The Business Law Blog

Too scared to move

2010-04-10T13:22:00.002-04:00

It's a cliche to say that America is a litigious country, but once again someone has come into my office with a problem that, quite frankly, would like not have occurred in any other country.

The details of the problem aren't relevant, and shouldn't be disclosed in any event. But here, in such a generic way as to not disclose details but to make my larger point, are the circumstances:

1. A person suffers a catastrophic injury on or near my client's property.
2. Client in no way directly caused it (i.e., act of commission), and Client appears not to have indirectly caused it (i.e., act of omission), though the plaintiff's lawyer is digging to manufacture evidence by which a jury could at least conceive that perhaps something could have been done better by Client that could have prevented the injury from occurring.
3. Client is now in fear of losing his life savings at almost-retirement age, and likely will have to suffer the stress of civil litigation for the next 2-3 years.

It is a clear sign of the distaste our society has for Plaintiff's lawyers when our state's largest association of them changes its name from "The North Carolina Academy of Trial Lawyers" to the more innocuous sounding "North Carolina Advocates for Justice." We all want justice, right? Perhaps they should take one more step and call themselves the "Justice League," or maybe even just "The Superfriends."

While we can (and do) blame all lawyers for our litigious society, I'd point out that there have to be clients to keep lawyers in business, and furthermore, there wouldn't be this business if there weren't a system set up that appears to perpetuate trial litigation. Put together, we have a legal system in which litigious injury claims carry with them a chance of reward that far outweighs the small risk involved in filing them. Until that system is changed, it will only be logical that (1) more claims will be filed than should be; (2) cottage industries are set up simply to propagate the voluminous filing of claims; and (3) people will have to guide their actions not by what is right or best but instead what minimizes their risk and the costs associated with litigation.

Here are, however, a few suggestions for ways in which we could reduce the fear litigation in our society.

1. Make the Plaintiff state his full alleged claims, and then have to pay the Defendant's legal costs if he fails to recover at least half of the amount claimed for damages. This idea attacks two issues at once. First, in North Carolina, negligence plaintiffs are not required to state the amount of their damages, being required only to allege whether the damages are in excess of $10,000 or not. Obviously, this allows Plaintiffs to file claims without providing the Defendants any real idea of the damages they're claiming, or even having to know themselves what their alleged damages are. Furthermore, old ideas of a "loser pays" system neglect the fact that while many Plaintiffs go to trial and actually do receive damages, the damages are often for nowhere near what they really wanted--so though they received something, they in fact were in reality losers. This idea would (1) require the Plaintiff to place his cards on the table by naming concrete damages, and (2)require him to cover the Defendant's costs if what a court awarded him was far less than what he asked. More importantly, however, this requirement would reduce the overstated claims brought by Plaintiffs and their attorneys, by which they allege damages in excess of $10,000, and come to trial with wild figures in the six and seven figures. If you as a Plaintiff are required to specify your damages, and then further can be penalized if your recovery is less than half of what you specified, you, logically, will be more careful not to overstate your perceived damages.

2. Change negligence and liability law from the "common law" system to a "civil law" system. In general, you could find in me no greater standard-bearer for Anglo-Saxon history, culture and its legal system, and I proudly state that the United Kingdom, in the last few hundred years, is one of the main progenitors of democracy and modernization all over the world, and the world is better for English influence. That said, we could perhaps learn a little bit from "civil law" countries. Most English-speaking countries use common law in their courts to determine civil (non-criminal) liability. This system of law is developed, over time, by judges and courts of appeals, based upon case law, as established case by case. While this system is lauded for its flexibility, it has the nasty side effect--in liability cases--to be so gray, so murky, so difficult to pin down, that average citizens simply cannot know whether many of their actions could make them liable or not. The general rule as stated by the courts is whether an action is "reasonable" as determined by a "reasonable person" standard (i.e., would a reasonable person have taken this action or not?). The problem with this standard is it has no set interpretation, except for those made by lawyers to convince juries and judges. And it is fairly easy for attorneys and juries to play Monday morning quarterback, and to determine that, if looking back on an action, there was a better way to do it, then ipso facto the person by failing to do it that better way must have been negligent. There is no easy way for a person to determine whether his actions may bring him liability, other than to read years worth of court cases to determine where liability has been found in the past--and even in this case, that's not foolproof because the common law is constantly evolving, so that what's a rule this year may not be quite the same rule in the next.

By contrast, in a civil law country, these civil rules are determined statutorily, by legislators. While this can, of course, create its own set of inscrutable rules (see, e.g., the IRS code), there is at least a set of rules, written down on paper, that cannot be changed simply because judges or lawyers believe it is time to modify the laws.

In a civil law country, the rules would state very clearly, in black and white, what actions could make you civilly liable. Anything not included in those rules would then be activities that would not bring liability. Wouldn't that be nice?

Furthermore, the statutes could prescribe a set formula for damages in those instances of liability, so that a Defendant accused of negligence by a Plaintiff would very easily understand, by law, what his potential liability would be, instead of it being left in the hands of 12 strangers with no real restraints on your pocketbook.

3. Do not allow a Plaintiff to receive the benefit of punitive damages. In our common law system, there are two basic types of damages that a Plaintiff can receive: compensatory and punitive. Compensatory damages, in theory, compensate the Plaintiff for the loss he has incurred--if someone's negligence totalled your $10,000 car, then your compensatory damages would be $10,000. Punitive damages, however, are meant as a punishment for certain egregious wrongdoing of a Defendant. Perhaps, in certain cases, a Defendant's actions are so egregiously wrong that he should be punished. But if the goal of punitive damages is to punish, why should the Plaintiff then be given those damages? All this does is give a Plaintiff a greater financial incentive to misstate wrongdoing in order to increase his potential payday. Instead, any punitive damages awarded against a Defendant should be paid into the court system, to cover the court costs and minimize taxpayer expenditures. The punitives could only, perhaps, be awarded by a jury so that there is no incentive for judicial officials to award punitives in order to increase their budget coffers. Perhaps there are some times a Defendant should be justly punished--but should a Plaintiff be enriched as a result?

Without major changes in our legal system, future generations will live their lives in paralyzing fear of lawsuits, litigation, and perceived liability. If just a few of these changes were implemented, many of the wrongful incentives currently inherent in the system would vanish, creating a system instead where legitimate wrongs are redressed, but abolishing the low-risk lottery system we currently have in place.

A partnership exit plan

2009-09-06T15:10:00.003-04:00

If you've read this blog for some time, you know that I've written often about what happens when business partners can no longer get along. But other things can happen to break up a partnership that should also be considered when setting up a business venture. For example, what if one of you dies, becomes incapacitated, or suddenly is in a divorce that may cause your partner's share of the business to be owned by his ex-spouse?

Buy-sell agreements are integral to the start of a new venture, but a well-drafted one should cover not only what happens when it is time to end the partnership, but also what happens if the unexpected occurs. Some of the issues a good buy-sell should cover are:

1. A provision allowing for a buyout of a deceased partner's share of the business (often using the funds from life insurance policies paid for by the business).

2. A provision requiring a forced sell-out of a partner's interest if that partner is convicted of certain wrongdoing (such as felony criminal convictions) or, if he is in a profession, loses his license.

3. Contractual provisions that restrict the shares of a partner that pass unintentionally to a third party (such as through death or divorce), so that the surviving partner does not have to make partnership decisions with this new, unchosen partner.

A well-written buy-sell contract can help you envision and solve many of a partnership's long-term possible problems before the partnership ever gets off the ground. If you're in North Carolina, and need help setting up a venture or entity, feel free to contact me for an appointment.

Entrepeneurs and Adversity

2009-08-30T16:37:00.003-04:00

More than a year now into the recession, and, for the first time in my career, having watched a largely suceessful clientele of entrepeneurs weather financial storms, I've learned that business people have handled this recession in different ways, some positive and some negative. In addition, in connection with my banking practice, I have seen other entrepeneurs deal head-on with the financial stress brought on by the recent financial downturn.

1. "Be good to the people on your way up the ladder 'cause you'll need them on the way down..." Lucky Dube, "The Way it Is." Some formerly successful people have not handled the downturn well--financially or psychologically. Perhaps they didn't save for the eventual rainy day, perhaps their business plan was too narrow to envision failure, or perhaps they had great plans, but bad timing. These people have fallen on hard times, and they're not handling it well. They're bitter at the system that they believe failed them. They're angry with the banks foreclosing on their properties and homes. And often, they wonder what has happened to many of the friends they used to have. Were these people just "fake friends" and hangars on? Maybe. But my law partner and I were joking about a particular entrepeneur in the national news who'd fallen on hard times: "What's the difference between the rich Mr. X and the poor Mr. X? The poor Mr. X is an S.O.B.!"

The point, reader, is not that poverty makes someone a worse person--it's that when a person who isn't friendly loses the thing that makes them powerful (wealth), they're still left with all their poor qualities.

2. The contrarian investor. In pure financial terms, some entrepeneurs have excelled in these down times. Yes, I watched them make wealth during headier times. But these individuals were not one-trick ponies: they weren't riding the "house-flipping" band wagon of the real estate boom, nor were they likely part of the dot-com craze a decade earlier (though they might have made money off of both). Instead, these individuals possessed something, by their raising, their genes, or some sort of gift that simply allows them to see what most of us cannot. These individuals have been able to find money-making opportunities in any economic climate, and have actually thrived.

3. The lesson learner. Most entrepeneurs--even the good ones--have still felt the pinch of this latest economic crisis, however. They're NOT making as much money as they once were--and it's not clear for some if they'll ever make that much money again any time soon. Though things are not going as well as they used to, these entrepeneurs are enduring, and are become better people for it.

Some of them have done well enough in the past that they're able to continue to survive off of their savings. Others have had to pare down their business operations--and their lifestyle. Some are even struggling with their finances, but are doing so honestly, contacting the banks, trying to work out solutions while being fair to those whom they owe. For these people, the economic recession has been a lesson. It has made them realize that even the most successful business can fail given the right climate, that even a wealthy man can lose his riches in certain circumstances. It has caused them to remember that money isn't an end-all, and that many of the characteristics that helped them first gain financial success--hard work, integrity, and thrifty living--will also help them weather the current financial storms.

This recession will fade one day, but others will likely come. Entrepeneurs, from a financial standpoint, will you have what it takes to withstand--and even financially thrive--in the next downturn? More importantly, will you have the integrity and character necessary to let you take on life's financial difficulties?

Five things I did right as a lawyer

2009-07-12T19:52:00.003-04:00

A couple posts ago, I wrote to aspiring lawyers about some of the things I did wrong, in an effort to help some of you avoid my mistakes in your careers and personal lives. This week, however, I'd like to suggest certain things that I did right--and I hope you'll consider doing them too.

1. I kept the Bar Exam in perspective. I wanted to write this before many of you take your Bar Exams. When I say that I kept the Bar in perspective, I don't mean that I didn't take it seriously. I also am not going to lie to you and act like that I didn't worry about whether I'd pass it or what I'd do if I flunked it. No, all of those feelings are natural. I'm talking literally about what I did in the days leading up to the Bar Exam.

This was my first--and hopefully only--time that I would take the exam, so I didn't have previous history to go on as to how to study for the Bar. However, I knew what had worked for me in law school for three years, and I had to trust myself, and my own abilities, that if I simply stuck with what worked, and used my tried and true methods of study, that I'd be ok. For me, that meant setting up study schedules, allotting a set number of days and hours to each potential subject, and after planning it out, simply sticking to the plan.

I also knew myself well enough to know that if I took myself off the plan, and focused on others, I would become unsure of myself, and also might psyche myself out mentally. When I was in Raleigh for the exam, some law school classmates were, during their lunch breaks, trying to study together and compare notes with their classmates as to how they answered certain questions. DO NOT DO THIS!!!! First, you've studied all summer; eat a leisurely lunch because that one hour isn't going to give you any advantage on the exam anyway. Second, you will inevitably discover that you and your classmates answered questions differently, leading you to question your own answer, which will not only drive you crazy, but it could seriously distract you in the final legs of your exam.

I stayed focus, I stuck with what had worked in the past, and--guess what? It worked again. I'd suggest you do the same.

2. I found a good mentoring law firm. When I worked as a law clerk in Madison, Georgia, a lawyer named Jim Winkler told me that wherever I tried to find a job, make sure to find a firm that would mentor me. I'd never thought of that before, but I thought that sounded like pretty good advice and, after having worked in the law profession for 11 years, I can confidently say that he passed on to me sage words. The quality of a lawyer you will become in your career will depend, in part, upon your first formative years. Regardless of what you're taught at law school, much of what you'll learn that molds you most will come after you start practicing. Too many firms (big, small, city or country), look at that new associate as a form of cheap labor, just a low-paid minion that can do lawyer work for less. You need to find someone who's willing to give you as much as you give them--someone who's willing to teach you not only how to do a good job, but how to be the best lawyer you can be. I've helped train a couple of associates, and I've really grown to appreciate how much time my senior partner invested in me.

It takes time to train someone from the ground up, to look at them not just as a wage laborer, but someone whom you want to help reach the best of his or her potential. In the short run, my firm could've trained me for six months, then had me out in the fields making money for them. And if they had, I'd probably be not much better ten years later than I was then. But instead, the partners invested effort into making me the best they thought I could be. I hope I can do that for other lawyers, and I suggest you find a firm that can teach you the same. I don't want to disparage lawyers straight out of school who open their own shop, but there's nothing to replace the mentoring of a senior member of the Bar.

3. I got a wide variety of experience when I started. Working in a small-town firm as a new associate, my senior partner let me get a taste of everything. I handled traffic tickets, simple divorces, wills, boundary line cases--just about anything I could imagine. While I have no desire to be a general practitioner, the variety of experience I got was invaluable, because it helped me in my current practice think from a wider perspective. I was involved in a case a couple years back involving a breach of contract, with co-counsel who represented a separate defendant. I sensed the Plaintiff was lying, and something smelled bad. I finally figured out that the Plaintiff, who'd represented himself to be a large real estate mogul, was committing loan fraud and was a sham. How did I figure it out? From my days closing real estate loans, I looked at the Plaintiff's figures, and could determine that his supposed real estate empire simply couldn't have worked.

Also, practicing in multiple areas of law taught me areas which I didn't like, but steered me to areas in which I found I had a knack. As a new lawyer, try not to get pigeon-holed. Your development may proceed slower than, say, the associate at the Big Law Firm who's funneled into its Egyptian Antiquities Law Department, but you'll be better for it in the end.

4. I focused first on becoming skilled, then on the money. Because my senior partner focused on making me skilled rather than pimping me out for money, I similarly focused on becoming the best I could be. Honestly, I didn't do poorly those first few years, but to the extent I have financial success now, it is because I put in the time in the salad days. Lawyers who are hired and are not well-mentored tend to also have a mentality about money early on, and try to find the quickest way to earn a buck. At some point, though, they will plateau, and not only be mediocre, but will in fact generate less income than if they'd focused more on their skills earlier.

5. I stuck with it when things got tough. Lots of lawyers coming out of school fantasize about working a couple years with someone, then going out on their own. Five years into my practice, I was one step away from leaving, having already found a building to lease, incorporated my practice, and even turned in my notice. However, I worked things out with my partners, and now am glad that we worked together to create a better firm. This is not to say that every lawyer should stay at his first job forever--I know that's not always possible. But remember, there is power in numbers. You'll often find that with lawyers, the whole is greater than the sum of the parts, and often, lawyers with large client bases lose some of their stability and prestige when they go on their own. Think hard before you do it.

That's enough lawyerly advice for now. According to my calculations, you have about two or three weeks left before the big day. You've had your study break, now get back to work. Good luck, you can do it!

Business and Regulatory Confusion

2009-06-14T18:10:00.004-04:00

In the overregulated and hyperlitigated society in which businesses now exist, businesses of all sizes are now struggling with new statutes and regulations, sometimes hastily written and poorly thought-out, and coming from different legislative bodies. As a result, well-meaning businesspeople cannot always abide by the law--despite their best efforts--because they're no longer sure what the law even is anymore.

In the first instance this week, a client of mine hired me to help him legally set up a franchise he was trying to create. He had a brilliant idea, he had a business plan, and he even had his first interested franchisee. All he needed to know was what laws to follow, for which reason he needed my advice.

Unfortunately for my client, however, the answer was not so simple. Starting at the state level, he learned he was subject to the North Carolina business opportunity laws, made to protect (legislators believe) potential franchisees who need to be protected from themselves. The business opportunity statutes outlined about four pages of information that needed to be contained in a franchise offering circular, which had to be provided to the potential franchise purchaser at least 48 hours prior to the person signing a contract.

The state laws, however, were the easy ones. We then researched the applicable federal rules, promulgated by not legislators but the Federal Trade Commission. Those regulations outlined more than 40 pages of information that needed to be contained in the franchise offering circular, which had to be provided to a potential buyer at least 14 days ahead of time.

Which rules apply? Well, all of them, and my job is to come up with something that assimilates all of the rules together. My client is a professional and a businessman, as are his potential purchasers, and all intelligent enough to make their own business decisions about whether to enter into a franchise agreement. Both our state and federal governments, however, have driven up transaction costs by dozens of pages of requirements for a franchisor before he even enters into a contract. He has to provide, in essence, potential purchasers a background history of himself, his criminal past, his civil litigation past, company financials and even personal bankruptcies. The state, in addition, requires the franchisor to register and, in certain cases, to be bonded.

In a second instance this week, an institutional client needed help in determining what rules needed to be followed in response to new state and federal regulations that had been hastily promulgated to resolve a perceived crisis. Sitting around the table were various board members of this client company, the vice president and president of the company, and the company's compliance officer. The federal regulations contained certain requirements, the state statutes required others. Some at our table argued that the state statutes ruled; some that the federal regulations preempted state law. Finally, after much research and talking to both state and federal regulators, we finally received the satisfactory answer we needed, but not without the employment of numerous man-hours and the stress of all involved who, despite their differing interpretations, were all working their hardest to have their company simply abide by the law.

It's a truism that we, as citizens, are presumed to know the law and that "ignorance of the law" is not a defense to a violation thereof. In this time of heightened government regulation, however, businesses (small ones especially, I fear) run the risk of violating laws because those laws have become so (1) conflicting; (2) multitudinous and (3) poorly written and hard to understand.

What can a business do to keep itself safe in these hyperregulatory times? Here are a few ideas:

1. Stay informed. If your business is part of an industry or trade association, stay abreast of all current developments. Read your industry association periodicals, attend "recent development" seminars sponsored by your industry, and, if necessary, call your industry association's attorney (every association should have one) to be updated on new laws and regulations that may affect your business.

2. If in doubt about the law, take the more conservative interpretation. Many businesses have, in the past, ventured into gray areas of law, especially when dealing with taxation issues. In the present environment, however, with a federal government full of anti-capitalist goons who are already suspicious of business, you have to be on the defensive. If you're not sure about the interpretation of a law, take the more conservative interpretation. At their worst, politicians are looking for scapegoats to punish, and "corporate America" is a current target. At their more innocent, politicians are looking for more sources of revenue. When it comes to taxes, you'd better believe they're going to take the more government-friendly interpretation of rules. When looking at violations, expect the government to be less friendly and to assault alleged violators with heavier fines, penalties and punishments--regardless of whether the violators even knew they were violating a law.

3. Have your attorneys more closely involved with regulatory review. It sounds self serving, but believe it or not, it gives me no pleasure to say that. I hate the idea that small businesses should keep a lawyer on retainer simply as part of their daily business in order to weave through an increasingly complicated morass of regulation. But in the current climate, stakes are too high not to understand laws affecting your industry. Have an attorney readily at hand who understands your business, one whom you can call if you have any questions. It's not cheap, but it's less expensive than hiring a lawyer to defend you when the government comes after your business for violating its laws.

Times are not easy. The economy is still struggling, and legislators are doing their misguided best to regulate the economy into health. In these times, businesses need to be at their most vigilant in following and understanding laws that affect them.

Five Things I Wished I'd Done Differently as a New Lawyer

2009-05-31T17:50:00.006-04:00

I wanted to take a brief detour in this blog and write to new law graduates. Congratulations, you're a lawyer! Or not, because right now, though you've just earned your degree, you've not yet passed the all-important Bar--so near, yet so far! Though most of you are likely now preparing for the Bar exam, I thought I would share with you some of what I've learned in the past 11 years of practice.

Of course, you all know that in law school, and as new lawyers, there have been and will be scores of individuals imparting unsolicited advice, and now I join them. However, rather than specifically giving advice, I'll just share a little about my experiences as a new lawyer. Specifically, I'd like to share five things I wish I'd done a

little differently after passing the Bar. Of course, everyone's experience is different, and my perspective is colored by my own. I left school to work for what was initially a small, family-owned law firm in a small town in North Carolina, initially doing a general legal practice. I didn't go to work at a big city law corporation, or as an in-house counsel, or even as an assistant district attorney. All of those attorneys would have their own starting-out experiences that might differ from mine. Nevertheless, below are five things that I wished I'd done differently as a new lawyer.

1. I WOULD HAVE TAKEN TIME OFF BEFORE STARTING WORK.

When I took the North Carolina Bar in 1998, there was a period of approximately three to four weeks between taking the exam and finding out if I'd passed. I walked out of my examination room, got in my car, and went to the beach. But then, mere days later, I started my job and legal career for what likely would be the next four decades. To be fair, my employer didn't push me to start so soon--in fact, he frankly told me that he'd rather that I wait until I'd passed before starting, warning me that it would be very embarrassing if I started work and then had to quit because I'd failed the Bar. But I didn't listen to him, and started immediately. Part of it was that I was sick of being broke--I'd spent all summer as a 25-year-old man, living off my parents and their money, and I was ready for a paycheck. Plus, I'd worked for three years, and I was ready--chomping at the bit almost--to be an attorney. So, after a brief vacation at the beach, I began working during August 1998 as an "almost-lawyer"--going through training and learning my way, praying to God I passed the Bar, and working, always working.

What I should have done was what my boss suggested I do--simply take time off and enjoy myself until I'd passed the Bar in late August. Sure, I didn't have any money, but I was living at home for free--what did I need? I'd gone through four years of college, long preparatory courses to take the LSAT, three long years in law school, and a very difficult summer studying for the Bar. What was three weeks, after all of that?

More importantly, that time will likely have been the last time in my life--until retirement--that I would be able to take off three consecutive weeks from work. I could've spent a week at the beach, a week at home, and perhaps a week driving around the country (with a little money borrowed from my parents, of course). In any event, I could've lived and savored that time a little more.

Granted, in some states (such as Georgia, where my most of my classmates ended up), new graduates don't learn of the Bar results until around Thanksgiving, so practically, they can't simply vacate until the results come in. But they can take off some time. And for those of you who only have to wait a few weeks until passing the Bar, I would highly recommend that, if possible, you just enjoy yourself. Sure, you'll be nervous, as you await the results. But you can soak in all that you've recently accomplished and been through. And if you look at the odds, odds are, you're going to pass. Why not enjoy what may well be the last long vacation you take for decades?

2. I WOULD HAVE NOT TAKEN MYSELF SO SERIOUSLY.

In 1998, I'd just graduated from a high-tier law school. I'd studied the Bar--and I'd passed it. I was ready to set the world on fire! I suspect that most of my peers felt the same way. Coming into my new firm, I was ready to be ..... A LAWYER (trumpets sounding, please). At least, that was the music playing in my head.

I felt like I was a walking encyclopedia of the law, and was ready to take on any case or cause that came my way. I had my degree after all. I came in ready to show people how law should be practiced. Ok, maybe I didn't so clearly enunciate this 11 years ago, but at least that's how I acted. The truth of the matter--as most lawyers who've practiced a while will tell you--is that as a new lawyer I knew almost nothing. I'd learned a lot of cases, I'd learned how to research, but as a practical matter, law school didn't teach me or my classmates how to actually practice law on a daily basis. I had so much more to learn: about law, about how to treat people, and about how to be a good attorney.

Had I learned earlier on not to take myself so seriously (and I'm still learning this), I could've saved myself some grief. It doesn't matter that you're suddenly boss over a paralegal twice your age with half your education, and it doesn't matter that coming straight out of school you may be making more than her: truth is, she probably knows a heck of a lot more about day-to-day law than you do. Had I understood that more quickly instead of trying to show them what I knew, I'd have gotten along better with staff, and frankly learned a lot more in a shorter amount of time.

There is a biblical passage that, paraphrased, states the fear of the Lord is the beginning of wisdom. New lawyers, in your new career, the beginning of wisdom is to know how truly little you know, and how unimportant you are in the grand scheme of life. Paralegals, court officials, clerks--even bankers--will often know way more about the law than you do at the beginning. If you can keep this in mind, it will help you not take yourself so seriously. I learned this--but unfortunately not as quickly as I should have.

3. I WOULD HAVE NOT SPREAD MYSELF SO THIN IN MY PERSONAL LIFE.

When I first got out of school, I was so excited to regain some of the free time I'd lost in law school. I immediately tried to put that time to use. I picked up teaching a Sunday School class, volunteered at church events, and helped out some with my church's youth group. Of course, I did all of this after my 7 a.m. to 7 p.m. days at the office, often coming in on Saturdays as well to keep caught up. Still, it felt great to have all this extra time freed up from studying to, well, be productive. Eventually, however, it wore me down. I was a single guy, so I would get up, work out at 6:00 a.m., and, after working a long day, come home, fix whatever was easiest to put in a microwave, eat, watch a couple of hours of television, then go to bed to do it all over again. On some Fridays I'd help out with church functions. On Saturdays, I spent all day doing housework and yardwork--mowing my yard, ironing my dress shirts (!), and trying to manage my newly acquired home. On Sundays, I got up and taught Sunday School, always frustrated at the poor job I felt like I was doing. And then, on Sunday afternoon--sweet Sunday afternoons--for about three hours, I had a blissful period of rest, to nap, watch tv, or do nothing, before going back to church at night. Three sweet hours, out of the entire week, to simply do nothing. Of course, lots of times I couldn't enjoy that time because I was too worried about all the things I had to do on Monday.

New lawyers, it is very likely that your first few years of practice will be stressful, difficult, and involve long hours of work. That's just the unfortunate nature of the beast, the path you've chosen--at least for a while, as you hope to earn your stripes. Don't take on too much in the beginning with other obligations that you don't have to take on. In retrospect, perhaps I should've waited a while to be more active at church, so that I could've given it better attention. And I should've realized that, with home ownership, comes a lot of additional responsibility and work. Had I realized how much work a home entailed, I might have picked a house that had a smaller yard, or was newer and required less upkeep.

Speaking of my house.....

4. I WOULD HAVE NOT SPREAD MYSELF SO THIN FINANCIALLY.

That first paycheck I received as a lawyer was the biggest I'd ever held in my hand, but very quickly, I learned that it didn't go very far. I was actually pretty thrifty at first, and didn't waste my money. However, I subscribed to the prevailing wisdom of the time, which was to "buy as much house as you can afford." The thinking, at that time, was that if you bought more than just a beginner house, you could live in it for more years before wanting to upgrade. That part is true: ten years later, my wife and I are still living in my original bachelor house. On the other hand, though, by buying as much home as I could afford, I really spread myself thin financially.

I constantly worried about money, and lived on a very regimented budget. I worried about unforeseen expenses arising, and what I would do if a surprise house expense or medical expense came up. I had absolutely no discretionary spending money--I had $20 to spend for eating out in a week, and couldn't even budget for a movie! I couldn't even afford to take my dress shirts to the cleaners, which meant I spent every Saturday afternoon slowly ironing and starching French cuff dress shirts, eating up what precious free time I had.

If I'd simply bought a smaller, less expensive house, I wouldn't have been so financially bound. I could have saved up "rainy day" money for emergencies (thank God none came up during that first year). I could have gone on vacations with friends. I could have lived a little bit more.

5. I WOULD HAVE REEVALUATED MY LIFE AND PRACTICE EARLIER.

Most of us who enter the law practice have definite ideas of where we want our future to lead. In fact, we probably have had those ideas for some time. In college, we wanted to get into a good law school. In law school, we wanted to get a good job. Once we got that job, we then wanted to make partner, become the District Attorney, General Counsel, whatever. I'd had that focus going into my job.

But what I didn't do early on--that I wished I'd done--was to on a regular basis evaluate where I was in my practice, and where I really wanted to be. See the distinction? Instead of constantly asking myself, "How can I get more clients, a bigger salary, an equal partnership," I should have also been asking myself more soul-searching questions; questions like:

--Do I like the people for whom I'm working? (I did, and I still do);
--Do I like my particular area of law practice? (I did not, and didn't realize this until about six years into my practice);
--Is this what I'd hoped I'd be doing, when I was in law school?
--Do I want to be doing what I'm doing now twenty years from now?
--Are there better and different ways for me to do what I'm doing?

In my relentless search for all those things we lawyers want (success, however it is defined), I didn't, early on, ask myself these really important questions. Granted, as a new lawyer, your life is not likely to be a bed of roses. You don't get to name your hours, your practice area, or your salary. Hey, that's the game you and I have chosen to play, and you have to understand that in your first few years of law practice, life isn't going to always be easy. But what you shouldn't forget is that--for whatever reason you decided to practice law, not one of us said, "I want to go to law school so I can get out, be a lawyer, work a job and a practice I hate, and be miserable the rest of my life."

For five or six years, I walked around constantly stressed, harried, tired and worried--as a result of the practice I was in. It started innocuously enough, because I knew as a beginning lawyer that things would be tough. But as days turned into months, months then turned into years. I didn't stop to evaluate myself or where I was heading. I didn't ask myself why my stomach was tied in knots, why I lost my temper so much more quickly than before, or why I'd become a much different person than the one who'd entered law school.

Had I simply evaluated my life and my practice early on, I probably could have steered my path more quickly from a practice area that frankly was not for me, in the process, saving myself a few years of stress. Don't misunderstand me: your life as a new lawyer is NOT going to be easy. But don't let yourself fall into the trap of many lawyers, and let your career become one long period of stress and unhappiness. Evaluate yourself and your practice, at least on a yearly basis. Ask yourself some of the above questions!

New law grads, once again, I offer congratulations. Already, by getting this far, you really have accomplished something. You now stand before potentially fulfilling and lucrative legal careers, and I hope you can learn, more quickly than I, some of the lessons above.

Small business break ups

2009-04-26T16:00:00.003-04:00

Based on the comments I get from readers, one of the hottest topics on my blog are posts dealing with small business break-ups--be they partnerships, corporations or LLCs. As I've written before, within those disputes, one of the biggest struggles involves the inequality among partners or business co-owners, i.e., what happens when there are equal owners making unequal contributions.

What often happens in such cases is that the business breaks up. In worse cases, the disputes end in massive lawsuits, ugly recriminations, and financial ruin.

Where I've found this potential to be at its greatest is with the formation of those businesses where the co-owners are bringing different things to the table. For example, maybe one person is bringing money, another one is going to do the work, and perhaps a third is contributing an invention or patent that's going to make a million dollars. Each person is bringing something to the business, such that the whole is greater than the sum of its parts. Ironically, however, over time, these very differences can breed resentment among the partners and eventually cause business break-ups.

For example, at the beginning of the above hypothetical venture, the "worker" is getting the best of the deal: the money man risks losing capital, as, to a certain extent, does the inventor. The worker just risks losing his time, but nothing more.

Five successful years later, however, the dynamics may have changed. The capitalist and inventor are enjoying a nice return on their investment. The worker, however, is resentful: the business would stop without him. Whereas the capitalist and contributor have received back their investment (and then some), the worker continues to have to invest his time, effort and labor into the business.

I have also watched similar situations play out in a different manner. I've watched an "idea man", perhaps willing to do the work, who gathers up willing monetary investors. He's promised the investors great potential, and wonderful returns some time in the future. When things get successful, it turns out that he's issued himself so much stock, he effectively controls the company. The investors get little in the way of dividends, because by the time the idea man has paid himself a nice salary and benefits, there's little left. Theoretically, their stock is creating equity, but because their company isn't publicly listed (or, in an alternate scenario I have seen, they learn the shareholders' agreement has a provision requiring them to offer their stock back to the company at preferential rates prior to selling to a public buyer), the investors now have little hope of ever seeing a meaningful return. In other words, the passive investors' investments are held hostage.

Although attorneys do a good job of foreseeing the "worst case" scenario--i.e., what happens when things go awry--we also need to prepare for best case scenarios--i.e., what happens when things are going very well, and the equities have changed.

Here are just a few ideas to allow the continuation of a small business, even when the business contains different types of investors:

1. Provide benchmark dates at which the investments are vested, and any future contributions are paid for at arm's-length. This is a hard idea to pin down, except by way of example. Go back to my initial example of three different investors, each with a very different type of investment. Each investor, theoretically, could be benefited more than the rest, or less than the rest, depending upon how the company was structured. But they could all be treated fairly, if they come up with success benchmarks that allow them to treat their investment as having been fully paid in.

In the example of the worker, the company's organizational agreement could state, for example, that after the company reaches $X sales per year, the worker will be paid a salary--or perhaps, can hire staff and no longer have to contribute his own services. He is no longer captive: he's either now an investor and a paid-employee (in the first example), or else a passive investor like the rest (in the latter example).

For the inventor, perhaps the same agreement should state that after some benchmark (perhaps Y years), the inventor's patent will simply be licensed to the company, on a yearly basis, for a certain sum of money.

In other words, to avoid disparities later in the company's existence, you create a system so that the investors' later contributions of time, effort, or whatever, are compensated on an arm's-length basis.

2. Create, at the outset, scheduled pay-outs or buy-backs. In the other example, of the passive monetary investors, they contribute all the risk, but the idea man, as the business becomes successful, effectively shuts them out and sews up their contribution. Investors should recognize this as a risk, and ask for organizational documents that create some type of guaranteed payout--be it through a guaranteed buy-back, guaranteed dividends, or the like.

3. Create, in the organizational documents, forced buy-out or buy-back provisions. At the very least, you could place in the organizational documents provisions by which you can force a buy-out or buy-back, at an agreed upon price (or agreed upon pricing mechanism) during a certain time period or after a certain triggering event.

Interestingly, of the small business disputes I've seen, at least as many of them stem from business success as do from business failure. When setting up or starting a small business with numerous investors, don't just think about the worst-case scenario: ask yourself, what problems arise if the best case scenario occurs?

(Somewhat) Off-topic: The Economy and Temperament

2009-03-28T22:14:00.002-04:00

I've been speaking to my law partner lately, and we've together come to the conclusion that the populace, in the past year, has just gotten a little ... meaner.

My business practice consists of both transactional work (e.g., the buying and selling of businesses) and business-related litigation. While I'm not surprised by the fact that transactional business is currently down, I've been surprised at how much business-related litigation has picked up (and this is not counting collections and debt-related litigation). Sure, some of the cases I've picked up involve the fact that someone is now financially unable to perform the terms of the contract, but many of the cases involve malice, opportunism, fraudulent behavior.

The tide of meanness doesn't just stop with clients, however. I've spoken to some of my fellow attorneys, many of whom are extremely frustrated. Some are just wanting to get out. In tough times, when an attorney is involved in a transaction, if something goes wrong, everyone looks to the attorney as a sort of insurance policy or bank, expecting him to pay for everyone's mistakes--and this is what a couple of my colleagues are feeling right now. Others have started to fight among themselves, even to the point of spreading rumors about some of their fellow attorneys' impending shutting down of offices.

Beyond the legal profession, I've seen more bitterness in the local newspapers (who seem more than usual, to engage in rumor mongering and yellow, opinion-based journalism), in consumers, and in the population at large.

When pointing this out to my partner, he agreed, and we discussed what we thought about this ugly mood that we're seeing. Here, I believe, are some of the causes:

1. Economic Difficulties. This, of course, should be no surprise. My insurance clients tell me that more questionable claims have arisen, and claimants are quicker to threaten suit if they don't receive a settlement they believe is fair. Folks, desperate to hold on, want someone--anyone--to bail them out, and so they appear to be quicker to point the finger of blame and expect compensation. Anyone who is married knows that when money is tight, you tend to argue more, and with an American populace collectively feeling the pinch, there are a whole bunch of ornery people out there right now looking to fight.

2. Political Difficulties and Change. In the last year, the country has seen a sea change of politics. The political minority is scared about the direction being taken by a decidedly leftist administration. Some realists within the political majority are coming to see that a smooth-talking man with a cult of personality is not the panacea they hoped. It's all different now. And the politics have gone from an understanding that government is no solution, to one in which a desperate population is willing to give up its collective freedom for financial security.

3. Changing of the Rules. With all of the political and economic change described above, many of the rules we've all gone by suddenly have been thrown out the window. Real estate, the way to sure riches, suddenly has become a burden and a source of loss. Whereas two years ago we were all reading books and dreaming of how to leave the boring office cubicles to live an exciting life of entrepenurialism and self-employment, most of us now are just thankful for (or even worse, still wishing they had) those same boring jobs.

While I expect the effects of all this change to eventually settle in (for better or worse), the current instability has created an ugly mood in our area. The only lesson, perhaps, to be drawn from this is that in this world, when depending on the temporal, it can all be taken away, and if that is the base of a person's life, it, like a foundation created on sand, can wash away in a great storm.

All you could ever want to know about North Carolina Foreclosures

2009-01-31T18:06:00.002-04:00

Are you interested in learning how to find deals on foreclosures? Want to know more about how the foreclosure process works so that you can try to buy deals from the banks? Look no further. I've just published "A Guide to Buying North Carolina Foreclosures," a book that is, the best I can tell, the first book ever written specifically about North Carolina foreclosures. My book will:

--expose some of the biggest myths about buying foreclosures;
--show you how to learn about foreclosures more quickly than others;
--explain how to ensure that you have a good and clean title;
--give you forms that will help you when you start buying foreclosures.

Interested? Go to http://stores.lulu.com/ncbusinesslaw . Paperback copies are $26.95, or you can download an e-book version for $19.95.

Tough times and exciting innovations

2008-12-07T20:44:00.000-04:00

One of the silver linings of a tough economy is that, absent heavy-handed government intervention or regulation, a business will adopt, adapt and improve if it wants to survive. Currently, my real estate developer clients are trying to innovate in an effort to stay alive in a credit freeze.

One of my clients, a commercial developer, tells me that even up to a year ago, when he began a project, he'd have five or six banks competing for his business. Now, however, he has to aggressively search out his own lenders and is lucky to find even one willing to make the loan.

Given this credit drought, I see innovative developers looking for new ways to get the funding necessary to complete their projects. In fact, I'm working with one client to come up with new methods of funding in these difficult times. What are some areas to consider?

1. Private financing. This has been around for a long time. There have always been private individuals or small companies willing to loan money. With large development transactions, I see a few practical issues with this. First, are you going to find any one person or private organization willing to loan you the amount of capital needed--not, say, $100,000 for a house, but perhaps two, three, four, or five million dollars? If not, are you going to have to procure multiple lenders? How will they each be equally secured? Even in boom times, private lenders typically charged a premium interest rate to cover what typically was a higher risk (i.e., if the venture was less risky, the thinking goes, it could've gone to a bank and paid bank rates). I recently saw a loan with a 50 percent interest rate! Most states have interest rate ceilings that mandate maximum interest rates chargeable on loans, but at least in North Carolina, that does not apply to non-consumer development loans.

2. Venture capitalism. I've written in other blog posts about venture capitalism, and v.c. has had a role, and will likely now have an even greater role, in real estate development. The main difficulty for developers is to price the increased cost of this money into its budget plan.

For example, perhaps a developer was creating a build-to-suit lease with an option to purchase for an 80,000 square foot commercial building, with a tenant lined up. The sales price, if the option is exercised, is $4,000,000. Previously, the developer would've created a pro forma (a projection of costs and income), and perhaps the developer worked out that the initial building costs would run at $3,000,000. The developer would also add into this the "carry costs"--i.e., what the loan payments would be. This figure would be pretty easy to figure out, based on standard loan rates or--even better--a promised loan rate from a particular lender.

But what about now? Just to make up numbers, the venture capitalist, approached to enter the deal, may have the money to loan, but may loan the money at a premium rate--i.e., instead of, say, six percent interest, the capitalist is charging 15 percent interest--which means that the carry costs will be higher. In addition, perhaps the venture capitalist wants 25 percent ownership. In such a tough time, these aren't necessarily costs that can be passed on to the tenant through increased rent or purchase price. In the previous example, the developer could count on $1,000,000 profit for taking on a $3,000,000 risk. Now, however, the profit will be less because of the increased carry cost (let's say, hypothetically, $100,000 more costs), and the net profit will then be shared with the v.c., leaving the developer, instead of $1,000,000, $675,000. This is still worth doing, hopefully, but the margins have decreased by one-third, in this example.

3. Stock offerings. Developers will also turn to stock offering in these days to raise capital. Instead of one venture capitalist providing funds, it will be numerous investors. One benefit of such an offering is that the developer's risk is reduced because the money is not a loan but is equity. On the down side, to raise the money necessary for a good sized development, the developer will have to part with a large share of the ownership. Going back to the previous example, if a developer only offered to sell 25 percent of its venture for the $3,000,000 it needs, those stock holders would be entitled, as a whole, to 25 percent of the final profit. Assuming again that the profit was $1,000,000, the stockholders' share would only be $250,000. Are stockholders collectively going to pony up $3,000,000, for a chance at $250,000 (or about eight percent) profit? Probably not. Instead, the developer will have to strike a balance by providing enough of his venture to make stock purchasers want to buy, but leave for himself enough to make it personally worthwhile.

Where will it end? Who knows. If you need advice about investment vehicles for your real estate development, and how to legally structure these vehicles, please contact me at 704-735-0483.

Business sales and having your own attorney

2008-11-30T20:25:00.002-04:00

I'm gearing up to help the purchasers of a business that has gone bad, and I'm mad.

My clients came in, and informed me that they'd purchase ABC Business. Once they bought the business, they quickly found out that--contrary to the seller's representations--the business was loaded with debts which the seller intentionally failed to disclose to my clients. Bad, but seems straightforward enough, doesn't it? Surely that would constitute a breach of the sales agreement, wouldn't it? Well, not so fast--here's where things get interesting.

Seller talked my clients into using his attorney to draw all the documents. The documents, at first blush, looked like a standard set of business sale documents, except for the part where the seller's attorney cut out all warranties of title, and basically provided that the buyers were taking the business "as is."

The lawyer, hired by Seller, had his fee paid equally between the buyers and the seller--all the while knowing that the seller was hiding from them tens of thousands of dollars of liabilities. That's a breach of his ethical responsibility, one that may cost him.

It's too early in the game to discuss details of what I intend to do on my clients' behalf, but let me use this opportunity to offer some advice to other potential business buyers.

1. NEVER use the seller's lawyer to represent you in a business purchase. The case I mentioned above is extreme--most lawyers wouldn't purport to represent both sides yet withhold information from one party that the other is lying. But often, this joint representation is "de facto"--i.e., the lawyer represents that he represents the seller only, but the seller is telling the buyer that he really represents both sides. Don't fall for this trap. You need someone to specifically protect your own interests as a business buyer--especially if (as here) you're a first-time buyer.

2. Make sure your purchase agreement contains all the representations IN WRITING that the seller has been making to you verbally. Sounds easy, right? But often, a seller will make lots of verbal statements that for some reason don't find their way into the written document. And the standard sales agreement also contains a clause providing that the only representations being made are in writing, and that no other representations have been made. If you, as a buyer, sign this, you may not later be able to rely on oral representations made to you earlier. In the instant case, the seller, of course, made all sorts of representations about the business being free of any liabilities. But, in the document cooked up by the seller's attorney, absolutely no representations were made--as to amount of property, as to title to the property, or anything else. Think about it: if a seller expects you to give him money for his business, shouldn't he--AT THE ABSOLUTE VERY LEAST--be willing to say "I am the owner of this business, and have good title to the business?" Of course. But with my clients, the owner wasn't willing to do that. They should've smelled a rat right then.

3. Do your due diligence! Many business buyers are investing their life savings to follow a dream of running their own business, but get so excited with the dream, that they blind themselves to the realities. Take the time to look under the hood. Investigate the business finances, do a background search of the seller, do everything a smart person should do to make sure you don't get yourself into a quagmire!

If you're involved in a bad business purchase in North Carolina and need help, call me at 704-735-0483, and set up an appointment.

Partnerships -- an issue of trust

2008-10-25T14:11:00.000-04:00

Partners in a partnership are said to owe "fiduciary duties" to one another--that is, they owe a duty each to the other to look out after the others' best interests.

Though partnerships are usually meant to be equal (i.e., equal sharing of responsibilities, equal contributions, etc.), they are, in practice, rarely so. Someone, for example, may handle the actual rental of rental properties in a partnership. Another, for example, may handle the bookkeeping and bank accounts of the company.

Regardless of all the plans that partners make, regardless of the legal mechanisms put into place to make the machinery run more smoothly, one thing any partnership needs to thrive is trust.

The past few weeks, I've been representing partners who desired to dissolve their partnership with a remaining partner. When the partners, who'd been friends, decided to wrap up their business, they asked the partner handling the bookkeeping to give everyone copies of the accounts just to reconcile things. This partner was offended, and told them he'd not give them anything, that they should trust him. Of course, then my clients also got their suspicions up, and claims began being thrown by each way.

At the end of the day, after threats of a judicial dissolution, the managing partner provided us the information we needed, and everything is going to be resolved without the need for a lawsuit. The sad thing is that--other than some very minor disagreements about the way certain things were handled--there appears to have been no dishonesty on either side, just a conflict of personalities.

If you're a partner--even if you believe you're doing the bulk of the work--remember that you owe duties to your other partners to be open, honest and forthcoming. Provide your partners with all information. Be upfront, don't be controlling and--most of all--don't get defensive when you're asked for information.

At the end of the day, these ex-partners will have resolved their partnership by splitting everything equally. But if one partner had simply been forthcoming, they could have done this without the added expense of attorney's fees

Staying afloat in tough economic times

2008-09-27T14:07:00.000-04:00

Even in the Charlotte Metro area, which has tended in the last decade to better weather tough economic times than most parts of the country, we're filling the pinch of the current economic downturn.

Many of my clients have told me that their business is down: fewer homes are being buit, materials purchased, real estate sold, and so on. This, of course, is no surprise, and many of my clients are currently retooling their business to help bring in additional income during these times.

But staying profitable isn't just about earning money off of new business; it also means that you need to get paid for the business you have already performed. It's easier to lose one job (and the potential income) than it is to perform the job, expend the effort, labor and materials, then not get paid. For many of my clients, it may take two or three paying jobs to cover the cost of one job for which they didn't get paid.

How, then, can you protect yourself so that you get paid for the work you do, so that you get paid?

1. Written contract. Many of my clients are subcontractors (brickmasons, graders, plumbers, etc.), who work on houses, and they rarely get a written contract with the person or company who hired them. However, this is very important. Obviously, a written contract will show proof there's an agreement, but that's the least important factor (after all, if you've done the work, that's proof as well). No, a contract is more important because it will outline the terms of what you are supposed to do, and when you can collect your money, so that your client can't hold you at bay (e.g., saying, "I'm not paying you until the house is finished by everyone"). Also, in North Carolina, you typically can't collect attorney's fees unless you have a contract providing for it, nor can you collect interest on late payments without an applicable provision in your contract. Sure, if you hire an attorney who successfully collects your fee, you're somewhat relieved; but you'll also be disappointed once you subtract his fee, and realize that your money could've been earning interest over the six months it took to collect. By contrast, a well-written contract could provide that the debtor has to pay you 15 percent attorney's fees and legal costs if you have to sue, and can provide for 18 percent annual interest on bills more than 30 days due.

2. Personal guaranty. Many clients simply do business with the "company," even if the company is a one-man operation. If you're doing business, attempt to wrangle a personal guaranty, in writing, from clients. In other words, if you don't get paid, the person with whom you're dealing should personally guarantee payment of the debt. If you're performing contract work for, e.g., Wachovia Bank, this may not be possible. But I suspect most of your clients are small businesses. These businesses' owners have to guarantee their bank loans; make them guarantee payment for your work. If a business owes two bills, and one of them is personally guaranteed, the bill personally guaranteed will be paid first--simply because that bill shall cause the owner personal liability and therefore is more urgent!

3. Cutting off work early. Nobody wants to quit a job or stop supplying a customer, but as a small business owner, you need to be careful not to extend credit for too much work/supplies, nor should you let the unpaid bills linger. Often, a customer may get further in debt trouble the longer your bill lingers. If you haven't been paid in 30 days, do not continue to supply services, material or labor, or you can be getting YOURSELF further indebted to your customers. Some of my clients used to take a "double down" gambling approach: they know they shouldn't keep supplying goods or services, but don't want to make their customer mad and have them walk away. The problem with this approach is that the more the customer owes you, the more desperate YOUR become, and the harder the debt becomes to pay. Get out early, and collect your debt--by lawsuit if necessary. My clients, under my advice, now cut off credit after 30 days and send accounts to me shortly thereafter. Some of their customers get upset, but in the past two years, many of their customers became insolvent--but we got paid because we called our accounts due while there was still money for us to be paid.

If you have questions about account collections or creditors' rights, please contact me for an appointment at 704-735-0483.

The Art of Killing the Deal

2008-09-14T20:06:00.001-04:00

I've had the privilege, in my business law practice, to work on transactions and cases with good lawyers not only in my own state, but in other states as well. Each state (and state's lawyers) brings with it its own subculture and quirks. However, I've never, until a recent transaction, worked with attorneys who seemed hell-bent on picking a deal apart until it died a painful death.

I'll caveat what I write next with the possibility that perhaps I and/or my client were played, and (for whatever reasons) were manipulated for reasons we don't understand. But assuming not, I'll try to provide a few non-identifying details. My client, a commercial contractor, has certain niche construction that it has perfected and gained a reputation for in that niche. So much so, in fact, that it has expanded its operations in numerous states all over the U.S.

My client is run by its astute owner, who understands his own risk tolerance. Therefore, in negotiations, once he's received my advice, he accepts some, and rejects other, and we tend to quickly come to agreements with the other party. We negotiate hard, but we're flexible--and my client has become very successful with this.

But this time things simply have not worked out, and they may now crash and burn. We sent the other party a standard document, and what usually would be a process of a couple of negotiating back-and-forths has turned, instead, into months of excrutiating negotiation from the attorneys, nitpicking over minutae, creating far-fetched scenarios to justify their extreme positions. The result of this is that my client may simply be unable to do a deal with this client, and because of the length of time in these ridiculous negotations may no longer be able to enter into this contract anymore. Here then, are my own thoughts about the role of an attorney in negotiating a business transaction.

1. The attorney's role is to inform and protect. Notice that I didn't say just to protect. Of course, an attorney is supposed to protect his client, but in a business transaction, the client needs to understand what is contained in the contract or transaction. I always tell a new business client something like this: "I can protect you in a contract so that you're as protected as you'd ever want to be--but nobody would probably ever sign it." The point is, a contract that is too one-sided in favor of my client would not be commercially reasonable. Therefore, I try to protect my client as much as I can, but there will be issues on which the other party will not budge (perhaps, for example, the seller of a business will only allow my client 30 days due diligence). My job then is to let my client know the tough spots, let him know the risks, and fully inform my client so that he can make an informed risk decision about what he should do.

2. The attorney's role is not to be a roadblock in the way of the client's goals. Business clients, espcially experienced ones, are not children. Your job as an attorney is not to protect a client from himself, and shouldn't argue and negotiate ad infinitim. Some attorneys seem to get some pleasure in negotiating, haggling, and fighting for even the most minute and unimportant provisions in the contract, mentally chalking up points for every single concession they've obtained. I don't know what the "opposing counsel" feels like the score is in the contract I've been working on, but to me, we both score a big fat zero when a perfectly good deal dies as a result of the lawyers. If you want to fight and beat up your opponent, be a litigator! Transactional attorneys are supposed to HELP their clients accomplish goals.

3. The role of a business attorney is to help a client achieve goals, not to thwart them. This particular client has big goals (as do many of my clients). My job is to help these clients meet their goals: by making sure they comply with applicable laws, by drafting contracts that protect them and by helping them perform careful analysis so their dreams do not turn into nightmares. Yes, there are times when it is my job to tell a client, as I did a week ago, that a particular deal SHOULD NOT be done. But with most deals and most clients, it is a balancing act whereby I try to help my client reach what is a workable goal on a workable deal, while protecting the client.

Does this mean that I'm a "yes man" for my clients? Absolutely not. I often have to tell clients that the way they want to do something will, e.g., violate a contract or will not comply with the law. But for a good business attorney, the work doesn't stop there. My job then becomes how to help my client still reach that goal WITHIN the constrictions of law, contract and all practical considerations.

I look back at my clients, and what they have accomplished, and I am proud that I can say I have had a role (however small) in these accomplishments. Do these lawyers to which I refer take pride in how many deals they've killed?

Venture Capital, Part Two

2008-09-06T15:33:00.000-04:00

One of the biggest things to consider when entering into (either side of) a venture capital agreement is to determine whether the capital infusion will be treated as debt, as equity, or a mixture of both. I will write this article from the standpoint of the venture capitalist, although you, the reader, will quickly comprehend the different advantages and disadvantages for the recipient of the capital as well.

When providing venture capital for a startup, should you structure your capital as a loan to the company, as partial ownership in the company, or as some combination of both?

First, consider the advantages and disadvantages to treating the capital infusion as a loan.

Advantage One: Security. Venture capitalism is a speculative matter. That is, you, the capitalist, are putting money into a venture that may or may not succeed. If the business fails, will you get all, some or none of your money back? Part of that may depend on whether, if the business goes bust, you are treated as a creditor or as an owner. When a business becomes financially insolvent, any remaining assets or monies are typically paid out according to certain priorities. There are many nuances, but put simply, creditors will be paid before the owners. Therefore, if the business fails, you have a BETTER chance of getting paid if you have structured yourself as a creditor than if you have structured yourself as an owner.

Advantage Two: Protection. Similar to the first advantage described, structuring the transaction as a loan will give the venture capitalist more protection than as an equity owner. Often, the venture capitalist will not be involved with the day-to-day operation of the company. I have seen numerous instances in which the business operators mismanaged the funds of the "money partner," spending in a deficit until nothing was left. By structuring the capital as a loan--and more importantly, as a loan secured by collateral of the company--the venture capitalist can better protect against the squandering or liquidation of the assets. Using an example, say the operation is run by the two majority shareholders, and you, the venture capitalist, provided $250,000 for a 33 percent stake. If the majority shareholders, who saw the business was floundering, decided to start selling off the company property to keep funds coming (and to pay their salaries), they could do it. And if they did it quickly enough, you would not know about it soon enough to stop it. By the time the company went bust, there would be nothing left to divide. On the other hand, if you were a secured creditor, the shareholder/operators would be unable to sell off the company property without paying you off first (or at least, getting your permission to sell).

Advantage Three: Control. Believe it or not, being a creditor of the company may give you more control than being an equity holder. As a simple shareholder, you can be outvoted on many of the corporate decisions unless you are given a majority of the stock (which is unlikely). As a creditor, however, you can place certain restrictions within the initial loan agreement, such as:
1. Prohibitions against selling off the assets;
2. Prohibitions against the company owners taking excessive salaries or dividends;
3. Prohibitions against taking major company actions without the approval of the creditor.

Of course, there are disadvantages to treating the venture capital infusion as a purely loan transaction. The biggest, and most important, is that a loan limits the amount of profit that can be realized. A loan will contain interest, and some sort of repayment plan. At the end of the day, there is ceiling to what profit the creditor can realize. For example, if the venture capitalist provides a $100,000 loan for five years at eight percent interest,then the capitalist would know that, at best, he would realize a total profit of $21658.36--and that's if the loan is not paid off early! Remember too, that venture capital involves, quite often, higher than average risk, for which a venture capital should expect (if successful), a higher than average reward. There are easier ways to earn eight percent returns than by investing in risky ventures that may completely fail.

Owning equity in the company, of course, allows the venture capitalist a chance to share in both the risks and rewards of the start-up company. In theory, as an equity holder, the capitalist risks losing his investment if the company busts, but shares the potential reward with all other shareholders if the company succeeds.

The disadvantages to being an equity holder are, as you may guess, the converse to the advantages of lending shown above.

1. Security. If the company goes bust, an equity holder is the last in line to get paid from the remaining company assets (and usually, there are none by that time).

2. Protection and Control. As a pure equity holder, the capitalist will have less chance to exert control over the company, and stands a higher chance of being susceptible to abuse by the majority shareholders.

What then is the best approach? There is no solution that fits all, but a typical venture capital deal will try to combine the two approaches: that is, the venture capitalist's money is treated in part, like a loan, but also provides the capitalist an ownership interest in the company. The following are some of the provisions that may be found in this approach:

1. Typical loan provisions, that provide a promise to repay (a promissory note), as well as some sort of security (for example, a lien on company assets).

2. Restrictions that the company cannot take certain actions (selling all of its equipment, for example) while the loan is still outstanding.

3. Sometimes, a provision that, at a given time, part or all of the loan is converted into stock.

4. A certain amount of stock ownership.

5. A guaranteed director or number of directors on the company's board.

6. A shareholder agreement that the company may not issue additional stock without the venture capitalist's approval.

7. A provision that provides the start-up owners the right to buy out the venture capitalist or, conversely, a provision giving the venture capitalist the right to force his stock to be bought.

If you have questions about engaging in a venture capital agreement in North Carolina, please contact me for an appointment at wldeaton@ppd-law.com

Venture Capital, Part I

2008-08-23T13:06:00.000-04:00

A client came to me last week with the opportunity to be a venture capital investor in a small start-up company. He knew how much he wanted to invest, had some clear ideas about what he wanted back out of the company, and then left it to me to prepare a venture capital agreement.

Venture Capital is simply a term for money obtained by a company that needs to change its position. Perhaps that position is that it needs to actually get started ("start-up capital"). Perhaps the company is on the verge of collapse. Often, as in this case, an already-existing company needs additional money in order for it to successfully grow in order to keep up with its new business.

Often, the business can raise money by debt--that is, by borrowing money (either from a bank or from private lenders). But borrowing, however, is tied in with risk--and most lenders do not want an exceedingly risky loan. If a business is brand new, or is getting ready to expand or change direction, there may be certain risks involved such that a traditional lender is unwilling to take the loan risk, considering that its return would likely be somewhere between six and ten percent per year.

On the other hand, there are investors who may be willing to invest their money or capital in riskier propositions--if they believe the risk will be appropriately rewarded. These are venture capitalists. These investors quite often will infuse money into a company that may have more risk, in return for the possibility of greater reward. In the next few blog posts, I'm going to discuss items to consider if you're asked to invest capital into a small or start-up company. But for today, the major considerations are as follows:

1. Debt versus Equity: Is your investment going to be treated like a loan, like ownership in the company, or like a mixture of the two?

2. Period of the investment: Is this open-ended, or do you want a specific time-frame in which your investment return should be realized?

3. Control: What rights of control will you have in the company?

4. Operation of the Company: What can the company do with your money? How much can the owners pay themselves?

Hopefully, this discussion will help both potential investors, as well as company owners looking to find investors.

Common Reader Questions Regarding Partnership Disputes

2008-08-17T14:44:00.002-04:00

I got some reader questions this week. While I normally don't respond (it's not that I don't want to help, but I don't like giving advice to someone whose laws may be different), I thought I could perhaps give general advice to situations like these.

I will caveat that my law license is limited to just North Carolina. However, I hope to give some general principles that can help:

"I just recently opened up a company but the amount of problems and arguments that I am having with my business partner is unbelievable. We are always arguing, during working hours she will just sit there going on about things that are not even necessary, wasting time and money and she will complain over the smallest thing. She has asked me to buy her out but she wants way more money than she actually put in to opening the company--which I am not agreeing to. The company has not even made that amount of money as yet so I don't know what to do. I can not work with the lady anymore ,its come to a stage where I don't even want to work myself but its my company so I am going to have to find a solution to this matter SO CAN I PLEASE GET SOME ADVICE ON WHAT TO DO?"

Unfortunately, your problem is one of the most common. You've not told me whether you are equal partners, or whether there is some unequal distribution of ownership. You've also not told me if your contributions were equal and in-kind (i.e., did you each put in the same amount of money? Or is she putting in money, and you're putting in sweat-equity?). Finally, you've not said if you have a written agreement (though I guess not).

Knowing so little about your situation, at least let me throw an idea your way that I talked about in my last blog: offer a buy/sell deal (see previous blog entry from July 26).

In other words: go to your partner, let her know that you appreciate things need to be resolved one way or another. Then make the offer I discussed in my last blog, and put the ball back in your partner's court.

1. Tell her that one partner should by the other out.
2. Tell her that you'll give her the choice: either you can set the value for the whole business, and then she can decide whether she wants to buy or sell at that value; or she can set the value, and you get to decide whether to buy or sell.

This works even if you're not equal partners (e.g., if you're 60/40, for example, the value would be set at the price for the whole company (assume your partner set value as $100,000), and then you'd decide whether to buy the partner out for $40,000, or sell to her for $60,000.

Here's the good thing that I gathered from your scenario: you're early on in this business relationship. What would be more difficult is if, three years from now, you were wildly successful (no thanks to your partner), and she wanted to be bought out--in essence, getting paid for the equity you created in the company. At this stage, however, you've not turned a profit yet. Also, you know she wants out. Most likely, if she has any sense, she'll let you choose the price of the company. Be sensible, and don't go too low, or she may buy you out. If, however, she wants to set the price of the company--then let her. After all, if she really does think it's worth so much, she may make you an offer that will financially reward you!

Hope this helps.

Here is one very similar:

"Hi Wesley.
A scenario for you:

My partner came up to me and said it would be a good idea to open a shop in
the area [certain medical equipment]. I agreed.

So I found the location, came up with the business name, discussed things
with real estate agents, distributers, employed staff etc etc.
My partner has done minimal work, much to my frustration.
Thus we have decided that one should buy the other out due to this and
we cant see eye to eye on decisions.
We have a lease for 18 months.
The shop isn't open yet and therefore no stock purchased.

We have put in $X each.

Does one just pay the other that $X back?

Do we get more than that from the other because I did more than my partner
or that it was his initial instigation not mine?
Does this count at all?

Do we just work out a number randomly?"

Ok, lots of good questions here. First, my usual disclaimer is that your jurisdiction (while another common law country) is not the same as mine, so remember that my free advice MAY be just worth what you've paid for it!

That being said, let me take care of the biggest question: since you're equal owners, unless your courts are different than ours, you'll be unlikely to get paid more for your share than your partner's. Sorry. The good news though, is, like the other reader, you didn't get too far into the relationship before realizing its inequalities.

I'm going to give you very similar advice to what I gave the other reader, with a few additional opening questions:

1. First, are you enjoying this business? I.e., would you want to continue it if you could buy your partner out?
2. Second, can you afford to continue the business?

It sounds to me as if, now that the ball is rolling, you'd like to try and make a go at it if you could.

3. Is it more likely that your partner would just like to be bought out and leave?

If so, offering your partner his initial start-up money might buy him out.

If you're not sure as to question number 3, then you might want to make your partner the offer I suggested to the first reader:

Offer them a buy/sell workout. One of you sets the price, the other gets to choose whether to buy or sell at that price. In my mind, the best thing in the world that could happen to you (or the reader above) is that your partner would want to set the price. In such situations, the partner (who truly wants to be bought out anyway), could set the price so high in their greed that you'd rather take a buyout, and start a new business.

But considering that your partner will be scared of this happening, he'll most likely ask you to make the price. Unfortunately, then, you've got a hard decision. Probably, in your mind there's one price you think HE should be bought out at (a low price), and a different price that YOU'D be content with being bought out at (the high price). The buy/sell price you make, will likely need to be somewhere in between.

The best advice I can give you for the price you set is not really legal advice--it's more practical. Set a price, and then make yourself comfortable--before offering it--that, come what may, you'll be happy with the results. Think of all the benefits you'll get if you can buy your partner out. But then think of the freedom you'll have if your partner buys you out and you go your own way (perhaps you can start your own business now, or take a regular job with shorter hours, etc.).

Finally, there is a legal consideration. As part of this buy/sell deal that I suggest you offer your client, you need to agree, as part of the deal (before either of you makes a decision), that the BUYING partner will take over the lease and all partnership obligations and indemnify the SELLING partner from any liability therefrom. Even better, if at all feasible, see if the landlord will be willing to release the SELLING partner from the lease's liability (I'd say chances are against it, but at least try).

It's only fair to the selling partner that he (or you) not have to worry about any partnership liabilities creeping back in the next 18 months.

For both of the individuals above, I'd suggest that if your disgruntled partner takes you up on the offer, that you then hire a qualified attorney/solicitor to draw up the paperwork. I'll be happy to recommend someone in your area if you desire. And please, let me know how things turn out!

The easiest and fairest way to resolve a partnership dispute

2008-07-26T10:59:00.001-04:00

If you read my posts regularly, you know that in my business practice I run across business ventures in which--for whatever reason--the owners no longer have the same goals. Sometimes, they outright dislike each other, in others, they simply want to do different things. Sometimes these differences involve LLCs, corporations or true partnerships (and here, I'll refer generically to the co-owners as "partners").

Hopefully, a good organizational agreement will provide for a way to resolve these disputes between partners, but, as you have seen in previous posts, they don't always.

What I'm going to provide you today is the easiest, fairest, most common sense way to resolve a dispute between two partners over the direction of the business. First, however, a few caveats:

1. You'll need to have your finances in order.
2. You'll need to understand the possible ramifications that will result from this method.
3. You'll need to prepare yourself to be satisifed with whichever result occurs.

Those warnings are cryptic, aren't they?

Here it is, then: If you and you partner are at odds, or are wanting to go in different directions and can't resolve your differences, meet with your partner, and make him this offer (and for this example, I'm assuming two partners who are equal owners).

1. You think that the partnership between the two of you is going in different directions.
2. The best thing for everyone is if one partner buys the other one out.
3. One partner should set a value for the business (i.e., what that partner thinks the partnership, or at least his half of it, is worth).
4. The other partner then gets to decide whether to sell at that price, or to buy at that price.
5. You give him the option to decide whether he wants to set the price, or whether he'd rather decide whether to buy or sell.
6. You wait.

Think about how absolutely, finally, quickly and fairly this can effect a business buyout and a resolution of the dispute--whether you're running a lucrative partnership or one that is barely struggling along.

I was involved with a buyout, recently, where this occurred. One partner decided to make this offer to the other. Before he made the offer, he searched his soul, and made a decision at what value he'd place on a partnership interest. Then he determined that he'd be happy either way--if he got bought at for that price, he could live with it, or if he was asked to buy the partner out at that price, he'd live with it.

He then approached his partner, and made the suggestion for a buy/sell. The other partner agreed. Now, think about how easy things become at this point: My client had already decided his value point. If the other partner decided to set the value, my client could make his buy/sell decision in about 30 seconds, simply based on whether the offer was higher or lower than my client's buy/sell point he had already mentally set.

Or if (as was the case in this instance) the partner asked my client to set the price, my client could offer the price he'd already decided, and then sit back and wait for the partner to make the decision of whether to buy or to be bought out.

The two hardest parts about this mechanism are (1) coming up with a value that you can live with whether you buy or sell and (2) convincing the other partner to do this (for example, perhaps the other partner would only want to sell, or would only want to buy, etc.). But once the other partner agrees to this mechanism, the buyout will be fair.

In my client's case, if his partner had thought the price offered was too low, then the partner had the right to buy my client out at that low price. If he thought the price was unrealistically high, then he could sell out to my client at that price. Conversely, my client had to be realistic about the price. Perhaps he would've liked to have sold for a higher price, or to have bought out his partner for a lower price, but since he did not know which choice his partner would make, he had to make a price that he could live with either way.

If you have any more questions about partnership issues in North Carolina, feel free to schedule an appointment at 704-735-0483.

Limited Liability Company Buyouts

2008-07-12T13:00:00.000-04:00

A client and his wife came in a few weeks ago with some questions. He, his wife, and another couple had formed an LLC for a new business venture. Each member owned 25 percent. The venture was still fairly new, though experiencing some apparent success already, when one of the two couples decided it wanted out. My clients, who wanted to keep the business going, came to me for some counsel about what to do.

Fortunately for all parties, we reached a very easy and amicable solution by which my clients will, next week, buy out the other couple for a sum representing their initial investment. It's a good thing that everyone was reasonable, however, because the Operating Agreemeent did not provide a good "dissolution" mechanism, in the event that the discussions had become acrimonius, and it made me realize the importance of a good buyout provision in these operating agreements.

The operating agreement, like most in our state, was written so that the departing couple could not have sold its interest in the company without my clients' approval. And without my clients' approval, they'd have been out of look. Worse yet, my clients owned the physical location of the LLC's business, and, if they'd wanted, could have evicted the LLC from the location and simply set up a new LLC to run practically the same business.

Of course, the departing husband and wife were decent people, and my clients were decent people, and they quickly and fairly negotiated a fair resolution that was mutually beneficial.

The majority of limited liability companies I set up seem to be two parties (usually two men, but sometimes two couples), and in these LLCs, when you're setting them up, think about the exit provisions:

1. Consider putting in a provision that would allow you to sell your interest to a third party if the remaining owners are not willing to buy you out; and/or

2. Consider a provision that will value your interest and set up a payment plan so that while you can force the remaining parties to buy you out, conversely a mechanism is in place so that they can do it without ruining their cashflow.

Of course, picture yourself in the reverse provision: what if you want to stay in but your co-owners do not? A good operating agreement will provide provisions that will provide you a comfort level so that if you start going different ways, you'll already ahead of time know that Agreement has provided a way for all of you to easily separate your interests.

Business Litigation, pt. 2 Victory

2008-06-18T20:44:00.000-04:00

We won our trial, and now I can describe more details about it. My client, a real estate developer, had been sued for issues arising from a former partnership. My client and three other men had formed a partnership to develop a tract of land. One of the partners, who happened to work for my client, was bought out years ago. However, in 2006, when the partnership sold its last lots in 2006, the former partner sued, saying he was still a partner and entitled to partnership proceeds. The Plaintiff lost and received nothing. My client received satisfaction and bragging rights--but at what cost? Here is what I believe my client learned from this lawsuit:

1. Get everything in writing and keep good records.

My client had evidence that he'd gotten, in writing, something showing the Plaintiff had given up his interest, but that the file mysteriously disappeared when the Plaintiff quit working for my client. What could my Plaintiff have done differently? He could've had his lawyer at the time draw up the document, make it legally clear, and keep triplicate originals--one for the client, one for the man who gave up his interest, and one for the lawyer (just to be safe). Also, my client could have kept his employee files locked (the testimony was that the files weren't locked).

2. Understand the sheer randomness of a jury.

I always tell clients that you never know what a jury is going to do in a trial, and I really couldn't tell, until they returned a verdict in our favor, what the jurors were thinking. I try to pick up on body cues (do they appear bored when I talk? Are there arms crossed? Are they attentive), but this is not an exact science, and worse yet, an attorney (or his client) can drive himself crazy trying to put meaning into every action of a juror. At one point, the jury sent a question to the judge, and when it was read, my client thought we had lost. Instead, we won; jurors create an emotional rollercoaster for the parties involved, and I think my client knows this now.

3. Place a value on your opportunity costs and your time. This case, in the grand scheme of things, did not involve a lot of money. In fact, early on it became clear that--if carried to its finish--my fees would eclipse the value of the case. However, this case involved (to my client) principle, and, honestly, a bit of a grudge between two individuals. My client was fully prepared to to pay my costs to the end. However, I believe if he were to be asked now, he'd rethink settling earlier, not for the fees he's having to be me, but for the amount of money he probably lost having to sit at trial for a week. My client is an entrepeneur, a commercial real estate developer, who travels the country. During the time he spent in trial, my client missed an important meeting with his largest customer in South Carolina (who, in fact, was going to present him with an achievement award), and also had to forego trips to other parts of the country to oversee and/or initiate start-up projects. The greatest loss, for a client like this, is not the court costs, but the missed opportunity costs.

Things aren't all bad, however. I obtained this client because he was on the opposite side of a lawsuit about five years ago and, though I'd handled many cases for him in the interim, they'd all either gotten dismissed or settled. This was the first opportunity I'd had to show my client how I reacted in the stressful setting of a courtroom in a week-long jury trial. Many corporate lawyers sit behind their desks advising clients, but I hope that my client has now seen my advice put to action.

The Business of Business Litigation

2008-06-07T14:45:00.000-04:00

In cities larger than the one in which I practice, most attorneys either fall into the category of litigators (i.e., trial lawyers) or office attorneys who never see the inside of a courtroom.

I've volunteered to be part of a working group of the Bar Association's Business Section, that is comparing the corporate laws of North Carolina versus the analogous laws of Delaware. I'm going to have to miss the group's first face-to-face meeting next week because it appears that I'm going to be in court trying out a partnership case.

The benefit I believe I bring to the table for prospective business clients is that, when I'm advising them or drafting something for them, my experience comes not just from a knowledge of the law or from what someone has taught me, but quite often from my experience in litigating similar issues.

When I reach a trial, I already feel in a sense as if I've failed, because I have been unable to reach a resolution of the case (whether through obtaining a court dismissal or a settlement) for my client. At trial, you see, there comes a point at which the result will be out of the hands of myself and my client: that is, the jury will take over.

In my experience, juries really do try to do the right thing, and also in my experience, I've found they most times have done the right thing. We've all heard the stories of runaway jury verdicts that appear to rape justice, but at least where I practice, the jurors have good common sense and try to do the right thing.

Still, a business tries to control uncertainty as much as possible. Sure there's risk--without which, we wouldn't have entrepeneurism--but most businesses I represent don't want uncertainty (which is different than risk). A jury trial is the ultimate uncertainty. I can do my best for a client in court, but on any given day, something can happen--a bad judge, a runaway jury, whatever--and the unbelievable happens.

Therefore, though I'm happy to litigate for clients, I always advise them that they need to be in the business of THEIR business--not in the business of fighting in court. Because no matter how good your lawyer is, and no matter how good your case is, there are always two sides, and there's always uncertainty.

Minority Shareholders, Revisited

2008-05-31T15:59:00.000-04:00

A friend of mine finally resolved a longstanding situation in which he was involved, and I thought I'd revisit a commonly queried subject of mine--buying shares of stock in startup companies.

During the Dot Com bubble, my friend, and many other intelligent, financially astute professionals, were talked into investing in a startup corporation. What it did or was supposed to do don't matter for the purposes of this discussion, but recently, the corporation was bought out by a larger company. My friend received five cents on the dollar for his investment, and by the time it had arrived, was happy that he even saw that much of his money back--he'd resigned himself to having lost it all.

The purpose of this blog is not to speak to that company's business plan, or why the business never really took off. However, in retrospect, my friend's experience demonstrates a cautionary tale for investors who are buying minority shares in a startup company.

1. Understand what you're buying into. Ok, in the strictest sense, this isn't legal advice, but it bears repeating. At the time this company was started, technology companies were the rage, and everyone wanted to be a part of a new tech startup that "took it public" (sounds like the recent "flipping" craze, doesn't it?). I listened to my friend and other investors describe the company's goals, but I never could understand it--and I don't consider myself too terribly slow. What I heard were lots of big academic words, such as "shifting of paradigms," but I never was satisfactorily told exactly WHAT the company would do. Looking back on it, I'm not sure my friends understood either. If you don't understand what it is the company is supposed to do, I'd submit that you shouldn't invest in it.

2. Understand what it means to be a minority shareholder. Being a minority shareholder means that, unless specific safeguards are put into place, you have very few rights. For example, you can't force the sale of a company, you can't get your money back upon demand, and you pretty much have to do what the majority dictates.

3. Understand the value of stock offered. Let's say this startup corporation issued 100,000 shares, each of which were valued at $1.00. Pretty simple right? You put in $25,000, and you own 25 percent of the company. Except you might not. Unless a shareholder's agreement is put into place, there's no restriction against the company issuing additional stock. Stock can be issued when needed to bring in additional money. For example, using the above example, if the corporation needed another $100,000, it could issue 100,000 more shares. But what if some of the shareholders were issued shares because they were the startup engineers (i.e., the "idea men")? What if, even though your stock was valued at $1.00 per share, the company issued 100,000 shares to monetary investors, and then 200,000 shares to the two guys who thought up the idea, yet put no money into the company. That simple math can show you that the company would take quite a bit of growth before the stock you had might really sell back at $1.00 per share. Worse yet, what if the two original startup guys decided to issue more stock--to themselves? They might be able to do it--they're the majority, after all.

When buying stock in a startup company, understand the real value of the stock--in other words, is its value initially diluted by investors who are holding stock but have contributed no money or assets? Can the stock value later be diluted by the issuance of additional stock without your consent? Think about these things. In the case of my friend, the only person who appears to have profited from the corporation was the "idea guy," who'd issued himself so much stock with having placed a minimal amount of money into it that, even being paid a nickel on the dollar, he has profited well.

4. Understand what it means to own stock that's not publicly traded. Lots of stocks on publicly traded exchanges gain and lose value every day, sometimes because of the poor acts of the officers or directors. However, when you buy publicly traded stock, you know that, at the very least, you're not captive--you can sell your stocks on the open market for whatever price it will bring. However, when stock is in a very small company and isn't publicly traded, you may simply be stuck--as my friend was. He knew for years that the company was doing poorly, and simply had to watch as the value of his stock went down the drain.

There's nothing wrong with investing in a private startup company--in fact, I've both invested and started such companies. However, at least understand your rights when you invest!

Arbitration, Part 3 -- Right of Appeal

2008-05-11T19:25:00.000-04:00

Binding arbitration is designed to be a quick and final extrajudicial disolution to disputes. However, experience has shown that this forced expediency often sacrifices accuracy and correctness.

Typically, binding arbitration does not allow for a right of appeal--either through an appellate arbitration panel or through judicial appeal. This means that the entire dispute will be decided by one individual.

In Court, though the process is admittedly often too long, too expensive, and too arbitrary, one benefit is that the judicial procedure provides for sufficient checks and balances that will prevent many egregious judicial errors. If the judge inappropriately dismisses a case before trial, the courts of appeal will typically reverse the trial court's decision and remand (send) the case back to the trial level.

If the trial judge makes an error of law in his ruling, the appellate courts will likely catch this error and reverse it. Furthermore, most, if not all state courts (and the federal courts) provide for additional layers of appellate oversite such that there are appellate courts to which you can appeal the decisions of other appellate courts.

All of these layers of judicial oversite create a heavy cost to taxpayers and to the individual litigant. However, of all the criticisms of the judicial system, one that you rarely hear is that, at the end of the day, after all appeals are through, that the courts got it wrong.

In the Arbitration proceeding, however, if a party is unhappy with the Arbitrator's decisions, there is little recourse. The aggrieved party will not be able to seek further redress within the Arbitration procedure. Furthermore, the party will not have access to the courts either. Typically, the role of the courts is limited to (1) enforcing an arbitration award into an official enforceable judgment or (2) to set aside arbitration awards in only the most egregious circumstances (i.e., beyond just mere errors of law and erroneous rulings).

This means that your entire case is in the hands of one arbitrator, sometimes not even an individual trained in the law, who holds your interest in the palms of his hand, secure further in the knowledge that--whatever he does--he likely will not be overturned.

Therefore, before entering into an agreement for binding arbitration, decide whether accurate and correct rulings should be sacrificed to the potentially arbitrary and unappealable ruling of an arbitrator.

Arbitation, Part 2: Cost

2008-04-26T09:36:00.000-04:00

One of the supposed benefits of Arbitration is the decreased costs in comparison to traditional litigation. The arbitration process is more compact and is briefer, and attempts to dispense with extended discovery (in fact, often opting for no discovery at all), thus reducing the costs of numerous lawyer's hours, court reporter's hours, deposition transcripts, etc. While in the case I just finished, it is true less money was spent on attorneys and depositions, the other costs that were incurred at the very least were equal if not greater than traditional litigation fees.

First, unlike in traditional litigation, the parties are required to pay the "judge" (i.e., the Arbitrator), whose fees per hour will rival or even exceed his attorney counterparts. While from a purely abstract libertarian perspective, I like the idea that the parties to a dispute pay the full costs of the legal proceedings rather than burdening the taxpayers through tax-funded courts and personnel, as a practical matter, this can sometimes end up being more costly for a client than simply going through the state- or federally-funded litigation process.

Second, in my specific case, the costs were trebled through legal maneuvering from the other party's attorneys. The case at issue involved an owner/contractor disagreement, involving three different properties the contract was constructing for my client. Instead of filing one lawsuit or one arbitration, the contractor filed three. In traditional litigation, a judge likely would have combined all three into one case for the sake of judicial efficiency. In this case, however, the arbitrator assigned to rule just on this motion (whom had to be paid separately) ruled against it. That meant my client was required to ante up money for three different arbitrators, assigned to three distinct cases, when one paid arbitrator could have decided it in about the time it would cost to hear one case. It was an interesting tactic, because I believe my client was more able to absorb the costs than his opponent.

We estimated that the case, if consolidated, would take about a week to try, but unfortunately, because each arbitrator would be hearing his particular case anew, each time we'd need to spend a few days simply laying out the facts. Instead of paying for one week's arbitration, we would now pay for approximately three. Do the math on arbitrators who charge about $300 per hour, assume eight hour days, times 21 days. It's not cheap. Now add in attorneys for each side who will also be litigating for three weeks.

Finally, even though trial litigation can be expensive, the reality is many cases never make it that far--not because of settlement (which of course happens often)--but because the case is disposed of earlier by motions. I've litigated numerous cases for this particular client, but more than half of them never made it to trial because I got them dismissed early on. Because the arbitration procedure does not typically rule on such dispositive motions, and simply lets it go to a hearing (and if you think about it, it's in the arbitrator's financial self-interest to keep the case going so he can be paid), my client would have spent far more if those cases had been arbitrated than it did by litigating them.

Although I am sure each arbitration varies on its merits, my experience thus far is that arbitration has not been less expensive than litigation, and in fact has been more so.

Arbitration and Arbitration Clauses in Contracts -- Overview

2008-04-20T16:35:00.000-04:00

Many of my more sophisticated clients, for whom I draw contracts, commonly ask if we should put in a provision to require "Binding Arbitration" in the event of a legal dispute.

The idea, in theory, is a good one. Arbitration, it is said, will reduce the legal costs otherwise incurred in court; will produce fairer results less dependent on technicalities and based more on the merits and equities; and will resolve matters more quickly.

I'd sat on the sidelines for a long time and advised against them, primarily from cases I had watched and from my own personal convictions that I was able to use the mechanics of the legal system to obtain a more favorable result for most of my clients.

However, I finally got the benefit of putting Arbitration to the test, recently, when a client of mine got into a dispute with a large commercial contractor over several projects. Each project was governed by a separate contract, each of which provided for binding arbitration in the event of a dispute, and the contractor, pursuant to his rights, demanded binding arbitration. Because the contractor's attorney was a litigator who specialized in construction litigation, and because I did not want my first experience in arbitration to be against an experienced specialist when hundreds of thousands of dollars were on the line, I associated a colleage of mine who was also a construction litigation specialist.

Through the process, I got the opportunity to watch how binding arbitration worked, to see its advantages and disadvantages in action, and now feel more qualified than before to speak about arbitration.

First, my opinion: putting binding arbitration clauses in contracts is still, in my opinion, a bad idea. Arbitration, in my experience, does not adequately deliver on its promised benefits (costs and fairness), while subjecting its participants to a procedure and to rulings that are only loosely bound by a rule of law and, for the most part, are non-appealable.

Next, in the upcoming articles, I will discuss the structure of binding arbitration, its alleged benefits and its drawbacks, and allow the reader to draw his own conclusions. Stay tuned....

Reader's questions about minority shareholders

2008-04-05T14:48:00.000-04:00

A reader recently wrote a very good question about minority shareholders, and I thought the situation would be worthy of posting. Here is the question, and answer, with permission.

"Hi,

I read your article about minority shareholders. I got an offer to become a shareholder of a small company without paying anything, just because I have been working for them for a period of time.

However, my plans are to go to grad school and then after a year or two look for a position in a large company. Can I then go to work for another company if now I've agreed to become a shareholder of the small company that is just starting? If not, can I, after a year or two, tell that small company that I don't want to be a shareholder anymore? I'm being told by the other shareholders that everything will need to be confidential, so I don't know if my husband and I can show the shareholder agreement to a lawyer."

--------------

First, understand that I am only licensed to practice in North Carolina, and this does not constitute legal advice.

Second, at least in North Carolina, but usually in other states, it is a general industry practice that any agreements which would involve you personally but are labelled "confidential" can still be studied, shared, reviewed by legal counsel before you decide to sign it. Still, the best practice is to let the others know you'd like your personal attorney to review the documents.

Finally, there are two things which may prevent you from joining a big company while still a shareholder of the smaller one. The first is that (assuming their businesses are similar), if you're involved with the smaller company, you owe a duty of loyalty to that smaller venture. If you go to another company, you are not able to use your best efforts for the smaller company. In fact, your actions may go further and violate specific provisions of your shareholders' agreement.

The second issue is also a serious one: what if you just give up your stock rights and leave the company; will that solve everything? There still may be a problem if the remaining shareholders allege that you are using proprietary or confidential information you obtained while a shareholder in the small company. This may specifically violate terms of your shareholder's agreement (which may contain a non-disclosure provision) or it may violate your state's common law rules (i.e., civil rules created by caselaw) regarding what information from your former employer/partnership/venture/etc. that you can use once you leave.

The best thing you can do? Be upfront with the other shareholders, and negotiate a provision that, while protecting their interests, allows you the freedom one day to leave for bigger things: e.g., perhaps an agreement that allows you to leave and join a competing business, but provides that the remaining shareholders can buy out your interest at a fair price (the determination of which would be a subject in itself). If they won't agree to this, both sides are already on notice that there will be a potential conflict in the future--so why buy into it? Either walk away, or understand you may have a fight on your hands when you leave.

Purchasing a Business and using Brokers

2008-03-15T15:13:00.000-04:00

On a weekly basis I represent individuals who are buying and selling small businesses. Occasionally, these clients employ the services of a business broker who, like a real estate broker, brokers the sale of the business, often representing the interests of both buyers and sellers in setting up a deal.

I've met some very knowledgeable brokers who have found niche specialties--such as one with whom I worked last month who only brokers the sale and purchase of pharmacies. However, just as with real estate brokers, there are very good ones, and then there are those who add little value to the deal other than putting a willing buyer with a willing seller.

The purpose of this post is not to discourage business buyers or sellers from using a business broker (after all, the broker can sometimes put you in touch with another party and connect you in ways you could not do yourself). However, there are at least two areas in which you need to be careful and protect yourself when using a business broker.

1. Do not let the business broker draw up your contract. Going back to the real estate analogy, in residential (and often commercial) real estate transactions, the broker often draws up the contract to be signed by the parties. However, these contracts have often been developed over time and adopted by your state's realtors association as well as the state bar association. These contracts have been used and revised enough that they can fairly well cover the exigencies involved with real estate.

A business sale, however, is far more complicated and multi-faceted, and does not lend itself well to a one-size-fits-all form contract. Furthermore, a business broker (unless he is a specialist broker, and often even not then) will not have sufficient legal understanding of all of the issues which are involved (and the laws governing them), to adequately protect the buyer and seller in a business sale contract.

Take, for example, a form contract I recently reviewed for a client in the construction industry. He'd agreed to sell his business for a price certain, and the buyer had agreed to purchase my client's building, within 60 days of the business sale, for an additional price. The parties had also agreed in theory--as is often the case--that my client would stay on as a consultant on an as-needed basis for a certain length of time. Pretty simple, isn't it? Perhaps, but the form contract drafted by the broker left some glaring holes:

1. First, though the broker was only responsible for listing the business (and thus receiving a commission on the business), he'd written the real estate sale into the form contract such that the broker would receive a 10 percent commission on the sale of the real estate as well--more than doubling what his commission would have been!

2. The purchaser wanted my client to sign a 100-mile radius non-compete for three years, which the broker had written into the form contract. However, such a wide-ranging non-compete would likely not be upheld in the state of North Carolina. The broker didn't know this.

3. The contract provided that my client would work as a consultant, but didn't specify his hours or his rate of pay.

In addition, the broker attempted to steer both parties to one attorney who would close the deal for both of them (more on that later). By the time my client came to me, the two parties were arguing over all the gaps which had been left in the contract but were now needing to be filled in.

A broker's form contract for the sale of the business is inadequate unless it is to operate merely as a non-binding letter of intent which just ensures the parties, in theory, have an agreement.

A well-written business purchase agreement is large, often contains lots of legalese, and will sometimes take quite a bit of negotiation. However, the beauty of it is that, once it is signed, the parties know exactly what the terms of the deal are, and now can move forward to closing with a clear understanding of what the seller is selling and the purchaser is purchasing. In the last two closings I handled, the actual "closing" of the business, in the attorney's office, took about 30 minutes each!

A good purchase agreement should be clear on the details, and, once signed, allow the purchaser to move forward with his due diligence and the seller to prepare for the conveyance of his business without having to haggle over details.

In the case above, the parties were able to sign an agreement quickly, but over the ensuing months of trying to fill in the details, have now become somewhat at odds with each other. This doesn't need to happen.

2. In a business purchase or sale, each side should have his own attorney. Often, brokers attempt to funnel both buyer and seller to a supposed "neutral" attorney, who simply draws up the conveyance papers based upon what was agreed upon in the form contract. Often, I've found, these forms state something like, "You should hire your own attorney to review these documents," but in practice, my clients tell me that the broker has discouraged them from doing this, saying one lawyer is enough.

Sure, it sounds self-serving, but in a business transaction each side should have his own counsel. In many real estate transactions, one lawyer can adequately (and, at least in North Carolina, legally) represent both sides. However, a business sale is much more complicated.

In the example above, the attorney recommended by the broker was good and was honest. In fact, he was so honest that he felt he should only represent the purchaser's interests and not try to represent both sides. My client came to me with proposed closing documents that included:

1. A consultation agreement requiring him to work at the purchaser's will for less than half of his normal hourly pay rate;
2. A property lease that allowed the purchaser to lease--with no obligation to purchase--the seller's real estate, notwithstanding the provisions of their form contract.
3. A non-compete that was so overbroad and vague, it would have prevented my client from getting work that was realistically not in competition with the purchaser's acquired business.

Furthermore, if both parties go to a supposedly "neutral" attorney, what is that attorney's obligation to point out (or even correct) legal flaws created in the original form contract? In this case, the hired attorney pointed out that the originally agreed-upon non-compete was overly broad and unenforceable in our state. But what if he had not? Would he have overreached against the seller? Or would he have been negligent and committed malpractice as to the purchaser, who, if he needed to enforce the non-compete, would have been unable to do so?

In sum, though business brokers are a valuable source of information when buying and selling your business, you'd be best served to hire counsel to advise you through the process.

If you need help or representation in buying or selling your business, you can set up a consultation with me by calling 704-735-0483.

The Family Business -- Finale

2008-02-23T14:46:00.000-04:00

In the last few weeks, I've been discussing what to do with your family business, specifically focusing on the issues inherent to passing the business on to your family members. Today I'll go through a few of the remaining issues to consider.

1. (If you're selling) Should you sell for cash to your family or owner-finance? As a practical matter, your family will likely be unable to pay for the business unless you can owner finance. If you really want to cash out, you'll probably need to find an arms-length third party buyer.

2. Should you stay or should you go? One issue to consider is, when you convey your business to your family, should you request or offer to stay on in some limited capacity (e.g., as a part-time employee, a consultant, etc.)? When selling your family business to an outsider, the buyer usually should have a desire to keep you on, if for no other reason than to (1) help retain the business's good will and (2) create a smoother transition period.

Family businesses offer different dynamics, however; no matter how much you love your family, can y'all work together?

Anecdotally, from my past experiences, most parents do not stay on after conveying their business to their children. I suspect that, by the time they hand it over, they're ready to see if the business can sink or float on their children's efforts, and quite frankly know that they would drive themselves (and their children) crazy if they hang on and offer advice. A small exception to this, however, is that some parents I've seen stay on as "consultants" (usually, at most a nominal title) so that they're able to stay "employed" by the business and keep some type of needed medical insurance.

3. Anything else I should consider? Most likely, but your business is special, and it's unique to you. One of the joys of my practice is that I've learned the quirks and specialties of numerous small business, as well as the idiosyncracies of each of their individual owners. No two businesses--even within the same industry--are alike, so you need to make sure you're represented by competent tax and legal professionals. Preparing a succession plan for your business will only happen once in your lifetime--make sure it's treated importantly. If you would like to talk further about your specific situation, contact me at 704-735-0483, and set up an appointment.

The Family Business, Part 3: Give or Sell?

2008-02-16T16:41:00.001-04:00

I've been blogging in the past few weeks about the "family business"--i.e., that small business set up by an entrepeneur, and nourished to fruition--and issues that any successful small business owner should consider when getting closer to retirement age.

First, I discussed the issue of whether the family members had the desire or even the ability to carry on the family business, because in my anecdotal experience, fewer than half of entrepeneurs have families who are both willing and able to carry on the family business.

But for this week, let's assume your family falls into that category. If a member of you family has both the desire--and the ability--to keep the family business running, what you should consider next? Based upon my experience with family businesses, I would suggest that you next consider whether you should sell your business to your family, or whether you should give your business to your family.

The average non-entrepeneur I'd hazard would be be a bit aghast at the idea of selling his business to his family. The average non-entrepeneur believes that his or her job should be to share his wealth with his children, to the extent possible. However, entrepeneurs--many of whom came by success with some difficulty--are more open to the idea. There are many non-legal reasons why perhaps you should consider the issue of sale versus gift (i.e., anything worked for is much sweeter, in an entrepeneur's mind), but I'm going to focus on legal and tax implications for considering this question. As always, there is no generally right or wrong answer--the issue needs to be carefully considered, with the help of both tax and legal counsel. Here are just three things to think about when considering this issue.

1. ESTATE PLANNING. One thing to consider is the tax consequences of your conveyance to your children (both income and estate). Chances are, the actual "book" value of your company (i.e. the value of its hard assets) is much less than you'd actually accept for it if you sold it on the open market. Perhaps, if you own a golf course, your land is worth $1 million, and your equipment is worth another $1 million. However, if your golf course is wildly successful, you might not be willing to sell it for less than $6 million (this value added to the hard value is what is commonly referred to as "good will"). Sometimes, tax lawyers or accountants will advise a sale of the company to children in order to reduce estate taxes.

Using the above example, even if you aren't willing to part with your golf course for less than $6 million, suppose your tax advisor tells you that--since you've never received an offer for your company and it has a book value of $2 million--you could legitimately sell it for $2 million to your children. You have effectively--and legally--gifted $4 million to your children without having to pay estate taxes.

Again using the above example, had you gifted your children the golf course with a book value of $2 million, that would not, at this time, create an estate tax consequence, but if you died leaving them much more property, you might very well create an estate tax burden for them (the subject of estate taxes is too lengthy and complicated to go into at depth; if you have any questions, please contact me and I will refer you to an excellent tax attorney).

Therefore, arms-length sales are sometimes an effective means by which to reduce your estate tax burden before you die.

2. REDUCING INCOME TAXES. Sometimes, a sale versus a gift can reduce the income taxes your family may pay on its property in the long run. This is especially important if you are considering, in the short term, a sale of the business to an outside investor. Using the golf course example, again, let's say that, when all the equipment and land were purchased, their book value was $300,000. If you were to sell the business right now for $6 million, you would pay taxes on your gain (Sales price of $6 million, minus original basis of $300,000 = taxes on $5.7 million). If, however, you could in good faith sell your family business to your family for its book value ($2 million, in my example), your family would pay taxes on the gain of $6 million minus $2 million, which would reduce its taxable basis. (Understand that I'm using simplistic examples: a tax advisor may tell you to hold your business until you die so that your children could get a "stepped up basis"--in this case, $6 million; so please understand there is no one formula that fits all).

3. SELLING YOUR BUSINESS TO FAMILY CAN PROVIDE YOU INCOME. Let's say that you family is willing and able to run you business, and your tax advisor believes that an arms-length book-value transaction is the best idea for your business. There's another good reason to sell your business versus giving it away: it can provide a steady stream of income. First, an assumption: almost no sale of family businesses to another family member involves an actual cash purchase. Instead, they typically involve selller financing. In addition to providing you tax savings, selling to your family can provide you a steady stream of income in the form of seller financing payments back to you on a promissory note. This is often important anyway, but if I am representing the spouse of a deceased entrepeneur, often this is even more important. Selling to the children, and owner-financing the sale, can provide to the seller a steady stream of income during the seller's golden years, while at the same time giving his or her children tax benefits and a leg up in this world.

If you have any questions, please call my office and set up an appointment at 704-735-0483.

The Family Business, Part 2

2008-02-08T17:34:00.000-04:00

When considering a succession plan for your family business, start with one of the most basic questions: who should succeed to your business in the event of your passing? A basic question, to be sure, but before you start planning your business plan wrap up, you need to determine whether it should descend to your family or not?

If you are like most entrepeneurs, you'll typically want your family to share in the successes of your business, but you may need to decide whether they should take on your business, or whether you should just pass to them the fruits of your business. When thinking about this, ask yourself these questions:

1. Does your family have the desire? First, ask yourself: does your family even want to continue your business? I've never done a formal survey, but anecdotally, I'd estimate that no more than half of the entrepeneurs I represent has families who even desire to take over the business. Often, the children have watched their parents sacrifice their private lives and time with family to build a successful business, and the children determine that they don't want to live their lives that way. I also suspect that for many of these children, who have enjoyed the financial fruits of their parents' labor, they subconsciously disconnect the labor necessary obtain those benefits. What do I mean? I've seen numerous children of successful entrepeneurs decide to work in lower-paying jobs--becoming teachers, social workers, and other idealistic professions. Some of these, I believe, decide to follow a calling such as this because in the back of their minds they know that they have their parents' financial resources to rely on.

If you're like most of my entrepeneur clients, your children have enjoyed the benefits of you owning the business: but do they want to own the business?

2. Does your family have the ability? Even if your family members do desire to take over the business, ask yourself this brutally honest question: do they have the ability to successfully continue (and even expand) the business you worked hard to create? Anecdotally, again, I've found that in more than half the cases, if a family member actually desires to continue the family business, that family member probably also has the ability. You've ingrained into him or her the work ethic necessary, and your family hopefully will share many of your same values that helped make your business a success. However, your family's ability is not a given. Just because you have a brilliant medical practice does not mean that your child can share that gift you have. Make an honest appraisal of your family members and your business. Does your business require mainly hard work and a certain ethic? If so, your child's desire to continue the business may see him through. Does it also contain certain talents or gifts that most people don't possess? Consider it more closely, then.

3. What do you do when there are multiple family members? I've been writing this article almost as if you only have one child, but the average family, of course, will have two or three children. This could bring multiple complications--all of which can be overcome with planning, but which need to be considered. I've seen all of the following issues:

--A brother and sister both want to run the family business, but don't get along.

--There are three brothers, two already in the family business, but one who is much younger and a minor.

--One child has always been in the business, and the other has never had anything to do with it, and the parent is trying to figure up how to divide his estate fairly between both of them.

None of the issues I have mentioned should keep you from making a succession plan with your family business. To the contrary, they are matters to be considered, and, with good planning from an attorney, an accountant, and perhaps even an investment advisor, they can all be taken into consideration when creating a successful plan regarding your business.

Passing on the Family Business

2008-01-13T19:20:00.000-04:00

Passing along a family business may seem like a pretty simple process. The entrepeneur builds a successful business, makes a solid living, then passes it along to his or her children. Easy, right? Unfortunately, those entrepeneurs fortunate enough to have created a successful business have found, when the time actually comes for them to pass the torch, that things aren't so easy. If you own a successful business, here are some issues that may come your way. In future blogs, I'll go through these different issues and describe how they can be overcome. But for now, give them some thought well before the time comes for you to pass down your business.

1. Do your children want the business? The first, and most basic question to ask yourself is, do your children really want the business? Do they have a desire to carry on the family business; do they have the same passion (and ability) to do what you are doing; and are they currently involved in your business? Or, have your children enjoyed the benefits of your business (e.g., annual gifts of cash, a company job at an inflated rate, a higher standard of living than their career would otherwise allow), but don't seem to have an interest in doing what you did to provide those benefits?

If your children are already adults (and you're considering retiring), chances are you probably already know this answer. But knowing the answer, and making future plans for yourself and your family, are two different things. If your family is not interested in joining, working at, or perpetuating your successful family business, then it's time to start thinking about your own future. You may want to consider selling the business while you are still healthy, and while the business has goodwill. Because if you have no one to succeed you, and you hold on to your business until you die, your business' value will wither quickly while your children try to orchestrate a quick liquidation.

If, on the other hand, your children are interested in taking over and continuing your business, you need to consider how best to accomplish such a handover. The way you accomplish this may have profound consequences, affecting your own standard of living during retirement; the net worth of your children; and estate taxes that may be suffered by your estate after you die.

2. Give or sell the business? Assuming one or more of your children do want to own the business, how should you convey it to them? Should it be a gift? Or should you sell it to them? While many people, at first blush, might be aghast at the idea of making their children pay them money, the decision on how to handle this shouldn't be made without the collective advice of tax and legal professionals.

3. Should you keep any control? When you convey the business to your children, should you walk away? Or should you retain the right to make business decisions even after you no longer own it? The decision you make should depend on the particular circumstances of the family members who will be taking over your business.

4. If you sell the business, should you take cash or owner finance? A cash payout will provide you hard, liquid assets that will allow you to live out your retirement goals. Owner financing, however, also has its own benefits--both for you, and the family members buying from you.

If you live in North Carolina, and have questions about a family business, feel free to contact my office to set up an appointment:

wldeaton@bellsouth.net
704-735-0483.

Limited Liability Companies

2007-11-03T16:40:00.000-04:00

In a spring post (http://thebusinesslawblog.blogspot.com/2007/04/limited-liability-companies-new-case.html) I wrote about a new case further strengthening the protection offered to limited liability companies. During that time, I was litigating a case in which a home purchaser had paid a large amount of money down to a home builder llc to build a home, only to have it fold. She sued not only the limited liability company, but also the three individual members, one of whom I represented. My client, the only financial strong member of the three, was of course an attractive target for the plaintiff. However, my client was also the least culpable. He'd never met the plaintiff, and actually was nothing more than the cliche' "silent partner"--somebody who put up his money and creditworthiness to allow the two primary members to get loans to build homes.

I'd felt comfortable going in to the case that the law seemed to be in our favor, and during its pendency, two new cases came down from the Court of Appeals further buttressing our arguments. I scheduled a motion for summary judgment (which, for those not in the legal field, is basically a motion to dismiss the Plaintiff's complaint) for mid-November. I wrote a letter to the Plaintiff's attorney giving them one more chance to dismiss their case against my client voluntarily. Normally, in such a case the Plaintiff's attorney, even if they think their case is week, will at least try to fight. However, the Plaintiff had her own risks--we'd filed a counterclaim for attorney's fees, and one North Carolina case had ruled that when a plaintiff improperly named an LLC's member in a lawsuit, the plaintiff may be liable for attorney's fees. The attorney, who was diligent for his client, nonetheless decided the right thing was to dismiss his case against my client. Therefore, though I never got a judge's ruling to reinforce my belief about LLCs, I believe the Plaintiff's dismissal bears out my theory.

Real Estate Contracts -- Conclusion

2007-10-20T19:15:00.000-04:00

A while back on this blog I wrote about real estate contracts (http://thebusinesslawblog.blogspot.com/2006_12_01_archive.html), and described a lawsuit which I was defending on behalf of a client. We tried the case out last week and, after successfully getting the judge to exclude most of the Plaintiff's evidence, we ended up settling the case for a nominal value (about one percent of what the Plaintiff was asking).

Now that the case is over, I can look back and give some advice to prospective buyers and sellers who find themselves in a contract dispute.

1. To the Buyer: it's rarely worth it to sue over a lost sale. In North Carolina, you've got two remedies of a seller breaches his contract to sell: either get a court order forcing him to sell the proprety to you, or ask for damages.

As for specific performance (the court order), this is great if the Court will do it, but it is what is called an equitable remedy, and the Court, in its discretion,
may not order the seller to convey the property to you. Also, to get this remedy, you have to take certain quick legal steps to tie up the property (called a Lis Pendens) before the seller sells it to someone else. In my case, the Plaintiff attempted to do this, but my clients sold the property too quickly. Therefore, that just left a remedy of damages.

As for damages, they are figured by subtracting the price you would have paid for the property (the contract price) from the actual market price. In other words, you have to argue that you were buying the property for less than what it was really worth. If, however, the seller immediately resells the property (and actually this is often the reason why the seller refuses to sell it to the original buyer), then a buyer will be able to show damages in the amount of the difference between what the property sold for and what the buyer had contracted to buy it for.

In my case, however, the buyer, in addition, attempted to sue for lost profits. My clients sold the property for only $15,000 more than the original price with the Plaintiff. But the Plaintiff claimed he thought it was "feasible" that he could have subdivided it and made $700,000 profit from the sales. The judge felt that testimony was speculative, and would not allow it into evidence.

2. Sellers, don't communicate in writing with the buyer. The Plaintiff/Buyer in my case based his hopes, in large part, on the fact that he'd carried on a string of email conversations with my client long after the closing time had passed. He argued that these conversations (in which closing dates were set and re-set) showed that my clients had waived the closing deadline. I was able to get this evidence excluded (without which the Plaintiff didn't have much of a case), but on appeal (or if the Plaintiff had dismissed his case and re-filed again), I don't know if that ruling would have stood. In any event, had my client not communicated in writing with the Plaintiff, this case probably would never have been filed.

3. Get an attorney to draw the contract. Self-serving, I know. But had I drawn the contract for my clients, I would have put in numerous provisions that probably would have kept this case from ever getting started, such as:
a. A time is of the essence provision.
b. A provision that any extensions of time must require additional earnest money.
c. A larger earnest money deposit.

4. Speaking of earnest money... One final piece of advice: if you're selling a serious piece of property, make sure you have a serious buyer by requiring a serious earnest money deposit. I'm convinced that the Plaintiff/Buyer was someone who was financially unsound and was attempting to "flip" the property with almost no money down. My clients only requested a $1,000 earnest money deposit--on a purchase of $389,000! The company that ultimately bought their property put down $25,000 earnest money, and bought the property in less than 14 days. Had my clients forced the Plaintiff/Buyer to come up with serious money (at least $10,000), he probably would not have been able to, and would have simply walked away, looking for another easy mark.

Planning for emergencies in a (large) one-man company

2007-05-30T20:15:00.000-04:00

Over the Memorial Day weekend, I received the sad news that a business client of mine had died in an automobile accident. In addition to the grief and sadness that the sudden loss brought, they had the additional worry of how to keep his successful business running. My client was the sole shareholder of a company that employed a large number of employees on construction jobs, was the only licensed contractor employed by the company, and furthermore was the sole officer and director of the company (more on that later). This crisis has given me pause to think about how, if you own your own large business, you should plan for what happens if an accident strikes.

1. Make sure that at least one other person can make binding decisions in your absence. My client divorced his ex-wife a few years ago, and bought out her shares of the company. At the time, he simply did not want to place anyone else in a position of authority or trust within his company. However, better times came, and as he went back to work he forgot about appointing someone, say, as a secretary or vice-president, because he was a natural leader. Unfortunately, however, when he died, no one could keep the company, which had numerous large-scale construction contracts, in motion. Had someone been able to step in as an officer (or manager) of the company, contracts could have been continued, and the process, while practically not seamless, would at least have been a legally smooth transition.

2. Plan for someone that has practical experience in running the company, in your absence. In a sole proprietorship, a business may simply fold with the death of the owner. In a larger company, however, it is not so simple: there are numerous workers employed, contracts to be fulfilled, people who are relying on the company to stay around and complete its obligations. In a construction company, at least one person has to be a licensed contractor. My client was that person. In his absence, family members are scrambling to either obtain a license for one of the employees or to hire an employee holding such a license.

3. Make sure that someone knows the important details about your company and its business. Once again, in a sole proprietorship, the business may fold with your death. However, in a large company, at least one other person in the company should know important details such as what contracts are outstanding, how to pay the bills, the location of accounts, etc. Fortunately, my client kept at least two co-workers knowledgeable about these details, and in this interim period, they have been able to keep the company above water by, e.g., paying employees.

4. Plan your estate. Most fortunate of all, my client did make a good estate plan. He set up a trustworthy executrix, and made provisions for what would happen if his children were still minors (and one is). Had my client not made such provisions, his entire estate would be tied down in a slow and difficult process since the minor would have to have a guardian appointed and the company ownership would stand in a quagmire. Instead, the executrix will soon be appointed by the Court, and will be able to then appoint officers of the company and help the company get back on its feet during these difficult times. Therefore, though some matters within the company could have been planned better, my client's overarching desire to take care of his children inadvertently helped prevent a much larger crisis in his corporation.

If you have any questions about succession planning for your business, contact me at wldeaton@vnet.net.

Partnership and Corporate Disputes -- Final Settlement

2007-05-08T08:39:00.000-04:00

I've been writing lately about different clients who've found themselves in disputes with their small business partners or co-owners. This week I settled one case, involving a man who'd owned both a corporation and a partnership with one other co-owner. Although emotions ran high between the two former friends, and they'll likely not be on speaking terms for a long time, the actual dissolution process was fairly tame and was resolved without going to court. Looking back on it, there are a few lessons to be drawn from this experience.

1. Put your agreements in writing. Although both gentlemen were the type who liked to do business on a handshake, they'd had the sense, 20 years ago, to put their business agreement in writing. When things between them went sour, and they started rattling their swords at one another, at the end of the day their resolution of the conflict was governed by the written documents that had been drafted two decades earlier. Had the two men operated on simply a handshake, as is quite often the case, I believe my client would likely have been simply shut out of the company and would have had no recourse to protect himself other than go to court.

2. Look at the balance of power. One thing my client, in retrospect, would have done differently is to have put more thought into the balance of power. The two gentlemen were each 50 percent owners, so the opposing party was agreed upon as President, and my client was the Vice President. They created, however, a three-person board, made up of my client, the opposing party, and the opposing party's wife. When things went bad, my client was, to a certain extent, shut out of decisions because his partner and partner's wife constituted a majority of the board of directors. If he had it to do over, I think he'd rather have appointed an independent third party (such as an accountant) as the tie-breaking director.

3. Know your rights. When things between my client and his partner first went south, his partner threatened to just push him out of the business. My client, quite frankly, was scared that he could simply be pushed out of the business. However, he came to an attorney specializing in business matters. We reviewed his business agreement as well as the applicable law, and I was able to advise him of both the strengths and weaknesses of his position. My client learned, for example, that if he and his partner could not agree, the worst thing that could happen is that the business could be judicially dissolved and the assets divided (or sold and the proceeds divided) between the two of them. On the other hand, he also learned that if the corporation and partnership were judicially dissolved, it would involve high court costs and would likely not bring the full value of the property. Armed with this knowledge, my client was able to go into negotiations with a certain degree of confidence, yet also knew that he needed to work together with his former partner so that they both could come out better.

If you have questions about a partnership or corporate dissolution, contact me at wldeaton@vnet.net.

Think Before You Invest as a Minority Shareholder

2007-04-29T19:05:00.000-04:00

You've got a little extra money in your pocket, and you're looking to invest. Somebody comes to you with a great business idea, and offers to cut you in on it. For just $X, you can own a five percent, 10 percent, 49 percent share in the company, and it has a lot of potential!

I have clients who are approached with these situations every day. Some are wealthy people who are actively searched out to be investment partners in large-money ventures. On the other extreme, some are humble folks, who are considering (or have) poured what little savings they have into a new start-up company. Before you invest as a minority shareholder in a company, consider these tips, and think about the cautionary tales below.

DEFINITION OF MINORITY SHAREHOLDER: a minority shareholder is someone who holds less than a 50 percent ownership interest in a company. I'm using the term loosely to not only include true stockholders in a corporation, but, for example, partners in a partnership or members in a limited liability company. If you hold less than a 50 percent interest in a company, some one or some group of people have the potential to outvote you on company governance matters.

1. What management rights will you have in the company? In consideration of your buying into the company, will you have any rights to control the daily operations of the company, other than your rights as a minority shareholder? Often, the people who start up the company want to retain majority ownership, and are looking to other investors to provide capital, yet still leave control with them. This isn't always bad, but remember, if you're not guaranteed a position as a director or an officer, you're just a shareholder, and one who can be outvoted.

2. What dividend or payout rights will you have in the company? Are there any benchmarks or rights that you'll have to receive money or profits? Too many novice investors blindly invest money in a friend's or acquaintance's speculative company, just to find once they've put their money in, that their money is not bringing them any return. Will you receive any dividends or payments? Or are you just hoping that the value of your investment will go up? Ask these questions at the beginning!

3. What buy/sell rights will you have in the company? In its simplest form, an investor should invest in ownership of a company because he thinks the company will grow, and thus will his investment. However, if you're a minority shareholder, you may not be able to control the direction of the company. What happens if you want to sell out? Can you? Or are you held hostage to the majority interests of the company? A minority interest in a company in which you can't sell your interest is practically worthless.

4. What are the other investors contributing?
Sometimes, the investors trying to get you to invest are contributing their own money, dollar for dollar. Other times, however, the investors are wanting
you to contribute the money, and yet they retain a majority of the stock. This is neither good or bad inherently, but you need to understand. If your $100,000 investment buys you a 49 percent share of a company, and the start-up investor has put in $100,000 yet wants to retain 51 percent ownership, that might be reasonable in some cases. If you're being asked to put up $100,000 for a 10 percent share, and the start-up investor has nothing but his brilliant dream, and wants to retain 60 percent ownership, you need to think about the deal a little harder.

5. Consider a Shareholders' Agreement. If you trust the other investors, and you agree that all interests should be protected, the best thing you could do is to have the attorney setting up the company draw a shareholders' agreement, a buy/sell agreement, or something similar. It, in essence, is an agreement for small companies that is set up to protect the interests of the individual investors. It often guarantees each investor a management position (such as a guaranteed spot on the corporate board of directors), and provides buyout provisions in the event of a dispute.

By way of example, I've recently handled two situations involving investors in small corporations.

In the first case, a tearful woman came in to me after she'd invested in a small corporation. She and a former co-worker had been involved in the dress design business together, and then decided to start their own. The co-worker would get 90 percent ownership, and she, for her smaller monetary contribution, would get 10 percent. They both were supposed to work as employees of the company. Unfortunately, things didn't work out, they got into a dispute, and she was fired as an employee. She was completely shut out of the company's business, and watched as her former friend continued to hire new employees and run the company without her, not providing her any idea of profits or losses. She now wants to be bought out, but under the corporate agreement she entered, the majority partner can buy her interest out with payment, over a long period of time, at a very low interest rate, such that she would likely be paid $100 per month until her interest is paid off in a few years. It's unfortunate, but she did not, when entering into the agreement, make provisions for minority shareholder rights, and has in effect given the majority shareholder money that he really doesn't have to repay.

By contrast, another client of mine hired me before the fact to review a proposed investment for him. This investor had extensive knowledge in science, and owns a chain of stores in his specific field of expertise. He was approached by a scientist and another businessman about going together and starting up a company that would create, market and sell a new invention that the scientist had created. This invention was something my client could visualize, and he knew that, if created, it could save his own business a lot of money, so he knew it was a potentially good idea.

The scientist and businessman wanted my client to invest a large sum of money for a 25 percent interest in the company. If my client desired, he had the right, within a two-year period, to purchase an additional 25 percent interest in the company for a similar sum of money.

I read the documents over numerous times, and spoke to my client about what he visualized the company doing, and what he wanted from the company. I told him I saw a few problems with the agreement:

1. The scientist and businessman were not putting any money into the company, other than their own "sweat equity." Therefore, they had less to lose.
2. The scientist and businessman would each be a director, and my client would be the third director--which meant he could always be outvoted.
3. My client, though putting forth all the money, would not have a majority interest as a shareholder.
4. In fact, the contract was written so that, after a given time, my client had to re-convey a 10 percent interest in the company to the company's employees, therefore guaranteeing that he would become a minority shareholder.

I told my client that I couldn't speak to the wisdom of the business plan, but I didn't like the fact that he was putting up all the money, yet he could be shut out of the control of the company, and furthermore had no way to force returns or the sale of his stock if the business were successful.

We sent a letter back to the gentlemen, nicely telling them that my client was interested in investing, but only if he could have more safety, and outlined some proposals that would protect my client's rights as a shareholder. He never heard from them again, and far from blaming me for "killing" a deal, he thinks that I saved him from potential trouble.

If you have questions about investing in a small company, contact me at wldeaton@vnet.net.

Limited Liability Companies, new case

2007-04-19T08:16:00.000-04:00

I've written before on this blog that, in my opinion, LLCs are not only as protective as a regular corporation, but that recent caselaw suggests they may be stronger than corporations. A new case from the North Carolina Court of Appeals appears to support this.

In Babb v. Bynum & Murphrey, PLLC, the Plaintiff sues a professional LLC, and one of the members of the LLC (Mr. Murphrey), for alleged wrongful acts committed by the LLC's other member, Mr. Bynum (basically, misappropriation and/or theft of trust account monies held for the Plaintiff).

Plaintiffs stated that they were not following a theory of vicarious liability (i.e., they did not allege that Mr. Murphrey was liable just by virtue of being a member), and the Court appears to tacitly acknowledge that this theory would have gotten the plaintiffs nowhere. Instead, the Plaintiffs proceeded on the theory that the Defendant failed to act to stop the misdeeds of his fellow member. The Court of Appeals held that the "innocent" member had no affirmative duty, absent actual knowledge of wrongdoing, to investigate his fellow member.

This case appears to further buttress the theory that LLCs are strong. Had the defendant law firm been a corporation of some sort, the case most likely would have included additional allegations that corporate formalities weren't followed, or would otherwise argue that the corporate veil should be pierced.

To read the text of the case, go to:

http://www.aoc.state.nc.us/www/public/coa/opinions/2007/060876-1.htm

Owner Financing Property

2007-03-31T15:01:00.000-04:00

Perhaps you own a piece of property that you want to sell. If you're like most, you would just like to sell, take your cash, and move on. However, perhaps you should consider "owner financing" your property--that is, letting someone buy your property on payments. Before you owner finance anything, consider some of the advantages and disadvantages, as well as ways to best protect yourself.

Advantages:
1. You spread out your tax burden. If you're making a profit, selling by taking payments can allow you to spread out the taxes you'll pay.
2. You can make money on top of money. If you sell your property and finance the purchase, you can charge interest, which lets you make money in addition to your initial sales profits.
3. You create a larger buyer's pool for your property. By offering owner financing, you can sometimes pick up possible purchasers who otherwise would not be able to buy your property (e.g., someone starting out with no credit, or someone who's got a poor credit history preventing them from getting a loan, but who now can make payments).

Of course, there are some disadvantages as well:

1. You don't get your money up front. This is pretty self-evident, of course, but bears stating. That means if you owe money on your property, you can't pay off the mortgage (and thus, owner financing in such a case will be an imperfect solution). Also, if you need the money from this sale to finance something else, owner financing may not be for you.
2. You will create a long-term relationship with the buyer. You'll be a bit like a landlord, which means you'll be making calls if someone's payment is late, or if you find out the buyer has let his insurance on your property lapse.
3. What if the buyer stops paying? With owner financing, there's always the risk that your buyer, for whatever reason, will stop paying. This means you might have to go through a costly foreclosure procedure, and take back a property that you no longer wanted to own.

STILL INTERESTED? If so, below are some tips to help protect you if owner financing the sale of a property.

1. Do it right and have an attorney draw up the necessary paperwork. Do not attempt to draw up papers on your own. In North Carolina (and probably most other states), the law is very specific about what has to be done to owner finance property. For example, many of my clients had drawn up their own documents that they called "lease/purchase" documents, which stated that if one payment was missed, the buyer could be "evicted" and all payments kept as rent. They believed this was better than a traditional mortgage document, which would take two to three months to foreclose on in the event of a default. Unfortunately, in North Carolina, those documents are not enforceable, and when the debtor stopped paying, my client lost its attempt at an eviction, and eventually had to hire me to sue the people to get out. We got them out--after the debtors had lived in the house rent-free for more than a year.

2. Do your own due diligence on the buyers. Do they have bad credit, or do they perhaps just not have much credit yet because of their age? Are the people going to pose a risk? Run a credit check on the potential buyer through one of the credit reporting services.

3. Shore up your collateral. Offering 100% owner financing is a great way to sell your property. However, if a buyer has little invested in the property, you'll carry more risk. Although it is not always possible, when owner financing, try to get some money down. This of course will reduce the risk that if you foreclose on the property you will incur a financial lost. But more importantly, when a buyer has invested money already into the property, he is less likely to default in his mortgage to begin with.

4. Protect your investment. For so long as you are financing the sale, think of the collateral as "yours"--because one day, you might have to foreclose on it and sell it at a public auction. Therefore, it is in your best interest to make sure the collateral is taken care of.
a. Have your attorney draw up requirements that the debtor will keep the property insured and list you as the mortgagee on his insurance--and make sure that the insurance company mails you proof of the policy annually. You don't want to know how many properties I've seen mysteriously burn down right before the owners were to lose them at foreclosure. Being listed as a "mortgagee" (and not an additional insured) on the policy means your mortgage will be paid off (and you'll get your money) if the property is destroyed--even by an act of the insured!
b. Make sure the property taxes are paid on time. If you find out the debtor is not paying his taxes, it may be an early indicator of trouble.
c. Put in the agreement that you may remedy problems and charge the costs back to the loan balance. If, for example, the debtor fails to pay taxes, or allows a huge hole to open in the roof of a house, you have a self-interest in remedying the problem. If the debtor refuses to remedy the problem, place in the agreement that you can either foreclose or fix the problem and charge the costs to the loan balance.

5. [Advanced] Understand anti-deficiency laws. In North Carolina, the law provides that owner-financed mortgages are non-recourse. This means that if the debtor default, the seller can only foreclose on the property and cannot seek a personal judgment against the debtors. This can be a disadvantage if the sale of the property brings less than what it is owed (e.g., you're owed $90,000 but the property only brings $60,000 at a sale and you don't want to bid any higher to get the property back). First, you need to understand the limitations of the anti-deficiency laws. Second, if you don't like this, in North Carolina you can circumvent the laws by creating a separate entity to finance the property. For example, perhaps I own the property and sell it; however, I can structure the sale so that, though Wesley Deaton sells the property, the buyer is financing the sale with "Wesley Deaton, Inc." This is a bit tricky, and you'll need to seek good counsel so you don't create undesired tax implications (and violate any specific state laws regarding licensing of lenders). However, if you're very concerned about this issue, then setting up an entity lender is an option.

If you'd like to learn more about owner financing property in North Carolina, give me a call at 704-735-0483 to set up a consultation, or email me at wldeaton@vnet.net

Tips on building your home

2007-03-17T15:53:00.000-04:00

A departure from the usual this week, brought about by some questions asked of me by some friends with whom I attend church.

You're in your late 20s or early 30s, and that old house you've been living in just isn't cutting it anymore. One and a half baths, while ok when you were first married, is not enough for you, the spouse, and two little ones. Or perhaps you just want to show the world that you've arrived, and get in that great neighborhood. Or maybe you're just ready for something nicer.

Having a new home custom built for you can be a great experience. You'll have the house your way, and it will reflect your own tastes and style. But if you're not careful, your new home can become a nightmare. That six month construction project may drag on over a year; the costs could run over beyond your budget, and your brand new home could be flawed and even fail to meet code requirements.

How, then, can you make sure that your new dream home won't become a nightmare?

1. Buy below your means. Go against everything our society tells you, and buy less of a house than you can afford. Many of the problems my clients run into when building a house results from them trying to stretch their budget to the very maximum when buying a house. Most of my clients first decided what was the most house they could afford, then tried to pick out a plan meeting that criteria. When you do that, if anything goes wrong, you could have problems. Instead, figure out what you can afford, and either plan to buy less or plan to save more first.

2. Pick your contractor based on reputation, not on price. The second problem I've found with my clients is that, once they've picked out the plan they want (which usually maxes out their budget), they then want to find the cheapest builder. This is often because they've underestimated the cost of their house, and when they submit it for bids, they can't afford most of the contractors. In any given area, there are dozens of builders, and their abilities, honesty and qualities run the gamut. Just looking at their bids, or their slick presentation, will not help you pick the right one. Instead, look at the builders' prior work, speak to their prior customers; better yet, start off by picking builders who've been specifically recommended to you by friends or family who are satisfied customers. Or ask your attorney. Believe me, if any client asks me, I can tell them a half-dozen great builders; and better, yet, if they give me a name, I can tell them the builder's reputation.

I can say the next statement without qualification: in every builder/contractor dispute I've been involved in, when home buyers picked the cheapest home builder's bid, there have always been problems. If one builder's bid is far lower than the rest, be very wary. Some unscrupulous builders will underbid the project to get the job, then surprise his customers with cost overruns. Other builders are not dishonest, but are so inexperienced or unqualified that they cannot accurately quote a project. If they can't quote it accurately, they will probably cause you other problems during the building process.

3. Put everything in writing. Unlike some lawyers, I'm not going to tell you to lock your builder into a set-price contract (i.e., he'll build your house plan for a set fee of $X). For one thing, that's just impractical, and for another, most reputable builders will not agree to it because they can't control the fluctuating prices of materials. Whatever the contract you agree to, PUT IT IN WRITING! Too many home owners are promised things by the builder, such as total estimated cost, estimated completion time, etc., that are never reduced to writing. Make sure the important areas of the contract are put into the contract. For one thing, it will bind your builder legally, and prevent later disputes about what was said. For another, though, it will make sure that you and your builder have a good understanding between each other, and will prevent misunderstandings that can occur when some things are just assumed or are left unsaid.

4. Be conservative. In all your estimations, hope for the best, but plan for the worst. If your builder tells you that your kitchen should cost between $15,000-$17,000, plan on $18,000 or $19,000 just to be safe. If you're told the house will be finished in five months, plan on six or seven. Planning for time or cost overruns will keep you from getting into a budget crunch and will help reduce the stress of those unexpected contingencies that will inevitably arise.

5. Changing your mind costs money. One final thing: the more you change your mind during the building process, the more it will cost you. I represented one custom builder whose clients continuously changed their minds and upgraded their options during the building process. By the time they were done, their house cost 25 percent more than had originally been quoted! Just remember that if you change, for example, the layout of a room or decide to upgrade some of your options, you run the risk of increasing your costs not just because you've decided on something more expensive, but also because you might disrupt the flow and timing of your project, thus causing additional delays and man-hours. If you want to change your mind, that's fine; but be aware of what it's costing you!

If you have further questions about have a new home built in North Carolina, feel free to contact me and set up an appointment at 704-735-0483.

Buying out your partner, Pt. 2--think ahead

2007-03-10T13:12:00.000-04:00

If, in your "partnership" (whether it be in form a two-person LLC, corporation or a true partnership), you believe there is beginning to be inequities in the amount of output you are producing versus the amount of profits you are receiving, you should immediately take stock of your situation. What circumstances am I talking about?

1. Perhaps your partner put up the money, and you're doing the work; or
2. Perhaps you're both 50/50 owners of the company, but feel like you're putting in more time and effort, and/or are producing more profits.

The longer your relationship continues, the more "in-equity" you might build. For example, consider Mr. A and Mr. B who twenty years ago set up a two-man corporation. The corporation owns their company vehicles, their building, and some cash assets invested over the years. At the end of the year, most of the profits are taken out of the company and given in equal shares to the two shareholders.

Over the years, however, Mr. A has developed a niche market in their business. His clients and their jobs are higher-end, require more labor, but produce a larger profit. Mr. B has not grown his side of the business over the years, and in fact, has let a few of his clients drop since he's getting older and doesn't want to work as many hours.

In fact, now, Mr. A brings in approximately 70 percent of the company's gross earnings, and Mr. B only 30 percent. Finally, Mr. A has enough, and tells Mr. B it's time they split up. At this point, if the two can't agree, Mr. A can ask the courts to split up and dissolve their corporation, pay off debts, and then divide the assets. Unfortunately for Mr. A, however, the assets will be split in proportion to stock ownership: 50 percent each; which is not in proportion to the amount worked.

Perhaps Mr. A had, when he set up his company, entered into some sort of agreement by which he could buy out Mr. B at some point. That's savvy, but if the purchase price is determined by the company's value, Mr. A has hurt himself by letting things drag on so long. He's increased the value of the company by his own labor, and is now going to have to pay Mr. B a premium for his stock--stock that rose in value primarily by Mr. A's actions!

The lesson to be learned from this story is that if you enter into a small company or joint venture, be aware that if the labor and/or production starts to skew unevenly, do not let the situation linger, or you may end up not only working harder than your partner, but one day having to pay more for the valuable product you created.

Buying out your business partner.

2007-02-24T15:16:00.000-04:00

Perhaps you've been buddies since high school or college; or maybe mutual interests or kinship brought you together. Over the years you entered into a joint venture (whether as a partnership, an LLC or a corporation). But now, for whatever reason (a falling out, or simply to pursue different interests), you and your business partner have decided to part ways. You're buying him out, and he's moving on. What things do each of you need to consider?

1. Mutual Releases (both): If this is going to be a clean break, the both of you need to execute mutual releases releasing each other from any causes of action or claims you might have against the other. If this is an amicable split, it might not seem necessary, but if you're leaving not on the best of terms, this is an absolute must.

2. Release of Company Liabilities (Seller): If you're the one leaving the business venture, the business still might have some liabilities and debts, for which you are personally liable, such as bank loans which you were required to personally guarantee. Some lawyers simply have the buyer sign an indemnity for you, which simply means that he (the remaining partner) agrees to pay the loans, and to protect you from liability against them. The problem with this is that the bank is not bound by this agreement, and if your partner at some point is unable to make the payments, the bank can still come after you. Sure you've got a contract, but your ex-partner is now bust, so what good is that going to do? Instead, ensure that your break is a clean one by getting the bank to release you from your personal guarantees when you leave.

3. Proper Corporate Filings (Buyer): If you're buying out a fellow shareholder (corporation) or member (LLC), it is important to execute the proper corporate paperwork and filings. For example, if buying out a fellow shareholder in a closely-held corporation, you need to have prepared proper corporate minutes in which the stock certificates are conveyed, and in which the seller resigns from all corporate offices, directorships and registered agency, if applicable. If the seller is a member in an LLC, you must make sure that he resigns as manager and (if there is more than one remaining member of the LLC) that all members consent to the seller leaving and to the sale, if any, of his membership interest.

Buying out a fellow partner (or selling out, as the case may be) can be relatively straightforward, so long as the proper procedures are followed.

If you need further advice on dissolving a venture, or buying out a fellow partner, contact me at wldeaton@vnet.net .

Back after a hiatus

2007-02-22T21:38:00.000-04:00

Though many things have been going on in the business of law, and the law of business, I've been on vacation and, when coming back, worked on this blog's sister blog: http://investtheworld.blogspot.com, for a detailed trip report and analysis of Antigua property.

While on holiday in the resort compound of Jolly Harbour Villas, I was surprised to find on site, in addition to two real estate companies and one rental management company, a U.K.-licensed attorney practicing on-site. I thought it brilliant, really. The villas cater to a primarily Brit crowd, number in the hundreds, and have for the past two years enjoyed a market upswing.

One of the real estate agents told me the attorney, though born in the U.K., had a lot of ties with his family to Antigua, and took over his uncle's practice.

It got me thinking, as I always do, about the idea of practicing overseas law. Why?

Well, for one thing, the idea of being in an exotic locale is fairly exciting to me, and better yet, a locale that is sunny and warm all the time.

For another thing, certain countries overseas, and the Caribbean in particular, contain strong privacy, corporate and asset protection laws. In this age, when our government believes it is entitled to full access to our privacy, and various greedy individuals target those whom they believe have more, the ideas embodied in these laws make make sense now more than ever.

I've thought about the idea of opening up an offshore office (either as a satellite or as my main branch), and the idea intrigues and excites me. I think putting myself there is the only way to really provide this service to clients. I know of another lawyer in the metropolitan area whom clients claim can do overseas transactional work. I also learned through a mutual client that he was interested in and/or owned property in a lot of the same areas I'm interested in (Belize, Panama, etc.).

When I talked to him, however, he seemed a bit vague, and the best I could take away from our conversation is that he's set himself up as a middle man between client and overseas counsel. I'm not sure that I personally would like that fit. Sure, I could help set clients up more easily than if they were trying to find an attorney on their own. But if a client is intelligent/savvy enough to want offshore services, could they not talk to an attorney without me?

Also, if the FBI came putting pressure to bear on the client and tried to invade his or her privacy, with an American attorney as a middle man, the government could get its hands on the lawyer, and perhaps threaten him until he talked.

From a more selfish vein, our government is so invasive and suspicious at this point, that if a client ended up doing something illegal offshore (for example, secreting income and not declaring it), the American lawyer could get caught up in that net, even though he might have known nothing about it and simply been a conduit or middle-man. Is that worth it?

By contrast, a lawyer practicing offshore would be a little more removed from our government's tentacles. His office, files and business transactions would take place off American soil, making it at least more difficult for our government's intrusions.

Does anybody know of an American-licensed lawyer who either jointly practices offshore or has moved offshore?

Limited Liability Companies -- Put to the Test

2007-01-20T13:13:00.000-04:00

I've written previously about North Carolina Limited Liability Companies, a form of entity which, I believe, offer greater ease of use than corporations and which appear, according to case law, to offer better liability protection than corporations. My theory is getting ready to be put to the test!

I've been hired to represent a member/manager of a three-man LLC. Mr. X had been the silent partner in a Limited Liability Company set up to build spec houses in a subdivision Mr. X owned. He put up some land and some money, but otherwise stayed out of the day to day operations of the business.

The LLC, due to apparent mismanagement by other managers and their employees, collapsed, and in the process, left owing numerous bills and unhappy customers, who had already paid the company down payments to purchase spec houses. One unhappy customer, who has allegedly lost a sizeable down payment, has now sued not only the company, but the company's three owners, alleging breach of contract, breach of fiduciary duty, and fraud--among other things. During the discovery process that we're now in, what has quickly come to light is that Ms. Plaintiff has had no dealings whatsoever with Mr. X, and admittedly only dealt with one member of the company, and some of the company's employees.

Ms. Plaintiff's lawyer is proceeding under the theory that if one member of the company has defrauded Ms. Plaintiff, then he is entitled to pierce the corporate veil to reach out and get all owners/members of the company.

If this were a corporation, I'd likely agree. If it were found that the corporation's owners had not followed formalities (see the previous blog entry), and that fraud had been committed, I think a judge would not dismiss the action against the corporation's owners.

Under North Carolina's limited liability company law, however, I tend to disagree. North Carolina's law has held that members are not liable for the acts of the company--regardless of any corporate formalities--unless the specific member actually committed the act. In other words, a member who stole $10,000 from a customer cannot hide behind the LLC's shield; however, a member of an LLC whose employee stole $10,000 could hide behind the LLC's shield.

Many cases, thankfully, resolve themselves or settle before a trial. However, if this one does not, it will be an interesting case for a motion to dismiss and, failing that, an appeal to the Court of Appeal to help set precedent.

Corporations: Start the New Year off right!

2007-01-01T17:13:00.000-04:00

If you own a small corporation (i.e. you're the sole owner, or your corporation is privately held), mark this week down as a time to hold your annual meeting.

Many small business owners set up a corporation to create a liability shield personally from business activities; however, setting up the corporation is only half the process. Each year, you should hold a corporate meeting to elect new officers, board members, and, ostensibly conduct annual corporate business.

For a small business owner, it might seem silly to go throught the formalities of a corporate meeting; however, the consequences of failing to do so might not be funny. As you know, the main purpose of setting up a corporation is to shield the owner's personal assets from liability arising out of the company's business activities. But that protection will do you no good if a Plaintiff's lawyer is able to "pierce the corporate veil" of your company. Simply put, if you run the corporation as nothing more than an extension of yourself, you might be able to be sued individually for the acts of your corporation.

Before piercing a corporate veil, the Courts look at whether the owner simply disregarded the corporate entity--for example, by mixing personal and corporate funds and, most importantly, by failing to follow the corporate formalities (such as, holding an annual meeting).

As you can see, for the purposes of an annual meeting, the substance of the meeting is much less important than simply having one. How, then, should you conduct your annual meeting?

First, understand that it's not necessary that the annual meeting be live. In other words, you could prepare a printed set of meeting minutes, which are signed off on by all the shareholders, owners and officers of the corporation, without having actually attended a real physical meeting in person. Actually, this is the standard mode of annual meetings for small, closely-held corporations.

How, then, should you conduct your annual meeting? First, if you have not done so, buy a corporate minutes book. Most likely, if you incorporated using an attorney, you have one of these. If not, you can find these for sale on the internet.

Second, mark on your business calendar some time in January to hold (at least on paper) an annual meeting. Your corporate bylaws have probably stated somewhere therein the annual date and time of the meeting.

Third, draw up--or have your attorney draw up--a pre-printed set of annual meetings that you can use year after year. In each annual meeting of shareholders, there should be blanks in which you elect directors. In each annual meeting of directors, there should be blanks in which you elect officers. It doesn't matter that your directors, officers and shareholders stay the same each year. What is important, however, is that you hold the meetings.

If you incorporated through some sort of office supply store or internet forms, this might sound foreign to you. Unfortunately, these outfits often show you only how to incorporate (i.e., file the articles of incorporation). But if they've not created a corporate internal structure (such as bylaws, and annual meetings), your corporations is next to useless in the face of a lawsuit.

If you need help with annual meetings or any other corporate advice, please contact me at wldeaton@vnet.net.

Real Estate Contracts

2006-12-10T19:48:00.000-04:00

I could write a series of articles about real estate contracts--and in fact, perhaps should--but right now, I've got just one thing I'd like to discuss this evening.

Tomorrow, I'm going to court on behalf of some clients in a real estate contract dispute. The clients, fairly sophisiticated land dealers, had contracted with the Plaintiff to sell the Plaintiff some land.

The Plaintiff, a licensed real estate broker, drafted the contract himself. He couldn't close in time, and in fact, kept failing to close even after being given numerous chances. When the clients ended up selling to someone else, he tried to sue them to stop the sale. Unfortunately for him, he waited to long and the property was sold; now he's suing for the profit he says he would have made had he been "allowed" to purchase the property.

The Plaintiffs' attorney has filed a motion stating that, as a matter of law the Court should determine my clients breached the contract, and the jury should only decide what damages they're entitled to. I've filed motions to dismiss their case.

I believe my clients are in the right, and frankly think the Plaintiff/Buyer is little more than a flim-flam artist. That being said, however, there are things that you can do, when selling real estate, to avoid potential problems.

1. Put a hard deadline in your contract. In North Carolina, this means including the words, "Time is of the essence." Common sense says that if you put that the buyer has 60 days to close, and he fails, then the contract is over. Not so, say the North Carolina Courts, who have ruled that, notwithstanding the plain language of the contract, the buyer is allowed a "reasonable time" thereafter to close--judicially squishy language that has spawned a multitude of litigation. By placing the magic words "time is of the essence" in the dates, you make the date hard and fast--e.g., "the Buyer must close within 60 days. TIME IS OF THE ESSENCE."

2. If the Seller fails to meet a deadline, come to a written understanding immediately. Do you want to continue working toward a closing? Sign a written extension of time. Do you want to terminate? Try to document everything in writing and get both parties to sign it.

3. Obligate the Seller to prove to you he can purchase the property and is making progress. Some unscrupulous buyers, in the recent hot market, tried to delay closing on a contract to purchase until they could find someone to re-sell it to. That's a great tactic if you're a buyer. But if you're a seller, that causes you additional carrying costs--property taxes, loan fees, etc.--while the buyer, for free, is buying time to find a purchaser. Instead, put terms in the contract that allow you to obtain verification from the seller that he's ready and able to close. Examples of this are the right to ask for a loan commitment (if the buyer is getting a bank loan), the right to demand a closing within X days after demand, and the right to terminate the contract if the buyer cannot satisfactorily provide proof thereof. This provides a solid defense against unscrupulous buyers who want to claim, after the fact, they were ready and able to close on your property.

Most of all, in all but the simplest residential sales contracts, have an experienced attorney draft the contract for you. They can provide more protections for you than the standard real estate agent's contract (or a homemade deal) will afford.

Business, Capitalism and Election '06

2006-11-11T18:43:00.000-04:00

I don't pretend to be a political pundit, and frankly, many of those who do make such claims are about as reliable in their predictions as stock analysts. Nonetheless, as an attorney who represents businesses, entrepeneurs, and high-net-worth individuals, I do think the recent election results have the potential, if those on the left carry out their desires, to affect businesses, entrepreneurs and capitalists--as well as capitalism in general. Here are some of the effects you might see:

1. The curbing of civil liberties infringement in the name of anti-terrorism. One of the possible positive outcomes of these elections is that the now-split government in Washington will either roll back or at least curb the last few years' intrusions into privacy and civil liberties. The Bush administration, in the name of the War on Terror, created broad powers to pry into electronic communications, banking and other areas in which U.S. citizens typically expected privacy. The American Left, for all of its flaws, at least tends to value some issues of privacy, and is leary of Big Brother. Hopefully, the new Congress can at least stop if not roll back the Bush Administration's incursions.

The unfortunate thing about Leftists, however, is that though they think Americans deserve the freedom of privacy and civil liberties, they believe that freedom stops--and good Leftist Government should begin--when the Left does what it knows is to be in everyone's best interests. Here are some of the more worrying possibilities that capitalists may face:

2. Socialist Healthcare.

Prior to coming into power, some of the bolder Democrats were already beginning to voice the same old story about socialized medicine--termed "Universal Healthcare." Like all free things promised by the Left, it's not free; just paid for by someone else. Potential targets feeling the pain of this leftist scheme could be doctors, insurance companies, and small businesses that are asked to subsidize the Left's generosity to its voters.

3. Paternalistic Intrusion into Personal Choices.

For all the Left's talk of civil rights, those rights stop when the Left can make better choices for the individual than he can make for himself. Leftist pseudoscientists, the media, and leftist politicians are slowly preparing Americans mentally for the once-ridiculous idea that the government should financially penalize us for the choices we make with which it doesn't agree--such as the foods we eat. Businesses which sell disfavored products or items--that is, items from which the Left wants to protect individuals from their own choices--should be prepared for attempts at penalty taxes and investigations of a type once reserved for the tobacco industry.

4. Free Breakfasts.

Entrepeneurs, businesses and capitalists may feel the "tyranny of the majority" with the Left attempting to provide "free breakfasts"--literally--by stealing from the most productive members of our society. Recently, I read an article by someone with an apparent activist bent who reported in the media that studies recommended that all schoolchildren--not just poor ones--should be provided free breakfasts, because they'd eat healthier than they'd eat at home.

This type of thinking is the mantra for Leftists. There are many disturbing aspects about this study. First, that it would use the word "free" instead of subsidized, because that's what it is. It would only be "free" because parents of public school children--regardless of how wealthy they might be--would have their kids' food paid for by taxpayers--regardless of their own financial status or whether they themselves had children to support. Second, it reaffirms Leftist thinking that the government should get involved with individual choices because "it can do better." Finally, it's unclear exactly where the Leftists would attempt to extract the money for this. "There's no such thing as a free lunch?" What about a free breakfast?

5. Heightened Distrust of Entrepreneurs.

Finally, business owners, capitalists and entrepeneurs need to prepare themselves for a Leftist mentality that is derisive of them and refers them as "corporate America" as if that term is itself a self-evident term of derision. Be prepared to deal with individuals who treat with suspicion all of the following:

1. Attempts to make the most efficient and profitable operation possible (the Left says you should pay everyone as much as possible and then see if you can actually make your business work).
2. Attempts to pay only the smallest amount of taxes you're legally required (the Left calls that "tax loopholes").
3. Attempts to protect your assets in foreign or offshore accounts (the Left--and even some on the Right--think nothing good can come from investing or protecting your money outside of this nation).

If you asked me what one step you could take to hedge against some of the uncertainty of the Left, I'd advise you to "have a plan B." Good business owners and entrepeneurs know that the unforeseen can sometimes happen. Sometimes you need a backup plan in place. Now, I believe, is that kind of time. The dollar is weak, freedom in our country is being restricted like never before, and the new government coming looks scary. Speak to your financial advisor, your tax advisor and your legal advisor. Look at investing offshore. Look at moving some assets offshore. Look at investing in foreign properties in nations that still respect business and freedom.

That's the way things look from where I stand.

Second Passports

2006-11-05T10:33:00.001-04:00

After discussing our meeting with a St. Kitts solicitor in my last post, I thought it might be helpful to discuss the purposes and benefits of a second passport, as well as try to answer some questions you might have about a second passport.

1. Second Passports don't require you to give up your primary citizenship. You can be a dual citizen of the United States and another country (unless that country's laws state to the contrary). If you were, say, to obtain a Panamanian passport, you'd still be a citizen of the United States as before. You've not had to give up your rights as a U.S. Citizen. You've just now obtained the rights of citizenship in a second country.

2. Conversely, Second Passports don't let you escape United States obligations. As a U.S. citizen, you're obligated to pay federal income tax on income earned anywhere in the world. Though there are some credits you'd be entitled to receive, this is the general rule. Just as your second passport doesn't strip you of your U.S. rights, it also doesn't alleviate any of your obligations in the U.S. If you truly wanted to escape those obligations (such as high taxation), you'd have to renounce your U.S. citizenship. Before you do that, you should talk to a legal specialist.

3. Second Passports allow you to travel more anonymously. One of the biggest benefits touted of second passports is that they would allow you to travel under a different nationality, when that would be to your advantage. Specifically, for U.S. citizens, this would allow you to go to places where being an American might carry a stigma, and represent yourself as a citizen instead of, say, St. Kitts. This is similar to what many backpackers in Europe had done for years when they would purport to be Canadian so that they wouldn't carry the "American" stigma. Though this has some validity, this alone shouldn't be your motivation for a second passport. Ask yourself: is it worth paying thousands (or hundreds of thousands) of dollars just to make a Frenchman be your buddy? If you're a white man with a Christian name who travels to Pakistan, would they care that you claim to be from Grenada rather than the U.S.? Would it not be simply easier and cheaper not to travel to those types of places?

4. Second Passports give you traveling privileges of your second country. This reason has more advantages. In many countries, you must have not only your country's passport, but a Visa from the host country. However, the host country often waives the visa requirement to some of its closest allies. Also, even entry, duty and residency requirements are lessened among some allied countries. For example, if you had a St. Kitts passport, you'd be given easier travel all around the Caribbean, since most of the Caribbean countries are part of a cooperative known as Caricom (sort of a Caribbean Union), which means that when you went through Customs and Immigration, you'd be going through the shorter line designated for the "locals." Though this, in itself, might not justify purchasing a second passport, it would sure be a nice perk.

5. Second Passports can make you more "anonymous." Though there are many dubious reasons why someone would want to become anonymous (e.g., running from a crime), many folks, especially those who are paranoid of our government, like the idea of giving themselves a lower profile with a second passport. This would, theoretically, occur in two ways. The first would be that you'd be less likely to register if using a second passport. For example, if the airport authorities were looking for U.S. Citizen Wesley Deaton, I could pass through with my St. Kitts passport in my name. With computer sophistication being as high is it is, I don't know if that's realistic.

The second way would be by using a different name on your second passport--I'm told, for example, that individuals will often use their mother's maiden name as their own on the passport. So in the example above, if the airport authorities had U.S. Citizen Wesley Deaton on some sort of "list," when Panamanian Citizen Wesley Dycus appeared, he'd pass through undetected. Two caveats about this: first, I can't tell you in what countries this would be legal and in which countries this would be illegal. More importantly, I can't advise you (because I don't know) which passport programs allow assumed or changed names. If this is something that interests you, you'd need to contact an attorney or solicitor specializing in obtaining second passports.

6. A Second Passport gives you the right to live and have citizenship rights in another country. The most basic, yet most important, aspect of a second passport is that it allows you to live in the country of the passport. This, for many people, is what makes the passport so important. Perhaps the individual simply wants to try life in another locale (if you've endured decades of cold winters, moving to Panama or St. Kitts sounds pretty inviting, doesn't it?). In other cases, individuals want to escape persecution--or at least be able to escape, if need be. In countries offering second passport programs, for example, many of the applicants are wealthy former citizens of either Hong Kong or Taiwan, who fear the impending power of the Chinese state. In addition, many Americans--often who have financial wealth--also fear our government's increasing sue of coercive power, surveillance and taxation, and want a "Plan B," in case things get bad enough.

Simply moving and living in another country legally is not always simple. Often, countries require visas of anyone wanting to live there for more than 30 days. Furthermore, as an outsider, it's not always easy--or legal--to obtain gainful employment. In Belize, for example, newcomers are not legally allowed to obtain jobs for one year after moving there.

In short, a second passport allows the holder to move, without barriers, inside the adopted country, without all of the barriers often placed on outsiders.

Buying a Second Passport--St. Kitts and Nevis

2006-10-24T17:40:00.000-04:00

On my recent trip to St. Kitts and Nevis (see http://investtheworld.blogspot.com) I scheduled an appointment with David Rawlings, an attorney who specializes in, among other things, offshore corporations and economic citizenship in the islands.

“Economic Citizenship” is the name for a procedure in St. Kitts by which an investor, through fees paid and money invested in an approved real estate investment, can receive a passport and second citizenship in St. Kitts and Nevis. The benefits of such citizenship would be easier traveling through some countries, a possibly lower profile of travel (than, say, traveling with a U.S. passport) in some countries, and a “backup” home country to which one could escape if one’s own country became inhospitable.

By purchasing a piece of “approved” real estate property (i.e., one which has been officially declared “investment property” by the Federation Government of St. Kitts and Nevis), an individual can qualify. The approved property will consist of a condominium or villa, but not raw land. According to Mr. Rawlings, this is because the government desires to encourage the development of residential and tourism projects. The property also must sell for at least $350,000 (changed as of one month ago from $250,000) in U.S. dollars. In addition to purchasing the property, the applicant must also pay a one-time fee of $35,000 for one person (more for a couple or family, though they can all be qualified by one property purchase).

In addition, there will be some other incidental costs that add up, such as transfer tax fees which, though technically set as a seller’s cost, will as a practical matter raise the price of the property (a 12 percent tax), and attorney’s fees. According to my calculations, the cost for purchasing a piece of property for one person would be, at a minimum, about $420,000 US.

One positive note, however, is that the citizenship rule places no restriction on how long an investor must hold a property. This means that an individual could, conceivably, purchase the property, obtain his citizenship, and immediately resell it the next day.

Also, the property can only be used as an investment property once, meaning that once you’ve purchased it as an investment property, you cannot re-sell it to someone else also as a qualified investment property.

There has been talk in the past about Nevis seceding from St. Kitts, and Mr. Rawlins informed me that if this indeed happened, Nevis would have the right, in its constitution, to decide who to recognize as a citizen, meaning theoretically that if you purchased your citizenship for the purpose of living on Nevis, its status could be changed if Nevis ever seceded. Mr. Rawlings, however, believes secession to be unlikely, saying that there have been concessions made with Nevis giving it more autonomy such that the threat of secession has been reduced.

In addition, we discussed banking privacy with Mr. Rawlings, who states that the Federation’s laws have been made stricter such that privacy is respected and, for the government to be able to inquire into a private account, it bears the burden of showing cause.

Mr. Rawlins informed us that St. Kitts and Nevis allowed offshore corporations with relative low cost and expense. Basically, a company could be set up in the Federation that isn’t taxed, so long as it doesn’t transact business in the Federation (other than incidentally). For a $900 attorney’s fee, a $200 registration fee, and small annual fees, an investor could set up a St. Kitts offshore corporation.

Finally, we discussed the purchase of real estate in the country. Apparently, the country has two concurrent systems of real estate registration: typical conveyance registration, common to most English common law countries and U.S. states, and the “title” system of registration.

The conveyance system is the traditional system of recorded deeds, and “checking title” (i.e. looking through outconveyances for a period of years) to determine any encumbrances thereto. The “title system” however, is more similar to a state’s vehicular title registration method. The document is a title, and lists on its face and back all items that encumber it—restrictions, liens and any other matters. Banks generally require properties used as collateral to be titled. The process, apparently, requires notice to be published in the paper and to neighboring property owners that requires anyone objecting to the title (i.e., claiming an encumbrance, right of way or overlap) to respond. Upon hearing no response, the government will allow the property to be titled. As you can see, the process of titling likely does quite a bit to clean up old encumbrances of record, such as uncanceled judgments, rights of way, and other defects.

My traveling buddy and I, however, did further investigation of the real estate market, and have come up with these conclusions:

Upon research and consideration, the passport program might not be such a great deal as is touted. The theory is that you buy a piece of qualified property, pay a fee on top of it, and, for the cost of the $35,000 fee, you’ve got a passport and for the price of the real estate a newly developed home or condominium. Our own inspections reveal that the investment-applicable properties are priced higher than similarly built non-applicable properties. Furthermore, associated lawyer’s fees and transfer taxes (whether paid by the buyer or built into seller’s purchase price) can add another ten percent or more. Therefore, the reality is that if you bought a minimum-level investment property ($350,000), in our estimation, you’ve really bought a $250,000 or $275,000 property with a $75,000-$100,000 premium added, and in addition to the $50,000 government fee have expended another $20,000-$30,000. Given that, you might want to consider Panama’s different investor and passport programs, which don’t appear to require so many costs.

Buying a business, Part 4--Keeping Your Business Sound

2006-10-15T17:11:00.001-04:00

Now you know a little about how to finance a business and perform your due diligence, what do you do after a closing? Although the below list is not exclusive, here are some tips; some of these contain legal advice, and others come from my experience in watching business acquisitions.

1. Learn from the Seller. Hopefully, during the negotiations to purchase the business, you included a clause that required the Seller to either work for you or be available for consulting during the initial period after closing. In my experience, the Seller's expertise is a sorely underused resource after the purchase. Most Sellers are willing to offer their advice--and in fact, expect to be able to offer their advice, if they're owner-financing the purchase. Too many purchasers come in with the idea that they're going to take it, with no experience, and turn it into a goldmine. Remember: it was a going concern before you bought the business, so learn first the way the seller did it. Then improve on it if necessary.

2. Incorporate. If you didn't prior to closing, take the time to incorporate your business into some sort of liability-protected entity, so that your personal assets are not at risk for the actions of the business or its employees.

3. Watch your cash flow and debt service. Another thing that I've seen cause new business purchasers to crash is their failure to watch their cash flow and their debt service. Often the individual who has grown a business and then sells is now financially successful. But that success often came after much initial sacrifice of time and enjoyment, and a period of lean years where the business owner had to forego some material comforts in order to grow the business. The buyer, however, sometimes just sees the end result (a wealthy business owner), and expects to walk right in, have a positive cashflow, and begin making a wealthy living immediately. Remember, you're probably paying more money out at the beginning (if nothing else, in loan payments) than what the Seller had been paying when he sold it to you. Those first few years should not be a time of purchasing lots of material items; they should be spent learning the business, growing the business and paying down the debt so that the business can one day may you more money. Don't buy every new item that you think your business might need that first year; don't get heavier in debt. Make sure the bills are paid, then grow the business, then you can one day profit on a more personal level.

4. Surround yourself with professionals. If you're taking over a business, you are in a sense a business professional. You're asking the public to come to you and purchase specific product or service which you claim to be more qualified than the average public to provide. If you want to help your success, therefore, you need to surround yourself with advisors and professionals who are similarly outstanding. At the very least, you need a good certified public accountant (CPA), and an attorney who specializes in business representation. Going to the guy down the street who "does books" might cost you a smaller fee, but a genuine accounting professional will save you money in the long run--I've seen it: my clients with professionally certified accountants come out better on their taxes and bookkeeping than with nonprofessionals. Similarly, the lawyer who goes to you church and did your daughter's traffic ticket may be a nice guy, and give you some good general advice, but you need to find someone whose day-in and day-out practice consists of representing people like you. You're a professional--now surround yourself with other professionals. Your business depends on it.

Buying a business, Part 3--Don't buy a lemon

2006-10-09T17:41:00.000-04:00

At this point, you've found a business you think you'd like to buy, and you think you know how you're going to pay for it. How can you "kick the tires" to make sure that beauty you're buying isn't a lemon? First and foremost, have a specialist attorney draw a contract to purchase. This isn't like purchasing a boat or a pull-behind trailer, where a handshake and change of title might be all it takes. It needs to be put in writing, and put in writing by an expert who is aware of all the issues that can come up! Here is a list of items which, at the very least, you need to consider putting into your offer to purchase.

1. A sufficient due diligence period. More than anything, you need time to research the business to verify it really is in fact what you thought you were going to buy. So in your offer, make sure that there is a sufficient period to examine the business--often called an "examination period" or "due diligence period." You need to build in enough time to accomplish the following (which is not an all-encompassing list):
--Getting your related paperwork (loans, corporate papers, etc.) set up.
--Having a CPA review the profit and loss statements, as well as tax filings and other papers, in order to ensure the business really was as profitable as the seller claims.
--Having a real estate attorney check the title of any real property being purchased, as well as having the property potentially surveyed and inspected for structural issues (if it is a building).

2. Non-competition agreements. If the real value to "Bob's Superette" was the high level of quality that came to be associated with "Bob," you don't want to by Bob's business and then have him set up "Bob's Quick-Mart" the next day down the street. You need to consider from the outfront whether a non-compete is desirable (it almost always is), and have the basic terms put into the contract at the beginning, so that at the closing, when a non-compete agreement is handed to the seller, he knew it was coming.

3. Representations. The contract needs to contain affirmative representations of the seller, so that the seller warrants the business in many different ways, such as:
--no mistatements have been made about the business;
--there exist no outstanding lawsuits or claims against the business;
--the business is not in violation of any laws;
--the seller has good title to al business property being sold;
--the business' real property is not in violation of any environmental or zoning laws.

4. Employment of the Seller. You need to consider whether you should have the seller agree to remain employed at your company for a period of time after sale, to help as a consultant and to ease the transition. If so, at least the basics need to be in the offer to purchase.

5. The right to terminate. Your contract should state that you have the right to terminate and receive back any earnest money you've given if you discover that the business, prior to purchase, is not what you'd thought it would be.

This ist isn't exclusive, but should get you thinking. If you need more help, contact me at wldeaton@vnet.net or 704-460-7398.

Buying a Business Part 2--How can you Purchase a business?

2006-10-08T16:50:00.000-04:00

Let's say you've found a business that, at first glance, looks like it could be a winner. In my next installment, I'll discuss ways in which you can help determine whether the business you want to buy really is a profitable business. But for now, there's a more pressing concern: How can you pay for this business you want to buy?

Simply put, there are only four ways to buy a businses:

1. Pay cash.
2. Obtain financing from an outside source.
3. Obtain funds through partners/shareholders.
4. Have the owner finance all or a portion of the purchase price.

Often, purchasing a business involves using a combination of the above sources. From a purchaser's standpoint, however, there are advantages and disadvantages to each method, depending on your own personal situation and the details of the business you want to buy.

Let's go through them one at a time:

1. Paying Cash. The main advantage to paying cash for a business is that you'll have an easier time reaching a positive cash flow. After you've bought the business, you'll have to pay taxes, salaries and wages, insurance, lease payments and other costs. Buy cutting out the necessity of a loan payment (and the interest that comes with it) you've reduced your overhead, and made it more likely that you can turn a profit. Often, by paying cash, you've got more bargaining power and can perhaps negotiate a lower purchase price.

There are, of course, some downsides to paying cash for a business. The first is a practical one: as with purchasing a home, many would-be buyers simply don't have the financial wherewithal to pay a lump sum for a going concern.

There are other disadvantages as well. Even if you do have the cash, tying it up in a business reduces your ability to invest your money in other endeavors. You are, as the cliche goes, putting your eggs in one basket. You're also risking a lot. What if your business fails? Then all the cash you've tied up could go with it.

Finally, there's one large disadvantage to paying cash that many would-be purchasers don't consider, but I'll discuss it further down below.

2. Obtain financing from an outside source (such as a bank).

As opposed to tying up a lot of your cash, a bank loan allows you to use less of your own capital, and more of other people's money, to get your business started.

Also, a bank loan, if granted, often comes at a better interest rate than, say, owner financing, discussed more below.

Finally, if you can obtain a bank loan for your purchase, usually some disinterested third party (the loan officer) is in effect giving you a second opinion on the business you're wanting to buy. You will need (as will be shown in further discussions) to do your own due diligence, but having an extra set of eyes look over the business and think it can work will at the very least reduce your chance of failure.

What are the disadvantages?

From a practical perspective, you'll still need to come up with some of you own money, because banks will usually not loan 100 percent of the purchase price on a business. Unlike a piece of real estate, which is dirt, bricks and mortar, a business is the value of something less tangible--the cash flow.

Also, of course, having to make loan payments of principal and interest will reduce your cash flow, making it harder to turn a profit.

Finally, if you borrow money from a bank and fail, you stand a greater risk of financial ruin. If, for example, you paid cash for a business and it failed, you'd at worst lose your cash you invested (though perhaps you'd get some of your money back simply by selling inventory and equipment). If, on the other hand, you borrowed the money and your business failed, you'd have to repay a bank note. If you could note, the bank could potentially repossess and foreclose on your business, and then go further and file a suit for any remaining unpaid money. More than once I've seen a wide-eyed would-be entrepeneur buy a business with bank money hoping to strike it rich, only to fail, and suffer foreclosure, financial ruin and bankruptcy.

3. Bring on partners or shareholders. One way to bypass some of the risks associated with borrowing money for a business venture is to raise your needed cash through partners or shareholders. Basically, each individual contributes money with the understanding that the money isn't a loan, and that there's risk involved, but also with the hope that the money will be a good investment through dividends, profits or perhaps increased equity and a sale in the future. This lowers the risk of a disastrous failure. If the business doesn't make it, at least you won't have put up all the cash (or be subject to foreclosure and repossession).

The down side, however, is that now you owe duties not just to yourself (or yourself and your lender), but to other owners of your business venture. Savvy investors will want a say in how your business is governed, and might even want a guaranteed dividend if the business turns a profit.

Furthermore, though you might have had the vision for the business's success, you've now got to get along with and cooperate with other investors whose visions may differ from your own.

4. Owner Financing. Under this scenario, the business seller finances all or a part of the purchase price by accepting payments, with interest, on the purchase. Some naive purchasers, ready to take the business to the moon, don't like the idea of a continued relationship with the seller after closing. However, I think this option can often provide the best chance of success. Why? Because the owner has a continued stake and interest in your business success!

In all of the other three situations, the owner would successfully be able to "cash out" and walk away from the business. To be sure, the owner couldn't intentionally deceive you about what you were buying, and a good lawyer might recommend that as part of the sale you make the seller sign certain agreements (a non-compete and an employment agreement) to help your success. But nothing will give the seller more incentive to help you succeed than the knowledge that if you fail, he doesn't get paid!

When I represent business sellers, I try if at all possible to discourage sellers from owner financing, because they will remain in essence a business partner for years to come, without the benefit of getting the profits. But from a purchaser's viewpoint, owner financing is very desirable.

Sometimes (though not always), the interest charged might be higher than a bank's rate. On the other hand, sellers often are willing to finance a larger percentage of the purchase than a bank, because the sellers have greater confidence in the business which they're selling.

If your seller has taken his cash and gone, you sometimes run the risk that he will not be around if you have questions, or that, absent an agreement to the contrary (or sometimes in spite of one) he will open up a competing business.

However, when the seller is receiving his sales price month by month, from the fruits of your business success, he has little incentive to not help you, and even less incentive to work against you or compete with you.

If you're looking at purchasing a business, before you sign a contract--or even a non-binding letter of intent--let a business attorney advise you. If you would like to meet with me, please contact me at 704-460-7398 or wldeaton@vnet.net .

Buying a Business, Part One: Introduction.

2006-10-01T20:44:00.000-04:00

If you've always fancied yourself an entrepeneur, at some time in your life you might want to purchase an existing business. Though traditionally, business owners created their own business, there are some valid reasons to purchase an already-created business (or an "ongoing concern"). Here are a few reasons:

1. An established name recognition (sometimes referred to as "goodwill") can provide immediate income and cashflow, which is usually not available when creating a business from scratch.

2. An established set of processes and employees which will hopefully make the business run more smoothly from the beginning.

3. A chance to reduce some of the risks of starting up a new business by purchasing something with a proven record of success.

On the other hand, purchasing an existing business comes with certain risks:

1. What if the business you were sold isn't what it was made out to be (i.e., what if you purchase a lemon?)?

2. What do you need to do to protect yourself once you buy the risks?

And most importantly:

3. Even if the business is good, how do you keep it good?

In the next few blogs, I'll be writing about things to consider if you purchase a business. I'll be answering questions such as:

How do you make sure you're buying what you really think you're buying?

How can you get the money to purchase the business?

How do you protect your rights as a business owner?

Stay tuned....

"Living Trusts"

2006-09-24T17:11:00.000-04:00

Every week I have clients come to me asking if they should set up a "Living Trust." I first ask them if they understand what a living trust is supposed to be. Usually, they tell me they do not. I next ask them what it is they hope they can accomplish with such a living trust. With this question, they invariably tell me the following:

1. They don't want they government to take their property/They don't want their estate taxed heavily.

2. They want to get everything out of their name for liability protection/medicaid protection.

3. They want to avoid probate, the high costs of probate and probate lawyers, and they don't want individuals to see what's in their estates because probate consists of public records.

While I do have clients that might benefit from such living trusts, after explaining it to them more in depth, they often decide that a standard will and testament will do just fine.

Before you invest in an expensive set of trusts, ask yourself these questions:

1. Just what is a "living trust," exactly? A trust, like a corporation, is an instrument created on paper that takes on a legal life of its own. Basically, someone (the trustor or grantor) gives property for the benefit of someone or some group (the beneficiary or beneficiaries), but the property is held by someone else (the trustee). The most standard trusts are set up to take care of the beneficiary (be it a child, an old person, or whatever) by letting someone with presumably better judgment handle the property for the beneficiary. A "living trust," however, is a subset of this where the grantor, trustee and beneficiary, at the time the trust is set up, are often the same person--you've just created a legal entity to hold it. The idea is that you still get the benefit of it and control it, but you designate how it will go at your death, or who will handle your property for you if you become unable. That's pretty much all it does.

2. Will a Living Trust protect me from the government taking/taxing my property? Probably not. First, some people believe that if they don't have a named beneficiary or will that at their death, the government will take their property. This is incorrect--their "heirs" (as determined by state law) will take their property. The benefit of planning your estate yourself (by will, trust or whatever means) is that you, not the state, get to control who your estate gets left to. As for estate taxes, if your estate is large enough to be subject to taxes (I'll talk more about this in a second), whether your property is controlled by a trust or by yourself or by a will doesn't effect the taxes. It's how you plan your estate (both during your life and at death) that will effect what taxes the government may or may not take.

A secondary question you should ask is, "Am I even subject to estate taxes anyway?" Do you and your spouse's assets, including life insurance policies, come close to $1.5 million? Currently, estates must be almost $2 million to be taxed anyway.

3. What kind of asset protection am I looking for? First, if you've already got a potential claim coming against you (a lawsuit or you've been in an auto accident, etc.), it's too late to get property out of your name anyway--state laws prevent transfers of property to avoid creditors. Second, if you do want asset protection, their are better methods of doing this other than so-called living trusts: corporations, limited liability companies, even family limited partnerships can provide better asset protection than a trust in which you are the grantor, trustee and beneficiary all rolled up into one.

4. What probate issues will I avoid, and are they worth avoiding?
First, let me put some of these probate fears in perspective.
a. The costs: probate fees in the state of North Carolina will usually run, at worst, a couple of hundred dollars. More of my clients than not probate their deceased's own estate without having to resort to a lawyer.
b. The publicity: One of the few completely true statements that trust-sellers always make is that your estate is public record and everyone can know what you owned. When I meet with my client and he tells me that, I then ask him, "If you and your wife are both dead, does it really matter to you if people know what your estate is?" They inevitably tell me, "No." More practically, I go to my local courthouse almost every day, and I can tell you from my experience that I've never seen someone lurking in the courthouse to look up someone's estate file just to see what the deceased owned.

5. Do I really want to go through the hassle of putting all my property in a trust? For it to work like it's supposed to, you'll have to re-title everything--cars, houses, land, etc.--into the name of the trust. Do you want to have to do that? And what if you forget and leave something out? Well, your estate might just have to go through probate anyway!

I'll give you one example that makes my point. A married couple in their early 60s came to me to amend their trust. They'd purchased it for $3,000 from a seminar. It was basically a computer print out form, in a black spiral-bound notebook, with their names in it.

I asked them out of curiosity why they bought a trust, and they gave me all the reasons listed above. After some discussion with them, I determined that their estate was probably less than
$300,000, they had no liability issues, and that with some simple planning, the first spouse's estate was so simple it wouldn't have needed probating anyway. They'd been sold something they really didn't need!

And the worst yet--they had me do a will for them too!

Granted, there are individuals with sophisticated estates who probably could use a trust; but most of the individuals I know who've bought them just think they've got a sophisticated estate.

Before you go through the expense and trouble of setting up a so-called living trust, talk to your attorney, or a tax professional. You might just find that it's unnecessary. If you have any further questions, or would like to set up a consultation, contact me at wldeaton@vnet.net .

I saved a client $40,000 this week... pt. 2

2006-09-16T18:06:00.000-04:00

This week, a client of mine sold a property he'd purchased only one month earlier for $135,000 profit. But he paid no taxes. How? Read below, and see how he saved $40,000.

The Internal Revenue Service has written a rule in its code in Section 1031 that provides a way in which people who sell property (usually, though not necessarily, real estate) can defer the taxes on their profits--indefinitely!

The original way in which taxes were saved was through a swap. For example, you bought a piece of land at the beach for investment for $100,000. Five years later, it's worth $200,000. You'd like to get rid of this land, and buy yourself a duplex. As it so happens, I have a duplex that I bought for $100,000 which I'm willing to sell for $200,000. We work out a deal by which we just swap properties. Although technically, we've each sold property for $100,000 more than we paid (thus usually triggering a tax), Section 1031 lets us defer any gain or taxes because we performed a simultaneous exchange.

Of course, this type of exchange is pretty limited. Usually, if you find someone willing to buy your property at the price you set, they're not going to have a like-kind property you could swap. Section 1031 provides another way to defer taxes called the "non-simultaneous like-kind exchange."

In short, the non-simultaneous exchange (commonly referred to as a "1031 exchange" or "like-kind exchange") allows you to sell your property, put your money into a sort of holding tank (technically called a "qualified intermediary"), find another piece of property you want, take the money out to buy it, and not pay any taxes.

Of course, it's not quite that simple. You've got to pick out the other property (called the "replacement property") within 45 days, and you've got to buy the replacement property within six months after you sold your original property.

Furthermore, the property has to be roughly similar. In other words, you can't sell a piece of land, and do a like-kind exchange with stock or bars of gold. On the other hand, the code doesn't require that the property has to be identical. If you sell a beach lot, you don't have to buy another beach lot--you could replace it with, for example, a duplex.

Back to the original example: let's say a buyer came along willing to pay you $200,000 for your beach lot you bought five years ago for $100,000. To do a like-kind exchange, you'd sell it, and the money would be held by the intermediary. You'd have 45 days to find a replacement property. Let's say after three weeks, you find a rental duplex that you like, which also happens to be roughly the same in value, and sign a contract to purchase. You'd then notify the intermediary, who would provide the money at closing. In this example, not only did you not have to pay taxes on your $100,000 gain, but you converted a non-income-producing property (raw land) into an income-producing property (of course, you'll have to pay income tax on any rentals you receive).

In my real life example, my client purchased a lakefront house and lot for investment at the beginning of August for an excellent price. Last week, he sold it to a buyer for $135,000 more than he'd paid for it.

For the last year, my client had been dickering and negotiating with an individual to buy a 70-acre tract of land my client wanted for investment purposes. They eventually came to an agreement on price. However, my client really didn't want to sink a bunch of cash into the purchase, but he also didn't want to borrow that much money for the land, which would likely sit there for a period of years without earning any income. When I explained the 1031 exchange to him, it was a Godsend. He took the profit from his lake sale, and used it to purchase the acreage he'd wanted. He benefitted in two ways: first, he basically was able to buy the acreage without borrowing money, but also without coming up with any money out of his pocket. Second, he made $135,000 profit, without paying a nickel of taxes--a savings of at least $40,000.

If you're interested in a 1031 exchange for your property, please consult an attorney. If you're interested in discussing it further with me, please contact me by phone at 704-460-7398 or by email at wldeaton@vnet.net.

I saved a client $40,000 this week...

2006-09-15T16:48:00.000-04:00

And I can help you too! Stay tuned for more over the weekend...

North Carolina Limited Liability Companies--twice the protection of a corporation

2006-09-10T18:15:00.000-04:00

Most individuals who start their own business--and the attorneys who represent them--understand that there are certain legal benefits to incorporating their business. By setting up the business into a corporation or limited liability company (LLC), if followed properly, the owner's personal assets are safe from potential lawsuits against the business.

For example, if Jim owns a painting service, called "Jim's Painting," he might have four employees, each driving a "Jim's Painting" truck. If one of the employees injures a person in the worktruck, Jim will be sued for his employee's acts. If a jury finds Jim's employee at fault, it will also likely rule against Jim, subjecting both his business assets and his personal assets to levy and seizure. Suddenly, Jim could potentially lose everything to a judgment!

By correctly incorporating, Jim's personal assets would be safe. In the above scenario, if an employee of "Jim's Painting, Inc." injured someone, Jim's Painting, Inc. could be sued--but if a jury returned a verdict of liability, Jim's personal home and assets would be safe.

All of this, of course, is fairly common knowledge. But what many business owners and entrepeneurs don't know is that there are ways to incorporate so that you can protect some of your assets from personal liability judgments--and it's perfectly safe and legal! It's the Limited Liability Company.

In North Carolina, the two common liability protections are corporations and limited liability companies. Though they operate a bit differently (a corporation has a bit more formality attached to it, while an LLC is a bit less formal and operated more like a partnership), they both have the goal of protecting personal assets from liabilities attaching to "company" activities.

What many people don't know is that the LLC offers one more layer of liability! Let's go back to the example above of Jim. Let's assume he correctly incorporated, his business has grown, and now Jim's Painting, Inc., is a successful business with 20 trucks, a large cashflow, and more than 100 employees. What if Jim got sued for something unrelated to his business--say, an auto accident in his own car? In that case, he could be sued individually. If the jury returned a large verdict (larger than his insurance would cover), the plaintiff would be entitled to satisfy the judgment against Jim by levying own and selling almost anything Jim owned in his own name: his cars, his bank account--and even Jim's shares of stock of Jim's Painting, Inc. Suddenly, Jim could face the real threat of losing his company to a judgment that had nothing to do with the lawsuit or judgment!

This is where the LLC offers one more layer of protection! Unlike a corporation, an individual's ownership in an LLC is not subject to a judgment levy. See Herring v. Kessler, 563 S.E.2d 614 (2002). The blurb for that case reads as follows:

"Judgment creditor filed motion seeking an order directing judgment debtor's membership interests in certain limited liability companies (LLC) be sold and the proceeds applied towards the judgment, and requested a charging order that pending the sale of debtor's membership interests in the LLCs, any distributions and allocations of those interests be applied towards the satisfaction of the judgment. The Superior Court, Wake County, Jack W. Jenkins, J., entered judgment, enjoining creditor from seeking the seizure or sale of debtor's membership interests in the LLCs, denying creditor's motion, insofar as he sought to have debtor's membership interests in the LLCs sold or transferred, and granting creditor's motion for a charging order. Creditor appealed. The Court of Appeals, Greene, J., held that creditor's remedy in having the judgment satisfied did not include seizure and forced sale of debtor's interests in the LLCs.Affirmed."

Therefore, whereas if your business is in the form of a corporation in North Carolina, your stock could be subject to seizure for personal judgments--your limited liability shares will not!

There are two limitatiosn, however, of which you need to be aware.

First, you cannot place property into an LLC to escape liability or a judgment that is already looming against you. If you are sued, and convey your property to an LLC, or a spouse or parent, the Plaintiff, if he obtains a judgment, can usually successfully get the conveyance undone as being fraudulent.

Second, North Carolina law does allow an individual's membership interest to be "charged," in pursuit of collecting a judgment. What this means is that if the LLC declares profits, and distributes the profits to members in proportion to their interests, the judgment creditor does have the right to intercept these payments by getting a "charging order" from a court.

"In this case, despite Plaintiff's attempts to have Defendant's membership interests in the LLCs seized and sold, his only remedy is to have those interests charged with payment of the judgment under N.C.Gen.Stat. § 57C-5-03." Herring.

However, a judgment creditor would be powerless to attach or charge any payments made by the LLC to the member as an employee of the company, any payments made by the LLC to the member for reimbursements, and any LLC property which the member may use (such as a company car, etc.).

In the example above, if Jim had incorporated as "Jim's Painting, LLC," the judgment creditor couldn't take Jim's company from him. At most, the creditor could obtain a charging order against any profits declared to Jim as a member. But you know what? Jim doesn't ever have to declare profits!

The long and short of it? The LLC can protect assets from an individual's judgments--so long as the LLC doesn't declare profits to the member, and the member hasn't used the LLC fraudulently as a holding tank to secrete assets.

Think about it...

The Sovereign Society

2006-09-10T18:03:00.000-04:00

For business owners, high-net-worth individuals, or attorneys representing either of these groups of people, asset protection, estate planning, and tax planning should be a concern.

The Sovereign Society is an organization, in its own words, has as its mission

" to help you achieve Total Wealth - the peace of mind that comes with knowing your financial affairs are kept private, your assets are fully (and legally) protected and that you have unfettered access to the world’s top performing investments. We've identified the safest and most private nations around the globe, where our members can find the best offshore banks, tax havens, legal structures, insurance vehicles, investment opportunities and tax management solutions. Our Global Council of Experts - experienced lawyers, estate planners, tax consultants, investment analysts, money managers, trust providers and currency traders - all specializing in offshore finance, are at your service. Take advantage of our offshore asset protection and global investment strategies and feel the freedom of total wealth."

Pretty tall talk, but this organization does a good job. You can sign up for free "A-Letters" published daily during the week, which are very informative, and if you're further interested sign up for additional services.

www.sovereignsociety.com

For a sample article about offshore planning:

http://www.sovereignsociety.com/offshore1802.html

Case Review

2006-09-06T20:33:00.000-04:00

On Tuesday, the Court of Appeals came down with its bi-weekly rendering of opinions. Listed below are a few that might be of interest to the business owner or business law practictioner:

Hickory Orthopaedic Center, P.A. v. Nicks: Doctors entered into a Professional Association (P.A.), and further entered into a shareholder agreement, the basic provisions of which involved whether severance pay and buyout provisions would apply, and also how, if the exiting doctor's stock was to be repurchased, the stock would be valued. The Defendant left after his doctor declared him psychologically unable to continue his practice. The Corporation and he differed (1) on whether he voluntarily left or left due to disability (which would make a difference in his severance pay and (2) how to value his stock on the stock repurchase. Specifically, the defendant stated his stock was worth more than $600,000, and the plaintiff corporation stated it was worth slightly more than $8,000. Though the trial court valued the defendant's stock at more than $600,000, the Court of Appeals reversed, finding there to be insufficient evidence of such value, and remanded for further hearings. The Court of Appeals further agreed with the trial court's ruling that the defendant left because of a disability.

IMPORTANT POINTS TO REMEMBER: When drafting a shareholder's agreement, pay very close attention to the language regarding when shareholders can be bought out, and the value of their buy-out. In this case, the language used in the agreement used "Full Book Value," "Net Book Value," and "Book Value," somewhat interchangably, even though their definitions were somewhat different. When setting up a corporation or limited liability company involving more than one owner, set up very clear guidelines as to how the parties can either dissolve their company, or buy one another out.

The purpose of this blog

2006-09-05T13:00:00.001-04:00

Are you a business owner? An entrepeneur? Or perhaps you, like me are a professional who represents these people, such as an accountant or an attorney. If you fall into on of these categories--or want to--then this blog is designed for you.

The purpose of this blog is to advise readers of interesting events in the business world. Specifically, I will be writing about issues affecting your money, your business, and your financial freedom.

If you have any questions, feel free to contact me at the email listed on this blog.