to these questions. 

It will clarify what you and your business partner intend for your company, and can provide guidelines for handling future disagreements. The agreement (sometimes referred to as a “buy-sell” agreement), or in some instances the governing documents of the business itself, should set forth:

  1. The respective ownership interests of the business partners.

  2. The next steps to take when an owner resigns or retires, becomes disabled or dies, or files for personal bankruptcy (e.g., buyout provisions, rights of first refusal, etc.;

  3. The valuation of the stock or interest;

  4. If your company will buy out the departing or deceased shareholder's stock or interest.

All of these issues, and more, should be addressed in a good Shareholder/Operating/ Partnership Agreement to avoid the business pitfalls resulting from a change in personal circumstances.  An ounce of prevention is worth a pound of cure.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Tuesday
Aug232011

Good Housekeeping and the Art of Business Entity Maintenance

 

by Robert A. Hull

How many times have you heard that you should not mix your business with your pleasure?

Well, here’s yet another reason to separate the existence of your business affairs from your own:Viewtech, Inc. v. United States (9th Cir. 2011). More on that in a moment.

As a Los Angeles business lawyer and estate planning attorney, one of my most common refrains to clients is to ‘respect the formalities’ of your business entity. Like any successful relationship, you must respect boundaries – in this case, by complying with government-mandated formalities. 

That means, among other things, maintaining: 

▪ Adequate Corporate Minutes

▪ State Filings

▪ Clear Separation of Personal & Business Identities:
Online business formation and legal forms services often ignore these, and other aspects of an entity’s ongoing obligations.

If you do not comply with the above, you may face personal liabilities as the result of any business liabilities, defeating the very purpose of having such a business entity. Or, as the recent 9th Circuit Viewtech case indicates, your business might suffer as the result of your personal liabilities.

Here’s what happened:

1. The IRS subpoenaed bank records of an S-Corporation, Viewtech, in the IRS’s search for funds of an assessed taxpayer, Jung Kwak, the primary owner of Viewtech.

2. Viewtech moved to quash the subpoena on the grounds that it had not been given proper notice by the IRS (notice of such a third-party subpoena does not have to be given to the third party if the party was a fiduciary or transferee of the assessed taxpayer, among other exceptions).

3. The Court found on several grounds, that the IRS did not have to give notice to Viewtech. One of those grounds was that Kwak transferred personal funds into Viewtech’s account, and the corporation both paid money into his account, and paid some of his taxes (presumably, there was no contemporaneous promissory note which established separateness between the corporation and its shareholder).

The Court noted that this ground supported the conclusion that Viewtech was Kwak’s fiduciary or transferee, and the IRS could subpoena Viewtech’s bank records in a case relating to Kwak’s tax deficiency without any notice whatsoever to Viewtech.

The IRS Will Treat You the Way You Treat Yourself

It’s important to note that the Court found that Viewtech was also not entitled to notice because Kwak, as a 100 percent and 97 percent shareholder during the relevant periods, was entitled to substantially all of Viewtech’s income, and was a Viewtech employee and officer, and therefore had a sufficient interest in Viewtech.

So, even if separate accounts are maintained, the IRS may be able to subpoena your business entity’s records without notice to your company.

But this is no reason to ignore the formalities. Since Kwak did not maintain a separate business entity and commingled his accounts, he risked his corporation’s financial well-being, in addition to his own. The IRS may be able to seize not only Kwak’s personal assets transferred to the corporation, but also the rest of the corporation’s assets as well.

The IRS can argue that since Kwak did not treat Viewtech as separate from himself, the IRS can do the same.

Practicalities & Precautions in Housekeeping

Federal courts often give the IRS more leeway than they would give to a private party suit against you (for example, allowing the IRS to apply certain tests “non-technically” as indicated by Viewtech Court’s recounting of a prior applicable case).

This means that it is even more important that entity formalities are maintained – they are no guarantee against a successful suit by the IRS, but dollars to doughnuts the IRS will use the slightest entity upkeep irregularity to come after your assets for your corporation’s liabilities and vice versa. Why? Because it can. Don’t give the IRS that ‘in’ – keep your business and personal houses in order. An ounce of maintenance is worth a pound of cleanup.

The Takeaway – “Good Housekeeping” is not just a magazine, but sound advice when conducting your business through an entity such as a corporation or limited liability company.

If you have any questions regarding business formalities for your entities, or any other questions regarding your particular business, please feel free to Michael Hackman: 818.990.2120.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120