Tag: business documents

What Should You Know Before Buying Into a Business? 5 Key Considerations for the Informed Investor.

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Buying into a business can be an exciting next step in your career and present uncapped opportunities for growth. It can be especially lucrative from a financial perspective, as well as the professional allure of working for yourself. For example, if you are a doctor working for a clinic, you may be given an opportunity to buy into as a partner. Or, as an employee you may be presented with an option agreement that lets you purchase a membership stake in your employer. Note that this discussion is limited to privately held companies – if you are buying stock in a publicly-traded company (or receiving stock options as part of your compensation) or otherwise investing in an SEC-registered security, you may encounter different issues.

Here are 5 key considerations when faced with a (private) buy-in opportunity:

1. Retain an attorney to represent you. Buy-in options often come from a boss or trusted partner with whom you have an existing relationship. You may even be friends outside of work, which may make you reluctant to involve an attorney. However, you owe it to yourself to treat this as a business deal – because it is a business deal – and it is better to get professional advice now, rather than try to undo something years down the road. There are countless court cases that develop from one person trusting the other too much, people taking advantage of each other, or even a fundamental miscommunication or difference in expectations.

2. Review the operating agreement or the bylaws of the business. As part of your fundamental due diligence, you must ask for the basic formation documents. For a corporation, the foundational document is called the bylaws and for a limited liability company (LLC) the document is called the operating agreement. This document describes the rights and obligations of members, distributions, voting, buy-sell rights, mandatory offers to sell in situations like death, divorce, or insolvency of a member, and other important provisions. Be especially careful if you are buying a minority stake, which does not give you voting control If the company is governed by a majority vote and one person owns the majority, it is effectively at the control of that majority shareholder. Make sure you know what your rights are as a minority shareholder before you invest – you certainly want to avoid a situation where you are “frozen out” or otherwise oppressed, with no remedy other than potentially going to court.

3. Do not assume that you will receive distributions just because you are now part owner. As a shareholder or equity owner, you are also sharing in the losses of the business, as well as its gains. Just because you paid $50,000 into the business, you are not guaranteed a return or any profit at all. Again, it is important to understand the operating agreement or bylaws of the business. When are distributions paid? Monthly? Yearly? Who decides how the gross income of the business is allocated? What happens if the business loses money? Are the owners required to contribute additional capital? Can the majority owner issue additional shares and introduce new members?

Additionally, when you buy into a private company, you cannot cash out your investment very easily. Even if an operating agreement or bylaws include a mandatory sale clause, there is a matter of determining the sale price and the company may very well not have the assets to buy out your shares, even if you try to sell them back. Further, private companies restrict the ability of its owners to sell their shares to third parties or on the open market. In other words, an investment in a privately-held company is an investment for the long-haul, and you should be financially and psychologically prepared for that fact.

4. Get familiar with your new tax status and obligations. If you were a W-2 employee, your tax situation is relatively simple. But if you switch to partnership status, suddenly you will be responsible for paying your own taxes (quarterly), calculating the right amount of self-employment tax, and setting aside sufficient funds for future tax obligations. You will likely receive a new document from the business – a K-1 form – which will change the way you do taxes. Also, any retirement contributions (401k, IRA, etc.) will need to be reassessed in light of your new partnership status. It may be a good time to consult with an accountant as well.

5. Take the time to do your due diligence. Because you are likely dealing with a familiar person when buying in, you may feel pressure to act quickly or forgo asking the tough questions. Again, this is a business deal and a significant financial obligation that you are assuming. Just because your boss assures you that “this is a great opportunity and we will be millionaires” does not make it so. In addition to reviewing the business forms, you should ask for and review (with your lawyer and/or accountant) the financial documents like profit and loss statements, assets and liabilities, projections, and the business plan. After all, you would not buy a house without an inspection and a walkthrough, nor would you buy a car without test driving it first. Even if you think you know the business from working there as an employee, ownership is a different game and it is in your best interest to gather as much information as you can before making a significant financial investment.

Business ownership presents an exciting opportunity. As long as you are proceeding patiently and consulting outside professionals, you will be able to make a fully informed decision. And remember, even if presented with an option to buy-in, it does not mean you have to take it now or even take it at all. It is called an “option” because it optional and should be exercised only if it is in your best interest.

More questions? Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.


© 2021 Artaev at Law PLLC. All rights reserved.

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Into the Fire: Effective Strategies for Litigation Management Before Going to Court

Are you a litigious business owner? Do you copy your attorney on correspondence to a non-paying client or a vendor? Have you ever threatened another business owner with “I’m going to sue you”? Is this something you do as part of your day-to-day business routine? Does your county’s local business judge know you by name? If so, you probably are not effectively managing the litigation aspect of running a business.

As a Metro Detroit business attorney, I frequently encounter clients who are always “ready to sue.” However, as an attorney, my job is to counsel the client regarding all possible approaches, and to the extent that litigation is the preferred route, I am always honest with the client regarding the judicial process. If your lawyer talks up your case, or uses terms like “sure thing” or “slam dunk” to describe the lawsuit, stop and ask questions. Litigation is not a “hammer” with which to punish someone who wronged you – rather, the justice system is designed to be a neutral process to achieve a the correct result by applying the law to your specific facts.

But you may be thinking–come on Dan, this guy or girl totally screwed me! File the lawsuit tomorrow! I WANT BLOOD!!! I’ll pay you, whatever it takes!

But that approach is only likely to result in added time, expense, and headache for you. No matter how strongly you feel about your case, you absolutely must consider the following and discuss with your attorney:

  1. Litigation is a lengthy process – it may take years to reach a resolution at the trial court level, and then there is always the risk of appeal. Yes, years. Even if you think your case is “easy.” Remember the goal of the justice system is to reach the correct result, given certain facts and the law. Very rarely do the courts dispose of a case quickly, and it is especially so when you are the plaintiff (the side who initiates the lawsuit) because you will have the burden of proof. Most judges are also inclined to let cases drag on, in hopes that the case will settle and the judge won’t have to make a decision. If you file a lawsuit, be prepared for the long haul.
  2. Litigation is a disruptive and unpleasant process – as a business owner, you should never approach litigation as a money-making scheme. Litigation will not only require a substantial financial investment (see below), but it will also be disruptive to your business. You and your staff will need to search for and provide all relevant documents, emails, texts, phone logs, etc. as part of the discovery (or fact-finding process) to your attorney. You and your staff will have to appear for depositions (to provide testimony in this case). Then there are motion hearings and trial. If there are electronic data storage issues, you will need to retain an IT expert. All of this takes time and resources away from your business and you must do a careful cost-benefit analysis before getting involved in litigation.
  3. Litigation is an expensive process – you may easily end up paying tens of thousands of dollars to your lawyers over the course of the case. The fact-finding process that is discovery is the most costly and lengthy. Paying your attorney to attend a 5 hour deposition, review the transcript, respond to discovery requests, and craft your own discovery requests adds up very quickly. And, even if you win, YOU DO NOT GET YOUR ATTORNEY FEES PAID BY THE OTHER SIDE. The only exception to this general rule in the business world is a contract provision that expressly provides that the loser pays the winner’s attorney fees in the event of litigation. Of course, such a provision is a double-edged sword that applies to both parties.
  4. Litigation is an uncertain process – cases are rarely black and white and no attorney can predict what a judge (or jury) will do with your claim. You may have an unpredictable or eccentric judge. You may have attorneys on the other side that will make life not only difficult through discovery, but also expensive by dragging out the process. Also, even if you go to trial or win on a motion, there is always a chance for the losing party to appeal. And, if the Court of Appeals “remands” the case–meaning sends it back to the trial court with instructions–the process could very well restart and drag on for years more.

So what’s a business owner supposed to do? What are some options to enforce your contracts short of going to court? You should consult an attorney about the following options:

  • Consider pre-suit facilitation, but be mindful of the applicable statute of limitations.
  • Consider using arbitration clauses in your contracts to mandate an alternative dispute resolution process between the parties.

The unpredictability and expense of litigation also highlights the need to retain an attorney to advise your business and review any contracts before signing them.

The bottom line is a business does not make money litigating. It is a huge drain on time and resources that could be spent growing market share. If you find yourself considering litigation or on the receiving end of a lawsuit, contact an experienced business law attorney immediately for a consultation.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

4 Must Have Legal Documents for New Business Owners

Whether you are a one-man computer whiz coding the next blockbuster iPhone app, or a five-employee manufacturer making parts for a Tier 1 auto supplier, you need basic corporate forms to protect your assets and investments. A limited liability company (or LLC) is the preferred way to organize and obtain this protection. Plus, if you ever apply for a business loan or decide to sell your business, having an organized and up-to-date corporate record book will do wonders to enhance your value. After all, when Google offers to buy your start-up for a couple million dollars, the transaction will go much smoother with an up-to-date Operating Agreement, corporate consents, assignment documents, and annual statements for the buyer to review.

I recommend the following 4 must-have corporate documents for every business owner:

  1. Articles of Organization –  If you registered your LLC with the State of Michigan, you already filed the basic Articles as part of your initial paperwork. These Articles effectively form your LLC, set forth its name, purpose, duration, and designate a registered agent (or contact person) for your company. Even if you are a sole proprietor, it is worth spending the initial $50 filing fee (and the $25 renewal each subsequent year) to create an LLC. That way, your personal assets are separate from your business assets and are protected from both creditors and litigants.
  2. Operating Agreement — While all LLCs have Articles of Organization, not all bother to have their attorney draft an Operating Agreement. An Operating Agreement sets the rules for how the company is run, including how many votes it takes to make a decision, who owns how many shares, and how shares are valued and transferred. This is a critical document that can prevent many disputes down the line, especially when there are multiple owners involved.
  3. Written Consents/Resolutions – Written consents, or resolution, are records of the business’s decisions. The Operating Agreement will set forth the process for making decisions through written consents (as opposed to meetings). Even if you are the sole owner, it is critical that you draft and maintain written consents whenever the LLC acquires property, makes a distribution, sets a salary, has its annual meeting, or takes another material action. Written decision records help prevent future disputes and also ensure ongoing protection of the corporate form for the owners.
  4. Assignments – If you decide to transfer shares to another LLC member or give an investor an equity stake, the share sale must be documented in an Assignment. The typical assignment document will set out the purpose of the transaction, the value exchanged, the final distribution of shares, and will address the assumption of company liabilities (if any) by the transferee. It may be tempting to simply exchange cash for a promise of membership, but a formal assignment will clearly define the parties’ rights and responsibilities, which will prevent future disputes.

Establishing the proper corporate forms and drafting the paperwork need not be expensive. An attorney will generally be able to register your LLC and draft an operating agreement for a couple thousand dollars. Written consents and assignments can then be created on an as-needed basis. This up-front investment is well-worth the protection that it provides for your assets, as well as protection from disputes and even intra-company litigation down the road.

BONUS TIP – just as critical as a good attorney, a business owner should consult with a reputable insurance provider and a CPA. A solid insurance policy and a tax expert to review your financials will protect you from the unexpected and likely save you money in the process.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2020 Artaev at Law PLLC. All rights reserved.

Non-Compete vs. Non-Solicitation: Key Differences that Every Employer Must Know

No matter what industry you are in, you have probably encountered non-compete and non-solicitation agreements. In Michigan, standard pre-employment paperwork often contains obligations for the employee not to compete with the employer (non-compete) and not to solicit the employer’s existing customers or other employees (non-solicitation).

Although these obligations may be in the same boilerplate paragraph of the documents your employees signed before or on that first day of work, non-competes and non-solicitation covenants are very distinct in terms of their enforcement by the courts. As an employer, you should understand the different goals of these two types of covenants, the differences in the applicable law, and also understand that Michigan courts will not automatically enforce an agreement just because an employee signed it.

For the uninitiated, a non-compete agreement obligates the employee to not “compete” with the employer’s line of business for a set period of time after leaving employment. The non-compete not only prevents direct competition (for example, an employee starting his or her own rival company), but also prohibits an employee from working for a competitor located within a certain area. By way of example, an employee working as a sales rep for a medical supply store might agree not to work for any competing medical supply store located within 100 miles of their current employer for a period of 1 year after leaving. In essence, the non-compete seeks to preserve the employer’s competitive advantage by restricting its employees’ ability to go work for a rival or to start their own competitive enterprise.

Because the non-compete restricts the free labor market, the Michigan Antitrust Reform Act of 1984 (MCL 445.774a) requires non-competes to:

  1. Protect a reasonable competitive business interest;
  2. Be reasonable in terms of duration;
  3. Be reasonable in terms of geographical area; and
  4. Be reasonable in terms of the the type of employment or business affected.

What is reasonable is a question of fact that depends on the scope of the restrictions and on the nature of the work to be restricted. For example, an agreement prohibiting a medical supply sales rep from competing for a year within 100 miles of his current territory is likely reasonable. However, the same agreement prohibiting the sales rep from working in the any medical-related field for 50 years anywhere in the world is probably not reasonable.

Also, the non-compete must protect a “reasonable competitive business interest” – meaning that agreements targeting back-room employees like maintenance or unskilled workers may be vulnerable to challenge because restricting those employees furthers no legitimate business interest. Before drafting and requiring a non-compete, an employer should ask themselves exactly what they are trying to protect. If the answer is something concrete like “customers” or “sales contacts” – then the agreement likely meets the reasonable competitive business interest criteria. If they struggle to come up with an answer or the answer is “I don’t want the employee working somewhere else” – then the agreement may not be considered reasonable and may not be enforced.

A non-solicitation agreement on the other hand is a promise not to interfere with the employer’s actual business by stealing their customers and employees. The non-solicitation is easier to enforce than a non-compete for several reasons. First, a non-solicitation agreement is NOT subject to MCL 445.774a because it does not “expressly prohibit[] an employee from engaging in employment or a line of business after termination of employment.” Thus, the statutory “reasonableness” requirements set forth above do not apply. Second, the non-solicitation by its nature is directly tied to legitimate competitive interests. There is little question that a business’s customers and employees are valuable assets. To prohibit an existing employee from interfering with those assets is not much different than prohibiting stealing on the job. Third, a non-solicitation agreement will not apply to a lower-level employee because they are not as likely to have no reason to or opportunity to steal customers or employees. After all, a maintenance tech working at a manufacturing plant is not likely to quit his or her job to start a rival manufacturing plant and steal customers and employees. But a C-suite executive may very well become a direct competitor.

As an employer, it is always a good plan to update your on-boarding documents and employee handbook to ensure that you know exactly what your employees are agreeing to. It is grave mistake to simply print some forms from the internet and cobble together a policy that does not make sense in the context of your business. After all, it pays to have a solid, enforceable document. If there are problems, it is better to find out that the document is problematic before it is held unenforceable by the courts.

Have more questions? Contact Dan Artaev at dan@artaevatlaw.com or 269-930-0254 to set up your free initial consultation.

© 2021 Artaev at Law PLLC. All rights reserved.

‘Tis the Season for (Corporate) Resolutions!

What do you associate most with the start of a new year? I personally think of resolutions and how the gym used to get crowded with all those who resolve to get in shape. So for many, the New Year is about a new start, a chance to set goals, and a chance to catch up on everything that has been neglected in the old year. For the busy business owner, the start of the year is a great time to “resolve” to get their corporate resolutions “in shape.”

But what is a corporate resolution? A corporate resolution is a formal document that approves a company action. Despite the name “corporate resolution,” the term applies to limited liability companies too. For example, if you and your business partner decide to appoint John Smith as the new Manager, there needs to be a written record showing that the requisite number of shareholders voted to approve the appointment, and that the action is consistent with your bylaws. A sale of assets or a purchase of real estate must also be memorialized. Indeed, lenders and title companies often require a resolution to finalize a transaction, as evidence that the particular party to the transaction has the necessary authority to close. Bylaws generally provide for decisions through meetings or by written consent in lieu of meeting. In either case, an actual written corporate resolution that evidences the decision is a must. As my law school business enterprises professor always said: “If it isn’t in writing, then it did not happen.” Corporate resolutions are that “writing” to prove the the business action in question “did happen.”

Some common corporate actions that should be memorialized through a resolution include, but are not limited to, the following:

  • Occurrence of an annual meeting.
  • Appointment or removal of an officer, such as president, vice-president, or treasurer, including the terms of employment.
  • Issuance of new shares or membership interests.
  • Changes to the Board of Directors and any compensation packages for said Board members.
  • Calls for capital contribution.
  • Retention of a business attorney, accountant, or other third party professional.
  • Approval of any amendments to the bylaws.
  • Becoming a party to any real estate lease or equipment lease.

Corporate resolutions are an essential part of good business governance and best practices. A well-organized and up-to-date corporate book has many benefits — for example, when you finally sell your business. Or if a lender wants to see your corporate book before they approve the new line of credit or loan. Additionally, whether an entity adheres to formal corporate practices is one of the factors the courts consider when deciding whether to pierce the corporate veil. Yet many business owners – especially busy up-and-coming entrepreneurs – neglect this relatively simple but critical task.

Finally, what about single-member LLCs or solo corporations? Do they still have to keep written records of their business decisions? YES. Corporate resolutions (as well as other formalities) are equally as important when you wear the many hats of the owner, manager, and sole employee of your business. Indeed, they may be more important in the single-owner context because it not practical to hold a “shareholders meeting” with yourself or record meeting minutes with one person.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

Why Annual Meetings Are Critical to Protecting Your Personal Assets From Business Debts.

As a new and growing business owner, you read my articles on incorporation and essential corporate documents, and took my advice to heart. You retained an attorney and accountant, drafted and filed the basic forms, and Small Business LLC is up-and-running. However, you are not done — there are important steps to take for you to maintain the benefits of the “corporate form” and keep your personal and business assets separate. Take special note if you are a single member LLCs or single-shareholder corporation. When you are busy running your business, it is easy to overlook corporate formalities — yet whether you are a solo shop or a 50 employee corporation, these formalities are equally as necessary and important to protect your investment.

The exception to the general rule that an owner’s personal assets are protected from a business’s creditors and litigious plaintiffs is called “piercing the corporate veil.” This term of art originated from one of those archaic law school cases that no one remembers, yet practitioners and courts frequently use this phrase today. The idea behind “piercing the veil” that a business owner cannot abuse the corporate form and use it to commit fraud. If a plaintiff convinces a court that the defendant corporation or LLC is a sham, the plaintiff gets to “pierce the veil” and proceed against the business owner directly and personally, as if the corporation or LLC never existed. 

Of course, there is always the possibility that an unpaid creditor will accuse your company of fraud and abusing the corporate form even in instances of legitimate business insolvency. After all, everyone wants to get paid, and if there are significant personal assets shielded by the corporate form, it may just be worth the time and money to argue.

Here are some basic tips on how you can maximize the protections of the corporate form and mitigate the risk that a court will order “piercing the veil”:

  1. Separate bank accounts – This might seem basic, but it is astounding how many business owners co-mingle corporate and personal funds. It is absolutely critical that you maintain separate accounts and keep track of business income and expenses separate from your personal expenses. When examining whether the corporation is a sham, this is one of the first factors that a court will consider. In other words, pay your mortgage from your personal account and buy inventory using the company credit card (as opposed to your personal VISA). 
  2. Have an annual meeting – If you are organized as a corporation, an annual meeting is required by law. While it is not required for LLCs, having an annual meeting (and keeping a written record that such a meeting was held) is another important factor that courts will consider when deciding whether the owner is entitled to continuing “corporate veil” protection. 
  3. Keep a binder with written consents and meeting minutes – Your bylaws or articles of organization likely provide for the ability to make corporate decisions through written consents. Your attorney can help you prepare these documents, but generally these “consents” are written evidence that a particular transaction, such as a sale of real estate, a purchase of assets, an appointment of an officer, was authorized by the company. It is good practice to pick a shelf in your office and maintain a three-ring binder with all the consents arranged chronologically. If the company holds a meeting (whether annual or otherwise), it is best practice to record meeting minutes and keep them in the same binder as the written consents.
  4. Maintain good standing with the State of Michigan – This is the easiest requirement to observe, yet it is frequently overlooked. Each year, the State of Michigan requires business owners to file an annual statement form and a fee. Failure to do so for a period of time is not only evidence that might cause you to lose corporate protection, but actually can cause your entity to be automatically dissolved. While it is possible to bring your company back into compliance through retroactive payments and filings, the process costs extra fines and needlessly exposes the business owner to losing the benefit of corporate entity protection.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

5 Often-Overlooked Essentials When Selling Your Business

You finally got that phone call from the California venture capital firm that wants to buy your  start-up for a couple of million dollars. You are eager to sell and use that money to pursue other projects and passions. The attorneys and accountants have been retained, and the Asset Purchase Agreement has been drafted. 

But while the attorney drafted the proper asset descriptions and indemnification clauses, and the accountant has allocated the purchase price for the taxes, has your team addressed these five often-overlooked essentials? After all, the sale of a business is much more than just signing the papers and turning over the keys.

  1. Is the buyer hiring the existing employees? When transferring the assets of a business, one can easily overlook the employees who operate those assets and make the business run. Assuming that the buyer is buying the employees together with the business is a grave (and potentially costly) error. Most employees are at will and may walk out from their job if you spring a “surprise” acquisition on them one morning. This may especially be devastating in an industry like manufacturing, where qualified employees are difficult to find. To mitigate that risk, the buyer should provide offer packages to all current employees at least a few days before the sale. As a seller, it may benefit you to make a small monetary or personal gift to some of the long-time or more senior employees to thank them for their years of service and to throw a transition pizza party for the crew. Remember that the sale will be a personal and emotional event for those who work for you. While you are selling the machines and office furniture, the employees make the business run.  
  2. Are any key services performed by a family member or by the seller him or herself? In small businesses, owners often rely on their family members (or themselves) to perform certain key services (like quoting prices or estimating inventory) without a formal employment relationship. The seller should disclose any key services done by family members so that the buyer can make adequate provisions to hire someone to perform those key services. After all, the goal is to keep the business going after the sale and to provide for as few delays as possible. 
  3. What happens to the invoices and receivables received after closing? Continuing in the ordinary course of business, there will be both invoices and checks that the buyer receives post-closing. Who is responsible for the invoices for inventory received pre-closing? Who gets the checks for pre-closing product? And what about any open purchase orders – are those being assigned? To prevent future conflict, all of these topics should be addressed before the money is wired.
  4. What about the building? If the seller owns the building and is selling that building with the business, the transaction is relatively straight-forward. But if there is a lease, the seller must obtain landlord’s consent before assigning the lease. Alternatively, the buyer must enter into a new lease that starts on the day of the closing to ensure a smooth transition and continued operations.
  5. Have the customers been informed? It is a mistake to assume that the business’s customers will simply continue doing business with the new owner. Business is as much about relationships as it is about the numbers. The buyer and seller should discuss a transition plan with respect to existing customers and ensure that these valuable relationships are preserved going forward.

Of course, these are just some examples, and there will be other key topics specific to the nature of your business and to the transaction. 

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.

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