Business Services FAQs

BUSINESS LAW
 

Q: What is business law?

Business law encompasses the many rules, statutes, codes, and regulations which govern commercial relationships and provide a legal framework for the conduct and management of a business. Business law is highly diverse and includes areas such as:

  • business formation and organization
  • transactional business law (contracts) 
  • business planning
  • business negotiations
  • mergers and acquisition
  • divestitures

Q: What factors should be considered in choosing the type of business form for my business?

There are many important things to think about when choosing a business form.  Some of the main considerations include your preference of tax treatment, your state of residence, how you intend to capitalize the business, how many equity partners you will have, whether you plan to issue stock and trade it publicly, whether you will have employees, how you intend to structure the management of your business, and issues surrounding the liability of the business owners.

Q: What is a limited liability company?

A limited liability company (“LLC”), like a corporation, is a legal entity which exists separately from its owners. An LLC is created when Articles of Organization (or the equivalent under the laws of a particular state) are filed with the proper state authority, and all fees are paid. After the Articles of Organization are filed, the members of the LLC should adopt an Operating Agreement describing the operations, management and ownership structure of the LLC. This Agreement does not have to be filed with any state agency, but it is important that each member keep a signed copy of the Agreement for his or her records. Once formed, an LLC is subject to the ongoing requirements in its state of incorporation, such as filing annual reports and paying the applicable annual fees and/or franchise tax.

What separates an LLC from a corporation is the lack of formal hierarchy and meeting requirements.  Whereas a corporation has to elect directors, appoint officers, and hold annual meetings of shareholders and directors, no such requirements are imposed upon an LLC. 

Q: What is the organizational structure of an LLC?

An LLC can either be “member-managed” (managed by all of its members) or “manager-managed” (managed by one or more designated managers).  In a member-managed LLC, members may apportion duties among themselves as they see fit, and may use the corporate titles of president, vice president, secretary, and treasurer and assume duties normally associated with such title or titles.  In a manager-managed LLC, the management duties are delegated to a manager or a board of managers selected by the members.  A manager, whether an individual or an entity, can, but need not be, a member of the LLC. 

 Q: What liability protection does an LLC offer?

Although newer than corporations, LLCs can be structured to offer the same liability protection, but with fewer formalities.  Like shareholders of a corporation, LLC owners should be protected from personal liability for business debts and liabilities. While LLC members may lose their entire investment in the business, their other personal assets, such as homes, cars or personal bank accounts, should be safe from the creditors of the LLC.  However, in cases of claims arising out of a contract (particularly one that was personally guaranteed by a member) or damages resulting from the member's own negligence, fraud, illegal act or improper distribution, the limited liability protection may not be effective. Also, not all states provide similar creditor protection for an owner of a single-member LLC.

Q: How is an LLC taxed?

Federal tax regulations allow an LLC to elect its tax status for income tax purposes.  An LLC can be taxed as a disregarded entity, a sole proprietorship, or as a partnership.  It is also technically possible to tax an LLC as a corporation, although such election makes sense only in extraordinary circumstances. Unless it is a disregarded entity, an LLC will need to obtain a taxpayer identification number from the Internal Revenue Service.

Q:  Which state is the best for my LLC?

In most cases, the state to choose for your new LLC is the state in which you operate your business or the state in which your investment is located.  For example, if you own a rental property in Florida and wish to conduct rental activities through an LLC to protect your other assets from liability, you would form a Florida LLC.  Some entrepreneurs and investors pick other states, most commonly Delaware, since Delaware provides sophisticated courts and a business-friendly legal environment.

Sometimes, in addition to setting up your LLC in the state in which you operate your business, you will need to register your LLC as a foreign limited liability company in another state where your LLC owns property, invests or operates a related business.

Q: What is a registered agent?

A registered agent is an individual or a service company that acts as a representative for receiving notices or official government communications from the state department as well as service of process within the jurisdiction of the state where the company conducts its business. The registered agent can be any individual residing in the state where the company is registered and, in most cases, does not have to be a member or shareholder.

Q: How often should a corporation hold meetings and update its minutes

Meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation's ability to shield its officers, directors and shareholders from personal liability for the corporation's actions. Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes.  A limited liability company, in contrast, is not required to hold annual meetings, but having complete written records of manager/officer elections and major transactions is always a good idea.

Q: What does it mean to “pierce the corporate veil?”

“Piercing the corporate veil” refers to a situation where the court disregards the fictional “veil” that the law uses to separate a corporation from its owners. The specific criteria for “piercing the corporate veil” vary somewhat from state to state, but most commonly the courts bypass the usual corporate immunity in the following situations:

  • When an underlying business is indistinguishable from its owners who use it as merely their instrumentality or alter ego (e.g. divert corporate assets for their personal use), and the assets of the business are comingled with the personal assets of the owners
  • When a business is formed for fraudulent purposes (e.g., to defraud creditors or evade existing obligations)
  • When a corporation is undercapitalized at the time transactions with creditors are entered, or there is simply not enough capitalization to get the corporation running
  • When a business ignores the corporate formalities required by law such as record-keeping and annual meetings

In these situations courts may disregard the separate corporate existence and allow a plaintiff to reach the personal assets of the defendant owner(s) rather than limiting the plaintiff to recourse against the corporate assets only. 

Although the phrase “to pierce the veil” refers to corporations, similar criteria apply to actions against limited liability companies and their owners.  

Q: Is it a good idea to have a Buy-Sell Agreement?

LLCs and partnerships with more than one member or partner should seriously consider a buy-sell agreement. A buy-sell agreement is a contract which provides for the future sale of an owner’s business interest or for an owner’s purchase of a co-owner's interest in a business. Buy-sell agreements are also known as business continuation agreements and buyout agreements.  Corporations use a similar agreement called a shareholders’ agreement.  Without such an agreement in place, a shareholder's or member’s death, divorce, disability or termination of employment can create serious problems for the entity and its remaining owners.  A fully-funded buy-sell agreement can help minimize these problems by providing for an orderly succession.



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