A Spouse and the Non-Competition Agreement

The enforceability of a non-competition agreement on a non-signing spouse has been the source of much litigation over the years. The courts are divided as to whether or not a non-signing spouse can be held to the terms of the non-competition agreement. A recent Wisconsin ruling has brought this issue to the forefront of business owner’s minds as they try to sort through what can and cannot be enforced.

In Everett v. Paul Davis Restoration, Inc., 2012 U.S. Dist. LEXIS 133682 (E.D. Wis. Sept. 18, 2012) the Wisconsin court held that the non-signing wife had not directly benefited from her husband’s franchise agreement and therefore could not be bound. The court wrote, “In order to hold Ms. Everett to a contract she did not sign, PDRI must show that she benefitted directly from the contract, not the business that the contract made profitable.” This case is particularly egregious to many in the franchise industry due to the fact that the signing husband “sold” the business to his wife. He stopped being a franchisee, but his wife took the concept and began operating a competing business.

However, several other courts have held exactly the opposite. Tennessee, Indiana and Massachusetts all have cases that hold in favor of the franchisor or the business being harmed by the violation of the non-competition agreement by the non-signing spouse. (See: Servpro Indus., Inc. v. Pizzillo, 2001 Tenn. App. LEXIS 87 (Tenn. Ct. App. Feb. 14, 2001); McCart v. H & R Block, 470 N.E.2d 756, 761 (Ind. Ct. App. 1984); Sulmonetti v. Hayes (1964), 347 Mass. 390, 198 N.E.2d 297).

If you are a business owner, how can you know if your non-competition agreement will be upheld against a non-signing spouse? Ultimately, the courts finding a violation of the agreement against a non-signing spouse examine the issue on three levels.

First, did the spouse benefit from the agreement at the heart of the non-competition agreement? If a spouse worked in the business (franchise or otherwise) then there is a more likely argument that the spouse received an actual benefit from the agreement.

Second, is the non-signing spouse acting as the alter-ego of the signing spouse. Similar to a corporate veil argument, many courts will look at who is actually running the business and how much information from the prior business is being used to make the current business successful. One Illinois court put it this way, “there must be evidence that she aided or operated in concert with the covenantor to breach the covenant or that she was the alter ego of the covenantor.” Norlund v. Faust, 675 N.E.2d 1142, 1157 (Ind. Ct. App. 1997).

Third, how much confidential information did the non-signing spouse have access to? This is difficult to prove, but the greater the access to confidential information, the more likely the non-compete will be enforced.

The safest way to move forward if you are worried that a spouse might try and circumvent the purposes of the non-competition agreement, is to have every spouse sign an agreement. This presents problems in and of itself, but it does give the protection that many courts fail to provide to franchisors and other business owners.

Forgotten Essentials: Estate Planning for Business Owners

Business owners understand better than anyone that there are not enough hours in the day. With all the time, effort, and duties surrounding owning a business, a business owner can get overwhelmed with the number of items on their to-do list. Often a business owner will overlook one legal area that may ultimately be most important: estate planning.

 

Business owners work hard to build their businesses. This is usually done with the goal of providing for their family. However, without some estate planning, if the business owner passes away, all the hard work will not have been worth it because the family will not be protected.

 

The first estate planning tool for a business owner to consider is a buy sell agreement. This is an agreement that governs what happens if an owner dies or chooses to leave the business. This protects the interests of all owners. By agreeing beforehand how to handle these situations, the owners reduce the risk of lawsuits or other issues which could harm or ultimately ruin the business.

 

Next the business owner must consider estate planning documents that apply if the owner is incapacitated. This includes powers of attorney and advanced directives. A power of attorney is an authorization for someone to act on behalf of another regarding that person’s financial or legal needs. If an owner is incapacitated, then someone needs to have the power to make decisions and keep the business operating until the owner is able to do so himself or herself. Advanced directives are a set of written instructions for taking care of the health care decision of someone who is incapacitated. This helps ensure that the wishes of the owner regarding the medical they would receive if incapacitated are followed.

 

Finally, the business owner should make a will and consider using a trust, family limited partnership or LLC for certain property. This ensures that the business owner’s assets are divided between his or her heirs in the way that the business owner believes is best. The estate planning tools used by the business owner may have significant tax consequences.

 

In making any of these estate planning decisions, a business owner should consult an attorney to decide what would be best for his or her circumstances.

 

 

Trade Secrets In Your Business

When it comes to trade secret, most of the public would be able to point to the Coca-Cola or the KFC secret recipes. It is common for many businesses to hold secret and confidential information that is not known to the public. In order for this information to rise to the level of a trade secret a two-prong test must be met: the information must be kept secret through reasonable efforts, and an economic value must be derived from the secret information. If both these prongs are met then you are likely dealing with a trade secret.

Trade secrets are valuable intellectual property because they never expire (so long as the information is kept secret) and unlike a patent, no disclosure to the public is required. In the United States most states, and the District of Columbia, have adopted the Uniform Trade Secrets Act (the “Act”), or have adopted a version of the Act (Massachusetts, New York and Texas have not adopted the Act but have their own trade secrets acts).

What is a Trade Secret?

Most states adopting the Act define a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

     (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
     (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (See Utah Code Ann. § 13-24-2(4)).

Ultimately courts will look at six general criteria when determining if information constitutes a trade secret:

1.   Is the information claimed to be trade secret known outside of the business?

2.   Is the information readily known and available to most employees in the business?

3.   Is the information labeled as “confidential” or “trade secret” and are steps or measures taken to maintain the secrecy of the information? (also with this, courts will look at if employees are told certain information is protected trade secret).

4.   The amount of money spent by the business in developing the trade secret.

5.   The economic value derived from maintaining the information as secret.

6.   The difficulty or ease of discovering the secret.

A trade secret must be identified with reasonable particularity. In other words, claiming all documents created in a business are trade secret is not sufficient. Businesses should take steps to identify what they believe is trade secret and determine why it is trade secret. If it meets the definition and would pass the court’s scrutiny, then reasonable efforts should be immediately taken to protect the information as a trade secret.

Remedies

One of the tricks in trade secret protection and litigation is that the mere taking of information does not necessarily rise to the level of trade secret misappropriation. Another difficulty is if an employee or person is given access to the allegedly secret information, but is not told it is secret and given instructions on how to protect the secret, the information may have lost its trade secret status.

If you are able to show that the misappropriator used the secret information, and they had actual or constructive knowledge that the information was secret, then the courts can grant injunctive relief and can grant damages and attorney’s fees in some states.

Ultimately the burden rests on the business to prove trade secret protection. 

If you have a business that allows its employees to have access to confidential and trade secret information, you should develop a clear policy that prohibits the information from being stored on personal computers, taken from the office without prior authorization, and that requires any copies made to be immediately returned to the employer. These and other steps can minimize the exposure of a trade secret inadvertently (or purposefully) leaving the business and in turn lowering the amount of protection afforded to that information. 

Top 10 Mistakes Made by Small Businesses

To succeed in business you need to have a passion for what you do, failures cannot defeat you, and you must be  determined, optimistic and patient. Yet even with all these attributes some business owners still fail because they do not learn from the mistake of others. Below is a list of the top 10 mistakes made by business owners of small businesses and how to avoid them.

1)  Wrong Business Entity Choice. Which to choose? An LLC? A Corporation? An S-Corp? Choosing the right type of business entity can affect everything from management and ownership voting to taxes and personal liability.  Consult an experienced business attorney to determine which type of entity is best for your company.

2)  Under Capitalization. Most new businesses are underfunded because the business owners underestimate the cost of start-up and running the business and have unrealistic expectations of revenues from sales.  Most businesses take 1-2 years to turn a profit.  A business owner should expect to invest double what he originally anticipates. SBA loans are a great resource for start-ups and other small businesses.

3)  Lack of an Effective Business Plan.  Starting a business without a business plan is like starting a trip without a map. If you do not know where you are going, you will never get there. You can purchase inexpensive business planning software from most business supply stores. 

4)  Failure to Market Effectively.  Many small businesses waste money with ineffective marketing techniques. Be creative and utilize the internet and other forms of media. Make sure you have a good website that can be found. A marketing consultant may be beneficial as your business grows.     

5)  Lack of Necessary Agreements.  An operating agreement, bylaws, employment agreements and buy sell agreements are essential to your business. In addition, many business owners are victimized by having their brilliant ideas and business concepts stolen by employees, independent contractors and even business partners.  If you have employees, partners or consultants, these agreements are a must.

6)  Over-expansion. Do not confuse success with rapid expansion.  Focus on slow and steady growth.  Grow regionally first, build your brand identity and then expand out.

7)  Owners Lack Basic Accounting Skills.  Educate yourself on how to balance your books.  Well kept accounting is essential to any business. There are many self-help resources available and many competent accounts that can help. 

8)   Under Insured.  Businesses often fail because they lack the proper insurance. Insuring a business is less costly than most people think.  Obtaining proper insurance needs to be a priority.

9)  Businesses Try to Do It All by Themselves.  Most businesses do not take advantage of outsourcing.  Being a jack of all trades and master of none can keep your business from getting off the ground.  Know what you do well and seek help in the areas where you need it.

10) Wrong Choice of Professional Help.  Many small businesses think attorneys are an unnecessary expense.  However, many law firms offer special rates for small and start-up businesses.  In addition, an experienced business attorney can help a business owner avoid many of the problems that it has seen other businesses make. Investing in legal advice upfront starts a business off on the right foot and protects against costly legal trouble in the future.

FTC Business Opportunity Rule

There are three requirements to qualify as a business opportunity under the new FTC Business Opportunity Rule. (1) There must be a solicitation to enter into a new business (if it is in the same line of business as a purchaser, it is not a business opportunity); (2) the purchaser must make a required payment; and (3) the seller must represent it will provide any of the following: (a) location for purchaser’s display, kiosk, machine, equipment, etc.; (b) that the seller will buy back any goods or services acquired or purchased from the seller; or (c) the outlet, accounts or customers for the purchaser.

The Federal Trade Commission’s new Business Opportunity Rule went into effect on March 1, 2012. Among the changes that were made was the removal of the dollar amount requirement to qualify as a business opportunity, the expansion to include at-home business programs, and the reduction of required disclosures to be made from 20 to 5.

The new rule does not preempt the various state business opportunity laws; therefore, if you are offering in one of the 25 states with a specific business opportunity law, you must also comply with those state-specific disclosure requirements.

The Required Disclosures

There are now five required disclosures under the Business Opportunity Rule.

1.      Information on the Seller: this includes the name of the business, the name of the seller of the business opportunity, the business address and telephone number.

2.      Earnings Claim: this is a check the box disclosure. If you check ‘yes’ that there is an earnings claim, additional disclosures are required.

3.      Litigation History: similar to the FTC Franchise Disclosure Item 3 requirements, a business opportunity must disclose its litigation history for the past 10 years for itself, affiliates, parents and subsidiaries.

4.      Cancellation and Refund Policy: this is a check the box disclosure. If you provide for cancellation or refund of the business opportunity, there are additional required disclosures.

5.      List of Purchasers: you must provide a list of all purchasers of your business opportunity for the prior 3 years, or just the 10 purchasers residing closest to your prospective buyer.

Under the Rule, every seller of a business opportunity must retain several documents for at least 3 years after the disclosure is made to a prospective buyer. These are:

·         The disclosure receipt page;

·         Every version of the disclosure document;

·         All signed contracts with the buyer;

·         All verbal or written cancellation or refund requests by the buyer;

·         All earnings claim substantiation records.

Prohibitions

The new Business Opportunity Rule contains a long list of prohibited practices in making disclosures. Among these are the prohibition against making any representations (verbal or written) which contradict the disclosure document, providing extraneous information outside of the disclosure document; making false or unsubstantiated earnings claims; and requiring the buyer disclaim or waive reliance on any of the disclosures or representations.

The new Rule is comprehensive and you should become familiar with the requirements both on the federal and state levels.

IRS and Independent Contractors

The Internal Revenue Service (IRS) has announced it is undergoing an extensive initiative to identify businesses that are incorrectly classifying employees as independent contractors. For those businesses that choose to reclassify their independent contractors as employees the IRS is charging a small penalty payment to cover past payroll taxes. For those businesses who choose to continue with the independent contractor status, but in reality have employees, the IRS could audit the business and assess a large penalty fee.

 

If you are paying independent contractors that may be considered to be employees, you need to know the difference so that you can avoid a potential audit by the IRS. However, the distinction between an independent contractor and an employee is fuzzy. To help you with this determination, below is a brief summary of some points the IRS will look at. However, as this is a difficult area of the law and one that is undergoing scrutiny, speaking with legal counsel will help you better determine if you are in an employee relationship or not.

The independent contractor (“IC”) must:

            1.  Have an independent business. A business license is helpful.

            2.  Be free from the control and direction of your business i.e. is independent.

            3.  Work outside of your place of business.  

 

How To Clean Up Your Business

Spruce up your work by chucking these eight productivity pitfalls. No Swiffer required.

By Gwen Moran   |   Entrepreneur Magazine - May 2011

Spring cleaning isn't just about clearing cabinet clutter and that space behind the toilet. It's also a good time to get rid of the tasks, people and situations that drain time, money and energy from your business--and you. Here are eight productivity pitfalls to cart to the curb.
1. Scattered day plans.
Failure to plan their days is the No. 1 reason business owners waste time, energy and money, says New York City-based time-management expert Julie Morgenstern, author of Never Check E-mail in the Morning: And Other Unexpected Strategies for Making Your Work Life Work. By not planning their days, they tend to become reactive and distracted, diminishing their productivity and the revenue they can generate. Although a daily to-do list is a start, Morgenstern recommends planning a three-day arc. By looking at a three-day period--and the meetings, deadlines and other demands on your time--you can make better decisions when surprises or emergencies arise. A three-day plan also gives you a clearer idea of when you can postpone activities without overbooking your future. Morgenstern advises spending at least a few minutes each day updating your three-day plan.
2. DIY syndrome.
Morgenstern estimates that 75 to 80 percent of the small and midsize businesses she consults with waste employee salaries, including their own, by not focusing each person's time on the optimal task for that person. Kristin Marquet, founder of communications firm Marquet Media in New York City, found this to be her experience. When she mapped out how she was spending her time, she found she was devoting about 10 hours each week to administrative tasks. At her hourly rate of $100, she estimates she lost approximately $10,000 by trying to do everything herself. After that realization, Marquet hired a bookkeeper, writer and website designer, who cost one-forth of the revenue she would have lost if she had handled the tasks herself. "Although you may feel as if you don't have time to train anyone, spending six hours training someone on a two-hour-per-week task saves you nearly 100 hours per year," Morgenstern says.
3. Disorganized direction.
To make the delegation process more effective and less time-consuming, Bakersfield, Calif.-based business growth consultant Russell S. Allred, co-author of Best Practices of High Performance Entrepreneurs, recommends creating task-related systems and processes. Write a list of steps for each task you perform regularly in your workplace and the best practices for completing those steps. Many people learn through observation, so ask your employees to shadow you to see how you perform the tasks, he says. For maximum efficiency, create process sheets for as many activities as possible, and try to train more than one employee in each. If the employee who usually handles the task calls in sick or leaves, someone else can fill in--or, at least, you'll have an easier time training a replacement.
4. Untamed distractions.
A survey by home and office product company Brother International Corp. in April 2010 found that an estimated 38 hours per employee are lost looking for misplaced items in the office each year. And let's not think about how many hours are spent watching cute animal videos online. Many people have no idea how to manage the overwhelming amount of communication that comes their way on paper and electronically, says productivity consultant Kimberly Medlock, founder of Productive Matters in Olive Branch, Miss. To cut down on distractions and time-sucks, clean up your act, she says. Develop hard-copy and electronic filing systems to help locate important papers and information more quickly. Limit e-mail check-ins to certain times of the day so that you're not constantly interrupted by the "ping" of a new message, and unsubscribe from any recurring e-mail you don't need. If social media is a problem, look into tools such as Anti-Social or RescueTime, which put up a wall between your computer and distracting sites for blocks of time.
5. Leaky expenditures.
By checking his monthly expenses closely, Eli Mechlovitz, co-founder of GlassTileStore.com, an online glass tile retailer, found a variety of unwanted subscriptions, warranty programs, fee-based website analytics programs, utility bill errors and other incorrect or unwanted charges. Eliminating these budgetary leaks has saved his Brooklyn, N.Y., company approximately $4,000 per month. "It's so easy to add a subscription here and there or a small program that doesn't seem like it costs much. But over time, these things add up," he says. Every quarter, be sure to review where the money is going, he advises, and discontinue or fight unnecessary or incorrect charges.
6. Collecting (all) customers.
Maria Marsala, a business coach in Poulsbo, Wash., finds that many of her clients waste time and energy serving the wrong customers. She encourages them to define their "ideal" customer--the person or entity that will pay a fair price for their product or service, value their business, return and buy from them again and generate referrals. The greatest marketing investment and effort should be devoted to finding and courting those ideals, she says. Marsala initially marketed her coaching services to all small-business owners. She decided to define her niche in the business-to-business world serving established business owners who didn't balk at her fees. Then she created an opportunity to sell to a different audience by developing a series of CDs for startup or more cash-strapped business owners.
7. Energy-sucking employees.
When Mechlovitz has trouble with unproductive or negative employees, he tries to move them into positions that better suit their skills. In one case, a warehouse worker who wasn't good at picking orders turned out to be an exceptional packaging team member. But if an employee isn't a good fit or is miserable, he says, you have to end the relationship--quickly. A negative employee "sucks all of your creativity out of you and leaves you drained," says consultant Allred. "And why? You're the boss. Why are you messing with this person?" Of course, it's more complicated when the individual is a family member or close friend. Have a frank discussion to find out why the person is unhappy and what can be done to change the situation. At the very least, you need to stop the person from spreading the negativity, he says.
8. Persistent procrastination.
If you constantly avoid tasks or put off work until the last minute, you need to figure out why, Morgenstern says. Burnout could be from being overworked, but she often finds that procrastination is rooted in uncertainty or intimidation. If a project seems too big, procrastination can be a coping mechanism. She suggests breaking the task down into manageable steps you can do in shorter chunks of time: "You don't get eight hours to focus on something anymore. You'll get a 30-minute or one-hour window. Learning to chunk your work so that you can look at the time you have and figure out what part of the project you can finish in that time will help you find a place to start to get it done."

Should I Incorporate? Choosing the Form of Entity for Your Business

Choosing the form of entity by which to conduct business is one of the first, and often most important, questions faced by someone starting a business. Several factors determine which form of business entity is most appropriate for a particular business, including protection of the owners of the business from debts, obligations and liabilities of the business, and achieving favorable tax treatment. This article will help you understand the basic differences in business entities and the advantages and disadvantages of the several options from which to choose. In making your ultimate choice, you should discuss these and other factors with your legal and tax advisors.

In Utah, you have several options when choosing the form of entity for your business. The entities discussed in this article are: A) Sole Proprietorships, B) General Partnerships, C) Limited Partnerships, D) Corporations, E) S-Corporations and F) Limited Liability Companies. Not discussed are more specialized entities such as professional corporations, non-profit corporations, limited liability partnerships and business trusts.

A. SOLE PROPRIETORSHIPS: A sole proprietorship is a single individual who owns and operates a business typically using his or her own assets. The sole proprietorship is the simplest form of business entity, with little distinction between the owner and the business.

1. Advantages. A sole proprietorship is simple and requires no formalities or state filings. A sole proprietorship avoids the double taxation disadvantage of corporations. The owner may deduct business expenses and losses from his or her personal income.

2. Disadvantages. An owner is personally liable for all obligations of the business. Creditors of the business can seek recovery from the owner’s personal assets, as well as business assets. Also, all profit may be subject to self-employment tax, even if part of the profit is attributable to a return of capital.

B. GENERAL PARTNERSHIPS: A general partnership is an association of two or more persons formed for the purpose of conducting a business for profit. A partnership may be created by a formal agreement or merely by the parties’ actions.

1. Advantages. The biggest advantage of a partnership is its relatively favorable tax treatment. There is no separate tax at the partnership level and individual partners get the benefit of business expenses and deductions to offset income from other sources. Partners may also specially allocate income and losses, thus allowing them to shift tax benefits and burdens. A partnership can be formed and operated with minimal formality and no filings or agreements are necessary. Partnerships are relatively easy to manage.

2. Disadvantages. Each partner is jointly and severally liable for all obligations of the partnership. On dissolution of a partnership, a creditor of the partnership can sue any of the partners personally for unpaid partnership debts. In the absence of any agreement to the contrary, the death or withdrawal of one partner dissolves the partnership. Management of a partnership can be difficult if many partners are involved or if partners do not get along well. Interests in partnerships are not freely transferable. There is no centralized management in a partnership, and any partner can bid the partnership and the other partners in any matter of partnership business. Raising capital is difficult in the partnership form since the partnership cannot obtain funds through broad ownership distribution. It takes at least two persons to form a partnership.

C. LIMITED PARTNERSHIPS: A limited partnership is a partnership comprised of one or more general partners who operate and manage the business, and one or more limited partners who do not actively operate or manage the business. Articles of limited partnership must be filed with the state. A partnership agreement would normally describe the rights and duties of the partners.

1. Advantages. A limited partnership enjoys the same basic tax advantages as a general partnership, subject to the passive income and loss rules, and except that limited partnerships may be more limited in how they can specially allocate income and losses. The limited partnership affords investors limited liability, much like a corporation, so long as they do manage the business.

2. Disadvantages. The general partners of a limited partnership are liable for all partnership obligations. As with a general partnership, the death or withdrawal of a general partner will dissolve a limited partnership, absent a partnership agreement provision to the contrary. Although more freely transferable than general partnership interests, limited partnership interests are still not as freely transferable as corporate interests.

D. CORPORATIONS: A regular corporation, or “C Corporation” to the IRS, is the most common form of entity for doing business. A corporation is a legal entity, formed pursuant to state law that exists separately from its owners. Articles of incorporation must be filed with the state. The management structure and financial and voting rights of the shareholders are typically embodied by bylaws or shareholder agreements.

1. Advantages. It is difficult to “pierce the corporate veil” to hold shareholders, officers or directors personally liable for corporate obligations. Protection from liability is the principal reason a corporation is preferred as a form of business entity. Also, with a long history of use in this country, corporate law is well developed and fairly standard throughout the states, and therefore legal issues are more predictable and more readily settled. Ownership interests (stock) in a corporation are freely transferable.


2. Disadvantages. A C corporation’s income is subject to double taxation: first on the net income when it is earned by the business, and again on the dividends when paid to the shareholders out of the corporation’s remaining income. Also, a corporation requires more formalities and is somewhat more complex than a sole proprietorship, a general partnership or a limited liability company. Annual reports must be filed and corporate formalities, such as keeping proper corporate minutes, should be followed to maintain the separate identity of the corporation. Also, corporations are less flexible from a tax standpoint than other entities.


E. S-CORPORATIONS: An S-corporation is a corporation that, by complying with IRS requirements, avoids the double taxation of C corporation, and is taxed more like a partnership than like a C corporation. Articles of incorporation must be filed with the state and a form must be filed with the IRS indicating the corporation’s election to be treated as an S-corporation.

1. Advantages. Shareholders enjoy the same protection from liability for the obligations of the business as shareholders of a regular corporation. The primary advantage of an S-corporation over a C corporation is the avoidance of double taxation. Another advantage is that, to the extent there are losses in the corporation, those losses may be passed through to shareholders to be offset against shareholders’ income from other sources, subject to certain limitations.

2. Disadvantages. An S-corporation is limited by the number (100 or less) and type of shareholders it can have. It is also limited to one class of stock. These limitations may make it more difficult for an S-corporation to raise capital. Also, unlike a partnership, income and losses cannot be specially allocated to shareholders.

F. LIMITED LIABILITY COMPANIES: A limited liability company (LLC) is a relatively new form of business entity in Utah combining features of partnerships and corporations. An LLC has the tax advantages and operational flexibility of general partnerships, together with the limited liability protection of a corporation. The LLC is a separate legal entity which is organized by one or more persons or entities. Articles of organization must be filed with the state. The rights of the owners or “members” with respect to management and financial matters may be set forth in an operating agreement.

1. Advantages. Members of an LLC are not personally liable for the obligations of the company. LLCs enjoy favorably flow-through tax treatment without double taxation. LLCs can specially allocate income and losses among members. There is no limit on the number or type of members, and an operating agreement can, in effect, create different classes of ownership interests. There are relatively few formal requirements to create and operate an LLC. Finally, LLCs also offer certain other tax advantages of an S- corporation.


2. Disadvantages. One disadvantage of an LLC is that it is still the newest form of business entity and as such, is still somewhat untested in court cases. There still remains some uncertainty with respect to issues such as piercing the veil of an LLC, the treatment of the LLC and its members in bankruptcy, and the like. However, each year adds more experience so these concerns are becoming less disadvantageous. Another area of disadvantage of the LLC is that there still is no strong uniformity of state laws governing LLCs. An LLC entity conducting multi-state business may find it difficult to comply with the laws in all the various states. Also, to the extent an LLC engages in business in a state which has not passed LLC legislation, there is a risk that a court might not recognize the limited liability of members, and might hold the members personally liable in that state for the obligations of the business. However, most every state now recognizes LLCs as a type of business entity.

Each business is different, but determining which factors are most important to your business will help you better determine which type of entity will work best for you.

Importance of a Buy-Sell Agreement

For businesses with more than one owner, the importance of a buy-sell agreement cannot be overstated. Events such as the death, incapacity, retirement or even divorce of one of the owners (“Triggering Events”) can sink a business if the owners have not entered into a buy-sell agreement. Unfortunately, most small business owners do not have this vital agreement in place.

Many concerns arise when there is an unforeseen change in ownership. For the remaining owners, the most common concerns are 1) being forced to work with the departing owner’s successors, who may have potentially conflicting ideas; and 2) finding a source of capital to fund a significant buyout. And for the departing owner, the primary concerns are 1) ensuring his or her family is compensated fairly for their share of the business; and 2) providing funding for the family to pay potential estate taxes. A properly drafted buy-sell agreement can address each of these concerns.

Among other things, a buy-sell agreement can accomplish the following:

• Upon the occurrence of one of the above mentioned Triggering Events, owners are guaranteed their interest in the business will be purchased. A buy-sell agreement can also provide for optional buy-outs when a member wants to retire, wants to sell their ownership interest to a third party, declares bankruptcy, or has a court order affecting his or her ownership interest in the company.

• Provide that the departing or departed owner’s interest must be sold to the company, to the remaining owners, or a combination of the two;

• Provide a mechanism whereby the purchase price may be determined by agreement amongst the owners or by market conditions;

• Provide a funding source, primarily through insurance policies, so that the company can maintain its cash flow and the departing member’s family can be compensated fairly; and

• Establish a valuation of a deceased owner’s interest in the business for estate tax purposes.

Executing a carefully planned buy sell agreement can assure business owners that their ownership interest in their business is secure, regardless of any unforeseen circumstances. In many cases, this can be accomplished without putting excessive strain on the business’s cash flow, ensuring that the business and its remaining owners continue to succeed as well.