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
Sabtu, 31 Maret 2007
Sabtu, 17 Maret 2007
Tips on building your home
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.
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.
Sabtu, 10 Maret 2007
Buying out your partner, Pt. 2--think ahead
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.
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.
Sabtu, 24 Februari 2007
Buying out your business partner.
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 .
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 .
Kamis, 22 Februari 2007
Back after a hiatus
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?
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?
Sabtu, 20 Januari 2007
Limited Liability Companies -- Put to the Test
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.
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.
Senin, 01 Januari 2007
Corporations: Start the New Year off right!
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.
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.
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