Common Mistakes in Using “Template” LLC Operating Agreements

Not taking proper care of the organizational documents for an LLC is one of the major reasons investors, founders, and managers face issues later on. Many feel that executing a template or short-form agreement puts them ahead of the pack. In reality, these generic agreements can lock in disadvantageous positions.

Below is a quick list of questions to measure how well that Operating Agreement will work for you in rocky times.

Before you take pen to paper to fix the items yourself, remember that these are just some of the issues we’ve run into, which come from outdated, poorly drafted language that is not tailored for an owner’s specific objectives. Save yourself the time and risk by working with a competent attorney who will craft an agreement based upon your specific interests.

1.  Can one member hold up dissolution or your withdrawal as a member if the company falls stagnant? Many stock agreements only allow dissolution or withdrawal if agreed to by all voting members. If a business falls stagnant or fails to operate because of deadlock between the owners, then one member can use this as leverage and refuse to dissolve and refuse to let you withdraw. Some states allow for judicial dissolution by filing a lawsuit, which likely will end up being more expensive, and offering fewer options for dissolving, than if you had invested in a well-drafted agreement from the start.

Follow up item with your attorney: figuring out an appropriate, tested method for determining the strike point and handling the change in a manner fair to all parties.

2. Is a competent “Tax Matters Partner” identified in the schedules? Generally, the IRS views all members as bearing responsibility for ensuring the filing of an LLC’s tax return. Showing that a competent Tax Matters Partner was selected from the outset can help innocent members avoid late filing penalties when someone accidentally forgets to file the business return, refuses to issue K-1s to equity holders, or wrongly claims a business return isn’t required at all.

Follow up item with your attorney: figuring out how to minimize risks to a Tax Matters Partner unskilled in financial matters. 

3. Do you have a schedule detailing the capital contributed by each member, the form, and its value? This schedule is used for establishing the initial capital accounts of each member, and rebuffs claims of undercapitalization when others attempt to pierce the “corporate veil.” It also carries important tax implications when filing business tax returns.

Follow up item with your attorney: how using loans in lieu of capital contributions, and giving preference to return of capital over distribution of profits can undermine efforts to prevent veil piercing. 

4. Do your membership interests allow a voting block to create deadlock? Usually, this occurs when actions pass through a simple majority vote and voting percentages are evenly split in a way that creates a 50/50 block. It can also occur if a voting block prevents passage for a supermajority measure. Either way, an experienced business lawyer can show you how to craft an operating agreement in a way that divides ultimate decision-making on key issues among the members.

5. Did some members receive “sweat equity” or equity in exchange for a loan, equipment, services, land or other non-cash contribution? A well crafted operating agreement usually accounts for non-cash capital contributions through a separate agreement annexed as a schedule to the operating agreement. When working with original members, loans in exchange for equity should be evidenced through a promissory note, “sweat equity” through a services agreement, and equipment or land through equally appropriate documentation. Foregoing these additional agreements puts your business at risk.

Follow up item with your attorney: incorporating appropriate consequences for active founders who prematurely abandon the business while remaining founders continue.

These issues are common when working from a generic document, or when accepting a document provided by a lawyer (usually in a packet of other template agreements) without understanding and discussing the implications of each of the provisions.

It’s your business! Make the effort to be involved.

office@lfhesq.com | 1-888-886-1577 ext. 1

5 Ways Your Business Attorney Can Accelerate Growth

I recently sat down for lunch with a “prospective” client, and our conversation prompted me to write two posts. This is one of them. I say “prospective” client, using quotation marks, because I am not entirely convinced that his business operations are the right match for me, nor I for his business.

At any rate, I regaled him with a tale of how my recent representation brought one client a net savings (after legal fees) of over $100,000 in just four months, and moved the business dramatically closer to the expansion that eluded them when working with another attorney. And so he asked,

How can a lawyer possibly help accelerate growth, other than drafting funding documents?

This was followed by a hearty laugh. Clearly, I had amused him. In truth, it’s a good question. Here’s 5 ways that can happen.

Shielding You From Distractions. 

Be it a ridiculously unsupported invoice from an outside vendor, or allegations of wrongdoing, distracting  situations can drain valuable energy away from the business of getting business done. My clients don’t benefit from pouring energy into avenues that don’t move their ventures forward, rehashing with family and friends how someone tried to get over. When a client comes to me with a particularly draining distraction, my job is to make it my problem, not theirs. Key to this role is being acutely attentive to the core reasons this bogus invoice bothers them more than, say, that other bogus invoice from another vendor.

Facilitating Business Negotiations.

In one case, a client struggled for nine months to close on a second facility (which would serve as its new, flagship location). The situation was bleak. A stiff monthly “rent penalty” had already been imposed, and the sellers were ready to walk away, along with the hefty ernest money deposit that my clients had already paid. Six weeks after being staffed on the matter, they went to closing.

What was the difference? Honestly, I’d have to say it came down to 3 things:

(i) listening to outside parties (title company, lender, insurance company, etc.) on what they considered to be the issues, and digging deep on how true those were,

(ii) paying attention to the buyer’s and seller’s core grievances (not stated wants), and

(iii) identifying and tying off non-contentious issues so that they wouldn’t continue to be revisited.

It also helped that I had excellent clients who stayed in the game and trusted me to help them through this process.

Shoring Up Dangerous Weak Spots.

One thing I quickly realized is that many businesses do not start with ideal circumstances, including from a legal standpoint. So, immediately, I brought in my internal investigations experience at large law firms and modified it to create a Legal Compliance Audit program for entrepreneurs and smaller entities. Attorneys familiar with this process understand how to review a business’s affairs for high-risk weak spots, and shore them up so that it doesn’t crater future progress or wipe out assumed value down the line. After all, it’s pretty hard to catapult forward when standing on quick sand. Examples I’ve seen: inflated equities given to absent founders when loans were viewed as capital contributions, or failure to trademark early on despite growing use of a similar trademark by someone operating in the same field.

Priming Legal Work for Easy Scaling to Future Business Uses.

A business that’s ready to expand needs more than an even footing. It also needs legal advice and representation that will easily scale for future business use. This can impact everything from the way contracts are drafted, to moving forward on protecting copyrights & trademarks that may take months or even a year to secure, to reorganization of business structures and organizational documents so that they can easily work for what’s next. The point is that the legal representation will end up facilitating growth, instead of delaying it.

Introductions to the Right Professionals for that Next Step

Planning on seeking a loan down the road? If you’re dealing with a mediocre accountant or financial planner who is maxed out on her capabilities, then it may come to bite you in the future when trying to aim for that expansion. Get introductions to people now. Be open about where you are and where you want to go. Small Biz expert Melinda Emerson recently gave this piece of business advice: “Always know your next hire.” It’s true. If you know that you want to be at a certain place in the following year, don’t wait until you’re there to start bringing in the people who are perfectly suited for you at that stage. Nearly every business out there has an entry level option. If you’re having a hard time making the plunge from good to great, then use those entry-level options to start incorporating your new team now. It’s embarrassing at times the amount of time I spend working to find that perfect introduction for a client’s next step, but to me it’s essential for that client’s future growth, as well as mine.

#Hortonology

About the Author: Lenore Horton is an attorney, consultant, and serial entrepreneur whose goal is to help entrepreneurs, business owners and investors avoid needless failure in their ventures. She is the Managing Partner of her own New York-based law firm, and founder of KETNOI, a Washington DC-based consulting, coaching, and training firm. Tweet her @LenoreHorton.

The Balancing Act: Friends as Clients

I decided to write this post after seeing a friend destroy a business relationship, and possibly a friendship, through a series of blunders and errors after being hired by another friend. I took the safe route and decided to stay out of the mess. Even still, it got me thinking how so many of us could use a reminder (or primer) on what to consider when choosing to work with a friend as your client. Here are  tips to make sure you execute this balancing act with success.

Start Where You Want To End.

What do you value more: the friendship or the business relationship? That’s the thing to keep in mind as you start out, as bumps arise, and as you end one (or both) relationships. The beginning is a good time to envision what an ideal end to the business relationship would look like. And then, follow that up with B and C versions. This simple act can highlight a potential bad fit. If you cringe at the thought of the business relationship ending, or fear a multitude of scenarios involving poor endings, then this friend may not be a client candidate after all. As bumps arise in the friendship or professional relationship, remember where you want to end if one has to be sacrificed. On the other hand, don’t approach the two as if they are mutually exclusive. Some of my best clients have been friends, or became friends.

Be A Professional.

This means doing the things you would normally do (or should do) with your clients. Written agreements and prompt invoicing is a must. Also be sure that you use your support staff the same way (or  in nearly the same way) that you would for other clients. This also means not asking for extra favors from your friend when it comes to the business at hand. I’ve seen scenarios where a friend’s outstanding business requests went ignored for weeks even though the consultant would never do that with a “normal” client. Don’t be that consultant. It’s a great way to sour both a friendship and a business relationship.

One way I like to be sure that friends understand when I’m working as an attorney (or a consultant, depending upon how I’ve been hired) is to start any unscheduled call with a reminder that this is a “working” call, and to be sure to afford them the deference I would any other client while on the call. It might also be helpful to add that you want to talk about other things later. For example, I might start out by saying, “Hi Ruth, I’m calling to follow-up on last week’s consulting call. I know we still have some planning to wrap up Tisha’s birthday, but I can call you back tonight about that. Do you have 10 minutes to chat now about the consulting work?” Boundaries like these are important to being a professional, and you’ll want to make it a habit when working with friends.

Be A Friend.

One thing I quickly realized when working with friends is that I tended to pull back on the friendship because it seemed “too much.” Well, that’s the whole idea! You’ll end up spending more time with them because of the added working relationship.  I had to remember that I was dealing with a friend as well. Don’t neglect your friends who are clients by avoiding the things you would normally make time for with them.  Go to the movies. Drop by unannounced. Or call them for a chat or dinner. Or any of the things you would normally do to hang out.

If the business relationship ends poorly, remember that he is still your friend. Be clear that you are treating the two differently unless you have a genuine and sincere reason to conflate the two. And don’t be afraid to address the elephants in the room. Sometimes, a person will want to disengage on the business end but is unwilling to discuss it. Be the bigger person by raising the topic and giving a blame-free avenue for ending the professional engagement. This is especially important if your friendship is worth more to you than the business relationship.

#BeTheBoss

About the Author: Lenore Horton is an attorney, consultant, and serial entrepreneur whose goal is to help entrepreneurs, business owners and investors avoid needless failure in their business ventures. She is the Managing Partner of her own New York-based law firm, and founder of The KETNOI Group, a Washington DC-based consulting firm. Tweet her @LenoreHorton.

It Wasn’t Perfect. Now, Get Over It.

 

That would be the biggest piece of advice that I have for entrepreneurs 1 to 3 years post-launch.  I work with a lot business owners and professionals who see the imperfection of how they started out. I take it as a good sign, especially when their comments aren’t shrouded in excuses and blame. At some point, you have to get over the fact that your venture did not start out perfectly. You have to get over the fact that it isn’t exactly where you want it to be now. In short, you have to forgive yourself.

The reality is that so many people can’t get to launch simply because they are hung up on having the perfect product, service, website, business card… no really, it can get that ridiculous at times. Accepting the imperfection and moving forward is what sets apart those who get there and those who don’t.

What I hear a lot in these comments is the desire to plug the gaps. To fix what was lost in the hustle and bustle of starting up. To shore up the cracks in the foundation. The comments usually come right before a business owner makes an important jump to the next stage. So, when a prospective client for my consulting firm or law firm starts talking about what wasn’t done right, I get excited. It’s a sign that they are moving onto the next stage. The opportunity to be a part of that, or even see some of that, is truly gratifying.

Is Your Venture Leaking Value?

It’s easy to think as a business owner or entrepreneur that you have the best interests of your business at heart. In reality, many business owners and entrepreneurs are actually taking away from (or in some cases giving away) what makes their business valuable. So often, I have seen entrepreneurs foreclose the ability to extract value from their business, or end up with much less than they had hoped, for basic reasons that were entirely preventable.

Whether you are an established venture or pre-launch, here are a few questions to ask yourself.

  • Did you organize your business correctly, and execute governing documents with all owners?
  • Did you file tax returns appropriately and maintain good accounting records?
  • Are your licenses, registrations & permits in good standing?

For businesses that haven’t launched yet, consider these additional points.

  • Do you have good relationships with almost all, if not all, of the consultants and professionals used to build up the business, even if it hasn’t launched yet?
  • What do your files look like? If someone came along today and said, “That’s the exact business I wanted to start,” would you be able to hand them everything they need to simply “turn the key” and pick up where you left off? Or would you instead have to spend weeks pulling together lost files and documents?

Having all of your ducks in a row is a huge part of what makes your business valuable, and keeps you from leaking value down the line. If you ever decide to bring on a co-owner, or pivot to a new interest, you’ll be much better positioned to sell by plugging these holes.

And what of the successful startup venture that hopes to be acquired later on?  Unfortunately, I have seen up close how the following two points caused one venture to lose plenty of value down the line when it eventually sold.

  • Did you sign documents handing over trademark rights to an investor or corporate partner that strikes at the heart of your brand? Or better yet, did you fail to trademark at all?
  • Did you use unpaid interns in a way that flagrantly violates the Fair Labor Standards Act, thereby increasing liabilities that will show up during due diligence?

Getting a venture off the ground is exciting, and it may seem tedious and unnecessary to stay on top of these types of matters. In reality, they are a huge part of what makes your business valuable.

So, stop procrastinating! Take action today to get your business in order.

Legal Considerations for the Retiring Physician

By Lenore Horton, Esq. and Kyle Lanning, Esq.

In a 2012 study conducted by the Physician’s Foundation, more than 60% of the nearly 14,000 physician respondents
from across the United States 
answered affirmatively when asked if they would retired today, if they had the means.

An increase of 15% since the last time the survey was done, in 2008.*

Although early retirement may seem like a goal for many, physicians face increasing pressures from regulatory authorities, insurance companies, Medicare payment instability, sweeping healthcare reform, and an aging workforce.

Deciding to retire from practice is not an easy decision and certainly not one to take lightly. Physicians play an integral role in their communities by taking care of their neighbors, friends, and relatives; often times spanning generations.

If you are a physician who is contemplating retirement, here are some things to take into consideration to ensure a smooth transition for yourself, and your patients.

Full Retirement or Semi-Retirement

Many physicians looking to retire start to change the way they practice toward the end of their careers. If full retirement doesn’t seem like an option, a physician should consider reducing their patient loads or joining with other physicians. Academic appointments and alliances with local hospitals or state governments offer additional alternatives for transitioning to full retirement or pivoting within the medical field. For many solo-practitioners, the strain of running a small business becomes too much and they may opt to join a large specialty group or form a relationship with their local hospital to take advantage of the established administrative environment that they provide.

Nevertheless, even physicians who are transitioning to a ‘semi-retired’ status can benefit from consulting with an experienced healthcare attorney well before they begin the process. An experienced healthcare attorney can help by reviewing employment and teaching contracts, managing successful practice mergers, or even assist in selling a practice altogether. It’s never too early to contact an attorney regarding the ultimate decision to ensure that the road to retirement is as smooth and complication-free as possible.

Notifying Patients

Retiring physicians must notify their patients of their impending retirement. State laws often dictate how this must be accomplished. Some states require a letter to all patients seen within a set period of time. Others require a published notice in the local paper. Many states require both, at a minimum. The bottom line is that notifying your patients of your impending retirement is not only the right thing to do, but it is also legally required.

If you are looking at retirement, and you are concerned about the legal requirements surrounding patient notification, seek the assistance of an experienced attorney who practices in your state. Not only will they help guide you through the legal hurdles, but they may also have sample letters for you to use or draw from as you draft your notifications.

Medical Records

Except in a few rare cases, patients have a right to request a copy of their medical records. As a retiring physician, you have a responsibility to ensure that patient medical records are available to patients upon request, or that they are properly stored or transferred. Again, state law is your primary source of information on the requirements surrounding medical records, however, federal laws like HIPAA often come into play.

As medical records move (slowly) into the digital age (in the form of electronic health records) the practice of renting storage space to house boxes full of patient records will change. Nevertheless, there are limits to the availability of electronic health data. A retiring physician is well-served by calling their EHR/EMR vendor to discuss how the records are handled. Vendors often offer a compliance solution that satisfies your particular needs or have relationships with healthcare attorneys who can offer more customized guidance.

Other Considerations

Notifying patients and properly handling their medical records are the two big items that retiring physicians must address to avoid claims of abandonment or negligence.Other considerations are in play, and we’ve had many of the following questions raised during consultations:

  • Do I owe extra responsibilities to patients in the hospital?
  • What kind of ‘tail’ liability coverage do I need to make sure my retirement is protected?
  • What are my obligations to your partners or associates, if any?
  • How should I handle unused prescription pads or DEA order forms?

Beginning your retirement or transitioning to semi-retired status can be both exciting and a relief, especially when getting advice and guidance from experienced professionals. Winding-up services that combine legal advice with complementary compliance solutions and referral packages allow physicians to enjoy their transition with the confidence of knowing that they have fulfilled all of their obligations. After all, transitioning into retirement shouldn’t be about chance (unless, of course, you’ve a fondness for card games).

© 2014 Lenore F. Horton, Esq. and LFH ESQ.

*A Survey of America’s Physicians: Practice Patterns and Perspectives.” The Physician’s Foundation – 2012 Biennial Survey. The Physician’s Foundation, 1 Sept. 2012.

Equal Pay & #BuyFromWomen Day: How YOU Can Bridge the Gap

It’s simply not enough to be a woman or a minority,
or to employ women to consider one’s effort sufficient.

As a woman and a business owner, I am often surprised at how much marginalized groups, including women, simply do less than others when it comes to supporting women and other minorities. Some of that is intentional no doubt, but often it’s simply because people assume they are doing what they can and fail to assess where they are against where they should or could be. Here are some starting points to make sure that you are conscious of where you stand and have actively worked to BRIDGE THE GAP.

How can YOU help bridge the pay gap?

1) Check Yourself. Review your pay rates for staff and contractors. Are you paying women and men equally? If not, are your differences justified by meaningful, measurable factors?

2) Create Your Own Internal Pipeline. Commit yourself to a minimum level of expenditures for certified WOSBs. If you spend X each year on static & recurring costs, then identify an appropriate percentage of that to start diverting towards certified WOSB. If you’re already locked into contracts with suppliers, then put them on notice that you want them to certify a certain minimum percentage of subcontracting or expenses goes towards WOSB before renewing the contract. If they refuse, then you know to shop around.

3) Root Out Hidden Biases. Have you overlooked a woman for consulting or employment because of fears that pregnancy or marriage might interfere with performance? Did you choose a guy over a woman because you believed he would be more aggressive as a guy? If so, put the responsibility on yourself to undergo training and develop mechanisms for addressing these concerns that aren’t rooted in gender bias.

For 2014, April 8 is Equal Pay Day. This is how far into 2014 women have to work, on average, to earn as much as her male counterparts during the previous year. May 1 will be #BuyFromWomen day. What will you do in those 23 days to BRIDGE THE GAP?

*A version of this was originally posted on the LFH ESQ Google+ page on April 8, 2014.