19 Jan Business Planning for the New Year
Business Planning for the New Year
Family-owned and closely-held business often face the temptation to operate their businesses in an informal manner by not putting contracts or key business decisions in writing, holding shareholder meetings, nor keeping detailed records. This means that those businesses may not fully comply with statutory requirements that are applicable to their businesses and could potentially face enhanced liability. This enhanced liability should especially be a concern for corporations and LLC’s, where the owners of the business are sheltered from liability. If a court finds that you are operating your business without the proper formalities, then the court may remove the liability shelter and hold the business owners personally liable for any damages that may arise from a lawsuit. This is called “veil-piercing” and it can have serious repercussions on small businesses.
Piercing the Corporate Veil
One of the seminal cases on veil piercing is Sea-Land Services, Inc. v. Pepper Source, 941 F. 2d 519 (7th Cir. 1991). This spicy case dealt with peppers being shipped to Pepper Source by Sea-Land Services, and Pepper Source doesn’t end up paying Sea-Land for the shipping charges. While this seems like a typical non-payment case, Pepper Source also happens to be a sloppily run business. Pepper Source’s owner fails to keep accurate records, doesn’t comply with corporate formalities, co-mingles the funds Pepper Source with his other businesses, and treats Pepper Source as his personal bank account. The court ends up treating Pepper Source as a “fake” corporation and pierces the “liability veil” to hold Pepper Source’s owner personally liable.
Current Business Governance Issues
This kind of messy governance is still an issue today. A case decided in December 2015 from the Supreme Court of Mississippi tells the story of two siblings who inherit three family corporations from their parents. Even though both siblings own the businesses jointly, they each treat the corporations as their sole possession. In the eight years the siblings had been running the businesses, they had only held two shareholders meetings, they never documented any agreements, they did not consult each other on how to run the businesses, and they used the business funds to pay off their personal expenses. To top it all off, both of the siblings kept false records, filed false tax returns, and didn’t completely document the expenses of the businesses. When one of the siblings decided that she no longer wanted to own the businesses with her brother, she filed a suit to divide ownership of the businesses. Though this case was very complicated, the Supreme Court of Mississippi eventually ruled that because the siblings ignored the corporate formalities they were not entitled to the protections of the corporations. The Court gave each sibling a business and then sold the third business, with the proceeds being distributed equally to the siblings.
Business Governance Best Practices
While the previous case may be an extreme cautionary tale, it is important to remember that most litigation involving a business is drawn out and expensive, regardless of the severity of misconduct involved. Business litigation also has a huge human cost, as litigation is emotionally draining and stressful. This why small and family owned businesses need to stay on top of business formalities and the new year is the perfect time to start!
If you are an owner of a business, take advantage of the New Year by taking care of the following issues to streamline your business and ensure that you are complying with all of the applicable laws. If you do not know what laws your small business needs to comply with, please consult with an experienced business attorney. Additionally, consider tackling the following in 2016:
• Create an organizational system for your old records and revamp your record-keeping to make sure records are accurate and organized.
• Plan out any important due dates that you know about for the year to avoid any late penalties. This includes identifying when your state and federal taxes must filed and setting up reminders so you don’t forget!
• If you have been using a single bank account for several businesses or if you use the same bank account as your business, stop now. Each business needs a separate bank account and you should never use a business account for your personal expenses.
• If you often have oral contracts with your business clients, consider having an attorney drafting a form contract that you can use for a multitude of your clients. Having an agreement in writing can save you a lot of headache (and money) if something goes wrong.
• If the management structure in your business has changed, ensure that the paperwork has been completed to reflect it. • If you are a corporation, and you haven’t had a shareholder meeting recently, consider planning a meeting to conform to the appropriate formalities. If you don’t know what formalities you have to comply with, contact an attorney immediately!
Authored by: Mary E. Zoldak
Serving Columbus and Central Ohio
MacLaren Law LLC provides counsel for the estate and business planning needs of Columbus, Ohio and its surrounding communities, including: Bexley, Dublin, Upper Arlington, Worthington, Westerville, Pickerington, Pataskala, Delaware, Plain City, New Albany, Gahanna, Newark, Zanesfield, Marysville, Powell. MacLaren Law also serves Franklin, Delaware, Knox, Licking, Union, and Muskingum counties.