BUSINESS LAW BLOG

I generally get asked, why do I need to create an operating agreement for my Limited Liability Company (LLC)?  Isn’t it enough that I have registered the company with the Secretary of State (Sec of State)?

My response is if, as the owner of the company, it is important to you to decide how or who runs your company rather than the state legislators then it is critical for you to create an operating agreement.  Registering the LLC simply puts the public on notice that you intend to do business as LLC and it does not tell the world what rules and procedures you intended for running your company or resolving any disputes.  Even though there is no requirement that you must create an operating agreement, creating one permits you the freedom to choose a method for running your company and resolving any disputes that might arise.  If there is no operating agreement in place, the courts will apply the default rules meaning the rules that the state legislators selected when they enacted the LLC statute.  Although avoiding application of default rules ought to be important, there are other reasons for creating operating agreement as well such as understandings variations between different entities and clarifying terms between parties.

For example, LLC interests can and do differ in management, capital, profits and losses. Whereas, the law for business corporations mandates that shares of capital stock of the same class or series convey identical rights and preferences. If an investor A pays cash for 1000 units in an LLC but investor B contributes only sweat and equity for 100 units, investor A would receive his cash investment plus preferred return on that capital investment before the profits can be shared on the basis of the number of units each investor/member owns at the time of sale. Thus, unless the difference between economic interests from contributed property is defined in an operating agreement, the members may not realize or have intended the consequences from lack of knowledge and/or understanding.

There are various other reasons for creating operating agreement, which are as follows (of course this list is not meant to be exhaustive):
• Whether tax distributions should be made on the basis of the allocation of the LLC’s taxable income or economic sharing percentages?
• What happens when the LLC does not have enough cash flow from operations to make the required     distributions?
• What happens if one of the members is foreign citizen?

Harsharn K. Makkar practices Corporate Law in the Atlanta area. She can be reached at 404-200-4072 or hersh@makkarlaw.com.

A company must manage its metadata due to the risks associated with unintended disclosures. Many programs create data (invisible to the untrained eye) about data, which becomes a part of the visible text of the document in a single file. This unseen information if transferred to a recipient along with the document can have dire consequences for the company. For example, most documents reveal the author, creation dates and other similar information. General information about the sender may be harmless under most circumstances. However, other information such as comments added to a document during editing stages by the company executive and/or lawyer may haunt the company if those comments reveal confidential information and/or a formula or a trial and/or negotiation strategy. In addition, if employees are not educated about metadata, they may inadvertently post a document on the web that contains damaging information. For example, consider the consequences on your bottom-line if competitors gained information about your profit margins or manufacturing data from the workbook file posted on your website because an employee did not realize that a feature like fast save simply appends the changes at the end of the document rather than replace it with actual edited material. Lastly, metadata matters because sensitive data that becomes part of a given file may be stored off of company servers in various places as well as formats around the world without company’s knowledge or even capabilities to track it.

Georgia Secretary of State has posted a warning on their website that the office has received complaints about misleading mailing Georgia Corporate Headquarters is using to solicit business from Georgia corporations. According to this warning, the firm offers to complete corporate minutes on behalf of Georgia corporations, which includes Annual Minutes Disclosure Statement for a fee.

The implication from this mailer is that Georgia corporations are required to file corporate minutes with the Secretary of State, which is not the case. In addition, this firm Georgia Corporate Headquarters is not registered in Georgia to do business in this state. Also, the manner in which the solicitations are presented is causing confusion. The important point to remember, however, is that Georgia corporations are not required to file their minutes or do business with Georgia Corporate Headquarters.

If you have any questions, please call the Corporations Division Call Center at 404-656-2817.

It is important to form a company because it allows the business owner to insulate personal assets from corporate liability.  Corporate liability may stem because a third party commits a crime on your property such as burglary, rape, assault and/or battery.  It may stem from a slip and fall on a wet floor.  It may stem from tank leak, which contaminates the stream nearby.

There are various ways in which a corporate liability can occur.  Although there is no one form that protects from all types of corporate liability, some business forms at least limit the liability.  For example, if a business owner forms a corporation, the owner can limit his losses from the above mentioned examples to amount invested in the corporation.  In other words, the business owner can protect the personal assets.

Like other personal policies, a blogging policy can help employees understand the issues employees can or cannot discuss on a company blog or a personal blog. A blogging policy can forewarned the employees about the consequences of policy violations. A well thought out blogging policy also provides recourse against the employee blogger who divulges sensitive information on a company or employee’s personal blog. In addition, unless a company declares to the world its personnel policies ahead of time, it may not able to separate itself from the employee misconduct, which may result in loss of business reputation. Furthermore, such a policy can guide the company to establish clear standards so the company can take consistent actions in case of a violation rather than cherry pick, which may amount to condoning one employee’s misconduct.
But even if company has a blogging policy in place, what should an employer restrict. Should an employer forbid all employee blogs? Should an employer forbid blogs that simply make reference to the company?
Should employer forbid blogs that make only derogatory comments?
There is no one answer that fits all since a company must weigh potential benefits against banning all blogs based on its goals, its products and services, and the applicable laws. For example, a company that bans all blogs may be going overboard since current body of law only permits employers to discipline an employee for comments based on race, gender, interference with business relationship, etcetera. More importantly though, if a company decides to censor its employee blogs, the censorship may impose liability in case of an improper posting that should have been filtered. And if the company does censor the content, what should be the standard for censorship.
As articulated already that even though there are many unanswered questions and the policy that an employer may establish may not protect the company from all types of allegations, nevertheless, it is advisable to have a policy as a company would any other personnel policy since an imperfect policy is better than none at all.

Once you have decided that you want to form your company, the most critical factor that you must evaluate is whether the business structure offers liability and asset protection that meets your goals. In addition, you must consider the ease of formation and maintenance. Finally, you must evaluate the tax consequences of each structure. Both state and federal laws can influence your choice of entity decision, this article will only discuss state issues in this post but the following post will cover the federal issues that may impact your decision.

State Law

Basic entity types and pros and cons:

1. Sole proprietorship: A kid who sets up lemonade stand to make profit by selling lemonade to his friends and neighbors without taking any formal steps to form a company is a sole proprietor. The pros of this structure are that it is easy to form, it does not require state filings, and there are no documentation requirements such as bylaws or an operating agreement. Thus, the maintenance is simpler than other forms of structures. However, the cons are that this structure does not provide any liability or asset protection. For example, if someone sues, the sole proprietor’s personal assets are at risk. For this very reason this structure should be avoided. Having said that no entity type protects a professional from his or her own professional liability, i.e., an attorney or a physician.

2. Partnership: When two or more persons who associate to carry on as co-owners of a business, they are operating as a partnership. There are several different types of partnerships and the liability and asset protection in each depends on the type of partnership. For example, general partners are jointly and severally liable for all obligations of the partnership, which means if one of the partner files bankruptcy, the other partner is responsible for the bankrupt partner’s share of liability even if the source of those funds is personal assets of the other partner. But limited partners, on the other hand, are only liable to the extent of their share invested in the partnership. In other words, limited partnership shields the personal assets of the partners in a limited partnership. The pros of this structure are that a general partnership is easy to form, it does not require state filings, and there are no documentation requirements. However, the cons are this structure does not offer the best liability and asset protection as articulated above. In addition, if partners do not take the time to decide at the inception of partnership the management, withdrawal, and termination issues, it can complicate dissolution of the partnership.

3. Corporation: A corporation is an entity distinct and separate from its owner. An “S-corporation” is not a separate type of entity rather it is a different method of taxation. In order to form an S-corporation, one must form C-corporation and then select the tax treatment as an S-corporation. A corporation provides an excellent liability and asset protection, which means that a shareholder is not personally liable for the debts/obligations of the corporation, which includes liability stemming from the actions of co-shareholders. In other words, the liability of shareholder is limited to the corporation’s assets not the shareholder’s personal assets. The cons of forming a corporation is that it is one of the most complex entities to form and operate because it requires filing the articles of incorporation with the state’s Secretary of State’s office. It has documentation requirements such as bylaws in addition to annual reports and both directors and shareholder meetings. In other words, it requires high maintenance to preserve this status.

4. Limited Liability Company (LLC): This structure combines the features of a partnership and a corporation, which means that a member of an LLC has liability and asset protection like a shareholder of a corporation without the tax liability that a shareholder suffers. This feature is an excellent reason alone for forming an LLC. In addition, LLC is easier to maintain than a corporation since there is no requirement of maintaining annual meetings, etc. However, the cons of forming an LLC are that it requires state filings, it has documentation requirements such as an operating agreement, and there are annual fees. In addition, an LLC must be managed and controlled according to the operating agreement. If there is no operating agreement in place or the LLC is not managed according to the operating agreement, a plaintiff might be successful in piercing the LLC’s veil, which means the LLC member’s personal assets might be at risk. Finally, it is the newest form of business structure.

Although it may appear that forming an entity is not that complex, it would be a mistake to form an entity without consulting an attorney and an accountant because selecting the right entity that provides you the most liability and asset protection can be complex as well as it could result in you paying more taxes than necessary.