Legal Information for Large and Small Business Owners
Posts tagged Operating Agreement
Do I Need a Business Lawyer?
May 30th
When do I need to hire a corporate attorney for my business?
Some scenarios are obvious — you should call a criminal or corporate attorney when you’re being investigated by government officials for tax or securities fraud, when an employee is injured on the job or when a customer is injured by one of your products.
But you should also consider hiring a corporate attorney in other situations, like:
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When you are starting a business.
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When you are buying or selling a business.
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When you are considering dissolving your business.
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When you are hiring senior or key employees.
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When you are hiring employees with access to company secrets or confidential information.
When You Probably Need a Business Attorney
Here are a few examples of when you should consider hiring a good business attorney for your large business or small business.
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The members of your LLC, shareholders of your company, or partners of your partnership want to allocate the profits and losses is a special way in the LLC operating agreement, shareholder agreement or partnership agreement.
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The business partners will be contributing capital other than cash to the partnership, company, or LLC — like intellectual property, know-how, or appreciated property.
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In connection with the purchase of a business that has significant potential liabilities like: environmental issues (state and federal environmental laws impose liabilities on landowners in the chain of title, regardless if they caused the contamination); product liability, employee liability (sexual harassment or employee discrimination claims); excessive debt; or special capital calls.
Please note. If you are a member of a limited liability company, a shareholder in a closely held company, or a partner in a partnership, keep in mind that the company lawyer is representing the company, not you. There are times when members, shareholders or partners decide to form their business or eventually go separate ways. The corporate attorney hired for the business has the business as its client and protects the business’ interests. In the scenario of forming the business, each business partner has its own interest in mind, which may be adverse to the proposed company (for example, if one member is contributing intellectual property to the new business, it may want to have an exit strategy to keep its intellectual property if they part ways). Or in the event of a “business divorce,” where the remaining members, shareholders or partners are buying out other LLC members, company shareholders or partnership partners, the company lawyer has the company’s best interest in mind, which interest is adverse to the departing business partners. Business partners, members and shareholders should be represented by their own corporate attorney to avoid conflicts of interest, or at the very least, the business lawyer needs to advise the partners of, and they have to waive in writing, the conflicts of interest.
If you need help with deciding whether you need to hire a business attorney, you should contact a licensed business lawyer for an initial consultation. As the old saying goes, an ounce of prevention is worth a pound of cure.
How to Conduct Due Diligence for a Merger or Purchase of a Business or LLC
Apr 21st
Regardless of whether you are buying a business as an asset purchase, a stock purchase, or a merger, you (and/or your corporate attorney) must conduct due diligence on the target company. Due diligence involves an in-depth investigation of the business. It requires review of a lot of documents by your corporate attorney and a review of the financial reports and tax returns by your financial advisor or accountant. By conducting due diligence on the target business, you and your corporate attorney will have a thorough understanding of the business — being better able to ascertain a fair purchase price of the business, and identify any surprise business liabilities for which you likely will be liable after you become the business owner. Due diligence also is important because, depending on the outcome of the due diligence, you (perhaps with the help of your corporate attorney) may want to incorporate certain seller obligations in the term sheet of the deal (e.g., clearing any liens on the assets of the business, obtaining required third party consents, etc.).
Here is my due diligence checklist of the most common items to investigate when conducting due diligence in the buying or merging of a small business (of course, these are among other things to review depending on the facts and circumstances of the specific transaction):
Legal Due Diligence
1. Corporate Documents (or LLC Documents)
If the target business is a corporation, you (or your corporate attorney) should review the certificate of incorporation, good standing certificate, by-laws, minutes of shareholder and director meetings, shareholder agreements, and any outstanding warrants and option agreements.
If the target business is a limited liability company (LLC), you (or your corporate attorney) should review the articles of organization, good standing certificate, operating agreement, minutes of membership meetings, manager agreement, and any outstanding purchase rights agreements and option agreements.
In New York, you can order a good standing certificate from the New York Department of State, Division of Corporations.
2. Agreements
Major Contracts: You (or your business lawyer) should review all major distributor, supplier and customer agreements, all confidentiality and non-compete agreements, all intellectual property agreements (licenses into and out of the company), and all equipment leases.
Real Estate: You need to review all real estate leases entered into by the target company (whether as a tenant or a landlord), purchase agreements, surveys (if a long term lease or fee owned), title insurance policies (if fee owned); you should ascertain whether any consents are needed for the contemplated business sale (or merger) transaction, how much the rent liabilities are, whether there are sufficient term(s) remaining on the lease(s), among other things.
Insurance Policies: Have your risk advisor or insurance agent review all insurance policies carried by the target business to determine if the present coverage is adequate for the business as it is conducted (or plans to be conducted).
3. Licenses and Permits. Is the target business required to maintain licenses and permits with the local and state authorities (such as a liquor license or other operating permit)? If so, you (or your corporate attorney) need to obtain all copies and determine which licenses may require the seller’s obtaining prior consent for the contemplated sale or merger of the business. To find out what licenses and permits may be required in New York, you can visit the New York State’s Online Permit Assistance and Licensing website.
4. List of all (major) Assets and Liabilities. Regardless of whether you are buying the business as an asset purchase or a stock purchase, you want to be sure of what the target company owns and owes. The target company’s assets may include cash, securities, equipment, inventory, intellectual property (copyrights, trademarks, patents, domain names, and other proprietary rights), notes and accounts receivables, real property (leased and owned). Liabilities may include bank debt, employee benefits and bonuses earned and not yet paid, threatened, pending and current lawsuits, licensing violations, etc. You should be provided with a list of all employees and their current salaries. You should identify which employees are key to a successful transition and continued operation of the business.
5. UCC Liens. Uniform Commercial Code (UCC) information is important to any business or financial institution contemplating entering into a lien transaction as the secured party (the party providing funds or financing collateral). Knowing the current financial status of the target debtor business before extending credit is crucial, and it is the number of active, existing liens already in effect for that particular debtor party that most interests any future lender or secured party. You can search the New York Uniform Commercial Code Bureau files and records to see what financial obligations (including IRS liens) have been incurred by the target business and to see what, if any, liens exist on the selling business’ assets.
6. Customer Problems. You can easily search the internet to see if there is any negative publicity or customer complaints about the target business. The internet is a very powerful tool for viral marketing and unfortunately, for flaming a business. You don’t want to buy a business that is saddled with a lot of negative consumer awareness.
Financial Due Diligence
You should have your accountant or financial advisor review the following diligence materials. She or he should check whether there are any questionable accounting practices.
1. Tax Returns. Up to 5 years’ prior federal, state and local tax returns, including any sale and use tax returns. In New York and in other states, the successor to a business may be liable for tax liabilities incurred in the years prior to its purchase of the business. In order to be certain that you have the same returns that were filed with the taxing authorities, you can have the seller provide the applicable written consent so you can request copies of the actual tax returns directly from the applicable taxing authority.
2. Financial Statements. The seller of the business should provide detailed financial statements (including balance sheets and profit and loss statements) for the prior 3 to 5 years. If the target business is large enough, your financial advisor or accountant might request to review “audited” financial statements that have been prepared and certified by a certified public accountant.
3. Tax Liens. Your accountant or financial advisor should review the any tax liens filed on any assets owned by the target business.
If you need help with conducting due diligence on a business, you should contact a licensed business attorney.
(or your corporate attorney)
Are There Any Special Responsibilities or Formalities Associated With Forming a New York Limited Liability Company?
Apr 9th
According to Section 417 of the New York Limited Liability Company Law, the members of a New York LLC are required to adopt a written operating agreement. The operating agreement may be entered into before, at the time of, or within 90 days after the filing of the Articles of Organization. The operating agreement is the primary document that establishes the rights, powers, duties, liabilities and obligations of the members between themselves and with respect to the limited liability company. It is an internal document of the LLC and is not filed with the Department of State. Note, New York law is is silent on the consequences of not adopting an operating agreement, but as a general rule, it is best to have an operating agreement when the LLC has more than 1 member.
New York limited liability companies are required to publish a notice of formation. Section 206 of the New York Limited Liability Company Law requires a notice related to the formation of a limited liability company (LLC) to be published in two newspapers. The newspapers must be designated by the county clerk of the county in which the office of the LLC is located. An affidavit of publication from each newspaper must be filed with the Department of State. A Certificate of Publication, with the affidavits of publication of the newspapers annexed thereto, must be submitted to the Department of State, with the appropriate filing fee.
Of course, it is best to discuss the Special Responsibilities and Formalities Associated With Forming a New York Limited Liability Company with a New York Small Business Lawyer (or company lawyer).
How Do You Remove an LLC Member or Manager From Your Small Business?
Mar 12th
If a manager or a member of the LLC engages in conduct that harms the LLC, the other members do have standing to bring what is known as a “derivative action” to remove the member or manager from the LLC.
Generally, derivative actions are typically brought by a corporate attorney on behalf of the shareholders of a corporation demanding that the corporation take action against its directors, officers, or others for their actions that harmed the corporation (usually the acts are done outside the scope of their duties or exceeds the standard of reasonable “business judgement”).
Of course, your LLC operating agreement may set forth the rights of the members and the process to remove a manager or other member from the LLC in the event of bad behavior or for other reasons.
Although the New York Limited Liability Company Law does not explicitly provide for derivative actions to remove a manager or member from the LLC, New York Courts have recognized that LLC members do have standing to bring such a claim. Of course, each case stands on its own facts and merits — but if you believe your follow LLC member or manager is acting in a way that harms your business, you should contact a New York Small Business Lawyer or corporate attorney to discuss your options on how to remove them from your LLC.
Do You Need an Operating Agreement for Your Small Business LLC? Here is my LLC Operating Agreement Checklist.
Mar 10th
As you may know, a “corporate kit” includes a pre-made form of limited liability company operating agreement. There is no telling how complete these are and whether or not they were prepared by a corporate attorney. Certainly an off-the-shelf operating agreement is not customized for your needs. I recommend having a New York Small Business Attorney (corporate attorney) review and/or draft and negotiate the operating agreement — especially when you have two or more members. Here is a checklist of some of the items to consider addressing in your operating agreement (for that matter, these are some of the items that you should consider addressing in a shareholder agreement or a partnership agreement).
- General Provisions
- Purpose of LLC — Will this be a special purpose entity?
- Scope of activity — Geographic boundaries, etc.
- Limitations on operations — Incurrence of indebtedness, other?
- How many classes of membership? What are the membership rights and obligations of each class?
- Capital Contributions to the LLC
- Have there been any to date?
- Percentages
- Additional contributions
- Ability to call
- Default provisions (straight dilution or penalties?)
- Governance of the Limited Liability Company
- Day-to-day management of the LLC
- Company opportunities
- Conflicts of interest
- Major decisions
- Indemnification
- Resolution of deadlocks
- Arbitration
- Buy/Sell
- Methodology for determining price — By Triggering member, Appraisal, or Arbitration?
- Distributions of Profits / Allocation of Losses
- Timing
- Amount
- Capital vs. profits
- In-kind distributions
- Admission of Additional Member(s) to the LLC
- Any new members contemplated?
- Terms and conditions of admission
- Withdrawal of Member from the LLC
- Ability to withdraw
- Confidentiality
- Non-compete
- Other considerations?
- Transfers of LLC Membership Interests
- Permitted?
- To estate planning vehicles
- To family members/affiliates
- Third party transfers
- Right of first offer/right of first refusal
- Other conditions to transfer
- Termination of the Company
- Fixed term?
- Trigger events?
- Standard (involuntary bankruptcy, court order, etc.)
Of course, it is best to discuss the above New York LLC Operating Agreement Checklist with a New York Small Business Lawyer.
What are the benefits of having an LLC?
Feb 2nd
A New York Limited Liability Company has the following benefits:
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Liability Protection Like a Corporation. New York LLC members are generally protected from personal liability for debts and claims of the business. This means that if the business can’t pay a creditor or gets sued, the creditor cannot legally come after the member’s personal assets such as a house or car (unless the owner is hiding behind the corporate entity for his or her own unlawful or unscrupulous personal dealings, in that case the business owner might not be able to prevent personal liability if a creditor can prove facts and circumstance to “pierce the corporate veil”).
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Maintenance. LLCs are less formal than corporations and do not have the same corporate formality requirements such as annual meetings, maintaining minute books, and having corporate bylaws (of course, these items can be addressed in the LLC’s Operating Agreement).
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Management. An LLC provides a lot of flexibility in business organization and management. The owners can be individuals, trusts, partnerships, corporations, LLC and foreign individuals. There are no requirements to have officers — one or more managers can run the LLC (as set forth in the LLC’s Operating Agreement).
Of course, if you have any questions about the benefits of having a New York LLC, you should speak with a New York Small Business Lawyer.
Starting an LLC or a Business in New York? Here is my Business Startup Checklist
Jan 8th
As a corporate attorney, I am frequently asked for a checklist of items to consider when starting a business. Here is a “10,000 foot” overview of what needs to get done in starting or buying a large or small business in New York:
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Choose Your Business Structure
What type of structure is right for your small business? In New York, your choices are: sole proprietor, partnership, corporation or limited liability company. You should speak with your accountant/financial advisor to see what structure is the best for your tax situation and speak with an attorney to discuss various structure options. Also, you will want a structure that is flexible as your business grows. For example, if you hope to attract investors (or even become a publicly traded company in the future) a limited liability company or corporation might be a good structure. Of course, forming a New York limited liability company has the added expense of publishing the formation of your LLC in two newspapers (see my other post about LLC vs Corporation). Keep in mind, a sole proprietorship does not offer the limited liability protection of an LLC or corporation.
You should formalize your structure with a written agreement signed by the business principals and by filing the proper documents with the Secretary of State of New York. Please note, if you are doing business with other people without the proper written agreement in place, you may be in a de-facto partnership without knowing it (e.g., your partner could enter into agreements and monetary obligations in the name of the partnership and all partners would be liable for those obligations).
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Choose a Name for your Business
New York has laws regarding certain naming conventions that must be used.
Corporations must contain the word “corporation”, “incorporated” or “limited”, or an abbreviation of one of such words (click through to Laws of New York (bottom of page) to see Section 301 of New York Business Corporation Law (BCS)). Also, the name of the corporation cannot be the same as any other New York corporation, limited liability company or limited partnership. Search the New York Corporation and Business Entity Database for existing business and not for profit corporations, limited partnerships, limited liability companies and limited liability partnerships, as well as other miscellaneous businesses.
New York regulates or prohibits the use of certain terms in corporate names (or only allows them after approval). For example, certain phrases must have a legend so not to be confused with a “governmental agency”. You cannot use certain terms like “state police”, “urban development”, “chamber of commerce”, “state trooper”, “urban relocation”, “community renewal”, and “tenant relocation”, among other names. Also, certain names have additional requirements or approvals like “bank”, “guaranty”, “insurance”, “trust”, “doctor”, and “lawyer”. (click through to Laws of New York (bottom of page) to see Sections 301 and 302 of New York Business Corporation Law (BCS)).
Caution should be used to not name your small business company in a way that might be confusingly similar to an existing trademark. You should also consider a corporate name that is available as a domain name (however, that may mot be as important if you have a domain that has brand appeal). If your company will be doing interstate business (across state lines), may want to protect your corporate name with a trademark or trade name under federal trademark laws (check out the U.S. Patent and Trademark Office’s FAQs) or state trademark and trade name laws.
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Form Your Large or Small Business. Once you have selected the name of the company, you need to form the business by filing the proper documentation with the New York Department of State. See the Division of Corporations website for FAQs regarding the different entity requirements or engage a New York Business Lawyer as your corporate attorney.
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Enter Into a Written Agreement with your Fellow Business Owners. If you are going into business with other people, you need to enter into a written agreement with them setting forth the rights and responsibilities of the owners — this generally is in the form of an operating agreement (for a limited liability company), a shareholder agreement and corporate bylaws (for a corporation), or a partnership agreement (for a partnership).
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Get a Tax Identification Number and Learn about your Tax Obligations. Speak to your financial advisor or accountant, but generally it is a good idea to have a separate federal tax IS (or EIN) even if you are a single-member LLC (select a “disregarded entity”). Here is the link to the IRS’ How to Apply for an EIN (with separate instructions for Corporations, International Businesses, Partnerships, and Small Business/Self-Employed). Your applying by telephone is sometimes easier than via the online method.
As a New York small business owner, you need to understand your New York State tax responsibilities (Recordkeeping, Hiring employees, Selling products or services, and other New York State taxes). The New York State Department of Taxation and Finance site has a lot of information for those starting or buying a business. Also, you should read the IRS’ “Publication 583 Starting a Business and Keeping Records” is available as a pdf download or viewable on the IRS web site.
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Open a Business Bank Account. Once you have your federal tax ID, you should open bank account(s) in the name of the business. You should consider a bank with “commercial” services — in my experience its better to avoid “retail” banks that don’t have a lot of experience in sophisticate business needs. Generally the bank will need to see your business entity formation documents (including banking resolutions). The bank can provide you with generic banking resolutions, but if you are incorporated, you should include these in your corporate by-laws (with specific banking resolutions and officer powers). If you have questions, you can call a New York Small Business Attorney.
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Get the Necessary Licenses and Permits Necessary for your Business. Go to the New York State’s Online Permit Assistance and Licensing website to see what permits and licenses are required and call a New York Small Business Attorney.
