Iowa Law Blog : Iowa Lawyer & Attorney : Sullivan & Ward Law Firm : Iowa Law Blog

It seems like business formation activity is starting to pick up as people are starting to not only thaw out from the winter but also thaw out from the "economic ice storm".  Part of the process of any business formation involves consideration not only of creating the company but also terminating the relationship.  Much like a premarital agreement predetermines how assets are split at divorce or at death, a "buy sell" agreement will determine how the business will continue or dissolve in the event of a death of an owner, disability of an owner, bankruptcy of an owner, the divorce of an owner or a dispute by the owners.  None of these issues are typically on the near horizon when the process is starting, so it is easy to forget about them.  However, most small businesses will end at some point.  Better to start the planning now before too much is invested and when relationships are strong.

In looking at the issues, here is a brief outline of some items to consider as the business owner formulates a plan.

• Triggering Events
  
  • Death
  • Disability (consider length of necessary disability)
  • Divorce by one owner (ex-wife digging through company financials?)
  • Bankruptcy by an owner (bankruptcy trustee involved in company?)
  • Desire of one party to get out of the company

• Valuation Issues
  • Annually have the owners determine the value of shares by unanimous agreement or by appraisal or by some formula using company financials.
  • Professional appraisal at time of triggering event
  • “Texas Shootout” – one party submits price that they would either be willing to buy OR sell. Other party has option to either buy OR sell for that price.
  • Can use combination of valuation issues with different triggering events.

• Funding Issues - Upon a triggering event, how will the departing member be paid for his or her shares.
  • Insurance (life insurance, disability insurance, business continuation insurance)
  • Installment payments
  • Cash reserves of Company

• Company redemption vs. Cross purchase
  • Determining whether the company will redeem the company shares or whether the other owners will be making the purchase (who buys the owner out - company or other owners?).
  • This decision affects the valuation of the company and a shareholder’s basis in the company.

This outline is simply a starting list to get the thought process moving.  The final provisions can either be placed in the formation documents, or a separate "buy sell" agreement. The drafting of such a document can be very complex and you should consult an experience attorney to assist with the drafting of such a document.  Implementing the "business pre-nup" now will hopefully help smooth out the process later.

• Email This
• Print
• Comments
• Trackbacks

We've previously posted on the subject of the danger of personal guarantees when entering into contracts through a business entity. Normally, the officer/agent of the company needs to sign such an agreement in his or her capacity in the company, and not in their individual capacity in order to avoid personal liability. A recent case out of the Iowa Court of Appeals clarifies that signing in your corporate capacity isn't enough on its own to limit your personal liability.

In this case, which was handled by our own Lou Hockenberg, the defendant had signed an application for credit and signed the application as "Pres."  Right above that signature line, however, was a provision that provided the applicant was also personally liable for the debt. The Iowa Court of Appeals affirmed the judgment by stating that the the provisions of the binding agreement should not be negated by simply signing such an agreement in one's corporate capacity.

Moral of the story: Read what you sign.

• Email This
• Print
• Comments
• Trackbacks

One of the reasons that individuals form business entities, such as corporations and limited liability companies, is to protect their own personal assets from the debts and liabilities of the business. The law does provide some protection, but in order to get that protection, the company owners need to follow certain requirements. Fail to follow those requirements opens the individual owners up to liability of the company through a process called "piercing the corporate veil".

The Iowa Court of Appeals recently affirmed a basic case permitting the piercing of the corporate veil. In this particular instance, the individual defendants claimed they were not sufficiently aware that the Plaintiff was pursuing the defendants individually (attempting to pierce the corporate veil) in the lawsuit, rather than suing just the corporation. In the court's ruling, the court found sufficient evidence to put the plaintiff's on notice before the trial that the Plaintiffs intended to pursue them individually.  The defendant's claim of "trial by ambush" was rejected.

This case serves as a reminder to all business owners that the liability protection that can be provided by an entity, such as a corporation or a limited liability company, is only valid if you follow the proper formalities. Failing to keep corporate minutes and records, separate corporate finances, routine government filings and separate books of the business entity can expose the individual owners of the company to the company's liability. Setting up the corporation is only the first step and that step alone does not necessarily provide the corporate liability protection.

• Email This
• Print
• Comments
• Trackbacks

If your business is majority-owned by a female, a person with a disability, or a minority, your business may qualify as a "Targeted Small Business" (TSB).  If the business meets the requirements of a TSB, you have the opportunity for certain preferential treatment in state-funded projects.  For example, certain projects may require a certain amount of work be completed by a TSB.  By qualifying as a TSB, you are placed on a central list where contractors and state agencies are able to locate you and seek your services as part of the project.  In addition, TSB's are given the opportunity to bid on certain projects 48 hours in advance.  TSB's also have the opportunity to seek financial assistance in the form of grants or low-interest rate loans.

The Iowa Department of Inspection and Appeals administers the TSB certification program and have the application materials posted on their website.  Also, the Iowa Department of Economic Development has additional general information on their site. 

If you have questions about forming your business or the TSB process in general, feel free to contact us.

• Email This
• Print
• Comments
• Trackbacks

Whether you are a seasoned business owner or a relative new-comer, the issue either has or will come up sooner or later.  A customer tenders payment of a sum less then the full amount due and owing for services rendered yet the check is marked "paid in full," "acceptance of this check is payment in full," or something similar. 

The question is, what is the effect of cashing the check on the customer's account?  Under the Uniform Commercial Code (UCC)  if there is bona fide dispute between the parties and the business owner accepts and cashes the check an accord and satisfaction has occurred and the checkwriter will have a defense if the business owner would happen to take legal action for the difference. 

So, under the UCC, if there is a bona fide dispute as to the amount owed by the consumer and the check is conspicuously marked "paid in full" or something similar then the business owner can do one of two things.  He or she can either reject the payment and send the check back to the consumer or he or she can cash the check, essentially accepting the consumer's settlement offer and wiping out the rest of the debt. 

• Email This
• Print
• Comments
• Trackbacks

 If you're an Iowa business that hires independent contractors - or at least calls those individuals independent contractors - beware.  A recent article in the Des Moines Register highlighted a recent report from the state indicated that companies are abusing the classification of independent contractor, as opposed to treating them as an employee, in order to save costs and taxes.  The state report recommended enhanced enforcement, including aggressive investigations and cooperation with the IRS.  For questions on whether your company should be treating your workers as employees or independent contractors, read our prior post on this very topic.

• Email This
• Print
• Comments
• Trackbacks

Greg Herman-Kiddens at the North Carolina Estate Planning Blog has a good reminder article about using a limited liability company to own your investment real estate.  A limited liability company, as the name implies, gives you the capability to limit your liability exposure if you have any investment properties.  Insurance is the first level of protection, but there can be exceptions and limitations to insurance coverage.  That's where a LLC can come into play for the extra layer of protection.  If there is a gap in insurance coverage, individually-owned property exposes the owner and the owner's assets to liability.  However, placing that property in an LLC and only the LLC's asset are exposed.  But what if you have several investment properties?

Iowa is currently one of a few (7) states that permit series LLC's.  Basically, a series LLC allows the owner to have multiple properties/business ventures under one company structure, but treated as separate entities for tax purposes and liability purposes.  In fact, Marc Ward believes that there may be an argument that a series LLC could provide even better protection than a separate LLC. 

• Email This
• Print
• Comments (2)
• Trackbacks

Many people understand that a corporation or limited liability company can provide its individual owners with protection from the debts of the company.  For example, if a company is unable to pay its vendors, those vendors are typically unable to go after the owners of the company for those debts.  Or if the company borrows money, the lender can only recover the debt from the company and not the owners/shareholders/members, generally.

However, if the owner of the company has provided a personal guarantee to that vendor or any other entity that has provided money or services to the company, the corporate liability protection is meaningless at that point.  Most guarantees don't require that the creditor look to the company first, but could look first to the individual providing the personal guarantee. 

If at all possible, an owner should avoid giving a personal guarantee when entering into any agreements.   Conversely, as a creditor, whenever dealing with a small business with limited operating history, you should demand a personal guarantee from the owner(s) of the company.

• Email This
• Print
• Comments
• Trackbacks

The best time to make decisions regarding how to exit a business venture is at the beginning, especially if the business is to have more than one owner.  Why?  Because, although this my seem a little cynical, it is in all likelihood precisely the time when the soon-to-be business partners will be most closely aligned and focused on a common goal.  It is at this time, when leaving the business is the furthest thing from the partners minds, that objectivity can be achieved and a fair buy-sell agreement can be created that allows a partner out, without placing an undue burden on the remaining partner(s) and business.  At a bare minimum a carefully crafted buy-sell agreement will cover, (1) How the value of an owners interest in a business will be determined; (2) What, if any, internal or external events will trigger a buy-out; and (3) Is the sale of a departing owners interest restricted in anyway.

For information on different types of buy-sell agreements and their tax implications see Structuring Corporate Buy-Sell Agreements by David Joy, Jo Koehn  

• Email This
• Print
• Comments
• Trackbacks (1)

My husband and I are in the early process of purchasing a business. After some searching, a couple hints from a friend and a newspaper article in the Des Moines Register we stumbled on the Targeted Small Business program offered through the Iowa Department of Inspection and Appeals and the Iowa Department of Economic Development. The TSB program is for Iowa businesses that are at least 51% owned and managed by minorities and/or women or persons with disabilities. One purpose of the program is to provide financial assistance in the form of low interest loans and/or grants to new or existing businesses.

The process (as I am currently discovering) does take a little work. First, you must become a certified TSB through the Iowa Department of Inspection and Appeals. The application requires information concerning you and the current and/or future business. Because our business is not yet established my husband and I will apply to be conditionally certified. Once we are up and running we can become fully certified.

Once certified (conditionally or fully), you are eligible to apply for the TSB Financial Assistance Program. The financial assistance application is a bit more involved than the certification application. A complete business plan, including projected financials is required. Those who have little or no experience in developing a business plan or projecting profits and losses can contact the Department of Economic Development and be assigned an assistant who will guide you through the process.

If you are a minority, woman or person with disability thinking about starting your own business or expanding a current business, you should consider the Targeted Small Business Program.

• Email This
• Print
• Comments (1)
• Trackbacks

In a national study entitled "Value of Third-Party Debt Collection to the U.S. Economy in 2007:  Survey and Analysis" , which was conducted by PricewaterhouseCoopers and commissioned by ACA International, it was determined that in 2007 the collection industry was able to return $40 billion in bad debt back to large and small businesses that had previously extended consumer credit.  That $40 billion return represented a greater than twenty (20) percent reduction in private-sector bad debt.  The study suggested that this return of $40 billion translated to an average savings of $354 per American household, as the reduction in bad debt helped companies keep their margins low and in turn sell there products at a lower price.  So there you have it...through the diligence and hard work of its employees the collection industry benefits us all.

• Email This
• Print
• Comments
• Trackbacks

Iowa is an at-will employment state. The term at-will presumes that employment is voluntary and indefinite for both employers and employees. Either party can terminate the relationship at any time. For employers, however, there are some exceptions to the at-will doctrine.

Obviously employers cannot violate state or federal laws when firing employees. Employers may also not terminate employees if a contract exists between the parties. Employment contracts may be the result of collective bargaining agreements or individual written contracts. 

Less obvious to some, is the fact that employment contracts may arise through the policies outlined in an employee handbook provided to all employees. Handbooks may provide employees with expectations regarding disciplinary and termination procedures. Deviations from the policies outlined in the manual may provide a basis for a wrongful termination action against the employer.

In order to prevent such an action, employers that provide handbooks to employees should follow steps to ensure that the handbook reinforces the at-will doctrine. 

• Email This
• Print
• Comments
• Trackbacks

I can't speak for all businesses, but from my perspective most businesses have a signed agreement before they provide services for either an individual or a business. However, invariably it is those transactions in which the agreement was never actually signed that cause the most problems for the business owner.  

The typical fact pattern goes something like this:   an individual wants some work done to his home, he approaches an electrical contractor for a bid,  the contractor gives the homeowner a bid, the homeowner says, "yeah, that is fine but I need the work done right away because of (insert any emergency situation here)."  

Contractor, says,  "great, it just so happens that I have some time available within your time frame, if you will just sign this agreement I will go ahead and order the material that I will need for the job."    

Homeowner, says "Yeah, I will sign it, I just can't do it today because (insert any half-baked excuse you can imagine). 

That should be definite red-flag to the contractor, or to any other business owner for that matter; however, due to a downturn in the construction industry  and perhaps being a little strapped for cash and against the contractors better judgment he reluctantly takes the homeowner at his word and begins the project. 

At the end of the day the contractor incurred the expense of the project and now the homeowner is unwilling to pay and the contractor is placed in the unenviable position of having to decide to cut his losses and move on or he can go after the homeowner for his damages, which will require a further outlay of cash and time.

The point of this post is this,  if you are going to provide a service and would like to give yourself the best opportunity to be paid for that service, then you must get the agreement in writing.  I know that this is not earth shattering information, but it is worth repeating as everyone knows that they need to put an agreement in writing, yet from time to time exceptions are made and the exception leads to a big headache. 

The bottom line is this:  If you want to increase you ability to get fully paid for every service you provide and therefore increase your bottom line then you must not perform any work before you receive a signed writing spelling out the extent of the agreement. 

If for some unknown reason you find yourself proceeding without an agreement, then my advice to you would be to begin rubbing your rabbit's foot or looking for that four leaf clover because it will likely take all of the luck in the world for you to get paid in full and on time.  If someone does not want to put it in writing then they certainly do not want to pay for it. 

• Email This
• Print
• Comments
• Trackbacks

In an ideal world, when a business provides a service, the person or entity benefiting from the service promptly pays the provider for that service (assuming of course, that the service was performed as the service recipient expected).  As anyone who has been in business for longer than a week can tell you, when it comes to customers paying for the services that they receive, the world is not perfect. 

Because not all customers pay as agreed, it is imperative that before performing any work the service provider must first get a service agreement signed by the service recipient.   I know that this seems obvious and I would guess that the majority of businesses do get the bulk of their agreements in writing, yet it is always the small exceptions that end up causing business owners the biggest problems. 

Now, I know that there is portion of small business owners reading this that are likely saying to themselves:  "we do business on a handshake and a person's word is just as good as any contract," and  I would agree that that is the case 95% of the time,  but it does not take too many disputes over payment to begin to negatively effect your bottom-line.  When a service has been provided yet the recipient unjustifiably refuses to pay for that service,  then the business owner has a choice to make:  either eat the costs of the service or enlist the services of an attorney.   It has been my experience that most business owners would rather shove a stick in their eye then have to choose between those two options, but whether you like it or not, this is the decision that the business owner has to make.  

As you may have guessed, I mainly talk to the latter, business owners that chose to contact an attorney, and without exception the first question I will ask my client is whether there is a contract.  The answer to that question is determinative of the likelihood of being able to recover this debt for the business owner.   

If the answer is "yes, we have a contract signed by the service recipient and I will send it to you immediately", then I feel pretty good about the client's likelihood of recovery.  Conversely, if the client answers, "no, but...", then the client's prognosis for recovery has suffered a two-fold set back, first, it will be more difficult to prove the existence of a oral agreement to the satisfaction of a court and therefore, more attorney fees and second, and I may be generalizing here, but it has been my experience that if someone is unwilling to sign a contract for a service then they are equally unwilling to voluntarily pay for that service.

Tomorrow I will continue with part 2.

• Email This
• Print
• Comments
• Trackbacks