Violation of Bank Secrecy Act leads to $200,000 fine for Gold Buyer.

In December 2015, the Financial Crimes Enforcement Network (FinCen) fined a precious metal dealer for violating the Bank Secrecy Act (BSA) anti money laundering (AML) requirements, $200,000, in addition to forcing them to hire an auditor and provide comprehensive financials to FinCen. The gold buyer failed to secure the necessary customer information when buying and selling precious metals. And to think, the fine and penalties could have all been easily avoided.

The Bank Secrecy Act makes “dealers” of “covered goods” create and enforce an Anti-Money Laundering program. “Covered goods” are jewels, precious metals, precious stones, and finished goods (including jewelry. A “dealer” is a person, or entity that has purchased AND sold $50,000 of covered goods. Most businesses that buy and sell gold, fall under this definition.

If the business entity is a dealer of covered goods under the BSA, they must have an anti-money laundering program. The Bank Secrecy Act, Anti-Money Laundering Examination Manual mandates that the program have: “a system of internal controls to ensure ongoing compliance, independent testing of BSA/AML compliance, designate an individual or individuals responsible for managing BSA compliance (BSA compliance officer), and training for appropriate personnel.” The program is intended to identify large cash transactions of potential money launders. Pinellas, Hillsborough, and Paso counties are High Drug Trafficking Areas, so the need to launder money is great. Next time you have a large dollar transaction, think about your AML program.

Next Blog: The necessary elements of an AML Program.

 

The Walk Law Firm can help you become compliant with the BSA/AML statutes. Contact Frank Lago if you have questions or concerns about your BSA/AML compliance.

Understanding Limited Liability Company (LLC) Taxation

Once you’ve decided to form a limited liability company (LLC), your next decision is most likely going to be “how am I going to be taxed?” An LLC is not a tax entity. Instead, the IRS considers the LLC “disregarded” and applies tax laws that apply to sole proprietorships, corporations, and partnerships to the LLC. But, to avoid an esoteric discussion of tax law, I hope I can give you enough information in this article to help you in determining which tax entity is best for you.

If your LLC has one owner, it may elect to be a C corporation or S corporation, otherwise it will be a Disregarded Entity.  “Disregarded Entity” means the IRS ignores there is a legal entity between you and the income, losses, assets, etc. for tax purposes. A single owner disregarded entity will be treated as a sole proprietorship. If your LLC has multiple owners, it may elect to be a C corporation or S corporation, otherwise it will be a Disregarded Entity. A multi-owner disregarded entity will be taxed as a partnership.

To be or not to be… Disregarded

          Sole Proprietorships

The single member LLC, when disregarded, is analogous to a sole proprietorship. That is to say, you are your business and your business is you. Per the IRS, as a consequence of not making an election you will report your income and deductions, from your LLC, on a Schedule C, on your Form 1040. This is the simplest form of taxation and provides for single-level taxation. “Single” or “Double” taxation, as you’ll read later, refers to how many times the federal government gets to tax your “income.” With a sole proprietorship the only income tax that applies would be your individual income tax. But, the drawback of the sole proprietorships is that you have to pay Self-Employment Tax on all the income you make from the business. So keeping that in mind, you are going to pay income and self-employment tax on the profit you’ve made.

How much is self-employment tax? Generally it’s 15.3% on the first $117,000. Anything above $117,000 is subject to a 2.9% Medicare tax. There is an Additional Medicare Tax 0.9% tax for income over a threshold amount. The threshold amounts vary by filing status, but if you’re married filing jointly it is $250,000.

So in addition to your self-employment tax of 15.3%, you’re going to pay personal income tax. Assuming a 20% effective personal income tax rate, that’s a whopping 35.3%. Keep in mind that personal tax rates range from 0% to 39.6%, and possibly higher with the investment tax. As my good friend George says, the IRS is not my business partner, and luckily for him and for you there is a tax planning opportunity here.

C and S Corporations

The IRS allows for single members LLCs to elect, according to the check the box rules, to be taxed as a corporation. When you elect to be taxed as a corporation you are electing to be taxed under subchapter C of the internal revenue code, hence the nomenclature “C Corporation.” C corporations pay income tax on their income, though at preferential graduate tax rates. That means the overall tax brackets are lower than individual brackets. The profits stay in the company until there is a distribution. Typically, you’re going to distribute money from the corporation in the form of a dividend. Dividends are taxed at different rates than your income is taxed, typically much lower, at “capital gain” rates of 15-20%. But, you’re paying tax twice. Which is why this generally isn’t used as a tax structure, but the C Corporation’s brother, the S corporation is much more useful in reducing federal taxes.

Subchapter S corporations give the benefit single taxation at the individual level, while relieving some of the self-employment tax. Thus, instead of paying a corporate income tax, the S corporation pays nothing. In exchange, all of the income is deemed to have been distributed to the shareholders, unlike a C corporation, which only taxes its distributions when actually distributed. This is known as “phantom income.” The S corporation shareholders, whether or not they received the distributions, will pay taxes on that amount. One major benefit is that the shareholders do not pay self-employment tax on the income that is considered a distribution. This has the potential to greatly lower your tax bill. But, you have to approach this structure with caution. An S corp. does have to employ someone to do work. So if you’re doing all the work, you do have to pay yourself a “reasonable salary,” and you and the corporation will share the self-employment tax on your amount of compensation and file employment tax returns, Forms 941/944 and Form 940. Individuals get in trouble when they pay themselves too little and all the income as distribution. As in the case of Mr. Watson who found himself in court after paying himself $24,000 in wages and taking $203,651 in distribution.  While paying yourself a less than reasonable salary will lower your tax bill, it places you at risk. Nonetheless, any amount of money on which you do not have to pay employment tax, will reduce your taxes. Here’s an oversimplified example:

You’ve taxable income is $150,000 as an individual and you’re married. As a sole-proprietorship, you pay $39,528 in federal income tax plus $17,901 self-employment tax for a whopping $57,435. You keep $92,565.

If you were operating as an S corporation, let’s assume you pay yourself as a wage $75,000 and receive $75,000 in distributions. First, you’d pay self-employment tax on your wages of $75,000, which is $11,475. Reducing your distribution by that amount leaves you with $69,262 (75k for tax purposes) in compensation in your pocket and $69,262 available for distribution. Your income tax will be $35,928 plus 36% over 140,000. The product being $1,534 plus $35,928, totaling $37,426 in taxes. From $150,000 less self-employment taxes paid, take home $101,099 versus $92,565 as a sole proprietorship. A savings of $8,534 in taxes.

One caveat to keep in mind is that an S corporation generally cannot deduct health insurance and term life premiums while a C corporation can deduct up to $50,000 per employee. If you really wanted to make these amounts deductible, you could actually setup two separate entities and get the best of both worlds, primarily using a management contact.

S corporations also cannot make distributions unevenly, this is known as the “single class of stock” rule and have restrictions on ownership, unlike C corporations.

Partnerships

LLCs, with two or more members, who do not elect to be taxed as a corporation, will be taxed as a partnership. Partnerships, like S corporations, are a pass through tax entity. Meaning, the income is passed directly from the partnership to its Partners. Partnerships do not pay separate income taxes like C corporations. Partners of a partnership are not employees and should not receive a salary. There is a rich, legal history in understanding the employment status of partners in partnerships. Here is a detailed history. Otherwise, understand that a partner will pay self-employment tax on all of his income that flows from the partnership. A partnership can make “guaranteed payments,” which look like a salary to the partner. But, the partner will still need to pay self-employment tax on this income. There are several reasons to avoid the self-employment tax, but there are several reasons why you might choose to be taxed as a partnership.

Partnerships offer the most flexibility with a pass-through tax entity. A partnership will undoubtedly need a partnership agreement, or in the case of an LLC, an operating agreement. Both are contracts that govern the relationship between the entity and its members (LLC) or partners. With a partnership you can get creative in how cash will be distributed, who will be allocated income and losses, foreign or domestic, how debts are repaid, etc. For this reason, when there are multiple members who are not even partners, they often choose to be taxed as a partnership. But, to the extent that your entity doesn’t need a complicated structure of distributions or allocations, it is usually advisable not to be taxed as a partnership.

 A Note on Liability

As a general rule, LLC members are not liable for the debts of the LLC. But, in Florida, in accordance with the Olmstead case, the single member or a single member LLC, may become liable for the debts of the LLC, after the creditor secures a charging order. This is not the case for a multi-member LLC. If you are considering a single member LLC, you may consider a Florida Corporation with an S Corporation election, because you will get the limited liability you are searching for and the benefits of pass through taxation.

Need more help?
If you have more questions or need help establishing your entity please call our offices at (813) 999-0199, www.WalkLawFirm.com.

Frank Lago is an attorney at the Walk Law Firm, PA. HE is a graduate of Stetson University School of Law and holds an LLM in Taxation from Georegetown University.

When the DOL Proposes Changes to the Overtime Rules, Employers Must Take Note

WHEN THE DOL PROPOSES CHANGES TO THE OVERTIME RULES, EMPLOYERS MUST TAKE NOTE.  In 2014, 8,086 lawsuits were filed in federal courts for violations of pay practices under the Fair Labor Standards Act (“FLSA”).  Of these, 1,837 lawsuits, or approximately of 23% of all FLSA lawsuits in the United States, were filed in Florida.  In March 2011, a Florida-based company paid more than $754,000 in overtime back wages following a finding by U.S. Department of Labor (“DOL”) that its temporary supervisors were misclassified as exempt employeesSimply, improper time and pay practices are costly mistakes.

Earlier this month, the DOL proposed changes to the rules governing the white-collar exemptions (executive, professional, administrative, highly compensated, and computer related employees) to the overtime requirements under the FLSA.  The DOL estimates that the proposed rule changes will extend overtime protections to an additional 5 million employees.  Any business with at least 1 employee, should:

  • Understand the existing rules and proposed changes
  • Assess the impact of how the proposed changes will affect employee classification, timekeeping and pay practices, and payroll
  • Consider submitting comments to the DOL concerning how the proposed changes will affect your business. You may do so at: regulations.gov  on or before September 4, 2015.

THE EXISTING RULES AND THE PROPOSED CHANGES

Currently, under the FLSA, all employees covered by the Act, unless they specifically exempted, must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rates of pay. Employees who fall within the white collar exemptions are not entitled to receive overtime pay — regardless of the number of hours they work within a workweek.  To fall within one of these exemptions, employees must (1) be paid on a salary basis, (2) be paid at least a fixed minimum salary per week of at least $455.00 per week ($23,660.00), and (3) meet certain requirements as to their primary job duties that are specific to each exemption.

For more detailed discussions on the FLSA, 
please see the videos on the FLSA previously made by our new Of Counsel 
Attorney Kerry Raleigh at:
·         Introduction to FLSA
·         Employee Overtime:  Common Mistakes & Perceptions
·         Employee Overtime: Employers Need to Get It Right

THE PROPOSED CHANGES:

The DOL proposes three key changes to:

  • Set the standard salary requirement for the white collar exemptions from $455.00 per week to the 40th percentile of weekly earnings of full-time salaried workers, which is currently $921.00* per week ($47,892.00* annually);
  • Increase the total annual compensation requirement for the highly compensated employee exemption to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, which is currently $122,148.00* annually; and
  • Establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.

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What is Venue? Why Does Venue Matter? The Essentials of Venue Selection Clauses

Construction contracts, design services contracts, and for that matter most contracts typically contain a provision governing the location (venue) for litigation/arbitration/mediation of disputes arising out of or related to the contract. The terms relating to venue is often hidden in governing law provisions under the “Miscellaneous” terms.

What is Venue? 

Venue is the geographical place and court where the lawsuit will be handled.  Without a contract clause that establishes venue, the venue law allows an action to be brought in various locations: 1) the place of the defendant’s residence, or principal place of business; 2) the place where the cause of action accrued; or 3) where the property in litigation is located [§47.01 et seq., Fla. Stat. is the general venue law]. The party bringing the action gets to initially select the location because they are the party filing the action. However, if they file the action in an improper venue, a change of venue may be sought.  Avoid waiving the right to enforce the venue selection provision in your contract.

Why Could Venue Matter?

If you do business with a subcontractor or supplier to whom you make payments, the suit may be filed at the place where payment is due, thus a subcontractor with its principal office in Atlanta, could file suit against you in Atlanta. This would be inconvenient to say the least, and could be quite costly. There are various reasons to assign the venue for litigation within your contract; included among them are expenses and costs for litigation.

A venue far from your or your attorneys would increase the time and expense related to the action. The party with whom you contract, or the property being improved may be quite far from your office or your attorney’s office. Also, preferences for venue may be based upon factors related to the court system, judges or the jury pool. Some courts are back-logged and litigation may take a longer time in that jurisdiction.

Venue Selection Clauses are Not Bullet-Proof

Although a well drafted mandatory venue selection provision is ordinarily enforced, in limited circumstances the courts may not enforce the venue provisions contained in your contact. The rule in Florida recognizes a free and voluntary choice of forum that may be enforced. A Florida court is not required to enforce a venue selection clause if compelling reasons exist to not do so. One such compelling reason would be to avoid multiplicity of lawsuits. Another reason could be a conflicting clause in a related agreement under consideration in the same lawsuit, or a statute requiring venue in a particular location such as a lien transfer bond per F.S. §713.24. A venue selection clause may not be enforced when the clause or underlying contract was induced by fraud.

Bear in mind, that other states have their own rules and may not enforce the venue selection clause.

Conclusion.

In your contracts, if you have the ability to negotiate, it is good to have a favorable venue provision protecting your interests.  When presented with someone else’s form of contract, pay careful attention to this simple provisoin, as it may hae profound effects on your rights.  If you have any questions, please contact us.

May all your projects be successful.

 

Florida Annual Report for LLC’s, Corporations and Partnerships due by May 1

Many of you have corporations and limited liability companies domiciled in Florida and other states. As you know, to keep those companies active, it is necessary in most states to file some variety of an annual report or franchise report. You will likely receive emails or mail to your principal address listed in the state records, but often it looks like junk mail that can be ignored, or is sometimes set aside and just simply forgotten. There are also companies that send very official looking letters offering to update your records for a fee. These updates are advertisements and may or may not include filing your state annual report. You can tell if they are advertisements by looking carefully at the fine print.

For those of you doing business in Florida, the Florida Department of State, Division of Corporations requires each organized business doing business in the state, whether a corporation, limited liability company, or partnership, whether domiciled or just licensed to do business in the state, to file an annual report between January 1st and May 1st of each year in order to maintain an active status in Florida. The annual report is used to confirm or update the Florida Department of State, Division of Corporation’s records, including information related to the managers, members, officers and directors, the registered agent or registered office, the principal address or mailing address, and the federal employer identification number. For other states, similar reports and fees will also be required. The timing varies and it is important to check the dates so that you do not miss important deadlines.

If the annual report is timely filed between January 1st and May 1st, the reporting fee is as follows: $150 for a profit corporation; $61.25 for a not for profit corporation; $138.75 for a limited liability company; and $500 for a limited partnership or limited liability limited partnership. A $400 late fee will be assessed for any report filed after May 1st for profit corporations, limited liability companies, limited partnerships and limited liability limited partnerships. Failure to file an annual report by the third (3rd) Friday of September will result in the administrative dissolution or revocation of the business entity on the records of the Florida Department of State.

In addition, the Florida LLC Act has been revised and restated in whole. Effective January 1, 2014, any new limited liability company formed will need to be formed pursuant to the new Act. Any existing entity will need to amend its operating agreement and articles to reflect the new Act no later than December 31, 2015. With that in mind, we are recommending to clients that the amendments be done now and that the Annual Report filing be made reflecting the new Act requirements, specifically, the elimination of the concept of Managing Member. We also recommend filing a Statement of authority recognizing those in your company authorized to act on behalf of the LLC. This may avoid the need to file additional amendments during the year.

We are ready and able to assist you in amending your operating agreements and answering questions regarding the new Act. We are also available to assist you in properly filing your annual report in Florida and assisting you with other states.

The annual for Florida report can be submitted electronically on Sunbiz.org. Annual reports filed using credit card, debit card or Sunbiz E-file Accounts through the E-Filing tab on Sunbiz.org are processed immediately and should be posted on Sunbiz.org within twenty-four (24) hours. Check and money order payments must be submitted by mail and are processed within twenty-one (21) days, so e-filing is the preferred method of filing. For Delaware companies, the annual reported can also be submitted by following this LINK.

The e-filing process is very simple and can be completed in minutes. An Overview and Step-by-step instructions for completing the annual report can be found HERE.

If you have any questions or concerns, please let us know and we would be happy to assist you with completing the annual report.

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Five Questions to Ask When Hiring a Lawyer for Your Business

As a General Counsel, I spent a significant amount of time researching and interviewing attorneys and other professionals to represent my company’s interest in litigation and business negotiations. The selection of counsel is a significant investment for a business and is more than a cost. As a matter of fact, selecting the wrong counsel or failing to engage counsel may be the most costly decision a business may ever make.

Business lawyers are not a dime a dozen and all lawyers are not created equally. Experience in business and with specific transactions helps clients set strategy and successfully navigate the most difficult transactions from financing arrangements to large acquisitions of property and negotiations with key employees and contractors. Often, business lawyers are sounding boards to business owners contemplating  confidential business transactions.

With the advent of the internet, it is easy to find lawyers and there are plenty of bidding sites like Elance.com and Guru.com where you can get a flat fee or a cheap quote. As tempting as it is to hire the cheapest lawyer, I strongly suggest that business owners take the time to find the best lawyer for the situation, avoiding what might be a costly mistake. So here are 5* questions I always ask when I engage counsel for business matters:

1. Who at the law firm will handle my work?

  • If it is a team, who will be on the team?
  • Who will be the lead and my contact?
  • How was the team selected?

2. What is [each working attorney’s ] experience in handling matters like the one that I have described?

  • Has this attorney ever handled this type of matter before?
  • Has the lead attorney ever been the lead in a matter like this before?

3. What is the attorney’s and firm’s workload and ability to handle the work in my time-frame?

  • Any time off or vacations planned?
  • Is the lead attorney accessible?
  • How will communications work? Email or Telephone? In Person Meetings?
  • How often should I expect to receive a status report?

4. What does the attorney anticipate the process to be?

  • What outcomes might I expect or should I consider?
  • What are the issues are concerning?
  • Make sure you understand the terms the lawyer uses and do not be afraid to stop a lawyer and ask what something means!

5. Billing and Fees:

  • How does the firm/attorney charge?
  • Can the firm provide a detailed invoice no less often than monthly for my review?
  • How can the firm and I positively or negatively impact fees?

As you can see, fees and costs are last, but not forgotten. It is important to understand that an inexperienced attorney can consume excessive time researching a matter just like a disorganized client can consume excessive amounts of attorney time just to get information gathered — both situations can significantly increase legal cost.

I have found that for some matters, an hour of a very experienced, albeit pricey, lawyer’s time is often more valuable than ten hours of the time of an attorney who is a newcomer to the topic. When I expect the transaction or litigation to have big rewards or expose my company to significant risk, I choose experience over hourly rate every time.

*By way of disclaimer, I usually ask more than 5 questions, I always do plenty of research,  and I also ask business friends and other professionals I trust for referrals to appropriate business lawyers. My five questions are in addition to references and research.

 

 

When is the Best Time to Call Your Business Lawyer — Before You Make a Costly Mistake

In this day and age of lean budgets and concerns about return on investment, I find that many clients tend to shy away from calling legal counsel until the issue at hand has escalated to an uncontrollable level. I actually understand that, because, like my clients, I am a small business owner, with a limited budget and limited resources. I find myself watching every dollar and carefully assessing the return on my investment before clicking on my PayPal or writing a check for clicks and views, plaques and, most recently, the expense of being listed as a Top-Rate Lawyer in Tampa.  I even assess the return on legal research systems and online databases.

So how does spending to be listed as a Top-Rated Lawyer in Tampa compare with spending money on lawyers you may ask? It all comes down to return on investment. I am asked to sponsor groups, which I often do. I am asked to speak and mentor, which I gladly do, primarily for free. Lexis, WestLaw, bar associations and mediator organizations have pay-to-use and pay-to-list publications and systems.  The return on investment is fairly easy to see since my business comes to me by referrals and word of mouth, a little from the internet and mostly from reputation. I also spend some money with marketing firms, accountants, insurance, training and education and other counseling-like resources to gain guidance and to make sure that I am staying on top of  my game. The mostly costly decision I make each day about my business is the one which costs me a client or causes me to have liability for failure to deliver top quality legal services.

So how does that equate to the best time to call a business lawyer? It is before you make a decision that could cost you a sale or client or would create an undue liability for failure to deliver, breach of contract or violations of laws. For my clients, that means thinking about protecting intellectual property, providing standard or customized contracts that customers and suppliers are willing to sign, but still protect business interests, having important agreements drafted or reviewed and compliance with the laws, especially as it relates to employees and the environment so that the business is not shut down. At the Walk Law Firm, we help clients develop strategies for financing and introduce them to concepts and ideas that may be less familiar but ultimately are needed to successfully run a business. Our goal is to provide the legal counsel clients need while making sure they receive a good return on investment.

In the last few weeks, we have helped clients mediate and settle a wrongful discharge claim, resolve preference actions, navigate loan modifications  and handle a variety of after-the-fact situations that might have been avoided if we had a short conversation before a decision was made. This month, I have also found financing for a client who did thought Bankruptcy was the only option because we talked early and developed a strategic plan. After the fact, the legal fees plus the cost of settlement are often far greater than what one might anticipate in an early resolution or for a short conversation to set strategy.

For me, the best time to to call a business lawyer, is when you need to make tough decisions or when you are considering future growth and divestment strategies.  Consider a small retainer relationship with your lawyers and ask to have it cover periodic phone calls and questions. We do it for our clients so that clients can call whenever they need a little bit of legal counsel or advice before making a decision which could lead to a costly mistake.

To learn more, please visit our website at WWW. WalkLawFirm.com

 

Business Identity Theft: What is it? And how do I protect my business assets?

What is it?

Business identity theft is the fraudulent and unauthorized use of an entity’s identity.  It’s not just an information security breach. Rather, like consumer identity theft, business identity thieves impersonate the business or hijack the business’s identity in order to steal money or property, often by establishing lines of credit with banks and/or retailers. A corporate identity is an asset that needs protection!

Who is targeted?

The potential for more lucrative results has spawned an evolution of identity theft.  Rather than targeting a consumer, identity thieves are targeting unsuspecting businesses because businesses tend to have larger bank account balances, higher credit limits, and larger purchases made on behalf of a corporate entity generally don’t set off bells and whistles.  Small businesses are particularly vulnerable because they don’t have resources to constantly monitor accounts and records, and because they don’t have the structured security that large businesses have.

What is the result?

Generally, the damage that results from business identity theft is more severe than the results from consumer identity theft.  In consumer identity theft, the consequences tend to reach only the consumer targeted.  In business identity theft, the consequences affect the targeted business, but also the business’s employees and subcontractors, the business’s creditors, and the economy at large.

You might struggle obtaining a line of credit, which could impact operations. The cost of repairing or cleaning up the aftermath of a business identity theft can be costly with legal and accounting fees.

The terrible irony is that few businesses and business owners think about identity theft prevention as asset protection. But it actually is the most important asset protection plan a business can have.

How to prevent it?

At the Walk Law Firm, as Tampa small business attorneys, we advise our clients to take the same actions that public companies take:

  1. Protect your business information records – treat your EIN and Tax ID numbers like they are your social security number and limit access to all corporate records
  2. Monitor your corporate filings – many secretaries of state, including Florida, have email alert systems that notify you of any and all activity – enrolling in this service can provide early fraud detection
  3. Segregate Duties – accountants and auditors will tell you that no employee should be given access to all banking information as well as typical bank logins and passwords; segregate the duties relating to account access from those handling payroll and accounts payable
  4. Monitor your accounts and bills – frequent monitoring and reporting of suspicious transactions will limit your liability significantly
  5. Monitor the business’s credit report – routinely obtain a business credit report and review it for suspicious activity
  6. Train your employees to protect business information and to be aware of these crimes
  7. Be wary of phishing scams
  8. Install and utilize a firewall on your business computer and network
  9. Contact your creditors to ask about unusual activity

 

Business Loans and Personal Guaranties

The most common complaint I hear from business clients is that they cannot find financing. Needless to say, most are elated when they receive loan approval. As a practical business matter, that approval comes with a pile of paper including:

  1. A resolution of the governing board for the business approving the loan and authorizing signatories – Keep a copy of this in your minute or record book, it is an official corporate record;
  2. A Loan Agreement;
  3. A Promissory Note;
  4. A Security Agreement; and
  5. Personal Guaranties of the Owners or Shareholders.

I can write a blog and book on each of these documents, but today I want to focus on Personal Guaranties.

Let’s start by agreeing that Personal Guaranties are a necessary  part of the lending arrangement for small business today. As a business lawyer, I recognize that banks will not make loans without assurances and a way to ensure repayment. Clients generally assume that the Personal Guaranty is required and is limited to the amount of their investment in the business. Personal Guaranties ARE NOT limited automatically. Usually, they are joint and several.

A joint and several guaranty means that each party signing the guaranty is personally responsible for the whole amount due. So if the loan is for $1,000,000 and there are three owners, each owner can be sued for the full amount of $1,000,000, but the lender can only collect the amount once from any one or combination of the the three.

In order to be liable only for an owner’s proportionate share, the guaranty must be a limited guaranty, limiting recourse to a maximum amount or percentage.

To change the loan documents, an owner will need a productive relationship with the businesses bank and banker, and will need to specifically ask for limited recourse. Your business attorney can review the documents and help you negotiate a better deal. We recommend that small businesses find experienced business lawyers with the skills and knowledge to assist you with loan documents.

Please contact us if you have any questions.—-Rochelle Friedman Walk, Esq.

The Benefits of Year-End Corporate Record Keeping

With the end of 2012 fast approaching, it is an excellent time to review your record-keeping practices and make sure your records are updated.  As a small-business owner, you invest a significant amount of time and money to ensure your company’s progress and success, and taking the time now to update your records can help in a number of ways.

How to go about updating records?

Regardless of the form of entity, the manner or process for updating your records is fairly simple and straightforward.  First, it is important to review the entity’s governance documents – yes, the documentation you received and may not have read or reviewed since the time you organized your company – because this documentation will advise you as to how to proceed with corporate changes and updates.  So, if you have a corporation, this will be your articles of incorporation and your bylaws; if you have an LLC, this will be your articles of organization and your operating pr management agreement; and if you have a partnership, this will be your partnership agreement. You may have a shareholders’ or close corporation agreement, too.

Even if you have already implemented transactions, changes and updates in and to the business, it is important to ratify those actions by the manner or process defined in the governance documents.  Why?  In order to record the changes or updates and to evidence the fact that such modifications were authorized by the entity.   Failure to ratify and substantiate a change to the business can create issues like stalled or failed business transactions in the future or undue questions from the IRS or State when they audit. It is much easier to make these recordings contemporaneously with the actions so that later partners and outsiders do not question that authority. Also  as some of our clients will attest, the cost of recreating the history of the company years down the road so that you can sell or move or enter into a significant transaction is costly and time consuming.

Subject to the language in your governance documentation, many updates and changes can be authorized in writing.  Other updates may require a meeting – a board meeting, or a meeting between managers, members, or partners – and a vote.  In the event that you call a meeting, here are some things to keep in mind:

  • Be Prepared and Provide Sufficient Notice to Appropriate Parties
  • Make Sure You Have a Quorum or the Necessary Number of Voting Parties to Take Action and Know What Vote is Necessary to Approve the Actions Desired
  • Have an Agenda and Include Potential Ratification of Past Actions, and Other Potential Actions
  • Record Actions Taken at the Meeting and to whom Future Duties were Assigned
  • Get Feedback to Improve Meeting Process and Record-Keeping
  • Contact Outside Counsel in advance of the meeting if you have any questions and consider having counsel present if you anticipate a contentious issue or needing assistance documenting or explaining the situation

~ Rochelle Friedman Walk, Esq. and Matthew A. Welker, Esq., Walk Law Firm, PA