Corporate Governance

The VIDEO is a webinar on the topic of corporate governance–how to properly run your business AFTER the paperwork is completed. Liability protection does not come from just doing the documents! You must run the company in compliance with those documents and the law. Good corporate governance is what REALLY protection your.

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Basic Contracting

Contracts are both very simple and extremely complex. Sometimes, that’s just the law!

They are simple in that they can be formed very easily and sometimes without even knowing you’ve formed one. If a neighbor boy comes to your door and says he’ll mow your lawn for $15 and you say, “Great, do it!” You’ve formed a contract and you’ll have to pay him when he’s done. Likewise, if the same boy starts mowing your lawn and you see him and let him continue, you have also formed a contract that he can enforce against you for some kind of payment.

So what constitutes a valid contract? Very simply a contract is formed when there is an offer, an acceptance and consideration. The example above illustrates two kinds of offers: one is explicit (I will mow your lawn for $15), the other is implicit (the action of starting to mow the lawn with you watching). Both are valid offers. The same is true with acceptances. You can say, “Yes” to an offer or by your actions imply that you have accepted it. So you see, it can happen quite easily! Having an offer and an acceptance creates an “agreement.” Whether that agreement is legally binding depends on “consideration.”

Consideration is a legal term which basically means that “something of value” is promised or exchanged in the agreement. The boy commits to mowing your lawn and your promise back to pay him. You’ve exchanged promises that are of value and that “legalizes” the agreement. Usually consideration is not an issue in business contracts (but on rare occasions can be!). The question of consideration is more prevelent when gifts are involved. Lets say your neighbor sees that you have broken your leg and tells her daughter to mow your lawn. The young girl mows your lawn as you watch from your porch with a blanket over your broken leg. Is that a gift? Can the young girl expect to be paid? How is that different than the example where you watch the boy mowing your lawn?

If all three elements (offer, acceptance and consideration) are there, you have a legally binding contract. It’s that simple. But once you start getting into the details about the terms, payments, exceptions, terminations and many other “what if’s,”  contracts can become very complex.

 

ORAL CONTRACTS:

You’ve probably heard that oral contracts are not valid. Right? Wrong! Many oral agreements are legally binding.

In the course of business you will undoubtably encounter numerous situations where you are forming contracts with others. And you might do this without putting anything in writing.

CONTACT TIP: ALWAYS PUT YOUR AGREEMENTS IN WRITING!

Because a contract is formed any time there is an offer, an acceptance and consideration, if you offer to hire someone and they agree, then you may have formed a binding employment contract, even if it’s not in writing. If it’s not in writing, then there will be ambiguity about the terms and conditions. How much am I supposed to pay the boy for mowing my lawn? Confusion about the parties responsibilities always leads to problems and even litigation. Was the boy supposed to trim the edges, too? And litigation (or a negotiated settlement) is ALWAYS more expensive than writing a contract in the first place.

Did we make our point? While some kinds of contracts must be in writing (like contracts to transfer real property), others don’t. So make sure you know what you are doing.

Breglio Law Office provides most contracts that small business owners need at economical pricing. We can also draft contracts to suit your needs and review contracts given to you by other parties. Don’t get stuck out on a limb; make sure you understand your contracts.

TERMINATION: Most contracts either stipulate the way of terminating the arrangement or naturally expire at some occurance (payment and delivery) or time (end of a lease agreement). It can get difficult to get out of contract if there is no termination clause in the agreement itself.

BREACHING CONTRACTS: This is a big topic which we can’t completely cover but whenever you fail to perform a term of the contract you are in breach. Not paying rent when due is a breach of a lease agreement. You are then liable for damages that result from your breach unless you have a valid defense for breaching the contract.

DEFENSES: Sometimes, a breach of a contract won’t result in having to pay damages. In other words, you have a “defense” for your actions. While we won’t go into detail here, some common defenses for breach of contract are: unconscionability (the contract is really unfair or one-sided); mistake (usually only when the mistake is one of both parties); fruad (one side intentionally deceives the other); undue influence (when one side has unfair control over the other); and duress (under some threat of harm).

CONTRACTUAL DAMAGES: In contract law, courts only permit compensatory damages. This generally means that the non-breaching party can be made whole, as if you didn’t breach the contract in the first place. The damage award “compensates” you for whatever you “actually” lost because of the breach. Sometimes, these can be hard to determine. In these cases, some contracts stipulate “liquidated damages.” Liquidated damages are a fixed amount that is written into the contract in the event of a breach.

Instead of having to prove what the value of your losses is, you simply receive the fixed liquidated damage amount. Earnest money on a real estate purchase agreement is an example of liquidated damages. What contract law does NOT provide is punitive damages. Punitive damages are those that are inflicted upon the offending party as “punishment” for their actions. These kinds of damages occur in tort (personal injury) and similar cases. However, in some situations permitted by law, you can receive what is known as “treble damages” in a breach of contract case. In these situations, once the damages amount is determined (the amount to make you whole), it is multiplied by three. This is a form of punitive damages but must be authorized by law.

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY CONTRACT.

Signing Documents

How you sign on behalf of any business entity, be it an LLC, an Inc, or a Trust, is extremely important for your overall corporate liability protection and validity of the document you’re signing. If you don’t sign correctly, that document can be challenged and even voided. This is particularly true in real estate. Signing a purchase contract incorrectly can give the other party the right to cancel the contract! So, here is how you should sign on behalf of different entities.

  • There are two important point about signing your name: Your Title and The Entity. Keep this in mind as you read further.

Signatures for LLCs:

Sometimes you sign as a “member” and sometimes, if your LLC is managed by managers, as a “manager.” For most of our clients, we create manager-managed LLCs (see, LLC Members and LLC Managers for more info about those roles), so you will need to know when you’re signing as a member and when as a manager.

Sign as a “member” when acting as a Member of an LLC and for most “internal documents.” Internal documents are Minutes for Meetings of the Members, the Operating Agreement or amendments and changes to your company. The MEMBERS OF AN LLC ALWAYS DO THESE THINGS! So, sign like this to sign when signing an internal document:

  • BY: Donald Duck, Member

Se how we listed Donald’s “title” after his signature!

Internal documents should already have the name of the company on them, so you don’t need to state the entity you are signing on behalf of. This is true on any document:

  • NOTE: If the entity for which you are signing is listed above or below your signature, you do not need to print or sign it again. You also do not have 
  • NOTE: If the document comes pre-printed with your name and title, then all you have to do is sign your name. There is no need to sign your title. 

Remember, if your LLC is member-managed, you will always sign as a member. If your LLC is manager-managed (most!), then you will sign as a manager on almost all other documents because the authority to run the day-to-day operations is vested in the manager.

Always sign as a manager when signing most “external documents.” These would be ALL contracts with third parties, lease agreements, etc. These are part of daily operations that a manager signed. Here are some examples for both member-managed and manager-managed LLCs:

If your LLC is Member-Managed, this should be printed above or below the signature line:

  • BY: Donald Duck, Member
  • FOR: Goofy Tunes, LLC

If your LLC is Manager-Managed, this should be printed above or below the signature line:

  • BY: Tweety Bird, Manager
  • FOR: Goofy Tunes, LLC

Signatures for INCs:

All the same rules apply to signing corporations as for LLCs, except for the titles. There are no members or managers (usually) with an Inc. Instead there are typically board members called Directions, officers called President, Vice President, Secretay and so on and the owners called Shareholders. Your name, title and the entity for which you are signing should be printed above or below the signature line. here’s an example:

  • BY: Tweety Bird, President
  • FOR: Goofy Tunes, Inc.

Signatures for Trusts:

Again, the same rules apply to Trusts. For a trust, there are three possible titles. You will either be signing as a Grantor (or, Truster), Trustee or Beneficiary. Grantors and Beneficiary are like the members and usually only sign internal documents. The Trustee is like a manager on an LLC, they do all the day-to-day operations, they will sign most external documents. Here’s an example of a Trustee signature block:

  • BY: Donald Duck, Trustee
  • FOR: The Goofy Tunes Trust dated January 1, 2018

Note how we wrote the date of the trust as part of the trust name.

Signing can become even more complicated when an entity (instead of an individual) is representing another entity. For example, sometimes a business entity will be the trustee of a trust. In this case, there are three lines associated with your signature.

  • BY: Tweety Bird, Manager
  • FOR: Goofy Tunes, LLC
  • FOR: The Laugh A Lot Trust dated February 1, 2018.

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Corporate Succession

The VIDEO explains the need to plan for the future even with your LLC. Corporate succession is planning for what might happen to the members and managers in the future, whether that be death, incapacity, or possibly just wanting out of the company. There are numerous ways to plan for these eventualities as you will learn in this webinar.

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LLCs and Money

Keeping proper books for your company is paramount to not only a successful business but also for legal protection. Whether you are being audited by the IRS or being sues, well-kept accounts is one of the most important aspects of running your business. As most of Breglio Law Office’s clients have LLCs, the discussion below is tailored to them. However, the general points are applicable to all types of businesses.

TRANSFERRING MONEY: The first thing you should remember when putting money in or taking money out of a business is WHO is the owner. The second thing to remember is to JUMP through the right hoops. And the final thing is to keep a detailed RECORD of the transaction.

Putting Money In. When you, as an owner, want to put money in a business, it’s typically called a contribution. This is a way of funding, or making an investment, in your company to pay for start up costs, purchasing equipment or property, maintenance and etc. You, or any third party (like a non-owner or a bank), can also make a loan to the company if you draft the right loan documents. They method you choose, a contribution or loan, will depend on how you want to fund the company, where/who the money is coming from and possibly tax considerations. If you want borrow the money, please consult an attorney first to make sure you have the proper documents. But if you just want to make a contribution, you can do that yourself so that’s what we will focus on here.

The contribution is the standard way of putting money into a business. You can do so at any time and for any legitimate business reason. Usually, you don’t need to have an official meeting to make this decision (unless your operating agreement stipulates). You can make a decision, put a note of it in your company records and transfer the money to the business bank account. But here, you need to pay attention. Remember our three points above. First, an “owner” must make the contribution. This isn’t always as easy as it sounds. The owners are the persons or entities named as owners on company documents. Many people “own” a company by way of “another” entity. This is the case if you have a holding company or a trust that owns the company you want to put money into. If you have a holding company, then the holding company has to make the contribution. If you need to fund your holding company first, then you must contribute to the holding company, then it contributes to the final company. This is what we mean when we say you must “jump” through the right hoops! If you skip the “hoop” and put your personal money directly into a company that is owned by another entity, you’ve comingled funds and could lose your protection!

So, as long as you know who the actual owners are, jump through the right hoops and keep a record, you’ll be fine. If you have multiple layers for your business, please ask us to create a diagram to help you remember. We’re glad to do this for you.

Taking Money Out. There are two main way of taking money out of a company as an owner: Salary or Draw. A salary is just that, a wage you pay yourself. This can be done as an employee where you deduct taxes or as a contractor where you don’t. For LLCs you don’t have to pay someone according to their percentage ownership. One person can own 10% but receive a wage when the 90% owner doesn’t. This can also be used as a way to adjust allocating money among the owners rather than by sharing ratios. There are tax implications so please discuss with us or your accountant. A draw is when the owners simply take money out as a profit for being an owner of the company.

When you pay one of the owners (or anyone for that matter) a salary, make sure you have the appropriate employment or contractor agreements and then you can pay them accordingly.

When taking money out as a draw, remember the same three pieces of advice we stated above–the same rules apply! Only OWNERS can take a draw, so money must go from the company account to the owner’s account. If you have an intermediary entity, the money must go through that entity! And, as always, keep a record!

NOTE: Electronic transfers are acceptable as long as you jump through all the right hoops. But don’t let you bank statement be the only record. Keep a note of your contribution or draw in your company books!

BOOKKEEPING: This is simple. DO IT! It’s not that difficult. But if you really hate it, then you can hire professional bookkeepers rather inexpensively to keep your books for you. But either way, do it.

QUARTERLY TAXES: Even if you take out some money as salary with withholdings, you should still do quarterly taxes as a small business owner, even if it’s zero. You can file the forms yourself and find the forms HERE. See, Taxation, for more information about taxes.

RAISING INVESTMENT MONEY: If you are seeking “outside” money to fund your business, you may have to comply with SEC and state regulations. Please contact us if this is the case or even if you think it might be the case!

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY.

LLC Members

This is a short VIDEO describing who the MEMBERS are of a Limited Liability Company. It covers single-member and multi-member LLCs, husbands & wives, and non-related partners and why it’s important to know the difference and how they are taxed.

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Creating LLCs

This short VIDEO covers the basics of setting up the different kinds of LLCs. You’ll learn the important considerations in choosing which type of LLC you’ll need, as well as the basic form of LLCs: members, managers, registered agents, etc. This is a great video if you are unfamiliar with limited liability companies.

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