Tag: business

5 Legal Tips for Business Owners Weathering the Coronavirus Disruption

There is no doubt you are distracted by this coronavirus outbreak. Constant news alerts, supply shortages, government-mandated closures and cancellations make it all but impossible to also run your business. However, remember that your lawyers are available to assist you. For example, if you have questions about obligations to your employees, insurance coverage questions, contract responsibilities, or anything else related to your business, feel free to reach out. In the meantime, here are 5 legal tips to help your business through the crisis with minimal disruption:

  1. Review your existing contracts for a “force majeure” clause. Do you have a contract with a supplier, distributor, or vendor? Has the coronavirus outbreak affected performance under the contract – for example, are payments being delayed? Are shipments delayed? Has demand dropped to the level where you are having trouble paying normal operating expenses? The reality is that a lot contracts were negotiated in “good times” without the threat of external forces disrupting business operations. This means not all contracts provide for what happens in times of crisis, and if they do, they are often generic provisions that may not even be applicable to the current situation. Nevertheless, some contracts have standard terms — known as “force majeure” or “Act of God” clauses — that allow for contract termination, modification, or delay in performance under certain extraneous circumstances. Importantly, even if your contract does have such a clause, it often includes notice obligations to the other party – so if you suspect that contract performance may be disrupted (either on your end or on the part of the other party), contact a business attorney for guidance on your rights and obligations.
  2. Review your existing lease and make sure you know your rights and responsibilities. Leases are another type of contract that may be affected by the pandemic. In general, commercial leases are drafted in such a way that a tenant’s obligation to pay rent is absolute and non-excusable. If you are a business owner having trouble making rent payments due to decreased demand, you need to carefully review your lease for any possible options, including early termination. Alternatively, you should be prepared to discuss lease modifications with your landlord. If you are on the landlord side, reach out to your tenants and discuss any potential issues directly. While eviction is still available as a remedy, consider that finding a replacement tenant may be more difficult at this time, and you may want to conserve resources instead of spending money to evict someone. And as always, reach out to an attorney if you have any questions about your rights and obligations under any lease.
  3. Purchasing or selling a business? Adjust your expectations or consider termination. Uncertainty is high, which means that many business deals that seemed profitable a few months ago may no longer be attractive to potential buyers. Whether you signed a letter of intent and are conducting due diligence, or you are at the purchase agreement drafting or even closing stage of the transaction, make sure you know your rights and responsibilities. Is there a specific time for performance and what happens if there is a delay? Is “time of the essence” to this transaction? Particularly, be aware of any penalties or liabilities that may be attached to termination of the pending transaction before closing. There may be a liquidated damages provision involved, or perhaps something more onerous, like an “actual damages” clause, including attorney fees. You should have an attorney representing you in any buy-sell transaction, and in the current situation, it is especially important to retain advice about your options.
  4. Know that courts are still functioning, although in a diminished or delayed capacity. One of the reasons that it is critical to know your rights and responsibilities under your various contracts, is that you want to avoid business litigation. But you may think, aren’t courts closed? So how can I protect my rights? Most courts are actually operating in a “diminished” capacity, with civil litigation taking a back seat to criminal matters. However, a lawsuit can still be filed. And, if there is a need for emergency relief like an injunction against a former employee actively stealing customers, it is still available. Understand that even if the justice system is operating in a limited capacity, it is still operating. Litigation is a possibility – and expect that even when this pandemic is over, there will still be litigation fallout over breaches of contract and other business matters that arose due to business disruptions in this difficult time.
  5. This is a perfect opportunity for “corporate catch-up.” Even if your business is currently slow or completely shut down, this time may be a great opportunity to talk to your lawyer about some business matters that you have been putting off. For example, have you trademarked your logo, slogan, or business name? Do you have a new business idea and need to incorporate a new business? Or, do you need to update your LLC’s papers to reflect the fact that you hired your niece as your new CFO? Are there old corporate entities out there (after an acquisition or merger) that continue to exposre you to personal liability? And ask yourself, is your business prepared for the 4 Ds — divorce, death, disability, and debt? Now may be the perfect time for “corporate catch-up.”

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.

3 Common Mistakes that Compromise a Business’s Corporate Protection and Expose Your Personal Assets.

Businesses that commingle assets, forgo record keeping, official minutes, and fail to keep their registration with the State of Michigan up to date risk losing their corporate protections. In most cases, the corporate form limits your personal liability and insulates your personal assets from business debt – unless a creditor successfully argues that the corporate form is a sham and used to perpetuate fraud. However, this protection is not an absolute and there are many situations where that protection may be set aside and personal assets (the owner’s house, boat, car, bank account, etc.) are at risk.

Even if you run a perfectly organized business with current paperwork and a separate bank account, there are still situations where you are at risk of personal liability for your business debts. The following three scenarios are most common:

  1. Did you sign a personal guaranty for a business lease or a business loan? Personal guaranties (or guarantys) are additional collateral that you may be asked to execute as a prerequisite to a business loan or even a business lease. A personal guaranty is effectively an agreement that waives your corporate protection and allows a creditor to go after your personal assets directly. Because a small business does not have many assets to collateralize a loan or assure a landlord that obligations will be paid, you may be asked to sign the personal guaranty. Whether you accept that risk is up to you, but at a minimum you should read the document carefully and discuss it with your attorney so that you understand the implications. You may also be able to negotiate for a lease or loan without a personal guaranty, but in most cases you will need to provide sufficient collateral or other assurances to secure your obligations.
  2. Are you knowingly breaching a contact or a lease? Some business owners erroneously assume that because they have an LLC, they can ignore contracts or leases. For example, if your company signed a 3-year lease in a dying shopping center – what’s to stop the LLC from defaulting on the lease and walking away? A lawsuit can only reach the LLC, right? That’s not only wrong, but it is also a dangerous line of thinking that may put your personal assets at risk. A court will not allow the abuse of the corporate form to evade obligations or escape debts. Understand that corporations are created by statute – i.e. the law – to facilitate business. At the same time, the court system will not apply the law to facilitate a party’s evasion of its contractual obligations. If you are abusing the LLC to default on loans, other contracts, or lease obligations, a court may very well determine that you are abusing the system, pierce the corporate veil, and impose personal liability.
  3. Are you moving assets around to another company? You may also think that you can simply start over by forming a new LLC, transferring the assets of the old LLC to the new one, and leave the loans, contracts, and leases behind with the old shell of a company. But even if you declare bankruptcy for the old LLC, your assets are not immune from creditors. The bankruptcy proceedings allow aggrieved creditors to challenge any transfers made before bankruptcy as “fraudulent” and have them set aside for the creditor’s benefits. And even if your old business had no assets, a court may still impose personal liability and pierce the corporate veil if it is determined that your actions were for a fraudulent purpose – such as escaping a debt, contract, or lease obligation.

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.

Does Your Business Have a Pre-Nup? The Importance of Planning for Life’s Unexpectancies.

Nobody likes to plan for life’s unpleasantries, including divorce. While divorce remains an unfortunate fact of life, proper planning with your business attorney can help protect your business from the unexpected. This is particularly critical where a business has multiple owners, members, or partners.

In a recent case out of New York, a company’s three partners were shocked to learn that the fourth partner’s impending divorce would result in his ex-wife owning part of the business. Small businesses are particularly vulnerable to members’ interests becoming part of a divorce property dispute. And unlike blue-chip stock, who owns the shares of a small business has a direct impact on the day-to-day operations and decision making. In the New York case, the owners admittedly failed to plan for a divorce and ended up having to borrow $250,000 to buy out the divorcing partner.

However, with proper planning and consultation with a business lawyer, you can hedge against contingencies like divorce ahead of time. One such way is through a carefully-drafted Operating Agreement that expressly sets out what happens if a membership interest becomes subject to a divorce judgment. Common provisions grant the company a right of first refusal to buy out any sort of membership interest subject to transfer, and also set forth the rules for valuing such interest using either the Company’s books, a CPA, or an independent appraiser. Another common (and highly useful) provision prohibits a transferee of any membership interest from voting or otherwise participating in the Company’s affairs, until officially admitted as a “member” by the other members. Thus, even if a divorce decree awards a spouse part of the membership in the company, the spouse is limited to the economic benefit of such ownership until (and only if) the rest of the membership decides to allow the new member to participate in the actual business. Another planning tool is a separate buy-sell agreement, which sets forth the rules and conditions for each owners’ membership interest.

Divorce is not the only “D” word that a prudent business owner must plan for. Death of a member is another contingency that should be expressly addressed in a company’s documents. Disability or incapacity is another. Finally, a business should have specific provisions in place to address the potential of bankruptcy or insolvency.

The four “D”s–divorce, death, disability, and debt–are realities that no one likes to think about. However, planning for the bad as well as the good is a part of running a business. With a plan in place, a company will suffer much less disruption and uncertainty when the unthinkable happens. And that is good corporate governance.

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.

Categories
Uncategorized

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.

Exit mobile version